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ETHANOL PTNRS. ACCREDITED v. WIENER

September 13, 1985

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



The opinion of the court was delivered by: KELLY

 KELLY J.

 Presently before the court are defendants, Harold E. Card, Raymond Jallow, Ira Palmer and William H. Palmer's motion to dismiss, and defendants, John P. Redd and J. Michael Redd's motion to dismiss. The parties seek the dismissal of the complaint pursuant to Fed. R. Civ. P. 12(b)(1), for lack of subject matter jurisdiction, Fed. R. Civ. P. 12(b) (6) for failure to state a claim upon which relief can be granted, and Fed. R. Civ. P. 12(b)(3) for improper venue.

 Additionally, the two groups of defendants here each made motions to change venue. Both groups of moving defendants seek transfer to the Western District of Missouri and rely upon 28 U.S.C. § 1404(a) for authority for their position.

 I turn first to defendants' argument that this court does not have subject matter jurisdiction. Defendants assert, inter alia, that the selling of the Ethanol plants by Midwestern and its subsidiaries does not constitute the selling of securities; additionally, defendants suggest that plaintiffs have not alleged that any of the defendants were involved in the subsequent sale by the plaintiffs of the limited partnership interests in the ethanol plants. A security is defined in the Securities Act of 1933 § 2(1), 15 U.S.C. § 77b(1) which states:

 The Securities Exchange Act of 1934 also defines a security, and has been held to be virtually identical to the Securities Act of 1934. Tcherepnin v. Knight, 389 U.S. 332, 335-336, 19 L. Ed. 2d 564, 88 S. Ct. 548 (1967). Here plaintiff contends that the sale of the ethanol plants to the partnership and the subsequent sale of the limited partnership interest constitutes investment contracts. Indeed, under the Security Act of 1933, and the Securities Exchange Act of 1934, investment contracts are considered securities.

 The Supreme Court in Securities & Exchange Commission v. W.J. Howey Co., 328 U.S. 293, 298-299, 66 S. Ct. 1100, 90 L. Ed. 1244 (1946) observed: "an investment contract for purposes of the Securities Act means a contract, transaction or scheme whereby: [1] a person invests his money [2] in a common enterprise and [3] is led to expect profits solely from the efforts of the promotor or a third party . . . ." Thus, this court must find all three prongs present for an investment contract transaction to come within the purview of the Securities Act of 1933, 15 U.S.C. § 77, et seq., and the Securities Exchange Act of 1934, 15 U.S.C. § 78 et seq.

 The general partners purchased six ethanol plants from Midwestern. The general partners and a subsidiary of Midwestern entered into an agreement which vested management and control of the ethanol plants with Midwestern and a subsidiary. Indeed, the result was that the partners would reap the profits of the plants without control over the plants. For the purpose of finding an investment contract, I do not find difficulty in finding that two prongs of the Howey test are met, namely the investment of money and the expectation of profits from the efforts of a third party. The finding of a "common enterprise" presents a problem for the plaintiffs here. The Third Circuit Court of Appeals in Salcer v. Merrill Lynch, Pierce, Fenner and Smith, Inc., 682 F.2d 459, 460 (3rd Cir. 1982) required a finding of a "pooled group of funds" for a finding of a common enterprise under Howey. In Wasnowic v. Chicago Board of Trade, 352 F. Supp. 1066 (M.D. Pa. 1972) aff'd without opinion, 491 F.2d 752 (3d Cir. 1973), cert. denied, 416 U.S. 994, 94 S. Ct. 2407, 40 L. Ed. 2d 773 (1974), the district court, for the purpose of finding whether an investment contract comes within the scope of the Securities Act, held that a discretionary trading account in commodities futures was not an investment contract because pooled investments had not been made such that each of the various investors did consolidate their investments and then shared the profits from the common funds.

 In Milnarik v. M-S Commodities, 457 F.2d 274, 276-277 (7th Cir. 1972) the court in searching for the meaning of a "common enterprise" held that although the defendant entered into various discretionary trading account contracts with various customers, the "success or failure of those other contracts had no direct impact on the profitability of plaintiffs' contract . . . . [Defendant's] various customers were represented by a common agent, but they were not joint participants in the same investment enterprise." Here the sale of the ethanol plants by Midwestern to the partnership cannot be viewed as an investment in a common enterprise since there has been no allegation that the investments were pooled with other investors. In accordance with Howey and Salcer, I find the sale of the ethanol plants to the partnership is not the sale of a security under the Securities Act of 1933 or the Securities Exchange Act of 1934.

  The sale of the limited partnership interests by the general partners may be construed as the sale of securities, where the conveyance constitutes the sale of an investment contract. McGreghar Land Company v. Meguiar, 521 F.2d 822 (9th Cir. 1975); Kroungold v. Triester, 407 F. Supp. 414 (E.D. Pa. 1975). Here the sale by plaintiffs of the limited partnership interests constitute the sale of investment contracts since the three prongs set out in Howey are met. Accordingly, this portion of the action comes within the purview of the securities laws.

 Defendants here contend that the plaintiffs have not alleged any connection between the sale of the limited partnership interests and the alleged frauds and misrepresentations defendants participated in to induce the sale of the ethanol plants to the general partners. After scrutinizing the complaint I find that the complaint does state that the alleged frauds committed by the defendants were used to defraud the limited partners. However, I do find serious fault in plaintiffs' allegations of fraud by the defendants here. Plaintiffs make conclusory allegations of fraud and misrepresentation against the whole group of defendants here. Plaintiffs make few distinctions in the various roles each of the defendants allegedly took in perpetuating the fraud. When fraud is pleaded, it must be done with particularity. *fn1" Segal v. Gordon, 467 F.2d 602, 607 (2d Cir. 1972) ("mere general allegations that there was fraud, corruption or conspiracy or characterizations of acts or conduct in these terms are not enough no matter how frequently repeated.") (Quoting Chicago Title & Trust Co. v. Fox Theatres Corp., 182 F. Supp. 18, 31 (S.D.N.Y. 1960)); Kimmel v. Peterson, 565 F. Supp. 476 (E.D. Pa. 1983). Defendants here must be sufficiently apprised of the claim against them so that they may answer the complaint, and be informed as to what they are to defend against. Plaintiffs have failed to give the defendants here adequate notice of the purported frauds. Because of this deficiency in Count I, it will be dismissed with leave to amend.

 Concerning the portion of the complaint which relies on the Securities Act of 1933, Section 17(a), defendants here contend that a private cause of action does not lie under this section. For the many reasons I set out in my Memorandum and Order No. I of June 27, 1985, 617 F. Supp. 300 (E.D.Pa. 1985), I Agree.

 Next, I turn to defendants' claim that the Racketeer Influenced and Corrupt Organization (RICO) claim fails to state the predicate act convictions as well as specific RICO injury. In light of the recent Supreme Court decision in Sedima, S.P.R.L. v. Imrex Company, Inc., 473 U.S. 479, 105 ...


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