The opinion of the court was delivered by: GREEN
Plaintiffs are a group of investors who purchased limited partnership interests in Rocky Mountain Drilling Associates ("Rocky Mountain") in December 1980. Subsequently, the value of plaintiffs' interests declined precipitously and they commenced this action for damages or recision. Plaintiffs allege that defendants participated in a conspiracy to defraud them, and in so doing violated federal securities and racketeering statutes, as well as various provisions of state law. Upon motion of the defendants,
the Court grants them summary judgment.
Plaintiffs are Dorothy G. Bender, Stanley B. Bender, Howard M. Bender, Stanley Prill, and Jason Shrinsky. On December 26, 1980, plaintiffs purchased limited partnership interests in Rocky Mountain. Rocky Mountain was formed to engage in developmental and exploratory drilling for oil and gas in Ohio and Utah, and to sell, lease, sublicense or otherwise utilize a new, undeveloped drilling device known as the "Terra-Drill."
Rocky Mountain had entered into previously an agreement with Mitchell Petroleum, an exclusive licensee of the Terra-Drill, allowing Rocky Mountain to obtain a five-year sublicense for use of the Terra-Drill in parts of Texas and on Rocky Mountain's property in Utah. Defendant Finesod was the owner of Mitchell Petroleum. The Terra-Drill had been licensed to Mitchell Petroleum by its developer, Tround International, Inc. ("Tround").
Prior to investing in Rocky Mountain, plaintiffs acknowledge that they received and read an Offering Memorandum providing information about Rocky Mountain and indicating the risky nature of the venture. Complaint, paras. 31, 46. The Offering Memorandum consisted of 55 pages of text and 12 exhibits, one of which was a tax opinion letter prepared by Friedman & Shaftan, P.C., a New York law firm (the "Law Firm"). Robert P. Shaftan, who died on January 6, 1986, was at the time a member of the Law Firm.
The Offering Memorandum contained detailed information concerning Rocky Mountain and the transactions underlying its formation and its acquisition of the Terra-Drill sublicense. The Offering Memorandum emphasized clearly the highly speculative nature of the venture. Its cover stated prominently that "THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK." Attachment to Shaftan Defendants' Exhibit A at i. The next page stressed that "INVESTMENT IN THE LIMITED PARTNERSHIP INTERESTS OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK, INCLUDING MATERIAL FEDERAL INCOME TAX RISKS." Id. at ii.
With regard to the exploitation of the Terra-Drill sublicense, prospective investors were warned that the Terra-Drill was "currently in the development stage"; that "[a] prototype of the Terra-Drill ha[d] not yet been developed"; that "no assurance [could] be given that Tround [would] be successful in developing the Terra-Drill, or in reaching Production Capabilities"; and that numerous risk factors made the potential of profit from the device very uncertain. Id. at 1, 10, 13, 22-25, 2N.
In a section entitled "tax risks," the Offering Memorandum warned of the possibility that the Internal Revenue Service ("IRS") would disallow any deduction by Rocky Mountain of the payments it made to Mitchell for the Terra-Drill sublicense, and of the adverse tax consequences this would have for investors. Id. at 15. Further, the Offering Memorandum stated prominently in its summary section, "THERE IS A SUBSTANTIAL RISK THAT THE [IRS] WILL SEEK TO SET ASIDE ALL OR A PORTION OF THE DEDUCTIONS CLAIMED BY THE PARTNERS AND/OR WILL CHALLENGE THE TIMING OF SUCH DEDUCTIONS." Id. at 5; see also id. at 41-50.
The tax opinion accompanying the Offering Memorandum highlighted similarly the possibility that the IRS would disallow Rocky Mountain's deduction of the sublicense fee paid to Mitchell, id. at 12B-25B, and noted that the opinion's conclusion that the sublicense fee would be legally deductible was "conditioned" upon "the amounts and terms of the sublicense and royalty fees payable by the partnership [being] commercially reasonable." Id. at 2B.
The Offering Memorandum emphasized that the Law Firm was not rendering an opinion as to the reasonableness of the sublicense fee. Id. at 5. The Law Firm indicated clearly that it was relying on the factual representations by Rocky Mountain's general partners. Id. at 1B, 2B, 23B, 24B, 26B.
The Offering Memorandum required expressly that each investor either be sophisticated in financial and business matters, so as to be able to evaluate the merits and risks of the investment independently, or employ an advisor of sufficient sophistication that the investor and the advisor together could perform jointly such an evaluation. Id. at 26-28. Each investor was required to sign a subscription agreement, in which he warranted expressly, inter alia, that he (1) had "received current information concerning the Partnership (including its General Partners) and underst[ood] the nature of the risks involved in his investment (including the tax consequences thereof)"; (2) was "able to bear the economic risks of his investment in the Partnership and realize[d] that he [might] lose his entire investment in the Partnership"; (3) "either ha[d] received professional guidance with respect to his investment in the Partnership or [was] experienced in investment and business matters"; and (4) "recognize[d] that the Partnership [was] newly organized and ha[d] no history of operations or earnings and [was] a speculative venture." Id. at 16A, 17A; see also id. at 2F, 3F.
The Offering Memorandum continued to disclose numerous additional facts, including, but not limited to, potential conflicts of interest; the sums to be paid for the Terra-Drill master license and sublicense; the individuals behind the various companies and any cross-relationships; and features of the Rocky Mountain partnership. In short, the fifty-five page Offering Memorandum, attached exhibits, partnership agreement, and tax opinion appears to have been a full disclosure of a highly speculative investment scheme.
Plaintiffs, in possession of all this information, chose to purchase limited partnership interests in Rocky Mountain. For the units they purchased, the five plaintiffs made a total cash outlay, on the purchase date and within approximately one year thereafter, of $975,000, plus notes payable in 1993 totaling $2,925,000. Complaint, paras. 4-8. Plaintiffs purchased the investments from defendant Robert O'Neal, a sales agent for Rocky Mountain, ...