to reflect the basic marketability of a security is not so unlikely. This Court concludes that the rationale of Peil and Basic can properly be extended "where the promoters knew that the subject enterprise was worthless when the securities were issued, and successfully issued the securities only because of defendants' fraudulent scheme." Abell, 858 F.2d at 1122-23. In such cases, it is reasonable to presume that an investor would actually rely on the integrity of an illiquid market to reflect such a fundamental characteristic. In sum, this Court finds Abell persuasive and adopts the narrow standard of a rebuttable fraud-created-the-market presumption endorsed by the Abell court. See id. at 1122 ("Securities meet the test of 'not entitled to be marketed' only where the promoters knew the enterprise itself was patently worthless.").
THE AMENDED COMPLAINT & THE FRAUD-CREATED-THE-MARKET PRESUMPTION
This Court determined that the Stinsons' Complaint -- which focused on the failure to disclose the inadequate financing of the Copper Lake Manor Project -- could not proceed under the narrow Abell fraud-created-the-market standard. See Stinson, at 138 ("Given that there has been no tenable suggestion that the bonds were worthless when issued and successfully issued only because of the alleged fraudulent scheme, the fraud-created-the-market theory is not applicable."). Thus, the question is whether the Stinsons proposed Amended Complaint alleges adequate facts justifying further proceeding under this theory. The Court notes that the focus of its inquiry is the value of the bonds at the time of issuance -- whether the promoters knew that the development project pledged to retire the bonds was patently worthless, a sham or hoax. Under the Abell standard, even where a project was misconceived and badly managed, this alone does not amount to the kind of unmarketability warranting application of the fraud-created-the-market presumption.
The new allegations by the Stinsons involve the defendants' misrepresentations and failure to disclose material facts regarding the Copper Lake Manor Project. These alleged omissions and misrepresentations include the failure to disclose: 1) the use of a contractor controlled by defendant Richard Liddell, and his family, and with which Copper Lake Manor, Inc. had no contract (instead of an independent contractor bound by a stipulated sum contract); 2) the use of bond proceeds for construction of Copper Lake rather than exclusively for project construction; 3) that the CLM partnership controlled by defendants James Hutson and Richard Lidell would conduct business related to the project; and 4) that defendants Miller & Schroeder and Laventhol & Horwath failed to conduct due diligence investigations of the construction or operation of the project. See Docket No. 59 at 4. These allegations are similar to the Stinsons's initial charges -- focusing on the alleged financial mismanagement in the planning and development of the project.
Without gainsaying the seriousness of such allegations, they fail to show the kind of sham or hoax required under the Abell standard.
As defendants have noted, there has been no showing that the bonds or the underlying retirement center project was or is now worthless.
While the Stinsons's allegations may be taken to suggest serious mismanagement and undisclosed self-dealing, they have not shown that the Copper Lake Project was patently worthless. The record shows that the planned retirement center was genuine. It was built and occupied -- although obviously not at rates sufficient to retire the bonds. So, despite the fact that the bonds have been in default, it is conceivable that under improved economic fortunes in Oklahoma the project could have succeeded and the bonds successfully retired.
Upon review of the Stinson's allegations, it is clear that this case does not involve unmarketable "worthless" bonds under the Abell standard. The Court concludes that the Stinsons allegations of fraud go to whether the bonds were offered at a fair value rather than to whether the bonds were marketable under Abell. Accordingly, their motion for leave to file an Amended Complaint will be denied.
An appropriate Order follows.
ORDER - August 10, 1989, Filed
AND NOW, this 10th day of August, 1989, upon consideration of Plaintiffs' Motion for Leave to Amend Their Complaint and for Reconsideration of the Order Dismissing Plaintiffs' Complaint with Prejudice, Made Pursuant to Fed. R. Civ. P. 15(a), 59(e), and Local Rule of the District Court for the Eastern District of Pennsylvania 20(g) (Docket No. 59), Defendant James L. Hutson's Memorandum of Law in Opposition to Plaintiffs' Motion for Leave to Amend Their Complaint and for Reconsideration of the Order Dismissing Plaintiffs' Complaint with Prejudice (Docket No. 60), Memorandum of Defendant Miller & Schroeder Municipals, Inc. in Opposition to Plaintiffs' Motion for Reconsideration of the Order Dismissing Plaintiffs' Complaint with Prejudice and for Leave to File an Amended Complaint (Docket No. 61), Memorandum of Law of Defendant Laventhol & Horwath in Opposition to Plaintiffs' Motion for Leave to Amend Their Complaint and for Reconsideration of the Order Dismissing their Complaint with Prejudice (Docket No. 64), Defendant James L. Hutson's Supplemental Memorandum of Law (Docket No. 65), and Plaintiffs' Consolidated Reply to Defendants' Memoranda of Law in Opposition to Plaintiffs' Motion for Leave to Amend their Complaint and for Reconsideration of the Order Dismissing Plaintiffs' Complaint with Prejudice (Docket No. 66), it is hereby ORDERED that plaintiffs' Motion for Leave to Amend Their Complaint and for Reconsideration of the Order Dismissing Plaintiffs' Complaint with Prejudice, Made Pursuant to Fed. R. Civ. P. 15(a), 59(e), and Local Rule of the District Court for the Eastern District of Pennsylvania 20(g) is DENIED.