The opinion of the court was delivered by: SHADUR
MILTON I. SHADUR, UNITED STATES DISTRICT JUDGE
Terrence Donohoe ("Donohoe") and 53 other investors in one or more of a series of oil and gas limited partnerships have filed a nine-count Fourth Amended Complaint (the "Complaint") against Consolidated Operating & Production Corporation ("COPCO"), its sole principals and shareholders Jack Nortman ("Nortman"), Morando Berrettini ("Berrettini") and Dennis Bridges ("Bridges"), and Bridges' wholly owned and operated corporations Ona Drilling Corporation ("Ona") and Onshore Rig Corporation ("Onshore").
Plaintiffs allege several violations of the federal securities laws' anti-fraud provisions and registration requirements, violation of Illinois state securities laws, common law fraud, breach of fiduciary duty and two types of RICO violations.
This action arises out of an oil and gas drilling program gone south. Plaintiffs claim defendants fraudulently induced them to invest in a program that never had a chance at success. Defendants counter that circumstances beyond their control caused an otherwise viable and promising project to go awry. One thing is certain: Despite the overwhelming overlap between the facts as presented by the parties, each side views the other as wholly bankrupt and deceitful in presenting the story. For instance, plaintiffs open their responsive brief to defendants' summary judgment motion by stating that reading defendants' proffered documents is "like taking a trip 'Through The Looking Glass'" (P.Mem. 1). Not to be outdone on the level of literary allusion, defendants retort that "plaintiff's response brief would more aptly be titled 'The Grand Illusion', for in the end it amounts to no more than the product of the sheer imagination of its authors" (D.R. Mem. 3).
Maybe counsel found such flippant accusations provided them with some needed comic relief in the process of preparing their admittedly dry and voluminous submissions. Neither characterization, however, is accurate or helpful to this Court's task of evaluating the underlying facts. This opinion's factual statement will avoid inclusion of the unsubstantiated assertions and characterizations that riddle all the parties' submissions and will stick instead to the mundane, though more constructive, task of laying out the basic events that gave rise to this action.
In 1982 Jack Smith, President of Itex Energy Corporation of Houston ("Itex"), introduced Berrettini to Bridges. At that time Berrettini was Vice President of Finance at Itex, and it was in the context of conducting Itex business that Bridges and Berrettini met several times during the middle of 1982. In October or November of that year Berrettini raised the subject of pursuing an oil or gas deal venture in Texas, and Bridges recommended considering drilling in the shallow wells of Corsicana. After that initial discussion with Bridges, Berrettini discussed the possible venture with Nortman, with whom he had an ongoing business relationship. Nortman's interest in the venture led to a late 1982 meeting in Chicago among Berrettini, Nortman and Bridges.
At that Chicago meeting Bridges told Nortman and Berrettini that he was looking for a source of investment funds for oil ventures in shallow, low-risk wells in the Corsicana area. Bridges then represented that he had previous success drilling in that immediate area and such wells could be expected to produce between four and six barrels of oil a day. After that meeting Nortman spoke with Etta Cole, an attorney who had handled his business matters for a number of years, and through her with her husband Stan Cole ("Cole"), whom Nortman knew to have substantial experience in the business side of oil and gas investment. Nortman and Berrettini talked to Cole and presented him with the information available to them, including the location of the proposed project and numbers based on potential recoveries, oil prices and lease costs (all of which had been worked up by Berrettini). On the basis of that information Cole told Nortman and Berrettini that on paper it appeared to make sense and that he was willing to meet with them and Bridges.
After making those inquiries Nortman and Berrettini travelled to Corsicana and met with Bridges. Bridges showed them the lease sites that would be available and some wells in the immediate area that he claimed to have drilled himself and that he also claimed were producing oil. Bridges further represented that the Wolf City formation, on which the already drilled wells were located, very likely extended into the proposed new drilling area. Nortman and Berrettini later generally reviewed the activity of that trip with Cole, and Bridges came to Chicago and himself made a presentation to Cole. That was followed by another trip to Texas from February 25 to 28, 1983 -- this time including both Etta and Stan Cole as well as Nortman and Berrettini. At the conclusion of that trip Cole reiterated his interest in the program and represented to Nortman and Berrettini that he was going to "check out" both Bridges and the proposed leases with his contacts in the oil industry.
Thereafter Cole reported to Nortman and Berrettini that his inquiries had yielded positive responses -- specifically he confirmed that there was production on the wells contiguous to the proposed site, that shallow wells were less risky although less productive, and that he was satisfied with what he had learned of Bridges. On the basis of that information Cole was excited about the project and began to discuss the possible structure of the deal in terms of return to investors, number of wells to be drilled and the preparation of a prospectus for a limited partnership.
At that time (the very end of February or early March 1983) Nortman and Berrettini decided to move full steam ahead with the project. They took steps to implement the assignment of the lease to COPCO,
had a series of meetings with Cole, who was now the head of Interbanc Equity Corporation ("Interbanc"), and retained Michael Firsel ("Firsel") as an attorney for COPCO, the newly formed corporate general partner,
to help structure the deal and prepare the Private Placement Memorandum ("PPM") for the limited partnership offerings.
Firsel, Cole and Bridges shared responsibility for drafting the PPM for COPCO-1.
All of the geological data was prepared by Bridges and Matt Nelson ("Nelson") of Nelson Geological Consultants. Financial projections were prepared by Berrettini with the aid of a computer program and numbers provided by Bridges, supposedly based on actual production from wells drilled by Bridges in the immediate area. In addition the PPM included brief biographies of Nortman and Bridges, based on information that they respectively provided.
COPCO-1 was offered for sale on April 1, 1983 with Interbanc as the sole broker of program units, taking 10% of the sale price of each unit as a commission. In addition to the already-described information, PPM-1 also explained that the lease was to be drilled on a "turnkey" basis by Ona. That arrangement involves the driller's agreement to complete a well -- including roads, electricity tanks, flow lines, pump jacks, geological services and everything else necessary to "turn the key" to allow oil, gas and/or water to flow from the wells -- at a fixed price. PPM-1 explicitly says that Ona built a substantial profit into the turnkey price, with the shareholders of the general partner COPCO expecting to share in that profit. Indeed, the actual turnkey contract, with a price of $ 60,062.19 per well, was set out in its entirety in the PPM.
Before the drilling in the COPCO-1 program had begun, COPCO drilled two wells (Baker 1 and 2) to comply with the lease requirement that drilling begin within a specified period of time after the acquisition of the lease. Bridges reported to both Nortman and Berrettini that drilling activity on those wells, which were in the COPCO-1 vicinity, showed initial production of oil.
By July 1, 1983 (the closing date for the offering of COPCO-1) 13.5 of the 30 available units of COPCO-1 had been subscribed. Early in August drilling on the COPCO-1 wells began. After completion of the first of several wells, Bridges told Nortman and Berrettini that things looked very positive and suggested they purchase the remaining units available in COPCO-1. Bridges offered to lend them the money to finance the purchase on the security of the Baker 1 and 2 wells, with the revenues from those wells to repay the loan. COPCO then purchased the remaining units and, on the advice of Firsel and another attorney Mark Samotny ("Samotny"), offered the limited partners the opportunity to acquire those units from COPCO before purchasing them themselves. That offer resulted in the sale of several more units to limited partners, leaving ten units available for Nortman, Berrettini and Bridges. Each of them bought 3-1/3 units, with purchase money borrowed from Ona on the terms outlined above.
On December 7, 1983 an additional 10% capital contribution call for COPCO-1 was made by a letter reporting that of the 10 wells drilled, five had been completed and three more were anticipated to be completed on or before December 15, 1983. Again the information in that letter had been provided to Nortman and Berrettini by Bridges.
In early December Nortman and Berrettini travelled once again to the COPCO fields to gather information for another investors report. Based on limited personal observations and on reports and projections provided by Bridges and Nelson, Nortman and Berrettini sent a December 13, 1983 report to investors notifying them that seven wells had been completed (six of which had been equipped with pumping units). That report also said COPCO was hopeful that nine of the ten wells would be completed and pumping before the end of that week, while the tenth well would not be put on stream because it was a gas well that was showing "rather prolific tendencies." That last bit of information as to the gas well had been independently confirmed in a test conducted by Well Test, Inc. and overseen by East Texas Consultants ("ETC"). While ETC cautioned that further testing was required, it did report that "the well does seem to be prolific" (D.Ex. 11).
Meanwhile the COPCO-2 PPM had been issued on October 25, 1983. Central to the drafting of that PPM (as well as that for COPCO-3) was the determination as to whether to characterize the programs as "developmental" or "exploratory." With the aid of Bridges-provided information, Cole, Firsel and Samotny determined that use of the term "developmental" as defined in the PPM was appropriate. That term was ultimately employed with Nortman's and Berrettini's approval. Nonetheless the PPM-2 contained much cautionary language warning investors that it was still possible that none of the wells would produce commercial quantities of oil.
PPM-3, issued on November 17, 1983, contained the same representations and caveats as did PPM-2. Again Cole and Interbanc were given exclusive selling rights for both COPCO-2 and COPCO-3.
When Arnold first began working on the COPCO programs, he went to the fields two to three times each week. That number gradually increased to the point where he virtually lived at the fields. Thus when in February 1984 COPCO requested periodic reports from the fields on the status of the three ongoing programs, it was Arnold who took the responsibility of preparing handwritten summaries based on his personal observations and reports from D'Abre and Bridges. Reports were also received by Nortman and other COPCO personnel in Chicago via telephone from Bridges or Arnold, and whenever possible back-up reports would be attached to the typed memorials of telephonic reports from the field. COPCO received such reports on a weekly or bi-weekly basis from late February or early March through May 1984. All those reports were forwarded to Cole at Interbanc.
According to those reports, wells in all three programs showed signs of oil during drilling, although further work was required to determine if commercially producible quantities were available. On April 30, 1984 Arnold advised COPCO that an oil pick up of 39 barrels from COPCO-1 was made on April 23 -- advice matched by a crude oil manifest from Scurlock Oil Company reflecting 38 barrels on that date. COPCO now acknowledges the Scurlock pick-up was of frac oil (oil injected into and then pumped back out of a well to attempt to stimulate production) rather than regular oil, but at the time both the reports from the field and the face of the Scurlock manifest clearly indicated that regular oil had been picked up.
In spring 1984 the COPCO-1 wells became trouble-ridden. Some began producing excessive amounts of water, so that injection wells had to be drilled to get rid of the water. Some began to develop gas lock and to produce a mixture of oil, gas and water. As a result the wells were shut in until tests could be made to determine their gas potential. Although negotiations were commenced with Cherokee Gathering Company to conduct gas tests on those wells, no such tests were in fact done.
COPCO-4 PPM was issued on March 15, 1984. Bridges individually was a general partner in the COPCO-4 program. Like COPCO-2 and COPCO-3, the COPCO-4 program was labelled "developmental" -- but the PPM set out the various stages of completion of the 28 wells that had been drilled in connection with the other three programs and warned that although oil appeared to be present, no assurances could be given that the wells would produce in commercial quantities or that any well would produce on a consistent ongoing basis. PPM-4 also said that to the extent wells were drilled in areas where no logs were available from past drilling by the partner, the current proposed drilling should be deemed exploratory. Not until December 31, 1984 were the minimum number of units in COPCO-4 sold, and of the ten plaintiff investors in COPCO-4 only two had not invested in any of the earlier COPCO programs.
In the summer of 1984 independent petroleum engineer Joseph Galoostian ("Galoostian") was hired to perform an evaluation of the COPCO fields. Galoostian's July 9, 1984 report provided a positive analysis of the COPCO fields and confirmed much of the data previously received from Ona. Galoostian then attended a July 17, 1984 investors' meeting and presented his report to the investors present. At that meeting D'Abre represented that only five more working days were needed to complete COPCO-2 and COPCO-3, although actual completion was not ultimately achieved until the end of January 1985.
It was also in the summer of 1984 that relations between Bridges-Arnold and Nortman-Berrettini became strained. That problem first manifested itself in June, when Bridges and Arnold travelled to Chicago to meet with Firsel about their complaint that Ona was having difficulty getting funds from COPCO. After that meeting Bridges attempted to withdraw the entire amount in an Ona Chicago account (approximately $ 230,000). However, at the request of the bank he withdrew only $ 30,000, the amount he needed at that time. Later that same week Bridges, Nortman and Berrettini met to discuss the financial situation. Bridges took the position that the money in the account was profit under the drilling contract, so that the three of them should therefore divide it among themselves as spelled out in the PPMs. Nortman and Berrettini refused to follow that path and instead obtained Bridges' agreement to transfer it to their control for future use in the fields as needed. It was their position that all sums owing to Ona pursuant to the turnkey contracts for COPCO-1, -2 and -3 had been disbursed, so that they should maintain control of the excess funds.
At that stage Arnold's understanding of the financial situation proves important, because Bridges began using Arnold as his collection arm in his disagreements with Nortman and Berrettini. Despite the purported understanding reached in June as to the funds in the Chicago Ona account, Bridges told Arnold that COPCO owed Ona money and that he should try to retrieve it. Arnold was aware that Ona was bouncing checks and did not have enough money, and he followed Bridges' orders to try to get the money. To that end Arnold travelled to Chicago in October to meet with Cole, who had agreed to act as intermediary at Bridges' request. At that meeting Arnold presented Cole with an invoice of charges owing from COPCO to Ona that Arnold had prepared. Cole was shocked at the size of the invoice presented by Arnold and agreed to talk to Nortman and Berrettini.
Firsel and Berrettini made a trip to Corsicana during which they visited the fields. In the course of that visit they observed, and D'Abre represented, that COPCO-1 was drilled and completed and that COPCO-2 and -3 were drilled and in the final stages of completion. Firsel saw oil in collection tanks and several wells that were pumping a mixture of oil and water. Firsel also visited the Ona offices, where Bridges and Arnold reviewed all of the COPCO and COPCO-1, -2 and -3 records in Firsel's presence. Despite repeated requests, Bridges refused to make Ona's books available at that time.
Berrettini reported his field observations to Interbanc employee Curtis Bergquist ("Bergquist"), who then prepared a status report to COPCO-2 and -3 investors. Berrettini returned to Texas in the second week of October to discover that rain had delayed the scheduled completion and that the money previously deposited into the Texas account was depleted and had not been used as intended. After further meetings with Arnold a revised estimate of costs for completing COPCO-2 and -3 was prepared and, at Interbanc's insistence, an escrow agreement for further payment of funds on those programs was entered into on November 15, 1984.
Under the agreement Ona executed releases and waivers of liens to COPCO and COPCO-1, -2 and -3, and Nortman and Berrettini deposited $ 115,000 into the escrow.
In addition, the agreement required Ona, in order to have funds released, to present sworn statements as to the work to be done and its cost, after which Ona was to obtain a paid receipt and a lien waiver from the party doing the work.
During late October and early November 1984 Arnold reported to Nortman and Berrettini (1) that he believed Ona had located a suitable buyer for the gas found in the COPCO-1 program to provide for a capital return to the investors and (2) that Ona was in the final stages of completing COPCO-2 and -3, although bad weather was hampering progress. On December 17, 1984 Bridges, Berrettini, Nortman and Cole met to discuss the future of the COPCO programs and agreed that all funds for COPCO-4 would be put into escrow in Texas and that the program would not move forward until D'Abre and Interbanc verified that COPCO-2 and -3 had been completed.
They also discussed the continuation of Bridges' efforts to obtain a gas contract for COPCO-1.
January 1985 finally witnessed the completion of the COPCO-1, -2 and -3 programs. On January 19 Bridges and Arnold informed Nortman and Berrettini that all ten wells in both the COPCO-2 and -3 programs were complete and pumping fluid into the tank batteries. On January 29 D'Abre reported that COPCO-1, -2 and -3 were all completed to tanks, with all systems including electric and water disposal having been completed, thus completing Ona's obligations under the turnkey contract. Cole and Bergquist personally reported to Firsel that they had inspected the fields and that the programs were complete in total accordance with the requirements of the respective PPMs. Nortman and Berrettini also went to Texas and inspected the fields and concluded that the terms of the turnkey contract had been met.
Based on his personal observations and experience, Arnold believed that COPCO-1, -2 and -3 were pumping fluid formation water, and he observed that wells in all three programs had oil shows in the form of rainbows indicating the presence of oil. Because of the oil shows and the initial production of oil and water, the wells had been completed as oil wells. In early February COPCO informed the investors in COPCO-2 and -3 that the programs were complete and, in the case of COPCO-3, made a 10% capital contribution call as provided for in PPM-3.
With the initial three programs nearing completion, D'Abre, Arnold, Berrettini, Nortman, Bridges and Cole had met on January 17, 1985 to discuss plans for COPCO-4. D'Abre presented a geology report on COPCO-4 -- basically an overview of geological data from the field producing next to the COPCO-4 lease and from the 31 wells in the other three COPCO programs. Bridges, Berrettini and Cole reached an agreement to proceed with COPCO-4 by establishing another escrow account, the details to be worked out by Firsel and Texas attorney John Theis ("Theis"), and by agreeing that Nortman, Berrettini and Bridges would share equally in the anticipated profits from the program. Final agreement as to those terms was memorialized in a March 4, 1985 letter agreement, the escrow agreement was entered into the following day and COPCO forwarded the required funds to Theis.
Another $ 20,000 was also provided to Theis as escrowee, to be disbursed for the cost of operating COPCO-2 and -3 through March 31, 1985.
Bridges used Ona personnel, equipment and resources to operate the COPCO leases as a subcontractor for COPCO, the named operator. On March 5 D'Abre prepared a status report for Nortman and Berrettini on COPCO-1, -2 and -3 in which he verified that all three programs were running on operating capital forwarded by COPCO. D'Abre also reported substantial gassing up in all three programs. All of COPCO-1 had been capped and shut in, and several wells in COPCO-2 and -3 had also gassed up and been shut in. Ten other wells had shown initial gas production before seizing up due to technical problems. D'Abre explained that those wells would be reworked by the operating personnel and pumped until they established a production pattern, with the established gas wells remaining shut in until a gathering system could be constructed. D'Abre concluded that report by stating, "Congratulations gentlemen! It appears you have a commercial gas field."
By late March a gas contract was finally executed between COPCO and Tangram Transmission Corporation ("Tangram"). As a condition precedent to Tangram's incurring any expense for setting up a delivery system, COPCO obliged itself to perform and report the results of a deliverability gas test on the fields. To that end COPCO engaged Milton M. Cook Company to perform the testing. Later in 1985 Tangram merged with Techline Industries, Inc. ("Techline") and the COPCO contract was assigned to Techline. On June 4, 1985 COPCO and Techline executed a contract. By letter dated June 21, 1985 COPCO informed the COPCO-1, -2 and -3 investors of the gas contract and the need for testing. At that time it also reminded the investors that COPCO was under no obligation to advance funds for the testing and said that because COPCO had already expended substantial amounts above the price of the turnkey contract it was not in a position to pay for the testing. Accordingly the letter requested pro rata contributions from the investors to fund the tests.
Approximately two weeks after the call was made to the investors, Cole informed Nortman that the call had been unnecessary because Bridges had informed Cole that Bridges would pay for the test personally. Bridges later denied that statement to Nortman, saying instead that he had merely obtained credit from the company performing the test. In the meantime Nortman and Berrettini determined that based on Cole's report the investors' funds that had been forwarded for the test should be returned. At an August 28 limited partnership meeting in Northbrook (with Bridges, Berrettini, Nortman, Arnold, Bergquist and a number of investors present), Bridges and Arnold reported that Don Owens of Techlines was to supervise the testing, which would be completed within the succeeding two or three weeks.
Drilling on COPCO-4 began in the spring of 1985 and proceeded quite smoothly. COPCO-4 operated on budget, and funds were made available through Theis as needed. By June 1 D'Abre reported that the majority of the COPCO-4 wells were drilled and pumping although no tank battery had been built, no flow lines had been installed and no electrical systems had been installed. At the end of that month Berrettini and Nortman made an inspection trip to the COPCO-4 field. On that occasion Bridges and D'Abre represented that five wells had been completed and two had been cased and cemented and that there was initial oil production from the five completed wells, verified by the logs. Nortman, Berrettini and Bergquist all confirmed by physical inspection the presence of oil in the temporary tank batteries of COPCO-4. D'Abre and Bridges both recommended completion of the remaining two wells, said that there was an excellent probability that COPCO-4 would be a good oil program and added that there was no evidence of gas production at that time. COPCO then sent a letter summarizing that information to the COPCO-4 investors and made the call for the 15% capital contribution provided for in PPM-4.
In mid-August 1985 Nortman and Berrettini were advised that the COPCO-4 15% call had, with the acquiescence of Cole and Bergquist, been redirected to Bridges. In fact Bridges had sent letters to the COPCO-4 investors directing them to mail their contributions directly to Texas in self-addressed envelopes he had enclosed. Without the knowledge of Nortman and Berrettini, Bridges began taking a lot of unilateral actions at that time. First of all he was communicating directly with Bergquist, who in turn dealt with investors about the 15% capital call without any notification to Nortman and Berrettini. Bergquist was also conducting negotiations with Techlines for gas testing, informing only Bridges of the substance of those negotiations. Furthermore, in September 1985 Nortman and Berrettini learned that Bridges had granted BGB Investments a 1% overriding interest in the acreage where COPCO-4 had been drilled.
Bridges also gave Arnold a.5% overriding interest in COPCO-4 and also explained to Arnold that he had renegotiated the Bartlett lease and in so doing had granted overrides to various people.
Beginning in April 1985 and continuing through mid-1986, Nortman, Berrettini, Firsel and even Bridges' Texas attorney Gregory Sweeney ("Sweeney") made repeated unsuccessful requests to Bridges and Arnold to provide COPCO with an allocation of equipment between the programs, an inventory of equipment and copies of all logs for the programs. On October 18, 1985 Bridges resigned as chief executive of COPCO and advised Nortman and Berrettini that his stock should be put in the name of the limited partners' investment group and sent to Donohoe. On November 4, 1985 Bridges resigned from the Board of Directors of COPCO, stating he would no longer act as a representative of COPCO except to execute his responsibilities as individual general partner of COPCO-4.
Throughout the remainder of 1985 and into 1986, Nortman and Berrettini attempted to find an operator for the COPCO fields to replace Bridges. To that end they communicated with Bob Stovall ("Stovall") of Southern Petroleum Company, Everett Sharp and Galoostian, ultimately hiring Stovall for the job. Throughout the same period Nortman and Berrettini continued to try to obtain from Bridges and Arnold the allocations and inventories of equipment and logs and other geological data to provide to potential new operators. Again their efforts were rebuffed.
In November and December 1985 COPCO again issued a call for voluntary contributions from the limited investors in all four programs. For the first three programs the funds were to conduct further gas tests to permit execution of the pending gas contracts (as already stated, all funds collected earlier for that purpose had been returned to investors). As for COPCO-4, the sought-after contributions were to provide funds for an operator for that field -- only a limited number of investors contributed, because many took the position that COPCO had the responsibility for advancing funds for such work. On that score, despite repeated requests from COPCO Bridges did not release the approximately $ 42,000 he had received in connection with the 15% capital contribution call in COPCO-4.
On March 11, 1986 a meeting was held in Chicago with Stovall and Owen of Techlines, to discuss once again the gas contract for COPCO-1, -2 and -3. Present at that meeting were Nortman, Berrettini, Bergquist and investors Clarence Sopko and Arnie Jensen. This time it was agreed that Stovall would perform the deliverability tests, which had still not been completed, and that he would complete an inventory of all equipment of the four COPCO programs (never prepared by Bridges and Arnold). Stovall agreed to do that work at a reduced price, which was to be paid out of funds advanced by the contributing limited partners and COPCO. Following that meeting a number of documents were provided to Stovall to assist him with his work. Among those were checks for services to be performed, all well tests in COPCO files, copies of logs and other items related to the fields.
On April 22, 1986 Bridges wrote to Nortman and told him that Bridges had acquired the lease to COPCO-4 and was resigning as the individual general partner of COPCO-4. Bridges added that he was going to give the wells back to the investors and have Stovall operate the field. Stovall's April 24, 1986 letter confirmed that Bridges had in fact obtained the leases but stated that Bridges had instructed Stovall not to perform any work on COPCO-4. Unable to do anything else as to COPCO-4 under those circumstances, COPCO (on behalf of itself and the limited partnerships) took legal action against Bridges, Ona and Theis.
Alleged Fraudulent Scheme
Complaint paras. 12-17 set out the alleged fraudulent scheme that underlies all the charged violations except for the securities registrations and breach of fiduciary duty claims, which will be dealt with separately. Direct quotation from the Complaint proves simplest in conveying the essence of plaintiffs' gripes:
12. Although the formal structure of the Limited Partnerships was modified from time to time, the fraudulent scheme applied to all of the Limited Partnerships as a whole and involved in a common purpose, as well as common misrepresentations and omissions concealed from Plaintiffs. The basic elements of this fraudulent scheme were as follows:
(a) there was no reasonable possibility of economic gain;
(b) the stated likelihood that drilling efforts would be successful in Copco 1 was represented solely to entice investors into that program, following which Copco 2, 3, and 4 could then be organized as purported more conservative "developmental" programs; and
(c) bogus completion reports and successful results would be reported for Copco 1 to induce investors to purchase units in Copco 2, 3 and 4.
14. In order to induce Plaintiffs to invest in the Limited Partnerships, Defendants in the Memoranda falsely represented that:
(1) the turnkey drilling price was competitive;
(2) a likelihood of successful drilling existed;
(3) the funds raised were sufficient to drill and complete the proposed wells to the level of commercial production; and
(4) a fair consideration would be made by Defendants of whether or not the wells should be completed.
(b) As to Copco 2, 3 and 4 (in addition to subparagraph (a) above):
(1) the wells would be drilled on "developmental" acreage;
(2) previous wells drilled on the same acreage were completed and producing;
(3) there had been successful prior drilling activities of Copco, the General Partner; and
(4) there were favorable reports of past drilling activities in the general area, although such was not relevant to the possible success of the Limited Partnerships.
(c) As to Copco 4 (in addition to subparagraphs (a) and (b) above):
(1) several wells were pumping oil into tanks;
(2) previous wells were in various stages of completion, all of which was also set forth in various reports to Plaintiffs, as described in para. 16.
15. The representations in para. 14 were false and misleading in that the Memoranda failed to disclose that:
(a) The turnkey contract for drilling costs, from a conceptual standpoint, was attractive, but the turnkey price set was grossly in excess of the actual drilling costs for work performed;
(b) the Defendants knew or had reason to believe that the likelihood of successful drilling was extremely remote;
(c) the Defendants knew or had reason to believe that all the wells would be drilled, as if completed, to ensure that Defendants' profits would be enhanced;
(e) Copco 1 was a failure at the time of offerings for Copco 2, 3 and 4;
(f) the geological reports and evaluations contained in the Memoranda were of no use whatsoever in supporting the purported economic viability of the programs; and
(g) the turnkey price, although grossly excessive in light of the actual work performed, would, in all likelihood, not be sufficient for the purpose of making the wells commercially productive.
16. During the period of time in which units in the Limited Partnerships were being sold, Defendants compounded the above misrepresentations and furthered their fraudulent scheme by:
(a) issuing favorable reports -- which were not based on the true facts -- dated October 3, 1983; December 7, 1983; December 13, 1983; and February 1, 1984. Such reports were false and misleading in that it was represented that:
(1) production was in excess of projections (October 3, 1983; February 1, 1984);
(2) revenue would be generated in the near future (October 3, 1983);
(3) oil production would commence on December 15, 1983 (December 7, 1983; December 13, 1983); and
(4) additional favorable geological data had been obtained (February 1, 1984);
(b) making bogus cash distributions (in or about April 1984) to investors to entice them to believe in the probable success of the investment and the programs;
(c) preparing geological reports which were without merit insofar as the economic potential of the proposed wells; and
(d) not disclosing that the field on which the wells were drilled was substantially depleted.
Despite what would appear -- at least in surface terms -- to be the overwhelmingly factual nature of this dispute, defendants have moved for summary judgment on all of the fraud-based claims. They assert that (1) there is no expert testimony or evidence to support the alleged technical deficiencies in the programs, (2) based on the totality of the facts it is wholly implausible that COPCO, Nortman and Berrettini engaged in the charged scheme to defraud, (3) every specific allegation of a knowing misrepresentation or omission on the part of COPCO, Nortman and Berrettini has no basis in fact and (4) each of the counts must fail due to insufficient basis in law or due to the lack of any genuine issue of material fact going to an essential element of the cause of action claimed.
Alleged Breach of Fiduciary Duty
Complaint Count Six alleges that defendants owed plaintiffs fiduciary obligations by virtue of the facts that defendants were sponsors and general partners in the venture, had control over disposition of partnership funds and were relied upon and trusted by plaintiffs. Plaintiffs assert those fiduciary obligations included duties to act in good faith, to exercise a high degree of trust and to act with a high degree of care as to plaintiffs' funds in their control. In addition to the assertedly fraudulent promotion of the investment (already detailed), plaintiffs contend that defendants intentionally breached their fiduciary obligations by (this time quoting directly from Complaint para. 37):
(a) failing to transmit to Plaintiffs timely or accurate form K-1's;
(b) failing to provide to Plaintiffs audited financial statements;
(c) commingling Plaintiffs' funds with other funds in an improper manner;
(d) misappropriating Plaintiffs' funds and using them for personal, rather than partnership, purposes;
(f) making bogus cash distributions to the investors in order to deceive them into believing that the investments were in the process of becoming commercially viable;
(g) making a call for supplemental funds upon completion of wells when in fact those wells had not been completed;
(h) mismanaging and wasting of partnership assets by purchasing equipment not suited for the purposes ...