The opinion of the court was delivered by: SHADUR
MILTON I. SHADUR, UNITED STATES DISTRICT JUDGE
This Court's lengthy April 10, 1990 memorandum opinion and order (the "Opinion," 736 F. Supp. 845
) disposed of, via summary judgment under Fed. R. Civ. P. ("Rule") 56, virtually all of the numerous claims asserted by 54 investors in one or more oil and gas limited partnerships. All that survived of this action was the claim brought under 15 U.S.C. § 77l(2) ("Section 12(2)," referring to the internal section numbering of the Securities Act of 1933, the "1933 Act"). That statute, invoked in Count 4 of plaintiffs' Fourth Amended Complaint, "attaches strict liability to any inclusion of an untrue statement of material fact or any omission of a material fact in a prospectus or oral communication used to offer or sell a security, so long as the plaintiff did not know of the untruth or omission" (Opinion at 876, citation omitted).
Section 12(2) alone remained in plaintiffs' arsenal because that statute does not require a showing of intent to defraud on defendants' part (a requirement on which other claims asserted by plaintiffs had foundered) and because material factual disputes remained as to alleged misstatements and omissions represented by the private placement memoranda ("PPMs") for the oil ventures. Now, although plaintiffs and defendants have joined in approving a final pretrial order in preparation for trial, defendants have since moved for summary judgment on the surviving Section 12(2) claim and the parties have briefed that motion. For the reasons stated in this memorandum opinion and order, the motion is granted and this action is dismissed in its entirety.
Statutes of Limitations: The Facts2
For the most part no further factual submissions by a movant seeking summary judgment can eliminate factual disputes that have been established by the opponent's submissions.
Hence defendants' current motion takes the position that even assuming the existence of securities law violations (that is, even assuming that any factual disputes on that score were to be resolved against defendants), plaintiffs have waited too long to assert their claims.
This action was filed on October 3, 1986. To determine whether limitations had run by then on the Section 12(2) claims under the several limited partnerships, it is necessary to set out the facts as to each.
Plaintiffs quarrel with that sequence of events, contending that as a technical matter the terms of the limited partnership agreement (and therefore of the securities offering itself) were not complied with. Their arguments are really bogus, given plaintiffs' total silence on that subject for more than seven years. Everyone (including plaintiffs) treated the purchases as having been consummated back then in 1983, and the money of plaintiffs and other investors was then used in the oil venture without any contention that COPCO-1 had no right to do so.
Even on the facts most favorable to plaintiffs in reasonably arguable terms, the latest date for the completion of all the sales was in mid-September 1983.
As for COPCO-2, COPCO-3 and COPCO-4, plaintiffs admit the factual assertions set out in D. 12(m) paras. 6-9. That absence of any factual quarrel in those areas confirms that all the units in those three drilling program limited partnerships had been purchased before the end of 1984.
So much, then, for the times at which the statute-of-limitation clocks potentially began to tick on the several securities transactions. What remains is to set out the facts as to the date of plaintiffs' realization -- or perhaps their imputed realization -- of the material misrepresentations or omissions that they have now ascribed to the PPMs.
D. 12(m) paras. 10-53, set out in Appendix 1 to this opinion (which is the entire D. 12(m) without accompanying exhibits), accurately set out (with one minor exception) the extent of early knowledge and concerns on the part of the most knowledgeable investors: first-named plaintiff Terrence Donohoe ("Donohoe") and Jack Elder ("Elder"), Clarence Sopko and Bernard Medvill.
When the underbrush is cut away from the P. 12(n) response, it is plain that plaintiffs do not really contest the material factual assertions by defendants, instead making an argument that plaintiffs themselves frame in these terms (P. 12(n) at 2-3 (emphasis in original)):
As the Court noted in its Memorandum Opinion and Order, this case is now markedly different than when first filed. The remaining claim under § 12(2) attaches strict liability to any inclusion of a misrepresentation of a material fact in or any omission of a material fact from a prospectus. Much of the discovery taken by the parties -- which addressed defendants' fraudulent scheme and mismanagement of the partnership -- is no longer relevant to plaintiffs' § 12(2) claims. Unfortunately, much of this evidence -- evidence that relates to defendants' mismanagement of the partnership -- has been cited by defendants in support of their argument that plaintiffs' § 12(2) claims are time-barred.
When read in that context, defendants' statement falls far short of establishing that Donohoe or the other plaintiffs discovered the untrue statements in or omissions from the prospectuses or should have discovered them by the exercise of reasonable diligence before October 3, 1985, one year before they filed their complaint.
What plaintiffs argue again and again in their individual responses to defendants' 12(m) statements is that the knowledge and concerns evidenced and articulated by Donohoe and other plaintiffs amounted only to knowledge or to inquiry-notice of post-sale mismanagement, and not of pre-sale misrepresentations or omissions. As the later discussion of legal principles in this opinion reflects, that is simply wrong. But again what is important for current purposes is that the relevant facts asserted by defendants are not really controverted.
Included among the material facts in this respect are these:
1. Donohoe's statement at a November 1984 meeting with Interbanc employee Curtiss Bergquist ("Bergquist") that "It seems to me that the people that have collected all this money had other intentions than drilling these wells" (Donohoe Dep. 134
2. Donohoe's January 1985 statement to Bergquist and Stan Cole that "I believed the whole program was a fraud and that it was a stall tactic" (id. at 82);
3. Elder's statements to Donohoe after their April 1985 inspection of the COPCO fields that "We're screwed," "We've been had" and "This thing is a sham. I can't believe I was so stupid to invest in it" (id. at 274); and
4. most conclusive and damning, the entire transcript of the July 24, 1985 meeting of plaintiffs' Concerned Investors Committee, which had previously been formed by Donohoe and which was convened for an airing of the investors' investigations and serious concerns (D. 12(m) Ex. N, reproduced as Appendix 2 to this opinion).
Although that does not represent an exhaustive listing of all the evidence that demonstrates without contradiction the matters that were then known or believed by more than one of the plaintiffs (and that are ascribable to all the plaintiffs in "reasonable diligence" terms), those listed items suffice to enable this opinion to turn to the controlling law on the subject.
Statute of Limitations: The Law
Two separate limitations periods apply to Section 12(2) claims. One is the drop-dead provision of Section 13, 15 U.S.C. § 77m:
In no event shall any such action be brought to enforce a liability created . . . under section 77l(2) [Section 12(2)] of this title more than three years after the sale.
On that score Norris v. Wirtz, 818 F.2d 1329, 1332 (7th Cir. 1987) confirms the unequivocal bar created by that portion of Section 13 ("It was understood that the three-year rule was to be absolute"). But Section 13 also includes a discovery provision that kicks in earlier (emphasis added):
No action shall be maintained to enforce any liability created under section 77k or 77l(2) [Section 12(2)] of this title unless brought within one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence. . . .
Again Norris, 818 F.2d at 1334 (citations omitted) (more recently reconfirmed in Astor Chauffeured Limousine Co. v. Runnfeldt Investment Corp., 910 F.2d 1540, 1544 (7th Cir. 1990)) provides added intelligence, this time as to the application of the discovery principle:
The rule of law applicable to this case therefore is, as the district court concluded, that the time to file suit begins to run when the investor either knows or in the exercise of reasonable diligence could have discovered the facts on which the suit is based. The investor need not actually know the facts or appreciate their significance; the "could have discovered" branch of the test is objective. And whether the investor actually exercised diligence also is irrelevant. The question is not whether she did, but whether diligence would have paid off. Failure to be diligent is no excuse, as [ Teamsters Local 282 Pension Trust Fund v.] Angelos [815 F.2d 452 (7th Cir. 1987)] holds.
Only the investments in COPCO-1 (and not those in the later oil ventures) are potentially subject to the three-year absolute bar of Section 13. For the reasons already set out in this opinion's factual discussion, the filing of this action on October 3, 1986 -- more than three years after the September 15, 1983 outside date for the sales of the COPCO-1 interests -- was time-barred as to those investments alone.
But even were that not the case, all the COPCO-1 as well as the COPCO-2, COPCO-3 and COPCO-4 investors unquestionably waited too long to file this lawsuit. When it comes to what the investors could have discovered "by the exercise of reasonable diligence":
1. All the plaintiffs may fairly be charged with the knowledge or potential knowledge that is directly ascribable to Donohoe -- they can scarcely challenge the notion that Donohoe's actual investigative efforts represented the exercise of "reasonable diligence."
2. All the plaintiffs may also fairly be charged with the knowledge of other fellow investors. And when any individual plaintiff reasonably expressed himself or herself, based on such knowledge, in terms that confirmed that plaintiff's belief in defendants' misconduct such as to demand further inquiry or investigation, all the plaintiffs must be held to that same duty to exercise "reasonable diligence."
3. Not later than the time of the July 1985 meeting of the Concerned Investors Committee, all the plaintiffs had available to them the kind of information that unquestionably mandated such further investigation. It is necessary only to read the transcript of that meeting (Appendix 2 to this opinion) to see that.
4. It is simply wrong for plaintiffs to mischaracterize, as they persistently seek to do, the statements and beliefs of Donohoe (and of some other plaintiffs) -- by labeling what Donohoe and those other plaintiffs perceived as defendants' "fraud" and "sham" and "con" activities and wrongdoing, among other pejorative labels -- as though such labels were somehow limited to post-sale mismanagement rather than also bearing upon pre-sale misrepresentations and omissions. If the legal test were limited to actual knowledge rather than extending to what could have been learned through reasonably diligent investigation, such an argument might -- just might -- be tenable. But people armed with Donohoe's and others' knowledge and concerns had to be hopeless myopes, or to don impermissibly narrow-focused blinders,
not to pursue active inquiry into the subject of defendants' misconduct in connection with the sale of securities that ultimately generated the complaint in this action.
What the evidence compels instead is the conclusion that one or more plaintiffs certainly knew enough to start the Section 12(2) clock ticking by the time of the July 1985 meeting if not sooner.
Instead of bringing suit within the statutory one-year period thereafter, they chose a different course of action: They tried to salvage the drilling ventures through their own efforts during that year. They were of course free to do that, just as any other injured party may choose to let the statute of limitations lapse without pursuing his, her or its claim. But having done so -- and there being no evidence or contention that they were lulled into such delay by defendants' conduct
-- they must suffer the consequences of their own fatal delay.
It follows that all the investors' claims under Section 12(2) -- whether stemming from their investments in COPCO-1, COPCO-2, COPCO-3 or COPCO-4 -- are barred by the one-year discovery provision of Section 13. It is therefore unnecessary to address the open factual issues that were identified in the Opinion, which have been rendered non-material (that is, non-outcome-determinative) by the untimeliness of this lawsuit.
Before today's ruling, only one arrow shaft remained in plaintiffs' litigation quiver -- their Count 4 claim under Section 12(2). But on analysis it turns out that there are no genuine issues of material fact on that claim either, so that defendants are entitled to a judgment as a matter of law on that claim as well -- the expiration of the statute of limitations has caused the remaining potential arrow to have no point (in the legal sense). Accordingly Count 4 and this action itself are dismissed with prejudice.
APPENDIX I IN THE UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
TERRENCE DONOHOE, et al.,
CONSOLIDATED OPERATING & PRODUCTION CORPORATION, et al.,
DEFENDANTS' STATEMENT OF MATERIAL FACTS
NOW COME defendants Consolidated Operating and Production Corporation ("COPCO"), Jack Nortman ("NORTMAN") and Morando Berrettini ("BERRETTINI"), by and through their attorneys Douglas P. Roller and Rooks, Pitts and Poust and pursuant to Rule 12(l), Local Rules for the Northern District of Illinois, present their statement of material facts as to which there is no genuine issue.
2. Each of the programs were offered through a Private Placement Memorandum (hereinafter PPM-1, PPM-2, PPM-3, PPM-4 respectively).
3. COPCO 1 was offered for sale on April 1, 1983 (PPM-1, p. 2, attached hereto as Exhibit A). [See Exhibits in Original]
4. The closing date for sale of COPCO-1 was July 1, 1983 (Exhibit A).
5. As of July 1, 1983, 16.5 units in COPCO 1 had been purchased, subscribed to and accepted. Subsequent to July 1, 1983, COPCO purchased the remaining 13.5 units but offered these units for sale to limited partners until September 17, 1983. 3.5 units were purchased by limited partners prior to September 17, 1983. (Berrettini Deposition pp. 207-210, [portions of Mr. Berrettini's deposition are attached hereto as Exhibit B]; COPCO correspondence dated August 10, 1983, attached hereto as Exhibit C).
6. COPCO 2 was issued on October 25, 1983 and closed no later than March 1, 1984 (PPM-2, p. 2, attached hereto as Exhibit D).
7. COPCO 3 was issued on November 17, 1983 and closed no later than March 31, 1984 (PPM-3, p. 2, attached hereto as Exhibit E).
8. COPCO 4 was issued on March 15, 1984. (PPM-4, p. 2, attached hereto as Exhibit F).
9. The minimum number of units for COPCO 4 were not sold until approximately December 31, 1984. (COPCO correspondence dated December 31, 1984 attached hereto as Exhibit G).
10. Plaintiffs Terrence Donohoe, Jack Elder, Clarence Sopko and Bernard Medville are the plaintiffs with the greatest knowledge of the facts of the case (Plaintiffs' Answers to Supplemental Interrogatory No. 5 attached hereto as Exhibit H).
11. Plaintiff Terrence Donohoe first became concerned about his investment in COPCO 3 at a July 1984 investors meeting (Deposition of Terrence Donohoe, 2/11/88, portions of which are attached hereto as Exhibit I, p. 131).
12. In November, 1984, Donohoe met with plaintiff Curtis Bergquist ("Bergquist") who also was an official of Interbanc, the seller of the securities. During that meeting, Donohoe told Berquist that Donohoe did not believe the COPCO officials were "shooting straight" with the investors and that he suspected mismanagement of funds. Bergquist said that he had heard allegations of commingling of funds by the general partners. Also during the meeting, Mr. Donohoe stated, "it seems to me that the people that have collected all this money had other intentions than drilling the wells." (Exhibit I, pp. 131-136).
13. Also during the November 1984 meeting with Bergquist, a discussion was had regarding the investment as a whole, whether it was a gas field or an oil field, and a disagreement regarding the definition of "turnkey" (Exhibit I, pp. 136-138).
14. Donohoe's meeting with Bergquist in November, 1984 served as the "catalyst" for Donohoe's trip to Texas in December 1984. (Exhibit I, pp. 138-140).
15. In December, 1984, Donohoe made his first trip to Texas. He made this trip because he did not believe what he was being told about the status of his investment or the fields. (Exhibit I, pp. 48-49).
16. During the trip to the COPCO fields in December, 1984, Donohoe observed that flow lines that were supposed to have been delivered previously were just being delivered and that a generator that was supposed to have been there was not on the field. Mr. D'abre told Donohoe that funds had not been received from COPCO in Chicago. (Exhibit I, pp. 61-70).
18. On December 8, 1984, Donohoe also called his personal lawyer to advise him of Donohoe's conclusion that he had been "duped". (Exhibit I, pp. 72-73).
19. On December 17, 1984 Donohoe met with Dennis Bridges. During the eight hour conversation, Mr. Bridges stated: Donohoe should be patient and not go to the Attorney General or pursue legal action; Donohoe was correct in his conclusions about the flow lines and generator; the lack of funding was because of Nortman and Berrettini; the prospectus prohibited transfer or resale of units but that Nortman had sold units to his father; he suspected that money had been "played with" out of the general funds of COPCO, and; the prospectus provided that profit from ONA would go back to the partners in COPCO. (Exhibit I, pp. 91-109).
20. In January 1985, Donohoe told Bergquist that Bergquist had "better do something" because Donohoe was "running out of patience." (Exhibit I, p. 123).
21. After receiving copies of correspondence from COPCO and Interbanc at the end of January, 1985, stating that COPCO Programs 1, 2 and 3 were completed, Donohoe had a meeting with Cole (also an official of Interbanc) and Bergquist. At that meeting Donohoe stated that he didn't believe the contents of the letters and expressed his belief that the whole program was a "fraud." (Exhibit I, pp. 76-86).
22. On March 18 and 19, 1985, Donohoe met with a Mr. Gibe in New Orleans and a Mr. McIntyre in the vicinity of Houston, Texas. Donohoe made the trip to learn about the oil and gas business. Mr. Gibe had been put in touch with Mr. Bridges by Donohoe in the fall of 1984 as a means to find out more about the COPCO Programs. Mr. Gibe told Mr. Donohoe that the COPCO offerings and geological survey were "sloppy" and that certain well numbers had been changed to conform with test results. (Exhibit I, pp. 159-169).
23. During Donohoe's meeting with Mr. McIntyre, who had been in the oil and gas business for over forty years, Mr. Donohoe discussed some of his concerns about the COPCO program with Mr. McIntyre, including the cost of the turnkey, commercial wells, AFE's, and division orders. Mr. Donohoe also engaged in "heavy geological and geopetro" conversation with Mr. McIntyre. (Exhibit I, pp. 207-217).
24. Mr. McIntyre told Donohoe that he thought "something was amiss in the partnership or in that investment." (Exhibit I, p. 219).
25. As a result of the meeting with Mr. McIntyre, Donohoe became even more concerned about COPCO. (Exhibit I, pp. 217-218).
26. Also as a result of the meeting with Mr. McIntyre, Donohoe located fellow investors, reread the prospectus, and caused an audit of COPCO to be undertaken. (Exhibit I, p. 217).
27. Following the meeting with Mr. McIntyre, Donohoe also started to buy books regarding oil and gas exploration to better understand the business. (Exhibit I, p. 223).
28. In March or April, 1985, Donohoe, through his lawyer, Lewis G. Greenblatt, made a request pursuant to the prospectus to view the books and records of COPCO. (Exhibit I, p. 180).
29. On approximately April 5, 1985, Donohoe met with investor Sandra Raven and coplaintiffs Jack Elder, John Schwartz, Bernard Medville and Clarence Drucker. Donohoe contacted these individuals at random after obtaining a list of investors from the State of Illinois. During the meeting, Donohoe told the other investors that he believed they "had a very large problem." Donohoe related what he had observed on his trip to Texas in December, 1984 as well as his meeting in January, 1985 with Mr. Nortman regarding the books and records of COPCO. (Exhibit I, pp. 225-227; 232-234).
31. Also at the April 5, 1985 meeting, Donohoe questioned whether the defendants and ONA could be trusted. The outcome of the meeting was that Donohoe and Elder were to take a trip to the COPCO fields. (Exhibit I, pp. 236-240).
32. Sometime prior to April 15, 1985, Donohoe had a meeting with a second group of investors. Present at this second meeting were plaintiffs Clarence Sopko, William Hajduk, Arnie Jensen, Frank Hays, George Kanpka, Joe LaPota, William Masseth and Allen Nathan. Donohoe expressed the same concerns at this meeting which he had expressed at the April 5, 1985 meeting. (Exhibit I, pp. 226, 240-244).
33. During approximately the same time period as the investors meetings, Donohoe contacted attorney Lewis Greenblatt concerning his legal rights. (Exhibit I, pp. 243-244).
34. During the April, 1985 trip to Texas, Donohoe and Elder inspected the COPCO fields and took photographs in order to document what Donohoe described as "incongruities" or what he thought was "highly irregular." They also took photographs of various wells and turned on valves of what were pointed out to them to be gas well caps. According to Donohoe, no gas came out of any of these wells. Donohoe described the field as not completed and not producing. Donohoe and Elder also took down registration numbers of several pumps, tanks and generators. (Exhibit I, pp. 248-258; 271-272, 279-283, 291, 299).
35. Immediately following their inspection of the COPCO fields in April, 1985, Mr. Elder told Donohoe that "we're screwed;" "we've been had", and "this thing is a sham. I can't believe I was so stupid to invest in it." (Exhibit I, p. 274).
36. Donohoe and Elder reached a consensus following this trip that they would pursue a request for an audit of COPCO's books and consult an attorney for legal counsel. (Exhibit I, pp. 275-276).
37. After returning from Texas, Donohoe met with attorney Greenblatt. This meeting occurred sometime between April 15 and April 26, 1985. Mr. Elder was present at either this meeting or subsequent meetings with attorney Greenblatt. (Exhibit I, pp. 278-279, 303).
38. In May of 1985, accountants on behalf of Donohoe reviewed certain books and records of COPCO and issued a report. Donohoe also reviewed certain financial records of COPCO. (Exhibit I, pp. 180-184, 188-189).
39. Following the audit, Donohoe consulted with his attorney who told him his "investment was in trouble". (Exhibit I, p. 190).
40. Mr. Elder, Mr. Hayes, and Mr. Schultz were among the investors requesting the audit. (Exhibit I, p. 191).
41. The audit in May 1985 gave Donohoe "greater concern" over the management of COPCO. (Exhibit I, P. 195).
42. Donohoe drew the conclusion at the time of the audit that his investment was "in serious, serious disarray and trouble" and that there was "a shred of truth" to the allegations made by D'Abre and Bridges. (Exhibit I, pp. 200-201).
43. In June 1985, Donohoe and Elder invited other investors to a meeting in Des Plaines, Illinois. At that meeting, only the investors whom they could contact and were interested in discussing their investment attended. (Exhibit I, pp. 303-304).
44. Somewhere between April of 1985 and July of 1985, the Concerned Investors Committee was formed. (Deposition of Terrence Donohoe, dated 12/1/88, portions of which are attached hereto as Exhibit J, p. 8). Upon the formation of the Committee a bank account was opened on behalf of the concerned Investors Committee. This bank account was opened on May 24, 1985. (Exhibit J, p. 46; Certified Resolution of Unincorporated Organization dated May 24, 1985, attached hereto as Exhibit K).
46. Approximately 19 investors signed a sign in sheet acknowledging attendance at the July 25, 1985 COPCO investor's meeting. (Exhibit J, p. 22; a copy of this sign in sheet and a hand out at the meeting are attached hereto as Exhibit M).
47. Donohoe read the Prospectus for COPCO 3 approximately six times. Notes of his review of the Prospectus were attached to the sign in sheet produced by Donohoe during discovery. (Exhibit I, p. 97; Exhibit J, pp. 22-24; Exhibit M).
48. A tape recording was made of the investor's meeting on July 25, 1985. The first seven pages of that transcript constitute an accurate recordation of the comments made at that meeting. The remainder of the transcript likewise appears accurate to Mr. Donohoe. (Exhibit J, pp. 8, 14-20; 24-26; a copy of the transcript of the transcript of the July 25, 1985 meeting is attached hereto as Exhibit N).
49. A second Investors Committee meeting was held on August 28, 1985. The notice regarding this meeting was sent to all Limited Partners. (The notice for the August 28, 1985 meeting is attached hereto as Exhibit O; Exhibit J, pp. 27-30).
50. At the August 28, 1985 meeting, it was decided that the Concerned Investors Committee would oversee the COPCO programs on behalf of all investors (Exhibit J, pp. 109-111).
51. By September 25, 1985, twenty investors had contributed to the Concerned Investors Committee. Eventually, forty-six investors contributed to the Committee. (A copy of the membership list, with names of investors, dates contributions were made and amounts of contributions, kept by plaintiff Donohoe is attached hereto as Exhibit P; Exhibit J, pp. 50-51).
52. Prior to the August 28, 1985 investor's meeting, Bridges, with the assistance of Curtis Bergquist, had directed the COPCO 4 15% call to Bridges (correspondence dated July 20, 1985 from Dennis Bridges, attached hereto as Exhibit Q; correspondence from Gregory Sweeney dated July 25, 1985, attached hereto as Exhibit R; August 2, 1985 correspondence from Curtis Bergquist, dated August 2, 1985, attached hereto as Exhibit S).
53. Curtis Bergquist began dealing directly with Don Owens of Tech Lines, Inc. concerning construction of a pipeline and possibly becoming operator of the field (correspondence dated August 26, 1985 from Curtis Bergquist attached hereto as Exhibit T).
54. On approximately March 11, 1986, Robert Stovall met with Curtis Bergquist, Clarence Sopko, Arnie Jensen and others regarding the COPCO fields (correspondence from Mr. Nortman dated March 4, 1986, attached hereto as Exhibit U).
55. Robert Stovall communicated directly with plaintiffs Bernard Medville and Clarence Sopko regarding his work on the COPCO fields (correspondence dated April 29, 1986 from Robert Stovall, attached hereto as Exhibit V).
56. On May 12, 1986, Robert Stovall advised that it would cost $ 100,000 to $ 110,000 to make the wells in COPCO 1, 2 and 3 ready for gas production. (Correspondence dated May 12, 1986 from Robert Stovall, attached hereto as Exhibit W).
57. Between August, 1985 and June, 1986, members of the Concerned Investors Committee acted on behalf of the other investors in determining the status of the COPCO investments. (Exhibit J, pp. 31-35; Exhibit X).
58. On June 17, 1986, an investor's meeting was held. The purpose of the meeting was to discuss finalizing legal action to be taken. (Notice of June 17, 1986 meeting, attached hereto as Exhibit X).
One of the Attorneys for Defendants, Consolidated Operating & Production
Corporation, Jack Nortman and Morando Berrettini
Chicago, Illinois 60603
COPCO INVESTORS COMMITTEE GATHERING Date: 7/24/85
Sheraton NorthShore Inn Start Time: Approximately 7:30pm
933 Skokie Blvd., Northbrook, IL.
"I want to thank you for coming out tonight. My name is Terry Donohoe and on behalf of your fellow investors I welcome you to the Concerned Investors of the Copco Operating & Production Committee: Mr. Frank Hayes, Mr. & Mrs. Al & Valerie Nathan, Mr. & Mrs. George & Delores Kampka, Mr. Bill Masseth, Mr. Jack Elder, Mr. John Schultz, Mr. Ed Johnson and myself, Mr. Donohoe.
You are here primarily in response to our communication to you stating our concern over our investments. So, what I planned for tonight, with Mr. Elder's help, is a synopsis of what type of actions we took together as a group that led to this particular meeting, what we found out to date of our own accord is the status of our investment, and discussion of our mutual concerns and a possible solution of the problems . . . if, indeed, they are problems.
I'm going to start with the following and I beg your indulgence. So we have a focal point, I'm going to give a brief history of why and how this all started. And, I'll have to interject a personal note. Will you please make yourselves as comfortable as possible. I'll probably be without the tie and coat in about ten minutes; but, I thought we'd go through the formality of it.
I bought this investment in December of '83 and believed, despite the claims of the salespeople, that like all good intentions -- being in the steel business that I own -- even the best intentions don't work out and they go astray at times, and the economy being what it is I put myself in the position of allowing not just despite the claims of the 'turn-on investment' of three months down the line, I doubled the time and I multiplied it by two. In other words, I figured I could afford personally because I do my own financing in my business, I could afford to hold this investment without any return for about a year's time, or four payments to the bank where I went and secured financing for this one unit of Copco #3.
So, the first quarter went by . . . I didn't hear much. The second quarter went by and it's about mid-year of '83. About a year ago, and this starts the history for me, I started to just say get antsy on general principle. And, so, like some of you or many of you, I came to the meeting that Copco Investors had last year, a little more than a year ago, I think it July 12 or thereabouts, and at that meeting I heard many different things. I heard reports from the partners, i.e. the General Partners, and I also heard a particular report that stated from the Field Engineer and Geologist, whatever Mr. Daubry's title is, that they had five work days left at which time plug it in, turn on the pumps and off we go! Now I, probably like yourselves, thought five days isn't a lot of work to do so I can hold out. I could be a little more patient. Well, and I want to make the point clear here, is that the term 'possible gassification' was thrown out in particular Phase #1 and perhaps that there might be a unitization of the Phases #1, #2 and #3. For those that don't understand that what it came down to was there was gas in Phase #1, some gas & oil in Phase #2, and basically oil in Phase #3. That's what I believe I heard. But, I did hear, because I wrote it down, that there was five days left to complete this project and they would turn it on and produce.
August of '84 I contacted COPCO & Interbank with a view towards doing some possible steel business although I'd never been in that end of the business; but, also as a view maybe of birddogging and getting an inside view as to the cost of the items despite the fact it's a 'Turnkey Operation', I wanted to know how much we were being, what the kind of markups were on steel casing that goes in the ground, etc. I, at that time, contacted a friend of mine from the steel business that made the jump from steel sheets and that type of material in the steel articles into the casing business and in fact was selling casing from New Orleans for two or three years to people like Texaco and people of that nature. And, so I ascertained some direction, some explanation of casing, oil field equipment costs, mark-ups, methods of payment, drilling costs and I asked him to snoop around and see if he could find out anything about COPCO just in general, or any of the people.
September '84 - Still in contact with COPCO & Interbank asking about the status of the field, progress reports, and was told things like generator was on the way, can't turn on the field unless we have some power. Flow lines were in the ground, we're going to start pumping anyday, except we have some bad weather delays. Have patience all is in control. That's September.
October - My suspicion rouse. I've been in construction before I got in the steel business. As a matter of fact, I worked 8 years as a foreman out in the field and I know what bad weather is. I think I do at least, but it's still kind of bugging me. It's October. It's July. It's still those five days. No switch turned on . . . no nothin'. So, I got a little more acquainted with the ONA Drilling people: Generator couldn't be delivered due to weather and I'm reading off notes that I scribbled along the way, so bear with me, and I started to talk to my lawyer. I said it doesn't seem to be progressing the way I imagined it. By the way, I'd made my third payment by this time. I contacted my friend in New Orleans as I say, who was discussing and learning about the steel end of the business.
Got to November. Was pretty well convinced that something was way off center. I contacted the Attorney General of Illinois. I got my rights as an investor explained to me at length according to the Illinois Limited Partnership Act. I tried to do some reading. The weather in Texas was still bad so nothing had changed there. I had a meeting with Mr. Berquist of Interbank and succinctly put I threatened in a nice way to seek counsel . . . which in effect would unplug everything and it all stops cold. In effect, if I didn't get a little support -- meaning from their organization -- doing some investigation in pushing these people in Texas to a completion, weather or no weather. This was done and agreed to. They did take an active part at that time by, I think, they started many of the treks down there. But, again I discussed more of the problem with my personal attorney and got some more ideas.
Now, I want to interject this point and I think it's very, very important that you understand this. I truly believe that I had a moral and ethical commitment to my fellow investors of whom I knew none of you -- not one of you other than by chance of friendship -- not to unplug, not to go running, not to scream wolf. So, I didn't! I put that off as of December of '84. Instead I decided I'd go down for myself to take a look around and I did.
Prior to this I was told the generator was around the corner and, God, it's like at the bottom of the road. Just had to slide it up there. And the flow line, into which the oil flows through when you pump, that had already been delivered and was in the ground. Despite the directions I was given, it took me quite a while to find our investment field. I got there about two o'clock on a Friday afternoon on the 14th of December and I could see that the flow line was just coming off a truck. As a matter of fact, I didn't even know what it was until I asked. It was being laid on top of the ground. This is the same flow line that supposedly was going to be in in five days of work. This was in December. I confronted Mr. Daubry in a very hostile way, admittedly, and I wanted to know some answers to some questions. He told me that in six months there had been no funding from COPCO. He told me about the bounced payroll checks to his men in the field, told me that no work had been done since his visit up here when he stood in front of us in July when he said there was five days to go. In effect, nothing had been done.
So, I show up in Houston at 9 o'clock on Saturday morning. Called Mr. Berquist from the airport and gave him an earful. Called my lawyer and gave him an earful. I met Mr. Bridges coming off the plane and for eight hours NONSTOP we sat in that airport. I can't tell you what's outside the door of that airport because I never got outside the door of that airport. Eight hours I heard this tale of woe. I heard about the inner fight. I heard about the personalities. I heard about the cut-off funding. I heard admissions that 'yes, there were indeed problems'. But, I heard a plea to be patient. He would bring-in the field. He would complete it.
I've been in tough situations in business. I'd waited a year. I could wait a little bit longer. I returned to the field on Monday and heard, in fact, that some of the claims about the weather were true. When the water started to come over the dome of the car and I couldn't see where the road was, I have to admit that the weather is that bad. I backed the car down the road and I said 'yes, I guess there are times you can't get to this field.'
January came along, I reiterated my legal intent to Mr. Berquist of Interbank and to whoever else would listen . . . probably Mr. Cole. I purchased some more reading material about the oil business. I contacted my friend in Louisiana for more direction and advice. Mr. Bridges, Mr. Daubry and Mr. Arnold came up sometime in January. I intercepted them at their hotel room. Mr. Arnold then told me 'he knew where the money had gone to. He was living in fear of a reprisal from whoever'. He offered to testify if he was subpoenaed, wanted to clear his name and his conscience. Pretty heavy stuff at this point.
Mr. Bridges suggested that I go with him to COPCO and meet with Mr. Nortman . . . which I did. And, taking a very beligerant attitude in Mr. Nortman's office, I told him how disappointed I was and I also suggested in a peaceable fashion, after I calmed down, that maybe he could avoid some of these problems if he just did some simple PR. Send out a letter. Call the people. Once a month! Tell them you've had problems. I think people are pretty understanding in general. I also warned of consequences if he didn't take the advice. Not just my advice; but, I'm sure there were other people who felt the same way. Nothing happened!
Until, we found out in February that the program was supposedly depleted and a 10% call for additional funds provided in that prospectus reached me by mail. I turned around and requested proof of completion and production which it states I have a right to do. I also requested the annual audited financial statement. I got nothing from either of those requests.
I contacted an entity about possibly taking over as General Partner . . . or at least how to go about it. I sought some more legal opinion.
March came. I went to Houston via Louisiana. Met my friend in Louisiana. He took me to Houston at my expense. We flew over and met with a man who, in fact, owned oil wells and had been in the business for forty-some years . . . his sponsor, if you will, in the oil industry. And he sat and counseled me for 8 hours. Told me what to look for, what to read, what strategy to use, what objectives to be listed right to the minute detail. Told me about the Texas Railroad Commission. And, it was at that point at his urging that I decided to start contacting fellow investors.
April came and with it my birthday. The day afterward, I had my first meeting with 4 or 5 people that were in the same financial status that I was at the bank. I had the pleasure of meeting 5 strangers and telling them that our investment was in jeopardy. I explained my findings. I explained my misgivings and my doubts. On the spot, all 5 has pledged money to research the rest of it. We planned for a trip. I began research on the public records of COPCO investors because it is an Illinois corporation and they are on record
. . . and that's how we got your names and your telephone numbers, etc. I have xeroxed copies of that both with me and in the back in case you want to know how we did the 'hocus-pocus'. There's nothin' to it. You can go over and demand any records you want.
And we took off! Jack and I took off around the 15th of April. Jack also has photographs of this trip and we found that things like flow lines were not connected and neither were electrical outlets or boxes. There was no completion! There was no production! We only counted X amount of drilling rigs. That's not to say they were stolen; but, there sure weren't 30 drills out there . . . or rigs rather. We took down some serial numbers. The flow line . . . the infamous flow line . . . was still laying on top of the ground and had not been buried. We checked to see if there was gas pressure. We opened some valves. There was no pressure! If there were, it would have knocked me on my derrier. We also went over to COPCO #4 where they were drilling, drilling, drilling.
We returned and phoned -in the results to our fellow 4 or 5 committed investors at that time and made a decision to retain counsel and to demand an audit.
On the 26th of April, and we have copies of this for you also, our first official request for the books and the records went out.
On May the 3rd, we had sort of a delay tactic . . . at least, this is an opinion at this point. But, it was agreed that we would finally get the books and records on the 7th of May at the CPA's offices although I requested, to defer costs, to see the books and the records at the COPCO offices and I make this little note simply because later when I am accused of running-up bills, the man that accused didn't even read the damn letter that I sent him. So we walked-in and what we were given was a sheet of paper and to say that we were unhappy would be an understatement. I calmed down Mr. Elder and Mr. Elder calmed down me. We left the auditors there. They proceeded with the audit . . . and I'm using that in terms of what they were trying to do -- not necessarily that it was completed. We walked across the street as luck would have it because the CPA that COPCO uses is across the street from my office. We called our legal counsel. We demanded more cooperation. In the meantime, I had told the auditors to xerox everything they could get their hands on, including in particular, the cancelled checks.
At about two in the afternoon, I got a call from Jack Nortman asking me sort of to back-off and think this thing over because the cost of doing this was just going to come out of everybody's hide from the investors' money.
On the 8th, we went back to continue the audit and the missing documentation that the auditors told me was not there was noted.
On the 14th, at the auditors' request, we sent out our second formal letter for the missing records . . . in particular the bank statements, the cash receipts, the deposit slips. There was no listing of assets, the payables, and in particular the outstanding payables to COPCO and also we asked for an update on any test reports. This test report thing becomes critical later.
On the 22nd, we asked for all this to be gathered-up again at COPCO's offices to defer costs. We went through the same game again and the same accusations.
Anyway, I got a call on the 22nd from the CPA firm which said there were no more records available. What you see is what you get basically. So, we postponed the audit and you have a copy which we will pass out to you probably at break and you can judge for yourself what the bottom line is there.
This brings us up to June. We had our first informal meeting out in DesPlaines. Again, it was names chosen at random and maybe through vested interests and particularly stayed away from any type of ethnic name. I don't think there was anybody Irish that I contacted for fear of any wild accusations. So we got about 5 names out of a hat and about 6 or 7 people who knew each other. So we're at about 10 or 15 people who know each other. I gave the same report and I thank The Kampka's and The Nathan's for their indulgence here and also The Druckers, as to what we had discovered factually up to this time. At the DesPlaines meeting, the concerns that came out were: 1) the lack of communication. 2) the status of the field, the pending gas contract, the lack of the audited annual financial report, the questioning of the 'operator of record' which I will explain in a second, determinations that there were indeed 13 bank accounts established for the Programs #1, 2 & 3. We discussed possible mismanagement of the funds. We discussed the 'turnkey' situation in question. We also discussed the fact that there is no list of assets and leading into that the possibility of bogus K-1's.
I don't know how sophisticated some of you are. I know that I'm not. But, simply put, a K-1 has to have some sort of documentation to back it up. Documentation means it's got to have a financial statement and part of a financial statement is a list of assets because it has an amount of money that goes against the payables and receivables. I guess what I'm saying is that the K-1 is in question because without a list of receivables the number arrived at is definitely in question. It's as simple an explanation as I can give you. I am not a CPA.
Mr. Cole, at that meeting, asked for patience and that there was in fact a contract about to be delivered and about to be ...