II. The FIB Defendants' Motion For Partial Summary Judgment
The FIB defendants make their own motion for partial summary judgment. Of the 20 limited partnerships which are the subject of this action, nine were fully funded prior to FIB's, May 23, 1983, acquisition of SBCY. The FIB defendants seek partial summary judgment as to these investments. As movant, the FIB defendants now face the same obstacles that led to the denial of plaintiffs' motion. All inferences which our prior analysis made in defendants' favor now cut against granting defendants' motion because summary judgment is appropriate only if no reasonable fact finder could find for the nonmoving party. Lund's, 870 F.2d at 844.
The conspiracy counts embody plaintiffs' primary theory for extending liability to the FIB defendants for pre-acquisition claims.
Plaintiffs contend that beginning in 1979, SBCY and the general partners and promoters of the various limited partnerships at issue formed a conspiracy to defraud investors, and that the FIB defendants joined this conspiracy on or about the time of their acquisition of SBCY and thereby became responsible for all of the conspiracy's past and future civil liabilities. Pls.' Br. in Op. at 29-31.
The FIB defendants do not contest the application of the "late joinder" rule to the case at bar, and argue only that parent and subsidiary corporations may not conspire with each other as a matter of law and, alternatively, that the undisputed facts do not support a finding that they conspired to defraud plaintiffs.
A. A Finding That The FIB Defendants Conspired With Their Subsidiary Is Not Precluded As A Matter Of Law.
The FIB defendants point to the parent-subsidiary relationship that existed between themselves and SBCY and argue that this eliminates the possibility of a conspiracy between defendants. To support their position, the FIB defendants largely rely on the Supreme Court's holding in Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 81 L. Ed. 2d 628, 104 S. Ct. 2731 (1984). We are not convinced that Copperweld's reasoning should be extended to the securities fraud, RICO, and common law conspiracies at bar; even if it were so extended, plaintiffs point to a number of third parties - with no corporate relationship to defendants - with whom a reasonable fact finder might find that defendants conspired.
In Copperweld, the Supreme Court held that a conspiracy in restraint of trade, in violation of section 1 of the Sherman Antitrust Act, could not be found where the players included only a parent corporation and its wholly owned subsidiary. The court noted that vigorous competition, which is at the base of our free market economy, is dependent upon the ability of firms to execute unitary corporate policy and therefore concluded that concerted action within a firm or between a firm and its wholly owned subsidiary is not constrained by section 1 of the Sherman Act. Id. at 769-774. Since we see no similar social benefit flowing either from agreements to commit securities fraud or to establish and maintain racketeering enterprises, or from joint tortious behavior, we question whether Copperweld should be extended to these contexts. Other courts have acknowledged that Copperweld's reasoning is specific to the antitrust context and have not applied it to RICO conspiracies. Rouse v. Rouse; 1990 U.S. Dist. LEXIS 13879, 1990 WL 160194, *13 (N.D.N.Y. 1990); Ashland Oil, Inc. v. Arnett, 875 F.2d 1271, 1281 (7th Cir. 1989); Shearin v. E.F. Hutton Group, Inc., 885 F.2d 1162, 1166-67 (3d Cir. 1989); Curley v. Cumberland Farms Dairy, Inc., 728 F. Supp. 1123, 1135 (D.N.J. 1989); see Haroco, Inc. v. American Nat'l Bank and Trust Co., 747 F.2d 384, 403 n.22 (7th Cir. 1984), aff'd on other grounds, 473 U.S. 606, 87 L. Ed. 2d 437, 105 S. Ct. 3291 (1985). The FIB defendants do not cite, nor have we discovered, any reliable authority stating whether New York law permits finding civil conspiracies between parent and subsidiary corporations.
There is some logic in the position that entities, which are made distinct by state corporate law, are also separate entities capable of entering into illicit agreements under state civil conspiracy law. However, we need not reach this issue because the conspiracy at bar includes participants with no corporate relationship to defendants.
Plaintiffs present a conspiracy which involved not only FIB, FIIS, and SBCY, but also the general partners and promoters of the various limited partners at issue. There is some evidence that the FIB defendants knew of, and agreed to participate in, a concerted action between SBCY and the partnership administrators to defraud plaintiffs.
The FIB defendants argue that they could not have engaged in such a conspiracy because they had no direct contact with the limited partnership promoters, participating in the affair only through their subsidiary, SBCY. However, to sustain a conspiracy claim, plaintiffs need show only that the conspirators "agreed on a common purpose" and need not show that every conspirator conspired directly with every other member of the conspiracy. United States v. Nerlinger, 862 F.2d 967, 973 (2d Cir. 1988); United States v. Friedman, 854 F.2d 535, 562 (2d Cir. 1988), cert. denied, 490 U.S. 1004 (1989).
Since, as shown below, a reasonable fact finder may conclude that, through an agreement with SBCY, the FIB defendants conspired with third parties to defraud plaintiffs, the conspiracy claims are not invalid as a matter of law.
B. The Undisputed Facts Do Not Preclude A Finding That The FIB Defendants Conspired To Defraud Plaintiffs.
The FIB defendants argue that the undisputed facts demonstrate that they did not conspire with SBCY to defraud plaintiffs. A conspiracy is an agreement between two or more persons to accomplish an unlawful purpose. Morse v. Weingarten, 777 F. Supp. 312, 318 (S.D.N.Y. 1991). The FIB defendants primarily argue that they did not know that SBCY was receiving undisclosed commissions and therefore could not have entered into an illicit agreement to defraud plaintiffs by concealing this fact; alternatively, they contend that even if they knew of SBCY's scheme to defraud, there is no evidence that they agreed to further these wrongful goals. Abrams v. Painewebber, Inc., 1991 U.S. Dist. 14819, 1991 WL 218106 (D.Conn. 1991). Since the undisputed facts do not support these arguments, the FIB defendants' summary judgment motion is denied.
As a preliminary matter, we point out that direct proof of a conspiracy is seldom available, and therefore an illicit agreement may be shown via circumstantial evidence. H.L. Moore Drug Exch. v. Eli Lilly and Co., 662 F.2d 935, 941 (2d Cir. 1981), cert. denied, 459 U.S. 880, 74 L. Ed. 2d 144, 103 S. Ct. 176 (1982). Proof of tacit, as opposed to explicit, understanding is sufficient to show agreement, and among the factors a fact finder may consider in inferring a conspiracy are the relationship of the parties, proximity in time and place of the acts, and the duration of the actors' joint activity. Diduck v. Kaszycki & Sons Contractors, Inc., 774 F. Supp. 802, 813 (S.D.N.Y. 1991), aff'd in part, rev'd in part on other grounds, 974 F.2d 270 (2d Cir. 1992). Further, to demonstrate a conspiracy, plaintiffs need not show that each conspirator agreed to every detail of the conspiracy but only that each agreed on the "essential nature of the plan". United States v. Rosenblatt, 554 F.2d 36, 38 (2d Cir. 1977).
The FIB defendants first contend that they had no knowledge of SBCY's fraud but admit that they knew that SBCY was receiving fees from the limited partnerships in which plaintiffs invested. In addition, because Dale Welton wrote a memorandum to James Fox in which he referred to SBCY fee income as income for "commissions/fees" and because the FIB defendants' outside counsel wrote a memorandum in which it analyzed whether SBCY's "commission" income would require SBCY to file with the SEC as a broker/dealer, a reasonable fact finder could also conclude that the FIB defendants knew that SBCY received commissions from the partnerships. See supra 11, 9. Thus, the FIB defendants argue only that they were not aware of SBCY's inadequate disclosure and always believed that SBCY was fully disclosing to its clients the commissions it received.
To support their position, the FIB defendants point to the depositions of James Fox (president and CEO of FIIS), Dale Welton (senior vice president and CFO of FIIS), and William Bogaard (executive vice president and general counsel of FIB) in which each states that, relying completely on oral representation by SBCY principals, he believed that SBCY was fully disclosing the fees received from the partnerships. Fox Dep. at 29; Welton Dep. at 83-84; Bogaard Dep. at 96. However, Michael Young testified at deposition that when he told representatives of the FIB defendants that the fees were fully disclosed, he was asked to provide documents to corroborate this representation, and in response he provided the FIB defendants with the file on every limited partnership containing SBCY's disclosure documents and its revenue data. Young Dep. 114-15. As plaintiffs have demonstrated in support of their motion a review of these documents would have revealed that SBCY was not disclosing the commissions it received on plaintiffs' investments,
and Young stated that pursuant to FIB's acquisition of SBCY a number of FIB's agents reviewed these documents. Young Dep. 137. The FIB defendants contend that since Young admits he was not present during the review of these documents, Young Dep. 119, 138-39, his statements are not sufficient to show that any representative of the FIB defendants read the documents and detected the fraud. However, given that these files were provided at the request of the FIB defendants, and in the context of a discussion of the adequacy of SBCY's fee disclosures, we believe a reasonable fact finder would be justified in concluding that representatives of FIB examined these documents with an eye towards the adequacy of SBCY's fee disclosures.
Further, as an investment advisor, SBCY was require to file ADV forms with the SEC and, after the acquisition, FIB undertook the responsibility of completing and filing these forms for SBCY. Pls.' Ex. 76 (Young Dep. at 104). In the ADV forms filed for 1986 and 1987 FIB made the following representation:
From time to time the applicant may have a financial interest through its advisory services rendered to an entity selling investment products to applicant's clients. In every such case a full written disclosure statement is provided to the client indicating the nature and extent of the potential conflict of interest and the extent of the financial interest.
Defs.' Ex. 32,33 (emphasis added). The FIB defendants would have the Court rule that although FIB represented, in documents filed with the SEC, that SBCY disclosed the nature and extent of every conflict of interest through a "full written disclosure statement", no reasonable fact finder could conclude that FIB read these written disclosure statements. We find that a reasonable fact finder might easily draw the contrary inference that FIB read these documents pursuant to its preparation of these SEC filings.
The FIB defendants' argument that they knew of the existence and the nature of SBCY's commission revenue, but never knew that the revenue was inadequately disclosed, is undermined by the FIB defendants' detailed review of the disclosure documents in the Searay limited partnership. The FIB defendants admit that they examined the disclosure documents in the Searay limited partnership, and although the Searay PPM discloses substantial fees to be paid to SBCY, the fees are characterized not as commissions but as financial consultation fees. See Defs.' Ex in Sup. 23. If a fact finder concludes, as one might, that the fees paid pursuant to the Searay limited partnership were commissions
and if the fact finder concludes that the FIB knew that the fees SBCY received from the limited partnerships were actually commissions, see supra 11,9, the FIB defendants may then be found to have known of SBCY's fraudulent behavior.
The FIB defendants contend that, even if they knew of the fraud perpetrated by SBCY, there is no evidence that they supported the conspiracy's illicit goal. Abrams, 1991 U.S. Dist. LEXIS 14819, 1991 WL 218106; see In Re Investors Funding Corp. of N.Y. Sec. Litig., 523 F. Supp. 550, 557 (S.D.N.Y. 1980) (conspiracy requires a showing of knowing participation in and attachment to the conspiracy). The undisputed facts do not support this conclusion. The ADV forms filed by FIB represented that the only type of products "sold" by SBCY were financial planning packages for which SBCY received periodic fixed fees. Pls.' Ex 56. FIB omitted from these filings any discussion of SBCY's sales of limited partnership interests and the commission income received therefrom. At trial, the fact finder may determine that these omissions evidence FIB's desire to conceal SBCY's fraud from the investing public, and therefore the omissions may be found to constitute actions by FIB in furtherance of a conspiracy to defraud plaintiffs.
Cf Newburger, Loeb & Co., Inc. v. Gross, 563 F.2d 1057, 1074 (2d Cir. 1977), cert. denied, 434 U.S. 1035, 54 L. Ed. 2d 782, 98 S. Ct. 769 (1978) (civil conspiracy found where corporation knowingly acquiesced in wrongful transfer of partnership assets).
In sum, there are sufficient facts to support a finding that the FIB defendants knew that SBCY was receiving commissions on plaintiffs' limited partnership investments, and that they knew those commission were inadequately disclosed to SBCY's clients. This, coupled with evidence that FIB actively attempted to conceal this fraud from the general public, is sufficient to support a finding that the FIB defendants conspired to defraud plaintiffs. Whether this evidence is sufficiently persuasive to produce a verdict in plaintiffs' favor on the conspiracy counts is a matter that may only be resolved at trial. However, as our analysis above indicates, plaintiffs have raised sufficient factual issues to defeat the FIB defendants' summary judgment motion.
For the foregoing reasons, the parties' cross motions for summary judgment are denied.
Dated: New York, New York
July 30, 1993
William C. Conner
United States District Judge