of unqualified opinion was reckless, in light of available information and methodology of audit, is question for jury).
For example, sufficient evidence to establish the recklessness of an audit has been found to exist in the case where direct evidence has been shown with respect to an accountant's admissions of inadequate inventory costing procedures which resulted in inventory overstatements. See Sirota v. Solitron Devices, 673 F.2d 566, 573 (2d Cir. 1982) (inferring intent from accountant's admissions). In the instant case, unlike Sirota, the defendant accounting firm vigorously denies any allegation of impropriety or inadequacy with respect to its auditing procedures. Instead, plaintiffs argue that the analysis of an array of factors (including certain statistical analyses, the rate of inventory turnover, the refusal by successor accountants to certify the annual audit and a sworn assertion that certain inventory values were overstated) is sufficient such that a reasonable jury may infer scienter on the part of defendant.
Despite defendant's point-by-point attack of plaintiffs' assertions, it is not the province of this court at the summary judgment stage to "evaluat[e] the evidentiary underpinnings of these disputes," but rather merely "to categoriz[e] factual disputes in their relation to the legal elements of the claim . . . ." Liberty Lobby, 477 U.S. at 248, 106 S. Ct. at 2510. In light of the foregoing analysis, this court finds that with regard to the 1983 stock and note purchase, it does not appear beyond doubt that plaintiffs are unable to prove a set of facts that would establish recklessness under their 10b-5 claim.
2. The 1984 Debt Subordination. With respect to execution of the 1984 Debt Subordination Agreement, this court need not reach either the issue of materiality nor that of scienter. Instead, this court finds that plaintiffs, as a matter of law, do not have standing under the stringent standard of Blue Chip Stamps, supra. In order to bring a Rule 10b-5 action a plaintiff must be an actual "purchaser or seller" of a security. 421 U.S. at 732, 95 S. Ct. at 1924.
In Tully v. Mott Supermarkets, Inc., 540 F.2d 187 (3d Cir. 1976), the Third Circuit noted that the interpretation of the language, "'"in connection with the purchase or sale" of any security,' contemplates a causal connection between the alleged fraud and the purchase or sale of stock." Id. at 194 (citations omitted). In this case, as in Tully, the alleged injury was not "suffered as a result of plaintiffs' actual stock purchase," id., but rather as a result of plaintiffs' compromised position as creditors and shareholders of SSI.
Plaintiffs also argue that, even if they are not technically within the ambit of the purchaser-seller rule, there has been such a "significant change in the nature of the[ir] investment or the[ir] investment risks as to amount to a new investment." Bull v. American Bank & Trust Co., 641 F. Supp. 62, 68 (E.D. Pa. 1986). In Bull, the court denied summary judgment and allowed plaintiffs to try and show at trial that assignments of cattle maintenance contracts was a fundamental alteration of their investment. See id. However, this case is distinguishable from Bull, in which the contracts were the "pivot on which investor expectations turned[.]" Id. In other words the subordination of plaintiffs' debt in the instant case is not the equivalent of "forcing the plaintiff[s] to exchange their stock for shares representing participation in a substantially different enterprise[.]" Keys v. Wolfe, 709 F.2d 413 (5th Cir. 1983).
Because plaintiffs' debt subordination does not amount to a new investment, nor does it directly involve the purchase or sale of a security, defendant is entitled to dismissal of this part of plaintiffs' Rule 10b-5 claim.
B. The RICO Count
Plaintiffs have also alleged a violation under RICO.
"The allegations necessary to support a RICO claim under 18 U.S.C. § 1962 . . . are (1) the conducting of, (2) an enterprise, (3) through a pattern, (4) of racketeering activity." Marshall-Silver Construction Company, Inc. v. Mendel, 835 F.2d 63, 65 (3d Cir. 1987) (citing Sedima, S.P.R.L. v. Imrex Co., Inc., 473 U.S. 479, 496, 105 S. Ct. 3275, 3285, 87 L. Ed. 2d 346 (1985)).
In Sedima, the Supreme Court also noted that even though two acts may be necessary to form a pattern, they may not be sufficient; rather, courts must analyze the "continuity plus relationship" of the alleged acts. 473 U.S. at 496 n.14, 105 S. Ct. at 3285 n.14.
Despite the fact that this court has dismissed one of plaintiffs' two Rule 10b-5 claims -- the 1984 debt subordination -- this is not dispositive of the RICO claim. The Third Circuit has recently noted that "racketeering activity constitutes a pattern only if it is in furtherance of (1) two or more unlawful schemes, or (2) a single open-ended ongoing scheme." Barticheck v. Fidelity Union Bank/First National State, 832 F.2d 36, 38 (3d Cir. 1987). In other words, Barticheck specifically "rejects the position that a RICO pattern must involve at least two distinct unlawful schemes." 832 F.2d at 39 (emphasis added) (citation omitted).
Thus the issue before this court is whether, as a matter of law, a pattern of racketeering activity may be inferred solely from plaintiffs' lone Rule 10b-5 claim stemming from their purchase of SSI stock and notes in 1983.
The Third Circuit has recently provided district courts with guidance as to what constitutes a pattern of racketeering activity under RICO. In Barticheck, supra, the court held that an alleged investment fraud scheme which was allegedly carried out by several individuals involving the repetition of similar misrepresentations to more than 20 investors constituted a pattern. 832 F.2d at 38. On the other hand, in Marshall-Silver, supra, the court held that a single-victim, single-injury "one-short" scheme involving only two active perpetrators did not amount to a pattern under RICO. 835 F.2d 63, slip op. at 6.
Within the spectrum of RICO pattern cases established by Barticheck and Marshall-Silver, plaintiffs' claim lies somewhere in the middle. The gravamen of plaintiffs' RICO claim is that Eisner & Lubin's certified annual audit reports of SSI for fiscal years ended 1982 and 1983, even though part of a single scheme, are at least two separate predicate acts which create a pattern of racketeering activity sufficient to satisfy the Sedima "continuity plus relationship" test as interpreted by Barticheck. However, it should be noted that the Third Circuit "decline[d] to adopt a verbal formula for determining when unlawful activity is sufficiently extensive to be 'continuous.' This determination necessarily depends on the circumstances of the particular case." Marshall-Silver, at 66 (quoting Barticheck, 832 F.2d at 39). Though this court is to undertake a case-by-case analysis, some of the relevant factors for consideration include "the number of unlawful acts, the length of time over which the acts were committed, the similarity of the acts, the number of victims, the number of perpetrators, and the character of the unlawful activity." Id.
In applying the essence of the above-quoted analysis to this case, this court finds that plaintiffs' allegations of defendant's activities are insufficient to meet the statutory requirement of a RICO pattern. In Marshall-Silver the Third Circuit noted:
The target of the RICO statute, as its name suggests, is criminal activity that, because of its organization, duration, and objectives poses, or during its existence posed, a threat of a series of injuries over a significant period of time.
835 F.2d at 66. In the case at bar, there was ostensibly a single victim (the Reliance Investors group), a single alleged perpetrator (Eisner & Lubin) and the nature of the activity was essentially a "one-shot" deal (to cause the plaintiffs to invest in SSI).
The facts of this case, if not more like those of Marshall-Silver, are clearly less like those of Barticheck. As a matter of law, therefore, this court is compelled to grant summary judgment in favor of defendant and thereby dismiss with prejudice plaintiffs' RICO claim.
C. The State Law Counts
Because this court has not dismissed all of plaintiffs' federal law claims, and because the violations alleged under state law arose from the same nucleus of common fact, summary judgment with respect to plaintiffs' pendent state law claims is denied.
With respect to Count 1 of the amended complaint, summary judgment is DENIED as to the 1983 stock and note purchase and it is GRANTED as to the 1984 debt subordination transaction. With respect to Counts 2 and 3, summary judgment is DENIED; and with respect to Count 4, summary judgment is GRANTED.
An order in conformity with this opinion shall be submitted herewith by defendant.
Dated: April 21, 1988