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ETHANOL PTNRS. ACCREDITED v. WIENER

June 28, 1985

ETHANOL PARTNERS ACCREDITED, et al.
v.
WIENER, ZUCKERBROT, WEISS & BRECHER, et al.



The opinion of the court was delivered by: KELLY

 KELLY, J.

 Presently before this court is a motion to dismiss for failure to state a claim filed by Carl E. Wright and Wright, Herfordt & Sanders (WHS), a partnership engaged in public accounting. Defendants here rely upon Fed. R. Civ. P. 12(b)(6) for authority for their motion. Additionally, defendants here argue that this court does not have personal jurisdiction over them, therefore, the court must dismiss pursuant to Fed. R. Civ. P. 12(b)(2).

 The plaintiffs have alleged several securities violations, a Racketeer Influenced and Corrupt Organization Act violation (RICO) 18 U.S.C. § 1961, et seq., and several state securities violations. Plaintiffs, two limited partnership organizations, *fn1" sought the purchase of various investments. In seeking investments plaintiffs purchased six ethanol manufacturing facilities on a "turn key" basis, with management of the facilities being provided for by the seller Midwestern Companies, Inc. (Midwestern) and its subsidiaries. Defendant Carl Wright, besides being the senior partner of WHS was also an officer and director of Midwestern. Plaintiffs, once the ethanol plants were purchased, sold limited partnership interests to investors.

 In count I, plaintiffs assert that defendants here used "manipulative and deceptive devices or contrivances which were designed to, and had the effect of generating and receiving millions of dollars in the limited partners' investments in the ethanol plants . . . ." Plaintiffs contend that: defendants misrepresented the completion time for the plants to be operational; the defendants misrepresented the total assets in place at each ethanol plant; defendants misrepresented the financial integrity of Midwestern and its ability to construct the plants; defendants misrepresented the fact that a performance bond was secured when in fact no bond had been secured; and defendants misrepresented projected revenues, expenses, cash flows and tax advantages of the ethanol plants. Plaintiffs allege that the defendants WHS and Carl Wright acted in concert with various other individuals, corporations, and partnerships (all of which are defendants in this action) who were involved in other aspects of the transaction of buying the ethanol plants and/or selling the limited partnership interests by plaintiffs.

 Plaintiffs in count I of their complaint seek relief pursuant to the Security Act of 1933 (SA) § 17(a), 15 U.S.C. § 77q(a)(1981) which states:

 
§ 77q. Fraudulent interstate transactions
 
Use of interstate commerce for purpose of fraud or deceit
 
(a) It shall be unlawful for any person in the offer or sale of any securities by the use of any means or instruments of transportation or communication in interstate commerce or by the use of the mails, directly or indirectly-
 
(1) to employ any device, scheme, or artifice to defraud, or
 
(3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.

 Defendants here contend that a private cause of action does not lie from SA § 17(a), supra. I ruled in Markovich v. Vasad Corp., 617 F. Supp. 142, slip op. 8-9 (E.D. Pa. 1985) that SA § 17(a) does not support a private cause of action. Plaintiffs believe that the Supreme Court's opinion in Herman & MacLean v. Huddleston, 459 U.S. 375, 74 L. Ed. 2d 548, 103 S. Ct. 683 (1983) requires a contrary result. However, the Huddleston Court was confronted with different questions, namely whether an implied cause of action under the Security and Exchange Act of 1934 (SEA) § 10(b) will lie for conduct subject to an express civil remedy under the SA § 11, and if the implied action does lie, what is the applicable standard of proof required. For the many reasons Judge Giles set out in Kimmel v. Peterson, 565 F. Supp. 476 (E.D. Pa. 1983) and for the reasons I set out in Markovich, I do not find the Supreme Court's opinion in Huddleston controlling here. Accordingly, a private cause of action will not lie under SA § 17(a). Plaintiffs' action to the extent it relies upon SA § 17(a) must be dismissed. However, to the degree plaintiffs rely upon SA § 12(2), 15 U.S.C. § 77 l (2) (1981) and SEA § 10(b), 15 U.S.C. § 78j(b)(1981) and Rule 10b-5, 17 C.F.R. 240.10b-5 (1984) promulgated thereunder, count I is a viable claim since a private cause of action is permissible under these sections. *fn2" Moreover, defendants here do not seek dismissal of these claims. Accordingly, count I will not be dismissed as to plaintiffs' claims which rely upon SA § 12(2), SEA § 10(b), and Rule 10b-5.

  In count I of the complaint plaintiffs couch a claim upon SA § 15, 15 U.S.C. § 77 o and SEA § 20(a) & (b), 15 U.S.C. 78t(a) & (b). *fn3" In alleging a claim based upon SA § 15 and SEA § 20(a) & (b), plaintiffs contend that defendants here have exercised control over other defendants in this action, who have violated SA § 12, 15 U.S.C. 77 l (1981). Because the Federal Rules of Civil Procedure only require notice pleadings, I find that plaintiffs have given sufficient notice to the defendants here; whether or not defendants here exercised control is a factual question which cannot be resolved on a Fed. R. Civ. P. 12(b)(6) motion to dismiss for failure to state a claim.

 If plaintiffs can establish, inter alia, that defendant here sufficiently controlled or had influence over other defendants in this action who violated either SA §§ 11 or 12, 15 U.S.C. §§ 77k, 77 l or those acts which are covered under SEA § 20, 15 U.S.C. § 78t, cf. Sharp v. Coopers & Lybrand, 649 F.2d 175 (3d Cir. 1981), cert. denied, 455 U.S. 938, 71 L. Ed. 2d 648, 102 S. Ct. 1427 (1982) (The court recognized certain limited situations where an accounting firm may be liable to parties who are persuaded and rely upon their advice) then plaintiffs will be entitled to recover. For all these reasons, I cannot dismiss in total count I of plaintiffs' complaint.

 I turn next to count II of plaintiffs' complaint, in which they allege a claim under RICO, 18 U.S.C. § 1964; however, plaintiffs fail to allege that defendants here have been convicted of the requisite predicate acts. Conviction of predicate acts are a prerequisite to stating a claim for civil relief under RICO. Sedima S.P.R.L. v. Imrex Company, Inc., 741 F.2d 482 (2d Cir. 1984) cert. granted, 469 U.S. 1157, 105 S. Ct. 901, 83 L. Ed. 2d 917 (1985); Viola v. Bensalem Township, 601 F. Supp. 1086 (E.D. Pa. 1984). Without more discussion, I will dismiss count II of plaintiffs' complaint against these defendants. *fn4"

 Defendants here do not seek dismissal of counts III through IX of plaintiffs complaint. Accordingly, I will not evaluate the allegations for adequateness of stating a claim, sua sponte.

 Turning to count X of plaintiffs' complaint, defendants seek dismissal because they assert that plaintiffs failed to "plead fraud with particularity" and thus contra to Fed. R. Civ. P. 9(b). In count X plaintiffs allege that defendants here completed the statements of revenues and statements of cash flow for the ethanol plants in a perfunctory manner, notwithstanding the fact that defendants here knew that plaintiffs would rely upon the schedules in making their decisions. Moreover, plaintiffs contend that defendants here negligently relied upon representations and assumptions from other defendants in this action in rendering their opinion. I do not read count X of plaintiffs' complaint as alleging fraud, but rather find count X alleges a breach of a duty, namely negligence and gross negligence. Accordingly, I find that count X has been sufficiently pleaded in accordance with Fed. R. Civ. P. 8, and that Fed. R. Civ. P. 9(b) is inapplicable to count X.

 Last, I address defendants' assertion that this court does not have jurisdiction over them. Defendants claim that they do not have agents within the Commonwealth of Pennsylvania, nor do they conduct business within the Commonwealth. Defendants here assert that they reside and conduct their business in Missouri. The SA and the SEA each provides for nationwide service of process and further each provides for jurisdiction in any district court. The SA § 22, 15 U.S.C. § 77v (1981) states in pertinent part:

 
§ 77v. Jurisdiction of offenses and suits
 
(a) The district courts of the United States, . . ., shall have jurisdiction of offenses and violations under this subchapter and under the rules and regulations promulgated by the Commission in respect thereto, and, concurrent with State and Territorial courts, of all suits in equity and actions at law brought to enforce any liability or duty created by this subchapter. Any such suit or action may be brought in the district wherein the defendant is found or is an inhabitant or transacts business, or in the district where the offer or sale took place, if the defendant participated ...

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