Defendants' argument need not be addressed since they admit
that the complaint alleges scienter (memo in support MTD brief
In Count III, however, plaintiffs' § 17(a)(2) claim is not
required to allege scienter. Aaron v. Securities Exchange
Commission, 446 U.S. 680, 100 S.Ct. 1945, 64 L.Ed.2d 611
(1979). In Aaron, the Supreme Court distinguished between §
17(a)(1) and § 17(a)(2). The Court held that § 17(a)(2) does
not have a scienter requirement whereas § 17(a)(1) does. Id. at
697, 100 S.Ct. at 1956. In this Court, plaintiffs allege a §
17(a)(2) violation and therefore were not required to allege
In Count IV, plaintiffs' fraud claim is required to allege
that defendants knew or believed the representations to be
false. Soules v. General Motors Corporation, 79 Ill.2d 282,
284, 37 Ill.Dec. 597, 599, 402 N.E.2d 599, 601 (1980).
Plaintiffs' conclusory statement that "the aforesaid conduct of
each of the defendants constitutes common law fraud"
inadequately alleges defendants knew or believed the
representations to be false.
Accordingly, defendants' motion to dismiss Count II for
failure to allege scienter is granted. Defendants' motion to
dismiss Counts III and IV are denied.
d. Common Law Fraud
TMS and Harris argue that the fraud claims in Count V must
be dismissed since they are predicated on defendants' failure
to accurately predict future events. Defendants' argument
might have been persuasive if plaintiffs based their claims
merely on inaccurate predictions. Plaintiffs' complaint,
however, actually alleges defendants fraudulently represented
the liquidity of certain tax shelter investments and
recommended purchasing investments without investigating the
tax consequences of those purchases upon plaintiffs.
Plaintiffs' claim states a cause of action because they allege
fraud claims based upon misrepresentation of current
e. Illinois Consumer Fraud and Deceptive Practices Act
Count VII is said to be defective because the Illinois
Consumer Fraud and Deceptive Practices Act (ICFDPA),
Ill.Rev.Stat. ch. 121 1/2, § 262, et seq. (1985), does not
apply to securities fraud claims because securities are not
considered merchandise under the ICFDPA.
The Illinois Supreme Court has held that an action under the
ICFDPA may only be brought by consumers who have purchased
merchandise. Section 1(b) of the ICFDPA defines merchandise as
including "any objects, wares, goods, commodities,
intangibles. . . ." Defendants' assertion that securities are
not merchandise is unpersuasive in light of the Illinois
Appellate Court's decision in People ex rel. Scott v. Cardet
International, Inc., 24 Ill. App.3d 740, 321 N.E.2d 386 (1974),
defining securities as "intangible" goods. In Scott, the court
defined "intangibles" as "property which has no intrinsic value
but which is representative or evidence of value, such as
certificates of stocks, bonds, promissory notes, and
franchises." Id. at 744, 321 N.E.2d at 390. Applying the facts
before this Court, plaintiffs' purchase of stocks is
merchandise under the ICFDPA and therefore ICFDPA applies.
Consequently, defendants' motion to dismiss is denied.
Defendants' motions to dismiss various counts of plaintiffs'
seven-count complaint is denied in part and granted in part.
First, Touche Ross' motion to dismiss Count VI for lack of
subject matter jurisdiction over plaintiffs' pendent party
claim is granted. Second, TMS' motion to dismiss plaintiffs'
§ 1962(c) RICO claim in Count I is granted because the
complaint alleged TMS was both the "enterprise" and the
"person" conducting the racketeering activity. Third, TMS and
Harris' motion to dismiss Count IV is granted because the
complaint failed to allege defendants Harris and TMS defrauded
plaintiffs with knowledge or belief that their representations
were false. The dismissal of Counts I and IV are without
IT IS SO ORDERED.
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