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VANNEST v. SAGE

December 23, 1997

DEAN G. VANNEST, et al, Plaintiffs,
v.
SAGE, RUTTY & CO., INC., et al., Defendants.



The opinion of the court was delivered by: LARIMER

 This case arises out of the sale of limited partnership interests in Pfeiffer House Mortgage Associates (Pfeiffer House). Defendant Sage, Rutty, the sales agent for the Pfeiffer House offering, sold the interests to plaintiffs through Karpus Investment Management, Inc. (Karpus). Karpus, also a plaintiff, purchased the interests on behalf of the other plaintiffs as their agent, pursuant to a limited power of attorney. The interests ultimately proved worthless. *fn1"

 Plaintiffs (consisting of twelve individuals and Karpus) commenced this action in November 1990 asserting a variety of federal securities, common law and RICO claims against multiple defendants including Sage, Rutty. Since that time plaintiffs have amended their complaint and this Court has ruled on successive defense motions to dismiss and for summary judgment, thus narrowing the number and type of claims and defendants. Sage, Rutty remains a defendant and, to date, three claims remain pending against it: a claim pursuant to Section 10(b) of the Securities and Exchange Act of 1934 (15 U.S.C. § 78j(b)) and SEC Rule 10b-5 (17 C.F.R. § 240.10b-5); a claim for fraud; and a claim for breach of contract/warranty.

 Presently before me is Sage, Rutty's amended motion for summary judgment, seeking to dismiss plaintiffs' claim brought pursuant to Section 10(b)/Rule 10b-5. Sage, Rutty also seeks dismissal of the remaining state law claims on the ground that, absent the Section 10(b)/Rule 10b-5 claim, this Court lacks subject matter jurisdiction over the supplemental state law claims. For the reasons stated below, Sage Rutty's motion is denied.

 DISCUSSION

 
(a) To employ any device, scheme, or artifice to defraud,
 
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
 
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,

 in connection with the purchase or sale of any security. 17 C.F.R. § 240.10b-5.

 In order to sustain a cause of action under Section 10(b) a plaintiff must allege that, "in connection with the purchase or sale of securities, the defendant, acting with scienter, made a false material representation or omitted to disclose material information and that plaintiff's reliance on defendant's action caused plaintiff injury." Feinman v. Dean Witter Reynolds, Inc., 84 F.3d 539, 540 (2d Cir. 1996)(citing In re Time Warner Inc. Securities Litigation, 9 F.3d 259, 264 (2d Cir. 1993)).

 In this case, plaintiffs allege that Sage, Rutty made false representations and material omissions to Karpus regarding the Pfeiffer House investment. The undisputed facts show that George Karpus, president of Karpus Investment Management (Karpus), was retained by each of the individual plaintiffs to make investment decisions on his or her behalf. Each individual plaintiff gave Karpus complete discretion and authority to buy and sell securities on his or her behalf, as evidenced by a Limited Power of Attorney stating in relevant part as follows:

 
I, the owner .... of the account of [name of plaintiff] hereby appoint Karpus Investment Management as my agent and attorney-in-fact with authority to purchase and sell stocks and ...

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