Polycast Technology Corp. v. Uniroyal, Inc.

OPINION

This dispute arises from the allegedly fraudulent sale by defendant Uniroyal, Inc. *932 (“Uniroyal”) of its wholly owned subsidiary Uniroyal Plastics Company, Inc. (“Plastics”) to plaintiff Polycast Technology Corporation (“Polycast”). In substance, Poly-cast alleges that in valuing and pricing the shares of Plastics and in consummating the transaction, it relied on materially misleading information furnished by defendants with respect to the financial status, earnings potential, and operating condition of Plasties, and that as a result it paid a grossly excessive price for the stock.

In four claims, the defendants are charged variously with violations of Rule 10b-5 promulgated under section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b) (the “Exchange Act”), section 12(2) of the Securities Act of 1933, 15 U.S.C. § 77i(2) and common law fraud. In this motion, defendants Martin H. Dubi-lier, Joseph L. Rice III, Clayton & Dubilier, Inc., The Clayton & Dubilier Private Equity Fund Limited Partnership (“Private Equity”) and Clayton & Dubilier Associates Limited Partnership (C & D Associates) (collectively, the “C & D Defendants”), who are charged as both principals and aiders and abettors, move to dismiss the § 10(b) and common law claims against them for failure to plead fraud with particularity pursuant to Fed.R.Civ.P. 9(b) and to dismiss the § 12(2) claims for failure to state a claim upon which relief can be granted pursuant to Fed.R.Civ.P. 12(b)(6).

Also Polycast moves for leave to file an amended complaint (“Proposed Fourth Amended Complaint”) adding a claim under the Racketeer Influenced and Corrupt Organizations Act (“RICO”), to add Uniroyal Plastics Acquisition Corp (“UPAC”) as a plaintiff, and to make certain additional changes. The C & D defendants have requested an order dismissing the First through Fifth Claims of the Proposed Fourth Amended Complaint should the Court grant Polycast’s motion for leave to file an amended complaint.

Defendant and counterclaim-plaintiff Alfred Weber has moved to dismiss counterclaim-defendant Plastics’ first amended counterclaims for failure to plead fraud with particularity, and for failure to state a claim upon which relief may be granted.

1. Defendants’ Motion to dismiss Counts One through Four of the Third Amended Complaint

A. BACKGROUND

The Court presumes familiarity with its prior opinion, Polycast Technology Corp. v. Uniroyal, Inc. [Current] Fed.Sec.L.Rep. (CCH) ¶ 94,005, 1988 WL 96586 (S.D.N.Y. Aug. 25, 1988), and summarizes only the salient and additional facts here. On August 25, 1988, this Court dismissed, with leave to amend, Polycast’s claims against the C & D defendants under federal securities and common law for failure to plead fraud with particularity. Subsequently, Polyeast filed an amended complaint (“Third Amended Complaint”). The C & D defendants now move to dismiss certain claims of the Third Amended Complaint on the same grounds. For the reasons set forth below, this motion is denied.

It is well settled that on a motion to dismiss, the Court must accept the allegations of the complaint as true. Luce v. Edelstein, 802 F.2d 49, 52 (2d Cir.1986). The complaint identifies C & D as an investment banking firm owned at all times relevant to this action by its Chairman, Martin Dubilier and Chief Executive Officer Joseph Rice. Both men were directors of Uniroyal and CDU Holding, Inc. Rice and Dubilier are also general partners of C & D Associates which is a general partner of C & D Private Equity (“Private Equity”). Private Equity is a limited partnership managed by C & D. As of the liquidation of Uniroyal and its parent, Private Equity allegedly owned all of the outstanding Class C common stock, or 32.5% of the then outstanding stock of CDU Holding, Inc. In addition, from September 24, 1985 until the liquidation of CDU Holding, Inc. on December 2,1986, Private Equity owned all of the outstanding shares of Uniroyal’s Second Preferred stock. CDU Holding, Inc., owned all of Uniroyal’s common stock throughout 1986 until Uniroyal and CDU Holding, Inc. were liquidated on December 2, 1986. Third Amended Complaint at ¶¶ 6, 18-26.

*933 In September 1985, pursuant to an agreement signed by Rice as President of CDU Acquisition, Inc. and CDU Holding, Inc. and an unspecified signatory on behalf of Uniroyal, Uniroyal merged with CDU Acquisition, Inc., a wholly owned subsidiary of CDU Holding. As a result, CDU Holding acquired all of Uniroyal’s common stock. C & D Private Equity owned 32.5% of the common stock of CDU Holding, Inc., and 260,000 shares of Uniroyal redeemable second preferred stock. The complaint alleges that after the merger was complete, the C & D defendants, among others, embarked upon a plan to liquidate Uniroyal and pay the bulk of the proceeds to themselves. As part of that plan, they commenced preparations for the sale of Plastics.

The complaint alleges, in essence, that throughout the preparations and negotiations leading to Polycast’s purchase of Plastics, the C & D defendants, among others, repeatedly misrepresented Plastics’ financial health and prospects, particularly Plastics’ 1986 estimated earnings.

Polycast claims the C & D defendants’ role in the deception began in December 1985 when they began preparing the allegedly fraudulent offering memorandum upon which Polycast relied in purchasing Plastics and continued until the sale of Plastics closed on October 31, 1986. Specifically, Polycast alleges that on December 3, 1985, Rice and Dubilier received a draft offering memorandum from Drexel Burn-ham Lambert Incorporated (“Drexel”) acting as investment bankers for C & D and Uniroyal in connection with the sale of Plastics. On December 5, 1985, Dubilier and Peter Dolle of C & D met with employees of Uniroyal, Plasties and Drexel at C & D’s offices to discuss the sale. Polycast alleges that at the meeting, Dubilier, Dolle and others reviewed the draft offering memorandum and discussed a 1986 earnings projection of $24 million that would appear in the offering memorandum. Id. at ¶ 40. Polycast also alleges that notes taken by defendant Donald L. Nevins at the meeting contain the phrase “need 600 more in EBIT [earnings before taxes].” Polycast interprets these words as reflecting discussion at or immediately following the meeting that the $24 million earnings projection contained at least $600,000 in known earnings shortfall. Id.

In a February 1986 meeting, Drexel gave C & D representatives a list of potential bidders who would be offered the opportunity to review the Plastics offering memorandum. Polycast alleges that either Dubi-lier or Rice or both attended that meeting. Later that month, Drexel presented to Du-bilier and Rice exclusively a document entitled “Uniroyal Plastics Company Preliminary Valuation Analysis.” Id. at ¶ 42. The alleged purpose of the document was to provide a basis for determining the market value of Plastics.

On February 5, 1986, Drexel circulated a new draft offering memorandum to Rice and Dubilier, among others. Id. at 1143. The cover letter accompanying the draft noted in detail the areas of Plastics’ business requiring attention by the recipients of the draft. For example, the letter directed the recipients’ attention to “more detail on competition in coated fabrics and roofing adhesives.” Id. It also contained notice that the recipients of the draft would meet the following week to discuss the draft and the noted areas of Plastics’ operations.

On February 13 at approximately 9 a.m., Dubilier spoke with defendants Castaldi, Alvine and Nevins by phone about the financial statements to be included in the offering memorandum. Id. at If 44. Poly-cast alleges that during this conversation, Dubilier specifically discussed how the offering memorandum should present Plastics’ management personnel, legal, treasury, computer, communications and industrial relations expenses. The following day, February 14, Drexel circulated a revised draft offering memorandum to Rice and Dubilier among others. Id. at 45. A note accompanying this draft stated that it incorporated “comments received from ... Clayton and Dubilier during the past week.” Id. Subsequently, Drexel circulated the final draft of the Plastics offering memorandum to Rice and Dubilier, among others.

*934 On about February 24, Dubilier contacted Castaldi who later reported his discussions with Dubilier to Nevins. Id. at ¶ 47. Polycast alleges — on information and belief based on Nevins’ notes — that Castaldi “instigated by” Dubilier, pressured Nevins to “find purported support” for the inflated 1986 earnings forecasts for Plasties to disclose to Polycast. Id. More specifically, Castaldi allegedly pressured Nevins “as to why Uniroyal could not project higher 1986 earnings for Plastics based upon alleged Plastics capital spending programs.” Poly-cast alleges, again on information and belief, that Dubilier and Castaldi knew that, in fact, these alleged capital and spending programs — to the extent they existed at all — were “catch-up” efforts to remedy past business failures that could not make up the shortfall in Plastics’ earnings.

Dubilier then telephoned Uniroyal employees to discuss the draft offering memorandum. Based on the notes from the files of defendant John Graham, Polycast alleges on information and belief that during that telephone call Dubilier discussed the earnings forecasts for Plastics to be included in the offering memorandum. Id. at ¶ 48. Finally, on March 26, Drexel submitted to Dubillier, among others, a draft letter describing the procedure for submitting indications of interest in purchasing Plastics, the final version of which was to be sent to prospective purchasers.

In March 1986, Uniroyal delivered the offering memorandum to Polycast and others. The memorandum described Plastics’ business and painted an optimistic picture of its future prospects. It contained financial data and estimated income for 1986 and beyond, including a specific projection that Plastics would earn approximately $24 million during 1986. Id. at ¶ 53. Polycast contends that in reliance on the representations in the offering memorandum, it bid for Plastics’ shares. Id. at ¶¶ 53-55.

On April 14, Drexel sent defendants Du-bilier, Rice and Joseph Flannery, Chairman, Chief Executive Officer and President of Uniroyal, a preliminary summary of the indication of interest letters received from bidders describing their identities and bid amounts. This summary was not sent to anyone else. Shortly thereafter, Drexel met with Flannery and Dubilier or Rice or both to obtain a decision from C & D and Uniroyal as to which bidders would be allowed to proceed in the bidding process. Id. at ¶ 57.

As outlined in the Court’s prior opinion, on May 8, Uniroyal managers met with Polycast and lowered Plastics’ forecasted 1986 earnings from $24 million to $22.5 million. Id. 1HI 53-55. On June 5, Oliver Kirrane, Controller of Plastics calculated an optimistic 1986 earnings forecast of $18.3 million which, when adjusted for expenses, would be no more than $17.7 million. About June 12, Uniroyal again lowered Plastics’ earnings forecast, this time to $20.5 million. Polycast alleges that defendants knew that forecast to be false. Id. at fl 64.

Around June 24, Uniroyal responded to inquiries from Polycast by lowering Plastics 1986 earnings forecast to $17.6 million. Polycast contends that in reality, Plastics’ financial condition continued to deteriorate, and consequently, this forecast was also false.

On June 30, Kirrane wrote Castaldi that a forecast of Plastics' 1986 earnings of even $16 million “would be a stretch,” and in fact was “not realistic.” Id. at ¶ 69. Kirrane felt that the maximum stretch forecast for Plastics’ 1986 earnings, even incorporating unrealistic market assumptions, was $13.1 million.

About July 23, Polycast submitted the winning bid for Plastics of $134 million and Uniroyal, Plastics and Polycast entered into an agreement for Polycast to buy all of Plastics’ outstanding shares. In the months thereafter, defendant Alvine, Vice President of the Engineered Plastics Group and Langhorne Reid III, then a managing director of Drexel, allegedly told Howard Curd, Chairman of Polycast, that Rice was the person principally responsible for determining the sale price of Polycast. Id. at ¶ 77. On August 27, defendants lowered their estimate of Plastics’ 1986 earnings to $15.5 million. Based on this material change in financial condition of Plastics, *935 Polycast withdrew its offer and terminated the purchase agreement.

Plaintiff alleges that in September, Uniroyal and C & D mounted a campaign to induce Polycast to return to the negotiating table. At a meeting held at C & D’s office on September 5, defendants Castaldi and Alvine, in the presence of Rice and allegedly acting on behalf of all defendants, including the C & D defendants, “represented to Polycast that (a) October 1986 would be a boom for Plastics; (b) September 1986 would be a very profitable month; (c) prior reductions in earnings were one time hits and nonrecurring in nature; and (d) the adhesives division was going to take off.” Id. at ¶ 80. Castaldi and Alvine, acting on behalf of all defendants, also told Polycast that Uniroyal’s final projection of Plastics’ 1986 earnings was $13.3 million and that number was a rock bottom estimate which could be “taken to the bank.” Polycast alleges on information and belief that in fact all defendants knew that the $13.3 million forecast was false.

About September 10, Polycast Chairman Curd spoke with Rice by telephone and told him that because Polyeast had calculated its bids as multiples of Plastics’ projected 1986 earnings, the accuracy of the latest forecast was of great importance. Id. at 84.

On or before September 12, Castaldi and Alvine prepared an updated description of Plastics for transmission to Polycast and sent it to Dubilier and Rice for review. Polycast alleges that this document untruthfully asserted that “the Plastics Company has reacted to the adversities of the first part of 1986 and is now positioned to move forward with increased profitability.” Three days later, Alvine told a group of Uniroyal employees that Plastics’ actual 1986 earnings would be materially lower than the $13.3 million figure disclosed to Polycast.

On September 23,1986, Polycast, Uniroyal and Plastics entered into a letter agreement modifying certain terms of the Purchase Agreement, but confirming the $13.3 million projection. On October 31, 1986, the deal closed at a price of $110 million. Plastics in fact earned $5.25 million in 1986.

On May 13, 1987, Polycast filed the instant action alleging securities and common law fraud.

B. DISCUSSION

Fed.R.Civ.P. 9(b) provides that “in all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge and other condition of mind may be averred generally.”

In order to state a claim under § 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder, plaintiffs must plead each defendant’s scienter. See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 197, 96 S.Ct. 1375, 1383, 47 L.Ed.2d 668 (1976). Although scienter may be averred generally, plaintiffs must nonetheless provide some minimal factual basis for conclu-sory allegations of scienter that give rise to a strong inference that the defendants possessed the requisite fraudulent intent. Connecticut Bank v. Fluor Corp., 808 F.2d 957, 962 (2d Cir.1987). “A common method for establishing a strong inference of scienter is to allege facts showing a motive for committing fraud and a clear opportunity to do so.” Beck v. Manufacturers Hanover Trust Co., 820 F.2d 46, 50 (2d Cir.1987), cert. denied, 484 U.S. 1005, 108 S.Ct. 698, 98 L.Ed.2d 650 (1988), overruled on other grounds, United States v. Indelicato, 865 F.2d 1370 (2d Cir.1989) (en banc); see also Goldman v. Belden, 754 F.2d 1059, 1070 (2d Cir.1985) (complaint specifically alleged facts which supported the allegation of defendants’ knowledge). On a motion to dismiss claims under 9(b), the Court must construe the allegations of the complaint “with great generosity” in favor of the pleader. Yoder v. Orthomolecular Nutrition Inst., 751 F.2d 555, 558, 562 (2d Cir.1985). The Court will apply these standards to each of Polycast’s allegations of fraud in turn.

1. Violations of § 10(b) of the Exchange Act as principals

A. Rice and Dubilier

Reading the complaint liberally, the Court finds that Polycast has corrected the *936 deficiencies in its complaint previously addressed by this Court. Polycast Technology v. Uniroyal, Inc., 87 Civ. 3297 (S.D.N.Y.1988) slip op. at 11. Plaintiff has pled sufficient facts to link Rice and Dubilier to the alleged frauds and to give rise to a strong inference that they possessed knowledge of the alleged frauds. The complaint states that Rice and Dubilier received the “Uniroyal Plastics Company Preliminary Valuation Analysis” which provided a basis for determining the market value of Plastics. After receiving this document, Rice and Dubilier allegedly helped draft the fraudulent offering memorandum. In fact, their comments were incorporated into the February 14, 1986 draft. Dubilier allegedly discussed the financial statements to be included in the offering memorandum with defendants Castaldi, Al-vine and Nevins, whose fraudulent intent is unchallenged on this motion. Plaintiff also alleges, on the basis of defendant Graham's notes, that Dubilier discussed the earnings forecasts that were included in the memorandum.

Further, representatives of both Uniroyal and Drexel allegedly told Polycast Chairman Curd that Rice was principally responsible for determining the sale price of Plastics. Rice and Dubilier attended meetings that involved a thorough examination of Plastics’ business by Uniroyal and Plastics officials, and a meeting at which, Polycast alleges, a known shortfall in the earnings forecast was discussed. Plaintiffs need not prove scienter at this stage of the litigation. They need only allege facts from which the fact finder could infer scienter. Read together, the allegations of the complaint raise such an inference. 1

Polycast’s allegations of Rice and Dubilier’s beneficial interest in Uniroyal’s assets implicitly establish a motive for committing fraud. The allegations of their involvement in the preparation of the offering memorandum demonstrate an opportunity for doing so and support the inference of knowledge on their part. Therefore, defendants’ motion to dismiss the § 10(b) and common law fraud claims against Rice and Dubilier as principals is denied.

B. C & D Private Equity and C & D Associates

While this Court rejects the notion of “inference by status alone”, Id. at 12, the intertwined management and financial structures of Uniroyal, C & D Private Equity and C & D Associates, when viewed in light of the allegations of Rice and Dubilier’s involvement in the preparation of the offering memorandum, also permits an inference of knowledge on the part of these defendants. See In re Coleco Securities Litigation, 591 F.Supp 1488, 1490 (S.D.N.Y.1984) (sufficient factual basis for scien-ter exists where the complaint alleged that defendants had knowledge of false statements due to their management positions).

Partnership liability is rooted in agency principles; it requires no actual participation in or knowledge of the acts performed by the partners to impose liability. Northwestern Nat. Bank of Minneapolis v. Fox & Co., 102 F.R.D. 507 (S.D.N.Y.1984). Rice and Dubilier were general partners of C & D Associates Limited Part *937 nership, which in turn is a general partner of C & D Private Equity Limited Partnership. Private Equity owned 32.5% of the common stock of CDU Holding. CDU in turn owned all of the common stock of Uniroyal from September 24, 1985 to December 2, 1986. Thus, Private Equity, C & D Associates, and Rice and Dubilier were all beneficially interested in the sale of Plastics. Rice and Dubilier’s actions to further their own interests simultaneously furthered the interests of the partnerships, and thus their actions were within the scope of their authority.

While it is true that “basic principles of corporate law presume that absent a rather egregious disregard of corporate formalities, one corporate entity or an individual with a substantial interest in the corporation is not automatically or readily responsible for the acts of another entity,” The Limited v. McCrory Corp., 645 F.Supp. 1038, 1044 (S.D.N.Y.1986), upon review of the parties’ submissions, the Court finds that this principle is not at issue here. It is not the doctrine of corporate veil piercing that renders Private Equity and C & D Associates potentially liable for frauds of their principals, but rather ordinary principles of agency and partnership law. Accordingly, defendants’ motion to dismiss Polycast’s § 10(b) and common law fraud claims against Private Equity and C & D Associates is denied.

C. C & D, Inc.

Polycast has also sufficiently connected C & D to the alleged frauds. Rice and Dubilier were officers and employees of C & D and may be said to have acted on behalf of the company in the preparation of the offering memorandum. Rice and Dubi-lier’s involvement took place in 1985 and 1986, during which time Uniroyal was paying C & D $1,000,000 per year for financial and management consulting services. Furthermore, another employee of C & D, Peter Dolle attended at least one meeting where the earnings forecast was discussed. As with Private Equity and C & D Associates, there is no need to pierce the corporate veil for C & D to be liable for the acts of its employees. Accordingly, defendants' motion to dismiss Polycast’s § 10(b) and common law fraud claims against C & D as a principal is denied.

2. Violations of § 10(b) as Aiders and Abettors

In the first count of the Third Amended Complaint, Polycast alleges that the C & D defendants were not only principal violators of § 10(b) of the Exchange Act, but also aided and abetted these violations. The C & D defendants have moved to dismiss this charge for failure to plead fraud with particularity as well. As set forth in the Court’s prior opinion, the

general requirements for establishing aiding and abetting liability are well settled in this Circuit. Plaintiff must prove (1) a securities law violation by the primary wrongdoer, (2) knowledge of the violation by the person sought to be charged, and (3) proof that the person sought to be charged substantially assisted in the primary wrongdoing, [citation omitted].

Armstrong v. McAlpin, 699 F.2d 79, 91 (2d Cir.1983); Bresson v. Thomson McKinnon Securities, Inc., 641 F.Supp. 338, 348 (S.D.N.Y.1986).

Polycast’s allegations supporting the claims against the C & D defendants as principal violators of § 10(b) of the Exchange Act also satisfy the standard for aider and abettor liability. Plaintiff has adequately pleaded the C & D defendants’ scienter, and has sufficiently alleged the substantial assistance the C & D defendants rendered the other defendants in the alleged fraud. Accordingly, defendants’ motion to dismiss the aiding and abetting charges against them is denied.

3. Violations of § 12(2) of the Securities Act

The C & D defendants have moved to dismiss counts two and three of the Third Amended Complaint, charging the C & D defendants with violations of § 12(2) of the Securities Act, for failure to state a claim upon which relief can be granted. Defendants argue that Polycast has not adequately pleaded that they solicited a *938 sale of securities for financial gain within the meaning of § 12(2). For the reasons stated below, this motion is denied.

Section 12(2) of the Securities Act creates a right of action for a purchaser who claims the security he or she bought was offered or sold by means of a prospectus or oral communication which includes an untrue statement of a material fact or omits to state a material fact. 15 U.S.C. §771 (2). The Second Circuit, applying the Supreme Court’s analysis of section 12(1) liability as articulated in Pinter v. Dahl, 486 U.S. 622, 108 S.Ct. 2063, 100 L.Ed.2d 658 (1988), has recently held that scienter is not required to state a claim under § 12(2) of the Securities Act against a defendant who solicited the sale of securities for financial gain. See Wilson v. Saintine Exploration & Drilling Corp., 872 F.2d 1124 (2d Cir.1989), citing Pinter v. Dahl, 486 U.S. 622, 108 S.Ct. 2063, 100 L.Ed.2d 658 (1988). The court in Wilson stated that:

Persons who are not in privity with the plaintiff but who would have been collateral participants under our former case-law will now be statutory sellers within the meaning of Pinter if they solicited the sales in question for financial gain ... whether or not scienter is shown.

Id. at 1126. This Court’s inquiry, consequently, must focus on whether the C & D defendants’ participation in the sale of Plastics amounted to solicitation of the sale.

In discussing the scope of the word “seller” for the purposes of § 12 liability, the Supreme Court stated that since “solicitation is the stage at which an investor is most likely to be injured,” Pinter, 108 S.Ct. at 2078, the term “seller” must include persons who solicit the purchase for financial gain. Solicitors are statutory sellers because they are “well positioned to control the flow of information to a potential purchaser, and, in fact, such persons are the participants in the selling transaction who most often disseminate material information to investors.” Id. 108 S.Ct. at 2078.

As the Second Circuit has interpreted the term “solicitation,” no direct contact between the purchaser and the purported “solicitor” is necessary for § 12(2) liability. In Capri v. Murphy, 856 F.2d 473 (2d Cir.1988), the court found solicitation within the meaning of § 12(2) where the defendants, although they were never in direct communication with the plaintiff investors, provided the information that was supplied to the purchasers by their colleague and contemplated and authorized all actions taken in relation to the investors. Id. at 478. The court found that the colleague’s promotional efforts could be directly attributed to the defendants under these circumstances.

Here, the defendants’ alleged direct contacts with Polycast are limited to a phone call by Rice to Curd, Polycast’s Chairman, in which Curd emphasized the importance of Plastics’ 1986 earnings forecast in Poly-cast’s decision to bid, and Rice’s attendance at a meeting allegedly designed to induce Polycast to buy Plastics’ after it had terminated the original purchase agreement. However, like the defendants in Capri, Rice and Dubilier supplied the information that was transmitted to Polycast through their significant participation in and oversight of the drafting of the placement memorandum. Furthermore, Rice and Du-bilier allegedly were principally responsible for determining which potential bidders would be offered the opportunity to review the memo and bid, and ultimately decided which bidders would be allowed to proceed in the bidding process, assisted only by Mr. Flannery, President and Chairman of Uniroyal. Although their direct contacts with Polycast were limited, by determining who would bid for Plastics and what information those bidders would receive, Rice and Dubilier effectively authorized and contemplated the communications of the other defendants with Polycast.

Under these circumstances, the Court concludes that Polycast has adequately alleged that Rice and Dubilier are “sellers” within the meaning of § 12(2) of the Securities Act as are the C & D entities according to the agency principles discussed above. Accordingly, defendants’ motion to dismiss counts two and three of the Third Amended Complaint is denied.

*939 II. Plaintiffs Motion for Leave to File Amended Complaint

Polycast has moved pursuant to Fed.R. Civ.P. 15(a) to amend the Third Amended Complaint to (1) add Uniroyal Plastics Acquisition Corporation (“UPAC”) as plaintiff; (2) delete Polycast’s prior allegations that defendant Donald L. Nevins, Jr. was a “controlling person” of Uniroyal; (3) divide its breach of warranty claim into two claims, one for breach of warranty and one for indemnity; (4) change the word “projection” to the word “forecast” throughout the complaint; (5) plead explicitly that it was defrauded by defendants’ 1987-1990 earnings forecasts for Plastics; (6) add a claim for reformation of the Purchase Agreement; (7) add a claim against all defendants under The Racketeer Influenced and Corrupt Organizations Act (“RICO”); to add claims in connection with its proposed RICO claim that (8) defendants defrauded Polycast by failing to disclose that prior to the closing of the Plastics sale, Northrop Corporation had can-celled its contract to purchase fuel cells from Plastics; (9) defendants violated the securities laws by wrongfully inducing Po-lycast to issue debt securities in order to finance its purchase of Plastics; (10) defendants committed numerous acts of mail and wire fraud. The Court will address each of the proposed amendments in turn.

A. DISCUSSION

Rule 15(a) of the Federal Rules of Civil Procedure provides that leave to amend a pleading “shall be freely given when justice so requires.” The Supreme Court has instructed that:

[i]f the underlying facts or circumstances relied upon by the party may be a proper subject of relief, he ought to be afforded an opportunity to test his claim on the merits. In the absence of any apparent or declared reason — such as undue delay, bad faith or dilatory notice on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, futility of amendment, etc. —leave should, as the rules require, be “freely given”.

Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 230, 9 L.Ed.2d 222 (1962). “Mere delay alone, absent a showing of bad faith or undue prejudice does not provide a basis for a district court to deny the right to amend.” State Teachers Retirement Board v. Fluor Corp., 654 F.2d 843, 856 (2d Cir.1981) (district court’s denial of leave to amend reversed despite fact that amendments were brought three years after plaintiffs learned of facts supporting amendment and one year after plaintiffs completed relevant depositions); S.S. Silberblatt v. East Harlem Pilot Block-Building 1 Housing Development Fund Co., 608 F.2d 28 (2d Cir.1979) (no prejudice sufficient to deny leave to amend even though new claim was asserted after discovery had proceeded for two years). Rule 15(a), however, gives the court authority to impose conditions when leave to amend is allowed. See 6 Wright & Miller, Federal Practice and Procedure (1971), § 1486 at 423-24. The most common condition imposed on an amending party is costs. Id. at 424; see also Pollux Marine Agencies v. Louis Dreyfus Corp., 455 F.Supp. 211, 216 (S.D.N.Y.1978).

1. The Addition of UPAC as a Plaintiff

Defendants do not object to Poly-cast’s adding UPAC as a plaintiff at this time. UPAC was formed for the purpose of acquiring Plastics and, with defendants’ prior knowledge and permission, was assigned all of Polycasts’ rights under the Purchase Agreement. UPAC continues to hold all of Plastics’ stock and is a proper party to this action. Polycast’s motion for leave to add UPAC as a plaintiff is therefore granted.

2. Deletion of “Controlling Person” Allegations

Defendants do not object to Polycast’s deletion of its prior allegation that defendant Nevins was a “controlling person” of Uniroyal and its parent, CDU Holding, Inc. for purposes of the federal securities laws. Polycast’s motion to delete this allegation is granted.

*940 3. Division of Breach of Warranty Claim

Nor do defendants object to dividing the breach of warranty claim in the Third Amended Complaint into two claims, one for breach of warranty and one for indemnity. Polycast’s motion to do so is, therefore, granted.

4. Request to Change “Projection” to “Forecast”

Plaintiffs’ unexplained request to change the word “projection” to “forecast” throughout the complaint is granted. While the rationale behind this change remains obscure, the strong policy of the Federal Rules permitting amendment of pleadings especially where, as here, the non-movant has not asserted any resulting prejudice, favors the plaintiff’s request.

5. Reformation Claim

Plaintiff has also moved to add a claim for reformation of the Purchase Agreement to allow Polycast to recover under the agreement’s indemnity provisions. Defendants oppose the motion. Their contention is that the Agreement on its face precludes any argument that Polycast is an indemni-tee and that its clear language forecloses the inquiry into the parties’ intent to include Polycast as an indemnitee without which there can be no reformation. In addition, defendants argue undue delay and that they will be prejudiced by the addition of such a claim because it will require them to re-depose two witnesses who allegedly omitted Polycast as a protected party under the indemnification provisions of the agreement.

Upon review of the relevant portions of the Purchase Agreement quoted in the proposed complaint, the court concludes that the language of the agreement does not preclude an inquiry into the parties’ intent. Plaintiffs allege that Section 8.2(a) of the Purchase Agreement provides in part that “Seller agrees to indemnify and hold harmless the Buyer Indemnities” against, inter alia, certain expenses “resulting from or arising out of the breach of any representation ... of the Seller or the Company contained in the Agreement.” Plaintiffs further allege that the Purchase Agreement defines the “Buyer” as Poly-cast. Section 1.1 of the agreement defines “Buyer Indemnitees” as “Buyer’s officers, directors, controlling persons, employees, attorneys, agents, subsidiaries, affiliates and stockholders, in each case past and present, or as they may exist at any time after the date of the Agreement.”

Polycast contends that in drafting and revising the agreement, it did not intend to exclude Polycast from the indemnitee provision’s coverage, but rather intended to enlarge the class of persons entitled to indemnification. To the extent that the definition of “Buyer Indemnitees” is construed to exclude Polycast, plaintiffs maintain that the Purchase Agreement reflects a mutual mistake by the parties, and fails to reflect the parties’ true intent. Polycast cites, among other things, section 8.2(d), entitled “Conditions Precedent to Buyer’s Right to Indemnification” as evidence of the parties’ true intent (emphasis added). That section provides that the “Buyer shall be entitled to indemnification” for certain expenses (emphasis added). Plaintiffs cite other provisions of the agreement which also tend to support their contentions. Po-lycast also notes that earlier drafts of the agreement clearly included the buyer — Po-lycast — as an indemnitee, and that Uniroyal at no time during negotiations asked Poly-east to sacrifice indemnification protection for itself. Since, Polycast argues, it would not have surrendered this protection unilaterally, to the extent the agreement can be interpreted to preclude such coverage, it reflects a mistake in the final version of the agreement. Under these circumstances, the Court concludes that the language of the agreement does not on its face preclude an inquiry into the intent of the parties.

Polycast is not guilty of undue delay in seeking this amendment as it appears that the parties’ differing views of the coverage of the Purchase Agreement was brought to light only by defendants’ response to the Third Amended Complaint. Furthermore, defendants are not unduly *941 prejudiced by the limited re-discovery they allege will be necessary. Defendants do not allege that plaintiffs proffer this amendment in bad faith. Accordingly, plaintiffs’ request for leave to add a claim for reformation is granted.

6. RICO Claim against all Defendants

Plaintiffs’ proposed amended complaint charges all defendants with violations of 18 U.S.C. § 1962. To state a claim under RICO, a complainant must allege:

(1) that the defendant (2) through the commission of two or more acts (3) constituting a “pattern” (4) of “racketeering activity” (5) directly or indirectly invests in or maintains an interest in, or participates in (6) an “enterprise” (7) the activities of which affect interstate commerce.

Moss v. Morgan Stanley, Inc., 719 F.2d 5, 17 (2d Cir.1983), cert. denied, 465 U.S. 1025, 104 S.Ct. 1280, 79 L.Ed.2d 684 (1984). Defendants contend that leave to amend should be denied because plaintiffs have failed to plead many of the proposed predicate acts of racketeering activity adequately, and because the alleged conduct did not involve sufficient continuity or threat of continuity to constitute a “pattern” within the meaning of the statute. The Court will first examine Polycast’s proposed list of predicate acts, and will then examine whether these acts sufficiently establish a “pattern” under RICO.

A. Proposed Predicate Acts

1. Earnings Projections

Polycast seeks to satisfy the requirement of pleading the predicate acts of “racketeering activity,” in part, by alleging that each of the five allegedly false earnings forecasts defendants gave plaintiffs constitutes a separate act of securities fraud and thus a separate predicate act for the purposes of RICO.

Defendants argue that the allegations of fraud in connection with their issuance of revised false earnings projections are deficient because these “superseded” projections did not proximately cause injury to plaintiffs. Defendants claim that in purchasing Plastics, Polyeast did not rely on these interim projections, but relied solely upon Uniroyal’s final forecast of $13.3 million.

In order to assert a cause of action under Rule 10b-5, a private plaintiff must prove that he relied to his detriment upon the defendant’s deception. See S.E.C. v. Tome, 638 F.Supp. 596, 620 n. 46 (S.D.N.Y.1986). The private plaintiff must prove two types of causation: loss causation — that the misrepresentations caused the economic harm — and transaction causation — that the plaintiff relied on the misrepresentations and was thereby induced to engage in the transaction. Schlick v. Penn-Dixie Cement Corporation,