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January 18, 1985


The opinion of the court was delivered by: Rovner, District Judge.


Eight individual investors*fn1 (collectively "plaintiffs") sued the State Exchange Bank ("Bank") and certain officers, directors and owners*fn2 of both the Bank and the now bankrupt State Exchange Finance Company ("SEFCO") (collectively "defendants") in a six-count Amended Complaint alleging the following violations by defendants: (1) the Racketeer Influenced and Corrupt Organization Act ("RICO"), 18 U.S.C. § 1961-68 (Count One); (2) Securities Exchange Act of 1934 ("1934 Act") § 10(b), 15 U.S.C. § 78j ("Section 10(b)") and related SEC Rule 10b-5 (Count Two); (3) Securities Act of 1933 ("1933 Act") § 17(a), 15 U.S.C. § 77q ("Section 17(a)") (Count Three); (4) the Indiana Securities Regulation Act ("Indiana Act") § 23-2-1-3, 23 Ind. Code § 23-2-1-3 ("Section 23-2-1-3") (Count Four); (5) common law fraud (Count Five); and (6) common law breach of fiduciary duty (Count Six). Defendants now move to dismiss the Amended Complaint under Fed.R.Civ.P. 12(b)(6). For the reasons stated in this Memorandum Opinion and Order, defendants' motion is denied.


On various dates beginning July 7, 1982 and continuing until December 18, 1982, officers and employees of the Bank sold to the individual plaintiffs investment notes issued by SEFCO, totalling $790,826. At the time of these sales, plaintiffs were told that SEFCO was a financially sound and profitable company and that SEFCO investment notes were safe, high quality investments. Beginning in approximately August, 1982, however, SEFCO became insolvent, and on December 30, 1982, SEFCO filed a petition under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 101, et seq., in the United States Bankruptcy Court for the Northern District of Indiana.

In order to understand the involvement of the various defendants, it is necessary to understand the relationship between SEFCO and the Bank. SEFCO is an Indiana corporation incorporated in 1923 by certain owners of the Bank. Prior to its bankruptcy, SEFCO was in the business of making commercial loans to persons and corporations in Northern Indiana. At all relevant times, the shareholders of the Bank were also shareholders of SEFCO, and SEFCO and the Bank shared common officers and directors. All of SEFCO's business was conducted by employees of the Bank, and SEFCO's principal place of business was located in the Bank's main office building in Culver, Indiana.

Beginning sometime in January 1979, the Bank, under the direction of defendants Adams and Deery, allegedly engaged in the following conduct: the Bank caused SEFCO to make numerous loans to various officers and directors and related persons or businesses, without adequate documentation or collateral and at lower than market interest rates; the Bank caused SEFCO to pay various personal expenses of defendants Adams, Deery, and other Bank/SEFCO officers and directors; the Bank authorized the transfer of unduly risky or defaulted loans from the Bank to SEFCO; and the Bank caused SEFCO to acquire for cash certain real estate owned or held for collateral by the Bank at greater than fair market value. The officer and director defendants either authorized, permitted, or recklessly disregarded the above actions.

By approximately January 1, 1982, the above conduct had caused a significant drain on SEFCO's cash and had left SEFCO with a large number of nonperforming loans with inadequate or non-existent collateral. The officer and director defendants became aware of SEFCO's condition, and various defendants, along with their relatives and business interests, began to further drain SEFCO of cash by secretly redeeming their investment notes, totalling approximately $6,200,000, during 1982. Also during 1982, defendants caused SEFCO to prepare and disseminate quarterly financial statements and one annual report which materially misrepresented SEFCO's financial condition. No defendant ever disclosed to plaintiffs any facts regarding the above-stated conduct or the fact that SEFCO was insolvent beginning in at least August, 1982 and thus would not be able to redeem its investment notes in the ordinary course of business. Indeed, all but one of the investment notes held by the various plaintiffs were issued between August and December of 1982, at which time the Bank and its employees misrepresented to plaintiffs the financial condition of SEFCO and the security of the notes. All of the director, officer, and shareholder defendants either engaged in, knew of, or recklessly

disregarded the above conduct. Because of these misrepresentations and omissions, plaintiffs purchased SEFCO investment notes which have not been redeemed since their dates of maturity, causing them to suffer $790,826.11 in damages.

Rule 9(b) Requirements

Defendants first argue that Counts One, Two, Three and Five of the Amended Complaint fail to plead fraud with the specificity required by Fed.R.Civ.P. 9(b) and thus should be dismissed. Rule 9(b) of the Federal Rules of Civil Procedure states:

  In all averments of fraud or mistake, the
  circumstances constituting fraud or mistake shall be
  stated with particularity. Malice, intent, knowledge,
  and other conditions of mind of a person may be
  averred generally.

The Seventh Circuit has interpreted Rule 9(b) liberally, stating that it must be read in conjunction with the notice pleading standard of Rule 8. Tomera v. Galt, 511 F.2d 504 (7th Cir. 1975). The Court in Tomera held that Rule 9(b) was satisfied by a "brief sketch of how the fraudulent scheme operated, when and where it occurred, and the participants." Id. at 509.

This Court finds that plaintiffs have satisfied the requirements of Rule 9(b): the Amended Complaint specifically describes the alleged misrepresentations and non-disclosures of material information as well as the alleged self-dealing of SEFCO insiders. Defendants have been given notice of the alleged fraud sufficient to allow adequate responsive pleading. See Adair v. Hunt International Resources Corp., 526 F. Supp. 736 (N.D.Ill. 1981). It is not necessary for plaintiffs to allege evidentiary details that will be used to support the claim of fraud at a later date. Caliber Partners, Ltd. v. Affeld, 583 F. Supp. 1308 (N.D.Ill. 1984). In a securities fraud case, plaintiffs are not required ". . . to set forth facts which, because no discovery has yet occurred, are in the exclusive possession of defendants." Merrit v. Libby, McNeill & Libby, 510 F. Supp. 366, 373 (S.D.N Y 1981). Plaintiffs here have alleged specific facts where available. For example, plaintiffs have set forth the specific list of notes redeemed by insiders, and they have specified the exact contents of the misstatements about the SEFCO notes made to them.

Defendants also contend, however, that even if the fraudulent conduct was alleged in sufficient detail, the Amended Complaint is still inadequate in one important respect. Defendants argue that where, as here, multiple defendants are involved, the complaint must provide reasonable notice of the part each defendant allegedly played in the scheme. Lincoln National Bank v. Lampe, 414 F. Supp. 1270, 1278 (N.D.Ill. 1976); Adair, 526 F. Supp. at 744. That rule is modified, however, where the multiple defendants are all corporate insiders. Numerous courts have held that the conduct of such individuals need not be specified and the fraudulent acts complained of need not be attributed to certain persons if the complaint sufficiently describes the fraudulent ...

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