Full opinion text
MEMORANDUM OPINION AND ORDER SHADUR, District Judge. Terrence Donohoe (“Donohoe”) and 53 other investors in one or more of a series of oil and gas limited partnerships have filed a nine-count Fourth Amended Complaint (the “Complaint”) against Consolidated Operating & Production Corporation (“COPCO”), its sole principals and shareholders Jack Nortman (“Nortman”), Morando Berrettini (“Berrettini”) and Dennis Bridges (“Bridges”), and Bridges’ wholly owned and operated corporations Ona Drilling Corporation (“Ona”) and Onshore Rig Corporation (“Onshore”). Plaintiffs allege several violations of the federal securities laws’ anti-fraud provisions and registration requirements, violation of Illinois state securities laws, common law fraud, breach of fiduciary duty and two types of RICO violations. After both sides had completed extensive discovery, Nortman, Berrettini and COPCO have moved under Fed.R.Civ.P. (“Rule”) 56(b) for summary judgment on all counts. Briefing on that motion has now been completed, and this Court has reviewed the truly massive submissions by both sides. For the reasons stated in this memorandum opinion and order, defendants’ motion is granted as to all counts except Count 4’s Section 12(2) claim, as to which genuine issues of fact remain for resolution at trial. Facts This action arises out of an oil and gas drilling program gone south. Plaintiffs claim defendants fraudulently induced them to invest in a program that never had a chance at success. Defendants counter that circumstances beyond their control caused an otherwise viable and promising project to go awry. One thing is certain: Despite the overwhelming overlap between the facts as presented by the parties, each side views the other as wholly bankrupt and deceitful in presenting the story. For instance, plaintiffs open their responsive brief to defendants’ summary judgment motion by stating that reading defendants’ proffered documents is “like taking a trip ‘Through The Looking Glass’ ” (P.Mem. 1). Not to be outdone on the level of literary allusion, defendants retort that “plaintiff’s response brief would more aptly be titled ‘The Grand Illusion’, for in the end it amounts to no more than the product of the sheer imagination of its authors” (D.R. Mem. 3). Maybe counsel found such flippant accusations provided them with some needed comic relief in the process of preparing their admittedly dry and voluminous submissions. Neither characterization, however, is accurate or helpful to this Court’s task of evaluating the underlying facts. This opinion’s factual statement will avoid inclusion of the unsubstantiated assertions and characterizations that riddle all the parties’ submissions and will stick instead to the mundane, though more constructive, task of laying out the basic events that gave rise to this action. In 1982 Jack Smith, President of Itex Energy Corporation of Houston (“Itex”), introduced Berrettini to Bridges. At that time Berrettini was Vice President of Finance at Itex, and it was in the context of conducting Itex business that Bridges and Berrettini met several times during the middle of 1982. In October or November of that year Berrettini raised the subject of pursuing an oil or gas deal venture in Texas, and Bridges recommended considering drilling in the shallow wells of Corsicana. After that initial discussion with Bridges, Berrettini discussed the possible venture with Nortman, with whom he had an ongoing business relationship. Nortman’s interest in the venture led to a late 1982 meeting in Chicago among Berrettini, Nortman and Bridges. At that Chicago meeting Bridges told Nortman and Berrettini that he was looking for a source of investment funds for oil ventures in shallow, low-risk wells in the Corsicana area. Bridges then represented that he had previous success drilling in that immediate area and such wells could be expected to produce between four and six barrels of oil a day. After that meeting Nortman spoke with Etta Cole, an attorney who had handled his business matters for a number of years, and through her with her husband Stan Cole (“Cole”), whom Nortman knew to have substantial experience in the business side of oil and gas investment. Nortman and Berrettini talked to Cole and presented him with the information available to them, including the location of the proposed project and numbers based on potential recoveries, oil prices and lease costs (all of which had been worked up by Berrettini). On the basis of that information Cole told Nortman and Berrettini that on paper it appeared to make sense and that he was willing to meet with them and Bridges. At that point (late 1982 or early 1983) Nortman and Berrettini began making inquiries into Bridges’ background. Nortman called Cecil Holly of Production Research (a Texas oil concern), whom Bridges had offered as a reference. In response to his general questions aimed at “checking someone out,” Nortman got a “fairly positive answer” (Nortman Dep. 105). Berrettini spoke to Everett Sharp, a geologist, who reported that he was aware of Bridges’ work through business associations and believed Bridges to have a good reputation, and also confirmed that the Corsicana field was a relatively low-risk drilling site. Itex President Smith also reported that he believed Bridges’ reputation to be good and represented that Bridges was especially knowledgeable in the area of shallow wells. After making those inquiries Nortman and Berrettini travelled to Corsicana and met with Bridges. Bridges showed them the lease sites that would be available and some wells in the immediate area that he claimed to have drilled himself and that he also claimed were producing oil. Bridges further represented that the Wolf City formation, on which the already drilled wells were located, very likely extended into the proposed new drilling area. Nortman and Berrettini later generally reviewed the activity of that trip with Cole, and Bridges came to Chicago and himself made a presentation to Cole. That was followed by another trip to Texas from February 25 to 28, 1983 — this time including both Etta and Stan Cole as well as Nortman and Berrettini. At the conclusion of that trip Cole reiterated his interest in the program and represented to Nortman and Berrettini that he was going to “check out” both Bridges and the proposed leases with his contacts in the oil industry. Thereafter Cole reported to Nortman and Berrettini that his inquiries had yielded positive responses — specifically he confirmed that there was production on the wells contiguous to the proposed site, that shallow wells were less risky although less productive, and that he was satisfied with what he had learned of Bridges. On the basis of that information Cole was excited about the project and began to discuss the possible structure of the deal in terms of return to investors, number of wells to be drilled and the preparation of a prospectus for a limited partnership. At that time (the very end of February or early March 1983) Nortman and Berrettini decided to move full steam ahead with the project. They took steps to implement the assignment of the lease to COPCO, had a series of meetings with Cole, who was now the head of Interbanc Equity Corporation (“Interbanc”), and retained Michael Firsel (“Firsel”) as an attorney for COPCO, the newly formed corporate general partner, to help structure the deal and prepare the Private Placement Memorandum (“PPM”) for the limited partnership offerings. Firsel, Cole and Bridges shared responsibility for drafting the PPM for COPCO-1. All of the geological data was prepared by Bridges and Matt Nelson (“Nelson”) of Nelson Geological Consultants. Financial projections were prepared by Berrettini with the aid of a computer program and numbers provided by Bridges, supposedly based on actual production from wells drilled by Bridges in the immediate area. In addition the PPM included brief biographies of Nortman and Bridges, based on information that they respectively provided. COPCO-1 was offered for sale on April 1,1983 with Interbanc as the sole broker of program units, taking 10% of the sale price of each unit as a commission. In addition to the already-described information, PPM-1 also explained that the lease was to be drilled on a “turnkey” basis by Ona. That arrangement involves the driller’s agreement to complete a well — including roads, electricity tanks, flow lines, pump jacks, geological services and everything else necessary to “turn the key” to allow oil, gas and/or water to flow from the wells — at a fixed price. PPM-1 explicitly says that Ona built a substantial profit into the turnkey price, with the shareholders of the general partner COPCO expecting to share in that profit. Indeed, the actual turnkey contract, with a price of $60,062.19 per well, was set out in its entirety in the PPM. Before the drilling in the COPCO-1 program had begun, COPCO drilled two wells (Baker 1 and 2) to comply with the lease requirement that drilling begin within a specified period of time after the acquisition of the lease. Bridges reported to both Nortman and Berrettini that drilling activity on those wells, which were in the COP-CO-1 vicinity, showed initial production of oil. By July 1, 1983 (the closing date for the offering of COPCO-1) 13.5 of the 30 available units of COPCO-1 had been subscribed. Early in August drilling on the COPCO-1 wells began. After completion of the first of several wells, Bridges told Nortman and Berrettini that things looked very positive and suggested they purchase the remaining units available in COPCO-1. Bridges offered to lend them the money to finance the purchase on the security of the Baker 1 and 2 wells, with the revenues from those wells to repay the loan. COP-CO then purchased the remaining units and, on the advice of Firsel and another attorney Mark Samotny (“Samotny”), offered the limited partners the opportunity to acquire those units from COPCO before purchasing them themselves. That offer resulted in the sale of several more units to limited partners, leaving ten units available for Nortman, Berrettini and Bridges. Each of them bought 3/3 units, with purchase money borrowed from Ona on the terms outlined above. As the drilling on COPCO-1 wells continued, each of Nortman, Berrettini, Cole and Firsel received positive reports from Bridges on the progress being made. In the beginning of October 1983 Nortman and Berrettini made a trip to Texas to observe the progress. Bridges took them on a tour of the property, showed them what he represented to be oil shows and reported on the favorable results of geological logs that had been conducted by him as well as by independent parties. On the basis of the information provided by Bridges on that trip, Nortman prepared an October 3, 1983 report to investors. On December 7, 1983 an additional 10% capital contribution call for COPCO-1 was made by a letter reporting that of the 10 wells drilled, five had been completed and three more were anticipated to be completed on or before December 15, 1983. Again the information in that letter had been provided to Nortman and Berrettini by Bridges. In early December Nortman and Berrettini travelled once again to the COPCO fields to gather information for another investors report. Based on limited personal observations and on reports and projections provided by Bridges and Nelson, Nortman and Berrettini sent a December 13, 1983 report to investors notifying them that seven wells had been completed (six of which had been equipped with pumping units). That report also said COPCO was hopeful that nine of the ten wells would be completed and pumping before the end of that week, while the tenth well would not be put on stream because it was a gas well that was showing “rather prolific tendencies.” That last bit of information as to the gas well had been independently confirmed in a test conducted by Well Test, Inc. and overseen by East Texas Consultants (“ETC”). While ETC cautioned that further testing was required, it did report that “the well does seem to be prolific” (D. Ex. 11). Meanwhile the COPCO-2 PPM had been issued on October 25, 1983. Central to the drafting of that PPM (as well as that for COPCO-3) was the determination as to whether to characterize the programs as “developmental” or “exploratory.” With the aid of Bridges-provided information, Cole, Firsel and Samotny determined that use of the term “developmental” as defined in the PPM was appropriate. That term was ultimately employed with Nortman’s and Berrettini’s approval. Nonetheless the PPM-2 contained much cautionary language warning investors that it was still possible that none of the wells would produce commercial quantities of oil.' - PPM-3, issued on November 17, 1983, contained the same representations and caveats as did PPM-2. Again Cole and Interbanc were given exclusive selling rights for both COPCO-2 and COPCO-3. In the beginning of 1984 Ona hired several new technical employees to work on the COPCO programs: Edgar D’Abre (“D’Abre”) joined Nelson as an additional geologist; Jeffrey Arnold (“Arnold”), who had an educational background in chemistry and accounting and had experience in drilling and engineering, joined Ona as a field operations manager; Ben Edwards (“Edwards”), who had degrees in chemistry and financial management as well as a background in drilling and petroleum engineering (including having completed approximately 100 wells in the Corsicana shallow fields), joined Ona as a petroleum engineer. Those new hires, as well as the information gathered from Nortman and Berrettini’s January trip to Texas, were reported to the investors in two letters dated February 1, 1984 — one addressed to COPCO-1 investors and the other to COP-CO-3 investors. Enclosed with the correspondence were the investors’ K-l income tax schedules for 1983. Also included in the COPCO-1 letter was a completion report, with a description of the status of each of the wells. Each of those letters also referred to a geological report that was being prepared by D'Abre and was ultimately included in the COPCO-4 PPM. When Arnold first began working on the COPCO programs, he went to the fields two to three times each week. That number gradually increased to the point where he virtually lived at the fields. Thus when in February 1984 COPCO requested periodic reports from the fields on the status of the three ongoing programs, it was Arnold who took the responsibility of preparing handwritten summaries based on his personal observations and reports from D’Abre and Bridges. Reports were also received by Nortman and other COPCO personnel in Chicago via telephone from Bridges or Arnold, and whenever possible back-up reports would be attached to the typed memorials of telephonic reports from the field. COPCO received such reports on a weekly or bi-weekly basis from late February or early March through May 1984. All those reports were forwarded to Cole at Interbanc. According to those reports, wells in all three programs showed signs of oil during drilling, although further work was required to determine if commercially producible quantities were available. On April 30, 1984 Arnold advised COPCO that an oil pick up of 39 barrels from COPCO-1 was made on April 23 — advice matched by a crude oil manifest from Scurlock Oil Company reflecting 38 barrels on that date. COPCO now acknowledges the Scurlock pick-up was of frac oil (oil injected into and then pumped back out of a well to attempt to stimulate production) rather than regular oil, but at the time both the reports from the field and the face of the Scurlock manifest clearly indicated that regular oil had been picked up. In spring 1984 the COPCO-1 wells became trouble-ridden. Some began producing excessive amounts of water, so that injection wells had to be drilled to get rid of the water. Some began to develop gas lock and to produce a mixture of oil, gas and water. As a result the wells were shut in until tests could be made to determine their gas potential. Although negotiations were commenced with Cherokee Gathering Company to conduct gas tests on those wells, no such tests were in fact done. COPCO-4 PPM was issued on March 15, 1984. Bridges individually was a general partner in the COPCO-4 program. Like COPCO-2 and COPCO-3, the COPCO-4 program was labelled “developmental”— but the PPM set out the various stages of completion of the 28 wells that had been drilled in connection with the other three programs and warned that although oil appeared to be present, no assurances could be given that the wells would produce in commercial quantities or that any well would produce on a consistent ongoing basis. PPM-4 also said that to the extent wells were drilled in areas where no logs were available from past drilling by the partner, the current proposed drilling should be deemed exploratory. Not until December 31, 1984 were the minimum number of units in COPCO-4 sold, and of the ten plaintiff investors in COPCO-4 only two had not invested in any of the earlier COPCO programs. In the summer of 1984 independent petroleum engineer Joseph Galoostian (“Galoostian”) was hired to perform an evaluation of the COPCO fields. Galoostian’s July 9, 1984 report provided a positive analysis of the COPCO fields and confirmed much of the data previously received from Ona. Galoostian then attended a July 17, 1984 investors’ meeting and presented his report to the investors present. At that meeting D’Abre represented that only five more working days were needed to complete COPCO-2 and COPCO-3, although actual completion was not ultimately achieved until the end of January 1985. It was also in the summer of 1984 that relations between Bridges-Arnold and Nortman-Berrettini became strained. That problem first manifested itself in June, when Bridges and Arnold travelled to Chicago to meet with Firsel about their complaint that Ona was having difficulty getting funds from COPCO. After that meeting Bridges attempted to withdraw the entire amount in an Ona Chicago account (approximately $230,000). However, at the request of the bank he withdrew only $30,-000, the amount he needed at that time. Later that same week Bridges, Nortman and Berrettini met to discuss the financial situation. Bridges took the position that the money in the account was profit under the drilling contract, so that the three of them should therefore divide it among themselves as spelled out in the PPMs. Nortman and Berrettini refused to follow that path and instead obtained Bridges’ agreement to transfer it to their control for future use in the fields as needed. It was their position that all sums owing to Ona pursuant to the turnkey contracts for COP-CO-1, -2 and -3 had been disbursed, so that they should maintain control of the excess funds. At that stage Arnold’s understanding of the financial situation proves important, because Bridges began using Arnold as his collection arm in his disagreements with Nortman and Berrettini. Despite the purported understanding reached in June as to the funds in the Chicago Ona account, Bridges told Arnold that COPCO owed Ona money and that he should try to retrieve it. Arnold was aware that Ona was bouncing cheeks and did not have enough money, and he followed Bridges’ orders to try to get the money. To that end Arnold travelled to Chicago in October to meet with Cole, who had agreed to act as intermediary at Bridges’ request. At that meeting Arnold presented Cole with an invoice of charges owing from COPCO to Ona that Arnold had prepared. Cole was shocked at the size of the invoice presented by Arnold and agreed to talk to Nortman and Berrettini. Meanwhile Firsel and Berrettini made a trip to Corsicana during which they visited the fields. In the course of that visit they observed, and D’Abre represented, that COPCO-1 was drilled and completed and that COPCO-2 and -3 were drilled and in the final stages of completion. Firsel saw oil in collection tanks and several wells that were pumping a mixture of oil and water. Firsel also visited the Ona offices, where Bridges and Arnold reviewed all of the COPCO and COPCO-1, -2 and -3 records in Firsel’s presence. Despite repeated requests, Bridges refused to make Ona’s books available at that time. In the second week of September 1984 Cole, Bridges, Nortman and Berrettini met and established a schedule for the completion of the wells. Bridges agreed to be prepared to follow the schedule within a week or so, and Berrettini was to travel to Texas to oversee payment of the work being done. Pursuant to that agreement Berrettini travelled to Texas in the last week of September, only to find that the work scheduled to be completed had not been set up. With D’Abre’s help Berrettini paid what outstanding bills he could and deposited additional funds in COPCO’s Texas bank account. Those additional funds originated from a segregated account in Chicago, which had been established when Bridges transferred $102,000 to COPCO at the end of December 1983. Bridges represented those funds to be an advance on profits. Berrettini reported his field observations to Interbanc employee Curtis Bergquist (“Bergquist”), who then prepared a status report to COPCO-2 and -3 investors. Berrettini returned to Texas in the second week of October to discover that rain had delayed the scheduled completion and that the money previously deposited into the Texas account was depleted and had not been used as intended. After further meetings with Arnold a revised estimate of costs for completing COPCO-2 and -3 was prepared and, at Interbanc’s insistence, an escrow agreement for further payment of funds on those programs was entered into on November 15, 1984. Under the agreement Ona executed releases and waivers of liens to COPCO and COPCO-1, -2 and -3, and Nortman and Berrettini deposited $115,000 into the escrow. In addition, the agreement required Ona, in order to have funds released, to present sworn statements as to the work to be done and its cost, after which Ona was to obtain a paid receipt and a lien waiver from the party doing the work. During late October and early November 1984 Arnold reported to Nortman and Berrettini (1) that he believed Ona had located a suitable buyer for the gas found in the COPCO-1 program to provide for a capital return to the investors and (2) that Ona was in the final stages of completing COP-CO-2 and -3, although bad weather was hampering progress. On December 17, 1984 Bridges, Berrettini, Nortman and Cole met to discuss the future of the COPCO programs and agreed that all funds for COPCO-4 would be put into escrow in Texas and that the program would not move forward until D’Abre and Interbanc verified that COPCO-2 and -3 had been completed. They also discussed the continuation of Bridges’ efforts to obtain a gas contract for COPCO-1. January 1985 finally witnessed the completion of the COPCO-1, -2 and -3 programs. On January 19 Bridges and Arnold informed Nortman and Berrettini that all ten wells in both the COPCO-2 and -3 programs were complete and pumping fluid into the tank batteries. On January 29 D’Abre reported that COPCO-1, -2 and -3 were all completed to tanks, with all systems including electric and water disposal having been completed, thus completing Ona’s obligations under the turnkey contract. Cole and Bergquist personally reported to Firsel that they had inspected the fields and that the programs were complete in total accordance with the requirements of the respective PPMs. Nortman and Berrettini also went to Texas and inspected the fields and concluded that the terms of the turnkey contract had been met. Based on his personal observations and experience, Arnold believed that COPCO-1, -2 and -3 were pumping fluid formation water, and he observed that wells in all three programs had oil shows in the form of rainbows indicating the presence of oil. Because of the oil shows and the initial production of oil and water, the wells had been completed as oil wells. In early February COPCO informed the investors in COPCO-2 and -3 that the programs were complete and, in the case of COPCO-3, made a 10% capital contribution call as provided for in PPM-3. With the initial three programs nearing completion, D’Abre, Arnold, Berrettini, Nortman, Bridges and Cole had met on January 17, 1985 to discuss plans for COP-CO-4. D’Abre presented a geology report on COPCO-4 — basically an overview of geological data from the field producing next to the COPCO-4 lease and from the 31 wells in the other three COPCO programs. Bridges, Berrettini and Cole reached an agreement to proceed with COPCO-4 by establishing another escrow account, the details to be worked out by Firsel and Texas attorney John Theis (“Theis”), and by agreeing that Nortman, Berrettini and Bridges would share equally in the anticipated profits from the program. Final agreement as to those terms was memorialized in a March 4, 1985 letter agreement, the escrow agreement was entered into the following day and COPCO forwarded the required funds to Theis. Another $20,000 was also provided to Theis as escrowee, to be disbursed for the cost of operating COPCO-2 and -3 through March 31, 1985. Bridges used Ona personnel, equipment and resources to operate the COPCO leases as a subcontractor for COPCO, the named operator. On March 5 D’Abre prepared a status report for Nortman and Berrettini on COPCO-1, -2 and -3 in which he verified that all three programs were running on operating capital forwarded by COPCO. D’Abre also reported substantial gassing up in all three programs. All of COPCO-1 had been capped and shut in, and several wells in COPCO-2 and -3 had also gassed up and been shut in. Ten other wells had shown initial gas production before seizing up due to technical problems. D’Abre explained that those wells would be reworked by the operating personnel and pumped until they established a production pattern, with the established gas wells remaining shut in until a gathering system could be constructed. D’Abre concluded that report by stating, “Congratulations gentlemen! It appears you have a commercial gas field.” On March 6 COPCO sent a letter to the limited partners in the first three programs, advising them of the status of the programs at that date to the extent known by COPCO. Its letter was based on representations from Bridges, D’Abre, Arnold and Cole. That did not of course include all the information transmitted by D’Abre in his March 5 letter to COPCO, which on the face of it would not have been received by COPCO until after the March 6 letter was mailed. That letter did inform the investors that the nine months of gas contract negotiations were showing signs of paying off and that COPCO in fact had a contract proposal in hand. By late March a gas contract was finally executed between COPCO and Tangram Transmission Corporation (“Tangram”). As a condition precedent to Tangram’s incurring any expense for setting up a delivery system, COPCO obliged itself to perform and report the results of a deliverability gas test on the fields. To that end COPCO engaged Milton M. Cook Company to perform the testing. Later in 1985 Tan-gram merged with Techline Industries, Inc. (“Techline”) and the COPCO contract was assigned to Techline. On June 4, 1985 COPCO and Techline executed a contract. By letter dated June 21, 1985 COPCO informed the COPCO-1, -2 and -3 investors of the gas contract and the need for testing. At that time it also reminded the investors that COPCO was under no obligation to advance funds for the testing and said that because COPCO had already expended substantial amounts above the price of the turnkey contract it was not in a position to pay for the testing. Accordingly the letter requested pro rata contributions from the investors to fund the tests. Approximately two weeks after the call was made to the investors, Cole informed Nortman that the call had been unnecessary because Bridges had informed Cole that Bridges would pay for the test personally. Bridges later denied that statement to Nortman, saying instead that he had merely obtained credit from the company performing the test. In the meantime Nortman and Berrettini determined that based on Cole’s report the investors’ funds that had been forwarded for the test should be returned. At an August 28 limited partnership meeting in Northbrook (with Bridges, Berrettini, Nortman, Arnold, Bergquist and a number of investors present), Bridges and Arnold reported that Don Owens of Techlines was to supervise the testing, which would be completed within the succeeding two or three weeks. Drilling on COPCO-4 began in the spring of 1985 and proceeded quite smoothly. COPCO-4 operated on budget, and funds were made available through Theis as needed. By June 1 D’Abre reported that the majority of the COPCO-4 wells were drilled and pumping although no tank battery had been built, no flow lines had been installed and no electrical systems- had been installed. At the end of that month Berrettini and Nortman made an inspection trip to the COPCO-4 field. On that occasion Bridges and D’Abre represented that five wells had been completed and two had been cased and cemented and that there was initial oil production from the five completed wells, verified by the logs. Nortman, Berrettini and Bergquist all confirmed by physical inspection the presence of oil in the temporary tank batteries of COPCO-4. D’Abre and Bridges both recommended completion of the remaining two wells, said that there was an excellent probability that COPCO-4 would be a good oil program and added that there was no evidence of gas production at that time. COPCO then sent a letter summarizing that information to the COPCO-4 investors and made the call for the 15% capital contribution provided for in PPM-4. In mid-August 1985 Nortman and Berrettini were advised that the COPCO-4 15% call had, with the acquiescence of Cole and Bergquist, been redirected to Bridges. In fact Bridges had sent letters to the COP-CO-4 investors directing them to mail their contributions directly to Texas in self-addressed envelopes he had enclosed. Without the knowledge of Nortman and Berrettini, Bridges began taking a lot of unilateral actions at that time. First of all he was communicating directly with Bergquist, who in turn dealt with investors about the 15% capital call without any notification to Nortman and Berrettini. Bergquist was also conducting negotiations with Techlines for gas testing, informing only Bridges of the substance of those negotiations. Furthermore, in September 1985 Nortman and Berrettini learned that Bridges had granted BGB Investments a 1% overriding interest in the acreage where COPCO-4 had been drilled. Bridges also gave Arnold a .5% overriding interest in COPCO-4 and also explained to Arnold that he had renegotiated the Bartlett lease and in so doing had granted overrides to various people. Beginning in April 1985 and continuing through mid-1986, Nortman, Berrettini, Firsel and even Bridges’ Texas attorney Gregory Sweeney (“Sweeney”) made repeated unsuccessful requests to Bridges and Arnold to provide COPCO with an allocation of equipment between the programs, an inventory of equipment and copies of all logs for the programs. On October 18, 1985 Bridges resigned as chief executive of COPCO and advised Nortman and Berrettini that his stock should be put in the name of the limited partners’ investment group and sent to Donohoe. On November 4, 1985 Bridges resigned from the Board of Directors of COPCO, stating he would no longer act as a representative of COPCO except to execute his responsibilities as individual general partner of COPCO-4. Throughout the remainder of 1985 and into 1986, Nortman and Berrettini attempted to find an operator for the COPCO fields to replace Bridges. To that end they communicated with Bob Stovall (“Stovall”) of Southern Petroleum Company, Everett Sharp and Galoostian, ultimately hiring Stovall for the job. Throughout the same period Nortman and Berrettini continued to try to obtain from Bridges and Arnold the allocations and inventories of equipment and logs and other geological data to provide to potential new operators. Again their efforts were rebuffed. In November and December 1985 COP-CO again issued a call for voluntary contributions from the limited investors in all four programs. For the first three programs the funds were to conduct further gas tests to permit execution of the pending gas contracts (as already stated, all funds collected earlier for that purpose had been returned to investors). As for COP-CO-4, the sought-after contributions were to provide funds for an operator for that field — only a limited number of investors contributed, because many took the position that COPCO had the responsibility for advancing funds for such work. On that score, despite repeated requests from COP-CO Bridges did not release the approximately $42,000 he had received in connection with the 15% capital contribution call in COPCO-4. On March 11, 1986 a meeting was held in Chicago with Stovall and Owen of Tech-lines, to discuss once again the gas contract for COPCO-1, -2 and -3. Present at that meeting were Nortman, Berrettini, Bergquist and investors Clarence Sopko and Arnie Jensen. This time it was agreed that Stovall would perform the deliverability tests, which had still not been completed, and that he would complete an inventory of all equipment of the four COPCO programs (never prepared by Bridges and Arnold). Stovall agreed to do that work at a reduced price, which was to be paid out of funds advanced by the contributing limited partners and COPCO. Following that meeting a number of documents were provided to Stovall to assist him with his work. Among those were checks for services to be performed, all well tests in COPCO files, copies of logs and other items related to the fields. On April 22, 1986 Bridges wrote to Nortman and told him that Bridges had acquired the lease to COPCO-4 and was resigning as the individual general partner of COPCO-4. Bridges added that he was going to give the wells back to the investors and have Stovall operate the field. Stovall’s April 24, 1986 letter confirmed that Bridges had in fact obtained the leases but stated that Bridges had instructed Stovall not to perform any work on COPCO-4. Unable to do anything else as to COPCO-4 under those circumstances, COPCO (on behalf of itself and the limited partnerships) took legal action against Bridges, Ona and Theis. On April 29, 1986 Stovall informed Nortman that COPCO-1, -2 and -3 could be made into a paying endeavor, although he could not then state how much it would cost to make them operational. By July 1986 COPCO had learned that it would take approximately $80,000 to transform the programs into productive gas fields. Because insufficient funds were available to COPCO to make that transformation COP-CO ceased operating the wells in COPCO1, -2 and -3. At that point all operations in all the COPCO programs ceased, and soon thereafter this action was filed. Alleged Fraudulent Scheme Complaint AH 12-17 set out the alleged fraudulent scheme that underlies all the charged violations except for the securities registrations and breach of fiduciary duty claims, which will be dealt with separately. Direct quotation from the Complaint proves simplest in conveying the essence of plaintiffs’ gripes: 12. Although the formal structure of the Limited Partnerships was modified from time to time, the fraudulent scheme applied to all of the Limited Partnerships as a whole and involved in a common purpose, as well as common misrepresentations and omissions concealed from Plaintiffs. The basic elements of this fraudulent scheme were as follows: (a) there was no reasonable possibility of economic gain; (b) the stated likelihood that drilling efforts would be successful in Copco 1 was represented solely to entice investors into that program, following which Copco 2, 3, and 4 could then be organized as purported more conservative “developmental” programs; and (c) bogus completion reports and successful results would be reported for Copco 1 to induce investors to purchase units in Copco 2, 3 and 4. ****** 14. In order to induce Plaintiffs to invest in the Limited Partnerships, Defendants in the Memoranda falsely represented that: (a)As to Copco 1: (1)the turnkey drilling price was competitive; (2) a likelihood of successful drilling existed; (3) the funds raised were sufficient to drill and complete the proposed wells to the level of commercial production; and (4) a fair consideration would be made by Defendants of whether or not the wells should be completed. (b) As to Copco 2, 3 and 4 (in addition to subparagraph (a) above): (1) the wells would be drilled on “developmental” acreage; (2) previous wells drilled on the same acreage were completed and producing; (3) there had been successful prior drilling activities of Copco, the General Partner; and (4) there were favorable reports of past drilling activities in the general area, although such was not relevant to the possible success of the Limited Partnerships. (c) As to Copco 4 (in addition to sub-paragraphs (a) and (b) above): (1) several wells were pumping oil into tanks; (2) previous wells were in various stages of completion, all of which was also set forth in various reports to Plaintiffs, as described in 1116. 15. The representations in 1114 were false and misleading in that the Memoranda failed to disclose that: (a) The turnkey contract for drilling costs, from a conceptual standpoint, was attractive, but the turnkey price set was grossly in excess of the actual drilling costs for work performed; (b) the Defendants knew or had reason to believe that the likelihood of successful drilling was extremely remote; (c) the Defendants knew or had reason to believe that all the wells would be drilled, as if completed, to ensure that Defendants’ profits would be enhanced; (d) the term “developmental” could not be fairly or accurately used in connection with the program, as that term is commonly used in the oil industry to indicate a relatively low risk prospect closely adjacent to commercially producing wells; (e) Copco 1 was a failure at the time of offerings for Copco 2, 3 and 4; (f) the geological reports and evaluations contained in the Memoranda were of no use whatsoever in supporting the purported economic viability of the programs; and (g) the turnkey price, although grossly excessive in light of the actual work performed, would, in all likelihood, not be sufficient for the purpose of making the wells commercially productive. 16. During the period of time in which units in the Limited Partnerships were being sold, Defendants compounded the above misrepresentations and furthered their fraudulent scheme by: (a) issuing favorable reports — which were not based on the true facts — dated October 3, 1983; December 7, 1983; December 13, 1983; and February 1, 1984. Such reports were false and misleading in that it was represented that: (1) production was in excess of projections (October 3, 1983; February 1, 1984); (2) revenue would be generated in the near future (October 3, 1983); (3) oil production would commence on December 15, 1983 (December 7, 1983; December 13, 1983); and (4) additional favorable geological data had been obtained (February 1, 1984); (b) making bogus cash distributions (in or about April 1984) to investors to entice them to believe in the probable success of the investment and the programs; (c) preparing geological reports which were without merit insofar as the economic potential of the proposed wells; and (d)not disclosing that the field on which the wells were drilled was substantially depleted. Despite what would appear — at least in surface terms — to be the overwhelmingly factual nature of this dispute, defendants have moved for summary judgment on all of the fraud-based claims. They assert that (1) there is no expert testimony or evidence to support the alleged technical deficiencies in the programs, (2) based on the totality of the facts it is wholly implausible that COPCO, Nortman and Berrettini engaged in the charged scheme to defraud, (3) every specific allegation of a knowing misrepresentation or omission on the part of COPCO, Nortman and Berrettini has no basis in fact and (4) each of the counts must fail due to insufficient basis in law or due to the lack of any genuine issue of material fact going to an essential element of the cause of action claimed. Alleged Breach of Fiduciary Duty Complaint Count Six alleges that defendants owed plaintiffs fiduciary obligations by virtue of the facts that defendants were sponsors and general partners in the venture, had control over disposition of partnership funds and were relied upon and trusted by plaintiffs. Plaintiffs assert those fiduciary obligations included duties to act in good faith, to exercise a high degree of trust and to act with a high degree of care as to plaintiffs’ funds in their control. In addition to the assertedly fraudulent promotion of the investment (already detailed), plaintiffs contend that defendants intentionally breached their fiduciary obligations by (this time quoting directly from Complaint H 37): (a) failing to transmit to Plaintiffs timely or accurate form K-l’s; (b) failing to provide to Plaintiffs audited financial statements; (c) commingling Plaintiffs’ funds with other funds in an improper manner; (d) misappropriating Plaintiffs’ funds and using them for personal, rather than partnership, purposes; (e) using equipment purchased with the funds received from Plaintiffs in one partnership for the operation of other partnerships; (f) making bogus cash distributions to the investors in order to deceive them into believing that the investments were in the process of becoming commercially viable; (g) making a call for supplemental funds upon completion of wells when in fact those wells had not been completed; (h) mismanaging and wasting of partnership assets by purchasing equipment not suited for the purposes of the Limited Partnerships; (i) defaulting on subcontracts and suppliers’ contracts, thereby incurring unnecessary lawsuits and delays in work; (j) using partnership property for personal purposes, all in derogation of the operating agreements between Plaintiffs and Defendants; and (k) abandoning or diverting to other uses equipment belonging to the partnership. In moving for summary judgment on that count, defendants argue that (1) plaintiffs lack standing to pursue that claim individually; (2) only COPCO as general partner owed a fiduciary duty to the limited partners, and the limited partners cannot pierce the corporate veil to place liability on Nortman and Berrettini individually; (3) each specific allegation of breach has no basis in fact; and (4) no alleged breach, even assuming one occurred, was the proximate cause of any loss to plaintiffs. Registration Complaint Count Three alleges that defendants sold unregistered securities to plaintiffs in violation of Securities Act of 1933 (“1933 Act”) § 5 (15 U.S.C. § 77e) and Illinois securities laws. Defendants admit they sold unregistered securities, but they move for summary judgment on the ground that no registration was required because the offering fell into the specific exemptions of the 1933 Act and the Illinois securities laws. Preliminary Evidentiary Matters Before this Court addresses the substantive legal and factual arguments put forth by the parties, this opinion must first touch on several preliminary evidentiary issues. In fact those issues have already been subsumed in the just-completed statements of facts, but it is useful to make explicit the reasoning underlying the determinations made there. 1. Hearsay Plaintiffs’ GR 12(m) response repeatedly lodges hearsay objections to defendants’ GR 12(1) statements that refer to information communicated to defendants by third parties. Wherever defendants state that at a certain meeting or in a certain conversation Bridges (or D’Abre or Arnold or anyone else) told them something, plaintiffs consistently ask that those statements be barred as inadmissible hearsay. As implied by this opinion’s inclusion of several of those statements in the preceding factual summary, such objections are without merit. Fed.R.Evid. 801(c) provides the relevant definition: “Hearsay” is a statement, other than one made by the declarant while testifying at the trial or hearing, offered in evidence to prove the truth of the matter asserted. That of course does not call for excluding all non-testimonial statements from evidence—only such statements as are “offered ... to prove the truth of the matter asserted.” Where as here out-of-court statements are offered only as they bear upon the state of mind of the listener, the declarant’s veracity is irrelevant, the rationale for excluding hearsay in the first place becomes inapposite and the evidence is admissible (United States v. Norwood, 798 F.2d 1094, 1097 & n. 4 (7th Cir.1986)). It follows then that the non-testimonial statements included in the factual summary can and will be used only to show what impact if any they could reasonably have had on the listener, and not for the truth of the statements themselves. 2. Illinois Dead-Man’s Act Plaintiffs’ second major evidentiary objection presents a slightly more complicated issue. Plaintiffs contend that the Illinois Dead-Man’s Act, read in conjunction with Fed.R.Evid. 601, should bar this Court from considering any testimony as to the statements or actions of Cole (who is now deceased). But this Court has determined that application of that statute would be inappropriate in light of the predominance of federal questions in this litigation. Illinois’ Dead-Man’s Act blocks the admission into evidence of alleged statements and actions of since-deceased individuals. Fed.R.Evid. 601 contains this mandate: [I]n civil actions ... with respect to an element of a claim or defense as to which State law provides the rule of decision, the competency of a witness shall be determined in accordance with State law. Both the literal terms of that directive and cases such as Sundstrand Corp. v. Sun Chemical Corp., 553 F.2d 1033, 1051 (7th Cir.1977) make it clear that where a federal claim is at issue the Dead-Man’s Act is inapplicable. This case poses a different question: whether and to what extent that Act should apply where a mixture of state and federal claims is presented in a federal forum. Plaintiffs argue that failure to apply the Dead-Man’s Act here would result in unfair prejudice to them — they say the overlapping elements of the state and federal claims would make it impossible for a limiting instruction to provide them with adequate assurance that the jury would not improperly consider Cole’s actions and statements in evaluating their state law claims. It may well be true that a limiting instruction in this setting would pose the potential for jury confusion — there may be some element of fiction in the notion that the jury, in the privacy of the jury room, can or will be meticulous in ignoring such evidence of which the jurors are aware. But to the extent that plaintiffs’ contention has any force, the potential for prejudice really cuts in the other direction. Of plaintiffs’ nine claims, six present federal questions and only three raise pendent state claims (common law fraud, breach of fiduciary duties and violation of the state blue-sky laws by issuance of unregistered securities). And among those three claims, the testimony about Cole relates only to the repetitive common law fraud claim (for it bears on the presence or absence of fraudulent intent). But on the federal claims the same issue of fraudulent intent, to which the Cole-related testimony relates, proves central to both the SEC Rule 10b-5 claim and the RICO counts. That being the case, defendants would suffer far more prejudice from the total exclusion of evidence that goes directly to the heart of several of the federal claims brought against them. Moreover, admissibility of the challenged testimony appears to further the policies of the Federal Rules of Evidence. Fed.R.Evid. 601, calling for application of state law as to competency of a witness where state law provides the rule of decision, parallels almost exactly the language of Fed.R.Evid. 501 as to privileges of witnesses. Both Rules defer to state evidentiary standards when state law supplies the rule of decision, but neither deals specifically with what evidentiary rule prevails when a case involves both federal and state claims. However, the Judiciary Committee Notes to Fed.R.Evid. 501 discuss that issue directly: If the rule proposed here results in two conflicting bodies of privilege law applying to the same piece of evidence in the same case, it is contemplated that the rule favoring reception of the evidence should be applied. This policy is based on the present rule 43(a) of the Federal Rules of Civil Procedure which provides: In any case, the statute or rule which favors the reception of the evidence governs and the evidence shall be presented according to the most convenient method prescribed in any of the statutes or rules to which reference is herein made. In the face of the silence of both the courts and Rule 601’s drafters on what to do in a case that embraces both federal and state claims, this Court finds the reasoning of the Judiciary Committee to be equally persuasive as to the issue of witness competency as it is to privilege. Therefore the testimony as to Cole’s statements and activities is admissible. 3. Admissibility of Affidavits of Etta Cole and Curt Bergquist Defendants have moved to strike affidavits of two plaintiffs — Etta Cole, Cole’s widow and executrix of his estate, and Bergquist. Defendants’ asserted ground is that the witness’ affidavits (respectively “E. Cole Aff." and “Bergquist Aff.’’) contradict their previously sworn answers to supplemental interrogatories (“Ints.”). ' It is well settled that in determining whether a material issue of fact exists a court may not exclude consideration of an affidavit simply because of some conflict with the affiant’s prior sworn testimony (see 6 (Part 2) Moore’s Federal Practice 1156.22[1], at 56-756 to 56-757 (1988 ed.)). But that proposition cannot be invoked to defeat the purpose of summary judgment by allowing parties to create genuine issues of fact simply by contradicting their own prior sworn statements on a central issue (see such cases as Richardson v. Bonds, 860 F.2d 1427, 1433 (7th Cir.1988) and cases cited there; Franks v. Nimmo, 796 F.2d 1230, 1237 (10th Cir.1986)). While all the cases that have come to this Court’s attention deal with affidavits in conflict with prior deposition testimony, there is surely no reason to treat answers to special interrogatories as less deserving of credence than depositions. Those two principles identified in the preceding paragraph look in opposite directions. To reconcile them in any case, a court must take a close look at the earlier testimony (or here the supplemental interrogatories) in juxtaposition to the objected-to affidavits, to determine both the existence or nonexistence, and the extent, of any conflict between the two. As for Etta Cole, defendants clearly over-read her affidavit in an effort to posit extensive contradictions of her supplemental interrogatory answers, rather than the limited conflict that really exists. Defendants maintain that E. Cole Aff. ¶¶ 7-10 and 18-19 attempt to establish Nortman’s and Berrettini’s expertise in oil and gas matters via factual information that should have been disclosed in answers to numerous supplemental interrogatories (those interrogatories had requested the factual basis for the Complaint’s allegations that defendants knowingly misrepresented technical aspects of the program). E. Cole Aff. ¶117-10 and 18-19 certainly convey information suggesting that Nortman and Berrettini had a degree of knowledge of geological and technical aspects of oil and gas drilling. But the affidavit nowhere states that Etta Cole had personal knowledge that either Nortman or Berrettini knew any of the technical misrepresentations to be true at the time they were made — and that was the information specifically requested by the supplemental interrogatories. Cole’s affidavit suggests that Nortman or Berrettini or both could have known that the technical information was false. However, the question as to their possible (rather than actual) knowledge was not posed to her by the supplemental interrogatories. Thus her affidavit is totally consistent with her interrogatory responses on the point of knowing technical misrepresentations. Similarly E. Cole Aff. 1130 in no way contradicts her interrogatory responses. E. Cole Aff. 1130 states that through her legal practice she was aware of an old scam in the oil and gas industry of dry well drilling, where sponsors would intentionally drill dry wells and make money off of the drilling process. That paragraph goes on to state that in 1984 she did not think that COPCO was that kind of scam. While that carries the negative implication that she now thinks COPCO was that kind of scam, what she may now suspect is no credible evidence of anything — and in any event it does not contradict her interrogatory reponses, which state that she had no personal knowledge of wrongdoing. Finally defendants maintain that E. Cole Aff. 111125-29 contradicted her sworn negative answers to Ints. 27(a) and 28(a), which asked for personal knowledge of misappropriation and commingling of partnership funds by defendants, and to Int. 42, which requested personal knowledge of any other wrongful acts. But E. Cole Aff. ¶¶ 25-26 and 28 merely report what Arnold had said to Etta Cole about the alleged financial quarrels between COPCO and Ona, her suprised reaction to that information and her later insistence that an escrow be opened for COPCO-1, -2 and -3 as a condition to the continued offering of COPCO-4 — none of which items goes to her personal knowledge of misappropriation or commingling of partnership funds. However E. Cole Aff. 1127 says that Nortman told her directly that he did not want to send back to Texas some money that he considered to be his advance on profits. There can be no doubt that at the time she considered that to be an admission of wrongdoing on Nortman’s part — E. Cole Aff. 1128 states expressly that she told Nortman that in her opinion such activity was “completely improper.” Furthermore, E. Cole Aff. 1129 states that Bridges told her he had sent the money in question back to Chicago at the insistence of Nortman and Berrettini, a fact that at the very least must be considered to have raised serious doubts in her mind as to the possibility that Nortman and Berrettini were innocent recipients of ill-gotten rewards. In that light, no justification appears for the total silence, in Etta Cole’s answers to the supplemental interrogatories, on this subject. Ints. 27(a) and 28(a) asked: 27. a. Do you have any personal knowledge that defendants intentionally misappropriated plaintiffs’ funds and used them for personal, rather than partnership, purposes in breach of their fiduciary duties. 28. a. Do you have any personal knowledge that defendants intentionally commingled plaintiffs’ funds with other funds in breach of their fiduciary duties. Etta Cole objected to both those interrogatories as calling for legal conclusions, but she then proceeded to answer “No” to both questions. She now maintains the interrogatories were poorly drafted to the extent that they called for knowledge of defendants’ state of mind as such, as well as knowledge of defendants’ state of mind as to the legal conclusion (that they were intentionally breaching their fiduciary duties), and that under those circumstances the only possible answer was “No”. That contention is unpersuasive. Defendants’ use of the word “intentionally” in those questions plainly refers to the claimed misappropriation and commingling, and it requires considerable stretching of the language to extend the inquiry to knowledge whether the breach of fiduciary duties was also intentional. Moreover, it is of no moment that the questions contemplate a legal conclusion: Etta Cole is a lawyer to whom the concept of fiduciary duty must be familiar, rendering the objection of no merit in her situation. In substantive terms, her affidavit does not refer to any commingling of funds and thus does not conflict with Int. 28(a) — but there can be no question that information contained in E. Cole Aff. HI! 27-29 shows that she did have personal knowledge of the assertedly intentional misappropriation of funds at the time she answered the interrogatories but failed to say so. If in fact she didn’t think the information she now recites in her affidavit was responsive to Int. 27(a), she certainly should still have included it in her response to Int. 42 (which asked for information regarding any other wrongful acts were not the subject of previous interrogatories). In sum, E. Cole Aff. ¶¶ 27-29 clearly conflict with her answers to the supplemental interrogatories. As for Bergquist, he too contradicted his supplemental interrogatory responses with his later affidavit. Bergquist Aff. 118 states: Nortman admitted to me that he had taken as profits, large portions of investors funds prior to the completion of the program. Nortman insisted that these funds belonged to him and Berrettini, referring to them as “their profits” and admitted that they had gained control, in some complicated fashion, of $195,000 of investor funds that had been sent to Texas. He also admitted that the money had been used for non-partnership purposes such as the purchase of an expensive computer system for COPCO and car phones. It is hard to imagine information that would be more directly responsive to Ints. 27(a) and 28(a). Bergquist also objected that those questions called for legal conclusions but then answered “No” without waiving the objection. Even giving Bergquist the benefit of the doubt that he was not obligated to answer questions that called for legal conclusions, he still had an obligation to provide the defendants with his personal knowledge of the claimed wrongdoing in his answer to Int. 41. And to that extent Bergquist Aff. If 8 definitely conflicts with his previous sworn answers to interrogatories. Where as here a conflict exists between an affidavit and previous sworn testimony, Franks, 796 F.2d at 1287 (citations omitted) teaches that courts should “disregard a contrary affidavit when they conclude that it constitutes an attempt to create a sham fact issue.” Franks, id. enumerates the factors relevant to making that determination: whether the affiant was subject to cross-examination when making the earlier sworn statement, whether the affiant had access to the pertinent evidence at the time of his earlier testimony or whether the affidavit was based on newly discovered evidence, and whether the earlier testimony reflects confusion which the affidavit attempts to explain. Application of those factors to the present situation strongly counsels in favor of barring the conflicting portions of the affidavits. Because cross-examination is unavailable by definition in the case of written interrogatories, that factor does not literally apply — but as already explained, the opportunity for time and thought in preparing interrogatory responses makes the later change of position in an affidavit even more suspect. As for the second factor, it is abundantly clear that both Etta Cole and Bergquist had access to the information later included their affidavits at the earlier time that they answered the interrogatories — yet they both provided unequivocal statements that they had no such information. And as for the f