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BARRIOS v. PACO PHARM. SERVS.

March 4, 1993

Angelina S. Barrios, Guilliam Nel, DC et al., on behalf of all persons similarly situated, and derivatively on behalf of Paco Development Partners II, Plaintiffs,
v.
Paco Pharmaceutical Services, Inc., Paco Technologies, Inc., and Dean Witter Reynolds, Inc., Defendants.


Pollack


The opinion of the court was delivered by: MILTON POLLACK

(Amended)

 Pollack, Senior District Judge:

 I. Overview

 Two actions against the same defendants asserting federal securities and pendent state-created claims were consolidated for pretrial purposes. As a result of motions by defendants for summary judgment a number of separable claims and parties plaintiffs were severed from the suits and dismissals were entered as final judgments thereon pursuant to Rule 54(b) F.R.C.P.

 The remainder of the motions relates to the claim of federal securities fraud pursuant to section lob of the Securities and Exchange Act of 1934 and Rule 10b-5 promulgated thereunder as well as pendent state claims against the remaining defendants Paco Pharmaceutical Services, Inc. and Paco Technologies, Inc.

 As will be shown hereafter, plaintiffs have failed to point to and introduce sufficient evidence to raise a genuine issue of material fact for a jury to decide. Consequently, the pending motion addressing alleged federal fraud by the remaining defendants will be granted and the actions thereon will be dismissed, with prejudice, and the pendent state claims against said defendants will be dismissed, without prejudice since no federal claim will remain to which the state claims are pendent.

 II. Factual Background

 These lawsuits arise from a private placement of limited partnership interests in Paco Development Partners II ("PDP II") created by Paco Pharmaceutical Services ("Paco") to engage in the research and development of transdermal and ophthalmic pharmaceutical products. Paco was an established, publicly traded company until the purchase of all of Paco's common stock in a publicly disclosed transaction in which Paco was merged into a wholly-owned subsidiary of Scherer. Scherer, originally named as a defendant, was not a party to any agreement with the investors and was dismissed from the suit by consent.

 Products, if successfully developed by PDP II, were to be marketed following approval by the Food and Drug Administration (the "FDA"). The investors would then be entitled to royalties based upon sales of the products. Five hundred and seventy-seven investors purchased limited partnership interests in PDP II for $ 25,000 or $ 50,000, investing a total of $ 25 million. Seventy-three investors asserted claims singly or jointly with spouses in the two actions referred to above.

 Paco Technologies, Inc., (Paco Tech) was the general partner of PDP II. Paco, the corporate parent of Paco Tech, provided a wide range of services to leading pharmaceutical companies, such as manufacturing sterile products and tamper-evident packages, and filling packages with products for customers. Paco Research Corporation, also a wholly-owned subsidiary of Paco, was to conduct PDP II's research and development activities.

 Dean Witter was the placement agent that prepared and issued, on September 22, 1986, a so-called Confidential Private Placement Memorandum (PPM) and an Investment Guide which was distributed to potential investors. Dean Witter worked with a regional investment banking firm -- First Albany -- and hired Bogart Delafield Ferrier ("BDF"), a renowned firm, to serve as technical consultant. BDF prepared a report that was appended to the PPM. Dean Witter had previously placed two other drug partnerships, Nova and Ares-Serono, for which BDF had also served as consultant.

 Due to the high cost and speculative nature of the investment, sales were limited to wealthy investors who satisfied specific and rigid financial requirements. Each investor was required to demonstrate a net worth (or joint net worth with the investor's spouse) exceeding $ 1 million at the time of the investor's purchase. PPM at 10. In the alternative, an investor needed to demonstrate that he had an individual income (exclusive of the investor's spouse's income) "in excess of $ 200,000 in each of the two most recent years and who reasonably expects an income in excess of $ 200,000" in 1986, the year of the offering. PPM at 10.

 The PPM further explained that prospective investors in some states may be required to represent in writing additional facts relating to net worth, sophistication in investment matters and access to investment advice. PPM at 10. The PPM warned prospective investors that even if they satisfied the financial requirements, they should still consult with their personal advisers to determine whether this risky investment was suitable given each potential investor's personal circumstances. PPM at 11.

 Each plaintiff signed a subscription agreement warranting that he or she "relied solely" on the information contained in the PPM, or answers to the investors' questions of Paco or Paco Technology and "has not been furnished with any oral representation, warranty or information in connection with the offering of the units by Paco, General Partner, the Partnership, the Placement Agent, or any Selected Dealer, or any officer, employee, agent, affiliate or subsidiary of any of them."

 The PPM abounded with warnings of the risky nature of an investment. The inside cover of the PPM bluntly stated, "Investment in the Units offered hereby involves a high degree of risk. No person should invest in the Units who is not in a position to lose his entire investment." PPM at Inside Cover. This admonition was reiterated immediately after the PPM's table of contents and before any description of the venture. PPM at ii. Additional warnings and deterrents to investment addressing numerous specific risks were contained throughout the PPM. These "RISK FACTORS" were summarized for prospective investors intent on a risky speculation at the outset of the offering memorandum:

 
"Prospective Investors should consider various risks associated with an investment in the Partnership and, through the Warrants, in Paco, including but not limited to the following;
 
* Uncertainties associated with research and development activities
 
* Potential need for funds in excess of those available to the Partnership
 
* Difficulties associated with obtaining patent protection, maintaining trade secrets of licensing technology patented by others
 
* Tax risks
 
* Competition and uncertain marketability of Products
 
* Risk that Paco will not exercise the Purchase Option
 
* Uncertainty of timely governmental regulatory approval
 
* Possible product liability
 
* Limited liquidity . . ."

 PPM at 2-3. An eleven-page section of the PPM entitled "Risk Factors" expanded on these warnings. PPM at 34-44. The prospective investors were explicitly warned that,

 
* the products were undeveloped or at a preliminary stage of development (PPM at 34);
 
* there was no assurance that the products would be successfully developed, manufactured or marketed (PPM at 34);
 
* there was no assurance that the appropriate scientific and technical personnel could be recruited (PPM at 36);
 
* there was no assurance that the sales and marketing force necessary to achieve the sales contained in financial projections would be established (PPM at 34);
 
* there was no assurance of timely governmental regulatory approval (PPM at 36).

 Further cautionary language preceded the "Potential Returns to Limited Partners" attached as Exhibit G to the PPM. Here, potential investors were advised that,

 
* the financial model containing the potential returns "is intended only as a mathematical illustration of the assumptions stated herein . . . ." (PPM at G-1);
 
PROSPECTIVE INVESTORS ARE ADVISED THAT WHILE THE [FINANCIAL] MODEL WAS PREPARED . . . ON THE BASIS OF CERTAIN ASSUMPTIONS WITH RESPECT TO THE PRODUCTS THAT [PACO AND PACO TECH] BELIEVE TO BE REASONABLE, NO REPRESENTATION IS MADE OR SHOULD BE INFERRED WITH RESPECT TO THE ACCURACY OR COMPLETENESS OF THE MODEL, THE UNDERLYING ASSUMPTIONS, OR ANY OTHER ECONOMIC MATTERS REFERRED TO HEREIN. (PPM at G-1).
 
* * *
 
IF THE PARTNERSHIP DOES NOT DEVELOP ANY NEW TECHNOLOGIES OR PRODUCTS, THE PRODUCTS ARE NOT DEVELOPED AT THE TIMES OR COSTS ANTICIPATED HEREIN OR THE PRODUCTS CANNOT BE PRODUCED OR CANNOT BE SOLD IN THE QUANTITIES OR FOR THE PRICES ASSUMED HEREIN AND, FURTHER, IF THE TAX TREATMENT ASSUMED HEREIN IS NOT AVAILABLE, THERE MAY BE A MATERIALLY ADVERSE EFFECT ON THE HYPOTHETICAL ECONOMIC BENEFITS SET FORTH IN THE FOLLOWING MODEL AND ON THE BENEFITS AN INVESTOR MAY DERIVE FROM HIS INVESTMENT.
 
* * *
 
INVESTMENT IN THE PARTNERSHIP IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. THERE CAN BE NO ASSURANCE THAT THE PARTNERSHIP WILL SUCCESSFULLY ...

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