The opinion of the court was delivered by: Getzendanner, District Judge:
MEMORANDUM OPINION AND ORDER
This action is before the court on the motions to dismiss of defendants
Pope Ballard Shepard & Fowle, Ltd. ("Pope"), Lindgren, Callihan, Weaver,
Van Osdol, Ltd. ("Lindgren"), State Bank of Freeport, Northwest Bancorp,
Inc., and Dan Heine. Plaintiffs, members of the McKee family, have
brought this action under the Racketeer Influenced and Corrupt
Organizations Act, 18 U.S.C. § 1961-1968 ("RICO"), and the Securities
Exchange Act of 1934, 15 U.S.C. § 78j(b) ("Exchange Act"). Plaintiffs
also allege a pendent state claim of conversion. As the parties are
clearly not of diverse citizenship, the court's subject matter
jurisdiction rests on the allegations of fraud under RICO and the
In plaintiffs' amended complaint they seek damages in excess of five
million dollars arising from injuries brought about by defendants'
alleged fraudulent activity. All defendants were involved in a
transaction involving the sale of banks of which plaintiffs were the
controlling shareholders and of four parcels of land of which plaintiffs
were the owners. The defendants are identified as follows: Pope is a
professional corporation of attorneys at law; Northwest Bancorp, Inc. is a
corporation holding the capital stock of the Bank of Freeport; the Bank
of Freeport is a full service bank; Heine is a president and director of
Northwest and/or the Bank of Freeport; and Lindgren is a professional
corporation of certified accountants. (First Amended Complaint ¶¶
Plaintiffs list the property that is the subject of this action at
¶¶ 12-13. This property consists of shares of stock in five banks
valued at about four million dollars and four parcels of real estate
valued at about one and one-half million dollars. Plaintiffs complain
generally of having been fraudulently coerced to enter "agreements" that
conveyed all of this property to the Bank of Freeport in exchange for
release of "defaulted indebtedness" owed by plaintiffs to that bank and
others. (Id. at ¶ 18.)
All of the pertinent factual allegations concerning the fraudulent
activities of these five defendant persons and entities are found in
¶¶ 14-29. These allegations may be summed as follows: all defendants,
along with other persons, coerced plaintiffs into entering into the
above-described agreements. However, none of the plaintiffs' debts was in
default and the value of the conveyed property far exceeded plaintiffs'
total debt. The Bank of Freeport unlawfully used plaintiffs' bookkeeping
information in preparing these agreements. (Id. at ¶ 14.) Plaintiffs
were clients of Pope and Lindgren. Pope represented Northwest and the
Bank of Freeport in preparing the agreements. (Id. at ¶ 15.)
Moreover, Lindgren furnished accounting information to Northwest and the
Bank of Freeport in furtherance of the preparation of the agreements.
(Id. at ¶ 16.)
The Bank of Freeport has not released the debt. (Id. at ¶ 22.)
However, the Bank of Freeport has taken control of three banks, and
refuses either to return control or to make an accounting for the assets
and operations of these banks. It is further alleged that the Bank of
Freeport purchased plaintiffs' debts at a discount, for which it failed
to account to plaintiffs. The final allegations are that "defendants"
have refused to return the conveyance documents to plaintiffs and to
allow plaintiffs to examine the books and records of the conveyed banks.
While these factual allegations are quite broad, the allegations of
fraud are broader still. In ¶¶ 30-37, plaintiffs attempt to set forth
a claim under the Exchange Act. Each of defendants, alone or together,
allegedly contrived a scheme to defraud plaintiffs. (Id. at ¶ 31.)
Regarding the agreements, "each of the Defendants made one or more untrue
statements of material fact and/or omitted to state other material facts
necessary in order to make the statements . . . not misleading. . . ."
(Id.) The statements occurred in connection with the Bank of Freeport's
and Northwest's recommending the sale of securities. Each
misrepresentation was made "with knowledge, participation, cooperation,
aid, abetment and assistance of each of the Defendants." (Id. at ¶
34.) Heine was controlled by the Bank of Freeport and Northwest, which
are thus liable jointly and severally with him. (Id. at ¶ 36.)
The RICO allegations are found at ¶¶ 38-45. Plaintiffs allege that
the RICO enterprises are Northwest and the association in fact are
Northwest, Heine, and the Bank of Freeport. (Id. at ¶ 40.) The
predicate acts of mail and wire fraud, 18 U.S.C. § 1341, 1343, are
alleged broadly: "Defendants on two or more occasions used or caused to
be used the United States mails" and "communicated, or caused
communications to be made . . . by wire . . . two or more times" in
furtherance of the scheme.
(Id. at ¶ 41 (a-b).) Securities fraud is also alleged as underlying
the RICO violations.
Defendants move to dismiss this action under Rules 8, 9(b), and 12
(b)(6). The court will address only the arguments under Rule 9(b), as
they dispose of the motions to dismiss in full. The court finds that
plaintiffs have failed to plead fraud with particularity, as required
under Rule 9(b). The first amended complaint is therefore dismissed.
Plaintiffs shall file a second amended complaint, following the
guidelines set forth in this opinion, by March 15, 1985.
Federal Rule 9(b) requires that in allegations of fraud, "the
circumstances constituting fraud or mistake shall be stated with
particularity." The violations of the Exchange Act in question here, which
are predicated on fraud, Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96
S.Ct. 1375, 47 L.Ed.2d 668 (1976), must comply with this special pleading
requirement. Tomera v. Galt, 511 F.2d 504 (7th Cir. 1975); Zerman v.
Ball, 735 F.2d 15, 2 (2d Cir. 1984). Similarly, the allegations of fraud
underlying a RICO claim must be pled with particularity. Haroco, Inc. v.
American National Bank and Trust Company of Chicago, 747 F.2d 384, 405
(7th Cir. 1984), cert. granted, ___ U.S. ___, 105 S.Ct. 902, 83 L.Ed.2d
917 (1985). Here, the predicate acts are mail, wire, and securities fraud
and all must therefore be pled in compliance with Rule 9(b).
The Seventh Circuit has made clear that Rule 9(b) should be read
together with Rule 8. Tomera, 511 F.2d at 508. The Court described the
relationship between these two rules as follows:
Rule 8 requires that a plaintiff give through his
pleadings notice to defendant of the nature of his
claims. [Citations omitted.] It urges the plaintiff to
make known his claims simply and concisely in short,
plain statements. With these principles in mind, the
purpose of rule 9 becomes clear. Rule 9 lists the
actions in which slightly more is needed for notice.
In a fraud ...