The opinion of the court was delivered by: MUKASEY
MICHAEL B. MUKASEY, U.S.D.J.
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)
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.
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.
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)
of 18 U.S.C. § 1962. He dismissed DED's claim under § 1962(b),
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)
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.
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).
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 ...