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June 14, 1995


Robert L. Carter, U.S.D.J.

The opinion of the court was delivered by: ROBERT L. CARTER

CARTER, District Judge

 Plaintiff moves pursuant to Rule 15, F.R. Civ. P. and Rule 3 of the Local Rules for leave to file a second amended complaint to amend its cause of action based on § 12(2) of the Securities Act of 1933 ("the 1933 act"), 15 U.S.C. § 771 (1988), and to add causes of action based on § 10(b) of the Securities Exchange Act of 1934 ("the 1934 act"), 15 U.S.C. § 78j (1988); on Rule 10b-5, 17 C.F.R. § 240.-10b-5 (1994); and on common law fraud. Defendants renew their motion for summary judgment and dismissal of the amended complaint pursuant to Rule 12(b)(6), F.R. Civ. P. and Rule 56, F.R. Civ. P. Defendants also move for a protective order staying discovery pending the disposition of these motions.

 I. Background

 The background of this action has been set out in the court's endorsement of December 12, 1994, with which familiarity is assumed. On October 21, 1991, ESI Energy, Inc. ("ESI Energy"), through its subsidiary, plaintiff ESI Montgomery County, Inc. ("ESI"), purchased a limited partnership interest constituting 72% of Montenay Montgomery Limited partnership ("MMLP"), which owns and operates a waste-to-energy facility in Pennsylvania. Defendant Montenay international Corp. ("MIC") retained a 28% interest in MMLP, through its related entities. Defendant Montenay Energy Resources of Montgomery County, Inc. ("MERMCI"), a wholly owned subsidiary of MIC, is the managing general partner of MMLP, and defendant Montenay Montgomery Trust ("MMT"), a common law trust created for the benefit of MIC and its affiliated companies, was a limited partner through October, 1991.

 ESI became interested in purchasing a share in MMLP after receiving a letter, dated August 14, 1990, accompanied by an investment memorandum prepared by Salomon Brothers, Inc. on behalf of MIC. ESI also received a second investment memorandum, dated March, 1991, and prepared by Salomon Brothers on behalf of MIC. On April 16, 1991, ESI offered to purchase a limited partnership interest in MMLP, and after a series of negotiations ESI and MMT entered into a purchase agreement, in which MMT sold a portion of its limited partnership interest in MMLP to ESI.

 On January 10, 1994, ESI filed a complaint against defendants, alleging that they had misrepresented material facts in the purchase agreement, thus violating § 12(2) of the 1933 act, which provides a cause of action for purchasers of securities who relied upon an untrue material statement contained in a prospectus. The complaint also alleged that defendants breached the purchase agreement and made negligent representations to ESI. Defendants subsequently moved for summary judgment on the § 12(2) claim, arguing that the claim lacked a basis because the purchase agreement, which was privately negotiated after market sale of a security interest, did not constitute a prospectus within the meaning of the 1933 act. Defendants also moved for dismissal of the state law causes of action on the ground that the court would lack subject matter jurisdiction once the federal securities claim had been dismissed. The court denied the motions, relying on Second Circuit precedent for the proposition that § 12(2) applied to private as well as public offerings of securities. ESI Montgomery County, Inc., No. 94 Civ. 0119, slip op. at 4 (S.D.N.Y. Dec. 12, 1994) (Carter, J.).

 II. Motion to Amend § 12(2) Claim

 Leave to amend a complaint pursuant to Rule 15(a), F.R. Civ. P., should be liberally granted in accordance with the liberal pleading policy of the federal rules. State Teachers Retirement Bd. v. Fluor Corp., 654 F.2d 843, 856 (2d Cir. 1981). Leave to amend should be denied, however, where amendment would be futile, where it is sought in bad faith, or where it would prejudice the opposing party. Id.

 Defendants oppose plaintiff's motion to amend the cause of action based on § 12(2), arguing that amendment would be futile in light of the ruling in Gustafson that § 12(2) applies only to a "public offering of securities by an issuer or controlling shareholder." Gustafson, 115 S. Ct. at 1073-74; see also In re Valence Technology Secs. Litig., 1995 U.S. Dist. LEXIS 10379, No. C94-1542-SC, 1995 WL 274343, at *19 n.15 (N.D. Cal. May 8, 1995) ("The Court in Gustafson held that § 12(2) does not apply to private placement transactions."); Endo v. Albertine, 1995 U.S. Dist. LEXIS 4517, No. 88 C 1815, 1995 WL 170030, at *6 n.3 (N.D. Ill. Apr. 7, 1995) (decision in Gustafson "limits recovery under § 12(2) to only those class members who purchased securities in a public offering"). Plaintiff disputes that this was the clear holding of the case, pointing to the majority's agreement with a conclusion reached by both the SEC, as amicus, and by Justice Ginsburg, in her dissent, that "§ 12(2) applies to every class of security (except one issued or backed by a governmental entity), whether exempted from registration or not . . . ." Gustafson, 115 S. Ct. at 1072. Plaintiff construes this language as indicating that although the security at issue here was exempted from the registration requirements because it was a private offering, it may still be covered by § 12(2). (Pl.'s Reply Mem. in Supp. of Mot. for Leave to File 2d Am. Compl. at 16-17.)

 Writing for the majority in Gustafson, Justice Kennedy was careful to note that although there was no disagreement between himself and the SEC regarding which securities were covered by § 12(2), "the question before us is the coverage of § 12(2), and the writings offered by the SEC are of little value on this point." Gustafson, 115 S. Ct. at 1072. The first time that Justice Kennedy formulated the question facing the court he wrote, "The question presented is whether this right of rescission extends to a private, secondary transaction, on the theory that recitations in the purchase agreement are part of a 'prospectus.'" Id. at 1064. In other words, the issue settled in Gustafson is not which securities are exempt from § 12(2), but rather which transactions are exempt from § 12(2). This distinction makes sense in light of the structure of the 1933 act, which distinguishes between exempted securities, which are identified in section 3 of the act, 15 U.S.C. § 77c (1988), and exempted transactions, which are identified in section 4 of the act, 15 U.S.C. § 77d (1988). Furthermore, in § 12(2) it was only by distinguishing between public and private transactions that Congress was able to impose liability without regard to fraud or reliance. Although the public should be allowed to rely upon statements "contained in a document prepared with care, following well established procedures relating to investigations with due diligence and in the context of a public offering by an issuer or its controlling shareholders," it would be overly draconian to impose such extensive liability with regard to "every casual communication between buyer and seller in the secondary market." Gustafson, 115 S. Ct. at 1071. Therefore, Gustafson, clearly permits plaintiffs to state a cause of action under § 12(2) only if they purchased their limited partnership interest in MMLP through a public offering.

 Whether an offering is public within the meaning of the 1933 act depends on "(1) the number of offerees; (2) the sophistication of the offerees, including their access to the type of information that would be contained in a registration statement; and (3) the manner of the offering." United States v. Arutunoff, 1 F.3d 1112, 1118 (10th Cir.), cert. denied sub nom. DeVries v. United States, 126 L. Ed. 2d 580, 114 S. Ct. 616 (1993). Had plaintiff alleged that the offering was public it would be premature for the court to assess the weight of these factors and determine the truth of plaintiff's assertion. However, plaintiff has not alleged that the offering was public -- on the contrary, plaintiff acknowledges that the investment memoranda were "private offering memoranda," (Pl.'s Mem. in Supp. of Mot. for Leave to File 2d Am. Complaint at 8), and that "the offer and sale of the limited partnership interest at issue in this case was exempted from registration by Section 4(2)" of the 1933 act, which exempts private offerings. (Pl.'s Reply Mem. in Supp. of Mot. for Leave to File 2d Am. Compl. at 17.) Confirming this interpretation, the investment memoranda both stated, "The leveraged lease or partnership financing being offered hereby has not been registered under the Securities Act of 1933, as amended . . . or under any state securities law in reliance upon exemptions from registration for transactions not involving a public offering." (Friedlander Aff., Ex. 8.) Therefore, plaintiff has no cause of action against defendants pursuant to § 12(2), the motion to amend must be denied on grounds of futility, and defendants' renewed motion for summary judgment on this claim is granted. *fn1"

 Plaintiff attempts to avoid the implications of Gustafson by arguing that the holding of that case was merely that private purchase agreements could not be considered prospectuses for the purposes of § 12(2), and that the Court "did not espouse an opinion on whether other documents selling or offering to sell securities would be considered prospectuses under the 1933 Act." (Pl.'s Mem. in Supp. of Mot. for Leave to File 2d Am. Compl. at 8.) This argument is based solely on plaintiff's observation that "courts have long recognized that private offering memoranda for the sale of limited partnership interests are prospectuses under the 1933 Act." (Pl.'s Mem. in Supp. of Mot. for Leave to File 2d Am. Compl. at 8.) As Justice Ginsburg noted in her dissent in Gustafson, however, all circuit court rulings finding that § 12(2) covered private offerings were overruled by the majority's holding in Gustafson. Gustafson, 115 S. Ct. ...

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