MEMORANDUM OPINION AND ORDER REGARDING PLAINTIFFS’ MOTIONS FOR RECONSIDERATION AND LEAVE TO FILE AMENDED COMPLAINT AND DEFENDANTS’ MOTIONS TO STRIKE
TABLE OF CONTENTS
I. PROCEDURAL AND FACTUAL BACKGROUND....................... 1482
A. Procedural Background............................................. 1483
B. Factual Background................................................ 1485
1. Securities Allegations.......................................... 1486
TABLE I: Comparison Of Securities Allegations In The First And Second Amended Complaints................................... 1486
2. RICO Allegations.............................................. 1489
TABLE II: Comparison Of RICO Allegations In The First And Second Amended Complaints................................... 1490
II. LEGAL ANALYSIS ................................................... 1493
A. The Motion For Reconsideration.................................... 1493
1. Applicable standards........................................... 1494
a. Rule 59(e) motion to alter or amend........................ 1494
b. Rule 60(b) motion for relief from judgment................. 1496
2. Reconsideration here........................................... 1498
a. Reconsideration in light of controlling precedent............. 1498
i. The disregarded precedent........................... 1498
ii. Import of the precedent.............................. 1499
iii. Irrelevance of the precedent to this court’s ultimate determination ............................................ 1500
b. Reconsideration of failure to include leave to amend......... 1501
i. Opportunity to replead after dismissal................. 1502
ii. Leave to amend here................................ 1505
3. Summary Regarding The Motion For Reconsideration............ 1507
B. Adequacy Of The Second Amended Complaint........................ 1507
1. Repleaded securities claims..................................... 1507
a. Commonality.............................................. 1509
i. Horizontal commonality............................... 1509
ii. Vertical commonality................................. 1513
b. Expectation of profit from the effort of others.............. 1514
2. Repleaded RICO claims........................................ 1516
a. A proper RICO enterprise................................. 1516
i. Association-in-fact enterprises......................... 1516
*1482 ii. Enterprises consisting of parents and subsidiaries....... 1520
iii. The enterprise alleged here .......................... 1521
b. Pattern or racketeering.................................... 1523
c. Predicate acts ............................................ 1524
i. Mail, wire, and common-law fraud..................... 1524
ii. Bankruptcy fraud.................................... 1525
3. Summary of disposition of the motion for leave to amend........ 1525
C. Interlocutory Appeal ............................................... 1525
III. CONCLUSION........................................................ 1527
In its prior order dismissing the complaint in this litigation,
DeWit v. Firstar Corp.,
Plaintiffs particularly take the court to task for its conclusion, in dismissing the first amended complaint, that the cattle feeding contracts at issue here are not securities as a matter of law. Plaintiffs assert that the court’s error in dismissing the securities claim is made even more apparent in the repleading of that claim in the proffered second amended complaint. However, rather than standing upon the RICO allegations made in the first amended complaint, the plaintiffs have submitted drastically altered allegations concerning the definition of the “RICO enterprise” in their proffered second amended complaint. Plaintiffs have thereby dramatically changed the inquiry concerning the adequacy of the pleading of their RICO claims.
Plaintiffs, investors in and suppliers to a cattle investment scheme called “Adventure Cattle,” filed this lawsuit against a bank holding company and subsidiary banks that provided banking services for Adventure Cattle, its principal, John Morken, and Morken’s related business, Spring Grove Livestock Exchange (SGLE), and against the bank officer responsible for the accounts in question. In a first amended complaint, plaintiffs alleged violations of the Racketeer Influenced and Corrupt Organizations Act (RICO), the Securities Acts of 1933 and 1934, and also asserted state common-law claims of fraud and wrongful conversion or set-off. The court granted defendants’ motion to dismiss the first amended complaint for failure to state a federal claim upon which relief can be granted and declined to exercise supplemental jurisdiction over state law claims. Plaintiffs now move the court to reconsider dismissal of the first amended complaint, arguing that the court made factual and legal errors in dismissing the first amended complaint and should have granted plaintiffs leave to file a second amended complaint to cure the defects the court perceived in the first amended complaint rather than simply dismissing it. Plaintiffs subsequently filed, as a supplement to their motion for reconsideration, a “second amended complaint” in order to demonstrate that their claims could be pleaded with sufficient particularity. Defendants resist the motion to reconsider, asserting that the court rightly dismissed the first amended complaint. Defendants further challenge either the filing or consideration by the court of the second amended complaint. In the event that the court considers the adequacy of the second amended complaint, defendants argue that it fails to cure the critical flaws identified by the court in the first amended complaint. Defendants therefore argue that plaintiffs should be denied leave to file the second amended complaint on the ground that the amendment is futile.
I. PROCEDURAL AND FACTUAL BACKGROUND
The procedural and factual background for this lawsuit is discussed extensively in the court’s prior ruling.
See DeWit v. Firstar Corp.,
A, Procedural Background
By order dated March 1, 1995, this court dismissed plaintiffs’ second amended complaint pursuant to
Fed.R.Civ.P.
12(b)(6) for failure to state a claim upon which relief can be granted. The court held that: (1) plaintiffs’ RICO claim failed to plead sufficiently the elements of a RICO offense under 18 U.S.C. § 1962(c); (2) plaintiffs failed to state claims of securities laws violations, because the Adventure Cattle contracts at issue are not “securities” under the test articulated by the Supreme Court in
Securities and Exchange Comm’n v. W.J. Howey Co.,
On March 9, 1995, plaintiffs moved the court to reconsider the dismissal of the first amended complaint. In that motion for reconsideration, plaintiffs assert that the court dismissed the first amended complaint in large part because the complaint lacked sufficient particularity. Plaintiffs argue, however, that the infirmities can be cured, and that the court should have allowed plaintiffs thirty days within which to file an amended complaint. Plaintiffs also contend that the court improperly departed from precedent of the Eighth Circuit Court of Appeals in holding that the Adventure Cattle contracts were not securities, but do not identify in their motion what that precedent was. Plaintiffs filed no brief in support of their motion for reconsideration at the time of its filing, but instead requested twenty days within which to file a memorandum and thirty days within which to file a second amended complaint.
Defendants responded to the motion to reconsider on March 22,1995. In their resistance, defendants attack plaintiffs’ motion to reconsider as failing to state with particularity the grounds therefor as required by Fed. R.Civ.P. 7(b)(1). Defendants suggest that if plaintiffs could indeed cure the defects in the first amended complaint, they should have submitted a proposed amended complaint. Defendants then argue that plaintiffs’ motion fails to articulate or demonstrate compliance with the standards for reconsideration of a ruling or to state or satisfy the grounds for amendment of a complaint. Defendants contend that plaintiffs’ proper course was to pursue an appeal of the dismissal of their first amended complaint.
Plaintiffs next filed a reply to defendants’ resistance on March 27, 1995. In that reply brief, plaintiffs assert that it would be an abuse of discretion for the court not to permit plaintiffs to amend their complaint after its dismissal, but they cite no authority for that proposition. Rather, plaintiffs assert that leave to amend pursuant to
Fed.R.Civ.P.
15(a) should be freely given. Plaintiffs argue that they could not attach an amended complaint to the motion to reconsider, because they first had to seek modification of the court’s March 1,1995, ruling to allow them to file an amended complaint. They also argue that they had inadequate time to file such an amended complaint between the time the court summarily dismissed the complaint and the deadline for filing a motion to reconsider the dismissal. Plaintiffs contend that huge numbers of documents obtained in discovery since the filing of the first amended complaint would allow them to cure any pleading deficiencies with a second amended complaint. Plaintiffs filed an affidavit of counsel in support of this contention. The reply brief then addresses the merits of reconsideration as to one of the court’s conclusions, asserting that in
Booth v. Peavey Co. Commodity Servs.,
On April 24, 1995, plaintiffs filed a supplement to their motion to reconsider and motion for leave to file an amended complaint consisting of a proposed second amended complaint. Whereas the first amended complaint was twenty-two pages and sixty-seven paragraphs long, the second amended complaint is seventy-five pages and one hundred thirty-six paragraphs long. Plaintiffs summarize the changes as including the following: (1) repleading of the RICO enterprise as an association in fact of the Firstar banks and Firstar Corporation with new allegations as to the common purpose of the enterprise and the means employed to achieve that purpose; (2) specification of the RICO defendants as Miley, Firstar Milwaukee, Firstar Wausau, and Firstar Corporation and addition of two new RICO defendants, Alfonso Buscemi and Roberto Vinent, both officers of Firstar Milwaukee; (3) pleading of three specific fraudulent banking schemes and their interrelatedness as demonstrating a RICO “pattern”; and (4) “clarifying” the horizontal and vertical commonality of the Adventure Cattle program and facts in support of plaintiffs’ securities claims founded on Rule 10b-5.
Although they had twitted plaintiffs for failing to file an amended complaint, on May 3,1995, defendants moved to strike plaintiffs’ proffered second amended complaint as untimely and inappropriate. 2 Defendants assert that any “supplement” should have been filed with the motion for reconsideration within ten days of the judgment and cannot now be used to support the vague and condusory motion to reconsider, which itself failed to comply with Fed.R.Civ.P. 7. Defendants also argue that the supplemental affidavits of counsel and a former bank employee filed in support of plaintiffs’ reply brief present only facts known to the plaintiffs prior to dismissal of the first amended complaint and therefore provide no ground for reconsideration under Fed.R.Civ.P. 59. In their brief, defendants then provide a thumbnail sketch of arguments that the proposed second amended complaint is futile, but seek leave to brief that issue more fully.
Plaintiffs resisted the motion to strike on May 22, 1995. 3 Plaintiffs assert that their original motion to reconsider was timely and presented with sufficient clarity plaintiffs’ argument that the court made factual and legal errors that could be resolved by the filing of a second amended complaint. They also assert that they filed a brief in support of the motion to reconsider within the twenty days of filing of the motion itself, as they had requested leave to do, even though the court had not granted that part of their motion requesting an extension of time to file such a brief. 4 Plaintiffs assert that because they agreed with defendants’ statement that a proposed amended complaint would help clarify matters, they filed such a proposed amended complaint. However, plaintiffs contend that the silence of the March 1, 1995, ruling on leave to amend meant that plaintiffs could not file such an amended complaint until they had first obtained leave to do so through a motion for reconsideration and modification of the March 1,1995, ruling.
Plaintiffs then assert the adequacy of the new allegations in the proposed second amended complaint. Plaintiffs contend that the revised pleading of the RICO enterprise and the more detailed pleading of the predicate acts are sufficient to sustain the RICO claims over objections made pursuant to Fed. R.Civ.P. 12(b)(6). They also contend that the Adventure Cattle program “was not accurately portrayed in the Court’s March 1, 1995, ruling in several important particulars,” and that the repleaded allegations will allow the court to correct its errors. The nature of the repleaded allegations is considered in greater detail below in the court’s discussion of the factual background for this decision.
On May 30, 1995, defendants submitted a brief in opposition to the proposed second *1485 amended complaint. 5 Defendants assert that neither the RICO nor the securities claims as repleaded state claims upon which relief can be granted. Even as repleaded, defendants contend, the Adventure Cattle scheme lacked either horizontal or vertical commonality, and did not provide an expectation of profits solely from the efforts of others, such that the underlying contracts could not be securities. Defendants contend that the repleaded RICO allegations still do not identify a proper RICO enterprise or a pattern of racketeering. Thus, defendants contend that the second amended complaint fails as futile.
The court held oral arguments on these pending motions on June 1, 1995. At the oral arguments, plaintiffs were represented by counsel Randall A. Roos of the Roos Law Office, P.C., in Sioux Center, Iowa. Defendants were represented at the oral arguments by counsel Thomas L. Shriner, Jr., and G. Michael Halfenger of Foley & Lardner in Milwaukee, Wisconsin, and Jeffrey L. Poulson of Corbett, Anderson, Corbett, Poulson, Flom & Vellinga, in Sioux City, Iowa. The oral arguments were spirited and informative. In light of those arguments and the parties’ written submissions, the court now turns to a more detailed discussion of the factual background for this case.
B. Factual Background
Because of the procedural posture of this case, the court will here identify differences between the facts as alleged in the first amended complaint and as alleged in the plaintiffs’ proffered second amended complaint. In the event the court determines that it should consider the proffered second amended complaint, the factual allegations of that amended complaint will be treated as required under Fed.R.Civ.P. 12(b)(6) and the standards for post-dismissal amendment to determine whether the second amended complaint is only a futile attempt to cure the deficiencies found in the first amended complaint.
Like the first amended complaint, the second amended complaint is in five counts. 6 Count I of the second amended complaint, as did Count I of the first amended complaint, alleges a violation of the provision of the Racketeer Influenced And Corrupt Organizations Act, 18 U.S.C. § 1962(c), which pertains to interest in or control of a RICO enterprise, but adds alleged violation of 18 U.S.C. § 1962(d), which prohibits conspiracy to violate any of the other provisions of § 1962. Counts II and III again allege violations of the Securities Acts of 1933 and 1934. The gravamen of Count II is that Firstar Milwaukee 7 was a “seller,” along with Morken, of unregistered securities in the form of Adventure Cattle investment contracts in violation of §§ 5 and 12(1) of the 1933 Act. Count III of the second amended complaint again alleges violation of § 12(2) of the 1933 Act, and § 10(b) of the 1934 Act and Rule 10b-5 promulgated thereunder and adds alleged violation of §§ 12(2) and 17(a) of the 1933 Act. The gravamen of this count is still that Firs-tar Milwaukee 8 failed to make full and fair disclosure of material information to Adventure Cattle investors, and adds further allegations that Firstar Milwaukee breached a fiduciary duty in failing to make those disclosures. Count IV is again a common-law claim of wrongful conversion or set-off, but with the responsible defendant identified as “Firstar Milwaukee,” not merely as “Firs-tar.” Finally, Count V is a newly amended common-law claim of fraud, this time identifying the responsible defendants as “Firstar *1486 Milwaukee” and “Firstar Wausau,” not merely as “Firstar.” The parties have directed their attention in the pending motions exclusively to the repleaded federal claims under RICO and securities laws, and the court’s supplemental jurisdiction over the state common-law claims, of course, depends upon the viability of one or more of the federal claims. The court will therefore focus, as did the parties, on the repleaded federal claims.
1. Securities Allegations
The second amended complaint provides more extensive allegations concerning the operation of the Adventure Cattle program than did the first amended complaint. Because it is upon these allegations that the court’s determination of whether or not the Adventure Cattle contracts were securities depends, if the court does indeed consider the second amended complaint, those allegations are presented here in full. For the sake of comparison, the allegations of ¶ 26 of the first amended complaint are presented side-by-side with the comparable allegations of ¶47 of the second amended complaint:
TABLE I: Comparison Of Securities Allegations In The First And Second Amended Complaints
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*1487 [[Image here]]
*1488 [[Image here]]
The sample “Cattle Feeding Contract,” appended to the second amended complaint as Exhibit C, 9 states that Morken would be “fully responsible for the care of the above described cattle” including responsibility for health and nutrition programs, cost of inputs, death loss, and market protection (including breakeven point). Second Amended Complaint, Exhibit C. The contract provides further that “Morken will be fully responsible *1489 for the marketing of the above described cattle.” Id.
In the securities claims proper, the second amended complaint places new emphasis on the operation of the Adventure Cattle program. It provides new allegations about the extent to which Morken “pooled” investors’ cattle, 10 the extent to which investors purportedly relied upon Morken’s ability to make their investment profitable, and the extent to which the fortuity of the investment allegedly depended on the fortuity of Morken’s fortunes. 11 New allegations also denigrate the extent to which individual investors had any decision-making authority with regard to the investment. 12
2. RICO Allegations
The RICO allegations in the second amended complaint demonstrate an even more extensive revision as compared to the first amended complaint. The first amended complaint identified the RICO enterprise as “Morken’s enterprises,” and alleged “Firs-tar’s” “control” of that enterprise. However, the second amended complaint instead identifies the RICO enterprise as “an association in fact” from approximately February of 1992 until June 2, 1994, of “Firstar Corporation, *1490 Firstar Milwaukee, Firstar Wausau, and Firstar Sioux City with John Morken and SGLE,” which had as its alleged common purpose the penetration and expansion of the Firstar banks’ presence in the agricultural lending markets of Minnesota and Iowa. Second Amended Complaint, ¶67. After June 2, 1994, when the strategy of market penetration was allegedly abandoned, the enterprise is alleged to have “continued but without the association of Morken and SGLE,” with the common purpose of shifting the losses caused by that aborted strategy and by allegedly fraudulent schemes devised in pursuit of that strategy to the innocent victims of that strategy. Second Amended Complaint, ¶¶ 67-68.
The second amended complaint alleges that this enterprise was distinct from that inherent in a pattern of racketeering, because the association of Morken and Firstar Milwaukee allowed the Adventure Cattle scheme to operate through Firstar Milwaukee’s operation of the controlled disbursement scheme, Second Amended Complaint, ¶ 69a; SGLE originated the purchase of all Morken controlled cattle and generated handling fees from the cattle allowing the enterprise to maintain the float, Id. at ¶ 69b; Firs-tar Corporation subsidiary banks were encouraged to market “products” like the controlled disbursement scheme and Bankers’ Acceptance financing scheme necessary to Morken’s operations, Id. at ¶ 69c, d, & e; and Firstar Sioux City and Firstar Milwaukee worked to involve investors in the Adventure Cattle program while providing loans to Morken to operate the program. Id. at ¶ 69f. The second amended complaint also alleges a new claim of conspiracy to control this RICO enterprise by defendants Miley, Firstar Milwaukee, and Firstar Wausau, with new defendants Buseemi and Vinent. Id. at ¶¶ 70-71. The second amended complaint alleges that the pattern of racketeering and the RICO predicate acts of this RICO enterprise, Id. at ¶ 72, included the controlled disbursement scheme, Id. at ¶¶ 74-83; promotion of the Adventure Cattle program, Id. at ¶¶ 84-95; shut-down of the controlled disbursement scheme, Id. at ¶¶ 96-103; and bankruptcy fraud, Id. at ¶¶ 104-106.
The court believes that, once again, a side-by-side comparison of the comparable allegations of the first and second amended complaints will assist in understanding the differences between the two complaints.
TABLE II: Comparison Of RICO Allegations In The First And Second Amended Complaints
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*1491 [[Image here]]
*1492 [[Image here]]
*1493 [[Image here]]
With this background in mind, the court turns to the legal analysis of the motions now pending before the court.
II. LEGAL ANALYSIS
A. The Motion For Reconsideration
Although the defendants’ criticism of the vagueness of plaintiffs’ motion to reconsider is well-taken, it is nonetheless apparent that the motion seeks two things. First, it seeks amendment of the court’s March 1, 1995, ruling to allow plaintiffs the opportunity to file an amended complaint, because plaintiffs believe that the deficiencies the court found in the first amended complaint could be cured, and the court should have granted leave to amend as a matter of course. Sec *1494 ond, it seeks alteration or amendment of the ruling, because plaintiffs assert that the court improperly rejected unidentified precedent of the Eighth Circuit Court of Appeals in determining that the Adventure Cattle contracts are not securities within the meaning of the Securities Acts of 1933 and 1934. 13 The court’s analysis begins with the standards applicable to, and, indeed, with the identification of the authority for, the plaintiffs’ motion to reconsider.
1. Applicable standards
Plaintiffs’ motion fails to identify the authority for a motion to reconsider. The Eighth Circuit Court of Appeals commented on the “dangers of filing a self-styled ‘motion for reconsideration’ that is not described by any particular rule of federal civil procedure,” and identified the usual bases upon which such motions are construed to have been made, in
Sanders v. Clemco Indus.,
Federal courts have construed this type of motion as arising under either Rule 59(e) (motion to alter or amend the judgment) or Rule 60(b) (relief from judgment for mistake or other reason). See Spinar v. South Dakota Bd. of Regents,796 F.2d 1060 , 1062 (8th Cir.1986). The two rules serve different purposes and produce different consequences, both substantive and procedural. See A.D. Weiss Lithograph Co. v. Illinois Adhesive Prods. Co.,705 F.2d 249 , 249-50 (7th Cir.1983) (per curiam). When the moving party fails to specify the rule under which it makes a postjudgment motion, that party leaves the characterization of the motion to the court’s somewhat unenlightened guess, subject to the hazards of the unsuccessful moving party losing the opportunity to present the merits underlying the motion to an appellate court because of delay.
Sanders,
The court’s “somewhat unenlightened guess” here is that the motion, filed within ten days after the judgment, was intended to be made pursuant to
FedR.Civ.P.
59(e);
Sanders,
a. Rule 59(e) motion to alter or amend
Federal Rule of Civil Procedure 59(e) provides as follows:
(e) Motion to Alter or Amend a Judgment. A motion to alter or amend the judgment shall be served not later than 10 days after entry of the judgment.
FedR.Civ.P.
59(e). Thus,
Fed.R.Civ.P.
59(e) empowers a district court to alter or amend original judgments.
FedR.Civ.P.
59(e). “Although the words ‘alter or amend’ imply something less than ‘set aside,’ a court may use Rule 59(e) to set aside the entire judg
*1495
ment.”
Sanders v. Clemco Indus.,
Although the rule identifies the time within which such a motion must be filed,
15
it does not otherwise establish the criteria by which the court is to assess the merits of the motion. However, the Eighth Circuit Court of Appeals quoted with approval the Seventh Circuit Court of Appeals’ statement that the “ ‘limited function’ ” of a motion for reconsideration is “ ‘to correct manifest errors of law or fact or to present newly discovered evidence.’ ”
Hagerman v. Yukon Energy Corp.,
The Eighth Circuit Court of Appeals has held that “ ‘[a] motion to alter or amend judgment cannot be used to raise arguments which could have been raised prior to the issuance of judgment.’ ”
Concordia College Corp. v. W.R. Grace & Co.,
The trial court’s grant or denial of a motion pursuant to
Fed.R.Civ.P.
59(e) is reviewed on the grounds of abuse of discretion.
Concordia College Corp.,
ft. Rule 60(b) motion for relief from judgment
Plaintiffs’ failure to identify the authority for their motion to reconsider, even though it was filed within ten days of the ruling it seeks to have reconsidered and may therefore be presumed to be made pursuant to Rule 59(e), could also reasonably be construed as a motion for relief from judgment made pursuant to Fed.R.Civ.P. 60(b). The court will therefore examine the standards applicable to a Rule 60(b) “motion to reconsider” as well. Fed.R.Civ.P. 60(b) provides, in pertinent part, that
[o]n motion and upon such terms as are just, the court may relieve a party or a party’s legal representative from a final judgment, order, or proceeding for the following reasons: (1) mistake, inadvertence, surprise, or excusable neglect; (2) newly discovered evidence which by due diligence could not have been discovered in time to move for a new trial under Rule 59(b); (3) fraud (whether heretofore denominated intrinsic or extrinsic), misrepresentation, or other misconduct of an adverse party; (4) the judgment is void; (5) the judgment has been satisfied, released, or discharged, or a prior judgment upon which it is based has been reversed or otherwise vacated, or it is no longer equitable that the judgment should have prospective application; or (6) any other reason justifying relief from the operation of the judgment. The motion shall be made within a reasonable time, and for reasons (1), (2), and (3) not more than one year after the judgment, order, or proceeding was entered or taken.
Thus, a motion pursuant to Rule 60(b) does not suffer from the same time restrictions as are found in Rule 59(e),
Robinson v. Armontrout,
The Eighth Circuit Court of Appeals has consistently held that a motion pursuant to Rule 60(b) requires that the moving party establish “exceptional circumstances” to obtain the “extraordinary relief’ the rule provides.
United States v. One Parcel of Property Located at Tracts 10 and 11 of Lakeview Heights, Canyon Lake, Comal County, Texas,
Because plaintiffs have cited no authority for their motion for reconsideration, the court must first attempt to discern the basis for that motion from the arguments plaintiffs make in their motion.
Robinson, 8
F.3d at 7 (movant did not detail which of Rule 60(b)’s ground he was relying upon, so
*1497
the court looked to nature of his allegations to determine the basis for his motion);
Sanders,
Rule 60(b)(6) was intended to provide relief “only where ‘exceptional circumstances prevented the moving party from seeking redress through the usual channels.’”
Atkinson,
“[ejxeeptional circumstances” are not present every time a party is subjected to potentially unfavorable consequences as a result of an adverse judgment properly arrived at. Rather, exceptional circumstances are relevant only where they bar adequate redress. As noted above, Atkinson had a full and fair opportunity to litigate his claim. The district court properly found that he [was not entitled to relief]. Accordingly, Atkinson is not entitled to relief under Fed.R.Civ.P. 60(b)(6).
Atkinson,
Whether to grant a hearing or make specific findings in ruling upon a Rule 60(b) motion is left to the district court’s discretion.
Atkinson,
Just as whether or not a hearing should be had is left to the court’s discretion, the ultimate grant or denial of a Rule 60(b) motion also rests in the discretion of the district court.
Sheng v. Starkey Labs., Inc.,
2. Reconsideration here
As the court observed above, the motion for reconsideration, now deemed, in the first instance, at least, to have been made pursuant to
Fed.R.Civ.P.
59(e), asks for two things. It seeks reconsideration of the court’s ruling that the contracts in question are not securities and the opportunity to replead the RICO claims. The court therefore begins its analysis of plaintiffs’ motion for reconsideration with consideration of the question of whether it committed a “manifest error of law,”
Hagerman,
After completing this dual analysis of the securities issue, the court will perform the same analysis two-part consideration, pursuant to both Rule 59(e) and Rule 60(b), of the question of whether it should have granted the plaintiffs leave to amend as a matter of course, rather than dismissing the first amended complaint outright. Woven into this analysis of the second issue presented in the “motion for reconsideration” must be due consideration for plaintiffs’ alternative motion for leave to file a second amended complaint, which presents significantly different allegations in support of both the securities law and RICO claims.
a. Reconsideration in light of controlling precedent
Although plaintiffs’ motion, rather surprisingly, does not identify the controlling precedent on the securities issue this court purportedly disregarded, plaintiffs eventually identified that precedent in their reply brief as
Booth v. Peavey Co. Commodity Servs.,
i. The disregarded precedent. The relevant portion of Booth, in its entirety, states as follows:
While the point was not argued by the parties, we feel it necessary to consider first whether an investor has a right to institute an action against a dealer for churning a commodity account. Such an action is not specifically provided for by the Commodity Exchange Act, 7 U.S.C. §§ 1-17. We believe, however, that a private remedy for churning a commodity account is permitted by either § 6(d) of the Commodity Exchange Act, Goodman v. H. Hentz & Co.,265 F.Supp. 440 (N.D.Ill.1967), or the applicable portions of the Securities Act of 1933,15 U.S.C. §§ 77a, et seq., and the Securities Exchange Act of 1934, 15 U.S.C. §§ 78a, et seq., Maheu v. Reynolds & Co.,282 F.Supp. 423 , 429, n. 2 (S.D.N.Y.1968); W.J. Abbott & Co. v. S.E.C.,276 F.Supp. 502 (W.D.Pa.1967). See also, Anderson v. Francis I. duPont & Co.,291 F.Supp. 705 (D.Minn.1968); Berman v. Orimex Trading, Inc.,291 F.Supp. 701 (S.D.N.Y.1968).
Booth,
ii. Import of the precedent.
First,
Booth
on its face says nothing explicitly about whether horizontal or vertical commonality is required for an investment vehicle to be a security. What it addresses is whether a cause of action exists against a dealer for churning a commodity account.
Booth,
Next, the court has reviewed the history of § 6 of the Commodity Exchange Act and finds that it did not in 1970 include a subsection (d) as identified in
Booth,
Turning to the second basis for the cause of action identified in
Booth,
which is the Securities Acts of 1933 and 1934, albeit without any identification of which particular provisions might be applicable, the court has again turned to the decisions cited by the Eighth Circuit Court of Appeals for elucidation. First, the Eighth Circuit Court of Appeals cites
Maheu v. Reynolds & Co.,
Nor do the other cases cited in
Booth
create the necessary implication that horizontal commonality has not been required by this circuit since 1970, as plaintiffs assert.
See W.J. Abbott & Co. v. S.E.C.,
iii. Irrelevance of the precedent to this court’s ultimate determination.
Even if
Booth
could be construed to mean what plaintiffs say it means, that construction of Eighth Circuit law would not mean that this court committed a manifest error of law in
*1501
ruling that the Adventure Cattle contracts were not securities. The court did not rely exclusively on its conclusion that the contracts lacked horizontal commonality in ruling that the contracts were not securities.
DeWit,
Plaintiffs omit from their characterization of the court’s prior ruling, however, its further conclusion that “[e]ven if vertical commonality alone would suffice to make an investment contract a security, the court concludes that such commonality is also lacking in this case.”
Id.
at 980. Thus, even if this court were wrong in its conclusion that horizontal commonality should be required, and the court does not retreat from that position, the court also decided that the Adventure Cattle contracts were not securities for lack of vertical commonality, which plaintiffs have asserted is the only commonality requirement in this circuit.
Id.
at 980. Furthermore, the court found that the Adventure Cattle contracts failed the third prong of the
Howey
test, the requirement that the investor expect profit from the effort of others.
Id.
at 980-82. The court also found that even if the Adventure Cattle contracts were securities, the defendants could not be held hable under the securities laws, because they were not “sellers,”
DeWit,
Nor are there any “exceptional circumstances” requiring the court to grant relief from its judgment, pursuant to Rule 60(b)(6), because, once again, if plaintiffs disagreed with the court’s determination of whether or not the Adventure Cattle contracts were securities as pleaded in the first amended complaint, the plaintiffs could have sought redress through the usual channels by assigning as error on appeal this court’s determination that there were no “securities” upon which to found securities law claims.
Atkinson,
b. Reconsideration of failure to include leave to amend
Plaintiffs next seek reconsideration of the court’s March 1, 1995, order, because the court did not, as a matter of course, grant plaintiffs leave to amend to cure the deficiencies the court had found in the first amended complaint, but simply dismissed the complaint. Plaintiffs have cited no authority for the proposition that the court should have granted such leave as a matter of course, although they do cite some authority for the obvious, black-letter rule that leave to amend, in general, should be freely given. Plaintiffs then contend that their ability to cure pleading defects has been improved by extensive discovery since the first amended complaint was filed. Plaintiffs acknowledge that the court opined that many of the pleading defects could not be cured by further discovery on the RICO issue, but take that to mean that “pleading defects” might be cured by repleading. Plaintiffs argue that a re-pleaded RICO enterprise would cure “virtu *1502 ally all” of the defects the court noted in the RICO claim. 20
Defendants counter that amendment of the complaint would be futile. They point out that plaintiffs had already amended their complaint once and had ample opportunity to do so again after defendants’ motion to dismiss identified the deficiencies in the pleading of the various claims, but plaintiffs did not do so. Defendants contend that they would be prejudiced by belated amendment, because they have already expended significant resources in demonstrating the inadequacy of the first amended complaint and this court has already determined that re-pleading would be a futile exercise by noting that additional discovery could not salvage the RICO claim. They argue that the court should not grant repeated opportunities to amend pleadings where plaintiffs have eschewed opportunities to replead challenged claims for an extended period of time after the opposing party challenged the pleadings but before the court ruled on the motion to dismiss. Finally, defendants argue that, because plaintiffs should previously have addressed these pleading deficiencies, allowing them to do so on reconsideration would give them a forbidden second bite at the apple when they have nothing hitherto unknown to them upon which to replead their allegations.
Before turning to the standards governing whether or not the court should have granted leave to amend as a matter of course, or whether leave to amend should be granted at all, the court first notes that plaintiffs never sought an opportunity to replead or reamend the challenged complaint in any resistance to the motion to dismiss submitted to the court or in oral arguments. Rather, during the pendency of the motion to dismiss, plaintiffs stood on the adequacy of their pleadings or upon their ability to prove sufficient facts at trial to prevail on their claims. A desire to amend the complaint, it appears to the court, only surfaced when the court dismissed the complaint. The court will consider in due course whether that belated response to identification of deficiencies in the first amended complaint is fatal to plaintiffs’ request for leave now to reamend the complaint.
i. Opportunity to replead after dismissal. Although plaintiffs have cited no authority whatsoever for a right to replead or common practice of allowing amendment after dismissal for failure to state a claim, this court has found a large number of decisions considering the propriety of granting leave to amend following such a dismissal.
Outright dismissal, without leave to amend, is not necessarily improper. For example, in Edgington v. Missouri Dep’t of Corrections, 52 F.3d 777 (8th Cir.1995), the Eighth Circuit Court of Appeals held that, despite the liberality with which courts are to treat pro se pleadings, the district court had not abused its discretion by dismissing without prejudice a prisoner’s pro se complaint pursuant to 42 U.S.C. § 1983, because the plaintiff was free to refile the complaint. Edgington, 52 F.3d at 779-80 (dismissal for failure to comply with court order to replead with specificity). Thus, although the complaint here has been dismissed for failure to state a claim, that dismissal was without prejudice and does not bar plaintiffs from refiling the complaint.
Furthermore, the Eighth Circuit Court of Appeals has held that following dismissal pursuant to
Fed.R.Civ.P.
12(b)(6), denial of leave to amend may be “entirely proper.”
Dorn v. State Bank of Stella,
[although a pretrial motion for leave to amend one’s complaint is to be liberally granted, different considerations apply to motions filed after dismissal. See, e.g., Wright v. Anthony,733 F.2d 575 , 577 (8th Cir.1984); Hinton v. CPC International, Inc.,520 F.2d 1312 , 1314 (8th Cir.1975). *1503 After a complaint is dismissed, the right to amend under FedR.Civ.P. 15(a) terminates. Czeremcha v. International Association of Machinists and Aerospace Workers,724 F.2d 1552 , 1556 (11th Cir.1984). Although a party may still file a motion for leave to amend and amendments should be granted liberally, such a motion would be inappropriate “if the court has clearly indicated either that no amendment is possible or that dismissal of the complaint also constitutes dismissal of the action.” Czeremcha,724 F.2d at 1556 n. 6. Here, the district court’s order of August 24, 1984 dismissed the complaint on its merits and did not grant Dorn leave to amend.
It is possible, of course, to give relief from a final judgment of dismissal under Fed.R.Civ.P. 60(b) [and presumably under Rule 59(e) as well], but where, as here, the motion for leave fell short of meeting the requirements of that rule in any real sense, and where, as here, the amended complaint added little, if any, of substance to the original complaint, it was not error for the district court to deny leave to amend three months after final judgment. Assuming that in present circumstances the district court had authority to grant leave to amend, its refusal to do so would be reversed only for abuse of discretion. See Holloway v. Dobbs,715 F.2d 390 , 392 (8th Cir.1983) (per curiam), and cases there cited. We find no such abuse here.
Dorn,
Cases from this circuit more recent than
Dorn
do not demonstrate the inapplicability of these standards. In
Estle v. Country Mut. Ins. Co.,
In a case more directly on point with the procedural posture of the present litigation,
Weimer v. Amen,
In
United States v. Maull,
The only Eighth Circuit Court of Appeals authority the court has found that might support plaintiffs’ assertion that the court should, as a matter of course, have allowed amendment of the complaint upon dismissing it for failure to state a claim is
Rogers v. Bruntrager,
Nor is Dorn out of step with decisions from other circuits. Although a number of other circuit courts of appeals have recently considered whether the district court should give leave to amend to plaintiffs whose complaints have been dismissed pursuant to Rule 12(b)(6), none holds that the district court is required to include leave to amend in the order of dismissal. 21 Most courts of appeals *1505 uphold the grant or denial of motions for leave to amend, made either in response to a motion to dismiss or following the court’s actual dismissal of the complaint, based upon whether or not the amended complaint cures the deficiencies identified by the court in its order of dismissal, and upon whether or not the plaintiff has bypassed earlier opportunities to amend the complaint in light of deficiencies identified by the opposing party. 22 Therefore, the court turns to application of the standards in Dorn to the present request for leave to amend in plaintiffs’ motion to reconsider.
ii. Leave to amend here.
Application of
Darn
to the present motion to reconsider, alter, or amend the March 1, 1995, judgment of dismissal yields the following conclusions. First, a
sua sponte
grant of leave to amend need not be incorporated as a matter of course into an order dismissing a complaint pursuant to
Fed.R.Civ.P.
12(b)(6).
Dorn,
Next, although Rule 15(a) and the case law that has grown up around it may articulate standards that are also applicable to whether or not leave to amend should be granted after dismissal of the complaint, Rule 15(a) does not provide the authority for plaintiffs request for leave to amend here. Dorn, at 443-44. Nor would it be proper for the court to grant leave to amend here without first granting plaintiffs relief from the judgment of dismissal. Although the court expressed only doubt that amendment was possible without stating that there was no possibility of curing each and every defect identified, the court did indicate that dismissal of the complaint also constituted dismissal of the action. Id. Plaintiffs were therefore correct in their response to defendants that they could not file a proposed amended complaint until they had first obtained amendment of or relief from the March 1, 1995, order allowing them to do so. Id.
Yet, the court concluded above that there was no “manifest error of law” requiring the court to alter or amend its judgment of dismissal
pursuant to Rule 59(e)
to provide for leave to amend — a conclusion that would seem to preclude granting plaintiffs relief from the dismissal to allow amendment of the deficient complaint. However, Rule 60(b) provides further grounds for relief from the dismissal, including the “catch-all” ground of “any other reason justifying relief from the operation of the judgment” found in
Fed. R.Civ.P.
60(b)(6), if plaintiffs can show the requisite “exceptional circumstances” required for relief under that rule.
See Dorn,
However, the court reads the standards for relief from judgment under Rules 59(e) and 60(b) to require the court ultimately to consider how justice can best be served, not whether or not the attorneys for the losing side have done their job in identifying the basis for the relief the
party
may wish to obtain. The court therefore turns to the question of whether Rule 60(b), instead of Rule 59(e), would provide for relief from the March 1, 1995, ruling to permit filing of the second amended complaint. The court notes first that neither the plaintiffs’ failure to make a request for leave to amend prior to dismissal or the court’s failure to include leave to amend in its order dismissing the first amended complaint constitutes “exceptional circumstances” necessary for the extraordinary relief plaintiffs request.
See, e.g., One Parcel,
However, although the plaintiffs have recourse to the court of appeals to redress improper dismissal of the first amended complaint,
Atkinson,
3. Summary Regarding The Motion For Reconsideration
Plaintiffs’ motion for reconsideration is therefore denied as to any alleged error in considering the lack of horizontal commonality of the Adventure Cattle contracts as fatal to the securities allegations as pleaded in the first amended complaint. Plaintiffs’ motion for reconsideration is denied, to the extent that it was made pursuant to Fed.R.Civ.P. 59(e), as to alleged error in failing sua sponte to grant leave to amend, but the court will nonetheless consider plaintiffs’ alternative motion for leave to amend pursuant to Fed. R.Civ.P. 60(b)(6). Defendants’ motion to strike the proffered second amended complaint is denied to the extent that the court will give consideration to the adequacy of the proffered second amended complaint. The court therefore turns next to the adequacy or futility of the second amended complaint in its effort to decide whether to permit the proffered amendment.
B. Adequacy Of The Second Amended Complaint
Although plaintiffs’ counsel indicated at oral arguments that the motion to reconsider sought relief primarily to replead the RICO allegations, the proffered second amended complaint also repleads the securities allegations. The court must therefore consider the adequacy or futility of the repleaded allegations supporting both the securities and RICO claims.
1. Repleaded securities claims
Plaintiffs have attempted to replead the securities claims to establish that the Adventure Cattle contracts had both horizontal and vertical commonality, and therefore were investment contract securities. They allege that investor funds were “pooled” with funds of other investors and with Morken in the “kite” accounts at Firstar Milwaukee, that Morken made all decisions concerning the cattle, that investor cattle were pooled with the cattle of other investors and Morken to make saleable lots, that each investor received his pro rata share of profits from such sales, and that plaintiffs did indeed have an expectation of profits tied exclusively and *1508 directly to Morken’s skill, efforts, and fortuity. Plaintiffs argue that the court incorrectly looked at only the investment decisions, and not the day-to-day operations decisions, of the Adventure Cattle scheme, which plaintiffs contend “eviscerates” Howey, because individual investors always make decisions about the timing of investments. They argue further that the court incorrectly concluded that plaintiffs retained the right to “pursue alternatives” with their cattle, when in fact Morken made all decisions and the investors were totally dependent on him. Plaintiffs contend further that the word “guaranteed” never appears in reference to the return plaintiffs could expect on their investments. Rather, plaintiffs now allege that they were led to expect “profits” from their investment in cattle and that those profits were protected by Morken’s other enterprises being able to make money even when cattle sales did not. Finally, plaintiffs contend that the cattle investment scheme here is very like the investment in individual parcels in citrus groves held to be a “security” in Howey, because both involved promises of profits from the entire operation.
Defendants reiterate that even as repleaded, plaintiffs cannot assert that there was a horizontal “pooling” or investment in shares in an undivided interest in Morken’s entire herd. Rather, each investor still owned only his or her own head of cattle, and obtained a return on those head of cattle, not some pro rata distribution of profits from an entire investment based on shares in the undivided interest. Defendants also reiterate that the return on the investment here was not in fact “profits” from the investment, but a guaranteed return protected by Morken’s profits from other business enterprises. Thus, defendants assert that the only commonality among investors was that Morken was a party to each contract. Defendants attack plaintiffs’ argument that “pooling” of cattle to make saleable lots in any way represented a “pooling” of investments in the common enterprise. Defendants also argue that there was no vertical commonality, because the return promised investors was not linked in any way to Morken’s fortunes or efforts, but guaranteed. Thus, the only fortuity in the investment was the amount of cattle investors could afford to purchase. Defendants acknowledge that the repleaded complaint demonstrates that Morken’s profits may have depended on his efforts, but that plaintiffs’ return on their investments did not. The payoff to investors was a fixed cost of Morken’s operations, over which he enjoyed profits and under which he suffered losses. Reliance on solvency of the promoter, defendants assert, is not the same as relying on the promoter’s efforts. Defendants reiterate that expectation of a specified interest payment is not the apportionment of profits, citing
Resolution Trust Corp. v. Stone,
In assessing the adequacy or futility of the repleaded allegations, the court reiterates that it must apply to that assessment the test of whether the repleaded complaint could withstand a motion to dismiss for failure to state a claim pursuant to
Fed.R.Civ.P.
12(b)(6).
Weimer,
*1509 a. Commonality
i. Horizontal commonality.
In
DeWit,
Here, the court is asked to infer that because Morken “pooled” cattle of several investors to make up saleable lots, the “profits” from those sales were “pooled” in Morken’s accounts prior to distribution to individual investors, and the distribution of proceeds was made “pro rata” to the investors based on the number of cattle they owned in the lot sold, that the necessary “pooling” of interests and profits has occurred, making the Adventure Cattle contracts as they actually functioned into “securities,” even though plaintiffs acknowledged that the contracts on their faces might not be securities. Such a legal conclusion and the factual inferences upon which it is based are unwarranted.
Plaintiffs’ error, however, does
not
lie in looking beyond the face of the contract to examine how the investment actually “worked.”
See, e.g., Howey,
These points bear further discussion. In Wals, the Seventh Circuit Court of Appeals distinguished investments with horizontal commonality, on the basis of ownership of undivided interests, from the condominium investment scheme before it, because
[t]he owner of a condominium does not own an undivided share of the building complex in which his condominium is located. He owns his condominium, and if it is rented out for him by the developer he receives the particular rental on that unit rather than an undivided share of the total rentals of all the units that are rented out. The nature of his interest thus is different from that of a shareholder in a corporation that owns rental property.
Wals,
Plaintiffs do not allege, and the SEC Realty defendants vehemently deny, that any rent-pooling arrangement existed among the Lake Park investors. The rents and expenses attributable to each unit were not shared or pooled in any manner, but were instead the sole responsibility of the unit owner. Plaintiffs owned individual units, and could make profits or sustain losses independent of the fortunes of other purchasers. There are simply no indicia of horizontal commonality. The fact that many purchasers employed the services of Harvey Freeman & Sons, Inc. in renting their units establishes, at most, a common agency, not a common enterprise. See Lavery v. Kearns,792 F.Supp. 847 , 857-59 (D.Me.1992) (no horizontal commonality where unit owners executed separate contracts with a common marketing agent). *1510 Accordingly, the Lake Park venture does not constitute a common enterprise within the meaning of Howey and the sale of the Lake Park condominium units cannot be considered the sale of securities for purposes of the federal securities laws.
Revak,
Nor was there a “pro rata” distribution of “profits” in the Adventure Cattle scheme.
Revak,
The plaintiffs assert that the repleaded complaint demonstrates that the investment here was more like the investment in the citrus groves found to be a security in Howey than the condominium investment schemes held not to be securities in Revak and Wals. In Howey, the Supreme Court held that, although each investor owned a specific parcel of land in the citrus grove,
individual development of the plots of land that are offered and sold would seldom be economically feasible due to their small size. Such tracts gain utility as citrus groves only when cultivated and developed as component parts of a larger area. A common enterprise managed by respondents or third parties with adequate personnel and equipment is therefore essential if the investors are to achieve their paramount aim of a return on their investments. Their respective shares in this *1511 enterprise are evidenced by land sales contracts and warranty deeds, which serve as a convenient method of determining the investors’ allocable shares of the profits. The resulting transfer of rights in land is purely incidental.
Thus, all the elements of a profit-seeking business venture are present here. The investors provide the capital and share in the earnings and profits; the promoters manage, control and operate the enterprise____
Howey,
The line between a “common agency” and a “common enterprise” can be crossed, as it was in
Long v. Shultz Cattle Co., Inc.,
Likewise, in
Barry v. Ceres Land Co., Inc.,
Fed.Sec.L.Rep. ¶ 99,008,
Although the cattle feeding agreements provided that the two plaintiffs and each of the other 14 investors in Pool V were to own a specific number of separately identified animals, Ceres treated each of the 16 investors in Pool V as owning a percentage of the entire herd, together with all of the risks of loss and expectations of profit that such a percentage ownership entailed. There was no way of identifying any specific Pool V animal as being owned by any specific Pool V investor but Pool V cattle were kept separate from other herds of cattle.
Id. The district court found that the investment met all three of the Howey factors, and was therefore a “security.” Id. at *7. As to common enterprise, the court found that “[plaintiffs’ cattle were pooled with the cattle of the other Pool V investors.” Id. The court also found that investors had an “expectation of profits,” because the plaintiffs testified that they entered into the agreement with the expectation of profits and purported tax benefits were secondary. Id. The court also found that the profits were expected to arise from the efforts of the promoter and third parties, because “there can be little doubt that plaintiffs relied on Ceres’ entrepreneurial and managerial efforts.” Id. at *8.
Looking only at the issue of common enterprise for the moment, the Adventure Cattle scheme is distinguishable from that in Barry in critical ways. First, there was no pooling of cattle such that the plaintiffs were treated as owning a percentage of the entire herd, together with all of the risks of loss and expectations of profit that such a percentage ownership entañed. Even as repleaded, the Adventure Cattle contracts and the “workings” of the investment provided that each investor owned specific head of cattle, Exhibit C, p. 1; Second Amended Complaint, ¶ 47.-a., and bore the expenses of feed and yardage for those specific cattle, Exhibit C, p. 1; Second Amended Complaint, ¶ 47.d., not shares of the herd and shares in the expenses of an entire herd. Unlike the investors in Barry, who relied on the promoter to arrange the financing for the entire group of investors, in the Adventure Cattle scheme, the investors each arranged their own individual financing for the purchase of their own cattle. Second Amended Complaint, ¶ 47.b. WMle in Barry, it is apparent that the investors as a group shared the risk of loss, with the promoter providing a “stop loss” or “floor” for losses, in the Adventure Cattle scheme, risk of loss was borne entirely by Morken and was not shared among the investors. Exhibit C, p. 1. Simüarly, the investors in Barry had an expectation that they would share among the group any profits derived from the sale of the entire Pool V herd, but in the Adventure Cattle scheme, there was no sharing of whatever profits might arise from the sale of the lot of cattle in which an individual investor’s cattle were sold, because each investor received the same, predetermined return whatever the sale price per head of the lot of cattle might be and whatever expenses of the individual investor had to be reimbursed first. 24 Exhibit C, p. 2, numbered ¶ 3.
Thus, plaintiffs’ aUegations of “pooling” are unwarranted inferences or legal conclusions contrary to
the facts
as pleaded in the second amended complaint, which, treated as true, demonstrate that there was no “pooling” of the investments of the investors.
Westcott,
*1513
ii. Vertical commonality.
Plaintiffs have also attempted to meet the “common enterprise” element of the
Howey
test by repleading allegations of vertical commonality. Although the plaintiffs explicitly plead that plaintiffs’ fortunes were tied either to Morken’s efforts or to his fortunes,
see
Second Amended Complaint, ¶¶ 47.g. & i. & ¶¶ 110-113, the standards for finding vertical commonality,
see Revak,
What the plaintiffs’ new allegations lack is the “direct correlation ... between success or failure of [the promoter’s] efforts [or fortunes] and success or failure of the investment.”
Eurobond Exchange,
the investors’ fortunes were quite independent of Morken’s, because each had been guaranteed a specific return on their investment. Morken enjoyed success beyond the guaranteed performance, and suffered performance below it — investors did not, at least not until the complete collapse of the scheme.
DeWit,
Furthermore, the Adventure Cattle contracts specifically uncoupled the success of Morken’s efforts in raising and marketing the cattle from the investors’ success with the investment. If Morken’s efforts were highly successful, reaping huge returns on the sale of the investors’ cattle, only Morken enjoyed the fruits of that success, because the return to the investors did not change. The investors were obligated under the contract to pay over to Morken “[a]ny and all funds generated by the sale of the cattle above the gross investment by the Investor following the payment of the 25% return.” Exhibit C, p. 2, numbered ¶ 3. On the other hand, if Morken’s efforts did not produce sufficient return on the cattle, pursuant to numbered paragraphs three and four of the sample contract, Exhibit C, p. 2, Morken undertook to “issue a check in an amount sufficient to equal the gross amount of funds and the 25% return to the Investor.” See Second Amended Complaint, ¶47.11. (identifying the sources from which Morken would provide the necessary capital). The fact that Morken ultimately could not perform the promises in the contracts does not make them securities subject to laws prohibiting securities fraud, although the allegations that Morken and others may have misrepresented Morken’s ability to fulfill those promises may state a common-law fraud claim.
On what, then, did the success or fortunes of the investors depend? The only part of the investment scheme in which investors could enjoy lesser or greater return was the part entirely out of Morken’s hands. Under the Adventure Cattle scheme, each investor negotiated the financing of the investor’s investment. The investor alone was responsible for paying the interest and other expenses of that financing, presumably out of the guaranteed return on the Adventure Cattle contract. See Second Amended Complaint, ¶ 47.b. & c. If the investor was able to negotiate a particularly favorable interest rate on that financing, the investor would enjoy a greater net return on the investment after paying those loan expenses out of the return from the sale of the cattle. If the investor negotiated a less favorable interest rate on that financing, the investor enjoyed a lesser net return. Similarly, the investor determined how many cattle to purchase, thus determining the investor’s return. As the court observed in its prior ruling
Morken did not make the decisions upon which the success of any particular investment depended: he did not arrange the financing for the investors and did not decide how many cattle to buy when, nor when to sell out of a particular group of cattle. Those decisions remained in the hands of the investors.
DeWit,
The court finds that even as repleaded, the Adventure Cattle scheme lacked the requisite vertical commonality. Therefore, the Adventure Cattle scheme did not involve the sale of securities, and filing of the repleaded securities claims would be futile.
Weimer,
b. Expectation of profit from, the effort of others
In its prior ruling, the court determined that the Adventure Cattle contracts
*1515
did not meet this prong of the
Howey
test, because there was no expectation of “profits.”
DeWit,
Merely changing the name for the return, however, will not make it “profits,” nor will striking the word “guaranteed” mean that the court must accept any of these allegations as true. Once again, the court cannot blindly accept plaintiffs’ legal conclusions and unwarranted inferences as facts.
Westcott,
Even were this not so, if the specified return on the investment could be construed to be profits, the court would nonetheless find the repleaded complaint inadequate on this final prong of the
Howey
test. Looking to the involvement of the parties in the investment scheme, rather than to whether or not investors had an expectation of profits,
*1516
Teague,
2. Repleaded RICO claims
In its prior ruling, the court determined that the parties agreed that the RICO enterprise was “Morken’s enterprises,” and the critical question was whether the defendants had “conducted” that RICO enterprise.
DeWit,
a. A proper RICO enterprise
Plaintiffs assert that there is nothing new about allegations that a bank holding company and its banks could be part of a RICO enterprise. They also argue that the shifting purposes and shifting personnel of the two phases of the alleged enterprise are not fatal, because only “some continuity” to the enterprise is required. Defendants, to the contrary, argue that such shifting personnel and purposes are fatal to the alleged enterprise. Defendants also argue the doubtfulness of the shared purpose between the banks and Morken in the first phase of the alleged enterprise, because Morken was unlikely to be interested in penetrating the agricultural lending market. Furthermore, they argue that a RICO association-in-fact enterprise cannot consist of a parent corporation and its subsidiaries, as is alleged to be the case in the second phase of the enterprise, because of the identity of purpose of such parent and subsidiaries. Thus, they argue, there is no enterprise distinct from the “RICO person” in the second phase alleged to have conducted the enterprise.
i. Association-in-fact enterprises. An “enterprise” is defined by RICO to include
any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity [.]
18 U.S.C. § 1961(4). Thus, “[t]he RICO Act encompasses two kinds of enterprises: legal entities, and ‘associations in fact.’ ”
Bennett v. Berg,
In
Atlas Pile Driving Co. v. DiCon Financial Co.,
The Eighth Circuit Court of Appeals has noted that “[a]n enterprise is particularly likely to be found where ... the enterprise alleged is a legal entity rather than an ‘associational enterprise.’ Legal entities are garden-variety ‘enterprises’ which generally pose no problem of separateness from the predicate acts.”
Bennett,
In other words, [plaintiffs] must show the existence of the enterprise, of which [defendants] were a part. As a matter of law, it is not sufficient that several organized, ongoing groups come together for one concerted action, unless those groups can also be shown to constitute a larger unit, over and above their separate structures and operations, and that this unit meets the Turkette criteria for an “association-in-fact.”
Libertad,
In
Console,
the Third Circuit Court of Appeals parsed out from
Turkette
a three-prong test for an association-in-fact enterprise as requiring the plaintiff to prove: (1) “an ‘ongoing organization’ ”; (2) “proof ‘that the various associates function as a continuing unit’ ”; and (3) “an ‘entity separate and apart from the pattern of activity in which it engages.’ ”
Console,
In
Atlas Pile Driving,
the Eighth Circuit Court of Appeals held that an association in fact may include corporations, citing prior
*1519
decisions from other circuits.
Atlas Pile Driving,
However, the Eighth Circuit Court of Appeals also held in
Atlas Pile Driving
that the “person” named as the defendant cannot also be the entity identified as the enterprise.
Id.
at 995;
see also Libertad,
Here, Atlas and Olson alleged that the enterprise was an association in fact consisting of DiCon, LMH, AES, Stroth, and CACC. Two members, DiCon and LMH, were also persons named as defendants. The appellants contend that, because Di-Con and LMH were members of the enterprise, Atlas and Olson have failed to demonstrate that there exists a person distinct from the enterprise. We disagree.
Here, the enterprise and the person are not identical, as the appellants assert. The enterprise in this case is an association in fact composed of five entities. A collective entity is something more than the members of which it is comprised. If five persons form an association in fact and engage in a pattern of racketeering activity such as drug smuggling and murder, an individual member could never be prosecuted for violating RICO under the appellants’ reasoning because he or she would not be considered distinct from the enterprise. We do not believe that Congress envisioned that this type of conduct would be insulated from RICO prosecutions. Other courts confronted with this issue have reached identical results. See, e.g., Perholtz,842 F.2d at 353-54 ; Galerie Furstenberg v. Coffaro,697 F.Supp. 1282 , 1287-88 (S.D.N.Y.1988); Connors v. Lexington Ins. Co.,666 F.Supp. 434 , 447-48 (E.D.N.Y.1987).
Thus, we find that Atlas and Olson have demonstrated that LMH and DiCon were distinct from the enterprise.
Atlas Pile Driving,
As to plaintiffs’ new claim of conspiracy pursuant to § 1962 and its relationship to a claimed association-in-fact enter *1520 prise, the Eighth Circuit Court of Appeals has held that
an individual’s participation in an association in fact will not necessarily establish his membership in a conspiracy---- [I]n order to prove that an individual joined a conspiracy to violate RICO under section 1962(d), the government must establish that the individual “objectively manifested an agreement to participate directly, or indirectly, in the affairs of an enterprise through the commission of two or more predicate crimes.” [United States v.] Philips [Phillips], 664 F.2d [971,] 1012 [(5th Cir. Unit B 1981), cert. denied,457 U.S. 1136 ,102 S.Ct. 2965 ,73 L.Ed.2d 1354 (1982).] It is true that where the enterprise is defined as an association in fact, proof of that enterprise may prove an unlawful agreement. United States v. Pungitore,910 F.2d 1084 , 1114 (3rd Cir.1990), cert. denied,500 U.S. 915 ,111 S.Ct. 2009 ,114 L.Ed.2d 98 (1991).
United States v. Bennett,
ii. Enterprises consisting of parents and subsidiaries. Defendants challenge the sufficiency of the repleaded RICO enterprise, at least in its “second phase,” as consisting only of a corporation and its subsidiaries, and therefore not an association at all, but a single entity. Defendants argue that none of the RICO defendants in this second phase is distinct from the enterprise, and therefore no RICO claim has been stated.
The Sixth Circuit Court of Appeals has directly confronted the question of whether the proper “distinctness” of the RICO person and the RICO enterprise exists when the enterprise is defined as consisting of a corporation and its subdivisions and the corporation is then asserted to be the RICO person:
Under the “non-identity” or “distinctness” requirement, a corporation may not be liable under section 1962(c) for participating in the affairs of an enterprise that consists only of its own subdivisions, agents, or members. An organization cannot join with its own members to undertake regular corporate activity and thereby become an enterprise distinct from itself. United States v. Computer Sciences Corp.,689 F.2d 1181 , 1190 (4th Cir.1982), cert. denied,459 U.S. 1105 ,103 S.Ct. 729 ,74 L.Ed.2d 953 (1983).
Davis,
Similarly, the First Circuit Court of Appeals examined the “distinctness” requirement as it pertained to a corporation and its subsidiaries in
Compagnie de Reassurance D’Ile de France v. New England Reinsurance Corp.,
As to the § 1962(c) claim, the district court stated that “the three Defendants were [not] separate persons.” In fact, however, NERCO, First State, and Cameron & Colby were distinct corporate entities, with separate legal identities. The distinction between those three entities is not, however, decisive for § 1962(c) purposes. The statute requires that the person (i.e., the three defendants) engaged in racketeering be distinct from the enterprise (in this case, Graham Watson, not a defendant) whose activities he or she seeks to conduct through racketeering. See, e.g., Miranda v. Ponce Federal Bank,948 F.2d 41 , 44-45 (1st Cir.1991) (citing cases) (“the same entity cannot do double duty as both the RICO defendant and the RICO enterprise”). Assuming the court meant to find that NERCO, First State, and Cameron & Colby were not distinct from Graham Watson, it was clearly entitled, on the evidence presented, to make such a finding. Up until mid-1980, Graham Watson was merely an unincorporated division of Cameron & Colby. After that time, although it became a wholly-owned subsidiary corporation, all of its employees were in fact Cameron & Colby employees, and there is no *1521 evidence whatsoever that Graham Watson took any actions independent of its parent. Cf. Brittingham v. Mobil Corp.,943 F.2d 297 , 302-303 (3d Cir.1991) (noting that § 1962(c) claims may be dismissed “when the enterprise and defendant, although facially distinct, are in reality no different from each other”). We accordingly affirm the district court’s dismissal of the plaintiffs’ RICO claims.
Compagnie de Reassurance,
Although it had held in a series of cases that the distinctness requirement is not met where the enterprise and RICO defendants are corporations and their subsidiaries, the Third Circuit Court of Appeals recently reiterated that it is the specific factual relationship among the entities, rather than simply their legal relationship, that is determinative.
Lorenz v. CSX Corp.,
[w]ithout additional allegations, therefore, a subsidiary corporation cannot constitute the enterprise through which a defendant parent corporation conducts a racketeering enterprise____ [C]laims will be dismissed when the enterprise and defendant, although facially distinct, are in reality no different from each other.
Lorenz,
iii. The enterprise alleged here.
There can be no doubt, in light of the foregoing cases, that plaintiffs may properly allege a RICO enterprise that is an “association in fact” rather than a legal entity, 18 U.S.C. § 1961(4);
Bennett,
Plaintiffs must therefore show that they have alleged an association-in-faet enterprise that is otherwise proper and a “pattern of racketeering activity.”
Turkette,
Defendants’ challenge to the repleaded RICO enterprise in its entirety is that it completely changes its purpose at the same time that key members, Morken and SGLE, departed from the enterprise. Thus, defendants argue, there is not one enterprise with continuity of personnel and purpose, but, perhaps, two distinct enterprises. Defendants then argue that each enterprise, which the court has described as the “first phase,” in existence before June 2, 1992, and a “second phase” thereafter, are each inadequate. Defendants attack the definition of the enterprises in the “first phase” as lacking a common purpose and common control. They attack the definition of the enterprise in its “second phase” as lacking a defendant distinct from the enterprise, because the enterprise as alleged consists only of a parent corporation and its subsidiaries, in reality a single entity, and therefore no RICO defendant is distinct from the enterprise.
Defendants’ first objection is well-taken, but not determinative. Although the law of this circuit requires only “
‘some
continuity ... of personnel,’ ” rather than “ ‘complete continuity,’”
Atlas Pile Driving,
Thus, the court turns to defendants’ challenge to the first-phase enterprise as lacking a common purpose. The “common purpose” of the first-phase enterprise plaintiffs allege in the second amended complaint was “to penetrate the agricultural lending market, expand participation in that market, and to derive substantial and increasing fee income through a direct association with Morken and SGLE.” Second Amended Complaint, ¶ 68. Defendants doubt that Morken and SGLE shared this purpose with the other members of the enterprise, which can reasonably be inferred to be a purpose only of the Firstar defendants. The court agrees. Nor does the court find that the enterprise, including Morken and SGLE, can be construed as merely being the “vehicle” for the plan,
29
because the question is whether the
enterprise
can be defined by a shared purpose.
Atlas Pile Driving,
Plaintiffs assert that the structure of the first-phase, and indeed, the second-phase enterprise is sufficient, based on the obvious structure and organization of the Firstar banks, and sufficiently distinct from the inherent predicate acts. Such an argument, however, misses the point that it is the RICO enterprise, not its constituent entities, that must display the requisite structure.
Richmond,
The second-phase enterprise, however, is more problematical, consisting as it does solely of a corporation and its subsidiaries. However, the court must apply the “in reality no different from each other” test of
Lorenz,
b. Pattern or racketeering
As the court observed in its prior ruling, a “ ‘pattern of racketeering’ has been described as ‘the heart of any RICO complaint.’ ”
DeWit,
c. Predicate acts
Like the first amended complaint, the predicate acts upon which the RICO claims depend in the second amended complaint include mail and wire fraud, securities fraud, common-law fraud, and bankruptcy fraud. Second Amended Complaint, ¶¶ 74-106. Because the court concluded above that the Adventure Cattle contracts are not securities, the allegations of predicate acts founded on securities fraud, Second Amended Complaint, ¶¶ 84-95, must be stricken and cannot be considered as supporting a “pattern” of RICO activity. However, the remaining allegations of predicate acts are sufficient.
i. Mail, wire, and common-law fraud.
In assessing the repleaded predicate acts of mail and wire fraud, upon which the RICO allegations here largely depend, the court is particularly mindful of a decision of the Eighth Circuit Court of Appeals handed down only the day before the court’s prior ruling.
See Murr Plumbing, Inc. v. Scherer Bros. Fin. Servs. Co.,
In its prior decisions, the court found that the claims of wire and mail fraud, and the deficiencies in those allegations, were “startlingly similar” to those in
Jepson, Inc. v. Makita Corp.,
By contrast, the mail and wire fraud allegations of the second amended complaint identify with particularity the actors in the fraudulent schemes as Firstar Milwaukee, Firstar Wausau, Vinent, and Buscemi, Second Amended Complaint, ¶¶ 74-76, the nature of the fraud, as disguising the nature of the banking transactions and Morken’s qualification for the purportedly legitimate banking services supplied,
Id.
at ¶¶ 77-79, and the time, place, and manner of the fraud.
Id.
at ¶¶ 80-83. Similar particularity as to time, place, manner, content, and identity of actors and victims is apparent in the renewed allegations of common-law and wire or mail fraud in the allegedly fraudulent shut-down of the controlled disbursement scheme.
See, e.g., id.
¶¶ at 97-103. The plaintiffs have
*1525
successfully alleged mail and wire communications in furtherance of an alleged fraud, even if the content of those communications did not include misrepresentations.
Murr Plumbing,
ii. Bankruptcy fraud.
The court noted that the first amended complaint pleaded with specificity the maker of the statements, to whom they were made, and the respect in which they were fraudulent, but found that the allegations pleaded only conelusory allegations of the Firstar defendants’ knowledge of the fraudulent nature of the filings in the bankruptcy proceedings, and further, that this lone allegation of a predicate act, which could possibly be salvaged by discovery and repleading, did not constitute a pattern of racketeering activity.
DeWit,
3. Summary of disposition of the motion for leave to amend
The court concludes that the RICO claims, as realleged, are not so futile as to bar their filing in an amended complaint following dismissal of the first amended complaint for failure to state a claim upon which relief can be granted. The court will therefore grant plaintiffs’ motion for leave to file the proffered second amended complaint. The court will grant plaintiffs an appropriate period to amend the alleged purpose of the first-phase RICO enterprise in order to conform the pleading to the purpose of that enterprise as alleged in plaintiffs’ brief. However, the claims in the second amended complaint alleging violation of securities laws are dismissed as futile. Furthermore, the allegations of RICO predicate acts founded on alleged securities law violations are also stricken. The court, having given plaintiffs yet another bite at the apple, will not allow a further amendment to attempt to state securities law claims against these defendants.
The court will therefore grant the parties one hundred and twenty days within which to pursue discovery on the RICO and common-law claims contained in the second amended complaint.
C. Interlocutory Appeal
The court, not unmindful of the complexity and closeness of the issues involved in this decision, and concerned that this litigation proceed in the most efficient manner finds this case appropriate for immediate appeal in its entirety pursuant to 28 U.S.C. § 1292(b). That statute provides, in pertinent part, as follows:
(b) When a district judge, in making in a civil action an order not otherwise appeal-able under this section, shall be of the opinion that such order involves a controlling question of law as to which there is substantial ground for difference of opinion and that an immediate appeal from the order may materially advance the ultimate termination of the litigation, he shall so state in writing in such order. The Court of Appeals which would have jurisdiction of an appeal of such action may thereupon, in its discretion, permit an appeal to be taken from such order, if application is made to it within ten days after the entry of the order: Provided, however, That application for an appeal hereunder shall not stay proceedings in the district court unless the district judge or the Court of Appeals or a judge thereof shall so order.
28 U.S.C. § 1292(b). As the Eighth Circuit Court of Appeals has observed, the statute provides for certification of controlling questions of law by the district court for interloe
*1526
utory appeal in circumstances where an appeal is otherwise unavailable.
City of Fort Madison, Iowa v. Emerald Lady,
Because § 1292(b) provides for appeal of orders otherwise unappealable, and thus provides an avenue for resolving disputed and controlling questions of law, the resolution of which will materially further the litigation, the appellate court reviews
de novo
the questions of law certified by the district court.
Simon v. G.D. Searle & Co.,
remain[s] free to consider ‘““such questions as are basic to and underlie” ’ ” the questions certified by the district court. [In re Oil Spill by the Amoco Cadiz,659 F.2d at 793 n. 5] (quoting Helene Curtis Indus., Inc. v. Church & Dwight Co.,560 F.2d 1325 , 1335 (7th Cir.1977) (quoting 9 J. Moore, Moore’s Federal Practice ¶ 110.25[1], at 270)); Merican, Inc. v. Caterpillar Tractor Co.,713 F.2d 958 , 962 n. 7 (3d Cir.1983), cert. denied,465 U.S. 1024 ,104 S.Ct. 1278 ,79 L.Ed.2d 682 (1984); United States v. Connolly,716 F.2d 882 , 885 (Fed.Cir.1983), cert. denied,465 U.S. 1065 ,104 S.Ct. 1414 ,79 L.Ed.2d 740 (1984).
Simon,
In a recent decision, the Eighth Circuit Court of Appeals consider the standards applicable to an interlocutory appeal pursuant to § 1292(b).
See White v. Nix,
This court is of the opinion that this order involves controlling questions of law, in the first instance, as to the viability of the plaintiffs’ securities law claims. The court has dismissed the plaintiffs’ securities law claims on its conclusion, as a matter of law, that the Adventure Cattle contracts are not securities. The securities determination is interwoven to the remaining RICO claims, because violations of the securities laws were also alleged as predicate acts for the RICO claims. Thus, an error on this controlling question of law could produce an incorrect conclusion not only on the dismissal of the securities claims, but on essential aspects of the claims the court has allowed to go forward. Next, the court finds that there is substantial ground for difference of opinion, owing to the frequency with which courts *1527 have held similar, but not identical, cattle feeding investment schemes to be securities, contrary to this court’s conclusion. Finally, interlocutory appeal will materially advance the ultimate termination of this litigation, because it would ensure that this involved, multiparty litigation goes to trial the first time on all viable claims, rather than presenting the courts and the parties with the possibility of ultimate reversal on the securities issues requiring retrial not only of those claims, but materially impacting the first trial of the RICO claims which could have been founded on securities fraud predicate acts in the first trial.
As to the RICO claims, the parties have strenuously argued the viability of these claims as well. The court’s determination that the second amended complaint states controlling questions of law, because it is the only remaining federal question upon which this court’s jurisdiction is founded, and because the court has concluded, as a matter of law, that the RICO claims are not futile as repleaded. There is substantial ground for difference of opinion as to whether the first-phase enterprise presents a shared purpose, whether the second-phase enterprise as pleaded falls within the ambit of the “in reality no different” test or is deficient as a matter of law, and whether the two phases of the enterprise as pleaded are separable or otherwise inadequate. The court also believes that there is some ground for a difference of opinion as to the adequacy of the pleading of a pattern of racketeering activity. For much the same reason as was stated above for interlocutory appeal of the securities ruling, the court believes that interlocutory appeal of the RICO determinations will materially advance the ultimate termination of this litigation.
As a final matter, this court is of the opinion that the complexity of the claims and issues presented here, the extensive discovery and huge amount of the documentary evidence involved, suggest that this ease is one of those “exceptional cases” involving the prospect of expensive and protracted litigation for which sparing use of § 1292(b) is particularly appropriate in order to move this matter more rapidly to a just and proper conclusion.
White,
III. CONCLUSION
The court has been confronted here with both a motion to reconsider its prior ruling dismissing this matter in its entirety for failure to state a claim upon which relief can be granted and an alternative motion to allow filing of an amended complaint which attempts to cure the deficiencies found by the court in the dismissed complaint. Although the court has found no ground for setting aside its prior ruling, it nonetheless concludes that it should allow the filing of the second amended complaint, albeit not in its entirety. As with its prior ruling in this matter, the court believes that everyone concerned would benefit from a summary of the court’s conclusions concerning the difficult issues presented.
The court was first confronted with the problem that the plaintiffs’ motion “for reconsideration” did not identify the legal authority upon which it was founded. The court finds that such motions are most often brought pursuant to either Fed.R.Civ.P. 59(e) or Fed.R.Civ.P. 60(b). The court concludes, in the first instance, that plaintiffs’ motion should be treated as one pursuant to Rule 59(e), because it was filed within ten days of the ruling plaintiffs seek to alter or amend, but the court has examined the issues offered for reconsideration pursuant to both Rule 59(e) and Rule 60(b).
Next, the court rejects plaintiffs’ assertion that the court improperly disregarded controlling precedent that purportedly held that, in this circuit, only vertical commonality, not horizontal commonality, is required for an investment to be a “security” subject to federal securities laws. The purported precedent does not stand for the proposition for which plaintiffs have cited it. Furthermore, even if the precedent could be construed to stand for the proposition for which plaintiffs *1528 cited it, the precedent is irrelevant to the court’s prior determination that the Adventure Cattle contracts in question here are not “securities,” because the court also based that conclusion on a lack of vertical commonality, lack of expectation of profits, and lack of reliance solely on the efforts of others, all requirements of a “security” under the Supreme Court’s test articulated in the Howey decision. Plaintiffs did not challenge any of these other determinations in the motion for reconsideration. Thus there is neither a “manifest error of law” nor “exceptional circumstances” requiring the court to alter or amend its prior judgment of dismissal concerning the securities law claims in the first amended complaint.
The court was also asked to reconsider its failure to grant leave to file an amended complaint as a matter of course upon dismissal of the first amended complaint for failure to state a claim upon which relief can be granted. However, the court concludes that there is no right, nor even any common practice, of granting leave to amend upon dismissal of a complaint for failure to state a claim. The applicable standards provides that the party seeking leave to amend after dismissal must first obtain relief from the judgment to allow such amendment and then present the court with a nonfutile amended complaint, i.e., one that would withstand a motion to dismiss for failure to state a claim upon which relief can be granted. Although there was no “manifest legal error” permitting alteration of the court’s prior order to permit such an amendment pursuant to Rule 59(e), “exceptional circumstances” can be found in the lack of opportunity to appeal disposition of a second amended complaint, coupled with the plaintiffs’ apparent willingness to abandon the first amended complaint making appeal of dismissal of that complaint an exercise in futility, the possibility of providing for such amendment pursuant to Rule 60(b) identified in precedent of this circuit, and the interests of justice and economy for the parties, the district court, and the court of appeals, all of which weigh in favor of the court’s consideration of the proffered second amended complaint. The court therefore denies defendants’ motion to strike the proffered second amended complaint, but will permit filing of only such portions of the second amended complaint as are not futile.
Turning to the adequacy or futility of the proffered second amended complaint, although the second amended complaint incorporates the language of applicable standards for a cause of action under the securities laws, it still does not thereby present a non-futile claim of violation of the securities laws. The court, not bound to treat as true either plaintiffs’ legal conclusions or unwarranted factual inferences, concludes that, even as repleaded, the Adventure Cattle contracts at issue are not securities. The Adventure Cattle investment scheme lacks horizontal commonality, because there is no sharing of the risks or profits, nor pooling of the investments among investors. Rather, under the facts as pleaded and taken to be true, each investors’ investment was distinct and treated as such. Furthermore, the Adventure Cattle investment scheme lacks vertical commonality, i.e., commonality between the investors and the promoter, because the Adventure Cattle contracts specifically uncouple the promoter’s efforts and fortunes from those of the investors by guaranteeing a specified return whatever the performance of the underlying cattle sales and by ensuring that return from the promoter’s other enterprises. Thus, the promoter’s fortunes enjoy possible upturns and downturns from which the investors are entirely insulated. The Adventure Cattle contracts lack an expectation of profits from the efforts of others, because the contracts provide a specified interest rate as a return, and because the investors made the only decisions that determined the net return on the investment. The securities claims must therefore be dismissed from any filing of the second amended complaint.
Turning to the RICO claims as realleged in the second amended complaint, the court concludes that plaintiffs have alleged not just one, but two, viable RICO enterprises as associations in fact. The first-phase enterprise is a viable allegation of an association in fact of the banking corporations, the promoter of the Adventure Cattle investment scheme, and the promoter’s cattle brokerage firm. Plaintiffs have alleged a viable “com *1529 mon interest” of this enterprise, albeit only in their brief, of facilitating a fraudulent scheme. The court rejects defendants’ assertion that the second-phase enterprise consists only of the RICO defendant, and therefore lacks the necessary “distinctness” of the RICO enterprise and RICO defendant, because it is composed of only a parent corporation and its subsidiaries. Under the “in reality no different” test, or “entirely separate” test, articulated by circuit courts of appeals, the fact question, which cannot be answered on the pleadings and therefore must be considered favorably to the plaintiffs here, is whether the subsidiaries were entirely separate actors from the parent corporation and could in fact form a RICO association-in-fact enterprise with it.
The next issues presented were whether the repleaded complaint alleges a pattern of racketeering activity and whether the predicate acts of racketeering necessary to support a RICO claim have been alleged with the requisite particularity lacking in the dismissed complaint. The repleaded allegations offer a decidedly greater particularity curing the pleading deficiencies identified in the first amended complaint. The repleaded RICO claims are therefore held to be nonfutile, and the second amended complaint may be filed. However, the securities law claims and the RICO predicate acts founded on alleged violation of securities laws must be dismissed or stricken from the second amended complaint.
Finally, the court recognizes that this ruling has involved a number of controlling questions of law on which there is substantial ground for difference of opinion. Therefore, the court deems this matter appropriate for interlocutory appeal pursuant to 28 U.S.C. § 1292(b). Nothing in this court’s order shall be construed as staying the proceedings pending interlocutory appeal.
As to procedural matters flowing from the grant of leave to file the second amended complaint, the court recognizes that the parties may wish to limit discovery to targeted issues raised in this ruling preparatory to the filing of a motion for summary judgment. The court would therefore entertain a motion for limiting discovery, if made within forty-five days of the date of this order, and would set such a motion for hearing to determine the targeted issues and necessary period for discovery. Additionally, the plaintiffs shall have thirty days to amend the second amended complaint to allege a purpose for the first-phase enterprise in accord with the purpose asserted for this enterprise in plaintiffs’ brief. The court also reminds the parties that pursuant this court’s certification of the appropriateness of an interlocutory appeal under 28 U.S.C. § 1292(b), any application for interlocutory appeal of this order must be filed within ten days of the date of this ruling.
IT IS SO ORDERED.
Notes
. The court declined, however, to dismiss the claim of wrongful conversion or set-off pursuant to Fed.R.Civ.P. 12(b)(7) on the ground that indispensable parties had not been joined, because the court concluded that the identified parties, the trustees of Morken’s and SGLE's bankruptcy estates, were not “necessary” parties under Fed. R.Civ.P. 19(a).
. An identical copy of this motion was filed on May 5, 1995.
. The overlength brief was actually ordered filed on July 12, 1995.
. The court assumes that plaintiffs are referring to their brief, designated a "reply” to defendants' resistance to the motion to reconsider, which was filed on March 27, 1995.
. The court granted defendants leave to file such an overlength brief on July 12, 1995.
. Although the court recognizes that the second amended complaint attempts to respond to deficiencies in the first amended complaint, particularly the court's requirement that matters such as fraud be pleaded with the particularity required by Fed.R.Civ.P. 9(b), the court nonetheless has some doubt that a complaint of seventy-five pages and one hundred thirty-six paragraphs meets Fed.R.Civ.P. 8(a)(2)'s requirement that the complaint contain a "short and plain statement of the claim.” The court has no wish to encourage long and conclusory pleadings and believes that a happy medium between particularity and “short and plain statement” is possible without excessive length.
. Count II of the first amended complaint alleged that “Firstar” committed these violations, without distinguishing among the defendants.
. Again, this is a change from designation of the responsible defendant as "Firstar” in the first amended complaint.
. This exhibit is identical to Exhibit A appended to the first amended complaint and previously considered by the court.
. Paragraph 110 of the second amended complaint alleges the following:
The Adventure Cattle program was a scheme in which Morken would pool the cattle owned by the various investors with cattle owned by Morken himself to make large marketable lots of uniform quality animals for favorable sale to various meatpackers. The individual investors had no part in the marketing decisions, and no knowledge of who owned the other animals that had been pooled with some or all of the [sic] their animals for sale to meatpackers. By pooling and combining the animals owned by multiple investors and by Morken himself, Morken generally was able to obtain better prices than would be realized by sale of smaller individual lots of cattle for an individual investor. Proceeds from the sale of the pooled animals were paid by the packers in a single check to SGLE, Morken’s licensed marketing agent, whereupon Morken would cause a prorated distribution of packer proceeds to be made to individual investors based on the number of that investor’s animals that had been contained in the pooled lot sold to the packer.
. Paragraph 111 of the second amended complaint alleges the following:
In the Adventure Cattle program, if the skill and efforts of Morken in marketing the pooled cattle resulted in proceeds being realized in excess of the costs of production incurred by the investor, a profit would be realized. If the profits were less than the amount of the guarantee, Morken would pay the investor an amount required to bring the profit up to the level guaranteed. If the profits were more than what had been guaranteed, the investor would remit the difference back to Morken. The fortunes of the investors were thus directly tied to the efforts and to the overall fortunes of Morken, since Morken's ability to honor the Cattle Feeding Contracts in an unfavorable cattle market depended upon Morken's overall financial strength and resources (or his credit) and his touted ability (as the investors were led to believe) to make money through handling charges, hedging, trucking, and other diversified endeavors even though the cattle market by itself might not always result in the generation of profits.
Paragraph 112 of the second amended complaint carries these allegations about the "fortuity” of the investment further:
Although concealed from the investors at the time that they made their investment decisions, (and, in fact, not revealed at any time except through discovery procedures in this case and in the related bankruptcy proceedings) in truth and in fact, the fortuity of the Plaintiffs’ investments was entirely dependent on the credit Morken was given through the controlled disbursement scheme that Firstar Milwaukee had provided for Morken to finance the Adventure Cattle program through float, and on the willingness of Firstar Milwaukee to continue that secret line of "specialty credit”. Accordingly, the fate of the investors was totally dependent on the fortunes of Morken in general, which (although unknown to them) included continuation of the float financing privileges that had been provided for Morken by Firstar Milwaukee through the controlled disbursement scheme.
. Paragraph 113 of the second amended complaint alleges the following:
Other than deciding whether or not to participate in the program, the investors in the Adventure Cattle program, including Plaintiffs, made no decisions regarding their investment once the decision to participate was made. Each investor relied totally upon Morken to make their investment profitable. Morken made all decisions regarding Adventure Cattle program animals. Morken decided what kinds of cattle to buy and in what quantities and quality. He decided where the cattle were to be fed. He decided what market protection (options or futures contracts) to acquire relative to the cattle. He decided when, where, how and on what terms the cattle should be sold.
. At oral arguments, counsel for plaintiffs characterized the relief sought by the motion in similar terms as not having ”ask[ed] for much,” just reconsideration of the securities issue and the opportunity to replead the RICO claims.
. Although plaintiffs’ motion also suggests that the court made factual errors, the court does not believe a motion pursuant to
Fed.R.Civ.P.
52(b) to be a viable alternative, although motions pursuant to both rules are often made jointly, and Rule 52(b) specifically provides for amendment of findings of fact. In the ruling plaintiffs ask this court to reconsider, which granted defendants’ motion to dismiss pursuant to
Fed.R.Civ.P.
12(b)(6), the court made no findings of fact. Rather, the court treated as true the facts pleaded in the first amended complaint.
See, e.g., Conley
v.
Gibson,
. Rule 59(e) motion must be filed "not later than 10 days after the entry of the judgment.”
Fed.R.Civ.P.
59(e). A party's failure to file a timely Rule 59(e) motion eliminates that rule as the basis for the district court’s action.
See Spangle v. Ming Tah Elec. Co.,
. Motions pursuant to Rule 60(b)(2), asserting newly discovered evidence, are, in any event, viewed with disfavor.
Mitchell,
. Because plaintiffs’ complaint alleges causes of action for fraud, the “fraud” ground of Rule 60(b)(3) must be distinguished from the plaintiffs’ fraud cause of action. To prevail on a motion under Rule 60(b)(3), "the movant must show, with clear and convincing evidence, that the opposing party engaged in a fraud or misrepresentation
that prevented the movant from fully and fairly presenting its case.” Atkinson,
. This court has found no other authority holding that an investment may constitute a security even though the "common enterprise” requirement of the
Howey
test has not been met. Indeed, two of the authorities cited in
Maheu
for the proposition that an investment vehicle may constitute a security even if there is no pooling arrangement or common enterprise antedate
Howey. See Maheu,
. In its March 1, 1995, ruling, this court acknowledged that the Seventh Circuit Court of Appeals had identified another Eighth Circuit Court of Appeals decision as requiring only vertical commonality.
See DeWit,
. Plaintiffs conceded in their motion that they could not cure the defect of lack of horizontal commonality, but reasserted their belief that horizontal commonality was not required under the law of this circuit. Nonetheless, as we shall see, plaintiffs have attempted to replead the securities claims to allege horizontal commonality of the Adventure Cattle investment scheme.
. The court has found a number of recent decisions pertinent to this point and offers a representative survey.
See, e.g., LRL Properties v. Portage Metro Housing Auth.,
.
LRL Properties
v.
Portage Metro Housing Auth.,
. The court admits to one error in its prior decision: in DeWit, 879 F.Supp. at 980, the court likens the Adventure Cattle investments to the “condominium contracts in Teague,” when in fact the court meant to liken the contracts to the "condominium contracts in Wals and Revak.” The court believes that its further discussion of the characteristics establishing the lack of horizontal commonality dispelled any misconception caused by its reference to the wrong condominium contracts.
. The court will return, in the proper place, to the differences between the expectation of profit shared among a group of investors in Barry and the expectation of a promised return in the Adventure Cattle scheme.
. In Revak, the Second Circuit Court of Appeals explained vertical commonality as follows:
In an enterprise marked by vertical commonality, the investors’ fortunes need not rise and fall together; a pro-rata sharing of profits and losses is not required. Two distinct kinds of vertical commonality have been identified: "broad vertical commonality” and "strict vertical commonality.” To establish "broad vertical commonality,” the fortunes of the investors need be linked only to the efforts of the promoter. See Long v. Shultz Cattle Co., Inc.,881 F.2d 129 , 140-41 (5th Cir.1989). "Strict vertical commonality” requires that the fortunes of investors be tied to the fortunes of the promoter. See Brodt v. Bache & Co.,595 F.2d 459 , 461 (9th Cir.1978).
Revak,
[a] common enterprise is a venture "in which the 'fortunes of the investor are interwoven with and dependent upon the efforts and success of those seeking the investment....' ” It is not necessary that the funds of investors are pooled; what must be shown is that the fortunes of the investors are linked with those of the promoters, thereby establishing the requisite element of vertical commonality. Thus, a common enterprise exists if a direct correlation has been established between success or failure of [the promoter’s] efforts and success or failure of the investment.
Eurobond Exchange,
. The court also cited the following cases for the proposition that the receipt of specified interest rate is not the apportionment of profits:
McVay v. Western Plains Serv. Corp.,
. Undeniably, Morken could expect profits, and could expect them only from his own efforts. Morken was the only direct participant in the Adventure Cattle scheme with such an expectation, however. Morken received the profits of the scheme after paying all expenses, including the promised 25% annualized return to the financiers/investors, if indeed there were any profits to be had merely from the sale of cattle. Morken could expect that his profits would be increased the more successful were his efforts. However, the investors were insulated from all of these concerns by the guaranteed flat return even if Morken did nothing.
. Because the court dismissed the previous version of plaintiffs' RICO claim pursuant to
Reves
v.
Ernst & Young,
Commentators have observed that the plaintiffs in Reves could possibly have satisfied the operation and management requirement of § 1962(c) had they alleged the existence of another enterprise.
In Reves the enterprise was the Co-op, but this is not the only possibility. Section 1961(4) defines enterprise as including any "legal entity” ... and “any union or group of individuals associated in fact although not a legal entity.” ... Thus, RICO's enterprise requirement can be satisfied by “a group of individuals associated in fact” even though not a distinct “legal entity.” What if the plaintiff in Reves had alleged that an association in fact consisting of Arthur Young, Jack White [the Co-op’s General Manager], and the Co-op constituted the racketeering enterprise, and that Arthur Young directed the affairs of this "enterprise?”
See Daniel B. Fischel & Alan O. Sykes, Civil RICO after Reves: An Economic Commentary, 1993 SUP.CT.REV. 193-94 (footnote omitted).
Jaguar Cars, Inc. v. Royal Oaks Motor Car Co.,
. The court acknowledges that Morken and SGLE might be the vehicle of such a purpose, if Morken and SGLE were still the enterprise, Scheidler, - U.S. -, -,
. Where the certified questions embody both factual and legal considerations, the appellate court "endeavor[s]'' to give deference to the district court’s factual determinations.
Simon,
. No party here has moved for certification of interlocutory appeal. Nonetheless, this court, reading the plain language of the statute, believes that if it “shall be of the opinion that such order” meets the criteria of the statute, it may certify the matter for interlocutory appeal sua sponte.