776 F. Supp. 888, *; 1991 U.S. Dist. LEXIS 15426, **;
Fed. Sec. L. Rep. (CCH) P96,448
SOUTHMARK PRIME PLUS, L.P., a Delaware Limited Partnership;
SOUTHMARK EQUITY PARTNERS III, LTD., a California Limited Partnership; SOUTHMARK
INVESTMENT GROUP 86, INC., a Nevada Corporation; and PRIME PLUS CORP., INC., a
Nevada Corporation, Plaintiffs, v. LEONARD F. FALZONE; BUFFALO
LABORERS' PENSION FUND; LABORERS'
INTERNATIONAL UNION OF NORTH AMERICA, LOCAL #210; REALCAP COMPANY, a Texas
General Partnership; QUANTUM REALTY CORP., a Delaware Corporation; CONCAP
MANAGEMENT L.P., an Illinois Limited Partnership; WILLIAM R. ARNOLD; SALVATORE
J. CACI; LOUIS P. CIMINELLI; JOHN A. DOYLE; PETER G. GERACE; EDWARD D. HERRICK;
JAMES C. LOGAN; TERRY L. MOEBEL; JOSEPH R. PIERI; ROBERT C. PATTERSON; and
DANIEL J. SANSANESE, Defendants
Civil Action No. 91-127-JLL
UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE
776 F. Supp. 888; 1991 U.S. Dist. LEXIS 15426; Fed. Sec. L.
Rep. (CCH) P96,448
October 10, 1991, Decided
CORE TERMS:
pension fund, proxy, contest, predicate, partnership, organized crime,
disclosure, pattern of racketeering activity, general partner, supplemental,
solicitation, injunctive relief, continuity, affiliate, omissions, partner,
criminal conduct, closed-ended, real estate, judicial notice, continuous, per
unit, repeated, managing, judicially noticed, notice, repetition, moot,
outstanding, registered
COUNSEL: [**1]
Robert K.
Payson and Stephen C. Norman of Potter, Anderson & Corroon, Wilmington,
Delaware, and Karen E. Katzman, Phillip A. Geraci, John J. P. Howley, and Hill
K. Israelof Kaye, Scholer, Fierman, Hays & Handler, New York, New York, of
counsel, for plaintiffs.
Richard R. Wier, Jr., Wayne J. Carey, and April
Caso Ishak of Prickett, Jones, Elliott, Kristol & Schnee, Wilmington,
Delaware, and Harold J. Boreanaz and Robert L. Boreanaz of Boreanaz, Carra,
Boreanaz, Buffalo, New York, of counsel, for Pension Fund defendants.
Perry F. Goldlust of Heiman, Aber & Goldlust, Wilmington, Delaware,
and Richard Lipsitz and William M. Feigenbaum of Lipsitz, Green, Fahringer,
Roll, Salisbury & Cambria, Buffalo, New York, of counsel, for Local #210
defendants.
Steven J. Rothschild, Matthew F. Boyer and Karen L. Valihura
of Skadden, Arps, Slate, Meagher & Flom, Wilmington, Delaware, and David S.
Steuer of Wilson, Sonsini, Goodrich & Rosati, Palo Alto, California, of
counsel, for RealCap defendants.
JUDGES: James Latchum, Senior United States
District Judge.
OPINIONBY:
LATCHUM
OPINION:
[*891] OPINION
JAMES LATCHUM, SENIOR UNITED STATES DISTRICT
JUDGE
This is an action brought by two real estate limited partnerships
and their managing general partners against a host of defendants, alleging
[**2] violations of the federal securities laws and the Racketeer
Influenced and Corrupt Organizations Act ("RICO"), arising from a threatened
proxy contest. This is not the first suit between the parties, and possibly not
the last. The facts of this case are involved and will be addressed in greater
detail infra at section II.A.
The case is presently before the Court on
the defendants' motion to dismiss on the pleadings pursuant to Federal Rule of
Civil Procedure 12(c) n1 and the plaintiffs' motion for leave to file a
supplemental complaint. After considering the briefs of the parties, and hearing
oral argument on September 13, 1991, the Court will grant the defendants' motion
in part and deny it in part and will deny the plaintiffs' motion for leave to
file a supplemental complaint.
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-Footnotes- - - - - - - - - - - - - - - - - -
n1 On May 14, 1991
RealCap, Quantum Realty Corp., ConCap Management, L.P., John A. Doyle, Edward D.
Herrick and Terry L. Noebel jointly moved for a dismissal of this action under
Federal Rule of Civil Procedure 12(c). (D.I. 45.) The remaining defendants,
Buffalo Laborers' Pension Fund, Laborers'
International Union of North America Local # 210, Leonard F. Falzone, William R.
Arnold, Salvatore J. Caci, Louis P. Ciminelli, Peter G. Gerace, James C. Logan,
Joseph R. Pieri, Robert C. Patterson and Daniel J. Sansanese, joined the motion
to dismiss on June 12, 1991 and August 5, 1991. (D.I. 53 & 73.)
The
plaintiffs in this action are Southmark Prime Plus, L.P.; Southmark Equity
Partners III, Ltd.; Southmark Investment Group 86, Inc. and Prime Plus Corp.,
Inc.
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- - - - - - - - - -
[**3]
I. THE APPLICABLE STANDARD
UNDER RULE 12(C)
The defendants have moved for judgment on the pleadings
pursuant to Federal Rule of Civil Procedure 12(c). n2 Since Rule 12(c) provides
for the summary disposition of a party's claims on the merits before discovery,
such motions are disfavored. Cardio-Medical
Assoc., Ltd. v. Crozer-Chester Medical Ctr., 536 F. Supp. 1065, 1072 (E.D.
Pa. 1982). Like Rule 12(b)(6), Rule 12(c) requires that the Court "accept
the allegations in the complaint as true, and draw all reasonable factual
inferences in favor of the plaintiff. [The motion can be granted] only if no
relief could be granted under any set of facts that could be proved." Turbe
v. Government of the Virgin Islands, 938 F.2d 427, 428 (3d Cir. 1991)
(citation omitted); see also Summit
Health, Ltd. v. Pinhas, 114 L. Ed. 2d 366, 111 S. Ct. 1842, 1845 (1991); Cardio-Medical,
536 F. Supp. at 1072 ("If a complaint contains even the most basic of
allegations that, when read with great liberality, could justify plaintiff's
claim for relief, motions for judgment on the pleadings should be denied."). The
Court need not, however, adopt "conclusory [**4] allegations or
statements of law." In
re General Motors Class E Stock Buyout Sec. Litig., 694 F. Supp. 1119, 1125
(D. Del. 1988). Where appropriate, the Court may grant a Rule 12(c) motion
for judgment on the pleadings in part, and deny it in part. See, e.g., Society
Hill Civic Ass'n v. Harris, 632 F.2d 1045 (3d Cir. 1980).
- -
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n2 Federal Rule of Civil Procedure 12(c) states:
Motion for Judgment on the
Pleadings. After the pleadings are closed but within such time
as not to delay the trial, any party may move for judgment on the pleadings.
If, on a motion for judgment on the pleadings, matters outside the pleadings
are presented to and not excluded by the court, the motion shall be treated as
one for summary judgment and disposed of as provided in Rule 56, and all
parties shall be given reasonable opportunity to present all materials made
pertinent to such a motion by Rule 56.
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Turning
more specifically to the issue before the Court, on a motion for judgment
[*892] on the pleadings, as [**5] with motions to
dismiss pursuant to Rule 12(b), the Court is not strictly limited to the facts
addressed in the pleadings; the Court may take judicial notice of additional
facts where appropriate. MGIC
Indemnity Corp. v. Weisman, 803 F.2d 500, 504 (9th Cir. 1986) ("On a
motion to dismiss, we may take judicial notice of matters of public record
outside the pleadings.") (citations omitted); Phillips
v. Bureau of Prisons, 192 App. D.C. 357, 591 F.2d 966, 969 (D.C.Cir.
1979) (on defendant's motion to dismiss, the Court will consider factual
allegations of complaint and matters of general public record); see, e.g.,
Huntt
v. Government of the Virgin Islands, 339 F.2d 309, 310 (3d Cir. 1964)
(taking judicial notice of certain facts on a Rule 12(c) motion).
Despite the language of Rule 12(c), the consideration of the judicially
noticed facts does not convert the motion into a Rule 56 motion for summary
judgment. It is only when the Court goes beyond the pleadings and judicially
noticed facts that the Court must convert the motion and give both sides notice
and an opportunity to supplement the factual record. In Mack
v. South Bay Beer Distributors, Inc., 798 F.2d 1279, 1282 (9th Cir.
1986), [**6] the Ninth Circuit noted that a Rule 12(b)(6) motion
did not have to be converted to a summary judgment motion even though the court
went beyond the pleadings because the additional evidence considered was of
public record and therefore could be judicially noticed. No notice or
opportunity to supplement the record had to be given.
In the present
case, evidence beyond the pleadings has been presented by the defendants and
discussed in the briefs. Unless the Court can take judicial notice of these
materials the Court would either have to disregard the evidence, or consider it
and convert this motion into a Rule 56(d) motion for summary judgment. If the
motion were to be converted, the Court would then, as explained above, have to
give notice to the parties and an opportunity to supplement the record.
Because discovery is needed to create a complete factual record, the
Court will not treat this motion as a motion for summary judgment. It is
therefore necessary for the Court to consider whether the additional facts
provided by the defendants can be judicially noticed pursuant to Federal Rule of
Evidence 201. See Institute
for Scientific Information, Inc. v. Gordon and Breach, Science Publishers,
Inc., 931 F.2d 1002, 1011, 18 U.S.P.Q.2D (BNA) 1527 (3d Cir. 1991)
[**7] (judicial notice on Rule 12(c) motion should be done in
accordance with Federal Rule of Evidence 201). Rule 201 states: "A judicially
noticed fact must be one not subject to reasonable dispute in that it is . . .
(2) capable of accurate and ready determination by resort to sources whose
accuracy cannot reasonably be questioned." Fed. R. Evid. 201(b)(2).
Both
parties have made reference to parallel proceedings in California. Pursuant to
Rule 201(b)(2), the Court can take judicial notice of the contents of court
records from another jurisdiction. Colonial
Penn Ins. Co. v. Coil, 887 F.2d 1236, 1239 (4th Cir. 1989); Green
v. Warden, U.S. Penitentiary, 699 F.2d 364, 369 (7th Cir.), cert.
denied, 461
U.S. 960, 77 L. Ed. 2d 1321, 103 S. Ct. 2436 (1983) ("Furthermore, federal
courts may also take notice of proceedings in other courts, both within and
outside of the federal judicial system, if the proceedings have a direct
relation to matters at issue.") (citations omitted). The contents of the court
records that may be judicially noticed include the briefs and petitions of the
parties. See, e.g., United
States ex rel. Geisler v. Walters, 510 F.2d 887, 890 n.4 (3d Cir. 1975)
[**8] (taking judicial notice of briefs and petitions filed in other
courts). These are materials that cannot be reasonably disputed and whose
accuracy cannot reasonably be questioned.
The defendants also seek to
have the Court consider certain Security and Exchange Commission ("SEC") filings
that indicate that the defendants have withdrawn specific SEC filings and thus
abandoned their proxy solicitation. (Opening Brief of RealCap, D.I. 49.)
Judicial notice of public filings is also appropriate under Rule 201(b)(2).
See, e.g., Massachusetts
v. Westcott, 431 U.S. 322, 323 n.2, [*893] 52 L. Ed. 2d 349, 97
S. Ct. 1755 (1977) ("Records of the Merchant Vessel Documentation Division
of the Coast Guard . . . may be judicially noticed."). More specifically, the
Second Circuit has recently held that on a Rule 12(c) motion SEC filings can be
considered by the Court because judicial notice of such filings is appropriate
under Rule 201(b)(2). Kramer
v. Time Warner, Inc., 937 F.2d 767 (2d Cir. 1991). This Court reaches a
similar conclusion. The defendants have offered other evidence which is not
appropriate for judicial notice and will therefore not be considered by the
Court on this Rule 12(c) motion. [**9] Specifically, the defendants
make reference to a letter sent between two of the defendants, offered because
it allegedly shows that RealCap has rescinded its agreement with the Pension
Fund to orchestrate a proxy contest to take over the two plaintiff limited
partnerships. This evidence will not be considered by the Court because it
addresses a disputed fact and its accuracy is not beyond question. See
Hinton
v. Dept. of Justice, 844 F.2d 126, 130 n.1 (3d Cir. 1988) (affidavits
pertaining to disputed facts are not appropriate for judicial notice). Alleged
statements made by non-parties are also not subject to judicial notice for the
same reasons.
II. BACKGROUND
A. The Relevant Factual
Allegations
1. The Parties.
The plaintiffs in this action are
two real estate limited partnerships and their respective general partners. The
plaintiff Southmark Prime Plus, L.P. ("SPP") is a Delaware limited partnership.
(Complaint, Docket Item ["D.I."] 1 at 4.) SPP operates as a real estate holding
company that sells shares called units and invests the proceeds in real estate.
(D.I. 1 at 4, 8-9). The holders of these units or shares are the limited
partners of SPP. [**10] (D. I. 1 at 9.) The plaintiff Prime Plus
Corporation ("PPC") is a Nevada corporation and the general partner of SPP. (D.
I. 1 at 4, 9.) As the general partner of SPP, PPC is responsible for the day to
day management of SPP's assets. (D. I. 1 at 9.) In return for these services,
PPC receives fees from SPP. (D. I. 1 at 9.) The plaintiff Southmark Equity
Partners III, Ltd. ("SEP III") is a California limited partnership which, like
SPP, holds a real estate portfolio in which people can invest by becoming
limited partners, i.e. unit holders. (D.I. 1 at 4-5, 9.) The plaintiff Southmark
Investment Group 86, Inc. ("SIG 86") is a Nevada Corporation and general partner
of SEP III. (D.I. 1 at 5, 9.) SIG 86 is paid to manage SEP III's portfolio.
(D.I. 1 at 5, 9.) All four of the plaintiffs list their principal place of
business as 2711 LBJ Freeway, Dallas, Texas. (D. I. 1 at 4-5.)
Both of
the limited partnerships, SPP and SEP III, were organized by Southmark
Corporation ("Southmark") or one of its subsidiaries. (D. I. 1 at 8-9.)
Southmark is "a real estate and financial services company," that in July of
1989 filed for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. (D.I. 1
at 9.) While [**11] Southmark is not a party to this suit, it did,
prior to its bankruptcy, own controlling interests in the two general partners
PPC and SIG 86. (D.I. 1 at 8-9.) Apparently, Southmark sold its interests in PPC
and SIG 86 in August of 1989 pursuant to a liquidation plan approved by the
Bankruptcy Court. (D.I. 1 at 9.)
The purchaser of PPC and SIG 86, and 32
other Southmark partnerships, was McNeil Real Estate Management Inc. ("McNeil
Management"), which was organized at about this time by an experienced real
estate investor and manager named Robert A. McNeil. (D. I. 1 at 9-10.) McNeil
and Southmark intended to seek proxies from the unit holders of SEP III and SPP
in an effort to replace SIG 86 and PPC as managing general partners of the
plaintiff limited partnerships with a newly created affiliate of McNeil
Management. (D. I. 1 at 10.) If the proxy solicitation were successful, a McNeil
affiliate would gain control over the day to day management of the limited
partnership assets and would presumably receive fees in return. (D.I. 1 at 10.)
2. Previous Litigation.
Prior to the filing of this suit, the
defendants filed three separate suits against the plaintiffs. On February 6,
1991 [**12] the defendants [*894] commenced a suit in
the Superior Court of the State of California captioned Buffalo
Laborers' Pension Fund and RealCap Company v. Southmark Equity
Partners III, Ltd., et al., Case No. BC020830. (D.I. 1 at 13-14.) Two suits
were also brought in Texas. (D. I. 1 at 15.) One was brought in Texas state
court, Consolidated Capital Properties I v. Southmark Management Corp., et
al., No. 91-1578, and the other in a federal Bankruptcy Court, Capital
Properties I, et al. v. Southmark Corp., et al., Adversary No. 391-3097.
(D.I. 1 at 15.) The defendants instituted the California suit in an effort to
obtain a list of the limited partners of SPP and SEP III and to prevent the
partnership plaintiffs from using partnership funds to assist McNeil's "election
as successor general partner." (D. I. 1 at 14.)
3. The Alleged
Connections to Organized Crime.
The crux of the plaintiffs' complaint in
this action involves the defendant Buffalo Laborers' Pension
Fund (the "Pension Fund"), which holds units of both SEP III and SPP and is
alleged to have organized crime connections, and its attempt to have a different
general partner elected to manage the portfolio and day to day
[**13] activities of SEP III and SPP. (D. I. 1.) The Pension Fund's
nominee was the defendant Quantum Realty Corporation ("Quantum"). (D.I. 1 at 6.)
This effort by the Pension Fund and its associates to replace SIG 86 and PPC is
alleged by the plaintiffs to violate several provisions of the Securities and
Exchange Act of 1934 and the Rules promulgated thereunder, as well as RICO.
These allegations will be addressed in greater detail below.
The
plaintiffs allege that organized crime controls the defendant
Laborers' International Union of North America Local #210
located in Buffalo, New York ("Local 210"). (D.I. 1 at 5.) ("[Local 210] has
been publicly linked by federal authorities to the Buffalo organized crime
syndicate."). The plaintiffs further allege that Local 210 and organized crime
control the Pension Fund. (D.I. 1 at 3, 8.) Local 210, its officers, and the
officers of the Pension Fund are alleged to be controlling persons of the
Pension Fund within the meaning of § 20(a) of the Securities and Exchange Act of
1934 ("1934 Act"). (D.I. 1 at 7-8.) Based on innuendo, newspaper articles, and
alleged statements by the U.S. Strike Force on Organized Crime (D.I. 1 at 5-6,
20-24), the plaintiffs [**14] further assert that three of the
Pension Fund Trustees, who are also Local 210 officers, are known organized
crime figures. (D. I. 1 at 5-6, 22-24.) These three defendants are Leonard F.
Falzone, Salvatore J. Caci, and Daniel J. Sansanese. (D.I. 1 at 5-6.) The
plaintiffs have named additional Local 210 officers and Pension Fund Trustees as
individual defendants. n3 Lastly, the plaintiffs also allege "that the Pension
Fund, its parent union and its officials have been and are the current subjects
of state and federal investigations for racketeering and various other criminal
offenses." (D. I. 1 at 3.)
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-Footnotes- - - - - - - - - - - - - - - - - -
n3 Listed below is a
complete list of the individually named defendants who are either officers of
Local 210 or Trustees of the Pension Fund. The office of each individual will be
listed and an asterisk will indicate those individuals who are both Local 210
officers and Pension Fund Trustees.
Local 210: Leonard F. Falzone
(Consultant)*, Salvatore J. Caci (Business Manager)*, Daniel J. Sansanese
(Secretary-Treasurer)*, Peter G. Gerace (President)*, Joseph R. Pieri (Business
Agent)*.
Pension Fund: Leonard F. Falzone (Administrator)*, Salvatore J.
Caci (Trustee)*, Daniel J. Sansanese (Trustee, Chairman)*, Peter G. Gerace
(Trustee) *, Louis P. Ciminelli (Trustee), Joseph R. Pieri (Trustee)*, William
R. Arnold (Trustee), Robert C. Patterson (Trustee). (D.I. 1 at 5-6.)
The
Court will refer to Local 210 along with its defendant officers as the "Local
210 defendants" or "Local 210." The Court will refer to the Pension Fund and the
defendant Trustees and Administrator as the "Pension Fund Defendants" or the
"Pension Fund."
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- - - - - - - - - - - - - - - [**15]
According to the
Complaint, in 1987 the Pension Fund purchased 3 million units of SEP III at $
1.00 per unit and 400,000 units of SPP at $ 10.00 per unit during the initial
public offerings of the two limited partnerships. (D. I. 1 at 10.) The
plaintiffs state that these purchases were irregular because they were the first
time outside money managers had not selected and made [*895]
investments for the Pension Fund. (D. I. 1 at 10.) The purchases were also
allegedly the first real estate investments ever made by the Pension Fund. (D.
I. 1 at 10.) The plaintiffs also attach significance to their allegation that
Ronald M. Fino, the then President of Local 210, made the decision to invest in
the SPP and SEP III units. (D. I. 1 at 10.) Mr. Fino is allegedly an FBI
informant and the son of a Buffalo mob leader. (D.I. 1 at 21.)
According
to the plaintiffs' complaint, by purchasing 400,000 SPP units the Pension Fund
acquired 7.3% of SPP's outstanding units. (D. I. 1 at 16.) Nonetheless, the
Pension Fund did not file a Securities and Exchange Commission ("SEC") Schedule
13D or 13G within the applicable time period allegedly required by § 13(d) of
the 1934 Act, 15
U.S.C. § 78m(d), and either SEC [**16] Rule 13d-1(a), 17
C.F.R. § 240.13d-1(a) or SEC Rule 13d-1(b), 17
C.F.R. § 240.13d-1(b). n4 (D.I. 1 at 16-17.)
- - - - - - - -
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n4 Under
the Securities and Exchange Act of 1934 and the Rules promulgated thereunder,
the acquisition of five percent or more of a registered security triggers a
series of reporting requirements. § 13(d) of the 1934 Act, 15
U.S.C. § 78m(d); SEC Rule 13d-1(a), 17
C.F.R. § 240.13d-1(a); SEC Rule 13d-1(b), 17
C.F.R. § 240.13d-1(b). Anyone who obtains five percent or more of a
registered security must file either a Schedule 13D or a Schedule 13G. A
Schedule 13D must be filed within ten days of a purchase of five percent or more
of a registered security and a Schedule 13G within forty-five days. A Schedule
13G disclosure statement can be filed instead of a Schedule 13D if the purchaser
of the securities is a pension fund or other eligible entity that holds the
securities in the normal course of business without any intention of affecting
the control of the issuer. If at any time the Schedule 13G filer decides to
affect or influence the control of the issuer, it must then file a Schedule 13D.
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- - - - - - - [**17]
By the fall of 1990, units of SPP and
SEP III had plummeted in value. Units of SPP which had been purchased at $ 10.00
per unit in 1987 were three years later trading at $ 1.45 per unit on the
National Partnership Exchange, Inc. ("NAPEX"). Units of SEP III originally
purchased at $ 1.00 per unit were trading at ten to twenty cents per unit on
NAPEX. (D. I. 1 at 10, 13.) As mentioned earlier, by August of 1990, the parent
of PPC and SIG 86 (the managing general partners of SPP and SEP III) was
liquidating most of its assets pursuant to a Bankruptcy Court order. (D.I. 1 at
9.)
4. The Planned Proxy Contest and Original Securities Filings.
Sometime in May of 1990 the Pension Fund approached the defendant
RealCap Company ("RealCap") to see whether it would be interested in
spearheading a proxy contest for control of SPP and SEP III. (D. I. 1 at 29.)
RealCap is a Texas limited partnership that owns and operates a large number of
properties. (D. I. 1 at 7, 29.) On October 22, 1990, approximately the same time
Southmark was undergoing bankruptcy proceedings, the Pension Fund entered into
an agreement with defendant John A. Doyle, defendant Edward D. Herrick, and
RealCap by which the Pension [**18] Fund agreed to support an effort
by RealCap to have one of RealCap's affiliates substituted in for PPC and SIG 86
as managing general partner of SPP and SEP III. (D. I. 1 at 11-12.) Pursuant to
this agreement, between November 28, 1990 and November 30, 1990, the Pension
Fund transferred to RealCap 5,000 units of SEP III at $ 1.00 per unit and 500
units of SPP at $ 10.00 per unit even though both SPP and SEP III units were
trading on NAPEX at significantly below those prices. (D.I. 1 at 13, 14, 30.)
According to the plaintiffs, these transfers were made so that RealCap or one of
its affiliates could participate in a proxy contest for replacement general
partner. (D. I. 1 at 14.) Allegedly, RealCap paid the original price of these
units so that the Pension Fund could avoid recognizing a loss and in turn avoid
possible liability under ERISA. (D. I. 1 at 19-20, 27-28.)
On February
4, 1991 the Pension Fund filed a Schedule 13G with respect to its 1987 purchase
of 7.3% of SPP's units. n5 (D.I. 1 at 17.) According to the plaintiffs, this
filing was nearly three years late and was materially misleading; at this point
the Pension Fund had already agreed to cooperate with RealCap in an effort
[**19] to gain [*896] control of SEP III and SPP and
therefore, according to the plaintiffs, was not eligible to file a Schedule 13G.
(D. I. 1 at 17-18.) The Pension Fund was no longer a passive investor and was
therefore required to file a schedule 13D. The Pension Fund also failed to
disclose that it had sold 500 units of SPP to RealCap. (D. I. 1 at 18-19.) The
plaintiffs further complain that the Pension Fund failed to disclose its
organized crime ties on the Schedule 13G it filed. (D. I. 1 at 3, 17-18.)
- - - - - - - - - - - - - - - - - -Footnotes- - - - - - - - - - -
- - - - - - -
n5 The Schedule 13G was apparently signed on January 31,
1991. (D.I. 1 at 18).
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Footnotes- - - - - - - - - - - - - - - - -
On the same date the Schedule
13G was filed, however, the Pension Fund and RealCap filed a joint Schedule 13D
notifying the SEC that the Pension Fund, RealCap and several affiliates of
RealCap had, as of October 22, 1990, agreed to jointly attempt to have RealCap
or an affiliate n6 made general partner of SPP and SEP III by means of a proxy
solicitation. n7 (D. I. 1 at 18.) According to the plaintiffs, this filing was
also late and failed to disclose [**20] the defendants' organized
crime ties and material information concerning the October 22, 1990 agreement
between the defendants. n8 (D.I. 1 at 18-20.)
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n6 The Court
will refer to the following defendants, all of whom are affiliates of RealCap or
officers of RealCap or officers of a RealCap affiliate, collectively as the
"RealCap defendants" or "RealCap." RealCap; Quantum Realty Corporation
("Quantum"); ConCap Management Limited Partnership ("ConCap"); John A. Doyle
(President, Chief Operating Officer, Director and shareholder of Quantum,
President and managing general partner of RealCap); Edward D. Herrick (Vice
President and Treasurer of Quantum, partner in RealCap, Vice President and share
holder of Concap); Terry L. Noebel (employee of RealCap and ConCap). (D.I. 1 at
6-7.)
n7 According to the Complaint, Quantum was organized under
Delaware law by the defendants sometime in early 1991 with the intention that it
become the replacement managing general partner of SPP and SEP III. (D. I. 1 at
6.)
n8 Specifically, the plaintiffs object that RealCap and the Pension
Fund apparently failed to: (1) state the number of units of SPP purchased by
RealCap from the Pension Fund, (2) indicate that RealCap paid the Pension Fund
the same amount the Pension Fund had paid for the SPP units even though they
were trading at significantly below that price, (3) explain why the parties
agreed to this higher price, and (4) describe their long term plans for SPP and
SEP III. (D.I. 1 at 19-20, 28.)
[**21]
- - - - - - -
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On
February 4, 1991, Herrick, Doyle, Quantum, and Noebel filed Schedule 14Bs
concerning their planned proxy solicitation to have Quantum installed as
managing general partner of SEP III. (D. I. 1 at 26.) On February 6, 1991,
ConCap filed a Schedule 14B with respect to the proxy contest for control over
the management of SEP III. (D.I. 1 at 26.) On March 4, 1991, Herrick, Doyle,
Quantum, Nobel and ConCap filed Schedule 14Bs for the same purpose with respect
to SPP. (D.I. 1 at 26.) On March 12, 1991, the Pension Fund also filed Schedule
14Bs with respect to the proxy solicitation of SPP and SEP III unit holders.
(D.I. 1 at 26.) The plaintiffs do not allege that these filings are late, but
allege them to be willfully false and misleading in that they do not mention the
organized crime ties of the filers and fail to provide other material
information. n9 (D. I. 1 at 25-28, 32.) By filing these Schedule 14Bs the
defendants allegedly "launched a proxy contest for control of the limited
partnerships." (D.I. 1 at 2.)
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-Footnotes- - - - - - - - - - - - - - - - - -
n9 The disclosures alleged
to be lacking are those that the plaintiffs allege to be lacking in the Schedule
13Ds filed, see supra note 8, and how these factors will affect the threatened
proxy contest.
- - - - - - - - - - - - - - - - -End Footnotes- -
- - - - - - - - - - - - - - - [**22]
5. The Reported Death
of the Planned Proxy Contest.
The plaintiffs do not contend that proxy
solicitations were actually mailed. To the contrary, the defendants have
withdrawn their proxy solicitation materials from the SEC. (Opening Brief of
RealCap, D.I. 49 at Exhibit ["EX"] B.) The plaintiffs have argued before another
court that the proxy contest is over, although they now claim this statement
only pointed out the defendants' misrepresentations and the defendants remain
poised for an effort at control. On July 9, 1991, the RealCap defendants filed
an amended Schedule 13D that stated that (1) it may not be deemed part of a
"group" under the securities laws; (2) Quantum has requested the SEC to withdraw
preliminary proxy materials from [*897] consideration on March 21,
1991; (3) neither RealCap nor its affiliates plans a change in control of the
management of SPP or any related partnership; (4) no contractual or other
relationship relating to the exercise of control over SPP units exists between
RealCap and the Pension Fund; and (5) RealCap and the Pension Fund have not yet
reached a termination agreement with respect to the agreement of October 22,
1990. Amendments to the original [**23] Schedule 14B were also made.
The plaintiffs then filed a motion for leave to file a supplemental complaint.
The proposed supplemental complaint charges the defendants with further
violations of § 13(d) and RICO for the failure to give an accurate report of the
status of the agreement between the parties, details of negotiations, and the
failure to report this lawsuit. The plaintiffs also claim that the Local 210
defendants have violated § 13(d) by failing to file amended Schedule 13Ds
disclosing these same facts. (Proposed Supp. Complaint, D.I. 72 at EX A, pp.
9-12.) Finally, the plaintiffs claim that these allegedly faulty securities
filings constitute additional predicate acts under RICO. (D. I. 72 at EX A, pp.
12-13.)
7. Damages.
The plaintiffs have made few specific
allegations concerning damages. The pollution of the electoral process and the
false or misleading information provided to unitholders is the most concrete,
and the Court will address these allegations. (D. I. 1 at 29, 39.) The
statements about the dire financial consequences of a change of management from
the allegedly threatened proxy contest (D.I. 1 at 36), are purely speculative.
At one point in the complaint [**24] the plaintiffs intimate that
the above alleged conduct has interfered with McNeil's intended proxy contest to
insert his affiliates as general managing partners of SPP and SEP III. (D. I. 1
at 10.) McNeil, however, is not a party to this suit. Another allegation of
damage made by the plaintiffs is their repeated assertion that "as a direct
result of the acts and conduct of defendants, plaintiffs have been injured in
their business and property." (D.I. 1 at 37-38.)
B. The Alleged
Violations of the Defendants
According to the plaintiffs, the above
facts reveal several violations of the law for which the defendants are liable
to the plaintiffs. The alleged violations are as follow.
1. The Pension
Fund, Local 210 and Real Cap violated § 13(d) of the 1934 Act by: (a) failing to
give timely disclosure of the Pension Fund's purchase of more than 5% (i.e.
7.3%) of SPP's outstanding units; n10 (b) failing to give timely disclosure of
the existence of the October 22, 1990 agreement between the defendants by which
they agreed to cooperate in an effort to seize control of SPP and SEP III; (c)
failing to provide additional information concerning the specifics of the
October 22 agreement, [**25] see supra note 8; and (d)
failing to disclose the defendants' ties to organized crime. n11 In the proposed
supplemental complaint the plaintiffs claim that RealCap further violated §
13(d) by: (e) falsely representing that [*898] RealCap had terminate
the October 1990 agreement unilaterally, since the agreement did not allow this.
They also charge the RealCap defendants and the Local 210 defendants with
violations of § 13(d) for the following: (f) failing to report the withdrawal of
proxy materials in a timely fashion; (g) failing to report material facts about
this litigation; and (h) failing to report material facts about the purported
termination agreement and the current relations between the defendants.
- - - - - - - - - - - - - - - - - -Footnotes- - - - - - - - - - -
- - - - - - -
n10 The Court assumes that the § 13(d) claims are only
being raised by SPP and PPC. Ownership of 5% or more of the outstanding shares
of a registered security triggers the disclosure requirements of § 13(d). While
the plaintiffs have alleged that the Pension Fund purchased 5% or more of SPP's
shares, no such allegation has been made with respect to SEP III. Since no
disclosures were required with respect to SEP III by the defendants under §
13(d), no violations could have occurred with respect to SEP III.
[**26]
n11 The plaintiffs contend that under § 13(d) the
defendants were required to include all of the above information in their
Schedule 13Ds and 13Gs that were filed on February 4, 1991. The allegation is
that the disclosures described in (a) and (b), though made, were made late. On
the other hand, the disclosures described in (c) and (d) were never made. Some
of the Schedule 13D and 13G omissions therefore have been partially remedied
while others have not. The Court also notes that RealCap's involvement in the
non-disclosures must have begun between May of 1990 when the defendants began
negotiating an agreement and October 22, 1991 when the agreement was finally
reached. The Pension Fund and Local 210's violations thus date back to 1987
while RealCap's violations only date back to May or October of 1990.
- - - - - - - - - - - - - - - - -End Footnotes- - - - - - - - - - - - - - -
2. The Pension Fund, Local 210 and RealCap are alleged to have violated
§ 14(a) of the 1934 Act by: (a) failing to disclose the existence of the October
22, 1990 agreement; (b) failing to disclose material information concerning the
October 22, 1990 agreement on the Schedule 14B, see supra note
[**27] 8; and (c) failing to disclose their ties to organized crime
on Schedule 14B. n12
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-Footnotes- - - - - - - - - - - - - - - - - -
n12 In this claim and
claim 2(b) above the plaintiffs contend that RealCap is liable for omissions
concerning the alleged organized crime connections of Local 210 and the Pension
Fund because RealCap should have known about those connections. The plaintiffs
reach this conclusion because, they argue, newspaper publicity made it common
knowledge that the Pension Fund and Local 210 were linked to organized crime.
- - - - - - - - - - - - - - - - -End Footnotes- - - - - - - - - -
- - - - - - -
3. According to the plaintiffs, the above described tardy
and incomplete SEC filings, along with the assignment of units from the Pension
Fund to RealCap, resulted in no less than twenty violations of the anti wire and
mail fraud statutes, 18
U.S.C. §§ 1341 and 1343. (D.I. 1 at 32-35.)
4. The plaintiffs also
contend in the Complaint and the proposed supplemental complaint that the
defendants were an enterprise that engaged in a pattern of racketeering activity
causing injury to business or property in violation of RICO. Specifically,
[**28] the plaintiffs contend: (a) that the defendants, through a
pattern of racketeering, have acquired an interest in and are attempting to
control an enterprise engaged in or affecting interstate commerce in violation
of 18
U.S.C. § 1962(b); (b) that the defendants conducted the affairs of an
enterprise affecting or engaging in interstate commerce by means of a pattern of
racketeering activity in violation of 18
U.S.C. § 1962(c); and (c) that in violation of 18
U.S.C. § 1962(d), the defendants conspired to violate both 18
U.S.C. §§ 1962(b) and (c). (Proposed Supp. Comp., D.I. 49 at EX B.)
C. The Remedies Sought by the Plaintiffs
Due to the above
alleged violations, the plaintiffs believe they are entitled to the following
relief: (1) that the defendants be permanently enjoined from acquiring
additional units of SPP and SEP III; (2) that the defendants be permanently
enjoined from soliciting proxies from unit holders of SPP and SEP III; (3) that
the defendants be permanently enjoined from voting their units of SPP and SEP
III; (4) that the defendants be permanently enjoined from using their units in
an attempt to control or affect management of SPP or SEP III; (5) that the
defendants [**29] be permanently enjoined from making any false
statements in an effort to control or affect management of SPP or SEP III; (6)
that the Court declare that defendants have violated §§ 13(d) and 14(a) of the
1934 Act; (7) that the Court order the defendants to divest themselves of their
units of SPP and SEP III; (8) that the Court order the defendants to file and
disseminate corrected Schedule 13Ds and Schedule 14Bs before they take further
action to influence the management of SPP or SEP III; (9) that the Court award
the plaintiffs treble damages pursuant to RICO; (10) that the Court award the
plaintiffs their costs and attorneys fees; and (11) that the Court award any
other relief it deems "just and proper." (D. I. 1 at 39-40.) The plaintiffs have
stated at oral argument they do not seek damages from an implied cause of action
as a result of the alleged violations of §§ 13(d) and 14(a) of the 1934 Act.
(D.I. 82 at 29-31, 37.) The Court will therefore only address the claim for
equitable relief under these provisions.
D. Jurisdiction and Venue
Jurisdiction and Venue in this Court are proper. (Memorandum Opinion and
Order [*899] of Senior Judge James L. Latchum dated June 20, 1991,
D.I. [**30] 55 & 56).
III. DISCUSSION
A.
The Application of Judicial Estoppel
One of the contested facts in this
case is how the Court should regard the proxy contest, and the resolution of
this question involves legal issues. In an attempt to dismiss a previous action
brought against them in California, the plaintiffs argued that the proxy contest
is "most indisputably" over because of the withdrawal of the proxy statements
and "there is no longer any battle for SEP III and SPP." (Opening Brief of
RealCap, D.I. 49 at EX A, pp. 1-2.) The defendants have argued that this
statement prevents the plaintiffs from contending the proxy contest is not over
and that this statement makes the case moot.
In the Third Circuit,
federal courts have estopped parties from asserting contradictory positions in
order to protect the integrity of the courts. See Scarano
v. Central Railroad Co., 203 F.2d 510 (1953). The plaintiffs claim that
their statement in the California litigation was premised solely on RealCap's
pleadings in this action. A fair reading of the plaintiffs statements, however,
shows that their statement was not contextual but purported to convey, in their
words, "the [**31] reality of the situation" about the lawsuit.
(Opening Brief of RealCap, D.I. 49 at EX A, p. 2.)
A party cannot change
a characterization of the facts in a case in order to later gain an advantage,
United
States v. Kepner, 843 F.2d 755, 760 (3d Cir. 1988), and the
contradictory positions of the plaintiffs in this instance are to their
advantage in both cases. The principle of judicial estoppel still applies where
the conflicting statements are made in a different fora. n13 See Oneida
Motor Freight, Inc. v. United Jersey Bank, 848 F.2d 414 (3d Cir.),
cert. denied, 488
U.S. 967, 102 L. Ed. 2d 532, 109 S. Ct. 495 (1988) (applying judicial
estoppel to a debtor's suit due to its actions in previous bankruptcy
litigation). The plaintiffs are therefore estopped from claiming that the proxy
contest was not "indisputably over" at that time.
- - - - - - - -
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n13 Scarano,
203 F.2d 510, is not to the contrary. Because of the narrowness of the
question presented, the court neither rejected nor adopted the traditional rule
that "a party to litigation will not be permitted to assume inconsistent or
mutually contradictory positions with respect to the same matter in the same or
a successive series of suits." Id.
at 513 (citation omitted).
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-End Footnotes- - - - - - - - - - - - - - - - - [**32]
The
plaintiffs, however, point out that since that time the defendants still have
not divested themselves of stock, taken the measures the plaintiffs think
necessary to dissolve the vestiges of their group, or made the disclosures the
plaintiffs have requested. It is not reasonable, however, to presume that a
proxy contest is imminent merely because a group of investors continue to hold a
block of shares and are reluctant to publicize alleged connections to organized
crime. The proxy contest is over. Nevertheless, the legal issues in the two
lawsuits are not the same, and the characterization of the former lawsuit as
moot may not apply to this one. See Miller
Tabak Hirsch & Co. v. Penn Traffic Co., 643 F. Supp. 1297, 1301 (W.D.
PA. 1986) (judicial estoppel not applicable to separate legal issues).
B. The Plaintiffs' Request for Equitable Relief Under the Securities
Laws
1. Mootness.
a. The § 14(a) Claims.
Section 14(a) of the 1934 Act, 15
U.S.C. § 78n(a), regulates proxy solicitations for registered securities.
Through SEC rules and schedules, § 14(a) imposes several specific disclosure
requirements on persons soliciting proxies. These disclosure [**33]
requirements would be applicable to the defendants' solicitation of proxies from
both SPP and SEP III. The Supreme Court has specifically addressed the
legislative intent behind this provision. "The purpose of § 14(a) is to prevent
management or others from obtaining authorization for corporate action by means
of deceptive or [*900] inadequate disclosure in proxy solicitation."
J.I.
Case Co. v. Borak, 377 U.S. 426, 431, 12 L. Ed. 2d 423, 84 S. Ct. 1555
(1964). The goal, ultimately, was "fair corporate suffrage." Id.
In light of the statute's purpose and its application to proxy contests,
injunctive relief to correct any of the mistakes alleged to be made pursuant to
§ 14(a) appears to be moot now that the plaintiffs have withdrawn from the proxy
contest. The defendants do not presently pose a significant threat to the
plaintiffs; neither a tender offer nor a proxy solicitation is ongoing. Because
the defendants are not currently soliciting proxies and have abandoned their
effort, they are not subject to § 14(a). See CNW
Corp. v. Japonica Partners, L.P., 776 F. Supp. 864, slip op. at 7 (D.
Del; 1990); Koppel
v. Wien, 575 F. Supp. 960, 966-67 (S.D.N.Y 1983), [**34]
rev'd in part on other grounds, 743
F.2d 129 (2d Cir. 1984). In order to avoid mootness, there must be a
reasonable expectation of recurrence or there must be harm from the alleged
violation. County
of Los Angeles v. Davis, 440 U.S. 625, 631, 59 L. Ed. 2d 642, 99 S. Ct. 1379
(1979). In the case of the § 14(a) claims, neither of these elements exist.
It is true that the defendants bear a heavy burden in arguing that the
proxy contest is over and that there is no reason to expect it to continue.
See United
States v. W.T. Grant, 345 U.S. 629, 633, 97 L. Ed. 1303, 73 S. Ct. 894
(1953). The plaintiffs prior statement that the contest was "most
indisputably over," however, allows the defendants to meet that burden on this
particular factual issue. Mere suspicions about the defendants' intentions are
not sufficient to revive the characterization of an active proxy contest.
See Thompson
v. United States Dep't of Labor, 813 F.2d 48, 51 (3d Cir. 1987).
There is no basis for corrective disclosure or other relief based on §
14(a). The plan to solicit proxies has been abandoned before it even began, and
therefore possible omissions or false statements about the proxies do not affect
[**35] the public record. In addition to an injunction serving no
useful purpose, there is no basis for declaratory relief. See CNW
Corp. v. Japonica Partners, L.P., 776 F. Supp. 864, slip op. at 8 (D.
Del. 1990). The § 14(a) claims are moot.
b. The § 13(d) Claims.
Section 13(d) of the 1934 Act, 15
U.S.C. § 78m(d), was added to the statute in 1968 by the Williams Act. Under
§ 13(d) any person who acquires 5% or more of the outstanding shares of a
registered security must satisfy specific disclosure requirements. These
disclosures must be made to the issuer, each exchange where the securities are
traded, and the SEC. Clearly, no claim can be made by SEP III or its general
partner SIG 86 under § 13(d) because the defendants never attained, nor
attempted to attain, a 5% or more interest in the outstanding units of SEP III.
The discussion of § 13(d) is therefore limited to claims brought by SPP and its
general partner PPC.
Section 13(d), and the Williams Act generally, were
enacted by Congress in response to growing concern over the increased use of
tender offers in contests for corporate control. Piper
v. Chris-Craft Indus., Inc., 430 U.S. 1, 51 L. Ed. 2d 124, 97 S. Ct. 926
(1977); Rondeau
v. Mosinee Paper Corp., 422 U.S. 49, 45 L. Ed. 2d 12, 95 S. Ct. 2069 (1975).
[**36] The legislative intent behind the Williams Act and § 13(d)
has been thoroughly addressed by the Supreme Court. In Rondeau, a § 13(d) case,
the Supreme Court noted:
The purpose of the Williams Act is to insure that public
shareholders who are confronted by a cash tender offer for their stock will
not be required to respond without adequate information regarding the
qualifications and intentions of the offering party.
Rondeau,,
422 U.S. at 58. Despite this apparently single minded concern with
protecting investors, Congress remained mindful of the need to ensure that the
Williams Act did not get used as a tool with which management could frustrate
legitimate tender offers. Piper
[*901] v. Chris-Craft Indus., 430 U.S. 1, 24-30, 51 L.
Ed. 2d 124, 97 S. Ct. 926 (1976); Rondeau,
422 U.S. at 58-59.
On the basis of this legislative purpose and
various cases, the defendants argue that the § 13(d) claims are moot. The
RealCap defendants rely on their amended Schedule 13D statement to show that no
group for the purposes of the 1934 Act exists, and all of the defendants rely on
the fact that the defendants are not now engaged in a proxy contest. Some of the
defendants [**37] also argue that the action is moot because the
alleged omissions and false statements still remaining are immaterial as a
matter of law, which will be addressed below.
The Court cannot conclude
at this stage that the existence of the group is not at issue. The plaintiffs
argue that a group still exists on the basis of the defendant's failure to reach
a termination agreement and the continued existence of the group's vehicles for
the purposes of acquisition. These facts, which the Court must accept as true,
and the factual dispute about the current status of the group do not allow the
Court to accept the defendants' assertions at this time.
The presence of
the proxy contest or even a threatened battle for control is not necessary to
pursue an action pursuant to § 13(d). By its own terms the rule applies the
requirement for disclosure not where there is a contest for control, but where
persons acquire a certain percentage of stock to comply with its terms. See 15
U.S.C. § 78m(d)(1). One section confirms this application of the disclosure
rules to periods without a proxy contest; it requires additional disclosure "if
the purpose of the purchases or prospective purchases is to acquire
[**38] control." 15
U.S.C. § 78m(d)(1)(C) (emphasis added).
Neither the rule's purpose
nor precedent limit its application. Although Congress intended the provision to
help prevent abuses in corporate control, it may be seen as a prophylactic rule
that helps investors to monitor those who come to control large blocks of stock
that might represent the potential for a change in control in the future.
See GAF
Corp. v. Milstein, 453 F.2d 709, 717 (2d Cir. 1971), cert.
denied, 406
U.S. 910, 31 L. Ed. 2d 821, 92 S. Ct. 1610 (1972). Its application is
therefore wider than in the context of a threatened proxy battle. Although the
Supreme Court left the question open in Rondeau,
422 U.S. at 59 n.9, many courts have been explicit in their reasoning in
concluding that "§ 13(d) is not tied to proxy contests." Sisak v. Wings and
Wheels Express, Inc., [1971 Transfer Binder]Fed. Sec. L. Rep. (CCH) para.
92,991 at 90,668 (S.D.N.Y. 1970); see also Dan
River, Inc. v. Unitex Ltd., 624 F.2d 1216, 1222 n.5 (4th Cir. 1980) ("the
target corporation has a right to injunctive relief prior to compliance").
2. Issuer Standing.
Contrary to some of the [**39]
defendants' contentions, an issuer has standing to seek injunctive relief under
§ 13(d). See, e.g., Energy
Ventures, Inc. v. Appalachian Co., 587 F. Supp. 734 (1984). Although
the Supreme Court's recent holding in Virginia
Bankshares v. Sandberg, 115 L. Ed. 2d 929, 111 S. Ct. 2749 (1991), limits
the standing of minority shareholders seeking damages under § 14(a), its
reasoning cannot be stretched so far as to prospectively overrule issuer
standing for injunctive relief under § 13(d). Actions for injunctive relief have
been regarded differently than implied actions for damages under the 1934 Act
and, as previously discussed, § 13(d) implicates a slightly different method of
monitoring corporate control than § 14(a).
Furthermore, even if the
reasoning of Virginia Bankshores did extend that far, the Court would be
restrained from finding no standing. The Supreme Court allowed issuer standing
for injunctive relief in a § 13(d) action in Rondeau
v. Mosinee Paper Corp., 422 U.S. 49, 45 L. Ed. 2d 12, 95 S. Ct. 2069 (1975).
The Supreme Court has cautioned the lower courts that "if a precedent of this
Court has direct application in a case, yet appears to rest on reasons rejected
in some other [**40] line of decisions, the [lower court] should
follow the [*902] case which directly controls, leaving to this
Court the prerogative of overruling its own decisions." Rodriquez
de Quijas v. Shearson/American Express, 490 U.S. 477, 483, 104 L. Ed. 2d 526,
109 S. Ct. 1917 (1989).
3. Materiality.
In order for this
Court to give relief, the alleged continuing violations must be material. Some
of the alleged violations of § 13(d) have now been remedied by the amended
Schedule 13D. The only continuing violations of § 13(d) alleged by the
plaintiffs in the Complaint are the defendants' failure to provide specific
details concerning their October 22, 1990 agreement, see supra note 8, and their
failure to disclose their alleged ties to organized crime. If neither of these
is material, the omissions and material statements alleged in the Complaint have
been corrected and the request for injunctive relief under § 13(d) has become
moot. See Rondeau
v. Mosinee Paper Corp., 422 U.S. 49, 45 L. Ed. 2d 12, 95 S. Ct. 2069 (1975).
In the context of § 13(d), the materiality of a fact can be determined
by whether a reasonable shareholder would consider it important in "assessing
the potential for changes in corporate control and adequately evaluating
[**41] the company's worth." GAF
Corp. v. Milstein, 453 F.2d 709, 717 (2d Cir. 1971) (citation omitted). At
this stage the Court can only find the fact immaterial if the omissions or false
statements are so unimportant that reasonable minds could not differ about the
issue. TSC
Indus., Inc. v. Northway, Inc., 426 U.S. 438, 450, 48 L. Ed. 2d 757, 96 S.
Ct. 2126 (1976); Craftmatic
Securities Litig. v. Kraftsow, 890 F.2d 628, 641 (3d Cir. 1989). The
issue of materiality is thus ill-suited to summary disposition. See TSC,
426 U.S. at 450.
Bearing this standard in mind, the Court will
determine if the alleged omissions may be disposed of because they are
immaterial as a matter of law. The plaintiffs charge that the securities filings
omit certain facts about some of the defendants' criminal backgrounds, including
an indictment of an officer of the Pension Fund for racketeering and
loan-sharking. In the past some courts have found investigations of uncharged
crimes and other incriminating facts to be material disclosures. See, e.g.,
Ballan
v. Wilfred American Educational Corp., 720 F. Supp. 241 (E.D.N.Y.
1989). At this stage of the [**42] proceeding, the Court cannot
say that none of the alleged facts about some of the defendants' backgrounds
could not be adduced by a rational trier of fact to involve material facts.
Similarly, the plaintiffs have alleged facts about the agreement between
the Pension Fund and RealCap that, taken as true, could be deemed material.
RealCap's amended 13D proclaims that RealCap has unilaterally terminated the
agreement but that the parties have not concluded a termination agreement.
(Reply Brief of RealCap, D.I. 49 at EX B.) On the basis of the defendants'
failure to reach a valid agreement terminating the relation between the
defendants and dissolving the vestiges of their undertaking, the plaintiffs
claim that an agreement still exists. Under the statute, the defendants must
disclose the details of an agreement, an arrangement or an understanding that
exists. 15
U.S.C. § 78(d)(1)(E). At this point the Court cannot conclude that no
reasonable trier of fact would not conclude that the filings in question meet
that standard.
4. The Possibility of Equitable Relief.
In
Rondeau the Supreme Court held that "questions of . . . relief . . . in private
actions under the securities laws . . [**43] . [are] to be
determined according to traditional principles." 422
U.S. at 64. In order for the plaintiffs to succeed in their efforts to
obtain equitable relief, they will have to meet all of the requirements
traditionally required for such relief. Id.
at 57-65. Traditionally, a party seeking injunctive relief must show that:
(1) it will suffer irreparable harm absent the relief, and (2) legal remedies
are inadequate. Id.
at 57. The Court should also consider: "(3) the possibility of harm to other
interested persons from the grant or denial of the injunction, and (4) the
public interest." Energy
Ventures, Inc. v. Appalachian [*903] Co., 587 F.Supp.
734, 739 (D.Del. 1984); see also Rondeau,
422 U.S. 49, 45 L. Ed. 2d 12, 95 S. Ct. 2069 .
The defendants
contend that because the plaintiffs have not specified any financial damages and
the threatened proxy contest has been abandoned, no irreparable harm exists that
could justify equitable relief. The continuation of material nondisclosures,
however, can constitute irreparable harm. General
Aircraft Corp. v. Lambert, 556 F.2d 90, 96-97 (1st Cir. 1977); Kaufman
and Broad, Inc. v. Belzberg, 522 F. Supp. 35, 46 (S.D.N.Y. 1981).
[**44] At this point in the litigation the Court cannot conclude
that the plaintiffs are not entitled to any injunctive relief.
5. The
Pleading of the Cause of Action Against the Local 210 Defendants.
The
Local 210 defendants may not escape the plaintiffs' § 13(d) claim merely because
their organization does not own any units in the limited partnerships. The Local
210 defendants could conceivably hold secondary liability under § 20 of the 1934
Act as controlling persons of the Pension Fund. See 15
U.S.C. § 78t. The Complaint states that the Local 210 defendants had a
controlling influence over the Pension Fund through their institutional
connections and is sufficient to allege secondary liability under § 20(a).
See Harriman
v. E.I. DuPont DeNemours and Co., 372 F. Supp. 101, 104-05 (D. Del.
1974).
6. The Pleading of the Cause of Action Against the RealCap
Defendants.
The RealCap defendants argue that the Complaint fails to
state a cause of action against them with regard to the allegation concerning
other defendants for failing to state that the RealCap defendants knew or should
have known of their acts. The plaintiffs need not plead the exact legal standard
in [**45] the Complaint. Here the Federal Rules of Civil Procedure
only require "a short and plain statement of the claim" that gives the defendant
notice of the claim and its basis. Conley
v. Gibson, 355 U.S. 41, 47, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957)
(quoting Rule 8(a)(2)). The Complaint adequately satisfies these criteria in
this case.
B. The Plaintiffs' RICO Claims
The plaintiffs' RICO
claims are brought pursuant to 18
U.S.C. §§ 1962(b), (c) and (d). Essentially the plaintiffs allege that: (a)
the defendants, through a pattern of racketeering, have acquired an interest in
and are attempting to control an enterprise engaged in or affecting interstate
commerce in violation of § 1962(b); (b) the defendants conducted the affairs of
an enterprise affecting or engaging in interstate commerce by means of a pattern
of racketeering in violation of § 1962 (c); and (c) in violation of § 1962(d),
the defendants conspired to violate both § 1962(b) and § 1962(c).
Claims
under §§ 1962(b) and (c) require a party seeking relief to establish a "pattern
of racketeering activity." n14 H.J.
Inc. v. Northwestern Bell Telephone Co., 492 U.S. 229, 106 L. Ed. 2d 195,
109 S. Ct. 2893 (1989). Additionally, "in order to state a claim
[**46] under RICO subsection 1962(d), a plaintiff must allege (1)
agreement to commit the predicate acts of fraud, and (2) knowledge that those
acts were part of a pattern of racketeering activity conducted in such a way as
to violate section 1962(a), (b), or (c)." Rose
v. Bartle, 871 F.2d 331, 366 (3d Cir. 1989) (citations, quotes, and
punctuation omitted). Like §§ 1962(b) and (c), § 1962(d) only imposes liability
where there is a pattern of racketeering activity or a pattern of racketeering
activity was intended because a person cannot knowingly engage in a pattern of
racketeering activity if the conduct engaged in does not [*904]
constitute such a pattern. See Seville
Indus. Machinery Corp. v. Southmost Machinery Corp., 742 F.2d 786, 792 n.8
(3d Cir. 1984), cert. denied, 469
U.S. 1211, 84 L. Ed. 2d 327, 105 S. Ct. 1179 (1984); J.A.
Moore Constr. Co. v. Sussex Associates, L.P., 688 F. Supp. 982, 996 (D.
Del. 1988) ("[A] RICO conspiracy must contain an agreement to employ a
pattern of racketeering activity . . . ."). Therefore, in order for the
plaintiffs to establish any of their RICO claims they will have to show that the
defendants engaged in a pattern [**47] of racketeering activity.
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- - - - - - -
n14 18
U.S.C. §§ 1962(b) and (c) read:
(b) It shall be unlawful for any person through a pattern of
racketeering activity or through collection of an unlawful debt to acquire or
maintain, directly or indirectly, any interest in or control of any enterprise
which is engaged in, or the activities of which affect, interstate or foreign
commerce.
(c) It shall be unlawful for any person employed or
associated with any enterprise engaged in, or the activities of which affect,
interstate or foreign commerce, to conduct or participate, directly or
indirectly, in the conduct of such enterprise's affairs through a pattern of
racketeering activity or collection of unlawful debt.
- -
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1. Establishing a Pattern of Racketeering.
Section 1961(5)
defines "pattern of racketeering activity" as
at least two acts of racketeering activity, one of which
occurred after the effective date of this chapter and the last of which
occurred within ten years . . . after the commission of a prior act of
racketeering [**48] activity.
18
U.S.C. § 1961(5). This definition, the Supreme Court has pointed out, is not
very informative because "'while two acts are necessary, they may not be
sufficient.'" H.J.
Inc., 492 U.S. at 237 (quoting Sedima,
S.P.R.L. v. Imrex Co., 473 U.S. 479, 496, 87 L. Ed. 2d 346, 105 S. Ct. 3275
(1985)). In an effort to answer some of the questions left open by the
statute concerning what is meant by "pattern of racketeering activity," the
Supreme Court developed its "related and continuous" test. H.J.
Inc., 492 U.S. at 239 ("to prove a pattern of racketeering activity a
plaintiff . . . must show that the racketeering predicates are related and that
they amount to or pose a threat of continued criminal activity."). For present
purposes the Court is primarily concerned with the continuity requirement.
a. The Continuity Requirement.
The Supreme Court's opinion in
H.J. Inc. suggests that a determination of whether predicate acts satisfy the
continuity requirement of RICO is based on a two step analysis. First, are the
predicate acts open-ended or closed-ended. Second, if the predicate acts are
open-ended, do they indicate a threat of long-term, or continued
[**49] criminal activity; and if the predicate acts are
closed-ended, what was, or will be, their duration. n15 As the Third Circuit has
noted, after H. J. Inc. "duration is the sine quo non of continuity." Hindes
v. Castle, 937 F.2d 868, 872 (3d Cir. 1991).
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n15 In
H.J. Inc. the Supreme Court described its analysis as follows:
[The continuity requirement] is both a closed- and open-ended
concept, referring either to a closed period of repeated conduct, or to past
conduct that by its nature projects into the future with a threat of
repetition. It is, in either case, centrally a temporal concept, and
particularly so in the RICO context.
* * *
A party
alleging a RICO violation may demonstrate continuity over a closed period by
proving a series of related predicates extending over a substantial period of
time. Predicate acts extending over a few weeks or months and threatening no
future criminal conduct do not satisfy this requirement: Congress was
concerned in RICO with long-term criminal conduct. Often a RICO action will be
brought before continuity can be established in this way. In such cases,
liability depends on whether the threat of continuity is
demonstrated.
492
U.S. at 241-42 (citations omitted).
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i. Closed-Ended or Open-Ended.
Predicate acts are open-ended
where, by their very nature, they "project[] into the future with a threat of
repetition." H.J.
Inc., 492 U.S. at 241. In H.J. Inc. the Supreme Court gave the example of a
hoodlum that extorts "protection money" from several store owners and tells them
that he will come back each month to collect his "premiums." 492
U.S. at 242. Another example given by the Supreme Court is the situation
where the predicates are an "ongoing entity's regular way of doing business."
Id. On the other hand, predicate acts are closed-ended when they do not project
into the future or threaten repeated conduct. Id.
at 241. Put differently, the closed-ended "concept refers . . . to a closed
period of repeated conduct." Id. An example is when the predicate acts pertain
to the attainment [*905] of a single clearly delineated goal. The
predicates alleged in the present action are closed-ended. Each of them pertains
solely to the defendants' now aborted attempt to gain managerial control over
SPP and SEP III. See, e.g., Hindes,
937 F.2d at 873 ("However, in this case because the fraudulent solicitation
[**51] of contributions ended with the election of Wolf in November
1988, and the alleged purpose of the scheme was achieved with the election of
Wolf, the district court properly determined that there existed no threat of
continuing racketeering activity."); Banks
v. Wolk, 918 F.2d 418 (3d Cir. 1990) (no threat of repetition where
defendants only participated in one completed real estate fraud and there was no
indication that they would participate in others); Marshall-Silver
Constr. Co., Inc. v. Mendel, 894 F.2d 593 (3d Cir. 1990) (no threat of
repetition where defendant engaged in a single scheme to bankrupt plaintiff).
The plaintiffs nonetheless argue that the defendants are engaged in an
ongoing scheme that projects into the future; a contention that is unsupported
by the allegations of the Complaint. The predicate acts themselves do not
suggest that there is a threat of repetition and the plaintiffs' broad
unsupported allegations that there will be other victims cannot convert the
defendants' predicates into conduct that projects into the future. n16 The only
allegations concerning the purported threat of repeated conduct are extremely
vague. The [**52] plaintiffs simply allege that the defendants plan
to seize control of "other public limited partnerships." n17 This allegation is
appended, haphazardly, to selected paragraphs of the complaint. (Compare D.I. 1
at paras. 103, 106, 114 & 117 with paras. 2, 45, 48, 50, 51 111 & 118.)
The plaintiffs' allegations of threatened future fraudulent conduct are
insufficient whether they are measured by Rule 9(b) or Rule 8 of the Federal
Rules of Civil Procedure.
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-Footnotes- - - - - - - - - - - - - - - - - -
n16 The alleged
involvement of organized crime does not alter the Court's analysis. As the
plaintiffs have persuasively argued in another section of their briefs, the
plaintiffs hold the defendants accountable for their conduct under the 1934 Act
and not their status. The Supreme Court has rejected the narrowing of RICO to
defendants connected with organized crime. H.J. Inc. at 236-37. The statute's
terms similarly cannot be broadened on this basis. Congress intended RICO to
attack ongoing criminal enterprises. The allegations of organized crime in the
air do not establish the continuity necessary for a RICO claim. Cf. Palsgraff
v. Long Island R.R., 248 N.Y. 339, 162 N.E. 99 (1928).
[**53]
n17 See e.g., D.I. 1 at para. 106
Sometime in or about May, 1990, defendants entered into a
conspiracy, scheme, and plan unlawfully to acquire and maintain an interest in
and control of legitimate enterprises, including SEP III, SPP, and other
public limited partnerships . . . .
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The plaintiffs
have described a scheme by which the defendants are alleged to have sought
managerial control of SPP and SEP III by fraudulent means. These allegations are
relatively clear. However, the plaintiffs' further allegation that the
defendants seek to gain control of several other unspecified partnerships is
inadequately pled under both Rule 9(b) and Rule 8.
In RICO cases fraud
must be pled pursuant to Federal Rule of Civil Procedure 9(b). Seville,
742 F.2d at 791; Berk
v. Ascott Inv. Corp., 759 F. Supp. 245, 254-55 (E.D. Pa. 1991); Klapper
v. Commonwealth Realty Trust, 657 F. Supp. 948, 959 (D.Del. 1987). This
does not mean that a party must plead the "date, place or time" of fraud.
Rather, as the Court in Berk noted: "The question . . . therefore, is whether
[**54] the plaintiffs have injected precision and some measure of
substantiation into their complaint sufficient to allow defendants to prepare an
adequate answer to the allegations." Berk,
759 F.Supp. at 254. In the present case, where the existence of a "pattern
of racketeering activity" depends in large part upon whether certain conduct is
ongoing or threatens repetition, the plaintiffs' failure to name the "other"
limited partnerships or any acts taken against them deprives the defendants of
an opportunity to respond to the allegation and show that there is no continuing
threat. Rule 9(b) is also intended to "safeguard against spurious allegations."
Klapper,
657 F.Supp. at 959. This purpose would be frustrated if the Court were to
allow plaintiffs in RICO cases to allege "additional [*906] unknown
future victims" and thus circumvent the statute's requirement that RICO
violations be "continuous." n18 The Court therefor will not consider the
plaintiffs' allegation that there is a threat of future criminal conduct by the
defendants. The illegal conduct alleged by the plaintiffs is closed-ended.
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- - - - - - -
n18 Even under Rule 8 which requires nothing more than
notice pleading, the Court concludes that the plaintiffs' vague allegation that
other unspecified and unknown limited partnerships will be harmed in the future
by the defendants does not give the defendants an opportunity to respond in a
meaningful way.
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- - - - - - - - - - - - - - - [**55]
ii. Duration.
Conduct that is "closed-ended" can still be "continuous" for RICO
purposes if the conduct spans a sufficiently long period of time. H.J.
Inc., 492 U.S. at 242. The Supreme Court's only guidance as to how long is
long enough was its statement in H.J. Inc. that
[a] party alleging a RICO violation may demonstrate
continuity over a closed period by proving a series of related predicates
extending over a substantial period of time. Predicate acts extending over a
few weeks or months and threatening not future criminal conduct do not satisfy
this requirement: Congress was concerned in RICO with long-term criminal
conduct.
Id.
at 242. The following subsequent case law has provided additional guidance.
Hughes v. Consol v. Pennsylvania Coal Co., 1991 wl 183159, at 6 (3d
Cir. 1991) ("twelve months is not a substantial period of time"); Hughes, slip
op. at 10-15 (conduct extending over eight months where there is no threat of
repetition is not continuous); Kehr
Packages, Inc. v. Fidelcor, Inc., 926 F.2d 1406, 1417-18 (3d Cir.
1991), cert. denied, 115
L. Ed. 2d 1007, 111 S. Ct. 2839 (1991) (predicate acts of fraud
[**56] extending over eight months not continuous where there was no
threat of repeated criminal conduct); Marshall-Silver,
894 F.2d at 597-98 (predicate acts that extended for a period of less than
seven months were not continuous where there was no threat of repeated criminal
conduct); Banks,
918 F.2d at 418 (period of eight months is not continuous). n19
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- -
n19 Swistock
v. Jones, 884 F.2d 755 (3d Cir. 1989) is not to the contrary. Writing
for the Court in Swistock, Chief Judge Sloviter noted that "the
existence of a [14 month] closed-end period of repeated conduct" may be
sufficient to satisfy the requirements of H.J.
Inc. Swistock, 884 F.2d at 759. The Court, however, noted that the
defendants' scheme included both fraud in the sale of real estate and fraud
related to leases that extended indefinitely into the future. Id. This threat of
continued conduct posed by the defendants in Swistock was important to the Court
of Appeals' decision to reverse the district court's dismissal of the RICO
action. As noted in another opinion written by Chief Judge Sloviter: "We said
that these further allegations [in Swistock] were sufficient to raise the issue
of whether fraud was the defendant's regular way of doing business" and thus
whether the defendants threatened continued criminal activity. Hindes,
937 F. 2d at 872. In any event, the predicate acts in this case extended
over 10 months not 14 months.
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-End Footnotes- - - - - - - - - - - - - - - - - [**57]
In
the present action the Court has already concluded that the alleged predicates
are closed-ended, i.e. they do not by their nature project into the future. The
next question is whether the alleged predicates extend over a "substantial
period of time" and thus suggest "long-term criminal conduct." The predicate
acts alleged by the plaintiffs begin, at the earliest, in May of 1990 when the
defendants allegedly agreed to jointly pursue a proxy contest for control of SPP
and SEP III and did not file already overdue Schedule 13Ds. The last predicate
acts occurred sometime before March of 1991 when RealCap requested by letter
that the SEC withdraw its proxy materials. (D.I. 49 at EX B; D.I. 62 at EX A.)
Any omissions or misstatements made after that date cannot be said to have been
predicates done in furtherance of the RICO enterprise's objectives. This ten
month period of activity by the defendants does not constitute continuous
criminal conduct. The plaintiffs have failed to adequately allege a "pattern of
racketeering activity." As a consequence, the plaintiffs' RICO claims will be
dismissed in their entirety.
D. Plaintiffs' Motion for Leave to File a
Supplemental Complaint
All [**58] four plaintiffs seek leave
of the Court to file a supplemental complaint alleging [*907]
further omissions and misstatements in the defendants' Schedule 13Ds. The Court
will deny this motion at this time. The proposed supplemental complaint does not
affect the Court's analysis of the RICO claims and therefore provides no reason
for allowing supplementation. See J.E.
Mamiye & Sons, Inc. v. Fidelity Bank, 813 F.2d 610, 613 (3d Cir.
1987). The alleged failure of the defendants to disclose the precise status
of the termination agreement, the precise relation between the defendants, and
this litigation are outgrowths of the inadequacy of original securities filings
and the controversy that surrounds it. All of the surviving allegations of the
defendants' securities violations relate to their failure to adequately disclose
the information called for on a Schedule 13D. They do not demonstrate a new
effort to seize control of the limited partnerships and do not extend the period
of continuity.
The Court will not provide a leave to file the proposed
supplemental complaint, but will allow the introduction of the facts stated
therein under the surviving § 13(d) claims. The proposed [**59]
supplemental complaint calls for the same relief as in the Complaint.
(Compare D.I. 1 at 39-40 with D.I. 49 at EX A, pp. 6-7.) The proposed
supplemental complaint also claims that the failure to disclose the existence of
this litigation and the negotiation and status of the termination agreement
further violates § 13(d). The Complaint states that the defendants continuing
failure to disclose material facts as required by § 13(d) is at issue. (D.I. 1
at 24.) The plaintiffs may attempt to show the facts stated in the proposed
supplemental complaint as evidence of the defendants' continuing failure to
satisfy the requirements of § 13(d). If it later appears necessary, the Court
will allow a motion to amend the pleadings to the evidence entered to show a
violation of § 13(d) in accord with this evidence. See Fed. R. Civ. P. 15(b).
IV. CONCLUSION
The Court will grant in part and deny in
part the defendants' Rule 12(c) motion to dismiss on the pleadings.
Specifically, the Court will dismiss: (1) the plaintiffs' RICO claims in their
entirety because the Complaint does not adequately allege a pattern of
racketeering activity; and (2) the plaintiffs' claims for injunctive relief
[**60] under § 14(a) of the 1934 Act. The Court will permit the
plaintiffs to go forward with their § 13(d) claims. These claims encompass any
omissions or misstatements made by the defendants in their 13D Schedules both
before and after the commencement of this litigation. Lastly, since the
plaintiffs have not alleged that the defendants owned 5% or more of the
outstanding units of SEP III, only SPP and PPC will seek relief under § 13(d) of
the 1934 Act. Accordingly, the claims of SEP III and SIG 86 will be dismissed in
their entirety.
An Order will be entered in accordance with this
Opinion.