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Pross v. Katz

February 28, 1986


Appeal from an order of the United States District Court for the Eastern District of New York, Leonard D. Wexler, Judge, dismissing a complaint alleging violations of the federal securities laws and numerous pendent state law causes of action. We conclude that the fraud alleged was not in connection with the purchase or sale of a security or in the offer or sale of a security. However, we remand to permit appellant to amend his complaint.

Author: Winter

Before: FRIENDLY, OAKES and WINTER, Circuits Judges.

WINTER, Circuit Judge:

This case involves claims of fraud in the handling of plaintiff's investments. Judge Wexler dismissed the complaint in the instant case for failing to state a claim for relief under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1982), under SEC Rule 10b-5, 17 C.F.R. § 240.10b-5(1985), or under Section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a) (1982). He viewed Pross' complaint as merely alleging that Katz and other defendants broke a promise to perform future acts and held that such a failure to perform did not Section 10(b) or Section 17(a). Having thus disposed of Pross' federal claims, he declined to exercise pendent jurisdiction, United Mine Workers v. Gibbs, 383 U.S. 715, 16 L. Ed. 2d 218, 86 S. Ct. 1130 (1966), and dismissed the state claims as well. We also believe the complaint to be deficient but on somewhat different grounds. We conclude that the purported fraud as presently alleged was not "in connection with the purchase or sale" of securities, as required by Section 10(b), or "in the offer or sale of any securities," as required by Section 17(a). Therefore, the complaint does not allege a violation of the anti-fraud provisions of the federal securities laws. However, we remand to permit Pross to amend his complaint.


Because Pross' complaint was dismissed for failure to state a claim, we are of course obliged to assume the facts it alleges to be true. Our task in this respect is not made easy by the length of the complaint, consisting of some 259 paragraphs comprising 70 pages, a prolixity seemingly designed to obscure rather than than to illumine the events giving rise to this lawsuit.

The pertinent allegations may be summarized as follows. Pross, a practicing dentist who is not without prior experience in similar litigation, Pross v. Baird, Patrick & Co., 585 F. Supp. 1456 (S.D.N.Y. 1984), purchased a limited partnership interest in 1974 in a real estate partnership, ILTIT Associates, at the behest of Katz, an attorney and real estate developer who "controlled" the partnership. Pross' investment was based on Katz's promises that he would manage the partnership faithfully and reinvest the proceeds on Pross' behalf. Between 1976 and 1981, Katz induced Pross to make further investments involving a complex series of sales of real estate in various legal forms, followed by purchases of other real estate in various legal forms.

The ILTIT limited partnership was thus converted in 1976 to stock in a cooperative corporation, 444 CPW, managed and controlled by Katz. Proceeds from the sale of Pross' stock in that corporation were reinvested in another cooperative corporation, 50 Park, also controlled by Katz. In 1981, Katz induced Pross to invest in three limited partnerships that also owned various real estate, in part using proceeds from the sale of stock in 50 Park. The limited partnerships constituted Pross' last investment in Katz-related ventures.

During late 1983 and early 1984, Katz, allegedly misusing his position as the manager of Pross' investments and as Pross' attorney, is said to have taken various fraudulent actions that divested Pross of his ownership interest in the three limited partnerships and of his remaining stock in the cooperative corporation. Ownership was transferred to Katz and other defendants in on his supposed scheme.

Although Pross' brief claims otherwise, there is no forthright allegation that, prior to 1983, Katz's conduct, in contrast to his future intentions, was either fraudulent or injurious with regard to Pross. The complaint alleges that Katz had from the outset a secret plan to divest Pross of his holdings. It also alleges ongoing promises by Katz to manage Pross' investments faithfully. Nevertheless, there is no allegation that, at the time of the final investment transaction in 1981, Pross had been fraudulently deprived of any property or otherwise injured.

Nor is there a forthright allegation that, even Katz sprung the "fraud trap," Brief of Appellant at 11, the fraudulent inducements employed to deprive Pross of this investments in 1983 purported to be part of a transaction in securities rather than the management of the particular real estate ventures. There is a three-page paragraph alleging that "in connection with the acquisition and management" of the various ventures, Katz took "at least" certain steps, including the securing of numerous blank signature pages from Pross. However, the complaint does not state with particularly which transactions involved blank signature pages, when the signatures were obtained, or how Pross was induced to sign them.

Finally, we note that various allegations in the complaint suggest that the real estate transactions at issue were undertaken in Dr. Pross' name at a time when Katz was disabled from doing so in his name under New York law. The underlying dispute may thus be over Pross' true ownership position. However, that goes to Pross' ability to prove his allegations, which must at this stage be assumed to be true.


To violate the anti-fraud provisions of the federal securities laws, the fraud must be either in connection with the purchase or sale or a security, Section 10(b), or in the offer or sale of a security, Section 17(a). Distilling the relevant from this seemingly endless complaint, we perceive two allegations of fraud upon which liability under those sections might be premised. First, Katz repeatedly represented that he would manage Pross' investments faithfully while harboring a secret intent to convert Pross' assets to his own use in the future. Second, Katz fraudulently induced Pross to sign blank signature pages and other documents that were used to effectuate the conversion. Reading the complaint with generosity and drawing every reasonable inference in favor of the appellant, Yoder v. Orthomolecular Nutrition Institute, Inc., 751 F.2d 555, 558 (2d Cir. 1985), we believe that those theories of liability fail to meet the statutory requirements stated above. However, we remand to allow Pross to ...

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