by defendants to establish and operate the enterprise." Id. at P 66.
Defendants argue that Magistrate Judge Francis erred in denying their motion to dismiss plaintiffs' RICO claim as plaintiffs' claim fails to meet any of the requirements for pleading a RICO claim. Specifically, defendants
contend that the (1) RICO claim is time-barred as any injury occurred when plaintiffs lost their investments; (2) predicate acts are insufficient as a matter of law because the Memoranda did not contain any fraudulent misrepresentations or omissions; (3) plaintiffs cannot establish justifiable reliance because the Memoranda disclosed all material facts; (4) complaints fail to assert facts supporting a strong inference of fraudulent intent; (5) plaintiffs have failed to plead the alleged predicate acts with particularity as required by Federal Rule of Civil Procedure 9(b); and (6) complaints fail to allege two or more predicate acts constituting a pattern of racketeering activity. Defendants' objections do not withstand scrutiny.
A. Statute of Limitations
The parties do not dispute that civil RICO claims are governed by a four-year statute of limitations period. The parties disagree, however, as to when the RICO claim accrued in the case at hand. Defendants argue that accrual occurs at the time of injury, namely the moment plaintiffs purchased their shares in the partnerships. This contention is meritless.
To sustain a civil RICO claim, a plaintiff must prove a RICO violation and a resulting injury. Bankers Trust Co. v. Rhoades, 859 F.2d 1096, 1102 (2d Cir. 1988) (citing Sedima, S.P.R.L. v. Imrex Co., Inc., 473 U.S. 479, 496, 87 L. Ed. 2d 346, 105 S. Ct. 3275 (1985)), cert. denied sub nom. Soifer v. Bankers Trust Co., 490 U.S. 1007, 104 L. Ed. 2d 158, 109 S. Ct. 1642 (1989). A RICO cause of action thus cannot be said to accrue until an injury occurs, id., and a RICO injury does not exist so long as the loss is "'speculative or [the] amount and nature unprovable.'" Cruden v. Bank of New York, 957 F.2d at 977 (quoting Zenith Radio Corp. v. Hazeltine Research, Inc., 401 U.S. 321, 339, 28 L. Ed. 2d 77, 91 S. Ct. 795 (1971)). Here, plaintiffs could not maintain a RICO claim until the Tax Court's decision in Smith since, prior to that decision, any claimed injury would have amounted to mere unsustainable conjecture. As the injury for RICO purposes did not occur until 1988 when the Smith case was decided, plaintiffs filed their complaints well within the permitted statute of limitations. Accordingly, defendants' objection to the Report on this ground is denied.
B. Predicate Acts
Defendants next argue that the RICO claim should be dismissed on the ground that the predicate acts underlying the claim, including allegations of securities, mail and wire fraud, are insufficient as a matter of law. To state a securities fraud claim under Section 10(b), a plaintiff must prove: (1) material misstatements or omissions; (2) indicating an intent to deceive or defraud; (3) in connection with the purchase or sale of a security; (4) upon which plaintiffs reasonably and detrimentally relied. Luce v. Edelstein, 802 F.2d 49, 55 (2d Cir. 1986). Similarly, to state a claim for violation of the federal mail or wire fraud statutes, plaintiffs must demonstrate the existence of a scheme to defraud and a knowing use of the mails or wires to implement the scheme. Sable v. Southmark/Envicon Capital Corp., 819 F. Supp. 324, 341 (S.D.N.Y. 1993). Defendants attack the sufficiency of the underlying fraud claims on the ground that plaintiffs cannot prove several of these elements. The Court shall address each of defendants' contentions below
1. Material Misstatements or Omissions
Defendants argue that plaintiffs fraud claim is untenable because it is based on Memoranda that "bespeak caution" as to precisely the negative investment results of which plaintiffs now complain. In Luce v. Edelstein, 802 F.2d at 56, the Second Circuit explained that it "was not inclined to impose liability" on the basis of statements and materials regarding projections of future tax benefits and other financial results where the statements "clearly 'bespeak caution.'" Id. Thus, warnings in offering materials may limit the ability of an investor to rely on such materials as a forecaster of future financial outcomes. Friedman v. Arizona World Nurseries, Ltd. Partnership, 730 F. Supp. 521, 541 (S.D.N.Y. 1990), aff'd, 927 F.2d 594 (2d Cir. 1991). Nonetheless, "employing statements which 'bespeak caution' does not automatically absolve the defendants of liability for any securities violation." In re Integrated Resources Real Estate Limited Partnerships Sec. Litig., 815 F. Supp. 620, 674 (S.D.N.Y. 1993). "Fraud is still fraud, and all the cautionary language in the world will not replace a true material omission or misstatement of a fact which would matter to a reasonable investor." Id.
Plaintiffs here do-not merely challenge the specific forecasts and predictions set forth in the Memoranda, such as the likelihood of profit, the likelihood of obtaining tax benefits and the reliability of certain appraisals and feasibility studies. Rather, plaintiffs also allege that the Memoranda and Tax Opinion Letters were specifically designed to dupe investors into believing that the partnerships created a potential for economic profit and tax benefits. According to the complaints, defendants knew at the time that the offer was made that no such possibility existed. While the issue of whether Plaintiffs were justified in ignoring the cautionary language contained in the Memoranda and Tax Opinion Letters is a question of fact requiring jury resolution, the Court cannot determine that material misrepresentations did not exist as a matter of law.
2. Reasonable Reliance
Defendants next argue that plaintiffs could not have reasonably relied on the Memoranda because they were replete with warnings and cautionary language, including admonitions to seek independent advice regarding the suitability of the investments. This argument fails for the same reason as discussed above. Specifically, an issue of fact exists as to whether plaintiffs reasonably relied on the defendants' representations in the Memoranda and Tax Opinion Letters as to the potential for economic profit and tax benefits from the investments. Thus, despite the Memoranda's cautionary language, defendants' statements as to the possibility of benefits may have induced plaintiffs to invest in the partnerships. Accordingly, the Court cannot say that plaintiffs unreasonably relied on the Memoranda as a matter of law.
Defendants also attack the sufficiency of the predicate acts on the ground that plaintiffs have failed to assert facts giving rise to a "strong inference" that Zukerman or the Moving Defendants intended to deceive or defraud plaintiffs. In order to state a claim for violation of the RICO statute, a plaintiff must establish that defendants acted with fraudulent knowledge. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 197, 47 L. Ed. 2d 668, 96 S. Ct. 1375 (1976). More specifically, a plaintiff is required to prove facts supporting a "strong inference" of knowledge on the part of defendants. Cosmas v. Hassett, 886 F.2d 8, 12-13 (2d Cir. 1989); see also Wexner v. First Manhattan Co., 902 F.2d 169, 172 (2d Cir. 1990) ("[A] complaint must adduce specific facts supporting a strong inference of fraud or it will not satisfy even a relaxed pleading standard.").
After a careful review of the complaints, the Court finds that the facts alleged, if true, adequately demonstrate a strong inference of knowledge by defendants. Most significantly, the complaints allege that defendants knew at the time that the Memoranda were sent that the Memoranda contained material misstatements and omissions designed to defraud plaintiffs. Accordingly, the Court agrees with the Magistrate Judge's determination that plaintiffs have satisfied the scienter requirement for establishing a RICO claim.
In addition to the foregoing, defendants object to the Magistrate Judge's ruling on the ground that the RICO claim is not pled with particularity. RICO claims must be pled with particularity pursuant to Rule 9(b) of the Federal Rules of Civil Procedure. See Hecht v. Commerce Clearing House, Inc., 897 F.2d 21, 25 (2d Cir. 1990); Browning Ave. Realty Corp. v. Rosenshein, 774 F. Supp. 129, 137 (S.D.N.Y. 1991); Kuczynski v. Ragen Corp., 732 F. Supp. 378, 383 (S.D.N.Y. 1989). To satisfy Rule 9(b), a plaintiff must specify: (1) the allegedly fraudulent oral or written misrepresentations; (2) the time and place of each such misrepresentation and the person responsible for making it; (3) the context of such statements and the manner in which plaintiff was misled; and (4) what defendants obtained as a result of the fraud. See Luce v. Edelstein, 802 F.2d at 54; United States v. International Bhd. of Teamsters, 708 F. Supp. 1388, 1396 (S.D.N.Y. 1989). As a general rule, a plaintiff claiming fraud must also establish a connection between the fraudulent statements and each defendant so that each defendant receives notice of the nature of his participation in the alleged fraud. Parnes v. MAST Property Investors, Inc., 776 F. Supp. 792, 796 (S.D.N.Y. 1991) (citing DiVittorio v. Equidyne Extractive Indus., Inc., 822 F.2d 1242, 1247 (2d Cir. 1987) ("Where multiple defendants are asked to respond to allegations of fraud, the complaint should inform each defendant of the nature of his alleged participation in the fraud.")). An exception to this general rule occurs, however, where the plaintiff alleges that an offering memorandum or prospectus was fraudulent and the defendants are all insiders or affiliates who participated in the securities offer. Luce v. Edelstein, 802 F.2d at 55; Parnes v. MAST Property Investors, Inc., 776 F. Supp. at 796.
The Court has reviewed the complaints and agrees with the Magistrate Judge's determination that plaintiffs have complied with Rule 9(b)'s particularity requirements. The complaints contain adequate specifics regarding the allegedly fraudulent acts and those persons responsible for any material misstatements and omissions. See Amended Complaint at PP 16-21. The Court further agrees with the Magistrate Judge's conclusion that those not individually identified fall within the "insiders or affiliates" exception described in Luce v. Edelstein. Accordingly, defendants' motion to dismiss pursuant to Rule 9(b) is denied.
C. Pattern of Racketeering Activity
Defendants also object to the Magistrate Judge's ruling on the ground that the complaints fail to allege a "pattern of racketeering activity." Plaintiffs seeking redress for alleged civil RICO violations must establish that defendants' conduct constitutes a "pattern of racketeering activity." 18 U.S.C. § 1962(a). A "pattern of racketeering activity" will not be found "without some showing that the racketeering acts are interrelated and that there is continuity or a threat of continuity." United States v. Indelicato, 865 F.2d 1370 (2d Cir.), cert. denied, 493 U.S. 811, 107 L. Ed. 2d 24, 110 S. Ct. 56 (1989). "A party alleging a RICO violation may demonstrate continuity over a closed period by proving a series of related predicates extending over a substantial period of time." H.J. Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 242, 106 L. Ed. 2d 195, 109 S. Ct. 2893 (1989).
The Court finds no basis for defendants' claim that plaintiffs have failed to plead a "pattern of racketeering activity." Rather, the complaints clearly allege that defendants' scheme to induce plaintiffs to invest in the partnerships extended over an eight-year time period. If plaintiffs' allegations are proved true, defendants' fraudulent conduct began in 1981 and 1982 with the initial offering of the partnerships and continued through the administration of the partnerships and the concealment of fraud through the late 1980s. Thus, the Court finds that the complaints plead the requisite "pattern of racketeering activity" necessary to sustain a RICO claim. Accordingly, defendants' motion to dismiss Count Two is denied.
For the reasons set forth above, defendants' motion to dismiss the complaints, pursuant to Rules 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure, is granted in part and denied in part. Specifically, defendants' motion to dismiss Counts One, Three, Four and Five is granted. Defendants' motion to dismiss Count Two is denied. The parties are directed to appear at a pre-trial conference on April 19, 1995 at 2:00 p.m.
SHIRLEY WOHL KRAM
United States District Judge
Dated: New York, New York
March 3, 1995