ANDREO v. FRIEDLANDER

No. H-85-551 Civil

660 F. Supp. 1362 (1987) | Cited 0 times | D. Connecticut | May 12, 1987

RULING ON MOTIONS FOR SUMMARY JUDGMENT, FOR JUDGMENT ON THE PLEADINGS AND TO DISMISS THE COMPLAINT

This case arises out of transactions relating to the privateplacement of various limited partnership interests insatellite communication facilities. There are 67 plaintiffswho purchased interests in one or more of three limitedpartnerships. The defendants, who were involved in thetransactions in various different ways, are a law firm, twopublic accounting firms, a lawyer/promoter, two namedcorporations, and unknown defendants designated as "John Does1-25" and "XYZ Corporations 1-25." The plaintiffs claim thatthe defendants were part of a scheme to defraud them,violating the federal securities laws, 15 U.S.C. § 77l, 77q,and 78j, the federal racketeering statute (RICO), 18 U.S.C. § 1961et seq., and state statutes and common law.

Defendants Peat, Marwick & Mitchell ("Peat Marwick") andZarrow, Zarrow & Klein moved to dismiss the original complainton a variety of grounds. In a ruling dated April 28, 1986,this court granted that motion and gave plaintiffs leave toamend the complaint within 30 days. On May 28, 1986,plaintiffs filed an amended complaint.

Defendant Peat Marwick subsequently moved to dismiss theamended complaint on a variety of grounds including failure toplead fraud with the amount of particularity required by Rule9(b), lack of a private right of action under section 17(a),and failure to state a claim under RICO. That motion wasgranted on December 23, 1986. See Andreo v. Friedlander,Gaines, Cohen, Rosenthal & Rosenberg, 651 F. Supp. 877 (D.Conn.1986).

Defendant Friedlander, Gaines, Cohen, Rosenthal & Rosenberg("Friedlander Gaines") has moved for summary judgment, forjudgment on the pleadings, and for dismissal of the complainton a number of grounds, including failure to plead fraud withparticularity, failure to state a claim under the securitieslaws and RICO, failure to comply with the statute oflimitations, and failure to state a claim under either of twodifferent state law theories. Although that motion was filedbefore the complaint was amended, counsel for the defendanthas asked that it be applied to the amended complaint. Oralargument on the motion was heard on January 20, 1987.

Allegations

The plaintiffs claim that the defendants engaged in a schemeto defraud them through three limited partnerships: Star LinkAssociates ("Star Link"), Sky Link Associates ("Sky Link") andGalactic Link Associates ("Galactic"). The purpose of theselimited partnerships was to build and operate ground stationlinks for satellite communications. The partnerships wereorganized by Benjamin Rabin, who was assisted in various waysby the other defendants.

Although the amended complaint contains many general andconclusory allegations as to the unlawful conduct of thedefendants, it is far more particular than the originalcomplaint. It spells out some specifics as to the role of thevarious defendants in the allegedly fraudulent scheme. Underthe heading "Role of Friedlander Gaines," plaintiffs allegethatFriedlander Gaines drafted the offering memoranda and taxopinions for each of the three limited partnerships. AmendedComplaint ¶¶ 41-46. They also allege that these documents usedgrossly erroneous financial projections and were substantialfactors in the sale of the limited partnership interests toplaintiffs. Id. ¶ 47.

Other specific allegations about the role of FriedlanderGaines are scattered throughout the complaint. There areallegations that Friedlander Gaines represented in theoffering memoranda that the debt assumption and conversionagreements were solely for tax purposes, id. ¶ 35; that itrecklessly failed to inquire about and disclose numerousirregularities in the documents and transactions relating toeach of the three limited partnerships, id. ¶¶ 61-63; that itknowingly or recklessly failed to disclose that thepartnerships would have revenue shortfalls, id. ¶ 65a; and thatit knowingly or recklessly failed to make inquiries aboutbusiness experience and capitalization and about the source,nature or independence of appraisals, which inquiries wouldhave exposed the scheme to defraud, id. ¶ 65b.

In addition, plaintiffs also allege on information andbelief that Friedlander Gaines failed to disclose that thelimited partnership certificate for Sky Link was never filed,and that it had obtained information which demonstrated thatits opinion letter relied upon by plaintiffs was wrong,id. ¶ 65c.

The final set of allegations specific to Friedlander Gainesare contained in a breach of contract count. There, plaintiffsallege that they were intended third-party beneficiaries of acontract between Rabin and Friedlander Gaines, and thatFriedlander Gaines breached the contract by failing to file alimited partnership certificate for Sky Link and/or failing toinform plaintiffs that such a certificate had not been filed,as well as by other unspecified actions. Id. ¶¶ 102-106.

Discussion

Although this motion has been brought as a motion forsummary judgment, for judgment on the pleadings and to dismissthe complaint, it will be treated as a motion for judgment onthe pleadings. Summary judgment under Fed.R.Civ.P. 56 would beinappropriate because discovery in this case was stayedpending resolution of the various motions to dismiss. See In reG. & A. Books, Inc., 770 F.2d 288, 295 (2d Cir. 1985) (partyopposing motion converted to a motion for summary judgmentshould be given reasonable opportunity to meet facts outsidethe pleadings), cert. denied, ___ U.S. ___, 106 S.Ct. 1195, 89L.Ed.2d 310 (1986); see also Fed.R.Civ.P. 56(f).1 Treatingthis motion as a motion to dismiss under Fed.R.Civ.P. 12(b) isalso inappropriate because it would be untimely. Such a motionis to be filed before a defendant answers the complaint,Fed.R.Civ.P. 12(b), but Friedlander Gaines filed this motionafter its answer. However, after the pleadings have been closedthe defense of failure to state a claim may still be raisedunder Rule 12(h)(2) on a motion for judgment on the pleadings.

The standards which apply to a motion authorized by Rule12(h)(2) raising the defense of failure to state a claim arethe same as the standards which apply to a Rule 12(b)(6)motion. Shapiro v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,353 F. Supp. 264, 268 (S.D.N.Y. 1972), aff'd onother grounds, 495 F.2d 228 (2d Cir. 1974); 5 C. Wright & A.Miller, Federal Practice and Procedure § 1367, at 688 (1969).Thus, grounds for dismissing a complaint under Rule 12(b)(6)are grounds to enter judgment on the pleadings under Rule12(h)(2) and Rule 12(c). In addition, all allegations that areproperly pleaded must be treated as if they were true and mustbe construed in favor of the nonmovant. See Shapiro v. MerrillLynch, Pierce, Fenner & Smith, Inc., 495 F.2d 228, 231 (2d Cir.1974); 5 C. Wright & A. Miller, supra, § 1368, at 690.

The court will first consider the sufficiency of thesecurities claims against Friedlander Gaines, followed by anexamination of the RICO claims, the statute of limitationarguments, and the state law claims.

I. Sufficiency of Fraud Allegations Under Section 10(b) of the 1934 Act

A. Standards

The thrust of plaintiffs' claim against Friedlander Gainesis that it aided and abetted Rabin and his associates in theallegedly fraudulent scheme. The elements for an aiding andabetting claim under section 10(b) of the 1934 Act are (1)that there be a primary fraud, (2) that the aider and abettorhave "knowledge" of the fraud, and (3) that aider and abettorprovide "substantial assistance" to the achievement of theprimary fraud. IIT, An Int'l Inv. Trust v. Cornfeld,619 F.2d 909, 922 (2d Cir. 1980) (Friendly, J.); see also Decker v.Massey-Ferguson, Ltd., 681 F.2d 111, 119 (2d Cir. 1982). Theknowledge element of aiding and abetting may be satisfied byreckless disregard of the truth in some circumstances. SeeDecker, 681 F.2d at 119; IIT, 619 F.2d at 923.

These elements must be pleaded with the particularityrequired by Rule 9(b) of the Federal Rules of CivilProcedure.2 Andreo, 651 F. Supp. at 880; In re CincinnatiGas & Elec. Sec. Litig., 594 F. Supp. 233, 237 (S.D.Ohio 1984);see also Decker, 681 F.2d at 119; IIT, 619 F.2d at 922-27.Thus, the amended complaint must plead the circumstances givingrise to the plaintiffs' aiding and abetting claim. Andreo, 651F. Supp. at 880; Fed.R.Civ.P. 9(b). To properly plead theknowledge element of aiding and abetting, the pleadedcircumstances must include the "events which [plaintiffs]assert give rise to a strong inference that the defendants hadknowledge." Ross v. A.H. Robins Co., 607 F.2d 545, 558 (2d Cir.1979); accord Decker, 681 F.2d at 115 (2d Cir. 1982);see also Connecticut Nat'l Bank v. Fluor Corp., 808 F.2d 957,962 (2d Cir. 1987).

B. Application of the Standards

The amended complaint is specific enough to meet theparticularity requirements of Rule 9(b). It is undisputed thatthe amended complaint sets forth a claim for primary fraudagainst Rabin and his immediate associates with sufficientparticularity. This primary fraud allegedly was substantiallyassisted by Friedlander Gaines' inclusion of false informationand/or omission of material information from drafts ofoffering memoranda and tax opinions. Plaintiffs have spelledout these omissions in detail,3 and have alleged that theywere both significant and material. Thus, the complaintsufficiently alleges the first and third elements of aidingand abetting.

The allegations with respect to the knowledge element ofaiding and abetting are more problematic. The amendedcomplaintcontains only conclusory allegations that Friedlander Gainesknew that erroneous information was included in the draftmemoranda and tax opinions and that material facts wereomitted. It does not set forth the factual basis for aninference of knowledge, and, as a result, the amendedcomplaint has not alleged knowledge with the necessaryparticularity. See Ross, 607 F.2d at 558; see also Decker, 681F.2d at 115.

Alternatively, reckless disregard of the truth can, in somecircumstances, satisfy the knowledge element of aiding andabetting. See Decker, 681 F.2d at 119; IIT, 619 F.2d at 923.Friedlander Gaines argues that the circumstances of this casedo not justify applying the recklessness standard for theknowledge element of aiding and abetting. It asserts that sinceit only prepared drafts of the offering memoranda and taxopinions and that it had no personal contact with any of theplaintiffs, it was not under a fiduciary duty to theplaintiffs, and therefore can be held liable only if it actedwith knowledge of the false information or material omissions.

The existence of a fiduciary duty, however, is not aprerequisite for the application of the recklessness standardto satisfy the knowledge element of an aiding and abettingclaim under the securities laws. Although the Second Circuithas not yet ruled on the issue, Sirota v. Solitron Devices,Inc., 673 F.2d 566, 575 (2d Cir.), cert. denied, 459 U.S. 838,103 S.Ct. 86, 74 L.Ed.2d 80 (1982), Judge Lasker has held thatattorneys can be held liable as aiders and abettors where it isreasonably foreseeable that potential investors will rely ondocuments they draft, if they omit material information fromthose documents or include erroneous information in recklessdisregard for the truth. Morgan v. Prudential Groups, Inc.,527 F. Supp. 957, 961 (S.D.N.Y. 1981), aff'd mem., 729 F.2d 1443 (2dCir. 1983); see also In re Investors Funding Corp. Sec. Litig.,523 F. Supp. 550, 558 (S.D.N.Y. 1980) ("recklessness issufficient to establish scienter [for aiding and abetting)where plaintiffs are third parties whose reliance upon theaccountant's audit or opinion letter is reasonablyforeseeable"); Olek v. Fischer, [1979] Fed. Sec.L.Rep. (CCH) ¶96,898, at 95,699 (S.D.N.Y. 1979), aff'd on other grounds,623 F.2d 791 (2d Cir. 1980). This standard of "reasonableforeseeability" is used in determining the scope of similarduties under common law. See Mallis v. Bankers Trust Co.,615 F.2d 68, 82 (2d Cir. 1980) (Friendly, J.) (majority common lawrule in American jurisdictions is that in determining the scopeof an accountant's duty to not make negligentmisrepresentations, the critical factor is the parties'reasonable expectations, not their formal legal relationship),cert. denied, 449 U.S. 1123, 101 S.Ct. 938, 67 L.Ed.2d 109(1981); Restatement (Second) of Torts § 552(2) (negligentsupplier of erroneous information may be held liable for thirdparty's reliance if supplier knew the information would beconveyed to third parties for their benefit and guidance);Prosser, Misrepresentation and Third Persons, 19 Vand.L.Rev.231, 239 (1966) (tendency to treat cases where party knows thatrecipient of information may pass it on to a group to inducereliance the same as cases where party intends that recipientrely on information); Note, Accountants' Liabilities for Falseand Misleading Financial Statements, 67 Colum L.Rev. 1437,1441-44 (1967) (common law imposes liability on accountantsthat recklessly prepare financial statement relied upon byinvestors).

The court agrees with Judge Lasker that attorneys should beheld accountable if they draft certain documents forsecurities offerings with reckless disregard of the truth.This does not mean that attorneys who draft such documentshave an affirmative duty to verify all information provided bytheir clients, or to discover if any pertinent informationmight have been omitted. Rather, those attorneys have aresponsibility to not act in reckless disregard of the truthwhen using the information provided by clients in performingtheir professional duties and preparing offering memoranda andtax opinions.

Friedlander Gaines' reliance on Chiarella v. United States,445 U.S. 222, 100 S.Ct. 1108, 63 L.Ed.2d 348 (1980), ismisplaced.In that case Chiarella, an employee of a financial printer,was convicted of securities fraud. From documents given to hisemployer, he had deduced before the information was publicthat certain companies were going to be the subject offorthcoming takeover bids. He then used this information inpurchasing stock of the target companies without disclosing itto the sellers. The Supreme Court reversed the conviction,finding that the defendant had no duty to disclose theinformation to the sellers.

Chiarella is distinguishable from Morgan and the otherauthority cited with it because Chiarella involved apurchaser's nondisclosure, rather than nondisclosures by aparty that helped prepare documents to be given to investors.While it is not reasonably foreseeable that a seller would relyon the disclosures of a purchaser (absent some specialrelationship), it is reasonably foreseeable that investorswould rely on the expertise of the professionals that draftoffering memoranda and tax opinions. As a result, suchprofessionals should be under the obligation to not act inreckless disregard of the truth when they undertake thedrafting of such documents.

In the present case it was foreseeable that the plaintiffs,as investors in the various securities for which FriedlanderGaines drafted offering memoranda and tax opinions, would relyon the drafts prepared by Friedlander Gaines. Therefore,allegations that Friedlander Gaines omitted materialinformation from the documents in reckless disregard of thetruth are sufficient to meet the knowledge element of anaiding and abetting claim. Since those allegations are spelledout in great detail,4 they also meet the particularityrequirement of Rule 9(b). Of course, whether that claim can beproven at trial is another matter, which would requireevidence that the conduct alleged was in fact highlyunreasonable and an extreme departure from professionalconduct. See Decker, 681 F.2d at 120.5

II. Sufficiency of RICO Allegations

Friedlander Gaines also argues that its role in draftingoffering memoranda and tax opinions, as alleged in the amendedcomplaint, is not sufficient to state a RICO claim against it.The two relevant sections of RICO will be considered in turn.

A. Section 1962(c)

Section 1962(c) of RICO provides:

(c) It shall be unlawful for any person employed by 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.

18 U.S.C. § 1962. Thus, in order to state a claim againstFriedlander Gaines under this provision, plaintiffs must allegethat Friedlander Gaines conducted or participated in conductinga RICO enterprise through a pattern of racketeering activity.See Sedima, SPRL v. Imrex Co., 473 U.S. 479, 105 S.Ct. 3275,3285, 87 L.Ed.2d 346 (1985). Racketeering activity is definedto include specific predicate offenses, including mail fraudindictable under 18 U.S.C. § 1341, wire fraud indictable under18 U.S.C. § 1343, and securities fraud punishable under variousfederal securities statutes. 18 U.S.C. § 1961(1). Thesepredicate acts involving fraud must be pleaded in conformitywith the particularity requirements ofRule 9(b) of the Federal Rules of Civil Procedure.Andreo, 651 F. Supp. at 882 (citing cases). The court will firstconsider whether the amended complaint states a RICO cause ofaction in general, and then whether Friedlander Gaines issufficiently implicated for the amended complaint to state aRICO claim against it.

1. Sufficiency of the Claim in General

There are a variety of predicate acts alleged in the amendedcomplaint that might support a RICO claim. The allegationsconcerning mail fraud and wire fraud can be disposed of at theoutset as not supporting a RICO claim because they are notpleaded with the necessary particularity. The complaint merelyalleges that "defendants" used the mail, Amended Complaint¶ 26, that "each of the defendants" transmitted "numerousmaterials through the mails in interstate commerce," id. ¶90(b), and that "each of the defendants" transmitted "privateoffering memoranda and other information" by wire, id. ¶ 90(c).Such conclusory allegations are insufficient. Andreo, 651F. Supp. at 882; see also Decker, 681 F.2d at 114; Ross, 607F.2d at 557. They do not specify which defendants used mail orwire services, what was transmitted, when it was transmitted,or to whom it was sent. See Zerman v. Ball, 735 F.2d 15, 22(2d Cir. 1984); see also Luce v. Edelstein, 802 F.2d 49, 54 (2dCir. 1986); Andreo, 651 F. Supp. at 880.

It is undisputed, however, that the amended complaintalleges securities fraud with respect to Rabin and hisimmediate affiliates with sufficient particularity to meet therequirements of Rule 9(b). The question, therefore, is whetherthese security fraud allegations, combined with otherallegations in the amended complaint, are sufficient to statea RICO claim.

For relief under RICO, plaintiffs must demonstrate thatdefendants were involved in an "enterprise" and that there wasa "pattern of racketeering." An enterprise for purposes ofsection 1962 is "`a group of persons associated together fora common purpose of engaging in a course of conduct' and `isproved by evidence of an ongoing organization, formal orinformal, and by evidence that the various associates functionas a continuing unit.'" United States v. Ianniello,808 F.2d 184, 191 (2d Cir. 1986) (quoting United States v. Turkette,452 U.S. 576, 583, 101 S.Ct. 2524, 2528, 69 L.Ed.2d 246 (1981)).

The allegations in the amended complaint sufficiently allegea RICO-type enterprise. Though the allegation in Count III isconclusory, Amended Complaint ¶ 88, it is supported by numerousother specific allegations regarding the relationships betweenthe defendants and the actions they took. For example, theamended complaint alleges that Rabin, the main principal in thealleged fraud, was the sole shareholder of ContinentalConsultants Corporation, which was an 80% owner of PrimeNetwork, Inc., which, in turn, owned Satellite CommunicationsNetwork, Inc., which was the general partner in the threelimited partnerships. Id. ¶ 22. Together with otherorganizations and individuals, these corporations allegedlyworked together as a continuing unit to promote fraudulentsecurities and to siphon assets out of the limitedpartnerships. See Amended Complaint ¶ 89.

The case law as to what constitutes a "pattern ofracketeering" is somewhat more confusing. The recent SupremeCourt decision in Sedima, SPRL v. Imrex Co., 473 U.S. 479, 105S.Ct. 3275, 87 L.Ed.2d 346 (1985), however, casts some light onthis requirement of a RICO claim. There, the Court indicatedthat a pattern of racketeering requires "at least two acts ofracketeering activity" and that the legislative history shows arequirement of "continuity plus relationship which combines toproduce a pattern." Id. 105 S.Ct. at 3285 n. 14. In addition,the Court noted that the definition of a pattern ofracketeering activity defined in the criminal part of RICOmight be useful in interpreting the phrase as used in the civilpart of RICO. Id. The criminal definition of pattern ofracketeering includes "acts that have the same or similarpurposes, results, participants, victims or methods ofcommission, or otherwise are interrelated by distinguishingcharacteristics and are not isolated events." 18 U.S.C. § 3575(e).These passages require"at least two acts that have a common purpose of furthering acontinuing criminal enterprise." Ianniello, 808 F.2d at 192.

Under these standards, the amended complaint alleges apattern of racketeering. It claims that three limitedpartnership offerings were undertaken by the same parties withthe same intent to defraud on three different occasions. Thus,there were more than two predicate acts with common purposes,results, participants, and methods of commission, whichallegedly furthered the continuing RICO enterprise. The factthat there were many different victims rather than the samefew victims is of no consequence. It merely demonstrates thatthe scheme was used against different people, not that apattern did not exist.

2. Sufficiency of the Claim Against FriedlanderGaines

Having determined that the amended complaint generallystates a claim for violation of RICO, it must next beconsidered whether the amended complaint states a RICO claimspecifically against Friedlander Gaines. To be implicated inthe allegations of a scheme to defraud outlined above,Friedlander Gaines must have conducted the enterpriseconducting the pattern of racketeering, or participated in it.18 U.S.C. § 1962(c).

The key to deciding whether the amended complaint states aRICO claim against Friedlander Gaines lies in the terms"conduct" and "participate." These terms are not defined inthe RICO statute. However, in common usage they imply at leasta general awareness or knowledge of the activity one"conducts" or in which one "participates." A person thatassists another in some unknown activity does not conduct theactivity and is not a participant. Thus, Friedlander Gainesconducted or participated in the enterprise conducting apattern of racketeering only if it assisted with knowledge ofthe illegal activities. Mere reckless disregard of the truthwhen drafting documents does not justify a finding of RICOcivil liability on the basis that the party participated inthe illegal enterprise. See O'Brien v. Dean Witter Reynolds,Inc., [1984 Transfer Binder] Fed.Sec.L.Rep. ¶ 91,509, at 98,562(D.Az. 1984) [Available on WESTLAW-DCT database] ("Civilliability under RICO requires knowing or intentionalparticipation and not mere negligence or recklessness."); seealso Moss v. Morgan Stanley, Inc., 553 F. Supp. 1347, 1362(S.D.N.Y.) (no participation in RICO scheme where defendant wasallegedly negligent or reckless in aiding and abetting), aff'don other grounds, 719 F.2d 5 (2d Cir. 1983), cert.denied, 465 U.S. 1025, 104 S.Ct. 1280, 79 L.Ed.2d 684(1984).6

This interpretation of the word "participate" is supportedby the case law on the doctrine of criminal aiding andabetting. The classic statement of the elements of criminalaiding and abetting comes from Nye & Nissen v. United States,336 U.S. 613, 69 S.Ct. 766, 93 L.Ed. 919 (1949). There, theCourt, quoting Judge Learned Hand, stated that "[i]n order toaid and abet another to commit a crime it is necessary that adefendant `in some sort associate himself with the venture,that he participate in it as in something that he wishes tobring about, that he seek by his action to make it succeed.'"Id. at 619, 69 S.Ct. 769 (quoting United States v. Peoni,100 F.2d 401, 402 (2d Cir. 1938)); accord United States v. Tyler,758 F.2d 66, 70 (2d Cir. 1985); United States v. DeFiore,720 F.2d 757, 764 (2d Cir. 1983), cert. denied, 467 U.S. 1241,104 S.Ct. 3511, 82 L.Ed.2d 820 (1984). For a defendant to"participate" in a crime as an aider and abettor, "it must beproved that the defendant consciously assisted the commissionof the specific crime in some active way." United States v.Dickerson, 508 F.2d 1216, 1217-18 (2d Cir. 1975). Thus, merereckless assistance is not sufficient to constituteparticipation as an aider and abettor. See Moss, 553 F. Supp. at1362; see also United States v. Newman, 490 F.2d 139, 142-43(3d Cir. 1974) (involvement in activities without knowing oftheir criminal objective did not constitute aiding andabetting.)7

The construction of section 1962(c) as requiring at least ageneral awareness or knowledge of the illegal activities ofthe enterprise is consistent with the reasoning and results ofother RICO cases not directly addressing this issue. Forexample, some cases have found that liability under RICOrequires more than mere membership in an enterprise, orassociation with it. United States v. Castellano, 610 F. Supp. 1151,1165 (S.D.N.Y. 1985); United States v. Russotti,555 F. Supp. 1236, 1241 (W.D.N.Y.), aff'd on other grounds,717 F.2d 27 (2d Cir. 1983), cert. denied, 465 U.S. 1022, 104 S.Ct. 1273,79 L.Ed.2d 678 (1984). In addition, cases that have imposedliability for aiding and abetting a RICO violation haverequired both knowledge of the illegal activity and substantialassistance in it. Laterza v. American Broadcasting Co.,581 F. Supp. 408, 412 (S.D.N.Y. 1984); Kranzdorf v. Green,582 F. Supp. 335, 337 (E.D.Pa. 1983).8

Under this standard, the amended complaint does not state aRICO claim against Friedlander Gaines. It alleges thatFriedlander Gaines conducted the enterprise by aiding andabetting the securities fraud, by committing mail fraud, andby committing wire fraud. Amended Complaint ¶ 90. Of theseallegations, the only ones that meet the particularityrequirements of Rule 9(b) are those which allege aiding andabetting through a reckless disregard of the truth in preparingdrafts of offering memoranda and tax opinions. Thoseallegations, however, do not amount to an allegation thatFriedlander Gaines conducted the alleged RICO enterprise orparticipated in it because they do not allege that FriedlanderGaines assisted the primary fraud with knowledge thereof.9

B. Section 1962(d)

Even if Friedlander Gaines did not participate in thealleged RICO violation, under section 1962(d)10 it may beheld liable if it conspired to do so. For liability under thatsection, the offending party "must have objectively manifestedan agreement to participate, directly or indirectly, in theaffairs of an enterprise through the commission of two or morepredicate acts." Andreo, 651 F. Supp. at 883; Laterza v.American Broadcasting Co., 581 F. Supp. 408, 413 (S.D.N.Y.1984); accord United States v. Cauble, 706 F.2d 1322, 1341 (5thCir. 1983), cert. denied, 465 U.S. 1005, 104 S.Ct. 996, 79L.Ed.2d 229 (1984); United States v. Melton, 689 F.2d 679, 683(7th Cir. 1982); see also United States v. Ruggiero,726 F.2d 913, 921 (2d Cir.), cert. denied, 469 U.S. 831, 105 S.Ct. 118,83 L.Ed.2d 60 (1984).

The amended complaint does not sufficiently allege a claimfor conspiracy under RICO. Although Rule 9(b) does not applyto claims of conspiracy because it is not one of theenumerated averments, see Alfaro v. E.F. Hutton & Co.,606 F. Supp. 1100, 1117 (E.D.Pa. 1985), plaintiffs must neverthelessprovide some factual basis for the legal conclusion that aconspiracy existed, id.; accord Angola v. Civiletti,666 F.2d 1, 4 (2d Cir. 1981); see also Ellentuck v. Klein, 570 F.2d 414,426 (2d Cir. 1978); Powell v. Workmen's Compensation Board,327 F.2d 131, 137 (2d Cir. 1964); Andreo, 651 F. Supp. at 883. Theamended complaint merely alleges that Friedlander Gaines "didunlawfully, wilfully, and knowingly conspire together [withother defendants] to violate 18 U.S.C. § 1692(c)."Amended Complaint ¶ 92. Although other parts of the amendedcomplaint set forth in detail various alleged acts or omissionsof Friedlander Gaines, they do not allege any objectivemanifestation of an agreement to participate in a RICOenterprise through the commission of predicate acts, nor dothey set forth the facts upon which the conspiracy claim isbased. Mere conclusory allegations such as these areinsufficient. Alfaro, 606 F. Supp. at 1117; see also Laterza,581 F.2d at 413 (allegations of an "unspecified role in anundetailed conspiracy" are insufficient).

III. Statute of Limitations

Defendant Friedlander Gaines also raises a statute oflimitations defense. Such a defense was raised in an earliermotion to dismiss brought by Peat Marwick, and the court'sruling with respect to that motion isdispositive here. After reviewing the allegations in thecomplaint, this court found:

[Plaintiffs] have cited acts of concealment by the defendants, including sending misleading status reports to the plaintiffs, and misrepresenting the gravity of certain IRS audits. Plaintiffs' assertions that defendants engaged in a common course of conduct to conceal the fraud may or may not be valid. At this early stage, however, they suffice to bring the equitable tolling doctrine into play. It is not clear from the face of the complaint that this action is time-barred; therefore, the statute of limitations alone would not be grounds for dismissing this claim.

Andreo v. Friedlander, Gaines, Cohen, Rosenthal & Rosenberg,Civ. No. H-85-551, at 19 (April 28, 1986) (citation omitted)[Available on WESTLAW, DCT database].

The amended complaint's allegations of concealment do notmaterially differ from those contained in the first complaint,and Friedlander Gaines has not presented any reasons why thisearlier decision should be reconsidered. Thus, since theequitable tolling doctrine applies with respect to plaintiffs'federal claims, id. at 18, the allegations are still sufficientto toll the statute of limitations.

This court's earlier ruling is also dispositive with respectto the statute of limitations defense as applied to the stateclaims. Under Conn.Gen.Stat. § 52-595, fraudulent concealmenttolls the statute of limitation. There is no reason why thecourt's earlier finding that plaintiffs sufficiently allegedsuch fraudulent concealment to toll the statute of limitationswith respect to the federal claims should not be applied to thestate claims as well. Therefore, at this early stage of thelitigation, the court considers the statute of limitationstolled for the state claims.

IV. State Law Claims

Friedlander Gaines also raises specific arguments withrespect to plaintiffs' state claims against it. Its argumentsas to the third-party beneficiaries theory, the ConnecticutUnfair Trade Practices Act (CUTPA), and pendent jurisdictionwill be considered in turn.

A. Third-party Beneficiary Theory

Friedlander Gaines argues that plaintiffs' amended complaintfails to state a claim against it under the theory that theplaintiffs were third-party beneficiaries to a contractbetween Rabin and Friedlander Gaines. In order to be athird-party beneficiary under Connecticut law, the parties tothe contract must have intended that the promisor would assumea direct obligation to the third parties. Knapp v. New HavenRoad Construction Co., 150 Conn. 321, 325, 189 A.2d 386 (1963).This intent is to be determined from the terms of the contractread in light of the circumstances attending its making,including the motives and purposes of the parties. Id. (citingColonial Discount Co. v. Avon Motors, Inc., 137 Conn. 196, 201,75 A.2d 507 (1950)). It is not necessary that in every instancethere be express language creating the direct obligation. Id.at 326, 189 A.2d 386.

The allegations in the amended complaint are sufficient tostate a claim for breach of contract as third-partybeneficiaries. Plaintiffs allege the existence of a contractbetween Rabin and Friedlander Gaines, that they were theintended third-party beneficiaries, that there was a breach ofcontract, and that the breach injured them. Amended Complaint¶¶ 102-105. While the amended complaint does not set forth anyspecific language of the contract or other evidence tending toshow that the parties intended to create a direct obligation toplaintiffs, that is a matter of proof not of pleading.11Under the FederalRules the amended complaint need only set forth a short andplain statement of the claim, see Fed.R.Civ.P. 8(a), which itclearly does.

B. Connecticut Unfair Trade Practices Act

Friedlander Gaines also argues that plaintiffs fail to statea claim under CUTPA. In a supplemental memorandum it directedthis court's attention to the recent Connecticut Supreme Courtdecision in Russell v. Dean Witter Reynolds, Inc.,200 Conn. 172, 510 A.2d 972 (1986). In that case, the court reversed theaward of damages that were based on CUTPA, id. at 184,510 A.2d 972, holding that CUTPA does not apply to the purchase and saleof securities. Id. at 175, 510 A.2d 972.

Russell's interpretation of the scope of CUTPA, of course, isbinding on this court. Since the plaintiffs claim that thealleged fraudulent conduct involved the sales of securities,Amended Complaint ¶ 4, they do not have a claim under CUTPA.

C. Pendent Jurisdiction

Friedlander Gaines argues that the pendent state claimsagainst them should be dismissed because the federal claimsare to be dismissed. Pendent jurisdiction is a doctrine ofdiscretion. United Mine Workers v. Gibbs, 383 U.S. 715, 726, 86S.Ct. 1130, 1139, 16 L.Ed.2d 218 (1966). Where the federalclaims are dismissed before trial, the state claims shouldgenerally be dismissed as well. Id.; Nolan v. Meyer,520 F.2d 1276, 1280 (2d Cir.) (retention of pendent state law claimafter dismissal of federal claim under Rule 12(b)(6) probablywould be an abuse of discretion), cert. denied, 423 U.S. 1034,96 S.Ct. 567, 46 L.Ed.2d 408 (1975).

From these principles it follows that the state claimsagainst Friedlander Gaines should not be dismissed. Since theamended complaint sets forth a federal cause of action againstFriedlander Gaines, it is appropriate for this court toconsider state claims arising out of the same occurrences.This court finds that it is in the interest of judicialeconomy, convenience and fairness to try the federal and stateclaims against Friedlander Gaines in the same case.

V. Section 17(a) of the 1933 Securities Act

One final argument merits consideration. Friedlander Gaineshas renewed the argument made in Peat Marwick's first motionto dismiss that section 17(a) of the 1933 Act, 15 U.S.C. § 77q(a),does not create a private right of action. After notingthat the issue is very controversial, this court declined totake a position on it in an earlier ruling because even ifthere was a private right of action, plaintiffs' complaint wasnot specific enough with respect to that claim. Andreo, CivilNo. H-85-551, at 27-29 (April 28, 1986). However, now that theamended complaint is particular enough to state a securitiesclaim against Friedlander Gaines, this court must now resolvethe issue for purposes of this case.

In Kirshner v. United States, 603 F.2d 234 (2d Cir. 1978),cert. denied, 442 U.S. 909, 99 S.Ct. 2821, 61 L.Ed.2d 274(1979), the Second Circuit squarely held that there is aprivate right of action under section 17(a). Even though theSupreme Court has noted that the issue is unsettled, see, e.g.,Herman & MacLean v. Huddleston, 459 U.S. 375, 378 n. 2, 103S.Ct. 683, 685 n. 2, 74 L.Ed.2d 548 (1983), and some notedjurists and scholars have criticized the Second Circuit rule,see, e.g., Yoder v. Orthomolecular Nutrition Institute,751 F.2d 555, 559 n. 3 (2d Cir. 1985) (Friendly, J.), Kirshner isstill the law in this Circuit. Thus, until such time as therationale of Kirshner is overruled, plaintiffs in this circuithave a private right of action under section 17(a). See UnitedStates v. Ianniello,808 F.2d 184, 190 (2d Cir. 1986) (court of appeals bound bydecision of earlier panel unless rationale overruled by an enbane panel or the Supreme Court).

Conclusion

For the foregoing reasons, Friedlander Gaines' motion forjudgment on the pleadings is granted in part and denied inpart.12 The amended complaint states a claim againstFriedlander Gaines for aiding and abetting a securities fraud.That claim is pleaded with sufficient particularity to satisfyRule 9(b). The amended complaint also states a claim againstFriedlander Gaines for breach of contract to the detriment ofthird-party beneficiaries. It does not, however, state a RICOclaim because it does not sufficiently allege that FriedlanderGaines conducted the RICO enterprise, or participated in it.While Friedlander Gaines may have assisted the scheme bypreparing documents in reckless disregard of the truth, suchassistance must be undertaken with at least general knowledgeor awareness of the illegal activities to constituteconducting a RICO enterprise or participating in it.Furthermore, the amended complaint does not state a claimagainst Friedlander Gaines for violation of the ConnecticutUnfair Trade Practices Act because that act does not apply tosales of securities. Thus, Counts III and IX of the amendedcomplaint are dismissed as to defendant Friedlander Gaines. Inaddition, since Connecticut law is clear as to the scope ofCUTPA, Count IX is dismissed as to the other defendants on thecourt's own motion.

SO ORDERED.

1. Even if the court considered this a proper motion forsummary judgment, the motion would be denied. As thediscussion that follows will show, there are genuine issues ofmaterial fact in dispute. The affidavits submitted byFriedlander Gaines establish facts which are not sufficientfor the legal defenses raised by its papers. For example, theaffidavits establish that Friedlander Gaines only prepareddrafts of offering memoranda and tax opinions, that it had noknowledge of the individual plaintiffs' identities, and thatit had no knowledge of any facts underlying the allegedmisrepresentations. Affidavit of Jules Levine ¶¶ 2, 5, 8;Affidavit of Joseph S. Rosenthal ¶¶ 2, 5, 8. These facts do notestablish that Friedlander Gaines is not liable as an aider andabettor in a securities fraud. As will be explained below,Friedlander Gaines may be held liable as an aider and abettorif it prepared the draft documents in reckless disregard of thetruth, and if it could reasonably foresee that investors suchas plaintiffs would rely on statements made in those drafts.

2. Rule 9(b) states:

In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally.

3. For example, paragraphs 61-63 of the amended complaintallege that Friedlander Gaines recklessly failed to disclosesome 23 different material facts in the three limitedpartnership offering memoranda. These omissions include: thatRabin was in violation of various securities laws for variousoffenses, that Rabin was involved as a defendant in othersecurities litigation, that Rabin had no experience in thecommunications field, that the general partner was involved inself-dealing, that a Rabin affiliate would profit fromconstruction of the earth stations, and that the financingarrangement was not as described in the offeringmemoranda.

4. See supra note 3.

5. At oral argument, counsel for Friedlander Gaines arguedthat the draft memoranda and tax opinions do not state a claimunder the holding of this court in its last ruling on a motionto dismiss because, by their terms, those documents "bespeakcaution." See Andreo, 651 F. Supp. at 881 (relying on Luce v.Edelstein, 802 F.2d 49 (2d Cir. 1986)). The court finds thisargument without merit. Counsel for Friedlander Gaines has notpointed out any terms which bespeak caution, and the court'sreview of the material indicates no such cautionary language.If anything, the language of the documents gives additionalreason for investors to rely on them. For example, the taxopinion indicates that Friedlander Gaines "reviewed thePartnership Agreement, Management Agreement and such otherdocuments and advice as we have deemed necessary to review orconsider."

6. There is a well-established rule in the Second Circuit,which, at first blush, seems inconsistent with this analysis.The rule states that RICO has no independent scienterrequirement; proof of scienter under the law prohibiting thepredicate acts is sufficient to justify liability under RICO.E.g., United States v. Biasucci, 786 F.2d 504, 512 (2d Cir.),cert. denied, ___ U.S. ___, 107 S.Ct. 104, 93 L.Ed.2d 54(1986); United States v. Bagaric, 706 F.2d 42, 53-54 (2d Cir.),cert. denied, 464 U.S. 840, 104 S.Ct. 133, 134, 78 L.Ed.2d 128(1983); United States v. Boylan, 620 F.2d 359, 361-62 (2dCir.), cert. denied, 449 U.S. 833, 101 S.Ct. 103, 66 L.Ed.2d 38(1980). But see United States v. Bledsoe, 674 F.2d 647, 661(8th Cir.) (expressing "grave doubts" about the rule), cert.denied, 459 U.S. 1040, 103 S.Ct. 456, 74 L.Ed.2d 608 (1982).Since the federal securities laws in some circumstances onlyrequire scienter of reckless disregard of the truth, see, e.g.Lanza v. Drexel & Co., 479 F.2d 1277, 1306 (2d Cir. 1973) (enbanc) (under Rule 10(b)-5); Chris-Craft Industries, Inc. v.Piper Aircraft Corp., 480 F.2d 341, 396-98 (2d Cir.) (section14(e)), cert. denied, 414 U.S. 910, 94 S.Ct. 231, 38 L.Ed.2d148 (1973), this rule would seem to allow liability under RICOupon proof of reckless disregard of the truth if the predicateacts are certain types of securities fraud.

These three criminal RICO cases are distinguishable. Theydid not directly face the issue of whether RICO liabilitycould be based on a reckless disregard of the truth. Instead,they were concerned only with whether RICO requires a findingof criminal intent to violate RICO in addition to the criminalintent required by the law prohibiting the predicate act. SeeBiasucci, 786 F.2d at 512; Bagaric, 706 F.2d at 53-54. Thus,the cases did not consider whether the word "participate" insection 1962(c) requires that the defendant have generalknowledge of the illegal activity for liability under RICO. Infact, two of these cases are implicitly consistent with theholding of this court. Those cases approved of juryinstructions that required a finding that the defendant have ageneral knowledge of the illegal activity (though both heldthat part of the instructions requiring specific knowledge wasunnecessary and overly generous to defendants). Biasucci, 786F.2d at 512; United States v. Scotto, 641 F.2d 47, 55-56 (2dCir. 1980).

That liability under RICO should require general knowledgeof the enterprise's racketeering activity even if liabilityunder section 10(b) of the securities law only requiresreckless disregard of the truth is supported by twodifferences between RICO and the securities laws. First,unlike the securities laws, RICO provides for theextraordinary civil relief of treble damages. 18 U.S.C. § 1964(c).Second, section 10(b) of the Securities Exchange Actof 1934, 15 U.S.C. § 78j(b), seeks to prohibit the use of "anymanipulative or deceptive device or contrivance," while section1962(c) of RICO, 18 U.S.C. § 1962(c), seeks to make it unlawfulto "participate, directly or indirectly, in the conduct of suchenterprise's affairs through a pattern of racketeering." Adocument which is issued in reckless disregard of the truth maywell be a "deceptive device" but not a means of"participat[ing]" in a pattern of racketeering.

7. A construction of the terms "conduct or participate"that would include those that assist a RICO enterprise withoutknowledge of its illegal activities would be inconsistent withthe legislative intent of the Act. The primary purpose of theRICO statute is to provide an additional tool to combatorganized crime. See Sedima, SPRL v. Imrex Co., 473 U.S. 479,105 S.Ct. 3275, 3288, 87 L.Ed.2d 346 (1985) (Powell, J.,dissenting). The reach beyond "traditional organized crime andcomparable ongoing structured criminal enterprises was intendedto be incidental and to exist only to the extent necessary tomaintain the constitutionality of [the] statute." ABA, Reportof the Ad Hoc Civil RICO Task Force 124 (1985); see alsoSedima, 105 S.Ct. at 3289 (Powell, J., dissenting). Ifliability could be based on assistance given to a RICOenterprise without knowledge of the illegal activities of theenterprise, the reach of the statute beyond traditionalorganized crime would be far more than "incidental." Under sucha standard, almost any person or entity employed or retained bythe principal of a RICO enterprise might be considered a"participant."

8. Although these cases used an aiding and abetting theory,the RICO statute does not specifically provide for it. Thiscourt does not address whether aiding and abetting is properlyapplied in the RICO context, except to the extent that it ishelpful in determining the scope of the phrase "to conduct orparticipate, directly or indirectly, in the conduct of suchenterprise's affairs through a pattern of racketeering."18 U.S.C. § 1962(c).

9. If the plaintiffs chose to amend their complaint in anattempt to properly bring Friedlander Gaines into the RICOcount, the court notes that they must be able to assert to thebest of their information and belief after reasonable inquirythat it is well grounded in fact that Friedlander Gaines hadat least a general awareness or knowledge of the illegalactivities of the RICO enterprise. See Fed.R.Civ.P. 11.Moreover, such an amendment would have to allege conducting orparticipating in a RICO enterprise in such a manner that itwould "give the defendant fair notice of what the plaintiff[s]claim is and the grounds upon which it rests." Conley v.Gibson, 355 U.S. 41, 47, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957).

10. The relevant part of section 1962(d) states:

(d) It shall be unlawful for any person to conspire toviolate any of the provisions of . . . this section.

11. Defendant Friedlander Gaines has submitted twoaffidavits upon which the court could rely to grant its motionfor summary judgment with respect to this claim. Theaffidavits indicate that members of Friedlander Gaines had noknowledge of the identity of any of the plaintiffs until theyfiled this lawsuit, and that they never had any communicationwith any of the plaintiffs. Affidavit of Jules Levine ¶¶ 5, 6;Affidavit of Joseph S. Rosenthal ¶¶ 5, 6. While these factsmight be taken as evidence that Friedlander Gaines did notintend to create a direct obligation to the plaintiffs asthird-party beneficiaries, summary judgment is not appropriateat this time because the plaintiffs have not had an opportunityfor discovery on these issues, and because the issues are oneswhere the facts are within the knowledge and control ofdefendants. See In re G. & A. Books, Inc., 770 F.2d 288, 295(2d Cir. 1985) (party opposing motion converted to a motion forsummary judgment should be given reasonable opportunity to meetfacts outside the record); see also Fed.R.Civ.P. 56(f).

12. Even though a judgment on the pleadings is normally afinal judgment, see 5 C. Wright & A. Miller, Federal Practice &Procedure § 1372, at 706 (1969), in this case the court willallow the plaintiffs the same rights as if this were a motionto dismiss under Rule 12(b)(6). Rule 12(h)(2) merely provides adevice which preserves the defense of failure to state a claimafter the pleadings close. Id. § 1367, at 689. As such, itwould make more sense for it to be raised under its own namerather than as a motion for judgment on the pleadings, id. §1369, at 701, since Rule 12(c) was really designed as "a meansof disposing of cases when the material facts are not indispute . . . and only questions of law remain," id. § 1367, at685, and was not designed to raise the procedural defectsusually raised by a 12(b) motion.

RULING ON MOTIONS FOR SUMMARY JUDGMENT, FOR JUDGMENT ON THE PLEADINGS AND TO DISMISS THE COMPLAINT

This case arises out of transactions relating to the privateplacement of various limited partnership interests insatellite communication facilities. There are 67 plaintiffswho purchased interests in one or more of three limitedpartnerships. The defendants, who were involved in thetransactions in various different ways, are a law firm, twopublic accounting firms, a lawyer/promoter, two namedcorporations, and unknown defendants designated as "John Does1-25" and "XYZ Corporations 1-25." The plaintiffs claim thatthe defendants were part of a scheme to defraud them,violating the federal securities laws, 15 U.S.C. § 77l, 77q,and 78j, the federal racketeering statute (RICO), 18 U.S.C. § 1961et seq., and state statutes and common law.

Defendants Peat, Marwick & Mitchell ("Peat Marwick") andZarrow, Zarrow & Klein moved to dismiss the original complainton a variety of grounds. In a ruling dated April 28, 1986,this court granted that motion and gave plaintiffs leave toamend the complaint within 30 days. On May 28, 1986,plaintiffs filed an amended complaint.

Defendant Peat Marwick subsequently moved to dismiss theamended complaint on a variety of grounds including failure toplead fraud with the amount of particularity required by Rule9(b), lack of a private right of action under section 17(a),and failure to state a claim under RICO. That motion wasgranted on December 23, 1986. See Andreo v. Friedlander,Gaines, Cohen, Rosenthal & Rosenberg, 651 F. Supp. 877 (D.Conn.1986).

Defendant Friedlander, Gaines, Cohen, Rosenthal & Rosenberg("Friedlander Gaines") has moved for summary judgment, forjudgment on the pleadings, and for dismissal of the complainton a number of grounds, including failure to plead fraud withparticularity, failure to state a claim under the securitieslaws and RICO, failure to comply with the statute oflimitations, and failure to state a claim under either of twodifferent state law theories. Although that motion was filedbefore the complaint was amended, counsel for the defendanthas asked that it be applied to the amended complaint. Oralargument on the motion was heard on January 20, 1987.

Allegations

The plaintiffs claim that the defendants engaged in a schemeto defraud them through three limited partnerships: Star LinkAssociates ("Star Link"), Sky Link Associates ("Sky Link") andGalactic Link Associates ("Galactic"). The purpose of theselimited partnerships was to build and operate ground stationlinks for satellite communications. The partnerships wereorganized by Benjamin Rabin, who was assisted in various waysby the other defendants.

Although the amended complaint contains many general andconclusory allegations as to the unlawful conduct of thedefendants, it is far more particular than the originalcomplaint. It spells out some specifics as to the role of thevarious defendants in the allegedly fraudulent scheme. Underthe heading "Role of Friedlander Gaines," plaintiffs allegethatFriedlander Gaines drafted the offering memoranda and taxopinions for each of the three limited partnerships. AmendedComplaint ¶¶ 41-46. They also allege that these documents usedgrossly erroneous financial projections and were substantialfactors in the sale of the limited partnership interests toplaintiffs. Id. ¶ 47.

Other specific allegations about the role of FriedlanderGaines are scattered throughout the complaint. There areallegations that Friedlander Gaines represented in theoffering memoranda that the debt assumption and conversionagreements were solely for tax purposes, id. ¶ 35; that itrecklessly failed to inquire about and disclose numerousirregularities in the documents and transactions relating toeach of the three limited partnerships, id. ¶¶ 61-63; that itknowingly or recklessly failed to disclose that thepartnerships would have revenue shortfalls, id. ¶ 65a; and thatit knowingly or recklessly failed to make inquiries aboutbusiness experience and capitalization and about the source,nature or independence of appraisals, which inquiries wouldhave exposed the scheme to defraud, id. ¶ 65b.

In addition, plaintiffs also allege on information andbelief that Friedlander Gaines failed to disclose that thelimited partnership certificate for Sky Link was never filed,and that it had obtained information which demonstrated thatits opinion letter relied upon by plaintiffs was wrong,id. ¶ 65c.

The final set of allegations specific to Friedlander Gainesare contained in a breach of contract count. There, plaintiffsallege that they were intended third-party beneficiaries of acontract between Rabin and Friedlander Gaines, and thatFriedlander Gaines breached the contract by failing to file alimited partnership certificate for Sky Link and/or failing toinform plaintiffs that such a certificate had not been filed,as well as by other unspecified actions. Id. ¶¶ 102-106.

Discussion

Although this motion has been brought as a motion forsummary judgment, for judgment on the pleadings and to dismissthe complaint, it will be treated as a motion for judgment onthe pleadings. Summary judgment under Fed.R.Civ.P. 56 would beinappropriate because discovery in this case was stayedpending resolution of the various motions to dismiss. See In reG. & A. Books, Inc., 770 F.2d 288, 295 (2d Cir. 1985) (partyopposing motion converted to a motion for summary judgmentshould be given reasonable opportunity to meet facts outsidethe pleadings), cert. denied, ___ U.S. ___, 106 S.Ct. 1195, 89L.Ed.2d 310 (1986); see also Fed.R.Civ.P. 56(f).1 Treatingthis motion as a motion to dismiss under Fed.R.Civ.P. 12(b) isalso inappropriate because it would be untimely. Such a motionis to be filed before a defendant answers the complaint,Fed.R.Civ.P. 12(b), but Friedlander Gaines filed this motionafter its answer. However, after the pleadings have been closedthe defense of failure to state a claim may still be raisedunder Rule 12(h)(2) on a motion for judgment on the pleadings.

The standards which apply to a motion authorized by Rule12(h)(2) raising the defense of failure to state a claim arethe same as the standards which apply to a Rule 12(b)(6)motion. Shapiro v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,353 F. Supp. 264, 268 (S.D.N.Y. 1972), aff'd onother grounds, 495 F.2d 228 (2d Cir. 1974); 5 C. Wright & A.Miller, Federal Practice and Procedure § 1367, at 688 (1969).Thus, grounds for dismissing a complaint under Rule 12(b)(6)are grounds to enter judgment on the pleadings under Rule12(h)(2) and Rule 12(c). In addition, all allegations that areproperly pleaded must be treated as if they were true and mustbe construed in favor of the nonmovant. See Shapiro v. MerrillLynch, Pierce, Fenner & Smith, Inc., 495 F.2d 228, 231 (2d Cir.1974); 5 C. Wright & A. Miller, supra, § 1368, at 690.

The court will first consider the sufficiency of thesecurities claims against Friedlander Gaines, followed by anexamination of the RICO claims, the statute of limitationarguments, and the state law claims.

I. Sufficiency of Fraud Allegations Under Section 10(b) of the 1934 Act

A. Standards

The thrust of plaintiffs' claim against Friedlander Gainesis that it aided and abetted Rabin and his associates in theallegedly fraudulent scheme. The elements for an aiding andabetting claim under section 10(b) of the 1934 Act are (1)that there be a primary fraud, (2) that the aider and abettorhave "knowledge" of the fraud, and (3) that aider and abettorprovide "substantial assistance" to the achievement of theprimary fraud. IIT, An Int'l Inv. Trust v. Cornfeld,619 F.2d 909, 922 (2d Cir. 1980) (Friendly, J.); see also Decker v.Massey-Ferguson, Ltd., 681 F.2d 111, 119 (2d Cir. 1982). Theknowledge element of aiding and abetting may be satisfied byreckless disregard of the truth in some circumstances. SeeDecker, 681 F.2d at 119; IIT, 619 F.2d at 923.

These elements must be pleaded with the particularityrequired by Rule 9(b) of the Federal Rules of CivilProcedure.2 Andreo, 651 F. Supp. at 880; In re CincinnatiGas & Elec. Sec. Litig., 594 F. Supp. 233, 237 (S.D.Ohio 1984);see also Decker, 681 F.2d at 119; IIT, 619 F.2d at 922-27.Thus, the amended complaint must plead the circumstances givingrise to the plaintiffs' aiding and abetting claim. Andreo, 651F. Supp. at 880; Fed.R.Civ.P. 9(b). To properly plead theknowledge element of aiding and abetting, the pleadedcircumstances must include the "events which [plaintiffs]assert give rise to a strong inference that the defendants hadknowledge." Ross v. A.H. Robins Co., 607 F.2d 545, 558 (2d Cir.1979); accord Decker, 681 F.2d at 115 (2d Cir. 1982);see also Connecticut Nat'l Bank v. Fluor Corp., 808 F.2d 957,962 (2d Cir. 1987).

B. Application of the Standards

The amended complaint is specific enough to meet theparticularity requirements of Rule 9(b). It is undisputed thatthe amended complaint sets forth a claim for primary fraudagainst Rabin and his immediate associates with sufficientparticularity. This primary fraud allegedly was substantiallyassisted by Friedlander Gaines' inclusion of false informationand/or omission of material information from drafts ofoffering memoranda and tax opinions. Plaintiffs have spelledout these omissions in detail,3 and have alleged that theywere both significant and material. Thus, the complaintsufficiently alleges the first and third elements of aidingand abetting.

The allegations with respect to the knowledge element ofaiding and abetting are more problematic. The amendedcomplaintcontains only conclusory allegations that Friedlander Gainesknew that erroneous information was included in the draftmemoranda and tax opinions and that material facts wereomitted. It does not set forth the factual basis for aninference of knowledge, and, as a result, the amendedcomplaint has not alleged knowledge with the necessaryparticularity. See Ross, 607 F.2d at 558; see also Decker, 681F.2d at 115.

Alternatively, reckless disregard of the truth can, in somecircumstances, satisfy the knowledge element of aiding andabetting. See Decker, 681 F.2d at 119; IIT, 619 F.2d at 923.Friedlander Gaines argues that the circumstances of this casedo not justify applying the recklessness standard for theknowledge element of aiding and abetting. It asserts that sinceit only prepared drafts of the offering memoranda and taxopinions and that it had no personal contact with any of theplaintiffs, it was not under a fiduciary duty to theplaintiffs, and therefore can be held liable only if it actedwith knowledge of the false information or material omissions.

The existence of a fiduciary duty, however, is not aprerequisite for the application of the recklessness standardto satisfy the knowledge element of an aiding and abettingclaim under the securities laws. Although the Second Circuithas not yet ruled on the issue, Sirota v. Solitron Devices,Inc., 673 F.2d 566, 575 (2d Cir.), cert. denied, 459 U.S. 838,103 S.Ct. 86, 74 L.Ed.2d 80 (1982), Judge Lasker has held thatattorneys can be held liable as aiders and abettors where it isreasonably foreseeable that potential investors will rely ondocuments they draft, if they omit material information fromthose documents or include erroneous information in recklessdisregard for the truth. Morgan v. Prudential Groups, Inc.,527 F. Supp. 957, 961 (S.D.N.Y. 1981), aff'd mem., 729 F.2d 1443 (2dCir. 1983); see also In re Investors Funding Corp. Sec. Litig.,523 F. Supp. 550, 558 (S.D.N.Y. 1980) ("recklessness issufficient to establish scienter [for aiding and abetting)where plaintiffs are third parties whose reliance upon theaccountant's audit or opinion letter is reasonablyforeseeable"); Olek v. Fischer, [1979] Fed. Sec.L.Rep. (CCH) ¶96,898, at 95,699 (S.D.N.Y. 1979), aff'd on other grounds,623 F.2d 791 (2d Cir. 1980). This standard of "reasonableforeseeability" is used in determining the scope of similarduties under common law. See Mallis v. Bankers Trust Co.,615 F.2d 68, 82 (2d Cir. 1980) (Friendly, J.) (majority common lawrule in American jurisdictions is that in determining the scopeof an accountant's duty to not make negligentmisrepresentations, the critical factor is the parties'reasonable expectations, not their formal legal relationship),cert. denied, 449 U.S. 1123, 101 S.Ct. 938, 67 L.Ed.2d 109(1981); Restatement (Second) of Torts § 552(2) (negligentsupplier of erroneous information may be held liable for thirdparty's reliance if supplier knew the information would beconveyed to third parties for their benefit and guidance);Prosser, Misrepresentation and Third Persons, 19 Vand.L.Rev.231, 239 (1966) (tendency to treat cases where party knows thatrecipient of information may pass it on to a group to inducereliance the same as cases where party intends that recipientrely on information); Note, Accountants' Liabilities for Falseand Misleading Financial Statements, 67 Colum L.Rev. 1437,1441-44 (1967) (common law imposes liability on accountantsthat recklessly prepare financial statement relied upon byinvestors).

The court agrees with Judge Lasker that attorneys should beheld accountable if they draft certain documents forsecurities offerings with reckless disregard of the truth.This does not mean that attorneys who draft such documentshave an affirmative duty to verify all information provided bytheir clients, or to discover if any pertinent informationmight have been omitted. Rather, those attorneys have aresponsibility to not act in reckless disregard of the truthwhen using the information provided by clients in performingtheir professional duties and preparing offering memoranda andtax opinions.

Friedlander Gaines' reliance on Chiarella v. United States,445 U.S. 222, 100 S.Ct. 1108, 63 L.Ed.2d 348 (1980), ismisplaced.In that case Chiarella, an employee of a financial printer,was convicted of securities fraud. From documents given to hisemployer, he had deduced before the information was publicthat certain companies were going to be the subject offorthcoming takeover bids. He then used this information inpurchasing stock of the target companies without disclosing itto the sellers. The Supreme Court reversed the conviction,finding that the defendant had no duty to disclose theinformation to the sellers.

Chiarella is distinguishable from Morgan and the otherauthority cited with it because Chiarella involved apurchaser's nondisclosure, rather than nondisclosures by aparty that helped prepare documents to be given to investors.While it is not reasonably foreseeable that a seller would relyon the disclosures of a purchaser (absent some specialrelationship), it is reasonably foreseeable that investorswould rely on the expertise of the professionals that draftoffering memoranda and tax opinions. As a result, suchprofessionals should be under the obligation to not act inreckless disregard of the truth when they undertake thedrafting of such documents.

In the present case it was foreseeable that the plaintiffs,as investors in the various securities for which FriedlanderGaines drafted offering memoranda and tax opinions, would relyon the drafts prepared by Friedlander Gaines. Therefore,allegations that Friedlander Gaines omitted materialinformation from the documents in reckless disregard of thetruth are sufficient to meet the knowledge element of anaiding and abetting claim. Since those allegations are spelledout in great detail,4 they also meet the particularityrequirement of Rule 9(b). Of course, whether that claim can beproven at trial is another matter, which would requireevidence that the conduct alleged was in fact highlyunreasonable and an extreme departure from professionalconduct. See Decker, 681 F.2d at 120.5

II. Sufficiency of RICO Allegations

Friedlander Gaines also argues that its role in draftingoffering memoranda and tax opinions, as alleged in the amendedcomplaint, is not sufficient to state a RICO claim against it.The two relevant sections of RICO will be considered in turn.

A. Section 1962(c)

Section 1962(c) of RICO provides:

(c) It shall be unlawful for any person employed by 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.

18 U.S.C. § 1962. Thus, in order to state a claim againstFriedlander Gaines under this provision, plaintiffs must allegethat Friedlander Gaines conducted or participated in conductinga RICO enterprise through a pattern of racketeering activity.See Sedima, SPRL v. Imrex Co., 473 U.S. 479, 105 S.Ct. 3275,3285, 87 L.Ed.2d 346 (1985). Racketeering activity is definedto include specific predicate offenses, including mail fraudindictable under 18 U.S.C. § 1341, wire fraud indictable under18 U.S.C. § 1343, and securities fraud punishable under variousfederal securities statutes. 18 U.S.C. § 1961(1). Thesepredicate acts involving fraud must be pleaded in conformitywith the particularity requirements ofRule 9(b) of the Federal Rules of Civil Procedure.Andreo, 651 F. Supp. at 882 (citing cases). The court will firstconsider whether the amended complaint states a RICO cause ofaction in general, and then whether Friedlander Gaines issufficiently implicated for the amended complaint to state aRICO claim against it.

1. Sufficiency of the Claim in General

There are a variety of predicate acts alleged in the amendedcomplaint that might support a RICO claim. The allegationsconcerning mail fraud and wire fraud can be disposed of at theoutset as not supporting a RICO claim because they are notpleaded with the necessary particularity. The complaint merelyalleges that "defendants" used the mail, Amended Complaint¶ 26, that "each of the defendants" transmitted "numerousmaterials through the mails in interstate commerce," id. ¶90(b), and that "each of the defendants" transmitted "privateoffering memoranda and other information" by wire, id. ¶ 90(c).Such conclusory allegations are insufficient. Andreo, 651F. Supp. at 882; see also Decker, 681 F.2d at 114; Ross, 607F.2d at 557. They do not specify which defendants used mail orwire services, what was transmitted, when it was transmitted,or to whom it was sent. See Zerman v. Ball, 735 F.2d 15, 22(2d Cir. 1984); see also Luce v. Edelstein, 802 F.2d 49, 54 (2dCir. 1986); Andreo, 651 F. Supp. at 880.

It is undisputed, however, that the amended complaintalleges securities fraud with respect to Rabin and hisimmediate affiliates with sufficient particularity to meet therequirements of Rule 9(b). The question, therefore, is whetherthese security fraud allegations, combined with otherallegations in the amended complaint, are sufficient to statea RICO claim.

For relief under RICO, plaintiffs must demonstrate thatdefendants were involved in an "enterprise" and that there wasa "pattern of racketeering." An enterprise for purposes ofsection 1962 is "`a group of persons associated together fora common purpose of engaging in a course of conduct' and `isproved by evidence of an ongoing organization, formal orinformal, and by evidence that the various associates functionas a continuing unit.'" United States v. Ianniello,808 F.2d 184, 191 (2d Cir. 1986) (quoting United States v. Turkette,452 U.S. 576, 583, 101 S.Ct. 2524, 2528, 69 L.Ed.2d 246 (1981)).

The allegations in the amended complaint sufficiently allegea RICO-type enterprise. Though the allegation in Count III isconclusory, Amended Complaint ¶ 88, it is supported by numerousother specific allegations regarding the relationships betweenthe defendants and the actions they took. For example, theamended complaint alleges that Rabin, the main principal in thealleged fraud, was the sole shareholder of ContinentalConsultants Corporation, which was an 80% owner of PrimeNetwork, Inc., which, in turn, owned Satellite CommunicationsNetwork, Inc., which was the general partner in the threelimited partnerships. Id. ¶ 22. Together with otherorganizations and individuals, these corporations allegedlyworked together as a continuing unit to promote fraudulentsecurities and to siphon assets out of the limitedpartnerships. See Amended Complaint ¶ 89.

The case law as to what constitutes a "pattern ofracketeering" is somewhat more confusing. The recent SupremeCourt decision in Sedima, SPRL v. Imrex Co., 473 U.S. 479, 105S.Ct. 3275, 87 L.Ed.2d 346 (1985), however, casts some light onthis requirement of a RICO claim. There, the Court indicatedthat a pattern of racketeering requires "at least two acts ofracketeering activity" and that the legislative history shows arequirement of "continuity plus relationship which combines toproduce a pattern." Id. 105 S.Ct. at 3285 n. 14. In addition,the Court noted that the definition of a pattern ofracketeering activity defined in the criminal part of RICOmight be useful in interpreting the phrase as used in the civilpart of RICO. Id. The criminal definition of pattern ofracketeering includes "acts that have the same or similarpurposes, results, participants, victims or methods ofcommission, or otherwise are interrelated by distinguishingcharacteristics and are not isolated events." 18 U.S.C. § 3575(e).These passages require"at least two acts that have a common purpose of furthering acontinuing criminal enterprise." Ianniello, 808 F.2d at 192.

Under these standards, the amended complaint alleges apattern of racketeering. It claims that three limitedpartnership offerings were undertaken by the same parties withthe same intent to defraud on three different occasions. Thus,there were more than two predicate acts with common purposes,results, participants, and methods of commission, whichallegedly furthered the continuing RICO enterprise. The factthat there were many different victims rather than the samefew victims is of no consequence. It merely demonstrates thatthe scheme was used against different people, not that apattern did not exist.

2. Sufficiency of the Claim Against FriedlanderGaines

Having determined that the amended complaint generallystates a claim for violation of RICO, it must next beconsidered whether the amended complaint states a RICO claimspecifically against Friedlander Gaines. To be implicated inthe allegations of a scheme to defraud outlined above,Friedlander Gaines must have conducted the enterpriseconducting the pattern of racketeering, or participated in it.18 U.S.C. § 1962(c).

The key to deciding whether the amended complaint states aRICO claim against Friedlander Gaines lies in the terms"conduct" and "participate." These terms are not defined inthe RICO statute. However, in common usage they imply at leasta general awareness or knowledge of the activity one"conducts" or in which one "participates." A person thatassists another in some unknown activity does not conduct theactivity and is not a participant. Thus, Friedlander Gainesconducted or participated in the enterprise conducting apattern of racketeering only if it assisted with knowledge ofthe illegal activities. Mere reckless disregard of the truthwhen drafting documents does not justify a finding of RICOcivil liability on the basis that the party participated inthe illegal enterprise. See O'Brien v. Dean Witter Reynolds,Inc., [1984 Transfer Binder] Fed.Sec.L.Rep. ¶ 91,509, at 98,562(D.Az. 1984) [Available on WESTLAW-DCT database] ("Civilliability under RICO requires knowing or intentionalparticipation and not mere negligence or recklessness."); seealso Moss v. Morgan Stanley, Inc., 553 F. Supp. 1347, 1362(S.D.N.Y.) (no participation in RICO scheme where defendant wasallegedly negligent or reckless in aiding and abetting), aff'don other grounds, 719 F.2d 5 (2d Cir. 1983), cert.denied, 465 U.S. 1025, 104 S.Ct. 1280, 79 L.Ed.2d 684(1984).6

This interpretation of the word "participate" is supportedby the case law on the doctrine of criminal aiding andabetting. The classic statement of the elements of criminalaiding and abetting comes from Nye & Nissen v. United States,336 U.S. 613, 69 S.Ct. 766, 93 L.Ed. 919 (1949). There, theCourt, quoting Judge Learned Hand, stated that "[i]n order toaid and abet another to commit a crime it is necessary that adefendant `in some sort associate himself with the venture,that he participate in it as in something that he wishes tobring about, that he seek by his action to make it succeed.'"Id. at 619, 69 S.Ct. 769 (quoting United States v. Peoni,100 F.2d 401, 402 (2d Cir. 1938)); accord United States v. Tyler,758 F.2d 66, 70 (2d Cir. 1985); United States v. DeFiore,720 F.2d 757, 764 (2d Cir. 1983), cert. denied, 467 U.S. 1241,104 S.Ct. 3511, 82 L.Ed.2d 820 (1984). For a defendant to"participate" in a crime as an aider and abettor, "it must beproved that the defendant consciously assisted the commissionof the specific crime in some active way." United States v.Dickerson, 508 F.2d 1216, 1217-18 (2d Cir. 1975). Thus, merereckless assistance is not sufficient to constituteparticipation as an aider and abettor. See Moss, 553 F. Supp. at1362; see also United States v. Newman, 490 F.2d 139, 142-43(3d Cir. 1974) (involvement in activities without knowing oftheir criminal objective did not constitute aiding andabetting.)7

The construction of section 1962(c) as requiring at least ageneral awareness or knowledge of the illegal activities ofthe enterprise is consistent with the reasoning and results ofother RICO cases not directly addressing this issue. Forexample, some cases have found that liability under RICOrequires more than mere membership in an enterprise, orassociation with it. United States v. Castellano, 610 F. Supp. 1151,1165 (S.D.N.Y. 1985); United States v. Russotti,555 F. Supp. 1236, 1241 (W.D.N.Y.), aff'd on other grounds,717 F.2d 27 (2d Cir. 1983), cert. denied, 465 U.S. 1022, 104 S.Ct. 1273,79 L.Ed.2d 678 (1984). In addition, cases that have imposedliability for aiding and abetting a RICO violation haverequired both knowledge of the illegal activity and substantialassistance in it. Laterza v. American Broadcasting Co.,581 F. Supp. 408, 412 (S.D.N.Y. 1984); Kranzdorf v. Green,582 F. Supp. 335, 337 (E.D.Pa. 1983).8

Under this standard, the amended complaint does not state aRICO claim against Friedlander Gaines. It alleges thatFriedlander Gaines conducted the enterprise by aiding andabetting the securities fraud, by committing mail fraud, andby committing wire fraud. Amended Complaint ¶ 90. Of theseallegations, the only ones that meet the particularityrequirements of Rule 9(b) are those which allege aiding andabetting through a reckless disregard of the truth in preparingdrafts of offering memoranda and tax opinions. Thoseallegations, however, do not amount to an allegation thatFriedlander Gaines conducted the alleged RICO enterprise orparticipated in it because they do not allege that FriedlanderGaines assisted the primary fraud with knowledge thereof.9

B. Section 1962(d)

Even if Friedlander Gaines did not participate in thealleged RICO violation, under section 1962(d)10 it may beheld liable if it conspired to do so. For liability under thatsection, the offending party "must have objectively manifestedan agreement to participate, directly or indirectly, in theaffairs of an enterprise through the commission of two or morepredicate acts." Andreo, 651 F. Supp. at 883; Laterza v.American Broadcasting Co., 581 F. Supp. 408, 413 (S.D.N.Y.1984); accord United States v. Cauble, 706 F.2d 1322, 1341 (5thCir. 1983), cert. denied, 465 U.S. 1005, 104 S.Ct. 996, 79L.Ed.2d 229 (1984); United States v. Melton, 689 F.2d 679, 683(7th Cir. 1982); see also United States v. Ruggiero,726 F.2d 913, 921 (2d Cir.), cert. denied, 469 U.S. 831, 105 S.Ct. 118,83 L.Ed.2d 60 (1984).

The amended complaint does not sufficiently allege a claimfor conspiracy under RICO. Although Rule 9(b) does not applyto claims of conspiracy because it is not one of theenumerated averments, see Alfaro v. E.F. Hutton & Co.,606 F. Supp. 1100, 1117 (E.D.Pa. 1985), plaintiffs must neverthelessprovide some factual basis for the legal conclusion that aconspiracy existed, id.; accord Angola v. Civiletti,666 F.2d 1, 4 (2d Cir. 1981); see also Ellentuck v. Klein, 570 F.2d 414,426 (2d Cir. 1978); Powell v. Workmen's Compensation Board,327 F.2d 131, 137 (2d Cir. 1964); Andreo, 651 F. Supp. at 883. Theamended complaint merely alleges that Friedlander Gaines "didunlawfully, wilfully, and knowingly conspire together [withother defendants] to violate 18 U.S.C. § 1692(c)."Amended Complaint ¶ 92. Although other parts of the amendedcomplaint set forth in detail various alleged acts or omissionsof Friedlander Gaines, they do not allege any objectivemanifestation of an agreement to participate in a RICOenterprise through the commission of predicate acts, nor dothey set forth the facts upon which the conspiracy claim isbased. Mere conclusory allegations such as these areinsufficient. Alfaro, 606 F. Supp. at 1117; see also Laterza,581 F.2d at 413 (allegations of an "unspecified role in anundetailed conspiracy" are insufficient).

III. Statute of Limitations

Defendant Friedlander Gaines also raises a statute oflimitations defense. Such a defense was raised in an earliermotion to dismiss brought by Peat Marwick, and the court'sruling with respect to that motion isdispositive here. After reviewing the allegations in thecomplaint, this court found:

[Plaintiffs] have cited acts of concealment by the defendants, including sending misleading status reports to the plaintiffs, and misrepresenting the gravity of certain IRS audits. Plaintiffs' assertions that defendants engaged in a common course of conduct to conceal the fraud may or may not be valid. At this early stage, however, they suffice to bring the equitable tolling doctrine into play. It is not clear from the face of the complaint that this action is time-barred; therefore, the statute of limitations alone would not be grounds for dismissing this claim.

Andreo v. Friedlander, Gaines, Cohen, Rosenthal & Rosenberg,Civ. No. H-85-551, at 19 (April 28, 1986) (citation omitted)[Available on WESTLAW, DCT database].

The amended complaint's allegations of concealment do notmaterially differ from those contained in the first complaint,and Friedlander Gaines has not presented any reasons why thisearlier decision should be reconsidered. Thus, since theequitable tolling doctrine applies with respect to plaintiffs'federal claims, id. at 18, the allegations are still sufficientto toll the statute of limitations.

This court's earlier ruling is also dispositive with respectto the statute of limitations defense as applied to the stateclaims. Under Conn.Gen.Stat. § 52-595, fraudulent concealmenttolls the statute of limitation. There is no reason why thecourt's earlier finding that plaintiffs sufficiently allegedsuch fraudulent concealment to toll the statute of limitationswith respect to the federal claims should not be applied to thestate claims as well. Therefore, at this early stage of thelitigation, the court considers the statute of limitationstolled for the state claims.

IV. State Law Claims

Friedlander Gaines also raises specific arguments withrespect to plaintiffs' state claims against it. Its argumentsas to the third-party beneficiaries theory, the ConnecticutUnfair Trade Practices Act (CUTPA), and pendent jurisdictionwill be considered in turn.

A. Third-party Beneficiary Theory

Friedlander Gaines argues that plaintiffs' amended complaintfails to state a claim against it under the theory that theplaintiffs were third-party beneficiaries to a contractbetween Rabin and Friedlander Gaines. In order to be athird-party beneficiary under Connecticut law, the parties tothe contract must have intended that the promisor would assumea direct obligation to the third parties. Knapp v. New HavenRoad Construction Co., 150 Conn. 321, 325, 189 A.2d 386 (1963).This intent is to be determined from the terms of the contractread in light of the circumstances attending its making,including the motives and purposes of the parties. Id. (citingColonial Discount Co. v. Avon Motors, Inc., 137 Conn. 196, 201,75 A.2d 507 (1950)). It is not necessary that in every instancethere be express language creating the direct obligation. Id.at 326, 189 A.2d 386.

The allegations in the amended complaint are sufficient tostate a claim for breach of contract as third-partybeneficiaries. Plaintiffs allege the existence of a contractbetween Rabin and Friedlander Gaines, that they were theintended third-party beneficiaries, that there was a breach ofcontract, and that the breach injured them. Amended Complaint¶¶ 102-105. While the amended complaint does not set forth anyspecific language of the contract or other evidence tending toshow that the parties intended to create a direct obligation toplaintiffs, that is a matter of proof not of pleading.11Under the FederalRules the amended complaint need only set forth a short andplain statement of the claim, see Fed.R.Civ.P. 8(a), which itclearly does.

B. Connecticut Unfair Trade Practices Act

Friedlander Gaines also argues that plaintiffs fail to statea claim under CUTPA. In a supplemental memorandum it directedthis court's attention to the recent Connecticut Supreme Courtdecision in Russell v. Dean Witter Reynolds, Inc.,200 Conn. 172, 510 A.2d 972 (1986). In that case, the court reversed theaward of damages that were based on CUTPA, id. at 184,510 A.2d 972, holding that CUTPA does not apply to the purchase and saleof securities. Id. at 175, 510 A.2d 972.

Russell's interpretation of the scope of CUTPA, of course, isbinding on this court. Since the plaintiffs claim that thealleged fraudulent conduct involved the sales of securities,Amended Complaint ¶ 4, they do not have a claim under CUTPA.

C. Pendent Jurisdiction

Friedlander Gaines argues that the pendent state claimsagainst them should be dismissed because the federal claimsare to be dismissed. Pendent jurisdiction is a doctrine ofdiscretion. United Mine Workers v. Gibbs, 383 U.S. 715, 726, 86S.Ct. 1130, 1139, 16 L.Ed.2d 218 (1966). Where the federalclaims are dismissed before trial, the state claims shouldgenerally be dismissed as well. Id.; Nolan v. Meyer,520 F.2d 1276, 1280 (2d Cir.) (retention of pendent state law claimafter dismissal of federal claim under Rule 12(b)(6) probablywould be an abuse of discretion), cert. denied, 423 U.S. 1034,96 S.Ct. 567, 46 L.Ed.2d 408 (1975).

From these principles it follows that the state claimsagainst Friedlander Gaines should not be dismissed. Since theamended complaint sets forth a federal cause of action againstFriedlander Gaines, it is appropriate for this court toconsider state claims arising out of the same occurrences.This court finds that it is in the interest of judicialeconomy, convenience and fairness to try the federal and stateclaims against Friedlander Gaines in the same case.

V. Section 17(a) of the 1933 Securities Act

One final argument merits consideration. Friedlander Gaineshas renewed the argument made in Peat Marwick's first motionto dismiss that section 17(a) of the 1933 Act, 15 U.S.C. § 77q(a),does not create a private right of action. After notingthat the issue is very controversial, this court declined totake a position on it in an earlier ruling because even ifthere was a private right of action, plaintiffs' complaint wasnot specific enough with respect to that claim. Andreo, CivilNo. H-85-551, at 27-29 (April 28, 1986). However, now that theamended complaint is particular enough to state a securitiesclaim against Friedlander Gaines, this court must now resolvethe issue for purposes of this case.

In Kirshner v. United States, 603 F.2d 234 (2d Cir. 1978),cert. denied, 442 U.S. 909, 99 S.Ct. 2821, 61 L.Ed.2d 274(1979), the Second Circuit squarely held that there is aprivate right of action under section 17(a). Even though theSupreme Court has noted that the issue is unsettled, see, e.g.,Herman & MacLean v. Huddleston, 459 U.S. 375, 378 n. 2, 103S.Ct. 683, 685 n. 2, 74 L.Ed.2d 548 (1983), and some notedjurists and scholars have criticized the Second Circuit rule,see, e.g., Yoder v. Orthomolecular Nutrition Institute,751 F.2d 555, 559 n. 3 (2d Cir. 1985) (Friendly, J.), Kirshner isstill the law in this Circuit. Thus, until such time as therationale of Kirshner is overruled, plaintiffs in this circuithave a private right of action under section 17(a). See UnitedStates v. Ianniello,808 F.2d 184, 190 (2d Cir. 1986) (court of appeals bound bydecision of earlier panel unless rationale overruled by an enbane panel or the Supreme Court).

Conclusion

For the foregoing reasons, Friedlander Gaines' motion forjudgment on the pleadings is granted in part and denied inpart.12 The amended complaint states a claim againstFriedlander Gaines for aiding and abetting a securities fraud.That claim is pleaded with sufficient particularity to satisfyRule 9(b). The amended complaint also states a claim againstFriedlander Gaines for breach of contract to the detriment ofthird-party beneficiaries. It does not, however, state a RICOclaim because it does not sufficiently allege that FriedlanderGaines conducted the RICO enterprise, or participated in it.While Friedlander Gaines may have assisted the scheme bypreparing documents in reckless disregard of the truth, suchassistance must be undertaken with at least general knowledgeor awareness of the illegal activities to constituteconducting a RICO enterprise or participating in it.Furthermore, the amended complaint does not state a claimagainst Friedlander Gaines for violation of the ConnecticutUnfair Trade Practices Act because that act does not apply tosales of securities. Thus, Counts III and IX of the amendedcomplaint are dismissed as to defendant Friedlander Gaines. Inaddition, since Connecticut law is clear as to the scope ofCUTPA, Count IX is dismissed as to the other defendants on thecourt's own motion.

SO ORDERED.

1. Even if the court considered this a proper motion forsummary judgment, the motion would be denied. As thediscussion that follows will show, there are genuine issues ofmaterial fact in dispute. The affidavits submitted byFriedlander Gaines establish facts which are not sufficientfor the legal defenses raised by its papers. For example, theaffidavits establish that Friedlander Gaines only prepareddrafts of offering memoranda and tax opinions, that it had noknowledge of the individual plaintiffs' identities, and thatit had no knowledge of any facts underlying the allegedmisrepresentations. Affidavit of Jules Levine ¶¶ 2, 5, 8;Affidavit of Joseph S. Rosenthal ¶¶ 2, 5, 8. These facts do notestablish that Friedlander Gaines is not liable as an aider andabettor in a securities fraud. As will be explained below,Friedlander Gaines may be held liable as an aider and abettorif it prepared the draft documents in reckless disregard of thetruth, and if it could reasonably foresee that investors suchas plaintiffs would rely on statements made in those drafts.

2. Rule 9(b) states:

In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally.

3. For example, paragraphs 61-63 of the amended complaintallege that Friedlander Gaines recklessly failed to disclosesome 23 different material facts in the three limitedpartnership offering memoranda. These omissions include: thatRabin was in violation of various securities laws for variousoffenses, that Rabin was involved as a defendant in othersecurities litigation, that Rabin had no experience in thecommunications field, that the general partner was involved inself-dealing, that a Rabin affiliate would profit fromconstruction of the earth stations, and that the financingarrangement was not as described in the offeringmemoranda.

4. See supra note 3.

5. At oral argument, counsel for Friedlander Gaines arguedthat the draft memoranda and tax opinions do not state a claimunder the holding of this court in its last ruling on a motionto dismiss because, by their terms, those documents "bespeakcaution." See Andreo, 651 F. Supp. at 881 (relying on Luce v.Edelstein, 802 F.2d 49 (2d Cir. 1986)). The court finds thisargument without merit. Counsel for Friedlander Gaines has notpointed out any terms which bespeak caution, and the court'sreview of the material indicates no such cautionary language.If anything, the language of the documents gives additionalreason for investors to rely on them. For example, the taxopinion indicates that Friedlander Gaines "reviewed thePartnership Agreement, Management Agreement and such otherdocuments and advice as we have deemed necessary to review orconsider."

6. There is a well-established rule in the Second Circuit,which, at first blush, seems inconsistent with this analysis.The rule states that RICO has no independent scienterrequirement; proof of scienter under the law prohibiting thepredicate acts is sufficient to justify liability under RICO.E.g., United States v. Biasucci, 786 F.2d 504, 512 (2d Cir.),cert. denied, ___ U.S. ___, 107 S.Ct. 104, 93 L.Ed.2d 54(1986); United States v. Bagaric, 706 F.2d 42, 53-54 (2d Cir.),cert. denied, 464 U.S. 840, 104 S.Ct. 133, 134, 78 L.Ed.2d 128(1983); United States v. Boylan, 620 F.2d 359, 361-62 (2dCir.), cert. denied, 449 U.S. 833, 101 S.Ct. 103, 66 L.Ed.2d 38(1980). But see United States v. Bledsoe, 674 F.2d 647, 661(8th Cir.) (expressing "grave doubts" about the rule), cert.denied, 459 U.S. 1040, 103 S.Ct. 456, 74 L.Ed.2d 608 (1982).Since the federal securities laws in some circumstances onlyrequire scienter of reckless disregard of the truth, see, e.g.Lanza v. Drexel & Co., 479 F.2d 1277, 1306 (2d Cir. 1973) (enbanc) (under Rule 10(b)-5); Chris-Craft Industries, Inc. v.Piper Aircraft Corp., 480 F.2d 341, 396-98 (2d Cir.) (section14(e)), cert. denied, 414 U.S. 910, 94 S.Ct. 231, 38 L.Ed.2d148 (1973), this rule would seem to allow liability under RICOupon proof of reckless disregard of the truth if the predicateacts are certain types of securities fraud.

These three criminal RICO cases are distinguishable. Theydid not directly face the issue of whether RICO liabilitycould be based on a reckless disregard of the truth. Instead,they were concerned only with whether RICO requires a findingof criminal intent to violate RICO in addition to the criminalintent required by the law prohibiting the predicate act. SeeBiasucci, 786 F.2d at 512; Bagaric, 706 F.2d at 53-54. Thus,the cases did not consider whether the word "participate" insection 1962(c) requires that the defendant have generalknowledge of the illegal activity for liability under RICO. Infact, two of these cases are implicitly consistent with theholding of this court. Those cases approved of juryinstructions that required a finding that the defendant have ageneral knowledge of the illegal activity (though both heldthat part of the instructions requiring specific knowledge wasunnecessary and overly generous to defendants). Biasucci, 786F.2d at 512; United States v. Scotto, 641 F.2d 47, 55-56 (2dCir. 1980).

That liability under RICO should require general knowledgeof the enterprise's racketeering activity even if liabilityunder section 10(b) of the securities law only requiresreckless disregard of the truth is supported by twodifferences between RICO and the securities laws. First,unlike the securities laws, RICO provides for theextraordinary civil relief of treble damages. 18 U.S.C. § 1964(c).Second, section 10(b) of the Securities Exchange Actof 1934, 15 U.S.C. § 78j(b), seeks to prohibit the use of "anymanipulative or deceptive device or contrivance," while section1962(c) of RICO, 18 U.S.C. § 1962(c), seeks to make it unlawfulto "participate, directly or indirectly, in the conduct of suchenterprise's affairs through a pattern of racketeering." Adocument which is issued in reckless disregard of the truth maywell be a "deceptive device" but not a means of"participat[ing]" in a pattern of racketeering.

7. A construction of the terms "conduct or participate"that would include those that assist a RICO enterprise withoutknowledge of its illegal activities would be inconsistent withthe legislative intent of the Act. The primary purpose of theRICO statute is to provide an additional tool to combatorganized crime. See Sedima, SPRL v. Imrex Co., 473 U.S. 479,105 S.Ct. 3275, 3288, 87 L.Ed.2d 346 (1985) (Powell, J.,dissenting). The reach beyond "traditional organized crime andcomparable ongoing structured criminal enterprises was intendedto be incidental and to exist only to the extent necessary tomaintain the constitutionality of [the] statute." ABA, Reportof the Ad Hoc Civil RICO Task Force 124 (1985); see alsoSedima, 105 S.Ct. at 3289 (Powell, J., dissenting). Ifliability could be based on assistance given to a RICOenterprise without knowledge of the illegal activities of theenterprise, the reach of the statute beyond traditionalorganized crime would be far more than "incidental." Under sucha standard, almost any person or entity employed or retained bythe principal of a RICO enterprise might be considered a"participant."

8. Although these cases used an aiding and abetting theory,the RICO statute does not specifically provide for it. Thiscourt does not address whether aiding and abetting is properlyapplied in the RICO context, except to the extent that it ishelpful in determining the scope of the phrase "to conduct orparticipate, directly or indirectly, in the conduct of suchenterprise's affairs through a pattern of racketeering."18 U.S.C. § 1962(c).

9. If the plaintiffs chose to amend their complaint in anattempt to properly bring Friedlander Gaines into the RICOcount, the court notes that they must be able to assert to thebest of their information and belief after reasonable inquirythat it is well grounded in fact that Friedlander Gaines hadat least a general awareness or knowledge of the illegalactivities of the RICO enterprise. See Fed.R.Civ.P. 11.Moreover, such an amendment would have to allege conducting orparticipating in a RICO enterprise in such a manner that itwould "give the defendant fair notice of what the plaintiff[s]claim is and the grounds upon which it rests." Conley v.Gibson, 355 U.S. 41, 47, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957).

10. The relevant part of section 1962(d) states:

(d) It shall be unlawful for any person to conspire toviolate any of the provisions of . . . this section.

11. Defendant Friedlander Gaines has submitted twoaffidavits upon which the court could rely to grant its motionfor summary judgment with respect to this claim. Theaffidavits indicate that members of Friedlander Gaines had noknowledge of the identity of any of the plaintiffs until theyfiled this lawsuit, and that they never had any communicationwith any of the plaintiffs. Affidavit of Jules Levine ¶¶ 5, 6;Affidavit of Joseph S. Rosenthal ¶¶ 5, 6. While these factsmight be taken as evidence that Friedlander Gaines did notintend to create a direct obligation to the plaintiffs asthird-party beneficiaries, summary judgment is not appropriateat this time because the plaintiffs have not had an opportunityfor discovery on these issues, and because the issues are oneswhere the facts are within the knowledge and control ofdefendants. See In re G. & A. Books, Inc., 770 F.2d 288, 295(2d Cir. 1985) (party opposing motion converted to a motion forsummary judgment should be given reasonable opportunity to meetfacts outside the record); see also Fed.R.Civ.P. 56(f).

12. Even though a judgment on the pleadings is normally afinal judgment, see 5 C. Wright & A. Miller, Federal Practice &Procedure § 1372, at 706 (1969), in this case the court willallow the plaintiffs the same rights as if this were a motionto dismiss under Rule 12(b)(6). Rule 12(h)(2) merely provides adevice which preserves the defense of failure to state a claimafter the pleadings close. Id. § 1367, at 689. As such, itwould make more sense for it to be raised under its own namerather than as a motion for judgment on the pleadings, id. §1369, at 701, since Rule 12(c) was really designed as "a meansof disposing of cases when the material facts are not indispute . . . and only questions of law remain," id. § 1367, at685, and was not designed to raise the procedural defectsusually raised by a 12(b) motion.

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