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April 2, 1996


The opinion of the court was delivered by: MUKASEY



 The Department of Economic Development ("DED"), an agency of the British government operating principally in Northern Ireland, brings this securities fraud action against the accounting firm Arthur Andersen & Co. ("AA") and three of its partners, Richard L. Measelle, Edward A. Massura, and Richard E. Beckman. Defendants have moved for summary judgment on all claims on various grounds. For the reasons that follow, the motion is granted in part and denied in part as explained below.


 A. A Brief Summary of the DeLorean Motor Co. Debacle1 (1978-1983)

 DED's predecessors, the Northern Ireland Development Agency ("NIDA") and the Department of Commerce ("DOC"), were agencies of the British government empowered to extend financial assistance to businesses to promote industrial development in Northern Ireland. On July 28, 1978, NIDA and DOC entered into a "Master Agreement" with several entities controlled by John Z. DeLorean ("the DeLorean entities"). The Master Agreement spelled out the contracting parties' rights and obligations with respect to the development and manufacture of the DMC-12, a sports car with distinctive gull wing-shaped doors and a rust-proof stainless steel body. (Zirin Aff. Ex. 49) The car was to be manufactured Dunmurry, an economically depressed, predominantly Catholic area near the Northern Ireland capital of Belfast.

 The principal DeLorean entities and their respective roles will be summarized briefly here. The DeLorean Motor Company ("DMC") was incorporated in 1975 under the laws of Michigan for the purpose of developing, manufacturing, and marketing the DMC-12 sports car. John Z. DeLorean was Chairman of the Board and Chief Executive Officer of DMC. The car was manufactured at the plant of DeLorean Motor Cars Limited ("DMCL"), a subsidiary of DMC based in Northern Ireland. DMCL's common stock was owned by DMC, and DMCL's preferred stock was owned by NIDA. After the Master Agreement was signed, another entity, DeLorean Research Limited Partnership ("DRLP"), was formed on September 22, 1978, to raise money for research and development for the venture. DMC was the sole general partner of DRLP. The DRLP limited partners were a group of individual American investors including several Hollywood celebrities. See generally Rudolph v. Arthur Andersen & Co., 800 F.2d 1040 (11th Cir.) (vacating district court's dismissal of securities fraud claims against AA by DRLP limited partners and DRLP liquidating trustee), reh'g denied, 806 F.2d 1070 (11th Cir. 1986), cert. denied, 480 U.S. 946, 94 L. Ed. 2d 790, 107 S. Ct. 1604 (1987); Judith Cummings, An Audit Under Fire, N.Y. Times, Mar. 16, 1986, § 3 at 4.

 In the Master Agreement NIDA agreed, inter alia, to purchase all of the 17,757,000 preferred shares of DMCL at a Price of $: 1 per share. (Master Agreement P 1.1, Zirin Aff. Ex. 49 at 128) Although the stock certificates were delivered at the closing of the Master Agreement, NIDA was to pay for the shares in a series of "calls" to be made at DMCL's discretion. (Id.) NIDA and DOC also agreed to extend a variety of grants, loans, and loan guarantees to DMCL up to a maximum of $: 44,936,000. (Master Agreement PP 7.1, 8.3.3 & Ex. F, Zirin Aff. Ex. 49 at 131, 133) To protect those investments, the Master Agreement provided that NIDA would appoint DMCL's financial comptroller and that DMC would "use its best endeavors" to insure that the boards of directors of DMCL and DMC each included two NIDA appointees. (Master Agreement PP 5.1.6, 6.4, 6.5, Zirin Aff. Ex. 49 at 129, 131) In addition, DMC issued a "put" to NIDA. Under the terms of the put after four years NIDA could force DMC to purchase NIDA's DMCL preferred shares for the cash value of 6.5 million shares of DMC common stock. After 10 years, NIDA could force DMC to buy its DMCL shares at a price of $: 1 per share plus a premium. (Master Agreement P 9.2, Zirin Aff. Ex. 49 at 133-34) In March 1980, the parties renegotiated the put. NIDA relinquished its original put rights in exchange for the single right, effective after four years, to force DMC to tender the cash value of 7 million shares of DMC stock in payment for NIDA's DMCL shares. (Zirin Aff. Ex. 50)

 Pursuant to the Master Agreement, DMC and another DeLorean-controlled corporation, the John Z. DeLorean Corporation, undertook to furnish to NIDA and DOC "within 120 days following the end of [DMC's] fiscal year . . . a consolidated balance sheet at the end of such fiscal year and a consolidated statement of income for such year, together with notes thereto and the report thereon of DMC's auditors." (Master Agreement P 6.1.5(b), Zirin Aff. Ex. 49 at 130) Those "Consolidated Financial Statements" treated DMC and its subsidiaries, including DMCL. AA, as DMC's auditors, prepared reports certifying the Consolidated Financial Statements. Those reports were issued in this country by AA's Detroit and New York offices. The first report, which certified the Consolidated Financial Statement covering the nine-month period ending August 31, 1978, was issued on November 20, 1978.

 The gravamen of DED's complaint is that DMC's Consolidated Financial Statements were false and misleading, and that by issuing reports certifying these statements, AA substantially helped DeLorean and others to execute a securities fraud. According to DED, AA's reports misrepresented or failed to disclose various questionable business transactions involving the DeLorean entities. Principally, DED alleges that AA inadequately investigated a November 1, 1978 contract between several of the DeLorean entities and GPD Services, Inc. ("GPD") a Panamanian corporation not related to any of the DeLorean entities. (Schade Aff. Ex. 141) DED contends that GPD performed none of its obligations under the contract, and that GPD instead was used by DeLorean to siphon money from DRLP and DMCL. Funds paid to GPD allegedly were transferred to Swiss accounts of the Dutch bank Pierson, Heldring, Pierson, N.V., and then loaned back to DeLorean at below market interest rates. DeLorean allegedly used the proceeds of the Pierson loan to repay a debt to Continental Illinois Bank incurred in connection with DeLorean's acquisition of Logan Manufacturing Company, a manufacturer of snow-grooming equipment and tracked vehicles based in Utah. DED alleges that AA knew or should have known of those transactions, but neglected to disclose its knowledge or its suspicions in its audit reports.

 In late 1981, the DeLorean entities began to collapse amid allegations of mismanagement and fraud. On February 19, 1982, DMCL was placed in receivership. On October 25, 1982, DMC filed a petition for reorganization under Chapter 11 of the Bankruptcy Code, and in December 1983 that proceeding was converted into a Chapter 7 liquidation. DED estimates that it suffered millions of dollars in damages as a result of the demise of the DeLorean entities. (Second Am. Compl. at 224)

 B. DED's Original Complaint (1985)

 On February 15, 1985, DED filed its initial complaint in this action, naming as defendants three branches of AA's worldwide partnership. *fn2" In that complaint, DED alleged that AA committed primary violations and aided and abetted violations of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. In addition, DED asserted civil claims under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1964(a)-(d), as well as a claim for aiding and abetting DeLorean's RICO violations. Finally, DED included common law claims for negligence, breach of contract, fraud, and aiding and abetting fraud. The case was assigned to the late Judge Charles E. Stewart of this Court.

 C. AA's Motion to Dismiss (March 1988)

 AA moved to dismiss the claims in the original complaint on various grounds. Pursuant to Fed. R. Civ. P. 12(b), Judge Stewart partially converted the motion to a motion for summary judgment after both parties submitted materials outside the pleadings for the Court's consideration. Judge Stewart issued an opinion on the motion in March 1988. 683 F. Supp. 1463 (S.D.N.Y. 1988).

 First, he found that it was appropriate to apply the American securities laws in this action because a substantial part of the conduct giving rise to the fraud claims took place in the United States. Id. at 1471.

 Second, he held that material issues of fact prevented a summary judgment as to whether the Master Agreement is a security for purposes of Rule 10b-5. Under Securities & Exch. Comm'n v. W.J. Howey Co., 328 U.S. 293, 90 L. Ed. 1244, 66 S. Ct. 1100 (1946), a financial instrument will be deemed an investment contract and therefore a security if the purchaser "invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party." Id. at 298-99. AA has maintained that NIDA and DOC did not "invest" with the expectation of profit, and that because NIDA participated in the management of DMCL, investment return did not depend solely on the efforts of others. 683 F. Supp. at 1473-74.

  Third, he found that AA's allegedly fraudulent certification of DMCL's financial statements was not "in connection with the purchase" of a security for purposes of liability under Rule 10b-5 with respect to the Master Agreement. NIDA had committed to purchase the DMCL preferred shares when the Master Agreement was signed on July 27, 1978, several months before AA issued its first audit report. Id. at 1475-76. Judge Stewart explained that


whatever the evidence of DeLorean's scheme to defraud, it is clear that defendants played no role in the initial sale of DMCL stock on July 28, 1978 and thus are not exposed to liability . . . for any securities violation that occurred "in connection with" that sale. . . . It could plausibly be argued that DeLorean induced NIDA to buy DMCL stock as part of a scheme to defraud NIDA. In contrast, all of defendants' alleged participation in this fraudulent scheme dates from after this initial purchase of DMCL securities. Defendant's first report was issued on November 20, 1978, nearly four months after NIDA's initial purchase of DMCL stock. Plaintiff has tied defendants to an alleged fraudulent scheme, but defendants' fraudulent acts within that scheme were not in connection with the initial sale of securities.

 Id. at 1479. The Court suggested that at most, AA aided and abetted the concealment of a fraudulent scheme involving the GPD contract, but that AA could not be liable for aiding and abetting the securities fraud itself. 683 F. Supp. at 1480 n.14. Five years after Judge Stewart's decision, in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 128 L. Ed. 2d 119, 114 S. Ct. 1439, 1455 (1994), the Supreme Court held that there is no private civil liability under Section 10(b) and Rule 10b-5 for aiding and abetting securities fraud. DED accordingly did not reassert any aiding and abetting claim under Rule 10b-5 in the Second Amended Complaint.

 Fourth, Judge Stewart denied summary judgment on the issue of whether the renegotiation of NIDA's put in March 1980 constituted a new purchase of a security for purposes of Rule 10b-5. He found material issues of fact as to whether that amendment to the Master Agreement produced "such significant change in the nature of the investment risks as to amount to a new investment." 683 F. Supp. at 1477-78 (quoting Abrahamson v. Fleschner, 568 F.2d 862, 868 (2d Cir. 1977), cert. denied, 436 U.S. 913, 56 L. Ed. 2d 414, 98 S. Ct. 2253 (1978)).

 Fifth, addressing DED's civil RICO claims, he found that DED stated a claim upon which relief could be granted under subsections (a) *fn3" and (c) *fn4" of 18 U.S.C. § 1962. He dismissed DED's claim under § 1962(b), *fn5" because DED had not set forth facts tending to show that AA purchased or maintained an interest in a racketeering enterprise. The Court also dismissed DED's § 1962(d) *fn6" conspiracy claim, because DED alleged no facts tending to show an agreement between DeLorean and AA to commit RICO predicate acts. 683 F. Supp. at 1482.

 Sixth, Judge Stewart held that DED adequately alleged a cause of action for aiding and abetting a RICO violation and denied summary judgment as to whether DED's RICO claims were time-barred. Id. at 1483. The statute of limitations for RICO claims is four years. Agency Holding Corp. v. Malley-Duff & Assoc., Inc., 483 U.S. 143, 156, 97 L. Ed. 2d 121, 107 S. Ct. 2759 (1987). DED filed this action more than four years after most of the allegedly fraudulent conduct occurred, but asserts that it was prevented from filing the action sooner by AA's concealment of acts of fraud. AA has maintained that DED had actual or constructive knowledge of the fraudulent activities of DeLorean and his accomplices within the limitations period.

 Finally, he denied a motion to dismiss based on forum non conveniens, finding that the Southern District of New York was not an inconvenient venue for this action. 683 F. Supp. at 1485. He declined to certify any part of the decision for interlocutory appeal. Id. at 1487. AA did not challenge, and Judge Stewart did not address, the pendent state law claims.

 D. DED's First Amended Complaint (July 1988)

 After Judge Stewart's ruling, DED filed a First Amended Complaint ("FAC") in July 1988. (Zirin Aff. Ex. 1) In utter disregard of Fed. R. Civ. P. 8(a)'s call for a "short and plain statement," DED submitted a 240-page tome laden with excessive evidentiary detail. DED asserted most of the same claims included in its first complaint, but dropped the RICO claims under subsections (b) and (d) of § 1962 which Judge Stewart had dismissed.

 E. Subsequent Procedural History (1990-1993)

 After the March 1988 ruling, AA asserted claims pursuant to Fed. R. Civ. P. 14 against third-party defendants Alex H. Fetherston, C. Shaun Harte, Ronald J. Henderson, Anthony S. Hopkins, and James Sim. These men were NIDA-appointed members of the boards of directors of DMC and/or DMCL. The third-party defendants moved to dismiss the claims in the third-party complaint in 1990. Judge Stewart dismissed all claims against Henderson for lack of personal jurisdiction. 747 F. Supp. 922, 929 (S.D.N.Y. 1990). On the merits, Judge Stewart granted the remaining defendants' motion to dismiss as to all claims except those for indemnity for negligence, and contribution for common law fraud and negligence. Id. at 944-45. The Court denied AA's request for leave to replead. 739 F. Supp. 804 (S.D.N.Y. 1990).

 In 1991, Judge Stewart ordered DED to produce for discovery numerous documents which DED had claimed were protected by executive, attorney-client, and work product privileges. 139 F.R.D. 295 (S.D.N.Y.), recons. denied, 139 F.R.D. 594 (S.D.N.Y. 1991). That ruling is discussed at length below in Part IV. (15) of this opinion. In summer 1993, Judge Stewart ruled on two smaller discovery disputes. See 1993 WL 293719 (S.D.N.Y. July 29, 1993) (granting leave to depose Pamela Newman in London, England); 1993 WL 293701 (S.D.N.Y. July 29, 1993) (holding that AA bears the burden of requesting a waiver of Parliamentary privilege in connection with deposition of L. Calvert).

 In the wake of Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 364, 115 L. Ed. 2d 321, 111 S. Ct. 2773 (1991) (adopting one year/three year limitations and repose structure of the federal securities laws for claims under Rule 10b-5), AA moved to dismiss DED's federal securities fraud claims on statute of limitations grounds. Judge Stewart denied the motion on the authority of the Federal Deposit Insurance Corporation Improvement Act of 1991, which added § 27A to the Securities Exchange Act of 1934. 15 U.S.C. § 78aa-1. That legislation barred the retroactive application of Lampf. 1992 WL 77542 (S.D.N.Y. Apr. 8, 1992). Judge Stewart relied on subsection (a) of § 27A; he did not apply subsection (b) of that provision, which was declared unconstitutional on separation of powers grounds in Plaut v. Spendthrift Farm, Inc., 131 L. Ed. 2d 328, 115 S. Ct. 1447, 1463 (1995).

 This case and its companion, Allard v. Arthur Anderson & Co., No. 84 Civ. 7703, a suit against AA by the bankruptcy trustee of DMC, were reassigned to my docket in early 1994. *fn7" In early spring of that year, AA moved for summary judgment. At a pretrial conference held on April 11, 1994, I granted DED leave to file a streamlined Second Amended Complaint and directed AA to resubmit a motion for summary judgment addressed to the new complaint. See Schade Aff. Ex. 8.

 F. DED's Second Amended Complaint (1994)

 On May 9, 1994, again in defiance of Fed. R. Civ. P. 8(a), DED filed a 225-page Second Amended Complaint ("SAC"). In response to the court's earlier request that DED pare down the complaint, DED simply reduced the line spacing and the size of the margins in the document. As a result, the Second Amended Complaint is 15 pages shorter than its predecessor, but each page is more dense.

 DED asserts eight claims in the Second Amended Complaint: (1) common law negligence, (2) breach of contract, (3) common law fraud, (4) aiding and abetting common law fraud or breach of a fiduciary duty, (5) securities fraud under Rule 10b-5, (6) violation of 18 U.S.C. § 1962(c) (RICO), (7) aiding and abetting RICO violations, and (8) violation of 18 U.S.C. § 1962(d) (RICO). The eighth claim is renascent -- Judge Stewart dismissed the RICO conspiracy claim in 1988 and DED did not replead that claim in the First Amended Complaint. For reasons explained above in Part I.C. of this opinion, DED has dropped its claim for aiding and abetting a violation of Rule 10b-5. DED also has dropped its claim under § 1962(a) of RICO, presumably because DED is unable to prove that NIDA and DOC suffered actual damages as a result of the investment of racketeering income in an enterprise. See Ouaknine v. MacFarlane, 897 F.2d 75, 83 (2d Cir. 1990). AA has moved for summary judgment on all eight remaining claims.


 Subject matter jurisdiction here is premised on 15 U.S.C. § 78aa, 18 U.S.C. § 1964, 28 U.S.C. § 1331, and federal common law principles of pendent jurisdiction. Jurisdiction could not be premised on diversity of citizenship under 28 U.S.C. § 1332(a)(4). Plaintiff is an agency of the British government deemed to reside in the United Kingdom. Defendant is a partnership including partners resident in the United Kingdom. Because § 1332 requires complete diversity and does not permit suits by aliens against other aliens, this action could not be brought as a diversity suit. Corporacion Venezolana de Fomento v. Vintero Sales Corp., 629 F.2d 786, 788 (2d Cir. 1980) ("the fact that alien parties were present on both sides would destroy complete diversity") (emphasis in original), cert. denied, 449 U.S. 1080, 66 L. Ed. 2d 804, 101 S. Ct. 863 (1981).

 The federal supplemental jurisdiction statute, 28 U.S.C. § 1367, has no application in this case because that statute became effective in 1990, five years after DED commenced this action. See Kreuzfeld v. Carnehammar, 138 F.R.D. 594, 608 (S.D. Fla. 1991) (§ 1367 does not apply retroactively). However, the judge-created principles upon which § 1367 was based do apply. See United Mine Workers of America v. Gibbs, 383 U.S. 715, 725, 16 L. Ed. 2d 218, 86 S. Ct. 1130 (1966) (state law claims that derive from same "nucleus of operative fact" as jurisdictionally sufficient federal claims arise under same "case or controversy" for purposes of federal subject matter jurisdiction). The doctrine of pendent jurisdiction permits the assertion of jurisdiction over DED's state law claims.

 Summary judgment is appropriate when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c). In making that assessment, the court resolves disputed factual issues against the movant and construes the evidence in the light most favorable to the nonmovant. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986).


 AA asserts the following arguments in support of its motion for summary judgment: (1) DED cannot establish transaction causation because NIDA and DOC would not have acted differently in the absence of the alleged misrepresentations. (2) DED cannot prove loss causation because economic recession -- not the alleged fraud -- caused the losses suffered by NIDA and DOC. (3) DED lacks standing to sue under RICO. (4) AA did not participate in the "operation or management" of a RICO enterprise as is required for liability under § 1962(c). (5) DED has not set forth facts tending to show an agreement between AA and DeLorean to commit RICO predicate acts as is required for liability under § 1962(d). (6) There is no cause of action for aiding and abetting a RICO violation. (7) DED's Rule 10b-5 claim is foreclosed as to both the Master Agreement and the March 1980 amendment thereto. (8) AA cannot be liable to DED for negligence under New York law because there was no privity between AA and NIDA or DOC. (9) DED's negligence claim is time-barred. (10) DED's breach of contract claim fails because NIDA ana DOC were not intended third party beneficiaries of AA's contracts with the DeLorean entities. (11) Aiding and abetting common law fraud is not a recognized tort in New York. (12) DED's damages cannot include grants paid to DMCL, because repayment of these funds was never contemplated. (13) All claims against Measelle, Massura, and Beckman are time-barred. (14) The state law claims in this action should be dismissed for lack of subject matter jurisdiction, because there are no viable federal claims. (15) The court should permit public filing of the memoranda of law filed by the parties in connection with this motion.

 These arguments will be addressed seriatim below.


 (1) Transaction Causation

 AA's first argument is a general attack on all the claims in the Second Amended Complaint. AA contends that DED cannot establish transaction causation, or reliance, for purposes of any of its claims. AA asserts that the British government was so desperate to create jobs in Northern Ireland that it would have continued to invest in the DMCL venture notwithstanding knowledge of DeLorean's misconduct. See generally Litton Indus., Inc. v. Lehman Bros. Kuhn Loeb Inc., 967 F.2d 742, 747 (2d Cir. 1992) ("the reliance element requires a showing that the violations under consideration caused the plaintiff to engage in the transaction"); Healey v. Chelsea Resources, Ltd., 947 F.2d 611, 618 (2d Cir. 1991) (plaintiff must establish that "the alleged misrepresentations were a 'substantial factor' in or a 'significant contributing cause' of his investment decision"). Alternatively, AA argues that it was unreasonable as a matter of law for NIDA and DOC to rely on favorable representations about DeLorean or DMCL because indicia of irregularities at DMCL put NIDA and DOC on inquiry notice as to fraud. See, e.g., Estate of Detwiler v. Offenbecher, 728 F. Supp. 103, 145 (S.D.N.Y. 1989) ("the Second Circuit repeatedly has recognized that access to the truth bars a claim of reliance upon purported misrepresentations") (citations omitted).

 DED disputes AA's characterization of the British government's investment strategy. DED argues that NIDA and DOC would have cut off financial assistance to the venture immediately had AA disclosed DeLorean's massive fraud.

 (a) The Rule 10b-5 Claim and the Master Agreement

 With respect to DED's Rule 10b-5 claim, to the extent that claim is based on the original Master Agreement, this issue already has been decided in favor of AA. As explained above in Part I.C. of this opinion, Judge Stewart ruled that AA's conduct was not "in connection with the purchase or sale of any security" for purposes of the Master Agreement because the alleged misrepresentations were made after July 28, 1978, the date on which NIDA committed to purchase the DMCL preferred shares. 683 F. Supp. at 1474-76. Judge Stewart reasoned that it would be impossible for DED to establish that NIDA, in making the initial decision to invest, relied on representations uttered after that investment decision was made.

 DED makes two attempts to resurrect this part of its Rule 10b-5 claim. First, DED argues that NIDA was not a "locked in" purchaser because the funding it was required to supply under the Master Agreement was paid in a series of calls after the issuance of AA's first audit report. Had NIDA known of the fraud that AA concealed, DED contends, NIDA would have been entitled to rescind the contract. Accordingly, DED concludes, AA's conduct did in fact induce NIDA to buy the DMCL preferred shares.

 The short answer to that argument is that it was considered and rejected by Judge Stewart, who explained that


a decision to rescind is not an investment decision. . . . The fact that NIDA paid for the DMCL stock over time rather than "up front", is irrelevant to the determination of when the "purchase or sale" took place for purposes of section 10(b).

 683 F. Supp. at 1476.

 Second, DED informs the court that "discovery subsequent to [the 1988] decision . . . has produced evidence of AA's knowledge of, and participation in, fraudulent acts by DeLorean prior to July 28, 1978." (Pl. Mem. at 198-99) DED claims that on July 1, 1978, Measelle met with NIDA and DOC representatives in Detroit "to answer their questions about DeLorean's integrity, ability, and business plan." (Pl. Mem. at 199) In addition, DED charges that during negotiations in June 1978, Lochlann Quinn and Brian McGhee, accountants at AA's Dublin office, furnished NIDA and DOC with fraudulent financial projections. According to DED, AA issued unreasonably optimistic profit estimates and an inflated estimate of $ 18 million for research and development expenditures for the DMC-12. DED alleges that there was a material discrepancy between that $ 18 million and the estimate of $ 7 million for research and development expenditures that appeared in the prospectus for a March 14, 1978 offering of DMC common shares. (Schade Aff. Ex. 24 at 17, 28) DED charges that the $ 11 million difference represented the amount DeLorean planned later to misappropriate, and that AA's $ 18 million estimate somehow furthered DeLorean's plan to steal. (SAC PP 34-35)

 DED's late-blooming and improvisational theory of reliance as to the Master Agreement is unconvincing. By the account of NIDA's own representative, the July 1 discussions with Measelle were general and bland. Measelle offered only general impressions about the expertise of DMC's management team and about the company's detailed planning efforts for the new sports car. See Mem. of C. Shaun Harte, Schade Aff. Ex. 80 at 1-2. DED accuses Measelle of neglecting to share vague concerns about "DeLorean's reasons for having left General Motors and his actual ability to carry out the project to completion." (Pl. Mem. at 55) But this is far from knowing concealment of fraud. DED cannot seriously contend that Measelle concealed DeLorean's theft of the proceeds of the GPD contract; in fact, the GPD contract was not formed until November 1978, several months after execution of the Master Agreement, and the alleged theft occurred even later. The most damning allegation DED can level about the July 1 meeting, consistent with the evidence and Fed. R. Civ. P. 11, is that Measelle did not disclose that DeLorean simultaneously was misleading the DRLP investors as to research expenditures. (Pl. Mem. at 199) But DED has offered principally unfounded speculation to connect Measelle at this early date to the allegedly misappropriated GPD contract proceeds. And even if DED could prove that AA helped DeLorean mislead the DRLP limited partners, that would not help DED here because DED has no standing to assert a claim arising from the sale of the DRLP partnership interests. See 683 F. Supp. at 1474.

 Moreover, the July 1 meeting is not new evidence uncovered in discovery. DED was aware of that meeting as soon as it happened, several years before discovery commenced in this case. DED's failure to mention that meeting as the basis for its fraud claims prior to Judge Stewart's 1988 ruling belies the claim that representations made at that meeting were a substantial factor in inducing NIDA and DOC representatives to sign the Master Agreement.

 DED's reliance on financial projections is equally misplaced. First, DED has produced no evidence that anyone at AA believed that any estimate in the projections was unreasonable. DED merely assumes this and then imagines -- the kindest verb I can summon -- that AA fudged the projections in order to further DeLorean's later-developed plan to embezzle. In fact, the evidence shows that AA had a minimal role in formulating the projections, which apparently were based on internally generated DMC estimates set forth in the DRLP private placement memorandum. See Letter from Douglas Pfaff of AA-Detroit to Francis Barrett of AA-Dublin, Zirin Aff. Ex. 254 at 016258 ("I have enclosed a copy of [DMC's] current profit projections. We have not been involved in the preparation or detailed review of these projections").

 Second, DED's emphasis on an alleged discrepancy undercuts its own case. If the projections truly played an important role in the decision to enter into the Master Agreement, and NIDA and DOC were aware of a material discrepancy in important financial data, this suggests that DED's predecessors saw and unreasonably ignored irregularities. Moreover, the discrepancy theory is itself incoherent. DED does not explain how the creation of an $ 11 million discrepancy in financial data would serve to conceal fraud. Intuitively, one would expect that a glaring discrepancy would bring attention to the source of the discrepancy; it is difficult to understand why anyone would create a conspicuous irregularity in order to disguise embezzlement.

 Third, the financial projections in question, like the July 1 meeting, do not amount to new evidence uncovered in the course of discovery. If there was any discrepancy between the June 1978 projections and figures in the DMC offering materials, NIDA and DOC were aware of it 18 years ago. NIDA representatives have admitted they knew that AA had some involvement in the preparation of the projections, see, e.g., Hopkins Dep., Schade Aff. Ex. 20 at 1165-66, and that they received and reviewed copies of the DMC offering materials as early as June 1978. See, e.g., Hopkins Dep., Zirin Aff. Ex. 257 at 1152; Henderson Dep., Zirin Aff. Ex. 264 at 251; Harte Dep., Zirin Aff. Ex. 265 at 520. The projections, like the July 1 meeting, were not cited before Judge Stewart's 1988 ruling as a basis for the decision to enter into the Master Agreement. I refuse to accept that DED forgot events that now suddenly are identified as the critical impetus for a multi-million dollar investment. The more plausible explanation for DED's sudden change of course is that this is a clumsy attempt to avoid Judge Stewart's adverse ruling on the identical issue in his March 1988 opinion.

 For the reasons expressed above, and consonant with Judge Stewart's 1988 ruling on this issue, DED's Rule 10b-5 claim is foreclosed with respect to funds committed pursuant to the original Master Agreement in July 1978. AA alleges that NIDA and DOC undertook a total financial commitment of more than $: 53 million at that time. Determination of the exact amount of funds affected by this ruling will require a more precise accounting and will be reserved for trial, if there is one and if such a determination then is necessary.

 (b) Transaction Causation for DED's Other Claims

 The requirement that fraud occur "in connection with the purchase or sale of any security" that defeats the Rule 10b-5 claim to the extent described above does not undo the balance of DED's claims. On the merits, the evidence on transaction causation insofar as it relates to those claims is equivocal. To be sure, the British government was under apparently extreme pressure to keep DMCL in business. See, e.g., Letter of John E. Cammell, Vehicles Div., July 29, 1980, Zirin Aff. Ex. 61 at 00641566 ("It has always been recognized that this was a very high risk project only justified because of the importance of trying to improve the employment situation in West Belfast and thereby ease the security problem"). As Lord Brittan, the Chief Secretary of the Treasury, opined in May 1981, there was "no industrial case for extending assistance but [], on wider political grounds, the company probably cannot be allowed to close." See Mem. of May 18, 1981, Zirin Aff. Ex. 248 P 5; see also Mem. of Jock Bruce-Gardyne, Economic Secretary of the Dep't of the Treasury, "DeLorean: The Post-Mortem," Oct. 10, 1982, Zirin Aff. Ex. 195 P 4 ("once such a folly is embarked upon it is remarkably difficult to stop. Prospects of employment have been created and must not be dashed"); Jock Bruce-Gardyne, Letter of Dec. 14, 1981, Zirin Aff. Ex. 238 ("The position of the Northern Ireland Office towards de Lorean is, as I commented in the House this summer, that of the young lady of Riga who went for a ride on a tiger. We are mounted; we cannot get off").

 However, that hardly compels the inference that NIDA and DOC were prepared to fund DMCL at literally any cost. If the DMCL venture was as permeated with fraud as DED alleges it was, it defies common sense to think that NIDA and DOC would have continued to give DeLorean money. In fact, NIDA and DOC ultimately did refuse to extend further assistance when the venture foundered in late 1981 and early 1982. Moreover, many of the statements AA cites as illustrations of the fund-at-all-costs mindset were made in at least partial ignorance of the irregularities that later came to light. I find much more credible the concededly self-serving, after-the-fact testimony of British officials to the effect that NIDA and DOC would not have mindlessly laid out additional millions of pounds for a hopeless venture. As former Prime Minister Margaret Thatcher explained at her deposition, had the British government known that NIDA and DOC funds had


not been used for the purpose of the people working in that factory, [and that] the funds have been misappropriated, the reason for giving any more would have fallen and so would the bona fides of the person to whom the assurance had been given. We should not both have been in good faith. That really would have gone to the root of the whole thing.

 Thatcher Dep., Schade Aff. Ex. 308 at 56-57.

 AA may be able to prove at trial that the investment decisions of NIDA and DOC would have been unresponsive to some extent to varying levels of knowledge of fraud. To that extent, the claims for relief may fail for lack of transaction causation. But this is far from saying that as a matter of law, knowledge of fraud would have had no effect on any investment decision of NIDA or DOC.

 AA's alternative transaction causation argument -- that any reliance by NIDA and DOC was unreasonable as a matter of law because British government officials knew of DeLorean's misconduct -- goes to the merits of DED's fraud claims. AA points out that key British government officials harbored concerns about the risk of the venture and about DeLorean's personal integrity long before the collapse of DMCL. For example, on August 7, 1980, one member of Parliament commented that NIDA was "the laughing stock, not only of the international motor industry but, for all I know, the criminal fraternity as well, on account of the scale of this rip-off." Remarks of Mr. Alan Clark, Zirin Aff. Ex. 138. Similarly, on February 12, 1981, the Economic Secretary of the Department of the Treasury stated on the floor of the House of Commons that "DeLorean apparently has a T-shirt on which is emblazoned the slogan 'I am a con man.'" Remarks of Jock Bruce-Gardyne, Zirin Aff. Ex. 137.

 In addition, AA insists that NIDA and DOC were or should have been alarmed at, inter alia, (1) the contents of an anonymous letter received by the Department of the Treasury in summer 1991 alleging an illegal transaction involving the GPD contract (Zirin Aff. Ex. 140), and (2) allegations on the floor of the House of Commons by Member of Parliament Nicholas Winterton of "a laundering of funds away from Northern Ireland." Zirin Aff. Ex. 159 at 2. AA also criticizes the NIDA nominee directors on the DMC board for failing to investigate the terms of the GPD contract, and attacks the credibility of DMC's financial officers -- Walter Strycker and Harry DeWit -- who have claimed that they communicated their suspicions about the GPD contract to AA.

 The above evidence suggests that on several occasions, different government officials sensed that something foul was afoot at DMCL and communicated their suspicions to different audiences. But it is far from clear whether the appropriate decision-makers knew the scope and details of the fraud allegedly perpetrated by DeLorean. Given the parties' differing accounts of the decline and fall of DMCL, and the susceptibility of the evidence to differing interpretations, it is not clear whether NIDA and DOC adequately investigated that which appeared suspicious. Similarly, it is not clear when AA realized what DeLorean had done and was doing.

 In short, there are material issues of fact as to who knew what, and when they knew it. Summary judgment therefore is not warranted on this ground as to the remaining claims for relief.

 (2) Loss Causation

 AA's second argument also is directed to all the claims in the Second Amended Complaint. AA asserts that a poor economy in general and weakness in the luxury car market in particular -- not fraudulent accounting -- caused the losses suffered by NIDA and DOC. (Pl. Mem. at 121, arguing that "the collapse of the DeLorean entities was caused by market forces, namely, a severe recession that rocked the entire automotive industry".) See First Nationwide Bank v. Gelt Funding Corp., 27 F.3d 763, 772 (2d Cir. 1994) ("when the plaintiff's loss coincides with a marketwide phenomenon causing comparable losses to other investors, the prospect that the plaintiff's loss was caused by the fraud decreases"), cert. denied, 130 L. Ed. 2d 632, 115 S. Ct. 728 (1995).

 AA correctly observes that the launch of the DMC-12 coincided with a worldwide recession, and that NIDA and DOC were aware that adverse economic conditions threatened the viability of DMCL and its parent. See, e.g., Dep. of Sir Kenneth Percy Bloomfield, Permanent Secretary of DOC, Zirin Aff. Ex 10 at 227 (acknowledging that the worldwide automobile market was "extremely depressed" in early 1982); Mem. on Report of Northern Ireland Dep't of Fin. & Personnel, Zirin Aff. Ex. 19 P 10 (attributing demise of DMCL to, inter alia, "the unprecedented contraction in the car market in the United States due to the effects of cyclical recession compounded in the short term by weather conditions"); Mem. of Sir Kenneth Percy Bloomfield, Jan. 14, 1982, Zirin Aff. Ex. 199 P 1 (noting that in December 1981, "sales of all cars in the USA fell to the lowest December figure since 1959, inventories soared to record heights and the industry shut down 29 plants").

 Macroeconomic troubles undoubtedly had some negative effect on DMCL's survival. But it is not clear on the current record that the failure of DMCL was attributable entirely to market conditions. DED has cited statistics suggesting that the luxury car market fared better than the general car market in 1981, perhaps due to greater price inelasticity of demand in the luxury market segment. See, e.g., Report of McKinsey & Co., Nov. 20, 1981, Schade Aff. Ex. 326 at 011843, 011853 ("Sales of luxury cars have held up well in the first 10 months of the year, despite the overall difficulties of the marketplace"); Letter of John E. Cammell, Vehicles Div., July 29, 1980, Zirin Aff. Ex. 61 at 00641566 ("luxury sports cars attract buyers who are somewhat insulated from short-term economic trends").

 AA challenges the validity of DED's market data and the assumptions about the car market on which DED's statistical conclusions are based. AA argues that the market outlook was so bleak that DMCL would have failed even if the misappropriated funds had never been removed from DMCL's coffers. The parties have offered differing estimates of how much more money would have been required to save DMCL. Compare Dep. of Joseph H. Penrose, Schade Aff. Ex. 97 at 506 ($ 15-20 million of additional capital would have saved DMCL) with Conclusions of Cabinet Meeting, Jan. 21, 1982, Zirin Aff. Ex. 204 at ("it was almost certain that without further urgent Government assistance of some $: 47 million,* DeLorean Motor Cars would have to cease trading").

 I find that the parties' conflicting submissions have created an issue of fact as to how much of the failure of DMCL was caused by a troubled car market. Accordingly, summary judgment cannot be granted globally for lack of loss causation.

 (3) RICO Standing

 With respect to DED's RICO claims, AA argues as a threshold matter that DED does not have standing to maintain a RICO action.

 Title 18 § 1962 declares unlawful certain conduct undertaken in connection with a "pattern of racketeering activity." Section 1961(1)(D) defines "racketeering activity" to include "any offense involving . . . fraud in the sale of securities." Section 1964(c) establishes a civil action in favor of "any person injured in his business or property by reason of a violation of section 1962." The Supreme Court has construed that language narrowly and has found that a plaintiff does not have standing to sue under RICO absent "some direct relation between the injury asserted and the injurious conduct alleged." Holmes v. Securities Investor Protection Corp., 503 U.S. 258, 268, 117 L. Ed. 2d 532, 112 S. Ct. 1311 (1992).

 The Second Circuit has held that a plaintiff cannot establish such a "direct relation" merely by showing that he is a shareholder in, or creditor of, a corporation injured by a RICO violation. Manson v. Stacescu, 11 F.3d 1127, 1131 (2d Cir. 1993) ("Since the shareholder's injury, like that of the creditor, is merely derivative of the injury to the corporation, the shareholder's injury is not related directly to the defendant's injurious conduct"), cert. denied, 130 L. Ed. 2d 206, 115 S. Ct. 292 (1994).

 However, the Second Circuit has recognized a "special duty" exception to the rule of no standing for creditors and shareholders. Under that doctrine, a plaintiff can maintain a RICO action if he sustained "injury that is separate and distinct from the injury sustained by the corporation." Id. For example, in Ceribelli v. Elghanayan, 990 F.2d 62 (2d Cir. 1993), the "special duty" exception was successfully invoked by plaintiff shareholders who alleged that the defendant fraudulently concealed material information about the corporation, causing the shareholders to pay too much for their shares. The Court found that the shareholders had standing to sue under RICO because the defendant had duties to the shareholders as securities purchasers that were distinct from duties owed to the corporation. Id. at 64. Thus, when fraudulent activity induces the shareholder to become a shareholder in the first place, the injury is not merely derivative of the injury suffered by the corporation. See, e.g., In re Colonial Ltd. Partnership Litig., 854 F. Supp. 64, 105 (D. Conn. 1994) (injury was not merely derivative; plaintiffs claimed that "defendants' fraudulent conduct induced them to purchase their limited partnership interests"); Friedman v. Hartmann, No. 91 Civ. 1523, 1994 U.S. Dist. LEXIS 3404, *11, 1994 WL 97104, *3 (S.D.N.Y. Mar. 23, 1994) (plaintiffs have RICO standing because allegedly fraudulent representations were the "basis for inducing the plaintiffs to make their investments"), recons. denied, 1994 WL 376058 (S.D.N.Y. Jul. 15, 1994); Dayton Monetary Assoc. v. Donaldson, Lufkin & Jenrette Secs. Corp., No. 91 Civ. 2050, 1993 U.S. Dist. LEXIS 14435, *4, 1993 WL 410503, *2 (S.D.N.Y. Oct. 14, 1993) ("plaintiffs do have standing to sue the trading defendants for injury proximately caused by alleged fraudulent representations which caused them to invest in limited partnerships which were worth less than they thought").

 Fraudulent inducement is exactly what DED alleges here. DED does not claim simply that it owned shares of DMCL and that these shares became worthless when the company was victimized by RICO violations. Rather, DED argues that NIDA and DOC were induced by defendants' misrepresentations and fraudulent omissions to invest capital in DMCL. As the successor to defrauded securities purchasers, DED would have standing to assert RICO claims, assuming DED could establish liability for the underlying RICO predicate acts.

 AA's fallback position is that AA did not in fact make fraudulent representations that induced NIDA and DOC to invest in DMCL. That contention goes to the merits of the fraud claims, on which I have found material issues of fact precluding summary judgment as explained above in Part IV. (1)(b) of this opinion.

  (4) Section 1962(c) (RICO)


 AA argues that DED's claim under § 1962(c) is foreclosed by the Supreme Court's ruling in Reves v. Ernst & Young, 507 U.S. 170, 113 S. Ct. 1163, 122 L. Ed. 2d 525 (1993). I agree.


Section 1962(c) provides:


It shall be unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity . . . .

 Securities fraud is one form of "racketeering activity." 18 U.S.C. § 1961(1)(D). A "pattern" of such activity means the commission of at least two predicate racketeering acts within 10 years. 18 U.S.C. § 1961(5). DED has argued that DMC and DMCL constituted a RICO enterprise, and that AA participated in the conduct of that enterprise's affairs through a pattern of acts of securities fraud and mail fraud. (Pl. Mem. at 295) In 1988, Judge Stewart denied AA's motion to dismiss this claim under Fed. R. Civ. P. 12(b)(6). 683 F. Supp. at 1483. However, in 1993 the Supreme Court narrowed the scope of liability under § 1962(c) with its decision in Reves.

 Reves involved a § 1962(c) claim arising from the bankruptcy of a farmers' cooperative association that had issued promissory notes. The noteholders sued the co-op's accountants, Arthur Young & Co., charging that Arthur Young's audit reports fraudulently concealed the co-op's insolvency. The plaintiffs alleged that Arthur Young had failed to reveal in its reports, and had failed to inform the co-op's board of directors, that one of the co-op's key assets had been overvalued. 113 S. Ct. at 1166-68. The plaintiffs argued that the co-op was a racketeering enterprise, and that Arthur Young participated in the conduct of the enterprise's at fairs through multiple acts of securities fraud.

 The Court barred recovery under § 1962(c). To be liable under that provision, the Court held, "one must participate in the operation or management of the enterprise itself." Id. at 1173. The Court stressed that "some part in directing the enterprise's affairs is required." Id. at 1170 (emphasis in original). Although an enterprise most typically is operated or managed by persons within an enterprise, the Court explained, "an enterprise also might be 'operated' or 'managed' by others 'associated with' the enterprise who exert control over it as, for example, by bribery." Id. at 1172-73.


 Struggling to survive Reves, DED alleges in the Second Amended Complaint that AA's accountants participated in the operation and management of DMC and DMCL. (SAC P 228(b)) DED argues that AA did this by


lending its reputation to the companies' courtship of public and private investors, participating directly in negotiations with prospective governmental investors, developing asset and earnings projections relied on by the investors, advocating the companies' positions before the SEC, chartering the Northern Ireland subsidiary, lending its staff to serve as company accountants, developing internal corporate policies, establishing accounting and information systems, creating the financial records and generating from them the financial statements it purported to audit, and even employing its partners and its venerable reputation to shield the companies from the slings and arrows of adverse publicity.

  (Pl. Mem. at 302) DED asserts that AA is liable under § 1962(c) because the firm performed tasks that were "well beyond anything that could be characterized as routine auditing or accounting." (Id.)

  Reves makes it more difficult to find "outsiders" such as accountants or lawyers liable under § 1962(c). See MCM Partners, Inc. v. Andrews-Bartlett & Assoc., Inc., 62 F.3d 967, 979 (7th Cir. 1995) ("Under the theory advanced in Reves, the accounting firm was considered by the Court as an 'outsider' to the enterprise, and . . . as outsiders, the accountants had not participated in the operation or management of the cooperative"); 131 Main Street Assoc. v. Manko, 897 F. Supp. 1507, 1527 (S.D.N.Y. 1995) (the "operation-or-management rule is intended to spare from RICO liability true enterprise outsiders (such as accounting firms)"); see also Amalgamated Bank of New York v. Marsh, 823 F. Supp. 209, 219-20 (S.D.N.Y. 1993) (discussing Second Circuit's broader pre-Reves interpretation of § 1962(c)). In Morin v. Trupin, 832 F. Supp. 93 (S.D.N.Y. 1993), for example, the Court dismissed a § 1962(c) claim against a law firm that provided legal services to a limited partnership alleged to be a racketeering enterprise. The firm had provided tax opinions and tax information included in a private placement memorandum prepared for an offering of partnership interests. In addition, the firm had represented the partnership in audit proceedings before the Internal Revenue Service. The Court found that activity insufficient to establish participation in the operation or management of the partnership. Id. at 98.

  Many other courts faced with post-Reves § 1962(c) claims against outside professionals have agreed that providing important services to a racketeering enterprise is not the same as directing the affairs of the enterprise. See, e.g., Azrielli v. Cohen Law Offices, 21 F.3d 512, 521-22 (2d Cir. 1994) (provision of legal services related to fraudulent real estate transaction was not management of the RICO enterprise conducting the fraudulent transaction); University of Maryland at Baltimore v. Peat, Marwick, Main & Co., 996 F.2d 1534, 1539 (3d Cir. 1993) ("Simply because one provides goods or services that ultimately benefit the enterprise does not mean that one becomes liable under RICO as a result"); Nolte v. Pearson, 994 F.2d 1311, 1317 (8th Cir. 1993) (preparer of opinion letters and informational memoranda for RICO enterprise did not participate in "operation or management" of enterprise); Morin v. Trupin, 835 F. Supp. 126, 135 (S.D.N.Y. 1993) ("providing legal advice and legal services does not constitute participation sufficient to ground an allegation of a violation of Section 1962(c)"); Fidelity Sav. & Loan Ass'n v. Felicetti, 830 F. Supp. 257, 260 (E.D.Pa. 1993) (even if appraiser's reports are "keystone" of enterprise's perpetration of fraud, appraiser can not be liable under § 1962(c)); Sassoon v. Altgelt, 777, Inc., 822 F. Supp. 1303, 1307 (N.D. Ill. 1993) (attorney did not participate in operation or management of RICO enterprise by drafting limited partnership offering documents and providing legal services to partnership); Gilmore v. Berg, 820 F. Supp. 179, 182-83 (D.N.J. 1993) (accountant's preparation of opinion letter did not constitute participation in operation or management of client's business under Reves).

  After Reves, some plaintiffs have argued that an outside professional can participate in the operation or management of a RICO enterprise by knowingly concealing the enterprise's fraudulent activities. That argument properly was rejected in Baumer v. Pachl, 8 F.3d 1341 (9th Cir. 1993), a case involving a § 1962(c) claim against an attorney who had been retained by an alleged RICO enterprise. The plaintiffs, purchasers of limited partnership interests, alleged that the attorney prepared letters to state officials "to forestall and cover-up the fraud by minimizing or mischaracterizing the allegedly improper activities" of the enterprise. Id. at 1342. That conduct was insufficient to establish liability under Reves, the Court found, because the attorney "at no time held any formal position in the partnership" and never played "any part in directing the affairs of the enterprise." Id. at 1344.

  Baumer is one of many cases recognizing the difference between actual control over an enterprise and association with an enterprise in ways that do not involve control; only the former is sufficient under Reves because "the test is not involvement but control . . . ." A.I. Credit Corp. v. Hartford Computer Group, Inc., 847 F. Supp. 588, 601 (N.D. Ill. 1994). . The importance of control is illustrated by the one example specifically cited by the Reves majority to demonstrate control over a RICO enterprise by a person outside the enterprise: bribery. 113 S. Ct. at 1173. Bribery is qualitatively different from mere influence or assistance because the outsider paying the bribes buys actual control over the actions of a person within the enterprise. Giving a bribe can be tantamount to gaining a management position within the enterprise, because the insider taking the bribes acts under the direction of the outsider giving them in conducting the affairs of the RICO enterprise. See generally United States v. Oreto, 37 F.3d 739, 750 (1st Cir. 1994) (accountants in Reves were not liable because "while they were undeniably involved in the enterprise's decisions, they neither made those decisions nor carried them out; in other words, the accountants were outside the chain of command"), cert. denied, 130 L. Ed. 2d 1116, 115 S. Ct. 1161 (1995). The Court's choice of bribery as an example of an act that might qualify as "operation or management" emphasizes how difficult it is to hold an outsider liable under § 1962(c) after Reves.

  An outsider who merely enjoys "substantial persuasive power to induce management to take certain actions," Morin, 835 F. Supp. at 135 (citation omitted), unlike an outsider who bribes, does not exercise control over the enterprise within the meaning of Reves. Similarly, it is not enough to control even fraudulent activity that is ancillary to the fraud carried out by the RICO enterprise. That principle compelled dismissal in De Wit v. Firstar Corp.,c 879 F. Supp. 947 (N.D. Iowa), leave to replead granted in part, 904 F. Supp. 1476 (N.D. Iowa 1995), where purchasers of interests in a cattle venture sued a financial institution which provided banking services to the venture. The venture was the alleged RICO enterprise. Citing Reves, the Court dismissed the claim because the plaintiffs


have alleged only that defendants conducted [the] enterprises's banking scheme. . . . Defendants' conduct was one step removed from management of the RICO enterprise itself, and thus liability will not lie under § 1962(c).

  879 F. Supp. at 965. The Court reasoned that "even provision of services essential to the operation of the RICO enterprise itself is not the same as participating in the conduct of the affairs of the enterprise." Id. at 966.


  One district court has held that an outside professional may participate in the operation or management of a RICO enterprise by knowingly concealing the fraudulent activities of the enterprise. In Clark v. Milam, 847 F. Supp. 409 (S.D.W.Va.), recons. denied, 872 F. Supp. 307 (S.D.W.Va. 1994), the Court refused to dismiss a § 1962(c) claim against accountants who had performed allegedly deficient audits for a RICO enterprise. The plaintiffs alleged that the auditors "knowingly concealed the activity of other defendants who exercised day-to-day control over the enterprise," and that this concealment was "integral to the continuing operation of the RICO enterprise." 847 F. Supp. at 417. The complaint survived Reves, the Court decided, because


the allegations of participation suggest that the Defendants did more than merely perform deficient work; it is alleged that they knowingly performed such work to protect other defendants by concealing those defendants' RICO violations from state insurance regulators.

  Id. at 416 (emphasis in original). Under this interpretation of Reves, DED would appear to have a viable § 1962(c) claim.

  For at least three reasons, I decline to follow Clark. First, Clark equates concealment of an enterprise's fraudulent activities with control over the affairs of the enterprise. The Clark Court reasoned that because the concealment was "integral to the continuing operation" of the enterprise, those who concealed the fraud controlled the enterprise. But it is difficult to see where the chain of control stops under that logic. An accountant's audit reports, or a lawyer's opinion letters, are always "integral to the continuing operation" of the enterprise in the sense that professional services are essential to the continued existence of a business. But so is the electricity supplied to the enterprise's offices, and it would be absurd to say that the public utility that provides the electricity participates in the operation or management of the enterprise. The Clark Court's "integral to the continuing operation" formulation thus seems at odds with the Reves requirement of "some part in directing the enterprise's affairs." Reves, 113 S. Ct. at 1170. The Clark test arguably would require Reves itself to be decided differently on its own facts, because Arthur Young's conduct in Reves was "integral to the continuing operation" of the enterprise in the sense that the enterprise could not function without accountants. Moreover, the Clark logic runs afoul of the rule, uniformly applied by the lower courts that have reached the issue, that the provision of services -- even essential services -- to a RICO enterprise is not the same as controlling the enterprise's affairs. See De Wit, 879 F. Supp. at 966 n.15 and cases cited therein.

  Clark is one of a small handful of cases decided by district courts that seem to under-appreciate the requirement of "control" under Reves. Similarly troublesome language has appeared elsewhere. In In re Phar-Mor, Inc. Secs. Litig., 893 F. Supp. 484 (W.D. Pa. 1995), for example, the Court dismissed a post-Reves § 1962(c) claim against an accounting firm on the ground that the firm had not been a "knowing participant in the fraud." Id. at 488. By dismissing for failure to allege "knowing participation" in fraud, the Court invited the mistaken inference that Reves is satisfied simply by a claim of "knowing participation" in fraud. See, e.g., Circle Business Credit, Inc. v. Becker, No. Civ. A. 92-3177, 1994 U.S. Dist. LEXIS 1894, *10, 1994 WL 52848 (E.D. Pa. Feb. 18, 1994) (refusing to dismiss § 1962(c) claim; plaintiffs alleged that accountant "actively participated in the primary RICO violation by certifying financial statements that he knew were false or which he knew would be used to promote fraud"). That inference is logically invalid. Moreover, the "knowing participation" formulation is substantively flawed because it begs the question. The concept of "participation" standing alone and in the abstract is broader than the text-specific sense of participation" used by the Supreme Court in Reves when it construed § 1962(c). See National Org. for Women, Inc. v. Scheidler, 897 F. Supp. 1047, 1071 n.19 (N.D. Ill. 1995) (stressing difference between dictionary definition of "participation" and meaning of "participation" under Reves). One can "knowingly participate" in fraud without having "some part in directing the affairs of the enterprise." Thus, a "knowing participation" definition, without more, arguably reads the "control" requirement out of Reves. Compare Felicetti, 830 F. Supp. at 260 (knowing preparation of fraudulent audit reports does not constitute "operation or management" under Reves).

  Second, language in Clark suggests that the Court conflated primary liability with aiding and abetting liability under § 1962(c). The Court prefaced its § 1962(c) analysis with the observation that there was no case law in the Fourth Circuit "addressing whether a claim of aiding and abetting a RICO violation is actionable." 847 F. Supp. at 416. The Court then applied Reves as though Reves set guidelines for aiding and abetting liability. As discussed below in Part IV. (6) of this opinion, I find that there can be no claim based on aiding and abetting a RICO violation in view of Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 128 L. Ed. 2d 119, 114 S. Ct. 1439 (1994). Moreover, the Court in Reves expressly held that "operating or managing" an enterprise within the meaning of § 1962(c) requires greater participation than aiding and abetting. See Reves, 113 S. Ct. at 1170; see also Mathon v. Marine Midland Bank, N.A., 875 F. Supp. 986, 995 (E.D.N.Y. 1995); Biofeedtrac, Inc. v. Kolinor Optical Enter. & Consultants, 832 F. Supp. 585, 592 (E.D.N.Y. 1993).

  Third, the Clark Court relied on Davis v. Mutual Life Ins. Co. of New York, 6 F.3d 367 (6th Cir. 1993), cert. denied, 114 S. Ct. 1298 (1994), a case that did not address the requirements for primary liability under § 1962(c) after Reves. The portion of the Davis opinion cited by the Clark Court dealt with vicarious liability; the Davis Court concerned itself with allocating responsibility between related parties after a primary violation of § 1962(c) by one defendant already had been established. 6 F.3d at 380.


  Reves itself provides confirmation that DED's allegations are insufficient to establish "operation or management" under § 1962(c). As Justice Souter noted in his dissent, the Reves plaintiffs alleged that


Arthur Young created the very financial statements it was hired, and purported, to audit. . . . Arthur Young took on management responsibilities by deciding, in the first instance, what value to assign to the Co-op's most important fixed asset . . . and Arthur Young conceded below that the alleged activity went beyond traditional auditing. . . .


Arthur Young did indeed step outside of its auditing shoes and into those of management, in creating the financial record on which the Co-op's solvency was erroneously predicated.

  Id. at 1175-76. DED's allegations are similar. DED charges that AA "created the financial records and generated from them the financial statements it purported to audit," and that AA's conduct "reached far beyond the scope of its profession." (Pl. Mem. at 302, 298) As the Reves majority and many lower courts have recognized, these acts do not reflect control over the enterprise. At best, they establish assistance to the enterprise. See, e.g., University of Maryland, 996 F.2d at 1539 (defendant accountants did not control enterprise under Reves by attending board meetings, providing consulting services, helping to computerize internal accounting functions, and performing valuations necessary for asset sales and acquisitions); Biofeedtrac, 832 F. Supp. at 591 ("even when professionals go beyond their customary role, they will not be deemed to have participated in the 'operation or management' of the enterprise itself"); Chamarac Properties, Inc. v. Pike, No. 86 Civ. 7919, 1993 U.S. Dist. LEXIS 14593, *12, 1993 WL 427137, *3 (S.D.N.Y. Oct. 19, 1993) (accounting firm's professional misconduct and assumption of limited management responsibilities were insufficient to establish § 1962(c) liability).

  I recognize and acknowledge the hazards of relying on a dissent to measure the breadth of a majority opinion. Nevertheless, the facts and allegations set forth by Justice Souter in his dissent were part of the record, and were deemed by the majority insufficient to establish liability under § 1962(c). The Reves majority did not simply adopt the new "operation or management test" and remand for its application. Rather, the Court determined as a matter of law that the facts in the record failed to establish Arthur Young's "operation or management" of the RICO enterprise. 113 S. Ct. at 1174. Because that result necessarily means that these facts were insufficient to establish liability, it is appropriate to compare these facts to the facts alleged in the case at bar in order faithfully to apply the Reves standard.

  The conclusion that AA did not participate in the operation or management of the DeLorean entities does not immunize AA altogether from liability. That conclusion bars recovery only under § 1962(c). DED may press its claims for the underlying securities fraud under Rule 10b-5, to the limited extent noted below in Part IV. (7)(b) of this opinion, and under state law, based on theories which do not require control over the issuer of the securities.


  As explained above, § 1962(c) makes it unlawful for any person" associated with an "enterprise" to participate in the affairs of that enterprise (within the meaning of Reves) through a pattern of racketeering activity. Under DED's principal theory of liability, AA was the "person" and the DeLorean entities were the "enterprise." For the reasons stated above, that claim is untenable. Apparently sensing what was to befall the theory underlying its First Amended Complaint, DED has loosed a torrent of alternative theories of § 1962(c) liability into its Second Amended Complaint and its Memorandum of Law. This continues a trend in which DED's S 1962(c) claim has undergone several metamorphoses over the past 10 years. I have been able to identify at least 15 different versions of the claim in DED's papers. The table below lists each different combination of "person" and "enterprise" DED has alleged in its Complaint, First Amended Complaint, Second Amended Complaint, and Memorandum of Law in Opposition to Summary Judgment: DOCUMENT "PERSON" "ENTERPRISE(S)" (1) Compl. P 140 DeLorean & accomplices DMC (2) Compl. P 140 the partners and AA employees of AA (3) FAC P 186 Measelle, Massura, and Measelle, Massura, and Beckman Beckman (4) FAC P 187 Measelle, Massura, and AA Beckman (5) FAC P 188 Measelle, Massura, and DeLorean & accomplices, Beckman DMC, DeLorean Mfg. Co., *fn9" Logan Mfg. Co., and AA (6) FAC P 189 AA-USA AA (7) FAC P 190 AA-USA DeLorean & accomplices, DMC, DeLorean Mfg. Co, Logan Mfg. Co., and AA (8) SAC P 228 Measelle, Massura, DeLorean & accomplices, Francis Barrett (a DMC, DeLorean Mfg. Co., partner at AA's Dublin Logan Mfg. Co., office), and Ian Hay CRISTINA, *fn10" Gotaru Co. Davison (the managing S.A., *fn11" AA, Measelle, partner of AA's London Massura, Barrett, office) Beckman, and Davison (9) SAC P 229 Measelle, Massura, AA Barrett, and Davison (10) SAC P 230 Measelle, Massura, DeLorean & accomplices, Barrett, Davison DMC, DeLorean Mfg. Co. Logan Mfg. Co., and AA (11) SAC P 231 AA-USA AA (12) SAC P 232 AA-USA DeLorean & accomplices, DMC, DeLorean Mfg. Co., Logan, and AA (13) Pl. Mem. at 340 AA and/or Measelle, Measelle, Massura, Massura, Barrett, and Barrett, and Davison Davison (14) Pl. Mem. at 340 AA and/or Measelle, AA, the DeLorean Massura, Barrett, and entities, and the Lotus Davvison entities (15) Pl. Mem. at 340 AA and/or Measelle, AA-USA, AA-UK, and Massura, Barrett, and AA-Ireland Davison


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