were not sold with the collateral agreements, Judge Weber found the condominiums failed to constitute investment contracts.
In the instant case, the plaintiffs allege that there was an exclusive rental agreement by which the purchasers would pay a portion of their rents to U. S. Capital. 2d Am.Co. para. 64(d)(6). Plaintiffs also allege that a major hotel chain had been retained to handle rentals through an 800 number. 2d Am.Co. para. 64(e)(4). These allegations are sufficient to indicate that the condominiums may have been offered
with a rental arrangement whereby the purchasers would benefit economically from the managerial efforts of another. Since this meets the Howey criteria for an investment contract we conclude that the condominiums may be securities. Next, we address whether or not there was fraud in the sale of securities.
U. S. Capital contends that plaintiffs cannot prove fraud in the sale of securities because the plaintiffs did not justifiably rely upon the alleged misrepresentations. U. S. Capital submits that justifiable reliance is absent because the public offering documents state that future phases "need not be built." Appendix to Defendants' Motion to Dismiss. 2d Am. Co., Exhibit 1 (hereinafter Defendants' Appendix). In addition, the sales agreement and offering documents provide that information not included in the public offering statement should not be relied on. Id., Exhibit 3.
U. S. Capital bases its argument on the Tenth Circuit's decision in Zobrist v. Coal-X, Inc., 708 F.2d 1511 (10th Cir.1983). The plaintiffs in Zobrist had purchased an interest in a coal venture which they had been told was a "sure thing" and had "no risks." A written memorandum serving as a prospectus directly contradicted these oral assurances and specifically expressed the risks attendant to the investment. When the venture appeared to fail the plaintiffs filed suit claiming misrepresentation in the sale of securities. The Court charged the plaintiffs with constructive knowledge of the full and fair disclosures in the memorandum. It then concluded, after considering several other factors, that the plaintiffs' reliance on the "no risk" representation was not justified.
U. S. Capital argues that Zobrist stands for the premise that a plaintiff cannot rely upon oral misrepresentations if the misrepresentations conflict with a written document received by the plaintiffs. We do not construe Zobrist as broadly as U. S. Capital would urge. The imputation of the information contained in the memorandum in Zobrist was due to the fact that the written memorandum expressly contradicted and directly refuted the oral representations. Even then, the imputed knowledge alone did not negate the plaintiffs' reliance. Rather, the plaintiffs' imputed knowledge in conjunction with the fact that the plaintiff was a sophisticated investor, together with the fact that the fraud was not concealed but openly provided to the plaintiffs, collectively provided the bases for the court to hold that the plaintiffs' reliance was unjustified.
In reaching its decision in Zobrist, the court followed its own "view that while the full and fair disclosure of information in the . . . Memorandum is a relevant factor which favors the defendants here, such disclosure is not determinative . . ." of whether reliance was justified. 708 F.2d at 1517. Similarly, although the contents of the public offering statement and the sales agreement are relevant in the instant case, the contents are not determinative of whether plaintiffs' reliance was justified. The oral representations do not directly conflict with the written documents. In fact, it is quite possible for both statements to be true at the same time.
Moreover, the instant action does not present plaintiffs as highly sophisticated investors.
Lastly, there remains the possibility that U. S. Capital concealed its fraud. Plaintiffs assert that inquiries regarding the existence of a new lower priced condominium project were flatly denied. Plaintiffs' Brf., p.9, n. 5. The public offering statement for the lower priced condominium unit also was allegedly delayed in release, thereby placing it in circulation only after plaintiffs had purchased their units. These facts are subject to a reasonable inference that U. S. Capital did not want plaintiffs to be aware of this new lower priced condominium project. For these reasons, we decline to find as a matter of law that plaintiffs did not justifiably rely upon the alleged misrepresentations. This will be a question for the finder of fact.
In conclusion, with regard to U. S. Capital's arguments that plaintiffs have failed to allege racketeering activity, we find that plaintiffs have demonstrated that a genuine issue of fact exists regarding whether there was fraud in the sale of securities. Judgment cannot be entered solely on this argument.
Moreover, judgment cannot be entered for U. S. Capital on the basis that plaintiffs have failed to allege a "pattern" of racketeering activity. Several factors must be considered to determine if there is a "pattern" of racketeering activity. Barticheck v. Fidelity Union Bank/First Nat'l State, 832 F.2d 36 (3rd Cir.1987). These include: "the number of unlawful acts, the length of time over which the acts were committed, the similarity of the acts, the number of victims, the number of perpetrators and the character of unlawful activity." Id. at 39. In the instant case, the alleged misrepresentations were made to the plaintiffs, the purchasers of thirty-three condominium units in all. The misrepresentations were similar in nature and made over several months' time in late 1982 and early 1983. These facts are sufficient to create an issue of fact regarding a pattern of activity. See Barticheck, 832 F.2d at 36; Saporito v. Combustion Engineering, Inc., 843 F.2d 666 (3rd Cir.1988).
Since we have determined that issues of fact exist regarding the elements of a pattern of racketeering activity, we go on to address whether plaintiffs have standing to assert their RICO claim pursuant to § 1962(a) against the U.S. Capital defendants.
Section 1964(c) provides that
any person injured in his business or property by reason of a violation of 1962 of this chapter may sue . . . .
18 U.S.C. § 1964(c). U. S. Capital argues that section 1964(c) requires plaintiffs to show that they were injured in their business or property by reason of defendants' investment of income derived from a pattern of racketeering in order to assert a RICO claim under § 1962(a). U. S. Capital contends that plaintiffs fail to claim any injury of this nature. For this reason, U. S. Capital urges we grant judgment in its favor on this claim.
U. S. Capital relies on Gilbert v. Prudential-Bache Securities, Inc., 643 F. Supp. 107 (E.D. Pa.1986) as support for its position. Gilbert presented a RICO claim under section 1962(a) based upon the plaintiffs' allegation that they were fraudulently induced to purchase securities. The Court found that the plaintiffs lacked standing under that section because "it is inconceivable that plaintiffs suffered any injury as a result of any violation of § 1962(a) which might have occurred . . . . Whether the defendant did or did not invest the proceeds in a business affecting commerce cannot have been causally related to any injury to plaintiffs." 643 F. Supp. at 109.
The Court's decision in Gilbert is consistent with the Supreme Court's decision in Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 87 L. Ed. 2d 346, 105 S. Ct. 3275 (1985). In Sedima the Court addressed the breadth of section 1964(c), 18 U.S.C. § 1964(c), which authorizes a private suit by an individual who has been injured by reason of a violation of section 1962. In particular, Sedima presented an alleged violation of § 1962(c). The Court noted that subsections (a),(b) and (c) of § 1962 respectively make it unlawful
to use money derived from a pattern of racketeering activity to invest in an enterprise, to acquire control of an enterprise through a pattern of racketeering activity, or to conduct an enterprise through a pattern of racketeering activity. §§ 1962(a)-(c).
473 U.S. at 495. Then, with specific reference to subsection (c), the Court required that the plaintiff must allege each of the elements to state a claim because "conducting an enterprise that affects interstate commerce is obviously not in itself a violation of § 1962, nor is mere commission of the predicate offenses. In addition, the plaintiff only has standing if . . . he has been injured in his business or property by the conduct constituting the violation." Id. at 496.
Similarly, the conduct constituting a violation under § 1962(a) is not the mere receipt of money derived from a pattern of racketeering activity. Nor can a violation be premised on the investment in an enterprise affecting interstate commerce. Rather, the essence of the violation of§ 1962(a) is the use or investment of the tainted money in an enterprise. Therefore, to have standing to assert a RICO claim under§ 1962(a) an injury to one's business or property must occur because of the investment of tainted money in an enterprise affecting commerce, the essence of the violation.
In the instant case, plaintiffs' pleading of an injury by the investment has been simply in conclusory fashion. See 2d Am. Co. para. 81. Plaintiffs have not shown, however, an injury because of the investment of tainted money in an enterprise affecting commerce. Whether the defendants did or did not invest the proceeds from the sale of the condominiums is not causally related to the plaintiffs' alleged injury. That is, the fact that the condominiums are not what were represented to plaintiffs when they purchased their units is not causally related to any investment of the proceeds. For this reason, plaintiffs lack standing to assert a RICO claim based on § 1962(a) against the U. S. Capital defendants.
B. 1962(a) and the Mellon defendants.
Although our conclusion that plaintiffs lack standing to assert a RICO claim pursuant to § 1962(a) against the U.S. Capital defendants is equally applicable to the Mellon defendants, we dismiss plaintiffs' RICO actions against the Mellon defendants on other grounds as well. Mellon submits that plaintiffs have failed to plead with specificity Mellon's involvement in mail, wire or securities fraud which would subject it to liability under RICO.
Rule 9 requires that "all averments of fraud or . . . circumstances constituting fraud . . . shall be stated with particularity." Fed.R.Civ.P. 9(b). This pleading requirement is applicable to RICO actions claiming fraud as the racketeering activity. Saporito v. Combustion Engineering, Inc., 843 F.2d 666, 673 (3rd Cir.1988). Hence, some circuits have required the time, place and content of the persons making the misrepresentation. Bennett v. Berg, 685 F.2d 1053, 1062 (7th Cir.1982). The Third Circuit, however, recognizes that alternative measures may be used by a plaintiff to provide precision and substance to a claim of fraud. Such measures adequately notify defendants of the misconduct alleged. Seville Indus. Machinery v. Southmost Machinery, 742 F.2d 786, 791 (3rd Cir.1984). Nevertheless, a plaintiff's averment must include sufficient particularity to identify who made the representations. Saporito, 843 F.2d at 675; Petro-Tech, Inc. v. Western Co. of North America, 824 F.2d 1349, 1362 (3rd Cir.1987); Eaby v. Richmond, 561 F. Supp. 131, 136 (E.D. Pa.1983).
In the instant case, the Mellon defendants contend that despite an opportunity to correct their previously defective amended complaint, plaintiffs have failed to allege who made the representations for which the Mellon defendants should be liable. A cursory review of the Second Amended Complaint reveals numerous allegations regarding "Defendants" collectively without further specification.
Mellon also submits that even when plaintiffs have narrowed this broad reference they fail to do so with any greater specificity than "Mellon Defendants." On this basis, Mellon urges this Court to dismiss plaintiff's Second Amended Complaint.
As support for their position, Mellon relies on Ethanol Partners v. Wiener, Zuckerbrot, Weiss, 635 F. Supp. 18 (E.D. Pa.1985). The plaintiffs in Ethanol Partners alleged defendants had violated RICO and federal securities laws. Defendants asserted that the complaint was not plead with the specificity required by Federal Rule of Civil Procedure § 9(b). The Court agreed with defendants. It characterized the plaintiffs' complaint as a 'shotgun' approach which failed to meet the particularity requirement of Rule 9. Since this was the plaintiffs' first complaint, the Court granted the motion to dismiss with leave to file an amended complaint. Plaintiffs were specifically ordered by the Court to include the time, place, subject matter of the fraudulent statements and the individuals who made the statements. The identity of the persons who made the statements was essential because the plaintiffs had grouped all the defendants together, a group which included accounting firms, law firms and consultants.
Most recently, the Third Circuit affirmed the dismissal of a RICO action in which the plaintiffs failed to plead who the persons were who had made the fraudulent representations. Saporito, 843 F.2d at 666. In Saporito v. Combustion Engineering, Inc., the Third Circuit affirmed the principle that civil RICO actions based on a scheme to defraud must "be pleaded with greater particularity than other pleadings." Id. at 675. The Court did not depart from its previous holding in Seville, 742 F.2d at 786, which recognized that Rule 9(b)'s pleading requirement did not always require allegations of date, place or time. Rather, the Third Circuit distinguished the complaint in Seville as one which "indicated who made the representations to whom, and the general content of the representations." Saporito, 843 F.2d at 675. In the absence of allegations specifying who made the statements, however, in Saporito the circuit affirmed the district court's dismissal with leave to amend.
Similarly, the Second Circuit has affirmed the dismissal of an action which failed to meet Rule 9(b)'s pleading requirements. Denny v. Barber, 576 F.2d 465 (2nd Cir.1978). Denny presented an action claiming fraud in the sale of securities. The initial complaint was dismissed with leave to amend because it failed to identify the statements alleged to be false and misleading. The amended complaint also was dismissed, but with prejudice. The Second Circuit reasoned that the amended complaint failed to identify the alleged false statements, a deficiency which plaintiff's counsel had notice of in light of the dismissal of the initial complaint. Consequently, the Circuit Court concluded that plaintiffs had no right to a second amendment because "this is not a case where 'justice so requires'. . . ." 576 F.2d at 471.
In the instant case, plaintiffs initially filed a complaint on December 5, 1986. Plaintiffs then filed an amended complaint on January 13, 1987. Plaintiffs' amended complaint was met by a motion to dismiss and a motion for a more definite statement. On June 3, 1987, the Eastern District Court dismissed plaintiffs' complaint with leave to amend. Plaintiffs were ordered to "set forth with particularity the alleged acts of fraud committed by each defendant. . . ." Bhatla v. Resort Development Corp., C. A. No. 88-147 (E.D. Pa.June 6, 1987) (emphasis added). Significantly, plaintiffs' deficient amended complaint also repeatedly grouped all the defendants together.
We conclude that plaintiffs' Second Amended Complaint fails not only to comply with the previous order dismissing the amended complaint, but also to satisfy the particularity requirement of Rule 9. Plaintiffs' Second Amended Complaint alleges that
the Defendants knowingly and willfully conspired with each other and with others presently unknown to defraud Plaintiffs in connection with their purchases of condominium units in Phase I of BKS & CC by:
(a) making false and fraudulent written and oral pretenses, representations and promises to them;