United States District Court, S.D. New York. Nandakumar CHANAYIL, et al., Plaintiffs, v. Deepak GULATI, et al., Defendants. No. 94 CIV. 0710 TPG. July 11, 1996. OPINION GRIESA, Chief Judge. *1 This is an action brought by a group of Indian American plaintiffs (referring to people from India) against Deepak Gulati and D. Gulati & Associates, Inc. (the Gulati defendants) and against Vision of Asia, Banad Vishwanath and Karl Khandalawala (the VOA defendants), in which plaintiffs claim they were defrauded into investing in certain promissory notes. Plaintiffs assert RICO claims under 18 U.S.C. ss 1962(c) and (d). They also sue on various state law theories. The action was commenced in February 1994. Deepak Gulati, who has been convicted of securities fraud and is in prison, filed a Chapter 7 bankruptcy petition in 1994. Accordingly, all actions against him are currently stayed. The action is dormant as to D. Gulati & Associates. In conferences with the court, the VOA defendants promptly took the position that plaintiffs' complaint was defective in that it contained a mass of detail on various matters but lacked any proper allegations of wrongdoing by the VOA defendants. It was clear to the court, without the necessity of a formal motion, that the original complaint was not a proper pleading, and the court requested that plaintiffs amend the complaint. The first amended complaint was filed in April 1995. At a conference shortly thereafter, the VOA defendants raised the same basic objections, and the court requested a further amendment. A second amended complaint was filed in June 1995. It is now clear that plaintiffs have amended their pleading as much as they are wiling and able to do. The VOA defendants have moved to dismiss the second amended complaint under Fed.R.Civ.P. 12(b)(6) for failure to state a valid claim and under Fed.R.Civ.P. 9(b) for failure to plead fraud with particularity. These defendants also move for an order denying plaintiffs leave to further amend, and move for sanctions. Plaintiffs oppose the VOA defendants' motion, and request sanctions against these defendants for making their motion. The court grants the motion of the VOA defendants to dismiss the second amended complaint without leave to replead. All applications for sanctions are denied. The Second Amended Complaint The essence of the second amended complaint is the claim of fraudulent activities to promote the notes-pleaded as securities fraud, mail fraud and wire fraud-said to constitute predicate acts under RICO. Plaintiffs allege that the VOA defendants have, for many years, broadcast in New York a 1 1/2 hour cable television program on Sundays entitled "Vision of Asia," catering to the Indian American community; that in the late 1980's the VOA defendants began including a 15-minute segment on alternate Sundays entitled "You and Your Money" featuring Deepak Gulati; that defendant Khandalawala, one of the Vision of Asia regular newsmen, hosted this segment. Plaintiffs allege that the VOA defendants indicated to viewers that the segment was a community service and a pro bono feature intended to assist Indian Americans, and that the VOA defendants, and particularly Khandalawala, expressed their backing and endorsement of Gulati. *2 The complaint alleges that Gulati used the segment to sell the notes in question, which were 12% "Short term client funds placement promissory notes," issued by D. Gulati & Associates. Plaintiffs claim that fraudulent representations were made on the "You and Your Money" segment in order to promote the notes, and that material facts were concealed relevant to these notes. Although such allegations are woven through many parts of the excessively lengthy complaint, paragraph 53 is intended to constitute the definitive summary of the false representations. This paragraph appears under the heading "The Fraudulent Misrepresentations." Paragraph 53 is introduced by the statement-"Defendants made the following misrepresentations to plaintiffs." There follows a list of 14 alleged fraudulent representations. It is clear from other parts of the pleading and from the oral argument of the motion that only Gulati, or sometimes a colleague of his, actually made the statements about the notes. None of the VOA defendants did so. Therefore paragraph 53 must be taken to refer solely to matters spoken by the Gulati defendants, with two exceptions to be noted. Paragraph 53 alleges the following false representations: a. That the proceeds from the sale of the Notes were lent to third party borrowers; b. That these alleged borrowers were "regular clients" of the Gulati defendants; c. That these alleged borrowers had "seasonal cash requirements" which were being met by the Gulati defendants' loans at high interest rates; d. That the Notes were fully secured; e. That the Notes were collateralized by the alleged borrowers' assets; f. That the Notes were guaranteed to return an annual interest of 12%; g. That the Notes were insured by the SIPC; h. That the defendants might not "accommodate" requests for rollovers from Noteholders; i. That the Gulati defendants had over $100 million in Citibank; j. That upon default in payment, investors could recover their principal investments and the interest at any time and without use of an attorney; k. That defendant Gulati was an "expert" investment counselor helping Indian Americans; l. That defendant Gulati was a "Registered Investment Advisor with the SEC, Washington, D.C.; m. That the Segment was a community service and a pro bono feature; and n. That the Segment was meant to assist Indian Americans to be financially successful. The only items which can reasonably be taken to refer to anything said by the VOA defendants are (m) and (n). Paragraph 55 contains the allegations of concealment. It appears under the heading "The Material Concealments." The allegations are that "defendants" knowingly concealed the following material facts from plaintiffs. a. That at least by mid-1991, the Notemaker defendant Associates's liabilities were considerably in excess of its assets; b. That at least by mid-1991, the investors were unlikely to ever recover their principal investments; *3 c. That the proceeds of the Notes were not lent to third parties at all; d. That at least some of the proceeds of the Note sales were used to pay interest and principal to earlier Noteholders; e. That at least some of the proceeds of the Note sales were used to pay expenses of the Gulati defendants' affiliates; f. That at least some of the proceeds of the Note Sales were used to pay investors in other ventures of the Gulati defendants; g. That the Gulati defendants never had $100 million in Citibank or anywhere else; h. That defendant Gulati had obtained a credit line of $1 million from the State Bank of India, New York, by fraudulently misrepresenting his net worth; i. That the Segment was neither a community service nor a pro bono feature; j. That the Vision of Asia defendants were paid for the broadcast of the segment; and k. That defendant newsman Khandalawala was merely a paid salesman for the Gulati defendants. It is obvious that these items relate to specific financial facts regarding the notes sold by the Gulati defendants, except for items (i), (j) and (k). DISCUSSION When the rhetoric and minutiae in the second amended complaint are analyzed to see what it all amounts to, the complaint alleges fraudulent statements by Gulati, and occasionally his colleagues, on a television program aired by the VOA defendants. Although it is alleged that the VOA defendants invited Gulati to be on the program, and that Khandalawala acted as the host and "endorsed" the speaker, it was Gulati who spoke about the notes. There is nothing in the second amended complaint which can be fairly construed as alleging that any of the VOA defendants participated in the preparation or presentation of what Gulati stated about the notes. There is nothing which can be fairly construed as alleging that the VOA defendants were involved in any way in the business carried on by the Gulati defendants that related to the notes. There are numerous allegations, stated in a variety of ways, to the effect that the VOA defendants were giving Gulati a communications tool by allowing him on their program and were expressing a very great degree of friendship and respect for Gulati. The second amended complaint is in effect alleging that the VOA defendants, because of these actions, should be held responsible for Gulati's fraud, perpetrated by his speaking on their program. The second amended complaint also contains a great deal of conclusory language to the effect that the VOA defendants knew of Gulati's fraud or were reckless with respect to such fraud or should have known of such fraud. It is the view of the court that the allegations in the second amended complaint do not constitute a valid pleading of fraud against any of the VOA defendants. The courts have consistently required RICO complaints for fraud to contain specific allegations of fact which give rise to a "strong inference" that the defendants possessed the requisite fraudulent intent or knowledge of the fraud. O'Brien v. Price Waterhouse, 740 F.Supp. 276, 279-80 (S.D.N.Y.1990), aff'd, 936 F.2d 674 (2d Cir.1991). A mere failure on the part of one defendant to investigate the truth or falsity of alleged misrepresentations made by another defendant is not, in and of itself fraud, and is not sufficient to create the necessary inference that the first defendant possessed the required scienter. Id. at 281 Essentially what is alleged in the second amended complaint is that the VOA defendants provided a broadcast facility for Gulati, who then committed fraud. There is surely no inherent reason why a party who provides a broadcast facility for a speaker, or who sponsors or hosts that speaker, will be a knowing participant in fraud committed by that speaker. Aside from purely conclusory allegations, the second amended complaint contains no assertions linking the VOA defendants to the business of Gulati or to the preparation of his statements in such a way as to indicate that the VOA defendants either knew that Gulati's assertions on the broadcast were fraudulent, or were reckless with respect to Gulati's fraud. *4 The only specific allegation of false statements or misrepresentations by the VOA defendants is the claim that it was false for the VOA defendants to state that the Gulati segment was a community service and a pro bono feature. It is said that the VOA defendants were paid to allow Gulati to promote the notes and that the VOA defendants fraudulently concealed this fact. But plaintiffs never argue that these allegations are, in and of themselves, sufficient to constitute a case against the VOA defendants. This case is about fraud in statements about the notes. Quite evidently, plaintiffs make out a valid case in this regard against the Gulati defendants. But if, as the court has found, no such case is pleaded as to the VOA defendants, then these defendants are entitled to be dismissed. There is no reasonable basis for leaving the action open to try the claims about whether the VOA defendants did or did not properly characterize the segment as a community service or pro bono. Plaintiffs do not even offer to explain how this could constitute a RICO violation. One final matter to be noted relates to the allegation (par. 36) that, even after the SEC commenced proceedings against the Gulati defendants in February 1992, the VOA defendants continued to broadcast the segment as before. However, the period of time alleged in the second amended complaint as involving fraudulent statements causing injury to plaintiffs was "between August 1990 and February 1992" (par. 21). There is no allegation that any broadcast following the commencement of the SEC proceeding caused injury to plaintiffs. CONCLUSION For the foregoing reasons the court holds that the second amended complaint does not state a claim for relief against the VOA defendants upon which relief can be granted. Nor does it contain the required particularity for a claim of fraud against these defendants. Since ample opportunity has been afforded plaintiffs to amend their pleading, the case is dismissed without leave to file a further amended complaint. SO ORDERED. S.D.N.Y.,1996. Chanayil v. Gulati Not Reported in F.Supp., 1996 WL 389252 (S.D.N.Y.), RICO Bus.Disp.Guide 9081 END OF DOCUMENT © 2009 Thomson Reuters/West. No Claim to Orig. US Gov. Works.