Opposition Brief — Topalian v. Ehrman

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Supreme Court, U.S

FILED

Sy, ' JUL 27 1992

, OFFICE OF THE CLERK

No. 91-1973 .

IN THE

Supreme Court of the United States

OCTOBER TERM, 1991

MICHAEL K. TOPALIAN, WARREN B. FIENGA, ROY JACOBS,

JR., RICHARD OROZCO, JUAN GARCIA-QUIROGA, JEAN

STUEBING, CHARLES W. ANDERSON, FRANCIS D. COVERT,

RICHARD H. MANUEL, JACK E. BURROUGHS, DON W. BOYETT,

BOBBY W. McDONALD, CHARLES F. LACELLE, RICHARD D.

MIKLES AND MJM VENTURES,

JOHN N. EHRMAN, EHRMAN INVESTMENT GROUP, INC., W.

RODERICK JOHNSON, W. RODERICK JOHNSON, P.C., RICHARD

O’DONNELL, HOUSTON PETROLEUM CO., INC., JOEL A.

MIDDLEBROOK, JOEL A. MIDDLEBROOK, CPA, VICTOR B.

RUSSEK, RUSSEK CO., BERT GAMBLE, RIO BRAVO OIL CO.,

INC., ROCKWOOD INSURANCE CO. AND ROBERT E. ECKIS, JR.

Respondenss.

Petition For A Writ of Certiorari To The United States

Court Of Appeals For The Fifth Cirauit

HOUSTON PETROLEUM CO., INC. AND RICHARD

O’DONNELL’S (”"RESPONDENTS” ) BRIEF IN

OPPOSITION

DON JACKSON

PAUL S. WELLS

Vinson & Elkins, L.LP.

2500 First City Tower, 1001 Fannin

Houston, Texas 77002-6760

(713) 758-2078

eee

Alpha Law Brief Co.* 6113 Aletha Lane* Houston, Texas 77081 (713)981-9000

QUESTION PRESENTED

Whether the District Court’s granting of summary

judgment in favor of Houston Petroleum Company

and Richard O’Donnell, and the Fifth Circuit Court

of Appeals’ affirmation of that decision, was proper

when Petitioners failed to present any competent

evidence or specific facts tending to establish a

genuine issue for trial.

INTERESTED PARTIES

PETITIONERS

MICHAEL K. TOPALIAN, WARREN B. FIENGA,

ROY JACOBS, JR., JUAN GARCIA-QUIROGA,

RICHARD OROZCO, JEAN STEUBING,

CHARLES W. ANDERSON, FRANCIS COVERT,

RICHARD H. MANUEL, BOBBY W.

McDONALD, JACK E. BURROUGHS, DON W.

BOYETT, CHARLES F. LaCELLE, RICHARD

MIKLES, and MJM VENTURES

RESPONDENTS

JOHN N. EHRMAN, Individually and In His

Representative Capacity As President of EHRMAN

INVESTMENT GROUP, INC., EHRMAN

INVESTMENT GROUP, INC., W. RODERICK

JOHNSON, W. RODERICK JOHNSON, P.C.,

RICHARD O’DONNELL, Individually and In His

Representative Capacity As President of HOUSTON

PETROLEUM CO., INC., HOUSTON

PETROLEUM COMPANY, INC., JOEL A.

MIDDLEBROOK, JOEL A. MIDDLEBROOK,

C.P.A., VICTOR B. RUSSEK, RUSSEK CO..,

BERT GAMBLE. Individually and In _ His

Representative Capacity As President of RIO BRAVO

OIL COMPANY, INC., RIO BRAVO OIL

COMPANY, INC., LAWRENCE KELLEY, JR.,

Individually And In His Representative Capacity As

President of KELLY ONSHORE DRILLING CO.,

INC., KELLEY ONSHORE DRILLING CO., INC..,

ROCKWOOD INSURANCE COMPANY - and

ROBERT E. ECKIS, JR.

iii

TABLE OF CONTENTS

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REASONS THE PETITION SHOULD BE

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TABLE OF AUTHORITIES

CASES

Celotex Corp. v. Catrett,

OEr Ae See CO ie RW a Pe 7

NO. 91-1973

IN THE

Supreme Court of the United States

OCTOBER TERM, 1991

MICHAEL K. TOPALIAN, WARREN B. FIENGA,

ROY JACOBS, JR., JUAN GARCIA-QUIROGA,

RICHARD OROZCO, JEAN STEUBING, CHARLES W.

ANDERSON, FRANCIS D. COVERT, RICHARD H.

MANUEL, BOBBY W. McDONALD, JACK E.

BURROUGHS, DON W. BOYETT, CHARLES F.

LaCELLE, RICHARD MIKLES, and

MJM VENTURES,

Petitioners,

Vv.

JOHN N. EHRMAN, EHRMAN INVESTMENT GROUP,

INC., W. RODERICK JOHNSON, W. RODERICK

JOHNSON, P.C., RICHARD O’DONNELL,

HOUSTON PETROLEUM CO., INC., JOEL A.

MIDDLEBROOK, JOEL A. MIDDLEBROOK, CPA,

VICTOR B. RUSSEK, RUSSEK CO., BERT

GAMBLE, RIO BRAVO OIL CO., INC.,

ROCKWOOD INSURANCE CO. AND

ROBERT E. ECKIS, JR.,

Respondents.

Petition For A Writ Of Certiorari

To The United States Court of Appeals

For The Fifth Circuit

HOUSTON PETROLEUM CO., INC. AND

RICHARD O’DONNELL’S ("RESPONDENTS")

BRIEF IN OPPOSITION

STATEMENT OF THE CASE

Respondents Houston Petroleum Company ("HPC")

and Richard O’Donnell ("O’ Donnell") adopt and incorporate

by reference for all purposes Rio Bravo Oil Company, Inc.’s

("Rio Bravo") and Bert Gamble’s ("Gamble") Brief in

Opposition to Petitioners’ Petition for a Writ of Certiorari

regarding the factual background, procedural background,

and reasons the petition should be denied except as expressly

stated otherwise herein. HPC stands in very similar shoes as

Rio Bravo in that HPC is an oil and gas operator that entered

into contractual agreements with Onshore permitting Onshore

to invest in wells to be drilled by HPC. Likewise,

O’Donnell is the president of HPC and stands in similar

shoes as Gamble who is president of Rio Bravo. For these

reasons, many of the facts and arguments set forth in Rio

Bravo and Gamble’s brief in opposition apply equally to

HPC and O’Donnell. Petitioners have also failed to raise

any special or significant reasons to warrant granting their

petition for writ of certiorari with respect to HPC or

O’ Donnell.

A. Factual Background

Like Rio Bravo, HPC’s only connection with Onshore

is a contractual relationship whereby HPC and Onshore

entered into agreements permitting Onshore to invest in wells

to be drilled by HPC. Petitioners have not alleged that HPC

and O’Donnell failed to actually drill on certain agreed upon

sites. Unlike many of the oil and gas programs promoted

during the early 1980’s, Onshore is a program that actually

drilled and recovered oil and gas and has made payments to

the Petitioners. Petitioners are merely dissatisfied because

their investment strategy to get rich from an investment that

looked lucrative in 1984 did not turn out quite as planned.

Neither HPC nor O’Donnell were involved in the

promotion, offering, or sale of any interests in Onshore nor

were they investors, partners, or owners in any interests of

Onshore. Petitioners, as plaintiffs below, brought suit

against HPC and O'Donnell, among others, alleging

violations of federal and state securities laws, the Racketeer

Influenced & Corrupt Organizations Act ("RICO"), and

common law fraud. The undisputed and uncontroverted

evidence produced to the District Court established that HPC

and O’Donnell were not involved in the selling of limited

partnership interests in Onshore nor did they make any

representations, misrepresentations, or omissions of fact to

any potential investor in Onshore. This evidence further

established that neither HPC nor O’ Donnell were involved in

any RICO activities. This uncontroverted evidence was

gleaned from extensive discovery that took place for over

eighteen months after suit was filed and included numerous

depositions of Petitioners, Respondents, and other

witnesses.' Petitioners failed to provide any deposition

testimony, counter-affidavits, or other competent evidence in

their Response to Houston Petroleum Co., Inc. and Richard

O’Donnell’s Motion for Summary Judgment ("Response")

that controverted or refuted the evidence produced by HPC

and O’Donnell in support of their Motion for Summary

Judgment.’

1. Swom affidavits were also provided as evidence supporting HPC and

O’Donnell’s Motion for Summary Judgment.

2. Acopy of HPC and O’Donnell’s Motion for Summary Judgment (without

deposition exhibits) is provided in the Appendix to Respondents’ Brief as H.1-H.39

Petitioner's Response to HPC and O’Donnell’s Motion for Summary Judgment

(with one exhibit attached) is provided in the Appendix to Respondent's brief as

H.40-H.56. A copy of the supporting affidavit of O’Donnell is attached as H.35-

H.38. All references to the Appendix are designated by an "H." preceding the page

number. -

B. Procedural Background

Like Rio Bravo and Gamble’s motion, HPC and

O’Donnell’s Motion was supported by competent evidence in

the form of sworn affidavits and deposition excerpts. The

affidavit of Richard O’Donnell contained testimony that

neither HPC nor O’Donnell (1) participated in any way in the

preparation of the offering materials or prospectus promoting

Onshore; (2) had any involvement with the selling activities

undertaken on behalf of Onshore nor were they aware of the

sales efforts made; (3) played any role in the offering of

securities to Petitioners or any other investors, made any

representations to any Petitioner, had any contact with any

investor prior to their investments, or even knew any

Petitioner’s identity prior to the filing of the lawsuit;

(4) played any part in or have control over the operation or

management of Onshore; (5) had any control of any Onshore

officer or employee or had any control over any of the

policies, management, decisions, or any aspects of the

business of Onshore; (6) were aware of any fraud or alleged

fraud of any party perpetrated or sought to be perpetrated

against any investor nor intended to render any assistance in

any alleged fraud; (7) involved in or participated in any

RICO activities or enterprise; (8) attempted to control any

RICO enterprise or acquire an interest in or maintain an

interest in a RICO enterprise; (9) participated in any

racketeering activity; (10) obtained a financial interest in

Onshore; (11) had any control over the affairs of Onshore;

(12) had any position with Onshore that facilitated the

perpetration of any alleged predicate acts; or (13) knowingly

or wilfully become part of any alleged conspiracy. (H.35-

H.38). Deposition testimony was also produced in support

of the facts set forth in O’Donnell’s affidavit and referenced

in Respondents’ Motion. (H.11, H.13, H.16-H-17, H-23,

H.29). In addition, uncontroverted deposition testimony of

the Petitioners established that neither HPC nor O’Donnell

made any statements to Petitioners in the offering or selling

of interests in Onshore.’ See H.11, H.16-H.17, H.23.

Therefore, the evidence produced by HPC and O’Donnell in

support of their Motion was not only competent but also

specific and substantial.

On July 26, 1989, Petitioners filed an untimely

response to HPC and O’Donnell’s Motion which the District

Court graciously considered. (H.40-H.52). Petitioners’

Response was filled with statements that the evidence

produced at trial "will establish" Respondents’ "culpability"

and "will establish" that Respondents were participants in a

scheme to defraud Petitioners. (H.43, H.46-H.47, H.49-

H.51). Petitioners also asserted that they “must be given the

opportunity to prove" Respondents participated in the alleged

scheme and that they "will show at trial" or "will be able to

show" at trial how Respondents engaged in this alleged

scheme. (H.46-H.47, H.49-H.51). No evidence, competent

or otherwise, was produced to the District Court to refute or

controvert the specific, competent, and sworn testimony

produced by HPC and O'Donnell in support of their Motion.

The only “evidence” produced at all that refers to HPC is an

unsworn and unsigned "stream of conscioussess" letter that-

makes a single reference to HPC as “crooks."* (H.53-

H.56). This, as the District Court stated, proves nothing.

Petitioners failed to produce any sworn evidence through

affidavits or deposition testimony to controvert the evidence

produced by HPC and O’Donnell. As a result, the District

Court granted HPC and O’Donnell’s Motion and the Fifth

Circuit panel affirmed that decision. Any additional

"evidence" Petitioners seek to have this Court review is

equally without competence and is not properly before this

Court.

3. Nowhere in the letter is Richard O’Donnell mentioned or even referenced.

REASONS THE PETITION SHOULD BE DENIED

Without burdening this Court with cumulative

arguments and authorities, HPC and O’Donnell adopt and

incorporate by reference for all purposes the arguments and

authorities set forth in Rio Bravo’s and Gamble’s Brief in

Opposition to Petitioners’ Petition for a Writ of Certiorari.

The exact same allegations made against Rio Bravo and

Gamble are made against HPC and O’Donnell. Similar

evidence and proof that was produced by Rio Bravo and

Gamble in support of their motion was produced by HPC and

O'Donnell in support of their Motion. Petitioners similarly

failed to produce any evidence or proof in their Response to

refute or contradict the evidence produced by HPC and

O’Donnell.

Petitioners have also alleged violations of the RICO

Statute against HPC and O’Donnell. These points are more

thoroughly addressed in Respondents’ Brief to the United

States Court of Appeals for the Fifth Circuit and

Respondents’ Motion for Summary Judgment. Both are

incorporated for all purposes and attached in the Appendix

hereto. (H.1-H.39, H.S7-H.121).

The only “evidence” presented to the District Court

in Petitioners’ Response was an unsigned and unsworn letter.

(H.53-H.56). This letter is not only incompetent summary

judgment evidence since it is unsworn, unverified, and

unsigned, but the letter does not state any specific facts

tending to show that there is a genuine issue for trial.

Nowhere in the letter does it have any specific facts or

Statements implicating HPC or O’Donnell in any alleged

RICO enterprise, violation of securities law, or scheme to

defraud investors in Onshore. As the District Court held,

this proves nothing. Even assuming this letter is competent

evidence, it is not specific nor sufficient to raise a genuine

issue for trial. For these reasons, and in accordance with

this Court’s decision in Celotex Corp. v. Catrett, 477 U.S.

317 (1986), Petitioners petition should be denied.

CONCLUSION

The judgment of the District Court and subsequent

affirmation by the Fifth Circuit Court of Appeals involves no

unsettled questions of law and is entirely consistent with the

prior rulings of the Court and other federal circuit courts.

The questions that Petitioners raise are neither special nor

significant. Therefore, the petition should be denied.

Respectfully submitted,

VINSON & ELKINS

By:

Don Jackson

State Bar No. 10476000

Federal I.D. No. 6915

Paul S. Wells

State Bar No. 21155800

Federal I.D. No. 11586

2500 First City Tower

1001 Fannin

Houston, Texas 77002-6760

(713) 758-2078

(713) 758-2346 (fax)

ATTORNEYS FOR RESPONDENTS,

HOUSTON PETROLEUM COMPANY

and RICHARD O’DONNELL

APPENDIX

IN THE UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF TEXAS

HOUSTON DIVISION

MICHAEL K. TOPALIAN, et al., §

Plaintiffs, §

§ Civil Action

VS. § No. 87-3826

; §

JOHN N. EHRMAN, et al., §

Defendants. §

MOTION OF DEFENDANTS HOUSTON PETROLEUM

CO., INC. AND RICHARD O’DONNELL

FOR SUMMARY JUDGMENT

Defendants Houston Petroleum Co., Inc. ("HPC")

and Richard O’Donnell ("O’Donnell"), pursuant to Rule 56

of the Federal Rules of Civil Procedure, file this motion for

summary judgment. In support thereof, HPC and O’Donnell

would show as follows:

a As more fully discussed in the accompanying

Memorandum, HPC and O’Donnell are entitled to summary

judgment on all claims because there are no genuine issues

as to any material fact and there is an absence of any

evidence to support plaintiffs claims.

y 2 As more fully discussed in the accompanying

Memorandum, HPC and O’Donnell are entitled to summary

judgment on plaintiffs’ claims under the Securities Act of

1933 on the ground that they are not sellers within the

meaning of the Act.

a As more fully discussed in the accompanying

Memorandum, HPC and O’Donnell are entitled to summary

judgment on plaintiffs’ claims under the Securities Exchange

Act of 1934 on the ground that they made no representations

or omissions of fact to plaintiffs.

4. As more fully discussed in the accompanying

Memorandum, HPC and O’Donnell are entitled to summary

judgment on plaintiffs’ RICO claims on the ground that they

did not engage in a pattern of racketeering activities by

acquiring, investing or controlling a RICO enterprise.

Moreover, plaintiffs have no standing to assert a RICO claim

against HPC and O’Donnell because their damages do not

arise by reason of such violation.

- In further support of this motion, HPC and

O’Donnell incorporate the Memorandum In Support of

Defendants Houston Petroleum Co., Inc. and Richard

O’Donnell’s Motion for Summary Judgment.

WHEREFORE, HPC and O’Donnell respectfully

request that the Court grant its motion for summary

judgment, and enter an order that plaintiffs take nothing, and

grant HPC and O’Donnell such other and further relief to

which this Court may deem them justly entitled.

Respectfully submitted,

OF COUNSEL: By:

Don Jackson

VINSON & ELKINS Admission I.D. No. 6915

1001 Fannin 1001 Fannin

3300 First City Tower 3106 First City Tower

Houston, Texas 77002 Houston, Texas 77002-6760

Telephone: 713/651-2222 713/651-2078

ATTORNEY IN CHARGE FOR

DEFENDANTS HOUSTON

PETROLEUM CO., INC. and

RICHARD O’DONNELL

CERTIFICATE OF SERVICE

This is to certify that a true and correct Copy of the

foregoing was mailed this 15 _ day of _June_, 1989, to:

Armando Lopez

LOPEZ & RAMIREZ

2990 Richmond,

Suite 205

Houston, Texas 77098

D. John Leger

LEGER & SANDERS

5847 San Felipe

Suite 1250

Houston, Texas 77057

Kevin F. Risley

BUTLER & BINION

1600 Allied Bank Plaza

Houston, Texas 77002

Frank Pinedo

PINEDO, CEZEAUX

& SWEENEY

1415 Louisiana

Suite 2550

Houston, Texas 77002

W. Sherman Rogers

Howard University

School of Law

2900 Van Ness, N.W.

Washington, D.C. 20008

Neil Wasserstrom

MARGRAVES, KENNERLY

& SCHUELER

2200 Dresser Tower

601 Jefferson

Houston, Texas 77002

Joel Middlebrook

2927 Drexel

Houston, Texas 77027

W. Roderick Johnson

JOHNSON & JOHNSON, P.C.

1800 West Loop South

Suite 1510.

Houston, Texas 77027

Wayne M. Byles

P. O. Box 542165

Dallas, Texas 75354-2165

John R. Knight

MORRIS & CAMPBELL

600 Jefferson,

Suite 1617

Houston, Texas 77002

Don Jackson

IN THE UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF TEXAS

HOUSTON DIVISION

MICHAEL K. TOPALIAN, et al., §

Plaintiffs, §

§ Civil Action

VS. § No. 87-3826

JOHN N. EHRMAN, et al., §

Defendants. §

MEMORANDUM IN SUPPORT OF DEFENDANTS

HOUSTON PETROLEUM CO., INC. AND

RICHARD O’DONNELL’S MOTION FOR

SUMMARY JUDGMENT

Houston Petroleum Co., Inc. ("HPC") and Richard

O’ Donnell ("O’ Donnell"), two of the defendants in the above

action, file this Memorandum in support of their motion for

summary judgment and would show the following:

BACKGROUND

Plaintiffs are dissatisfied investors in Onshore

Exploration, Ltd., 1984 Mid-Year Drilling Program

("Onshore"), an oil and gas drilling limited partnership

program. First Amended Complaint at 2-4 4 1-5

("Complaint"). These investments were highly leveraged tax

shelters promoted by John Ehrman and Ehrman Investment

Group. Wayne Byles was the original general partner in

Onshore. In December 1984 he was succeeded by Rod

Johnson and Ehrman Investment Group as _ co-general

partners. Complaint at 8 ¢ 46; 9 449. HPC is an oil and

———————

gas operator that entered an agreement with Onshore to drill

wells on certain sites. Complaint at 9 ¢ 49. O’Donnell is

the President of HPC and has been sued individually and as

President. Complaint at 1.

Unlike many of the oil and gas programs promoted

during the early 1980s, Onshore is a program that actually

drilled and recovered oil and gas and has made payments to

the plaintiffs. See Complaint at 25 4 110. In fact, Onshore

continues in operation today. Plaintiffs are not dissatisfied

because their promoter stole their money, the general partner

is in bankruptcy, or no drilling was ever completed. Instead,

plaintiffs are dissatisfied because their investment strategy to

get rich from an investment that looked lucrative in 1984 did

not turn out quite as planned. E.g., Binder dep. at 45-46.

Unfortunately, because of the inherent risk associated with

oil and gas drilling, one of which is the price of oil and gas

and the fact that such prices have plummeted since 1984,

these programs did not turn out to be as immediately

profitable as the plaintiff investors anticipated. Binder dep.

at 45-46; Garcia-Quiroga dep. at 98, 101; Steubing dep. at

69-70, 107-08. Therefore, plaintiffs have brought this action

claiming a laundry list of fraud and deception to get out of

their investments. Complaint at 3-4.

Included among their claims are claims against HPC

and O’Donnell for alleged violations of the federal and state

securities laws, common law fraud and Racketeering

Influenced & Corrupt Organization Act ("RICO"). The

undisputed evidence establishes that HPC and O’Donnell

were not involved in the selling of plaintiffs’ limited part-

nership interests, made no misrepresentations or omissions of

fact to the investors, and were not involved in any RICO

activities. Thus, because there is a lack of evidence to

support at least one essential element of each of the plain-

tiffs’ claims, HPC and O’Donnell are entitled to summary

judgment in their favor.

II.

STANDARD FOR SUMMARY JUDGMENT

Summary judgment is properly granted if the

pleadings and evidence "show that there is no genuine issue

as to any material fact and that the moving party is entitled

to a judgment as a matter of law." Fes R. Civ. P. 56(c).

The Supreme Court recently clarified the surden of a party

seeking summary judgment. In Celotex Corp. v. Catrett,

477 U.S. 317, 325 (1986), cert. denied, 108 S.Ct. 1028

(1988), the Supreme Court held that the moving party may

discharge its burden by showing an absence of evidence to

support the nonmovant’s case. Thus, the Court stated, "Rule

56(c) mandates the entry of summary judgment, after

adequate time for discovery and upon motion, against a party

who fails to make a showing sufficient to establish the

existence of an element essential to that party’s case, and on

which that party will bear the burden of proof at trial." Jd.

at 322; accord Fontenot v. Upjohn Co., 780 F.2d 1190, 1195

(Sth Cir. 1986).

"Where the record taken as a whole could not lead a

rational trier of fact to find for the nonmoving party, there

is ‘no genuine issue for trial.’". Matsushita Elec. Indus. Co.

v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). A mere

scintilla of evidence in support of plaintiffs’ position is not

sufficient to survive summary judgment. Plaintiffs must

point to particular evidence on which the jury could

reasonably find in their favor. Anderson v. Liberty Lobby,

Inc., 477 U.S. 242, 252 (1986). Furthermore, the

nonmovant may not survive summary judgment by resting on

mere allegations in their pleadings. Isquith v. Middle S.

Utils., Inc. , 847 F.2d 186 (Sth Cir.), cert. denied, 109 S.Ct.

- 310 (1988). The evidence in this case demonstrates that

plaintiffs cannot establish each of the essential elements of

the claims asserted against HPC and O’Donnell and therefore

summary judgment in their favor is proper.

III.

HPC AND O’DONNELL DID NOT VIOLATE ANY

PROVISION OF THE SECURITIES ACT OF 1933

Plaintiffs’ allegations under sections 12 and 15 seek

to impose liability on HPC and O’Donnell for alleged oral

and written misrepresentations in connection with the sale of

their partnership interests. Recent Supreme Court and Fifth

Circuit precedents demonstrate conclusively that no liability

for any violations of the Securities Act of 1933 can be

leveled against HPC and O’ Donnell because they do not meet

the statutory definition of "seller" under the Act, and

therefore they are entitled to summary judgment.

A, Elements of Section 12 and 15 Claims

Plaintiffs’ Complaint contains vague, confusing and

essentially meaningless cross-references that attempt to assert

a cause of action under sections 12 and 15 of the Securities

Act of 1933, 15 U.S.C. § 771), (0) (1982), against HPC

and O’Donnell. Complaint at 29, 34 and 39. Section 12(1)

provides a right of action against anyone who offers or sells

a security in violation of § 77(e), which makes it unlawful to

use interstate commerce as the means to sell a security unless

a registration statement is in effect and the prospectus meets

the requirement of the Act. 15 U.S.C. § 77(1)(1). Section

12(2) provides a private cause of action against any person

who offers or sells a security through communications which

include material misrepresentations or omissions of material

facts. Id. § 77(1)(2). Section 15 provides a private right of

action against any person who controls any person liable

under sections 12(1) or 12(2). Id. § 77(0). To come within

the ambit of these statutory provisions, plaintiffs must

establish that HPC and O'Donnell were "sellers" of their

securities. '

B. HPC and O’Donnell are not "Sellers"

The Supreme Court redefined persons liable under

section 12(1) of the Securities Exchange Act of 1934 in

Pinter v. Dahl, 108 S.Ct. 2063 (1988), finding that the

proper inquiry is into the relationship between the investor

and the defendant; nor the defendant and the transaction. Id.

at 2080-81. In directing this inquiry, the Court specifically

held that section 12(1) "imposes liability on the owner who

passed title, or other interest in the security, to the buyer for

value," as well as one who "engaged in solicitation." Jd. at

2076. The Fifth Circuit, following Pinter’s guidance,

extended that definition of seller to cover claims asserted

l 1. The statute of limitations applicable to actions under sections 12

and 15 is set forth in section 13, which provides that actions to enforce

liabilities under sections 12 and 15 must be brought either within three

years of the sale to plaintiffs, or within one year of the discovery of the

fraud, whichever period is shorter. 15 U.S.C. § 77(m) (1982), see Buder

vy. Merrill Lynch, Pierce, Fenner & Smith, Inc., 486 F. Supp. 56 (E.D.

Mo. 1980). In no circumstances may an action be brought more than

three years after the security is purchased. Moreover, plaintiffs’ sections

12 and 15 claims should be dismissed because section 13 provides that

actions must be brought within one year of discovery or after "discovery

should have been made by the exercise of reasonable diligence. ..." 15

U.S.C. § 77(m). Nowhere in the Complaint does any plaintiff allege

when he discovered, or should have discovered the alleged fraud. A

plaintiff must affirmatively allege compliance with section 13; failure to

make such an allegation is grounds for dismissal. See, e.g., Stewart

Coach Indus., Inc. v. Moore, 512 F. Supp. 879, 886 (S.D. Ohio 1981);

Kramer v. Scientific Control Corp., 352 F. Supp. 1175, 1176 (E.D. Pa.

1973).

————————————————

H10

under section 12(2) of the Act. Abell v. Potomac Ins. Co.,

858 F.2d 1104 (Sth Cir. 1988). The Court of Appeals held

that when a court examines any claim under section 12, two

inquiries must be made: "(1) [w]Jho passed title to the

plaintiff or solicited the transaction in which title passed; and

(2) from whom did the plaintiff buy the security?" Jd. at

1114.

Every case citing to and following Pinter has

expressly declared that a plaintiff must demonstrate that each

defendant "actually solicited their investment" for section 12

liability to attach. See, e.g., Capri v. Murphy, 856 F.2d

473, 479 (2d Cir. 1988) (noting that Second Circuit

precedent previously held that language of sections 12(1) and

12(2) is identical"); accord Schlifke v. Seafirst Corp., 1989

Fed. Sec. L. Rep. (CCH) 4 94,174 (7th Cir. Jan. 9, 1989)

(holding that a bank that financed allegedly illegal oil and gas

limited partnerships was not a "seller" since it did not

actively participate in the solicitation of investors or engage

in preparing the prospectus except for drafting the loan

documents included therein); Harelson v. Miller Fin. Corp.,

854 F.2d 1141, 1142 (9th Cir.), cert. denied, 109 S. Ct. 274

(1988) (finding that salesman/agent of defendant corporation

"solicited" sales of securities by presenting facts necessary to

effectuate sale to purchaser and receiving compensation for

bringing sale about); /n re Professional Fin. Management,

Lid. , 692 F. Supp. 1057, 1064 (D. Minn. 1988) ("Under the

Pinter standard, liability may be imposed against [defendants]

if they were principals to the sale or otherwise assisted in the

transfer of securities as brokers, and received financial

benefit in return.").

Plaintiffs muster no support for a finding that either

HPC or O’Donnell could be declared a seller under this

standard. The record is clear that they in no way "passed

title or other interest" to any plaintiff. Like the bank in

H11

Seafirst, HPC or O’Donnell were not involved in the solicita-

tion or sale of these interests. O’Donnell Affidavit, attached

hereto as Exhibit A. In fact, the plaintiffs admitted during

their depositions that HPC and O’Donnell had no part in the

sale or their interest to them. Garcia-Quiroga dep. at 136;

Boyett dep. at 86-87; Burroughs dep. at 22-23; McDonald

dep. at 1066; Topalian dep. at 127; Steubing dep. at 151;

LaCelle dep. at 144, 150, 156-57.

HPC was simply the drilling operator. The

undisputed evidence establishes that HPC and O’Donnell

were not involved in Onshore’s selling efforts. HPC and-

O'Donnell had no contact with Onshore’s sales personnel.

O’Donnell’s Affidavit. Likewise, there is no evidence to

support the allegation that HPC and O’Donnell participated

in the preparation of the prospectus or in any way promoted

the program. Moreover, the record directly refutes the

contention that anyone at HPC had any knowledge of

Ehrman’s sales tactics. O’Donnell Affidavit. The only

evidence establishes the contrary: O’ Donnell testified that no

HPC personnel had any knowledge of or control over the

means by which Ehrman or the Onshore salesmen marketed

the limited partnership interests. Boyett dep. at 109; Garcia-

Quiroga dep. at 159-60; Burroughs at 84-85; Steubing dep.

at 166; Topalian dep. at 135-36; McDonald dep. at 1061;

LaCelle dep. at 147-48.

Every passage of record testimony in this case refutes

the assertion that HPC and O’Donnell engaged in the

direction of or solicitation by Onshore’s sales force. HPC

and O’Donnell were not engaged in soliciting sales and

therefore cannot be said to have been "sellers" of these

interests for purposes of the 1933 Act. Plaintiffs’ claims

must be dismissed.

H12

il HPC and O’Donnell are not "Control"

Persons Under the 1933 Act

HPC and O’Donnell’s total lack of control removes

from possibility any liability under either the primary,

secondary, or “control person" provisions of the 1933 Act.

Particularly instructive here is the new decision by the

Seventh Circuit in Schlifke v. Seafirst Corp., 1989 Fed. Sec.

L. Rep. (CCH) 4 94,174, at 91,592 (7th Cir. Jan. 9, 1989).

In deciding that liability under the 1933 Act could not lie

against defendant Seafirst, the court noted that:

Although the Bank necessarily became

involved in the transaction ... to the extent

necessary to fully document and protect its

loans and collateral, there is no evidence that

[it] thereby intended to be making an

investment or that it took any steps to induce

any investment by [the borrower] with [the

seller].

Thus, we agree with the district court that the

Bank was acting merely as a commercial

lender when it extended a loan to ENI 1981-

III at a fixed rate of interest.

Id. at 91,597 (citations omitted, ellipses in original).

The Schlifke court expressly refused to allow any

cause of action based on “aiding and abetting" liability under

section 12(2). Jd. at 91,597-98. Likewise, in the recent

decision of Commins v. Johnson & Higgins, Inc. , 1988 Fed.

Sec. L. Rep. { 94,092 (N.D. Cal. Sept. 28, 1988), the court

explained that "control person" liability imposes liability

“only a person who ‘stands behind the scenes and controls

the [securities violator] who is in a nominal position of

H13

authority." Id. at 91,099 (quoting Wool v. Tandem

Computers, Inc., 818 F.2d 1433, 1441 (9th Cir. 1987)).

The record specifically negates any contention that

HPC or O’Donnell played any part in the operation or

management of Onshore. O’Donnell Affidavit; Boyett dep.

at 109; Garcia-Quiroga dep. at 159-60; Burroughs dep. at

84-85; Steubing dep. at 166; Topalian dep. at 135-36;

McDonald dep. at 1061; LaCelle dep. at 147-48. The

evidence clearly shows that no HPC employee or officer

directed or controlled any of the policies, management,

decisions, people, or any other aspects of the business of

Onshore, including any sales effort. O’Donnell Affidavit.

Thus, both the record testimony and the applicable

legal principles make it clear that HPC and O’ Donnell played

no role in the operation of Onshore or in the sale or

solicitation of plaintiffs’ investment interests. HPC and

O’ Donnell did not direct or control any Onshore employee or

operation. As such, HPC was merely the drilling operator

for some of the wells, and cannot be found liable under the

provisions of the 1933 Act.

IV.

HPC AND O’DONNELL DID NOT VIOLATE ANY

PROVISIONS OF THE SECURITIES ACT OF 1934

Plaintiffs additionally assert that HPC and O’ Donnell

violated section 10(b) of the Securities and Exchange Act of

1934, and Rule 10b-5. Plaintiffs cannot recover under either

theory because HPC and O’Donnell made no misrepresenta-

tion to plaintiffs, or any representation and owed no duty to

disclose and therefore made no omission of fact.

H14

A. Elements of Section 10(b) and 10b-5

Plaintiffs allege various violations of Section 10(b) of

the Exchange Act of 1934 and Rule 10b-5. Section 10(b)

provides an action by a purchaser or seller of "any security"

against “any person" who used "any manipulative or

deceptive device or contrivance" in connection with the

purchase or sale of a security. 15 U.S.C. § 78()(b) (1982).

Rule 10b-5 provides in material part:

It shall be unlawful for any person,

directly or indirectly, by the use of any means

or instrumentality of interstate commerce, or

of the mails or of any facility of any national

securities exchange, _

(a) To employ any device, scheme, or artifice

to defraud,

(b) To make any untrue statement of a

material fact or to omit to state a material fact

necessary in order to make the statements made, in

the light of the circumstances under which they were

made, not misleading, or

of business which operates or would operate as a

fraud or deceit upon any person,

in connection with the purchase or sale of any

security.

17 C.R.F. § 240.10b-5 (1983).

The purpose of a cause of action under § 10(b) and

Rule 10b-5 is

——_— _— —

H15

to protect persons who are deceived in securities

transactions -- to make sure that buyers of securities

get what they think they are getting and that sellers of

securities are not tricked into parting with something

for a price known to the buyer to be inadequate or for

a consideration known to the buyer not to be what it

purports to be.

Chemical Bank v. Arthur Andersen & Co., 726 F.2d 930,

943 (2d Cir.), cert. denied, 469 U.S. 884 (1984). The

essential elements of a § 10(b) and Rule 10b-5 claim are (1)

in connection with a securities transaction and (2) acting with

scienter, the defendants made (3) a _ “Material

‘ misrepresentation or nondisclosure (4) upon which plaintiff

relied and (5) thereby suffered injury. Chemetron Corp. v.

Business Funds, Inc. , 718 F.2d 725, 728 (Sth Cir.), vacated

on other grounds, 460 U.S. 1007 (1983); Pin v. Texaco,

Inc., 1986 Fed. Sec. L. Rep. (CCH) { 92,823, at 94,011

(Sth Cir. July 14, 1986) (under § 10(b) essential element is

misrepresentation or nondisclosure).

Most. significantly, the plaintiffs must prove that "the

defendant(s) acted with scienter, i.e., with intent to deceive,

manipulate, or defraud." Hermann & MacLean v.

Huddleston, 459 U.S. 375, 382 (1983). The authorities are ~

universal that this is a species of fraud. See, e.g., id.

(§ 10(b) is a “catchall antifraud provision"); Santa Fe Indus.,

Inc. v. Green, 430 U.S. 462, 472 (1977); Ernst & Ernst v.

Hochfelder, 425 U.S. 185, 203 (1976).? Moreover, as the

2.1n Ernst & Ernst, the Supreme Court refused to read a negligence

or should have known standard in § 10(b) or Rule 10(b)-5 actions. The

scienter requirement can be satisfied with a state of mind less than actual

knowledge such as "sever recklessness." This standard requires a

showing that the deception was "so obvious that the defendant must have

been aware of it." Warren v. Reserve Fund, Inc., 728 F.2d 741, 745 &

H16

Supreme Court put it, "Section 10(b) is aptly described as a

catchall provision, but what it catches must be fraud."

Chiarella v. United States, 445 U.S. 222, 234-35 (1980).

No plaintiff can point to any fact in support of their

allegation that the defendants were guilty of fraud.

Burroughs dep. at 84-85; Garcia-Quiroga dep. at 159-60;

Boyett dep. at 107-09, 111; LaCelle dep. at 161-62, 183;

Steubing dep. at 165-67; Topalian dep. at 135-36; McDonald

dep. at 1079. Accordingly, plaintiffs cannot establish an

essential element of their 1934 Act claim.

B. HPC and O’Donnell Made No

Representation to Plaintiffs

To recover under 10b-5, plaintiffs must establish that

HPC and O’Donnell made a misrepresentation of material

fact to them in connection with their purchase of these

securities. Abell v. Potomac Ins. Co., 858 F.2d 1104, 1115

(Sth Cir. 1988). Plaintiffs cannot recover from HPC or

O’Donnell for misrepresentation because the uncontroverted

testimony of the plaintiffs establishes that neither HPC or

O’Donnell made any statements, much less untrue

Statements, to them. McDonald dep., Vol. VI at 1062-66;

Topalian dep. at 151; Garcia-Quiroga dep. at 159; Law dep.

at 76; Burroughs dep. at 84-85; LaCelle dep. at 157-163,

168-69. The lack of statement is exemplified by plaintiff

Mr. Bobby W. McDonald’s testimony in deposition:

Q. Do you have any information or evidence to

indicate that Richard O’Donnell or HPC made

any false representations to anybody to get

them to buy Onshore units?

A. No, sir.

n.12 (Sth Cir. 1984). In the present case, the plaintiffs are unable to

meet even the 'esser standard of “should have known.”

H17 7

McDonald dep. Vol. VI, at 1066. As a further example,

plaintiff Charles F. LaCelle is unequivocal in his answers:

Q. Do you have any facts that would show that

HPC made any representations to you at all?

A. Directly? :

Q. Directly or indirectly.

A. No.

Q. What about Mr. O’Donnell? Did he make

any representations to you?

A. No.

Q. Would you have -- do you have any facts, or

are you aware of any facts, that would show

that HPC or Mr. O’Donnell assisted in any

fraudulent misrepresentations that others may

have made to you?

A. No

LaCelle dep. at 161-62.

The failure of the plaintiffs to prove any untrue

statement of material fact by HPC or O’Donnell requires that

plaintiffs’ 10b-5 claims be dismissed. See Abell, 858 F.2d

at 1115-16.

H18

c HPC and O’Donnell Owed no Duty to

Plaintiffs

The failure of a party to disclose facts constitutes

actionable fraud only if the party had a duty to disclose the

facts. E.g., Chiarella v. United States, 445 U.S. 222, 230

(1980); Tempo Tamers, Inc. v. Crow-Houston Four, Ltd.,

715 S.W.2d 658, 669 (Tex. App.--Dallas 1986, writ ref’d

n.r.e.). Accordingly, the first step in analyzing plaintiffs’

nondisclosure claims is to determine whether HPC and

O’Donnell had a duty to disclose facts to plaintiffs.

First, as drilling operator, HPC and O'Donnell owed

no fiduciary duty to the plaintiffs. A fiduciary relationship

generally arises only from a relationship of trust and

confidence. Thigpen v. Locke, 363 S.W.2d 247, 252-53

(Tex. 1962). A fiduciary relationship may be created from

a variety of circumstances usually involving attorney-client,

parent-child or some other special relationship; but generally

it does not include relationships between businessmen dealing

at arms length. Consolidated Gas & Equip. Co. vy.

Thompson, 405 S.W.2d 333, 336-37 (Tex. 1966). To allow

the plaintiff investors to transform this arms _ length

transaction between the drilling operator and the partnership

to create a fiduciary duty from the operator to them would

jeopardize the security of contracts in Texas. See Thigpen,

363 S.W.2d at 253. Thus, HPC and O’Donnell had no duty

to disclose based upon a fiduciary duty.

Moreover, any action HPC undertook to assure itself

of the viability of these programs for which it was about to

act as drilling operator, lends no support to the conclusion

plaintiffs wish to draw that HPC or O’Donnell owed

plaintiffs any duty to disclose facts regarding their Onshore

investments. See Schlifke, 1989 Fed. Sec. L. Rep. (CCH)

4 94,174, at 91,599. As one court has noted, it is ludicrous

H19

to contend that actions taken by a party in assessing its own

risks in connection with a proposed transaction somehow

translate into an affirmative duty to advise other participants

in the transaction with regard to their decision whether or not

to participate. See National Union Fire Ins. Co. v. Eaton,

701 F. Supp. 1031 (S.D.N.Y. 1988). In Eaton, the court

found that the surety’s review of the private placement

memoranda for its own purposes did not require it to disclose

any information to the investors. /d. The court noted that

a surety has no duty to disclose adverse information it may

have had. See generally Delany v. Blunt, Ellis & Loewi, 631

F. Supp. 175 (N.D. Ill. 1986) (citing Woodward v. Metro

Bank, 522 F.2d 84 (Sth Cir. 1975)); Quintel Corp., N.V. v.

Citibank, N.A., 589 F. Supp. 1235 (S.D.N.Y.) 1984);

Schlifke v. Seafirst Corp., 1987 Fed. Sec. L. Rep. (CCH)

q 93,107, at 95,443 (N.D. Ill. 1987), aff'd 1989 Fed. Sec.

L. Rep. (CCH) ¢ 94,174 (7th Cir. Jan. 9, 1989); In re Gap

Stores Sec. Litig., 457 F. Supp. 1135 (N.D. Cal. 1978);

Ingenito v. Bermec Corp., 441 F. Supp. 525, 549 (S.D.N.Y.

1977).

Likewise, in Schlifke, the Court of Appeals refused to

find any section 10(b) liability, stating that, "The bank had

no communications with the investors and did not initiate the

transaction cr participate in it in any way that would induce

the investors to rely on the bank to disclose information...."

Id. at 91,600 (quoting Jett v. Sunderman, 840 F.2d 1487,

1493 (9th Cir. 1988)). Indeed, in discussing secondary 10(b)

liability, the Seventh Circuit noted that routine extension of

a loan does not satisfy the "substantial assistance" element.

Id. at 91,601. The court concluded that “[e]ven affording

the plaintiffs the benefit of all reasonable inferences, they

had not sufficiently demonstrated that the [defendant] had

‘thrown in his lot,’ and . . ‘joined common cause with other

offenders or aided and abetted a scheme with the necessary

H20

State of mind.’" Jd. at 91,602 (quoting Barker v. Henderson,

Franklin, Starnes & Holt, 797 F.2d 490, 497 (7th Cir.

1986)).

Plaintiffs also assert that even if HPC and O’ Donnell

were not engaging in primary fraud, they may have aided

and abetted the primary fraud allegedly perpetrated by other

defendants. Under the Fifth Circuit precedent, parties are

subject to liability for aiding and abetting a securities

violation only if the following elements are proved: (1) there

must have been a security violation by the primary party; (2)

the aider and the abetter must have had a "general

awareness" of its role in a Rule 10b-5 violation; (3) the aider

and abetter must have knowingly rendered "substantial

assistance" in the Rule 10b-5 violation. Abel/, 858 F.2d at

1126; accord Bane v. Sigmundr Exploration Corp. , 848 F.2d

579 (Sth Cir. 1988); Woodward v. Metro Bank, 522 F.2d 84

(Sth Cir. 1975).

To establish the "general awareness" element,

plaintiffs must prove HPC and O’Donnell’s knowledge of

their role in a fraud, and their commitment (or intent) to aid

in the fraud’s success:

Scienter, then would require first that the

alleged abettor know of the fraud’s existence

and generally understand how its actions aid

in promoting the success of the fraud. The

second element of scienter-commitment would

be met where evidence shows that the abettor

acts from a desire to help the fraud succeed...

If the evidence shows no more than a

transaction constituting the daily grist of the

mill, we would be loathe to find 10b-5 liabil

H21

-ity without clear proof of intent to violate the securities

laws.

Abell, 858 F.2d at 1127, (citing Woodward, 522 F.2d at 97)

(emphasis added).

- HPC and O’Donnell played no role in the offering of

the securities. O’Donnell Affidavit. HPC nor O'Donnell

knew of the existence of any alleged fraud. See Bane, 848

F.2d at 581. In Bane, the defendant was a lender who

included loan documents in an investment package for an oil

and gas limited partnership and made loans to some of the

plaintiffs. Id. at 580. The court held that the inclusion of

documents in investors packages and loaning money to the

investors did not constitute substantial assistance for aiding

and abetting liability under Rule 10b-5. Id. at 581.

In this case, HPC acted solely as the drilling operator.

Thus, HPC was even more removed from the plaintiffs’

investments than the surety, lender or escrow agent in

Eaton, Schlifke and Bane. HPC did not review the investors’

financial information and did not even know their identity

until this lawsuit was filed. O’Donnell Affidavit. HPC had

no contact or communication in even the most remote sense

with any of the investors prior to their investment.

O’Donnell Affidavit. HPC did not contribute to the

prospectus. O’Donnell Affidavit. Although a copy of the

agreement between Onshore and HPC was attached to the

prospectus, as in Bane, this is not sufficient to reestablish

substantial assistance. As plaintiffs admit in their Complaint,

HPC’s limited role was fully disclosed in the prospectus.

Complaint at 12-14. Plaintiffs have no basis for asserting

that HPC or O’Donnell had any duty to disclose, therefore,

there is no basis for imposing liability on HPC or O’ Donnell

under section 10(b) and Rule 10b-5.

—7_——————————————

H22

HPC AND O’DONNELL DID NOT VIOLATE THE

TEXAS SECURITIES LAW

Plaintiffs allege generally the HPC and O’Donnell’s

actions violated the Texas Blue Sky Securities Act, Tex.

Rev. Civ. Stat. Ann. art. 581-33 (Vernon Supp. 1989). The

elements necessary to establish a violation of the Texas

Securities Act are substantially similar to those necessary to

establish a violation of Rule 10b-5. Thus, a failure to prove

a violation of Rule 10b-5 generally is considered a failure to

prove a Texas Securities Act violation. See Keasler v.

Natural Gas Pipeline Co. of Am., 569 F. Supp. 1180 (E.D.

Tex. 1983), aff'd, 741 F.2d 1380 (Sth Cir. 1984); Jeanes v.

Henderson, 688 S.W.2d 100 (Tex. 1985); Sibley v. Horn

Advertising Inc., 50S S.W.2d 417 (Tex. Civ. App.--Dallas

1974, writ ref’d n.r.e.), cert denied, 420 U.S. 929 (1975).

Because plaintiffs cannot establish that HPC and O’ Donnell

violated Rule 10b-5, they likewise cannot establish a

violation of the Blue Sky laws. Therefore, HPC and

O’Donnell are entitled to summary judgment as a matter of

law.

VI.

HPC AND O’DONNELL DID NOT COMMIT

COMMON LAW FRAUD

Plaintiffs cannot recover against HPC or O’ Donnell

on a theory of common law fraud. The elements of

actionable fraud in Texas are (1) that a _ material

representation was made; (2) that it was false; (3) that, when

the speaker made it, he knew it was false or made recklessly

without any knowledge of its +ruth and as a positive

assertion; (4) that they made it with the intention that it

should be acted upon by the party; (5) that the party acted in

reliance upon it; and (6) that he thereby suffered injury.

H23

South Hampton Co. v. Stinnes Corp., 733 F.2d 1108 (Sth

Cir. 1984); Trenholm v. Ratcliff, 646 S.W.2d 927 (Tex.

1983). As discussed above, plaintiffs admitted in their

depositions that neither HPC nor O’Donnell made any

representations to them, or consequently any

misrepresentations. McDonald dep. Vol VI at 1062-66;

Topalian dep. at 151; Garcia-Quiroga dep. at 159; Law dep.

at 76; Burroughs dep. at 84-85; LaCelle dep. at 157-63, 168-

69. Because plaintiffs cannot establish the elements

necessary to establish fraud, HPC and O’Donnell are entitled

to summary judgment.

Vil.

HPC AND O’DONNELL DID NOT VIOLATE.

THE RICO ACT

Plaintiffs assert RICO claims against HPC and

O’Donnell based upon allegations of illegal kickbacks, and

inflated contractual drilling prices. RICO prohibits four

forms ef activity: (1) investment in an enterprise engaged in

or affecting interstate or foreign commerce of income

obtained through a pattern of racketeering or through

collection of an unlawful debt, (2) acquisition of an interest

in such an enterprise through a pattern of racketeering or

through coliection of an unlawful debt, (3) conduct of the

affairs of such an enterprise through a pattern of racketeering

or through collection of an unlawful debt, and (4) conspiracy

to violate any of these three provisions. Civil remedies are

available for violations of section 1962 to persons injured "by

reason of” such RICO activities. Plaintiffs’ claims must fail

because they cannot establish any of the essential elements of

RICO and plaintiffs have no standing to assert — against

HPC and O'Donnell.

H24

A. Elements of a Civil RICO Case

The civil RICO statutes provide a private cause of

action for any person injured in his business or property by

reason of a violation of RICO. The injured person may seek

redress for treble damages against the person or persons who

caused his injury. 18 U.S.C. § 1964(c) (1982). To establish

a RICO violation under any subsection of 1962, the essential

elements are as follows: (1) a "person" (the defendant),

(2) through the commission of two or more predicate acts,

(3) constituting a "pattern" of "racketeering activity", directly

or indirectly invests in (§ 1961(a)), or maintains an interest

in (§ 1962(b) ), or participates in (§ 1962(c)), an

"enterprise", the activities of which affect interstate

commerce, causing plaintiff injury in his business or property

"by reason of" the defendants’ activity. Ocean Energy II,

Inc. v. Alexander & Alexander, Inc. , 868 F.2d 740, 742 (Sth

Cir. 1989); Moss v. Morgan Stanley, Inc. 719 F.2d 5, 17,

20-23 (2d Cir. 1983), cert. denied, 465 U.S. 1025 (1984).

Plaintiffs’ claims must fail because there is no evidence to

support any allegation that HPC or Q’Donnell engaged in a

pattern of racketeering activities or that plaintiffs’ injury was

caused by such acts. ;

B. Plaintiffs Lack RICO Standing

Section 1964(c) authorizes a suit by any person

injured in "his business or property by reason of a violation

of § 1962." 18 U.S.C. § 1964(c) (1982). Thus, the

Supreme Court has stated that anyone injured in his business

or property as a result of a defendant engaging in a pattern

of racketeering activity in a manner forbidden by § 1962 has

aclaim. Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496-

97 (1985). In a case presenting similar allegations as this

one, the Fifth Circuit in construing RICO’s standing

requirement examined whether the plaintiffs were injured by

- H25

the conduct constituting the violation and- whether the harm

suffered was caused by the predicate acts. See National

Enters., Inc. v. Mellon Fin. Servs. Corp. No. 7, 847 F.2d

251, 252-53 (Sth Cir. 1988). In Mellon, the plaintiff creditor

alleged it was injured by illegal kickbacks a company paid to

its primary lender as a condition of financing, asserting that

these kickbacks depleted the funds of the corporation which

eventually declared bankruptcy. The Court found that the

plaintiff's damages were too indirect, speculative and

"beyond the pale of rational causation." /d. at 254. Thus,

the court found the plaintiff lacked standing to assert a RICO

claim.

In this instance, although plaintiffs’ allegations are

vague and somewhat unintelligible, they appear to claim that

alleged kickbacks HPC made to Johnson, one of the general

partners, and over charges it made to Onshore for drilling

caused them injury. See Plaintiffs’ Response to RICO

Standing Order at 11, 31-33. Like in Mellon, plaintiffs who

are investors in the limited partnership suffered no direct

injury, if any, as a result of such alleged activity. Their

injuries, if any, are too remote and speculative to have

"flowed" from the commission of the predicate acts. See

Mellon, 847 F.2d at 254, Therefore, they lack standing to

assert RICO claims against HPC and O’Donnell.

C. Plaintiffs Cannot Establish the Existence of a

Enterprise

Plaintiffs’ claims must be dismissed because there is

no proof to support their allegations that Onshore is the

RICO enterprise. The existence of an “enterprise” is a

crucial element of plaintiffs’ RICO claim. See Sedima, 473

‘U.S. at 496-97; United States v. Turkette, 452 U.S. 576, 583

(1981). An "enterprise" incliides any "individual,

partnership, corporation, association, or other legal entity,

and any union or group of individuals associated in fact

alii aia

although not a legal entity."

H26

18 U.S.C. § 1961(4).

The

Supreme Court defined an “enterprise” in the context of §

1962:

The enterprise is an entity, for present

purposes a group of persons associated

together for a common purpose of engaging in

a course of conduct[,] ... proved by evidence

of an ongoing organization, formal or

informal, and by evidence that the various

associated function as a continuing unit.

The “enterprise” is not the "pattern of

racketeering activity"; it is an entity separate

and apart from the pattern of activity in which

it engages.

452 U.S. at 583. The Fifth Circuit defined "enterprise" as

requiring, in addition,

the existence of a decision making structure,

whether hierarchial or consensual. The RICO

enterprise must have a common or shared

purpose and continuity of structure and

personnel.

Shaffer v. Williams, 794 F.2d 1030, 1032 (Sth Cir. 1986)

(citations omitted).

To establish an “association in fact"

enterprise, a plaintiff must show (1) an ongoing organization,

formal or informal, (2) the association had a common

purpose of engaging in a course of conduct, and (3) its

various members functioned as a continuing unit. Turkette,

452 U.S. at 583; Montesano v. Seafirst Commercial Corp.,

818 F.2¢ 423,427 (Sth Cir. 1987); Shaffer, 794 F.2d at

1032.

H27

The Fifth Circuit recently elaborated on the distinction

between the pattern and the enterprise:

When the alleged section 1962(c)

violator is a legal entity, such as a

corporation, this required separation 1s not

established merely by showing that the

corporation, through its employees, officers,

and/or directors, committed a pattern of

predicate acts in the conduct of its own

business. Atkinson. Nor does the fact that

individual officers and employees of a

corporation, in the course of their employment

associate together and commit in the conduct

of the corporation’s business a pattern of

predicate acts in its name and on its behalf,

suffice to constitute such officers and

employees (alone or together with the

corporation itself) an association in fact

enterprise distinct from the corporation. /d.

And, in Montesano we also explained that a

RICO plaintiff must plead specific facts that

establish an association that exists other than

merely to commit the predicate acts that show

pattern. 818 F.2d at 427,

Old Time Enters., Inc. v. International Coffee Corp., 862

F.2d 1213. 1217-18 (Sth Cir. 1989). The plaintiffs’ “4

allegations in their response to the Court's RICO Standing

Order identifies the enterprise as Onshore. See Plaintifts’

Response to RICO Standing Order at 31 4 6(a). There is no

evidence to support the contention that Onshore functioned

for the common purpose other than conduct of its own

business. Neither is there any proof of any association-in-

fact among the various defendants that includes HPC and

H28

O’Donnell. O’Donnell Affidavit. Thus, plaintiffs cannot

establish the existence of a RICO enterprise.

D. Plaintiffs Cannot Establish a Pattern of

Racketeering Activity

Plaintiffs’ RICO claims should be denied because they

have not established that defendants committed a pattern of

racketeering activity. A "pattern" or racketeering activity

"requires at least two acts of racketeering activity." 18

U.S.C. § 1961(5) (1982). The Supreme Court in Sedima

gave some insight to the "pattern" requirement:

[A] pattern "requires at least two acts

of racketeering activity, " § 1961(5) (emphasis

added), not that it "means" two such acts.

The implication is that while two acts are

necessary, they may not be sufficient.

Indeed, in common parlance two of anything

do not generally form a “pattern," The

legislative history supports the view that two

isolated acts of racketeering activity do not

constitute a pattern. As the Senate Report

explained: "The target of [RICO] is thus not

sporadic activity. The infiltration of

legitimate business normally requires more

_.than one ’racketeering activity’ and the threat

of continuing activity to be effective. It is this

factor of continuity plus relationship which

combines to produce a pattern." . . . of the

same bill, Congress was more enlightening:

"criminal conduct forms a pattern if it

embraces criminal acts that have the same or

similar purposes, results, participants, victims,

or methods of commission, or otherwise are

H29

interrelated by distinguishing characteristics

and are not isolated events."

473 U.S. at 496 n.14 (citations omitted)

Since Sedima, the great weight of authority has

required a rigorous showing on this element. See Smith v.

Ayres, 845 F.2d 1360, 1365-66 n. 18 (Sth Cir. 1988);

Crocker v. FIDC 826 F.2d 347, 348 n.2 (Sth Cir. 1987),

cert. denied, 108 S. @t. 1075 (1988); Montesano v. Seafirst

Commercial Corp. , 818 F.2d 423,426 (Sth Cir. 1987); Smoky

Greenhaw Cotton Co. v. Merrill Lynch, Pierce, Fenner &

Smith, Inc., 785 F.2d 1274, 1280-81 n. 7 (Sth Cir. 1986),

cert denied, 482 U.S. 928 (1987). Thus, plaintiffs must

establish at least two predicate acts of racketeering activity,

which are indictable as defined in the 18 U.S.C. §

1961(1)(A), that show “continuity plus relationship" with the

legitimate business. Old Time Enters., Inc., 862 F.2d at

1217. Plaintiffs’ allegations fail to meet this "continuity plus

relationship" test. Plaintiffs allege that HPC paid kickbacks

to Johnson and over charged Onshore. There is no proot

that these alleged acts were anything other than isolated

instances.

Moreover, plaintiffs have no evidence that the alleged

"predicate acts" constitute kickbacks or that HPC

overcharged Onshore. RICO’s definition of racketeering

activity contains a laundry list of offenses which constitute

the predicate acts necessary to establish a violation. 18

U.S.C. § 1961(1). Such acts must be acts "indictable" or

“punishable” under one of several listed federal criminal laws

or "chargeable" under a listed state law. Jd. § 1961(1)(A).

The alleged kickbacks were payments from HPC to Johnson

arising from transactions wholly unrelated to Onshore.

O’Donnell Affidavit. As Johnson testified the transactions

transpired prior to his affiliation with Onshore. Johnson def.

NEE

H30

at 32, 35-36, 24. Johnson confirms that such payments were

not kickbacks. Johnson dep. at 77. Likewise, the auditor

hired to review HPC’s books and records testified that he

found no evidence that the payments were kickbacks. Leggio

dep. at 242-44. Furthermore, the alleged overcharges are

consistent with market prices and the contractual agreement

in existence between Onshore and HPC. O’Donnell

Affidavit. Thus, because plaintiffs cannot establish that HPC

committed "predicate acts" that constitute a "pattern" or

racketeering activity, HPC and O'Donnell are entitled to

summary judgment. oi

E. Plaintiffs Cannot Establish the Activities

Prohibited Under RICO

Plaintiffs cannot establish that HPC or O'Donnell

derived income through a pattern or invested income,

acquired or maintained an interest in, or controlled a RICO

enterprise through a pattern of RICO activity. Therefore,

their claims must fail.

To establish a violation of § 1962(a), the plaintiffs

must establish that HPC and O’Donnell "derived income"

from a “pattern" of “racketeering activity" in which they

participated as principals; and that they used or invested that

income to acquire an interest in, establish or operate the

enterprise. H.J., Inc., 648 F. Supp. at 428 n. 7. There is

no evidence that either HPC or O’Donnell used or invested

income derived from a pattern of racketeering activity in

Onshore for any purpose. In fact, HPC and O’Donnell had

no financial interest in Onshore. O’Donnell Affidavit.

Under 1962(b), the plaintiffs must establish that HPC

and O’Donnell “acquired or maintained" an interest or

"control". of the enterprise through a "pattern" of

“racketeering activity." The object of the activity must be to

H31

gain the interest or acquire control. Control is not limited by

stock or capital ownership but may exist when the defendant

has some meaningful ability to direct or influence the affairs

or actions of the enterprise. E.g., Sutliff, Inc. v. Donovan

Cos., 727 F.2d 648, 653 (7th Cir. 1984). Again, there is no

evidence that either HPC or O’Donnell gained an interest or

controlled the affairs or actions of Onshore. The only

evidence is to the contrary. O’Donnell Affidavit.

To establish a violation of § 1962(c), the plaintiffs

must establish that HPC and O’Donnell were "employed by

or associated with" the enterprise and "conducted" or

"participated" in the conduct of the affairs of the enterprise

through a pattern of racketeering activity. Montesano, 818

F.2d at 424. To satisfy the conduct element, the Fifth

Circuit has held that the person must be able to commit the

predicate offenses solely by virtue of his position in the

enterprise, or the predicate offenses must be related to the

activities of that enterprise. United States v. Cauble, 706

F.2d 1322, 1341 (Sth Cir. 1983), cert. denied, 465 U.S.

1005 (1984). The Cauble court, adopted the following test:

A defendant does not "conduct" or

"participate in the conduct" of a lawful

enterprise’s affairs, unless (1) the defendant

has in fact committed the racketeering acts as

alleged; (2) the defendant’s position in the

enterprise facilitated his commission of the

racketeering acts, and (3) the predicate acts

had some effect on the lawful enterprise.

Id. at 1332-33. There is no evidence that HPC or O’ Donnell

had any position with Onshore that facilitated the commission

of the alleged predicate acts. The only evidence is to the

contrary. O’Donnell Affidavit. Thus, their claims must fail.

H32

Section 1962(d) makes it unlawful to conspire to

violate § 1962(a), (b), or (c). To establish a violation of

§ 1962(d), plaintiffs must establish that: (1) two or more

persons entered into an unlawful agreement to violate §

1962(a), (b), or (c), as those offenses have previously been

defined; (2) HPC and O’Donnell knowingly and willfully

became members of the conspiracy; (3) HPC and O’ Donnell

agreed to commit at least two of the acts of racketeering

activity alleged by plaintiffs to create a pattern; and (4) one

of the members of the conspiracy knowingly committed at

least one overt act in furtherance of the conspiracy alleged.

United States v. Cauble, 706 F.2d at 1341: United States y.

Phillips, 664 F.2d 971, 1012 (Sth Cir. 1981), cert. denied,

459 U.S. 906 (1982); United States v. Elliott, 571 F.2d 880,

902-03 (Sth Cir.), cert. denied, 439 U.S. 953 (1978).

Plaintiffs must establish that HPC and O’ Donnell objectively

manifested intent to participate in the affairs of the

enterprise. Cauble, 706 F.2d at 1341. There is no evidence

that either HPC or O’Donnell knowingly and willfully

became a member of any alleged conspiracy. The only

evidence is to the contrary. See O’Donnell Affidavit.

VII.

CONCLUSION

Wherefore, for the foregoing reasons, Houston

Petroleum Co., Inc. and Richard O’Donnell urge this Court

to grant their motion for Summary Judgment in its entirety.

Respectfully submitted,

OF COUNSEL: By:

Don Jackson

H33

VINSON & ELKINS Admission I.D. No. 6915

1001 Fannin 1001 Fannin

3300 First City Tower 3106 First City Tower

Houston, Texas 77002 Houston, Texas 77002-6760

Telephone: 713/651-2222 713/651-2078

ATTORNEY IN CHARGE FOR

DEFENDANTS HOUSTON

PETROLEUM CO., INC. and

RICHARD O’DONNELL

CERTIFICATE OF SERVICE

This is to certify that a true and correct copy of the

foregoing was mailed this _15_ day of _June_, 1989, to: »

Armando Lopez W. Sherman Rogers

LOPEZ & RAMIREZ Howard University

2990 Richmond, School of Law

Suite 205 2900 Van Ness, N.W.

Houston, Texas 77098 Washington, D.C. 20008

D. John Leger Neil Wasserstrom

LEGER & SANDERS MARGRAVES, KENNERLY

5847 San Felipe & SCHUELER

Suite 1250 2200 Dresser Tower

Houston, Texas 77057 60i Jefferson

Houston, Texas 77002

Kevin F. Risley Joel Middlebrook

BUTLER & BINION 2927 Drexel

1600 Allied Bank Plaza Houston, Texas 77027

Houston, Texas 77002

H34

Frank Pinedo W. Roderick Johnson

PINEDO, CEZEAUX JOHNSON & JOHNSON, P.C.

& SWEENEY 1800 West Loop South

1415 Louisiana Suite 1510

Suite 2550 Houston, Texas 77027

Houston, Texas 77002

Wayne M. Byles John R. Knight

P. O. Box 542165 MORRIS & CAMPBELL

Dallas, Texas 75354-2165 600 Jefferson,

Suite 1617

Houston, Texas 77002

Don Jackson

EXHIBIT A

H35

IN THE UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF TEXAS

HOUSTON DIVISION

MICHAEL K. TOPALIAN, etal. §

7; § CIVIL ACTION NO.

§ 87-3826

JOHN N. EHRMAN, et al., §

AFFIDAVIT OF RICHARD O’DONNELL IN

SUPPORT OF HOUSTON PETROLEUM CO., INC.

AND RICHARD O’DONNELL’S MOTION FOR

SUMMARY JUDGMENT

THE STATE OF TEXAS §

COUNTY OF HARRIS §

Before me the undersigned authority on this day

personally appeared RICHARD O’DONNELL, President of

Houston Petroleum Co., Inc. ("HPC"), in the above-entitled

and numbered cause and makes this affidavit in support of

HPC and Richard O’Donnell’s Motion for Summary

Judgment, who, being duly sworn, deposes and says:

l. I am over 18 years old and am fully competent

to make this affidavit. At all times relevant to this dispute,

I have been the President of HPC, which is a Texas

corporation doing business in the State of Texas with its

principal place of business in Houston, Texas. In the

transaction between Onshore Exploration, Ltd. 1984 Mid-

Year Drilling Program and HPC, HPC acted as one of the

oil and gas operators.

H36

a Neither HPC nor I participated in any way in

the preparation of the offering materials or the prospectus

that was put together to promote the program.

3. Neither HPC nor I had any involvement with

the selling activities undertaken on behalf of the Onshore

Exploration Program. We were unaware of the sales efforts

that were made. We had no knowledge or control over the

means by which the salesmen marketed the limited

partnership interests.

4. Neither HPC nor I played any role in the

offering of the securities to the plaintiffs or any other

investors. As we were not involved in the offering of the

securities, we made no representations, much less untrue

statements, to any plaintiffs. Neither HPC nor I were

involved in the soliciting of any investors to purchase an

interest in the Onshore Exploration Program. Neither HPC

nor I sold any investors their interests in this offering. We

had no contact with the investors prior to their investments

and did not advise them whether to purchase or whether this

was a Solid investment. We made no representations to the

investors regarding the quality of this investment, about the

program or otherwise. Neither HPC nor I reviewed the

investors’ financial information prior to their investment in

the Onshore Exploration Program or at any time. We did

not even know their identities until after the lawsuit was

filed. Neither HPC nor I had any contact or communication

in any sense with any of the investors prior to their

investment.

a Neither HPC nor I played any part in or had

control over in the operation or management of Onshore.

We did not control any Onshore Officer or employee, and we

did not have any control over any of the policies,

H37

management, decisions or any aspects of the business of

Onshore, including but not limited to the sales efforts.

6. We were unaware and are still unaware of the

existence of any fraud or alleged fraud by any party

perpetrated or sought to be perpetrated against the investors

and did not intent to render any assistance to any alleged

fraud. We were and are unaware of how our actions would

promote the success of any alleged fraud. We had no intent

to violate any securities laws and did not violate any

securities laws. We did not participate or intend to

participate in any such fraud nor did we assist or intend to

assist any such fraud succeed.

ce Neither HPC nor I were involved in any RICO

activities. We did not participate in any RICO enterprise. We

did not attempt to control any RICO enterprise, acquire an

interest in, or maintain an interest ina RICO enterprise. To

the best of my knowledge, Onshore is not a RICO enterprise

nor is there any RICO enterprise associated with this drilling

program.

8. Neither HPC nor I have participated in any

pattern of racketeering activity. The payments HPC made to

W. Roderick Johnson were not illegal kickbacks as plaintiffs

alleged, but instead were commissions due to Mr. Johnson

for transactions unrelated to the Onshore Exploration

Program. HPC did not overcharge Onshore for exploration

activities that it undertook. Instead, the prices charged are

consistent with market prices and the contractual agreement

in existence between Onshore and HPC. Neither HPC nor

I had any financial interest in Onshore. Neither HPC nor |

had any control over the affairs of Onshore. We did not

have any position with Onshore that facilitated the

perpetration of any alleged predicate acts.

H38

?. Neither HPC nor I were knowingly or

willfully a part of any alleged conspiracy.

/S/

RICHARD O’DONNELL

SWORN TO AND SUBSCRIBED BEFORE ME this

15. day of June 1989, by Richard O'Donnell.

_/S/

Notary Public in and for the

State of Texas

(SEAL)

H39

IN THE UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF TEXAS

HOUSTON DIVISION

MICHAEL K. TOPALIAN, et al., §

Plaintiffs, §

§ Civil Action ¥

VS. § No. 87-3826

JOHN N. EHRMAN, et al... §

Defendants. §

ORDER GRANTING HOUSTON PETROLEUM

CO.,INC. AND O’DONNELL’S

MOTION FOR SUMMARY JUDGMENT

This cause came before the Court on the Motion of

Houston Petroleum Co., Inc. and Richard O'Donnell for

Summary Judgment. The Court, having considered the

motion and evidence on file, finds that there is no genuine

issue aS to any material fact and that defendants HPC and

O'Donnell are entitled to judgment as a matter of law.

It is therefore, ORDERED, ADJUDGED AND

DECREED that the motion of HPC and O’Donnell for

Summary Judgment be and the same hereby is GRANTED.

Plaintiffs shall take nothing by their action. This is a final

judgment. All costs are assessed against the »laintiffs,

jointly and severally.

Done this the day of , 1989.

UNITED STATES DISTRICT JUDGE

H40

IN THE UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF TEXAS

HOUSTON DIVISION

MICHAEL K. TOPALIAN, et al., §

Plaintiffs, §

§ Civil Action

VS. § No. 87-3826

JOHN N. EHRMAN, et al., §

Defendants. §

PLAINTIFFS’ RESPONSE TO THE HOUSTON

PETROLEUM DEFENDANTS’ MOTION FOR

SUMMARY JUDGMENT

To the Honorable Judge of said Court:

COME NOW Michael K. Topalian, et al., Plaintiffs

in the above styled and numbered cause, and file this their

response in opposition to the Houston Petroleum Defendants’

(Houston Petroleum Company Inc. and _ Richard

O’Donnell) Motion for Summary Judgment.

The Houston Petroleum Defendants’ Motion. for

Summary Judgment is friovolous. It. represents a last-ditch

effort by these Defendants to avoid a trial of this complex

securities fraud and RICO case in which the evidence will

clearly show that the Houston Petroleum Defendants and

others engaged in acts and practices which operated as a

fraud or deceit upon Plaintiffs in connection with the sale of

securities.

H4]

Plaintiffs, in their First Amended Complaint

(paragraphs 145 - 156), raise, in a clear and detailed manner.

a number of serious allegations against the Houston

Petroleum Defendants. The charges stem from the existence

of a pre-Onshore attorney/client relationship between these

Defendants and Onshore’s second Managing general partner,

Defendant W. Roderick Johnson and and his law firm, W.

Roderick Johnson, P.C.

The nature of such a relationship is naturally suspect

tor allegations of conflict of interest and, in the instant case.

as will be shown below, the relationship, in fact, led to self-

dealings resulting in "kick-backs" (from the Houston

Petroleum Defendants to the Johnson Defendants) in excess

of ONE HUNDRED THOUSAND ($100,000.00) DOLLARS

at the expense of Onshore and its investors. including

Plaintiffs.

Plaintiffs’ accusations are corroborated by the Johnson

Defendants, themselves. In their February 11, 1988, Motion

to Dismiss, the Johnson Defendants made the below quoted

admissions relevant to Plaintiffs’ allegations against the

Houston Petroleum Defendants:

"... As a result of an ElG-initiated audit,...

EIG demanded and received an adjustment

and a refund of moneys it had paid Houston

Petroleum Company. In other words, EIG

WAS THE VICTIM OF SUCH ACTS AND

EHRMAN AND EIG TOOK TIMELY

ACTION... TO PROTECT THE

INTERESTS OF THE HOLDERS OF THE

LP UNITS." (Emphasis added).

Defendant Joel A. Middlebrook, CPA and bookkeeper

for the Partnership, also corroborates the Ehrman and

H42

Johnson Defendants’ position regarding the Houston

Petroleum Defendants. In a January 22, 1986, letter to John

N. Ehrman (Plaintiffs’ Exhibit "A"), Ms. Middlebrook, in

relevant part, states as follows with regard to the Houston

Petroleum Defendants:

"... Lam surely disappointed that you did not

use Bobby Steelhammer (a Houston attorney)

to handle the settlement with Houston

Petroleum as promised. Why not ???? He is

a tiger, a good man to have in your corner

when dealing with slick deal artists.

I would like a copy of Rod’s (Defendant

Johnson) resignation as Managing General

Partner of Onshore Exploiation Ltd. 1984.

You had told me that you had Bobby

Steelhammer draw up his resignation papers,

because you didn’t want a thief in your midst.

... you have said that the cash investors are

strictly for development deals. If that is true,

did you give the money to the crooks at

Houston Petroleum????" (Emphasis Added)

Deposition testimony, similarly corroborative, has

been given by Onshore’s geologist, Victor B. Russek, Jr.,

Onshore’s original General Partner, Wayne M. Byles, |

Onshore’s securities counsel, Frank Pinedo and Onshore’s

independent, certified internal auditor, Mr. Frank Leggio.

Moreover, Plaintiffs’ extensive discovery in this case

has revealed that the Houston Petroleum Defendants

participated with Onshore’s General Partners in a course of

business which operated as a fraud on the Plaintiffs as

investors.

H43

Furthermore, Plaintiffs, at a minimum, can clearly

establish that the Houston Petroleum Defendant aided and

abetted the securities violations alleged in the Complaint.

Plaintiffs again call the Court's attention to Defendant Joel

Middlebrook who, on cross-examination by Houston

Petroleum’s attorney, testified in her deposition as follows at

page 466 - 467:

Do you recall a month or a year in

your association with Onshore that you

first became aware of Houston

Petroleum Company?

It would have to be in the Fall of °&4.

How about Mr. O'Donnell? The same?

Same.

And what was the occasion that brought about

your learning of Houston Petroleum

Company?

Well, one time I went to their office, before

they started the program, and visited with

them. They had several people there that

showed the office and what they were going

to drill, and so on. It was a kind of dog-

and-pony show for potential investors that

John had set up and did. (Emphasis Added)

Okay. And were you by yourself?

Yes; I went by myself.

H44

You did? Was anyone else at the meeting

besides...

Oh, yes; there were other people there.

Okay. Who was there?

I don’t know their names. They were just

different prospective investors that showed up.

Okay. Was Ehrman there?

Uh-huh.

Okay. Anyone else associated with Onshore?

I don’t remember. Rod may have been there;

I’m not sure. He may or may not. I don’t

know; I doon’t remember. I know John was

there; and a bunch of potential investors

were there. (Emphasis Added)

And who made the presentation for

Houston Petroleum Company? (Emphasis

Added)

One of their geologists. I don’t know his

name. I have forgotten his name. (Emphasis

Added) .

Was he the only individual who spoke?

No. I’m sure everybody had a little something

to say.

H45

Q. Do you recall the Prospect that was presented

at the time?

A. It was the one that was in the notebook, the

Prospectus.

Q. You don’t recall the name?

A. It was called the Thornton, No. |] Thornton.

In this regard, Plaintiffs contend that the evidence

Shows that these Defendants had more than just a "general

awareness” of their role in the Rule 10b-5 violations and that

they knowingly rendered "substantial assistance" in the

violations. See Abell y. Potomac Insurance Co., 858 F .2d

1104, 1126 (Sth Cir. 1988). Like Defendants Rio Bravo and

Kelley Onshore, the Houston Petroleum Defendants

disregarded the terms and conditions of the Memorandum

and commenced drilling operations before Onshore funded.

Plaintiffs’ claims under the RICO Statute are equally

Strong in view of prevailing precedent. See generally, H. J.,

Inc. v. Northwestern Bell Telephone Co., 57 U.S.L.W. 495]

(U.S. June 27, 1989), reversing and remanding 829 F.2d 648

(8th Cir. 1987); Sedima, S. P.R.L. v. Imrex Company, Inc.,

473 U.S. 479 (1985): R.A.G.S. Couture, Inc. y. Hyatt, 774

F.2d 1350 (Sth Cir. 1985), cited in s., he -¥.

Northwestern Bell Telephone Co.., supra, 57 U.S.L.W. at

4952 note 2.

Accordingly, the Houston Petroleum Defendants’

contention that there is no genuine issue as to any material

fact is on its face preposterous, especially given the complex

facts of this case. If ever there was a case that was

inappropriate for summary judgment, this is it. The Houston

Petroleum Defendants’ Motion for Summary Judgment is

H46

clearly part of a large effort of certain Defendantsto avoid

their day of reckoning by unnecessarily burdening Plaintiffs’

counsel with paperwork. These Defendants’ only hope at

this point is that this Court will dismiss them from this

lawsuit on any grounds possible so long as the ruling takes

place prior to a trial on the merits. What Defendants want

is a trial by deposition and affidavits; they fear the testimony

that will be presented at trial which establishes their

culpability. However, on this record, Plaintiffs are entitled

to have this Court resolve the multitude of issues involving

these Defendants in a trial on the merits.

1. THE SECURITIES VIOLATIONS. The

Houston Petroleum Defendants assert that they had no duty

to disclose anything to the investors because they lacked a

fiduciary or other similar relationship of trust and confidence

vis-a-vis the investors. They also deny liability for aiding

and abetting securities laws violations, among other things.

The Houston Petroleum Defendants’ contentions are

without merit. Plaintiffs contend that the evidence will

establish these Defendants’ culpability in the scheme to

defraud the Plaintiffs under Rule 10b-5. As the Fifth Circuit

has noted, coverage under Rule 10b-5 is not a limited one.

Hilgeman v. National Ins. Co. of America, 547 F.2d 298,

302 (Sth Cir. 1977). The Rule, among other things,

prohibits any person from engaging in “any act, practice or

course of business which operates or would operate as a

fraud or deceit upon any person." Hilgeman, supra, Section

240.10b-5.

Plaintiffs possess evidence which will establish that

Defendants were participants in a scheme to enrich

themselves and others at the expense of the Plaintiffs-

investors. Plaintiffs will also be able to establish that the

Houston Petroleum Defendants knowingly rendered

OOOO ———— ee

H47

substantial assistance to others who violated Rule 10b-5.

Plaintiffs assert that the Houston Petroleum

Defendants engaged in acts which operated as a fraud upon

the Plaintiffs in connection with the selling of securities. At

the trial on the merits, Plaintiffs will be able to Clearly show

thai they suffered an injury as a result of deceptive practices

"touching" the sale of securities to them within the meaning

of Section 10b of the 1934 Securities Exchange Act. Cf.

Superintendent of Insurance v. Bankers Life & Casualty Co.,

404 U.S. 6, 10-13 (1971).

Accordingly, Plaintiffs must be given the opportunity

to prove that the Houston Petroleum Defendants not only

aided and abetted violations of the securities laws but

engaged in acts and business practices which operated as a

fraud or deceit upon Plaintiffs in connection with their

purchases of securities.

The Houston Petroleum Defendants’ assertion that

they had no duty to disclose anything to the investors is

overbroad, inaccurate and without merit. As the Supreme

Court stated in Dirks v. SEC, 463 U-S. 646, 655 n. 14

(1983), under certain circumstances even outsiders may

become fiduciaries of investors where confidential

information is iegitimately revealed to an underwriter,

accountant, lawyer, consultant or other persons solely for

business purposes. That certainly, at a minimum, is the case

here since Houston Petroleum Company was a joint-venturer

In the project. Furthermore, it is also clear that one who

missappropriates material information to his own advantage

violates Section 10(b) and Rule 10b-5. Cf. SEC v. Materia,

745 F.2d 197, 203 (2d Cir. 1984); Carpenter vy. United

States, 791 F.2d 1024, 1027-1034 (2d Cir. 1986), aff'd by

an equally divided court on the ] O(b) issue, Ss U.S.

108 S.Ct. 316, 320 (1987). Congress has now made clear

H48

that liability is not dependent on a fiduciary relationship but

applies to any person buying or selling while in possession

of material undisclosed information and any persons

communicating this information to others. See "Insider

Trading and Securities Fraud Enforcement Act of 1988",

Sections 20A (a)(b)(c)(d) as amended, Pub. Law 100-704,

102 Stat. 4677 (November 11, 1988).

Accordingly, it is clear that there are many contested

issues to be resolved with respect to the Houston Petroleum

Defendants’ liability under Rule 10b-S.

Similarly, there are numerous fact questions to be

resolved concerning the Houston Petroleum Defendants

liability under sections 12(1) and 12(2) of the 1933 Securities

Act.

a RICO VIOLATIONS. The Houston

Petroleum Defendants’ argument that Plaintiffs have failed to

make out a RICO case against them is equally without merit.

These arguments are particularly inappropriate here.

Plaintiffs have gone to great lergths to plead this case with

clarity and specificity. | What Defendants are really

requesting is that Plaintiffs prove their case in their

Complaint.

Moreover, Defendants’ memorandum conveniently

omits any discussion of controlling cases that undermine their

arguments. See H. J., Inc. v. Northwestern Bell Telephone

Co., 57 U.S.L.W. 4951 (U.S. June 27, 1989), reversing and

remanding 829 F.2d 648 (8th Cir. 1987); R.A.G.S. Couture,

Inc. v. Hyatt, 774 F.2d 1350 (Sth Cir. 1985).

Throughout the text of their Complaint, Plaintiffs

clearly detail that they were fraudulently induced to make

sizeable investments of money in an "Enterprise" which was

H49

conceived, developed and operated for the unjust enrichment

of the Defendants. The "Enterprises" referred to are Clearly

the limited partnerships-Onshore Exploration Ltd., 1984

Mid-Year Drilling Program in one instance. and Texas

Energy, Ltd., in the other. Thus, it is plain to see that

Plaintiffs are not referring to Ehrman Investment Group,

Inc., or any of the other Defendants as the "Enterprise."

Plaintiffs do contend, however, that Defendants

Ehrman and Ehrman Investment Group, Inc. and the Houston

Petroleum Defendants, inter alia, conducted or Participated,

directly or indirectly, in the limited partnership -- the

Enterprise -- through a pattern of racketeering activity in

violation of 18 U.S.C. 1962 (c). Plaintiffs will show at trial

how the various Defendants constituted an association of

organizations that regularly engaged in the practice of selling

and financing investments in oil and gas limited partnerships

through fraud, omissions of material facts and other unlawful

acts.

To require Plaintiffs to conclusively prove these

matters prior to trial is not required. However, Plaintiffs

contend that they will be able to prove their case if given the

opportunity.

Defendants’ contention that Plaintiffs will not be able

to show a pattern of racketeering activity is similarly without

merit. In R.A.G.S. Couture, Inc. vy. Hyatt, 774 F.2d 1350,

1354 (Sth Cir. 1985), the Fifth Circuit read the "pattern and

other requirements of the RICO Act broadly. The’ Court

noted that the mailing of two (2) invoices alleged by plaintiff

to be fraudulent was sufficient to constitude a pattern of

racketeering activities". R.A.G.S. Couture, Inc. y. Hyatt,

supra, 774 F.2d at 1354. The Supreme Court recently cited

this case and holding in its most recent decision on RICO.

HS50

See H. J., Inc., v. Northwestern Bell Telephone Co., 57

U.S.L.W. 4951, 4952, n. 2 (1989).

In this case, Plaintiffs have alleged financial injuries

as a result of various predicate acts, including violations of

Section 10(b) and federal mail and wire fraud statutes.

These allegations are sufficient to withstand a motion to

dismiss. Corwin v. Marney Orton Investments, 788 F.2d

1063, 1069 (Sth Cir. 1986). Moreover, Plaintiffs will be

able to show "acts (on the part of Defendants) that have the

Same or Similar purposes, results, participants, victims, or

methods of commission," and that are otherwise "interrelated

by distinguishing characteristics." Sedima, S.P.R.L. v. Imrex

Company, Inc., 473 U.S. 479, 496 at note 14 (1985).

Accord: H. J. Inc. v. Northwestern Bell Telephone Co. , 57

U.S.L.W. 4951, 4953 (1989). Accordingly, Plaintiffs

believe that they have a strong case against Defendants.

As the Fifth Circuit stated in R.A.G.S. Couture, Inc.

v. Hyatt, supra, 774 F.2d at 1355:

"The scope of the civil RICO statute is

breathtaking. An allegation of fraud in a

contract action can transform an ordinary state

claim into a federal racketeering charge. It

may be unfortunate for federal courts to be

burdened by this kind of case, but it is not for

this court to question policies decided by

Congress and upheld by the Supreme Court."

Id.

Plaintiffs contend that they will be able to prove their

RICO allegations at the trial of this case under any of the

standards referred to by Defendants in their memorandum.

The acts of the Defendants in this case which were

perpetrated against the Plaintiffs were the result of their

HS]

participation, directly or indirectly, in the affairs of the

Parternship through a pattern of racketeering activity.

Plaintiffs are entitled to their day in court in order to prove

their case.

CONCLUSION

This difficult and complex case is_ Clearly

inappropriate for summary judgment. This is especially true

for these Defendants since Plaintiffs are in the process of

completing the deposition of Defendant Richard O’Donnell,

president of Houston Petroleum Company. Due to conflicts

in Mr. O’Donnell’s attorney’s trial schedule, Mr.

O’Donnell’s deposition has been re-scheduled on numerous

occasions and was finally commenced on Friday, July

21,1989, and continued on Saturday, July 22, 1989.

However, the deposition could not be concluded and Mr.

O’Donnell’s testimony will resume at a later date by

agreement between counsel.

Factual issues abound with respect to every issue in

this case. Congress has given this Court jurisdiction over

defendants such as the Houston Petroleum Defendants and

empowered this Court to award appropriate relief. Plaintiffs

will be able to clearly establish at trial that the Houston

Petroleum Defendants have played an important and

substantial role in an intricate scheme to mislead and defraud

investors for the personal gain of the Defendants. Plaintiffs

are entitled to their day in court. Accordingly, Plaintiffs

respectfully pray that the Houston Petroleum Defendants’

Motion for Summary Judgment be denied.

Respectfully submitted,

/S/

Armando Lopez

H§2

LOPEZ & RAMIREZ

Fed. 1.D.4: 4125

2990 Richmond Avenue, Suite 205

Houston, Texas 7709%

(713) 524-4801

OF COUNSEL:

W. Sherman Rogers

Fed. 1.D.#: 628]

Howard University School of Law

2900 Van Ness, N.W.

Washington, D.C. 20008

(202) 686-6436

CBEBREFIFIC ATE OF SER VICI

I, Armando Lopez, hereby certify that a true and

correct copy of the foregoing instrument has been hand

delivered to the Houston Petroleum Defendants, by and

through their attorney of record, Mr. J. Don Jackson,

VINSON & ELKINS, 3300 First City Tower, 1001 Fannin,

Houston, Texas 77002, and by U.S. First Class Mail to all

other counsel of record and pro-se parties on this the _7th

day of July, 1989.

/S/

Armando Lopez

HS}

January 22, |9R6

Mr. John N_ Ehrman

2 Northpoint Drive Suite 300

Houston. Texas 77/060

Dear Tohn

I need a copy of the contract with Ho ” }

Which you told me ahonut last week | r oo

you did not use Bobby Steelhammer to hand ne Se

With Houston Petroleum ac promised Ay

tiger, a good man to have in your corner »v

lick deal artist

| would like | Opy | Row] r ,! ¥) |

(;eneral Partner of Onshore } XpDIOTA 1G nA

told me. that You nad Konhy » EL ‘ 3 ifaw

resignation papers, because you did A

midst

I would like to review the a :

r ni . { rn (nck re , r tne , sd

DANK records on NsSno a

promised to give me the record ice Jur m5. WV

is your problem in letting me look

Please furnisn a copy i fun KeT ing \

HPC on the #1 through #4 Belt we lat

Tf sll memento mas +b —T, - -+ ,

ii YOU WIiil PrOVIde ~ Ww i j a ( WG

the royalty bank account records. I w Xe able

the 1099 S for 1985S AS YOu KM ‘A NY r ¥aAl / yr Vv 117

completed and we are ad c tO print SNeCKS ine Na ai ] Tr

necessary records

H54

Regarding Leggio, I called him to get a copy of the

Houston Petroleum and Rio Bravo Audit reports. He said

that he would see about getting a copy for me and that he

incidentally, needed the Oil & Gas Reserves and Kelley

Onshore contracts. You now have a copy of those contracts.

I would, as a second request, like to have a copy of the audit

reports.

The letter to Oil & Gas Reserves was asinine. Dick

Manuel must be confused. I have not talked with Terry

Richardson in a year and a half at least. The one person

who called me was Hop Nolen. He is the primary person

there. He is incidentally a client also. Your $350,000 hot

check has been a problem to say the least.

Regarding reselling 15 Onshore units, where did you

get your quantity?? Vic King is 3. Ernie is 1 or 2. You are

telling me Barrow is the other 10. To date he has not

received the $ from the sale of his units. And he has

provided you with financing statements for his units.

This is my second request for the above information.

If you don’t have time to gather it, I will come out to help

you get it together. You were supposed to leave a check for

about what you have done. You are now telling me that you

have only sold $1,500,000 in TEL. You are not supposed to

break escrow until you have $2,400,000. Is this another

occasion in which you do not exactly follow the prospectus

guidelines, or are you trying to screw me out of the money

You must not have the other $7,000,000 in cash

investors Or you would not have all those hot checks floating

around. But, you have said that the cash investors are

strictly for development deals. If that is true, did you give

HSS

the money to the crooks at Houston Petroleum???? Or does

the money actually exist???? Where’s the beef????

I have never known you to be niggardly about money.

You must be in serious trouble on this deal, to get down to

trying to short change me on this.

You have mentioned that you would like for me to cut

you some slack on this deal. I will be happy to talk with you

about it. Please tell me the truth about what you are doing.

| have a hard time with a different story each week about

what the deal is.

You are saying that you normally get 7 1/2% on the

note finance deal. Your prospectus calls for a 3% general

partner fee and a 4% sales commission. You pay out 3% to

salesmen, retaining a total of 4%. If you sell the deal

yourself, you keep a total of 7%. My 1/2% is equal to

12.5% of the 4% cash to the general partner. I will be

happy to take 12.5% of the fee due you on the cash

investors, since you receive 3% on those.

Thus, if you have $1,500,000 of note investors, you

owe $7500 for those and for the cash investors of

$7,000,000, you will owe $26,250, for a total of $33,750.

rather than the full amount called for in our letter agreement,

thus giving you a discount of $8750.

Per your letter of Monday, you say you aren’t trying

to short change me, that you haven’t collected the funds due

you. When you say you are going to leave a check for me

HS6

to collect when the funds are wired and you don’t. I do feel

you are trying to jack me around.

You have been rude, disloyal and untruthful in your

dealings with me and others. I have never been involved in

such a drill as this. As far as I am concerned, this will be

the last deal we will ever be in together. I had looked

forward to working with you in the oil programs. But, the

way you run your business, I don’t want to be involved.

Sincerely yours,

Joel A. Middlebrook

jne. 186

EXH. "A"

HS7

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

NO. 90-2106

MICHAEL K. TOPALIAN, WARREN B. FIENGA,

ROY JACOBS, JR., JUAN GARCIA-QUIROGA,

RICHARD OROZCO, JEAN STEUBING,

CHARLES W. ANDERSON, FRANCIS COVERT,

RICHARD H. MANUEL, BOBBY W. McDONALD, JACK

E. BURROUGHS, DON W. BOYETT, CHARLES F.

LaCELLE, RICHARD MIKLES and MJM VENTURES

Plaintiffs-Appellants,

VERSUS

JOHN N. EHRMAN, Individually, Etc., et al.,

Defendants-Appellees.

Appeal from the United States District Court

for the Southern District of Texas

BRIEF OF

HOUSTON PETROLEUM COMPANY and

RICHARD O’DONNELL

AS APPELLEES

HS8

J. Don Jackson

Paul S. Wells

VINSON & ELKINS

3300 First City Tower

1001 Fannin

Houston, Texas 77002-6760

(713) 758-2078

ATTORNEYS FOR APPELLEES,

HOUSTON PETROLEUM COMPANY

and RICHARD O’DONNELL

5 aaa a

HS9

CERTIFICATE OF INTERESTED PERSONS

Plaintiffs-Appellants

MICHAEL K. TOPALIAN, WARREN B. FIENGA,

ROY JACOBS, JR., JUAN GARCIA-QUIROGA,

RICHARD OROZCO, JEAN STEUBING,

CHARLES W. ANDERSON, FRANCIS COVERT,

RICHARD H. MANUEL, BOBBY W.

McDONALD, JACK E. BURROUGHS, DON W.

BOYETT, CHARLES F. LaCELLE, RICHARD

MIKLES, and MJM VENTURES :

Defendants-Appellees

JOHN N. EHRMAN, Individually and In His

Representative Capacity As President of EHRMAN

INVESTMENT GROUP, INC., EHRMAN

INVESTMENT GROUP, INC., W. RODERICK

JOHNSON, W. RODERICK JOHNSON, P.C.,

RICHARD O’DONNELL, Individually and In His

Representative Capacity As President of HOUSTON

PETROLEUM CO., INC., HOUSTON

PETROLEUM COMPANY, INC., JOEL A.

MIDDLEBROOK, JOEL A. MIDDLEBROOK,

C.P.A., VICTOR B. RUSSEK, RUSSEK CO.,

BERT GAMBLE, Individually and In _ His

Representative Capacity As President of RIO BRAVO

OIL COMPANY, INC., RIO BRAVO OIL

COMPANY, INC., LAWRENCE KELLEY, JR.,

Individually And In His Representative Capacity As

President of KELLY ONSHORE DRILLING CO.,

INC., KELLEY ONSHORE DRILLING CO., INC.,

ROCKWOOD INSURANCE COMPANY - and

ROBERT E. ECKIS, JR.

H60

OPPOSING LAW _ FIRMS AND/OR COUNSEL

Plaintiffs-Appellants, Plaintiffs-Counter Defendants

Appellants

Plaintiffs-Appellants and _ Plaintiffs-Counter

Defendants-Appellants are represented by:

ARMANDO LOPEZ

Federal 1.D. No. 4125

State Bar No. 12562800

2990 Richmond Avenue, Suite 205

Houston, Texas 77098

(713) 524-4801

Mr. Armando Lopez has retained the following

attorney on an "Of Counsel" basis with respect to this

litigation:

W. SHERMAN ROGERS

Federal I1.D. No. 6281

Howard University School of Law

2900 Van Ness, N.W.

Washington, D.C. 20008

Defendants-Appellees, Defendants-Counter Plaintiffs-

Appellees and Counter Plaintiff-Appellee

Defendants-Appellees JOHN W. EHRMAN and

EHRMAN INVESTMENT GROUP, INC. are

represented by:

H61

FRANK PINEDO

PINEDO & SWEENER

Federal I1.D. No. 1789

1415 Louisiana, Suite 2550

Houston, Texas 77002

(713) 658-0808

Defendants-Appellees W. RODERICK JOHNSON

and W. RODERICK JOHNSON, P.C., are

represented Pro-Se:

W. RODERICK JOHNSON

Federal I.D. No. 4497

1800 West Loop South, Suite 1510

Houston, Texas 77027

(713) 965-9979

Defendants-Appellees RICHARD O’DONNELL ana

HOUSTON PETROLEUM CO. are represented by:

J. DON JACKSON

VINSON & ELKINS

Federal I.D. No. 6915

3300 First City Tower

1001 Fannin

Houston, Texas 77002-6760

(713) 758-2078

fen -Appellees JOEL A. MIDDLEBROOK and

JOEL A. MIDDLEBROOK, C.P.A. are represented

Pro-Se:

H62

JOEL A. MIDDLEBROOK

2103 Durham

Houston, Texas 77007

(713) 861-2886

Defendants-Appellees VICTOR B. RUSSEK and

RUSSEK CO. are represented by:

D. JOHN LEGER

LEGER & SANDERS, P.C.

5847 San Felipe, Suite 1250

Houston, Texas 77057

(713) 781-5932

Defendants-Appellees BERT GAMBLE and RIO

BRAVO OIL COMPANY, INC. are represented by:

STEPHEN SCHUELER

MARGRAVES & SCHUELER

601 Jefferson Avenue

Houston, Texas 77002-7910

(713) 659-4800

Defendants-Appellees LAWRENCE KELLEY, JR.

and KELLEY ONSHORE DRILLING CO., INC. are

represented by:

These Defendants-Appellees were served but never

answered. Plaintiffs moved for a default judgment;

however, the District Court denied Plaintiffs’ motion

and dismissed these Defendants from the litigation.

H63

Defendant-Appellee and Defendant-Counter Plaintiff-

Appellee ROCKWOOD INSURANCE CO. is

represented by:

KEVIN F. RISLEY:

BUTLER & BINION

1600 First Interstate Bank Piaza

Houston, Texas 77002

(713) 237-3293

Defendant-Appellee ROBERT E. ECKIS, JR. 1s

represented by:

JOHN R. KNIGHT

MORRIS & CAMPBELL

600 Jefferson, Suite 1617

Houston, Texas 77002

(713) 659-8697

Counter Plaintiff-Appellant ONSHORE

EXPLORATION LTD. 1984 MID-YEAR

DRILLING PROGRAM (ONSHORE)

ONSHORE (the Partnership) was not a party in the

original suit now being appealed, but it was brought

in as a Counter-Plaintiff by the EHRMAN

Defendants. It is being represented by FRANK

PINEDO, counsel for the EHRMAN Defendants.

A REGARDIN RAL ARGUMENT

Appellees believe that although the issues presented

by this appeal are clearly set forth and addressed in their

brief, oral argument would be beneficial to this Court.

Therefore, Appellees request oral argument.

H64

EXPLANATION OF RECORD REFERENCES

A final record of this case has not been completed by

the District Court. Attorneys for Houston Petroleum

Company and Richard O’Donnell have contacted the clerk

for the Fifth Circuit and were instructed to cite directly to

the pleadings and documents referred to in their brief to this

Court.

H65

TABLE OF CONTENT

CERTIFICATE OF INTERESTED PERSONS ...

STATEMENT REGARDING ORAL ARGUMENT ..

EXPLANATION OF RECORD REFERENCES

TABLE OF CONTENTS

TABLE OF AUTHORITIES

STATEMENT OF THE CASE

SUMMARY OF THE ARGUMENT

ARGUMENT

A. Proceedings and Disposition in the Court

eee eee ee

B. Statement of the Facts ....-------:

THE DISTRICT COURT PROPERLY

GRANTED SUMMARY JUDGMENT FOR

HPC AND O’DONNELL BECAUSE HPC

AND O’DONNELL MET THEIR BURDEN

EM__T MMARY

AND BECAUSE PLAINTIFF

ING FORTH _SPECIFI

FACTS OR EVIDENCE TO DEFEAT THAT

a. cs es 2 £8 eh

“ae Oe ee Ce leet See tee Dn

Eee a ae ee ee ee eae a, ie ee ee a iad lg

IT.

ITI.

IV,

H66

A. HPC And O’Donnell Met Their

Burden Entitling Them To Summary

Ag en ate aerate ne arab es Y

B. Plaintiffs Failed To Bring Forth

Specific Facts And Evidence Sufficient

To Defeat HPC’s And O’Donnell’s

Entitlement To Summary

I 5 iG ai gr gk agree aihale «4 1]

ee Plaintiffs Are Not Entitled To Assert

Or Present Alleged New Evidence Or

Allegations For The First Time On

Appeal From The Granting Of The

Summary Judgment For HPC And

SES ry a wip aki wea ee 13

THE DISTRICT COURT PROPERLY GRANTED

SUMMARY JUDGMENT FOR HPC _ AND

O’DONNELL BECAUSE PLAINTIFFS’ SECTION

120.) AND_12(2) CLAIMS ARE BARRED BY

STATUTE OF LIMITATIONS ......... 14

A. Plaintiffs’ Section 12(1) Claims ..... 15

B. Plaintiffs’ Section 12(2) Claims ....... 16

THE _ DISTRICT COURT _ PROPERLY

GRANTED SUMMARY JUDGMENT FOR

HPC AND __O’DONNELL __ BECAUSF

PLAINTIFFS’ __10b-5 CLAIMS ARE

BARRED BY THE STATUTE OF

IE 5.0 g'blig A) coke tak ack ee 4s 18

PLAINTIFFS’ ASSERTIONS THAT THE

RECONFIRMATION AGREEMENTS WERE

UNTIMELY AND THUS ARE VOIDABLE

CANNOT DEFEAT SUMMARY

JUDGMENT BECAUSE THE CLAIM WAS

NOT PRESERVED FOR APPEAL. THESE

H67

ASSERTIONS ARE ALSO BARRED BY

8: ee ee a ae ee 20

I ND RE

IRRELEVANT TO THE DISTRICT

: MMARY DGMENT

Ee a ne a ee eee 21

VI. HPC AND O’DONNELL DID NOT

VIOLATE ANY PROVISION OF THE

REE) tg OY oe le ue. * < 24

A. ments Requir Establish Section

pe PB Ce 24

B. HPC and O’Donnell are not "Sellers" . 25

c. HPC and O’Donnell are not "Control"

Persons Under the 1933 Act....... 27

VI. HPC AND O’DONNELL DID NOT

VIOLATE ANY PROVISIONS OF THE

ECUR A 0 a ra 29

A. Elements Required to Establish Section

10(b) and Rule 10b-5

SE oe a be 8's Se ete at a ara ee 29

B. HPC and O’Donnell Made No

Representation to Plaintiffs ....... 30

aed HPC and O’Donnell Owed No Duty to

Plamtifte .......>. Par Gehan a ae 32

VII. HPC AND O’DONNELL DID NOT

VIOLATE THE TEXAS SECURITIES

CM ta Se kee RS CR ae Oe eS 36

VIII.

IX.

CONCLUSION

H68

HPC AND _O’DONNELL DID _ NOT

COMMIT COMMON LAW

NA 6-0. s 6 0 oe Se eke ea ees

HPC AND _O’DONNELL DID _ NOT

VIOLATE THE RICO ACT ...........

A. Plaintiffs Cannot Establish __ the

Activities Prohibited Under RICO

B. Plaintiffs Cannot Establish _ the

Existence of a RICO Enterprise... . .

E. Plaintiffs Cannot Establish a Pattern of

Racketeering Activity ...........

H69

TABLE OF AUTHORITIES

CASES Page

Abell v. Potomac Insurance Company,

858 F.2d 1104 (Sth Cir. 1988) ...... 25, 30, 32, 34

Anderson v. Liberty Lobby, Inc.,

eg ee 11, 22

Bane v. Sigmundr Exploration Corp.,

848 F.2d 579 (Sth Cir. 1988) .........0.. 34, 35

Capn v. Murphy,

Som Tae S75 (a6 Cir. 1968) weet

Celotex Corp. v. Catreti,

SFr Ui RT CUE ls Wak 5 dw oes ee ee Oe ee

| Chemetron Corp. v. Business Funds, Inc.,

| 718 F.2d 725 (Sth Cir.), vacated on other grounds,

| 460 U.S. 1007 (1983) ...........0 008. 19, 29

| Chiarella v. United States,

| sie ee rr 30, 32

Commins vy. Johnson & Higgins, Inc.,

1988 Fed. Sec. L. Rep. ¢ 94,092 (N.D. Cal.

RIERA Ae oe re 28

Consolidated Gas & Equip. Co. v. Thompson,

eB re rrr. ©

Corwin v. Marney, Orton Investments,

og Fee Pe er ae 19

H70

Crocker v. FDIC,

826 F.2d 347 (Sth Cir. 1987), cert. denied,

2 Io a co Gh. | a Oe Sp yee

Dart Industnes, Inc. v. Plunkett Co. of Oklahoma,

vue oe Se Cie Ce. I 1 |

Delany v. Blunt, Ellis & Loewi,

631 F. Supp. 175 (N.D. Ill. 1986) ..... 33

Doran v. Petroleum Management Corp.,

$76 F.2d 91 (Sth Cir. 1978) ...... 1S

Ernst & Ernst v. Hochfelder,

SD 3B. Ce tes x ks 6 Soe eee 30)

Frank C. Bailey Enterprises, Inc. v. Cargill, Inc..,

See F208 Ban Coe Ge TR. 8 ee 13, 2

H.J., Inc. v. Northwestern Bell Telephone Company,

648 F. Supp. 419 (D. Minn. 1986) ........... 38

Harelson v. Miller Fin. Corp..,

854 F.2d 1141, 1142 (9th Cir.), cert. denied,

jae 3. 4h. Cee Cee oe a Rap re

Herman & MacLean vy. Huddleston,

BOP Ws SIR REED 6 ee ae ek eee 30

In re Gap Stores Sec. Litig.,

437 F. Supp. 1135 GN.D. Cal. 1978) .......... 33

In re Professional Fin. Management, Lid.,

692 F. Supp. 1057 (D. Minn. 1988)........... 26

H7]

Ingenito v. Bermec Corp.,

441 F. Supp. 525 (S.D.N.Y. 1977) .......... 43

Irving Trust Company v. United States.

221 F.2d 303 (2d Cir.), cert. denied,

a . 23

Jeanes v. Henderson,

688 S.W.2d 100 (Tex. 1985) ............ 36

Keasler v. Natural Gas Pipeline Co. of Am..

569 F. Supp. 1180 (E.D. Tex. 1983), aff'd,

741 F.2d 1380 (Sth Cir. 1984) ......2 6

Kennedy v. Josephthal & Co. Inc..

814 F.2d 798 (Ist Cir. 1987) ....... 2. 17, 18

Matsushita Elec. Indus. Co. v. Zenith Radio Corp.,

ore Uo. OPP CieeO) ...............

National Union Fire Ins. Co. y. Eaton.

701 F. Supp. 1031 (S.D.N.Y. 1988) .... 33. 35

Old Time Enters., Inc. v. International Coffee Corp..

862 F.2d 1213 (Sth Cir. 1989) ......... 42, 43

Pin v. Texaco, Inc.,

1986 Fed. Sec. L. Rep. (CCH) $ 92,823. at 94.01]

(Sth Cir., July 14, 1986) ........2.~2~—~CO«*” 30

Pinter v. Dahl,

486 U.S. 622 (1988) ................ 25, 26

Quintel Corp., N.V. v. Citibank, N.A..

589 F. Supp. 1235 (S.D.N.Y. 1984) ........ 33

H72

Schlifke v. Seafirst Corp.,

1989 Fed. Sec. L. Rep. (CCH) 4 94,174

(7th Cir. Jom. 9, TGP) Www ce s B28, 33, SS

Sedima S.P.R.L v. Imrex Co., Inc.,

Ore Ces SO ee Ge No ewe ele 40, 42, 43

Shaffer v. Williams,

794 F.2d 1030 (Sth Cir. 1986) .............. 4|

Sibley v. Horn Advertising, Inc.,

505 S$.W.2d 417 (Tex. Civ. App.--Dallas 1974,

writ ref’d n.r.e), cert. denied, 420 U.S. 929 (1975) . 36

Smoky Greenhaw Cotton Co. v. Merrill Lynch, Pierce,

Fenner & Smith, Inc., 785 F.2d 1274 (Sth Cir. 1986),

cert. denied, 482 U.S. 928 (1987) ............ 43

South Hampton Co. v. Stinnes Corp..,

733 F.2d 1108 (Sth Cir. 1984) .............. 37

Sutliff, Inc. v. Donovan Cos.,

rere ow f fe, 3h ae | eee ee eer ae 39

Tempo Tamers, Inc. v. Crow-Houston Four, Lid.,

715 S.W.2d 658 (Tex. App.--Dallas 1986, writ ref’d

RIBS asia ee es ee ae ee a 2

Thigpen v. Locke,

Soe @. ae wes COM: COED 6 ok 6S ees Dey oe

Trenholm yv. Ratcliff,

G6 SW er Ce SO) 4 ko oe eG 37

United States v. Cauble,

706 F.2d 1322 (Sth Cir. 1983), cert. denied,

5 Ve Se Ce eis an e ee ee 39, 40

—

H73

United States v. Elliott,

571 F.2d 880 (Sth Cir.), cert. denied,

439 U.S. 953 (1978)... 2.0... 40

United States v. Turkette,

ee a BO eo he ee 40, 41

Warren v. Reserve Fund, Inc.,

728 F.2d 741 (Sth Cir. oe MEE Oe AS 8 30

Wood v. Combustion Engineering Inc.,

O43 F.2d 339 Gth Cir. 1981)... .. 2... 19, 20

Woodward vy. Metro Bank,

522 F.2d 84 (Sth Cir. DN at eS ol oe 33, 34

Wool v. Tandem Computers, Inc.,

818 F.2d 1433 (9th Cir. 1987) .............. 28

STATUTES AND RULES

Securities and Exchange Act of 1933

IF RNs BVM os ek ea os ee eee 24

eee EVO i a saloon eee 15

al ee S| | Se 15

AS U.S.C. OTA) ow cece. 16

15 U.S.C. § 77m (1982) .............. 14, 15, 18

H74

Securities Exchange Act of 1934

iS U.S.C. & FRR Clee oe ee eee 19, 29

15 U.8.C. § Fale) Cie) oc a ot os ee ke 20

13 U.S.C. § 2p a sc eee ee eee Oe es 20

Racketeer Influenced and Corrupt Organization Act

18 U.S.C. § 1961 et seq. (1982) ...... 37, 40, 42, 43

18 U.S.C. 3 YO . Soe ee ee eee

rep. R. CIV. B.S eee eee eee 8, 23

Fep. 8. Civ: 7. See se eee ee 11

TEX. REV. Civ. STAT. ANN. art. 581-33 (Vernon Supp.

AOD) on ee Sk ose ee

H75

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

NO. 90-2106

MICHAEL K. TOPALIAN, WARREN B. FIENGA,

ROY JACOBS, JR., JUAN GARCIA-QUIROGA,

RICHARD OROZCO, JEAN STEUBING,

CHARLES W. ANDERSON, FRANCIS COVERT,

RICHARD H. MANUEL, BOBBY W. McDONALD,

JACK E. BURROUGHS, DON W. BOYETT,

CHARLES F. LaCELLE, RICHARD MIKLES and

MJM VENTURES

Plaintiffs-Appellants,

VERSUS

JOHN N. EHRMAN, Individually, Etc., et al.,

Defendants-Appellees.

Appeal from the United States District Court

for the Southern District of Texas

BRIEF OF

HOUSTON PETROLEUM COMPANY and

RICHARD O’DONNELL

AS APPELLEES

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TO THE HONORABLE JUDGES OF SAID COURT:

COME NOW, Houston Petroleum Company and

Richard O’Donnell, as Appellees, and file this their response

to the brief of the Appellants.

STATEMENT OF THE CASE

A. Proceedings and Disposition in the Court Below

This is an appeal from a final judgment entered

against the Plaintiffs by the Honorable Judge Norman Black

in the United States District Court for the Southern District

of Texas, Houston Division. The Final Judgment provided

that the Plaintiffs take nothing by way of their suit and was

entered concurrently with an order granting summary

judgment in favor of all Defendants. The Final Judgment

and Order were signed by Judge Norman Black on October

4, 1989, and entered on the same date.

Plaintiffs are a group of investors in an oil and gas

limited partnership known as Onshore Exploration Ltd.

("Onshore"), and have brought this action against numerous

individuals and entities involved with or having some

relationship with Onshore. Included among the Defendants

is Houston Petroleum Company ("HPC") and Richard

O’Donnell ("O’Donnell"). HPC is an oil and gas operator.

HPC’s only connection with Onshore is a contractual

relationship whereby HPC and Onshore entered into

agreements permitting Onshore to invest in wells to be

drilled by HPC. O’Donnell’s only connection is that he is

the president of HPC.

Plaintiffs’ Original Petition was filed in the United

States District Court for the Southern District of Texas,

Houston Division on December 3, 1987. On December 18,

’

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1987, Plaintiffs filed their First Amended Complaint. The

First Amended Complaint was Plaintiffs’ operative pleading

at the time summary judgment was granted. The Complaint

alleged that Onshore’s general partners and others defrauded

Plaintiffs who purchased Onshore units. Specifically,

Plaintiffs allege that Defendants violated various federal and

state securities regulations, the Racketeering Influence and

Corrupt Organization Act, and committed common law

fraud.

On June 16, 1989, HPC and O’Donnell, along with

other Defendants, filed a motion for summary judgment.

Defendants HPC and O'Donnell filed their motion for

summary judgment over eighteen months after the suit was

filed and after numerous depositions and discovery had taken

place. The depositions taken included many of the Plaintiffs,

individual Defendants, Defendant entities, and other material

witnesses. Based on this extensive discovery, Defendants

HPC and O’Donnell’s motion was filed asserting that there

existed no genuine issue as to any material fact regarding any

of the claims alleged against HPC or O’Donnell.

On July 26, 1989, Plaintiffs filed their response to

this summary judgment motion. Although Plaintiffs’

response to HPC and O’Donnell’s motion was filed after the

filing deadline, Judge Black graciously decided he would

consider the Plaintiffs’ response.

On October 4, 1989, HPC and O’Donnell’s Motion

for Summary Judgment was granted and a Final Judgment

was entered providing that Plaintiffs take nothing. The

District Court filed a supporting opinion within its order,

including findings of fact and conclusions of law in

connection with the Final Judgment. It is from this Final

Judgment that Plaintiffs appeal.

———————————

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B. Statement of the Facts

Plaintiffs are dissatisfied investors in Onshore

Exploration, Ltd., 1984 Mid-Year Drilling Program

("Onshore"), an oil and gas drilling limited partnership

program. First Amended Complaint at 2-4 4 1-5

("Complaint").' These investments were highly leveraged

tax shelters promoted by John Ehrman ("Ehrman") and

Ehrman Investment Group (“EIG"). Wayne Byles ("Byles")

was the original general partner in Onshore. In December

of 1984, Byles was succeeded by Roderick Johnson

("Johnson") and EIG as co-general partners. Complaint at

8 4 46; 9 4 49. HPC is an oil and gas operator that had

entered an agreement with Onshore to drill wells on certain

sites. Complaint at 9 4 49. O'Donnell is the president of

HPC and has been sued individually and as president.

Complaint at 1.

Unlike many of the oil and gas programs promoted

during the early 1980s, Onshore is a program that actually

drilled and recovered oil and gas and has made payments to

the Plaintiffs. See Complaint at 25 4.110. In fact, Onshore

continued in operation as of the date summary judgment was

granted by the District Court. Plaintiffs are not dissatisfied

because Onshore’s promoter allegedly stole their money, the

general partner is in bankruptcy, or no drilling was ever

completed. Instead, Plaintiffs are dissatisfied because their

investment strategy to get rich from an investment that

looked lucrative in 1984 did not turn out quite as planned.

See, e.g., Binder dep. at 45-46. Unfortunately, because of

1.A final record of this case has not been completed by the District

Court Attorneys for Houston Petroleum Company and Richard

O’Donnell have contacted the clerk for the Fifth Circuit and were

instructed to cite directly to the pleadings and documents referred to in

their bnef to this Court.

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the inherent risk associated with oi! and gas drilling, one of

which is the price of oil and gas and the fact that such prices

have plummeted since 1984, these programs did not turn out

to be as immediately profitable as the Plaintiffs anticipated.

Binder dep. at 45-46; Garcia-Quiroga dep. at 98, 101:

Steubing dep. at 69-70, 107-08. Therefore, Plaintiffs have

simply brought this action claiming a laundry list of fraud

and deception to get out of their investments. Complaint at

3-4,

Included among Plaintiffs’ allegations are claims

against HPC and O'Donnell for alleged violations of the

federal and state securities laws, common law fraud and

Racketeer Influenced & Corrupt Organization Act ("RICO").

The undisputed evidence establishes that HPC and O’ Donnell

were not involved in the selling of Plaintiff's limited

partnership interests, made no_ representations,

misrepresentations, or omissions of fact to the Plaintiff-

investors, and were not involved in any RICO activities.

Thus, because there is a lack of evidence to support at least

one essential element of each of the Plaintiffs’ claims, HPC

and O'Donnell are entitled to and were properly granted

summary judgment.

SUMMARY OF THE ARGUMENT

The District Court’s order granting summary

judgment is well reasoned and sound. In their motion for

Summary judgment and the accompanying evidence, HPC

and O’Donnell met the initial burden of production imposed

on them by the United States Supreme Court in Celotex

Corp. v. Catrett, 477 U.S. 317 (1986). The law does not

require the District Court to specifically state in its order that

a movant has met his burden of production. In any event,

the District Court’s order in this case, taken as a whole,

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makes it clear that the court found that HPC and O’Donnell

met their burden.

Plaintiffs have alleged numerous violations of federal

securities laws. Without reaching the merits of these actions,

the District Court found that all of Plaintiffs’ federal

securities laws claims were barred by the applicable statute

of limitations. Some of the statute of limitations periods

include a discovery rule, and the District Court correctly

noted that the Plaintiffs had obtained all of the information

necessary to discover any securities law violation by May of

1985, more than two years before Plaintiffs filed suit in

December of 1987. Further, Plaintiffs, in their brief to this

Court, have raised a claim that the reconfirmation

agreements are voidable as untimely; however, this claim is

raised for the first time on appeal and therefore should not be

considered by this Court. Additionally, this claim, like all

the other federal securities law claims, is barred by the

Statute of limitations.

Even assuming that some or all of Plaintiffs’

securities claims are not barred by the statute of limitations,

those claims fail due to a lack of some essential element or

elements. HPC and O’Donnell were not "sellers" of the

partnership units as required by federal securities law but

rather they were only the drilling contractor hired by the

partnership to drill for oil. At no time did HPC or

O’Donnell engage in the sale of Onshore units. HPC and

O’Donnell were also not "control" persons under the

Securities Act of 1933 because they had no role in the

operation or management of the Onshore partnership.

Additionally, there is no Rule 10b-5 liability because the

record is clear that neither HPC nor O’Donnell ever made

any representations to any Plaintiff, and therefore could not

make any misrepresentations. Because HPC and O’Donnell

were merely the drilling contractor, and were not in a

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fiduciary relationship with any Plaintiff, HPC’s or

O’Donnell’s alleged failure to disclose any information which

they supposedly had cannot be considered a misrepresenta-

tion. Likewise, because Texas case law holds that the

elements of a violation of the Texas Securities Act are

substantially similar to the elements establishing a violation

of Rule 10b-5, Plaintiffs’ Texas securities law claim also

must fail.

As noted above, because HPC and O’Donnell made

no representations and had no duty to disclose, HPC and

O’Donnell cannot be held liable for any alleged common law

fraud.

Plaintiffs assert that summary judgment is not proper

in this case because Defendants, in their pre-trial order,

noted the existence of twenty-eight contested issues of fact.

Plaintiffs’ reliance on this argument is misplaced for two

reasons. First, the twenty-eight contested issues of fact listed

in the pre-trial order are rendered immaterial for summary

judgment purposes. This is true because of the District

Court’s findings that the various claims fail as a matter of

law either because of statute of limitations or because of

Plaintiffs’ failure to provide sufficient summary judgment

evidence on some element essential to their case. Second, a

pre-trial order is not proper summary judgment evidence

because its purpose -- to narrow the issues to be tried -- 1S

far different from the purpose of a summary judgment, which

is designed to allow the court to determine whether the

contested issues are both genuine and material.

Finally, HPC and O’Donnell did not violate the

federal RICO Act. First, Plaintiffs cannot establish a

violation of any of the four sections of the RICO Act

necessary for RICO liability. Second, Plaintiffs have

presented no evidence to support their allegation that

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Onshore is a RICO enterprise. Third, Plaintiffs’ minimal

allegations of RICO predicate acts fall far short of

establishing the "pattern" necessary for RICO liability.

ARGUMENT

I. THE DISTRICT COURT PROPERLY GRANTED

ARY DGMENT FOR HP AND

OQ” DONNELL BECAUSE HPC AND O’DONNELL

MET THEIR BURDEN ENTITLING THEM TO

SUMMARY JUDGMENT AND __ BECAUSE

PLA FS FAILED _T BRIN FORTH

SPECIFIC FACTS OR EVIDENCE TO DEFEAT

THAT RIGHT.

"Summary judgment is proper if the pleadings,

depositions, answers to interrogatories, and admissions on

file, together with the affidavits, if any, show that there is no

genuine issue as to any material fact and that the moving

party is entitled to a judgment as a matter of law." FED. R.

Civ. P. 56(c). The moving party seeking summary judgment

always bears the initial responsibility of informing the district

court of the basis for its motion. Celotex Corp. v. Catrett,

477 U.S. 317, 323 (1986). Ata minimum, the burden may

be discharged by pointing out to the court that there is an

absence of evidence to support the nonmoving party’s case.

Celotex, 477 U.S. at 325. The burden then shifts to the

nonmoving party to go beyond the pleadings and designate

“specific facts showing that there is a genuine issue of

material fact for trial" in order to defeat summary judgment.

Celotex, 477 U.S. at 324. HPC and O’Donnell met their

burden as the movants. — Plaintiffs, in their response to

HPC’s and O’Donnell’s Motion for Summary Judgment, did

not designate specific facts showing a genuine issue of

material fact. Instead, Plaintiffs responded to HPC’s and

O’Donnell’s motion by merely reasserting allegations

ee i

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contained in their pleadings and representing to the District

Court that they would present evidence at trial supporting

these allegations. Plaintiffs failed to show specific facts

which tend to contradict HPC’s and O’Donnell’s proof

presented with the motion for summary judgment.

Therefore, summary judgment was properly granted for

Defendants HPC and O’Donnell.

A. HPC And O’Donnell Met Their Burden

Entitling Them To Summary Judgment

HPC and O’Donnell met their initial burden by filing

a motion for summary judgment negating Plaintiffs’ claims

and showing the absence of any genuine issue of material

fact. This motion was supported by affidavits, deposition

testimony and other evidence obtained through extensive

discovery. See HPC and O’Donnell’s Motion for Summary

Judgment. HPC and O’Donnell specifically set forth their

entitlement to summary judgment against the Plaintiffs’

claims as follows:

l. Section 12 and 15 claims under Securities Act

of 1933

a. Plaintiffs’ Section 12 and 15 claims

were barred by the applicable statute

of limitations in 15 U.S.C. § 77(m).

b. HPC and O’Donnell were not "sellers"

within the definition provided by the

Act.

6. HPC and O’Donnell were _ not

"control" persons as defined by the

Act.

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Section 10b-5 claims under the Securities Act

of 1934

a. HPC nor O’Donnell made = any

representations to the Plaintiffs.

b. HPC nor O’Donnell owed any duty to

the Plaintiffs.

Claims under the Texas Securities Law

a. Plaintiffs cannot establish a claim for

the same reasons outlined in the

preceding section regarding the

Plaintiffs’ Section 10b-5 claims.

b. Plaintiffs admitted that neither HPC

nor O’Donnell ever made any

representations to them.

Defendants did not commit common law fraud

RICO claims

a. Plaintiffs lack RICO standing.

b. RICO enterprise cannot be established.

C. Pattern of racketeering activity cannot

be established.

d. Plaintiffs cannot establish activities

prohibited by RICO.

’

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By providing evidence tending to negate Plaintiffs’ claims,

HPC and O’Donnell went beyond the minimum requirement

to establish a movant’s right to summary judgment --

pointing out to the District Court the lack of evidence

Supporting a nonmoving party’s case -- and shifted the

burden to the nonmovant Plaintiffs. Plaintiffs’ position, "that

the Defendants never met their initial burden," is without

merit.”

B. Plaintiffs Failed To Bring Forth Specific Facts

And Evidence Sufficient To Defeat HPC’s

And O’Donnell’s Entitlement To Summary

Judgment

After the moving party has met its initial burden.

Rule 56(e) requires the nonmoving party to go beyond the

pleadings and, by its own affidavits, depositions, answers to

interrogatories, and admissions on file. designate specific

facts showing that there is a genuine issue for trial. Celotex,

477 U.S. at 324. Plaintiffs attempted to meet this burden by

making broad, conclusory allegations with promises of

evidence in their possession and proof to be provided at

trial.’ "A party resisting a motion for summary judgment

2. Throughout Plaintiffs’ response to HPC and O’Donnell’s Motion

for Summary Judgment and Plaintiffs’ brief to this Couri, they have made

accusations against the "Defendants" generally, without identifying which

specific Defendant or Defendants of which they are complaining. This

is confusing to the Court and the Defendants themselves and requires

each Defendant to distinguish itself from all others with respect to a given

allegation.

3.Just a few of these excerpts are: “Plaintiffs possess evidence ...";

“At the trial on the merits, Plaintiffs will be able to Clearly show...";

"Plaintiffs will be able to show acts...":. "Plaintiffs at a minimum can

Clearly establish..."; “Plaintiffs contend that the evidence will

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must do more than make conclusory allegations, it must set

forth specific facts showing that there is a genuine issue for

trial." Dart Industries, Inc. v. Plunkett Co. of Oklahoma,

704 F.2d 496, 498 (10th Cir. 1983).

Nowhere in Plaintiffs’ response to HPC and

O’Donnell’s Motion for Summary Judgment do they provide

specific facts or evidence showing that a "genuine issue" of

“material fact" exists. See, e.g., Anderson v. Liberty

Lobby, Inc., 477 U.S. 242 (1986); Matsushita Elec. Indus.

Co. v. Zenith Radio Corp., 475 U.S. 574 (1986). The only

"evidence" Plaintiffs offered, after 18 months of discovery,

was an unsigned letter and a one page deposition excerpt

from Ms. Joel Middlebrook, the bookkeeper for the

partnership.* As the District Court correctly stated in its

order, the Plaintiffs’ response to HPC’s and O’Donnell’s

motion contained “only one exhibit, a rambling, stream of

consciousness letter from one Defendant to another which

proves nothing." Order at p. 22. In addition, Ms.

Middlebrook did not purchase any shares of Onshore and is

not a plaintiff in this lawsuit. While the deposition excerpt

and the letter do illustrate Ms. Middlebrook’s dissatisfaction

with HPC, neither of these provide evidence that HPC or

O'Donnell are, or may be, guilty of possible securities act or

RICO violations but only amount to mere supposition and

speculation. To the contrary, the evidence clearly shows that

HPC and O'Donnell made no representations, misrepresen-

tations, omissions of fact, or had any connection whatsoever

with the sale or purchase of the Onshore units. Therefore,

Plaintiffs simply defaulted on their obligation to bring forth

establish..."; "Plaintiffs will show at tnal..."; “Plaintiffs contend that they

will be able to prove...”

4. Ms. Middlebrook had no connection with the sale or purchase of

Onshore units

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specific facts and evidence raising a genuine issue of material

fact. Because HPC and O’Donnell met their burden to show

their right to summary judgment, and because Plaintiffs

wholly failed to bring forth specific facts or evidence

sufficient to defeat that entitlement, the District Court

properly granted summary judgment for HPC and O’ Donnell.

sal Plaintiffs Are Not Entitled To Assert Or

Present Alleged New Evidence Or Allegations

For The First Time On Appeal From The

Granting Of The Summary Judgment For

HPC And O'Donnell.

A party appealing the granting of a summary

judgment motion cannot bring forth new evidence or

allegations beyond those presented to the trial court. Frank

C. Bailey Enterprises, Inc. vy. Cargill, Inc., 582 F.2d 333,

334 (Sth Cir. 1978). On appeal, Plaintiffs are limited to the

allegations and exhibits they presented to the District Court

in their response to HPC and O’Donnell’s summary judgment

motion. Plaintiffs’ brief is full of assertions and alleged

evidence which was not presented to the District Court and

should not be considered by this Court.’ The Plaintiffs do

not get a second chance to bring forth alleged new evidence

5.Examples of new evidence and allegations made by the Plaintiffs

for the first time are: (1) Defendants Joint Pretrial Order recognizes 28

contested issues of material fact; Plaintiffs’ brief at 37. (2) Plaintiffs are

entitled to avoid the reconfirmation contracts because they were “made”

in violation of SEC “nules"; Plaintiffs’ brief at 39 and 40. (3)

_ Defendants’ authorization of secondary sales of securities, in complete

violation of Rule 502(d) of Regulation D, resulted in a continuous

offering to the public for an indefinite period; Plaintiffs’ brief at 45. (4)

Plaintiffs are entitled to summary judgment ... since the Defendants

gained Plaintiffs’ reconfirmation acceptances in violation of the law.

Plaintiffs’ brief at 50.

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for the first time on appeal in an attempt to raise a genuine

issue Of material fact.

Additionally, before addressing Plaintiffs’ arguments

concerning alleged securities violations regarding the sale of

the Onshore units, the relationship between Plaintiffs and

HPC and O'Donnell needs to be specifically noted. All of

Plaintiffs’ allegations of securities violations concern

representations made to them in the sale of the Onshore

units. Neither HPC nor O'Donnell were directly or indirectly

involved in the sale of Onshore units to any of the Plaintiffs.

HPC is an oil and gas operator that entered into an

agreement with Onshore to drill prospective oil and gas

wells. However, HPC and O’Donnell are forced to address

each of the securities allegations because of the all-inclusive

nature of Plaintiffs’ charges. In this regard, the essential fact

that HPC and O’Donnell’s only involvement with the

Plaintiffs was that of a drilling contractor for the Onshore

partnership should not be overlooked.

I]. THE DISTRICT COURT PROPERLY GRANTED

SUMMARY JUDGMENT FOR HPC _ AND

OQ’ DONNELL BECAUSE PLAINTIFFS’ SECTION

2 AIMS ARE BARRED BY

STATUTE OF LIMITATIONS

Plaintiffs allege that the Defendants violated Sections

12(1) and 12(2) of the Securities Act of 1933. Section 13 of

the 1933 Act provides a clear statute of limitations for these

sections:

"No action shall be maintained to enforce any

liability created under section 77k or 771(2)

[section 12 (2)], of this title unless brought

within one year after the discovery of the

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untrue statement or the omission, or after such

discovery should have been made by the

exercise of reasonable diligence, or if the

action is to enforce a liability created under

section 771(1) [section 12(1)], of this title,

unless brought within one year after the

violation upon which it is based. In no event

shall any such action be brought to enforce a

liability created under . . . section 771 [section

12(2)] more than three years after the sale."

IS U.S.C. § 77m (1982). The District Court correctly found

that both of these claims are barred by the statute of

limitations.

A. Plaintiffs’ Section 12(1) Claims

Plaintiffs have alleged that the sale of the Onshore

units violated Section 12(1) of the Securities Act 0% 1933, 15

U.S.C. § 771(1). This section creates civil liability where

mail and other instrumentalities of interstate commerce are

used in the sale, delivery, or offer of sale of an unregistered

security, as prohibited by Section 5 of the 1933 Act, 15

U.S.C. § 77e. The 1933 Act imposes a requirement of

timeliness in prosecuting a Section 12(1) cause of action. It

States in pertinent part: "No action shall be maintained ... to

enforce a liability created under ... 771(1) of this title, unless

brought within one year after the violation upon which it is

based." 15 U.S.C. § 77m (1982).

In determining when the statute of limitations begins

to run, the relevant inquiry is to determine which of a

defendant’s activities--offer, sale, or delivery of the security--

occurred last. Doran v. Petroleum Management Corp., 576

F.2d 91, 93 (Sth Cir. 1978). The limitations period begins

to run upon the last action of the defendant. Doran, at 93.

The last action in the sale of the Onshore units was the

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reconfirmation offer sent to the Plaintiffs in January of 1985.

Therefore, the one-year statute of limitation established by

15 U.S.C. § 77m for any violation of Section 12(1) would

have begun to run in January 1985. The latest date that any

of the Plaintiffs could have filed suit in order to toll the

applicable limitation period would have been in January of

1986. The Plaintiffs did not file suit until December 3,

1987, well beyond the applicable limitations period. Thus,

Plaintiffs’ claims for alleged violations under Section 12(1)

are time-barred.

B. Plaintiffs’ Section 12(2) Claims

Section 12(2) of the Securities Act imposes liability

on any person who offers or sells a security by means of:

[A] prospectus or oral communication, which

includes an untrue statement of a material fact

Or Omits to State a material fact necessary in

order to make the statements, in the light of

the circumstances under which they were

made, not misleading. .. .

1S U.S.C. § 771(2). Plaintiffs’ Section 12(2) claims are

based upon allegations that Defendants lured them into

purchasing Onshore units by "general solicitations", "dog-

and-pony shows" and "puffery". In essence, Plaintiffs

argument is that they were assured by the Defendants that

this was a sound and lucrative venture. However, each

Plaintiff signed a subscription agreement with their initial

purchase of Onshore units. The subscription agreement set

forth the risks, warned about possible losses, and put the

investor on notice of the speculative nature of their

investment.

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The subscription agreement’s pertinent parts read as

follows:

3.(a) [The Investor warrants that he] (i)

has adequate means of providing for his

current needs ... and he has no need for

liquidity of his investment ... (ii) with

respect to each one (1) Unit subscribed, (1)

has a net worth of at least $200,000 ... and

can bear the economic risk of losing his

entire investment herein, and (iii) has ...

such knowledge and experience in financial

matters that he is capable of evaluating the

relative risks and merits of this investment.

3.(d) He has received and read or reviewed

- and is familiar with, the Partnership

Agreement, the Memorandum, and this

Agreement ...

3.(1) That the Partnership has no

significant financial or operating history;

this is the Partnership’s first venture and the

Units are speculative investments which

involve a high degree of risk of loss by him of

his entire investment in the Partnership.

4. The following representations,

guarantees or warranties have never been

made to him by the General Partners, its

agents, or employees or any other person,

expressly or by implication:

(ii) | The percentage of profit and /or

amount of or type of consideration, profit

)

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or loss ... to be realized, if any, as a

result of this investment.

(iii) The past performance or experience on

the part of the General Partners or any of

its affiliates, any securities broker of finder,

their partners, salesmen, associates, agents, or

employees or of any other person, will in any

way, indicate or predict the results of the

ownership of Units or of the overail

Partnership venture.

11. The undersigned specifically

acknowledges that he/she understands that

Houston Petroleum is not a General Partner

in this program. W. Roderick Johnson is the

Managing General Partner and Ehrman

Investment Group, Inc. is Co-General Partner

of Onshore Exploration Ltd. 1984 Mid-Year.

No other representations to the contrary have

been implied or expressed.

Assuming Plaintiffs’ allegations of misrepresentations

are true, the subscription agreement put Plaintiffs on notice

of possible discrepancies between what they were being toid

and what the subscription agreement provided. This

triggered the duty to exercise reasonable diligence. Kennedy

v. Josephthal & Co. Inc., 814 F.2d 798 (1st Cir. 1987).

Therefore, the statute of limitations under the 1933 Act

began to run when each Plaintiff had the opportunity to

examine the subscription agreement.

This same issue was decided by the First Circuit in

Kennedy v. Josephthal & Company, Inc., 814 F.2d 798 (ist

Cir. 1987). In Kennedy, glaring differences between terms

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of an offering memorandum and statements made to

prospective investors placed those investors on inquiry notice

at the time they had an opportunity to examine the offering

memorandum in light of oral representations. Kennedy

at 802. The First Circuit found, as a matter of law, the

exercise of reasonable diligence would require more from a

party than merely viewing two sets of statements, one of

which logically cannot be true, and choosing one of those

sets. Kennedy, 814 F.2d 803.

This lawsuit was filed on December 3, 1987. All of the

Plaintiffs, except Steubling, LaCelle, Mikles and MJM,

purchased their Onshore units before November 30, 1984, by

executing the subscription agreement. Therefore, under the

discovery rule of Section 77m, the latest date that any of the

included Plaintiffs could have filed suit in order to toll the

one-year limitation period would have been December 1,

1985. Disregarding the discovery rule of Section 77m, the

latest date that these Plaintiffs could have filed suit to toll the

three-year limitation period would have been December 1,

1987. In either instance, their claims are barred by both the

one-year and three-year limitation periods in 15 U.S.C. §

77m. The remaining Plaintiffs purchased their Onshore units

and executed the subscription agreement by May 1, 1985.

Thus, these claims are barred by the one-year statute in 15

U.S.C. § 77m. (1982).

lll. THE DISTRICT COURT PROPERLY GRANTED

SUMMARY JUDGMENT FOR HPC AND

O’DONNELL BECAUSE PLAINTIFFS’ _10b-5

CLAIMS ARE BARRED BY THE STATUTE OF

LIMITATIONS

Plaintiffs allege various violations of Section 10(b) of

the Exchange Act of 1934 and Rule 10b-5. Section 10(b)

provides for an action by a purchaser or seller of "any

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security" against "any person” who used "any manipulative

or deceptive device or contrivance” in the purchase or sale

of a security. 15 U.S.C. § 78(j)(b) (1982). The essential

elements of a Section 10(b) and Rule 10b-5 claim are: (1) in

a securities transaction (2) the defendants acting with scienter

(3) made a material misrepresentation or nondisclosure (4)

upon which plaintiff relied, and (5) thereby suffered injury.

Chemetron Corp. v. Business Funds, Inc., 718 F.2d 725,

728 (Sth Cir.), vacated on other grounds, 460 U.S.

1007(1983).

This Court in Wood v. Combustion Engineering Inc.,

643 F.2d 339, 341 (Sth Cir. 1981), determined that the

appropriate limitations period for 10b-5 claims in Texas was

two years. The limitations period begins to run when the

plaintiff discovers, or in the exercise of reasonable diligence

should discover, the alleged violations. Corwin v. Marney,

Orton Investments, 788 F.2d 1063 (Sth Cir. 1986). By

exercising reasonable diligence, the Plaintiffs should have

been put on notice of any alleged misrepresentations made

concerning the Onshore units when they read and executed

the subscription agreement.

As noted previously, the subscription agreement was

clear and concise in its warnings of the risks involved,

experience of the general partners, and the possibility that all

of a subscriber’s investment might be lost. Any oral

representations made to the’ Plaintiffs which was not

consistent with the language of the subscription agreement

put them on notice and started the limitations period running.

All Plaintiffs had executed the subscription agreement by

May 1, 1985. The latest date that the Plaintiffs could have

filed suit asserting a claim under Section 10(b) and Rule 10b-

5 would have been May 2, 1987. The present lawsuit was

not filed until December 3, 1987. Therefore, under the two

-year limitations period to assert a 10b-S claim, as

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determined by this Court in Wood, Plaintiffs’ claims under

10b-5 are also time-barred.

IV. PLAINTIFFS’ ASSERTIONS THAT THE

RECONFIRMATION AGREEMENTS _ WERE

UNTIMELY AND THUS ARE VOIDABLE

CANNOT DEFEAT SUMMARY_ JUDGMENT

B AIM WAS NOT PRESERVED

FOR APPEAL, THESE ASSERTIONS ARE ALSO

BARRED BY LIMITATIONS.

In their brief, Plaintiffs have raised a claim that the

reconfirmation agreements for the sale of the units are

voidable because they were signed after the all-or-none

offering had expired. This claim is not valid for two

reasons.

First, Plaintiffs have raised this issue for the very first

time on appeal to this Court. Nowhere in their First

Amended Complaint did Plaintiffs allege facts establishing a

right to void the agreements on this basis. Further, the issue

was not addressed in HPC and O’Donnell’s Motion for

Summary Judgment, the Plaintiffs’ response to HPC and

O’Donnell’s Motion for Summary Judgment, nor the District

Court’s order granting summary judgment to HPC and

O’Donnell. Plaintiffs cannot avoid summary judgment by

untimely raising. an issue never before presented to the

District Court nor to Defendants. Frank C. Bailey

Enterpnises, Inc. v. Cargill, Inc., 582 F.2d 333, 334 (Sth

Cir. 1978)

Second, even assuming that this claim had been plead

at a proper time and place, and further assuming that the

allegations are all true, Plaintiffs’ claim is time-barred under

the same statute which provides the right they assert. See

H96

Securities Exchange Act of 1934, § 29(b), 15 U.S.C. §

78cc(b) (1982). This section provides that:

No contract shall be deemed to be void by

reason of this subsection in any action

maintained in reliance upon this subsection, .

. .unless such action is brought within one

year after the discovery that such sale or

purchase involves such violation and within

three years after such violation.

‘d. (emphasis added). Plaintiffs acknowledge in their brief

that these reconfirmation agreements were entered into in

January, 1985. Accordingly, Plaintiffs should have known

that the reconfirmation agreements were- made after the

expiration of the all-or-none offering at the time they signed

those agreements in January of 1985. Plaintiffs did not bring

suit until December 3, 1987, more than two years after this

discovery in January, 1985, that the reconfirmation

agreements were in violation of the Securities Act, and long

after the one-year deadline for filing suit had expired.

Because Plaintiffs have raised this claim for the first

time on appeal and because this claim is also time-barred,

Plaintiffs’ assertions regarding the untimeliness of the

reconfirmation agreements cannot constitute a ground for

reversal of the District Court’s summary judgment order.

ws ss D_I F_FACT"_IN

; C R WERE NOT

ARE IRRELEVANT TO

RT’ MMARY

JUDGMENT ORDER.

In Plaintiffs’ brief, much is made of the fact that,

following Defendants’ motions for summary judgment, all

H97

Defendants filed a joint pretrial order which included a list

of 20 contested issues of fact.° See Plaintiffs’ Brief at 35-

36. This point is irrelevant for two reasons.

First, while Plaintiffs characterize the list in the joint -

pretrial order as a list of "twenty contested issues of material

fact" (Plaintiffs’ Brief at 36), the list is not one of "material

facts" as that term is used in the summary judgment context.

The Supreme Court has clearly defined materiality: -"[A]

complete failure of proof concerning an essential element of

the non-moving parties case necessarily renders all other

facts immaterial." Celotex, 477 U.S. at 323. Similarly in

Anderson vy. Liberty Lobby, Inc., 477 U.S. 242, the

Supreme Court stated that "[o]nly disputes or facts that might

affect the outcome of the suit under the governing law will

properly preclude the entry of summary judgment. Factual

disputes that are irrelevant or unnecessary will not be

counted." Jd. at 248. Therefore, where, as here, the

summary judgment evidence establishes that one of the

elements of the Plaintiffs’ cause of action does not exist as a

matter of law, or that Plaintiffs’ cause of action is barred by

a Statute of limitations, all other contested issues of fact are

rendered immaterial.’

Second, a pretrial order is not listed in Rule 56(c) as

proper summary judgment evidence. This is for a good

reason.

6.Plaintiffs argue that Defendant Rockwood Insurance Company

("Rockwood") listed “an additional 8 contested issues of fact." Plaintiffs’

Brief at 12-13. However, for purposes of the above analysis, the

discussion will be restricted to those allegations that are relevant only to

HPC and O'Donnell.

7.It should also be noted that the District Court granted summary

judgment after the pre-trial order containing the "twenty contested issues

of fact" was presented to the Court.

H98

The functions of the pretrial conference

described in Rule 16 and the summary

judgment motion provided in Rule 56. . . are

entirely different. . . .Upon a proper showing

that there is no genuine issue to be tried, a

judge may grant a motion for summary

judgment wholly irrespective of the terms of

a pretrial order specifying a number of issues

which remained after the discussion at the

pretrial conference had eliminated others.

Irving Trust Company v. United States, 22\ F.2d 303, 305

(2d Cir.), cert. denied, 350 U.S. 828 (1955). In short, the

purpose of a pretrial order 1s to narrow the issues to be tried

while the purpose of a summary judgment is to determine

whether those issues are both genuine and material. The fact

that all Defendants in this case noted 20 contested issues of

fact in the pre-trial order does not prevent the District

Court’s sudsequent determination that those issues were not

material to the outcome of the case.

The preceding arguments, considered alone. are

sufficient to uphold the District Court’s order granting HPC

and O’Donnell’s Motion for Summary Judgment. However,

recognizing that this Court’s review of the District Court’s

Summary judgment order is de novo, Defendants HPC and

O'Donnell summarize additional arguments that were

presented to the District Court in their motion for summary

judgment. These arguments, while not reached by the

District Court, provide ample grounds for sustaining the

granting of summary judgment.

H99

VI. HP "DONNELL DID NOT VIOLATE ANY

PROVISION OF THE SECURITIES ACT OF 1933

Plaintiffs’ allegations under Sections 12 and 15 seek

to impose liability on HPC and O’Donnell for alleged oral

and written misrepresentations in connection with the offer

and sale of the Onshore partnership units. Recent Supreme

Court and Fifth Circuit precedent conclusively demonstrates

that liability for any alleged violations of the Securities Act

of 1933 cannot be imposed against HPC or O’Donnell

because they do not meet the statutory definition of a "seller"

under the Act.

A. Elements Required to Establish Section 12 and

l laim

Plaintiffs’ Complaint contains vague, confusing and

essentially meaningless cross-references that attempt to assert

a cause of action against HPC and O’Donnell under Sections

12 and 15 of the Securities Act of 1933, 15 U.S.C. § 77(]),

(0) (1982). Complaint at 29, 34 and 39. Section 12(1)

provides a cause of action against anyone who offers or sells

a security in violation of § 77(e) which makes it unlawful to

use interstate commerce as the means to sell a security unless

a registration statement is in effect and the prospectus meets

the requirement of the Act. 15 U.S.C. § 77(1)(1). Section

12(2) provides a private cause of action against any person

who offers or sells a security through communications which

include material misrepresentations or omissions of material

facts. Id. § 77(1)(2). Section 15 provides a private cause of

action against any person who controls any person liable

under Sections 12(1) or 12(2). Id. § 77(0). To come within

the ambit of these statutory provisions, Plaintiffs must have

had to establish that HPC and O’Donnell were "sellers" of

their securities.

H100

B. P *Donnell are not "Sellers"

The Supreme Court redefined persons liable under

Section 12(1) of the Securities and Exchange Act of 1933 in

the case of Pinter v. Dahl, 486 U.S. 622 (1988), finding that

the proper inquiry is into the relationship between the

investor and the defendant; not the defendant and the

transaction. Jd. at 2080-81. In directing this inquiry, the

Supreme Court specifically held that Section 12(1) "imposes

liability on the owner who passed title, or other interest in

the security, to the buyer for value,” as well as one who

"engages in solicitation." Jd. at 2076. This Court,

following Pinter’s guidance, extended that definition of

"seller" to cover claims asserted under Section 12(2) of the

Act in the case of Abell v. Potomac Insurance Company,

858 F.2d 1104 (Sth Cir. 1988). In Abell, this Court held

that when a court examines any claim under Section 12, two

inquiries must be made: "(1) [w]ho passed title to the

plaintiff or solicited the transaction in which title passed; and

(2) from whom did the plaintiff buy the security?" Jd. at

1114.

Every case citing to and following Pinter has

expressly declared that a plaintiff must demonstrate that each

defendant “actually solicited their investment" for Section 12

liability to attach. See, e.g., Capri v. Murphy, 856 F.2d

473, 479 (2d Cir. 1988) (noting that Second Circuit

precedent previously held that the language of Sections 12(1)

and 12(2) is identical); accord Schlifke v. Seafirst Corp.,

1989 Fed. Sec. L. Rep. (CCH) { 94,174 (7th Cir. Jan. 9,

1989) (holding that a bank that financed allegedly illegal oil

and gas limited partnerships was not a "seller" since it did

not actively participate in the solicitation of investors or

engage in preparing the prospectus except for drafting the

loan documents included therein); Harelson v. Miller Fin.

Corp., 854 F.2d 1141, 1142 (9th Cir.), cert. denied, 109

H101

S. Ct. 274 (1988) (finding that salesman/agent of defendant

corporation "solicited" sales of securities by presenting facts

necessary to effectuate sale to purchaser and receiving

compensation for bringing sale about); Ja re Professional

Fin. Management, Lid., 692 F. Supp. 1057, 1064 (D.

Minn. 1988) ("Under the Pinter standard, liability may be

imposed against [defendants] if they were principals to the

sale or otherwise assisted in the transfer of securities as

brokers, and received financial benefit in return.").

Plaintiffs muster no support for a finding that either

HPC or O’Donnell could be declared a "seller" under this

standard. The record is clear that neither HPC nor

O'Donnell in any way "passed title or other interest" to any

Plaintiff. Like the bank in Schlifke, neither HPC or

O'Donnell were involved in the solicitation or sale of these

interests. See O'Donnell Affidavit, attached to HPC and

O’Donnell’s Motion for Summary Judgment. In fact, the

Plaintiffs admitted in deposition that neither HPC nor

O’Donnell took part or had any connection in the sale of

Onshore units to them. Garcia-Quiroga dep. at 136; Boyett

dep. at 86-87; Burroughs dep. at 22-23; McDonald dep. at

1066; Topalian dep. at 127; Steubing dep. at 151; LaCelle

dep. at 144, 150, 156-57.

HPC was simply the drilling operator. The

undisputed evidence establishes that HPC and O’Donnell

were not involved in Onshore’s selling efforts. HPC and

O'Donnell had no contact with Onshore’s sales personnel.

See O’Donnell’s Affidavit. Likewise, there is no evidence

to support the allegation that HPC and O’Donnell participat-

ed in the preparation of the prospectus or in any way

promoted the program. Moreover, the record directly refutes

the contention that anyone at HPC had any knowledge of

Ehrman’s sales tactics. See O’Donnell Affidavit. To the

contrary, the evidence clearly establishes the opposite:

H102

O'Donnell testified that no HPC _ personnel had any

knowledge of or control over the means by which Ehrman or

the Onshore salesmen marketed the limited partnership

interests. Boyett dep. at 109; Garcia-Quiroga dep. at 159-

60; Burroughs at 84-85; Steubing dep. at 166; Topalian dep.

at 135-36; McDonald dep. at 1061; LaCelle dep. at 147-48.

Every passage of record testimony in this case refutes

the assertion that HPC and O'Donnell engaged in the

direction of or solicitation by Onshore’s sales force. HPC

and O'Donnell were not engaged in soliciting sales and

therefore cannot be said to have been "sellers" of these

interests for purposes of the 1933 Act. Plaintiffs’ claims

pursuant to the 1933 Act were properly dismissed and

summary judgment granted.

Cc. HPC and O'Donnell are not "Control"

Persons Under the 1933 Act

HPC and O’Donnell’s total lack of control removes

any possibility of liability under either the primary,

secondary, or “control person" provisions of the 1933 Act.

Particularly instructive here is the new decision by the

Seventh Circuit in Schlifke v. Seafirst Corp., 1989 Fed. Sec.

L. Rep. (CCH) 4 94,174, at 91,592 (7th Cir. Jan. 9, 1989).

In deciding that liability under the 1933 Act could not lie

against defendant Seafirst, the court noted that:

Although the Bank necessarily became

involved in the transaction . . . to the extent

necessary to fully document and protect its

loans and collateral, there is no evidence that

[it] thereby intended to be making an

investment or that it took any steps to induce

any investment by [the borrower] with [the

seller}.

H103

Thus, we agree with the district court that the

Bank was acting merely as a commercial

lender when it extended a loan to ENI 1981-

II at a fixed rate of interest.

Id. at 91,597 (citations omitted, ellipses in original).

The Schlifke court expressly refused to allow any

cause of action based on “aiding and abetting” liability under

Section 12(2). Jd. at 91,597-98. Likewise, in the recent

decision of Commins v. Johnson & Higgins, Inc., 1988

Fed. Sec. L. Rep. 4 94,092 (N.D. Cal. Sept. 28, 1988), the

court explained that "control person" liability imposes

liability "only on a person who ‘stands behind the scenes and

controls the [securities violator] who is in a nominal position

of authority.’" Jd. at 91,099 (quoting Wool v. Tandem

Computers, Inc., 818 F.2d 1433, 1441 (9th Cir. 1987)).

The record specifically negates any contention that

HPC or O'Donnell played any part in the operation or

management of Onshore. See O'Donnell Affidavit; Boyett

dep. at 109; Garcia-Quiroga dep. at 159-60; Burroughs dep.

at 84-85; Steubing dep. at 166; Topalian dep. at 135-36;

McDonald dep. at 1061; LaCelle dep. at 147-48. The

evidence clearly shows that no HPC employee or officer

directed or controlled any of the policies, management,

decisions, people, or any other aspects of the business of

Onshore, including any sales effort. See O’Donnell

Affidavit.

Thus, both the record testimony and the applicable

legal principles make it clear that HPC and O’ Donnell played

no role in the operation of Onshore, in the sale of the

Onshore units, or in the solicitation of Plaintiffs’ investment

interests. HPC and O'Donnell did not direct or control any

Onshore employee or operation. As such, HPC was merely

H104

the drilling operator for some of the wells and cannot be

found liable under the provisions of the 1933 Act.

VI. HPCAND O’DONNELL DID NOT VIOLATE ANY

PROVISIONS OF THE SECURITIES ACT of 1934

Plaintiffs additionally assert that HPC and O’ Donnell

violated Section 10(b) of the Securities Exchange Act of 1934

and Rule 10b-5. Plaintiffs cannot recover under either

theory because HPC and O’Donnell made no

misrepresentation to Plaintiffs, and owed no duty to disclose

and therefore made no omission of fact.

A. Elements Required to Establish Section 10(b)

Rule 10b-5 Claims

Plaintiffs allege various violations of Section 10(b) of

the Securities Exchange Act of 1934 and Rule 10b-S.

Section 10(b) provides an action by a purchaser or seller of

"any security" against "any person" who used "any

manipulative or deceptive device or contrivance" in

connection with the purchase or sale of a security. 15

U.S.C. § 78(G)(b) (1982). The essential elements of a

Section 10(b) and Rule 10b-5 claim are (1) in connection

with a securities transaction and (2) acting with scienter, the

defendants made (3)a material misrepresentation or

nondisclosure (4) upon which plaintiff relied and (5) thereby

suffered injury. Chemetron Corp. v. Business Funds, Inc.,

718 F.2d 725, 728 (Sth Cir.), vacated on other grounds, 460

U.S. 1007 (1983); Pin v. Texaco, Inc., 1986 Fed. Sec. L.

Rep. (CCH) § 92,823, at 94,011 (Sth Cir., July 14, 1986).

Most significantly, the Plaintiffs must prove that "the

defendant(s) acted with scienter, i.e., with intent to deceive,

H105

manipulate, or defraud."* Herman & MacLean vy.

Huddleston, 459 U.S. 375, 382 (1983). As the Supreme

Court put it, "Section 10(b) is aptly described as a catchall

provision, but what it catches must be fraud." Chiarella v.

United States, 445 U.S. 222, 234-35 (1980). No Plaintiff

has yet to or can now point to any fact in support of their

allegation that HPC or O’Donnell were guilty of fraud.

Burroughs dep. at 84-85; Garcia-Quiroga dep. at 159-60;

Boyett dep. at 107-09, 111; LaCelle dep. at 161-62, 183;

Steubing dep. at 165-67; Topalian dep. at 135-36; McDonald

dep. at 1079. Accordingly, Plaintiffs cannot establish an

essential element of their 1934 Act claim.

B. HPC and O’ Donnell Made No Representation

to Plaintiffs

To recover under Rule 10b-5, Plaintiffs must establish

that HPC or O’Donnell made a misrepresentation of material

fact to the Plaintiffs in connection with the Plaintiffs’

purchase of the Onshore units. Abell v. Potomac Ins. Co.,

858 F.2d 1104, 1115 (Sth Cir. 1988). Plaintiffs cannot

recover from HPC or O’Donnell for any alleged

misrepresentation since the uncontroverted testimony of the

Plaintiffs establishes that neither HPC nor O’Donnell made

any statements, much less untrue statements, to the Plaintiffs.

McDonald dep., Vol. VI at 1062-66; Topalian dep. at 151;

Garcia-Quiroga dep. at 159; Law dep. at 76; Burroughs dep.

at 84-85; LaCelle dep. at 157-163, 168-69. The absence of

8.In Ernst & Ernst v. Hochfelder, 425 U.S. 185, 203 (1976), the

Supreme Court refused to impose a negligence or "should have known"

standard into § 10(b) or Rule 10(b)-5 actions. The scienter requirement

can be satisfied with a state of mind less than actual knowledge such as

“sever recklessness." This standard requires a showing that the deception

was “so obvious that the defendant must have been aware of it." Warren

v. Reserve Fund, Inc., 728 F.2d 741, 745 & n.12 (Sth Cir. 1984).

H106

any Statements is exemplified by Plaintiff Bobby W.

McDonald’s deposition testimony:

Q. Do you have any information or

evidence to indicate that Richard

O’Donnell or HPC made any false

representations to anybody to get them

to buy Onshore units?

A. No, sir.

McDonald dep. Vol. VI, at 1066. As a further example,

Plaintiff Charles F. LaCelle is unequivocal in his answers:

Q. Do you have any facts that would

show that HPC made any

representations to you at all?

A. Directly?

Q. Directly or indirectly.

A. No.

Q. What about Mr. O’Donnell? Did he

make any representations to you?

A. No.

Q Would you have -- do you have any

facts, or are you aware of any facts,

that would show that HPC or Mr.

O’Do

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