dismiss, and the affidavits submitted by plaintiffs and find no allegation or evidence that plaintiffs' alleged injury was caused by an activity different from that caused simply by the alleged predicate acts of wire fraud and mail fraud. Accordingly, the RICO count of the complaint will be dismissed.
Alternately, I conclude that a prior criminal conviction is a reprequisite to a civil RICO action, and in so doing, I again adopt the thorough and perceptive analysis of the Second Circuit in Sedima, supra, slip op. at 20-35. Since plaintiffs have not alleged prior RICO criminal convictions of defendants for the conduct involved in this civil action, the RICO claim will be dismissed on that basis also.
Plaintiffs allege that defendants' conduct, as described above, constitutes a violation of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and of the regulations promulgated thereunder, including Rules 10b-5 and 10b-7, 17 C.F.R. §§ 240.10b-5 and 10b-6. In particular, plaintiffs allege that the representations and omissions of fact made by defendants in selling the Jordan stock and the Central Valley interest were materially false and misleading, that they were made by defendants with knowledge of their falsity, that they were made with the intent to induce plaintiffs' reliance thereon and with the intent to defraud plaintiffs, that plaintiffs justifiably relied on the representations and omissions, and that plaintiffs have suffered proximate injury to their investments in Jordan and Central Valley by reason of defendants' fraud.
Defendants argue that the securities fraud count must be dismissed because plaintiffs' purchase of Jordan stock does not constitute a security under section 10(b) of the Act, under Rule 10b-5, and under the "economic realty test" of United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 44 L. Ed. 2d 621, 95 S. Ct. 2051 (1975), and SEC v. W.J. Howey Co., 328 U.S. 293, 90 L. Ed. 1244, 66 S. Ct. 1100 (1946). In light of the recent decision of the Third Circuit in Reufenacht v. O'Halloran, 737 F.2d 320 (3d Cir. 1984), defendants' argument must be rejected. In Ruefenacht, the court held that "the sale of all or part of a business effectuated by the transfer of stock bearing the traditional incidents of stock ownership" constitutes a sale of a "security" under the 1933 and 1934 Securities Acts. At 339.
Defendants also argue that plaintiffs have failed to allege, as required by the Securities Acts that defendants used any means or instrumentalities of interstate commerce or of the mails in connection with the sale of the stock. This argument is without merit. Paragraphs 18 and 21 of the complaint sufficiently allege the use of the mails and of the telephone in connection with the stock sale.
Defendants also argue that the securities count should be dismissed to the extent that it pertains to the sale of the interest in Central Valley. In particular, defendants argue that plaintiffs have failed to allege that defendants violated section 10(b) with respect to Central Valley and have failed to allege any conduct which could be construed as a section 10(b) with respect to Central Valley. Plaintiffs respond that defendants' fraud induced plaintiffs to purchase both the stock and "other unrelated interests" (presumably the interest in Central Valley) in a single business transaction, that defendants' illegal conduct thus "infested the entire transaction," and all aspects of that transaction may properly be the subject of the securities count. Neither side has adequately developed its legal position on this issue and additional briefing will be necessary.
The securities fraud issue may be appropriate for disposition on a motion for summary judgment. I will order the parties to submit motions for summary judgment on this issue 30 days following the close of discovery. Accordingly, the motions to dismiss the securities claim will be dismissed without prejudice.
Defendant Schussel, the accountant who reviewed the financial records of Jordan, also argues that the complaint should be dismissed against him on the additional ground that he was not a party to the transaction in which the Jordan stock and the Central Valley interest were sold to plaintiffs. This argument is without merit. Under both section 19(b) of the 1934 Act and common law, accountants who prepare or review financial statements may be liable for their conduct, even though they do not participate in the later conduct which is the basis for the fraud claim. Epprecht v. Delaware Valley Machinery Inc., 407 F. Supp. 315, 320 (E.D. Pa. 1976); Coleco Industries, Inc. v. Berman, 423 F. Supp. 275, 308-10 (E.D. Pa. 1976), aff'd in part, remanded in part, on other grounds, 567 F.2d 569 (3d Cir. 1977), cert. denied, 439 U.S. 830, 99 S. Ct. 106, 58 L. Ed. 2d 124 (1978). Accordingly, defendant Schussel's motion to dismiss on this additional ground will be denied.
Counts III and IV
In Count III plaintiffs allege that defendants' conduct constitutes fraud under Pennsylvania common law, and in Count IV plaintiffs allege that defendants Surnamer and Rothrock breached various warranties given in the agreement of sale, in violation of state law. Defendants argue that these counts should be dismissed because there is no independent diversity jurisdiction for them, and that if the federal claims are dismissed, the state claims should be dismissed as an exercise of my discretion over pendent state claims. Because I am allowing the securities claim to go forward, there is adequate subject matter jurisdiction for the state claims for the present, and I will withhold decision on this issue. If summary judgment is granted in favor of defendants on the securities claim, I will then require the submission of additional affidavits on the issue of diversity jurisdiction. Accordingly, the motions to dismiss the state law claims will be denied without prejudice.
Plaintiffs have agreed to withdraw this claim. Accordingly, this count is dismissed pursuant to Rule 41(a)(2) of the Federal Rules of Civil Procedure.
Defendants' Request for a More Definite Complaint
Defendants argue that if the complaint is not dismissed, plaintiffs should be required to file a more definite complaint in which the facts supporting the allegations of fraud are set forth. While I recognize that when allegations of fraud are made, Rule 9(b) of the Federal Rules of Civil Procedure articulates a stricter standard of pleading than the general rule of Rule 8(a), I conclude, after a careful review of the complaint, that plaintiffs have satisfied the requirements of Rule 9(b). The complaint identifies the parties and their roles in the transaction at issue, and eleven specific examples of alleged knowing misrepresentations and omissions are alleged. Plaintiffs have thus alleged far more than boilerplate claims of misrepresentation. The complaint adequately places defendants on notice and allows them to respond. See Kimmel v. Peterson, 565 F. Supp. 476, 480-81 (E.D. Pa. 1983). Defendants' request for a more definite statement will be denied. Defendants may pursue discovery to obtain the details which they seek.
[EDITOR'S NOTE: PAGINATION IN THE HARD COPY SOURCE ENDS AT THIS POINT]
An appropriate order follows.
NOW, October 16, 1984, upon consideration of defendants' motions to dismiss the complaint, plaintiffs' response, the memoranda and affidavits submitted by the parties, and for the reasons stated in the accompanying memorandum, the motions are GRANTED IN PART AND DENIED IN PART. The motions to dismiss Count I (the RICO count) are granted with prejudice. The motions to dismiss Count II (the securities fraud count) are denied without prejudice. Not later than 30 days following the close of discovery, the parties shall submit cross-motions for summary judgment on the securities fraud issue. The motions to dismiss Counts III and IV (the state law counts) are denied without prejudice. Count V is dismissed pursuant to Rule 4(a)(2) of the Federal Rules of Civil Procedure. Defendants' request for a more definite statement is DENIED.
NOW, OCTOBER 16, 1984,
IT IS ORDERED that:
1. FAILURE OF COUNSEL OR A PARTY TO COMPLY WITH ANY OF THE PROVISIONS OF THIS ORDER MAY RESULT IN DISMISSAL, DEFAULT, CONTEMPT, OR SANCTIONS AS MAY BE APPROPRIATE, INCLUDING THE AWARD OF REASONABLE EXPENSES AND COUNSEL FEES.
2. All proceedings in this action shall take place at the Reading Station, in the American Bank Building, 6th and Washington Streets, Reading, Pennsylvania. Conferences shall be held in Room 403 and trial in Courtroom 434.
3. All discovery and pretrial proceedings shall be completed not later than DECEMBER 31, 1984, and counsel shall take whatever steps are necessary to insure compliance with this time limitation.
4. If opposing counsel's lack of response or lack of compliance with discovery makes it appear likely that the deadline may pass without completion of discovery, counsel is expected to invoke the procedures established by the Federal Rules of Civil Procedure and the Local Rules of this Court to compel compliance. Failure of counsel to utilize such procedures to insure compliance of the discovery deadline shall not be a ground for enlargement of discovery time or postponement of trial.
5. Unless counsel commences discovery forthwith, particularly any discovery involving the parties themselves, and pursued discovery without delay, it is unlikely that leave will be granted for enlargement of discovery time or postponement of trial. Enlargement of the discovery period shall be granted only if the moving party shows both active and early discovery and a specific need for further discovery. Applications for enlargement of discovery time or postponement of trial shall be by motion pursuant to Local Civil Rule 20.
6. A FINAL PRETRIAL CONFERENCE SHALL BE HELD IN CHAMBERS (ROOM 403) ON JANUARY 18, 1985, at 10:30 AM in READING CHAMBERS.
7. (Plaintiffs) pursuant to section (c) of Local Rule of Civil Procedure 21, adopted August 1, 1980, shall file with the Clerk a pretrial memorandum not later than N/A, and (defendants) and third-party (defendants) shall file with the Clerk pretrial memoranda within fifteen (15) days of the filing of (plaintiffs) pretrial memorandum, or in the case of the third-party (defendants) within fifteen (15) days of the filing of its answer.
8. (Plaintiffs) pursuant to Local Rule of Civil Procedure 21, adopted August 1, 1980, shall submit to the Court (Chambers, Room 12614, U.S. Courthouse, 6th and Market Streets, Phila., PA 19106) a proposed final pretrial order on JANUARY 11, 1985, which shall comply fully and precisely with sections (d) 2. (a) and (b) of Rule 21.
9. Counsel shall become familiar with Local Rule of Civil Procedure 21, adopted August 1, 1980, and follow the provisions of that Rule precisely in respect to this action and particularly in complying with paragraphs 7 and 8 of this Order.
10. Counsel will mark in advance of trial all exhibits to be used at trial (the court reporter will not mark exhibits). Any documents likely to be used or referred to at trial, except impeaching documents, will be exchanged by counsel in advance of trial, so that counsel will be familiar with their contents and will not need to interrupt the trial to read them. At the commencement of trial the Court should be supplied with a copy of each exhibit in triplicate and a schedule of exhibits in triplicate which shall briefly describe each exhibit.
11. THIS ACTION SHALL BE CALLED FOR TRIAL IN COURTROOM 12-A, PHILADELPHIA ON FEBRUARY 19, 1985, AT 9:30 AM., WHEN THE JURY SHALL BE SELECTED, AND TRIAL SHALL COMMENCE THE FOLLOWING DAY AT THE READING STATION IN COURTROOM 434.
12. At least two days before the trial date each party shall submit proposed jury instructions and any proposed jury interrogatories in triplicate; ONE POINT PER PAGE the original shall be filed with the clerk and two copies shall be delivered to the Court (Philadelphia Chambers, Room 1261 The first day of trial each party shall respond in writing to the other party's proposed jury instructions and such response shall be submitted in triplicate, ONE POINT PER PAGE the original shall be filed with the Clerk and two copies shall be delivered to the Court (Philadelphia Chambers, Room 12614). Supplemental jury instructions may be submitted only for good cause and with the permission of the Court.
13. Trial shall not be continued because of the unavailability of a witness, particularly an expert witness. If the witness's availability to appear is at all doubtful, counsel shall consider taking the trial deposition of such witness by video tape.
14. Counsel shall comply with "Procedures which shall Govern the Trial of Cases before Judge Daniel H. Huyett, 3rd"; a copy of these procedures IS ATTACHED.