The plaintiffs allege that the true purchase price of the Property paid by the first Trupin entity to buy it was $ 15,200,000, and the fair market value at the time of the offering was at least $ 7.3 million less than the value set forth in the PPM. The PPM also concealed the affiliated status of North American, which was managed by a friend of and directly controlled by Trupin. A plaintiff who held interests in Sarasota Associates could lawfully deduct only interest payments on the first two mortgages on the Property, not at the higher rate of 18.875% provided for in the wrap-around mortgage.
The plaintiffs have also alleged that Barry Trupin converted Sarasota Associates partnership funds to his own account from June 1985 to December 1986, in the total sum of $ 3,304,850, and that he wired $ 1,218,000 from the proceeds of a new mortgage on the Property directly to a personal bank account on December 31, 1986. However, such post-offering acts cannot implicate SBC, which is charged only with aiding and abetting the frauds practiced on the plaintiffs through misleading or omitted statements in the PPM.
Banks holding the original mortgage and the Metro North mortgage instituted foreclosure actions on the Property in June and July of 1988. Sarasota Associates subsequently filed for protection from its creditors under Chapter 11. The plaintiffs allege they had no notice of the material misrepresentations in the PPM until January, 1989, when Sarasota Management Corp. was removed as the general partner of Sarasota Associates and the plaintiffs had access to the books and records of the partnership. The Bankruptcy Court entered a default judgment of $ 16,967,555.25 against Rothschild Registry Properties Corp., Rothschild Registry, and Sarasota Management Corp. on March 5, 1991.
I. Standards for a Motion to Dismiss
The standard of review under Rule 12(b)(6) requires the court to accept as true all reasonable inferences which can be drawn from the Third Amended Complaint. The complaint need only "contain direct or inferential allegations respecting all the material elements necessary to sustain recovery under some viable legal theory," Car Carriers, Inc. v. Ford Motor Co., 745 F.2d 1101, 1106 (7th Cir. 1984), cert. denied, 470 U.S. 1054, 84 L. Ed. 2d 821, 105 S. Ct. 1758 (1985) (citations omitted). A complaint is not to be dismissed unless it appears "beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitled him to relief," Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957); accord, Hishon v. King & Spalding, 467 U.S. 69, 73, 81 L. Ed. 2d 59, 104 S. Ct. 2229 (1984); Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 47 (2d Cir. 1991), cert. denied, 112 S. Ct. 1561 (1992).
In the Second Circuit, a complaint is deemed to include any written instrument attached to it as an exhibit or any statements of documents incorporated in it by reference. Cortec, 949 F.2d at 47; Cosmas v. Hassett, 886 F.2d 8, 13 (2d Cir. 1989); Goldman v. Belden, 754 F.2d 1059, 1065-66 (2d Cir. 1985). The court may review documents integral to the complaint even where they have been neither attached nor incorporated by reference. See Cortec, 949 F.2d at 47; I. Meyer Pincus & Assoc., P.C. v. Oppenheimer & Co., 936 F.2d 759, 762 (2d Cir. 1991). Since the complaint hinges upon misrepresentations in the offering PPM, it incorporates them by reference and accordingly they will be relied upon by this court in considering the motion to dismiss.
II. Failure to Plead Fraud with Particularity under Rule 9(b)
Rule 9(b), F.R.Civ.P., provides that "in all averments of fraud or mistake, the circumstances constituting the fraud or mistake shall be stated with particularity." Rule 9(b) is designed to further three goals: (1) providing a defendant who needs to prepare a defense with fair notice of the plaintiffs' claim; (2) protecting a defendant from harm to his reputation or good will, and (3) reducing the number of strike suits. Di Vittorio v. Equidyne Extractive Indus., Inc., 822 F.2d 1242, 1247 (2d Cir. 1987). Reference of misrepresentations in offering memoranda satisfies 9(b)'s requirement of identifying the time, place, speaker, and content of the misrepresentation where the defendants are insiders or affiliates participating the offering of the securities. O'Brien v. Price Waterhouse, 740 F. Supp. 276, 279 (S.D.N.Y. 1990), aff'd, 936 F.2d 674 (2d Cir. 1991) (citing Ouaknine v. MacFarlane, 897 F.2d 75, 80 (2d Cir. 1990)).
A claim of securities fraud under 10(b) adds the requirement that the cause of action involve the purchase or sale of a security to the elements required for commonlaw fraud: a knowing misrepresentation upon which the plaintiff relied and which was directly responsible for his loss. A complaint alleging securities fraud must allege facts which give rise to a strong inference that the defendants possessed the requisite fraudulent intent, supporting either intent to defraud, knowledge of falsity, or reckless disregard for the truth. Breard v. Sachnoff & Weaver, Ltd., 941 F.2d 142, 144 (2d Cir. 1991). This can be done by alleging facts showing a motive for committing fraud, and a clear opportunity to do so, or by identifying circumstances indicating conscious behavior by the defendant, though the strength of the circumstantial allegations must be correspondingly greater. See Ades v. Deloitte & Touche, 799 F. Supp. 1493, 1498 (S.D.N.Y. 1992)
The plaintiffs have alleged two facts which they claim support an inference of scienter: SBC's receipt of sales commissions and SBC's employment of Zukoff. Neither fact raises an inference of fraud on the part of SBC.
Allegations about the commissions do not support an inference of fraud because, as pled by the plaintiffs, they support inferences neither of scienter nor loss causation. The sections of the complaint which concern the commissions state in their entirety:
Upon information and belief, Becker and his affiliates, as testified to by Gnesin, received commissions for selling interests in Rothschild Group limited partnerships to Becker's clients.