United States District Court, Southern District of Illinois, Benton Division
November 7, 1986
HYMEN P. GOLDWATER, PLAINTIFF,
ALSTON & BIRD, PRICE WATERHOUSE, CENTERRE TRUST COMPANY, CENTERRE BANCORPORATION, HOSPITAL MANAGEMENT ASSOCIATES, INC., (H.M.A.) AND H.M.A., INC., THE JONES, BIRD & HOWELL PARTNERS, JONES, BIRD & HOWELL AND PETER WRIGHT, JACK HERETH, FUTRA INDUSTRIES, INC., AND HERETH JONES, INC., GALLOP, JOHNSON & NEUMAN AND J. NEIL HUBER, DONALD GALLOP, ALLAN JOHNSON, SANFORD, NEUMAN, THOMAS LEWIN, P. TERENCE CREBS, AND STEPHEN ROVAK, MT. VERNON HOSPITAL, INC., JEFFERSON COUNTY HEALTH FACILITIES AUTHORITY, INC., MICHAEL A. ALEXANDER, ROBERT O. KENT, KENNETH MARTIN, JR., WILLIAM D. THACKERY, FLOYD COLLINS AND MAX W. SCHURTZ, PETER ORR, DEFENDANTS.
The opinion of the court was delivered by: Foreman, Chief Judge:
MEMORANDUM AND ORDER
This matter is before the Court on the motions to dismiss of
the following defendants:
1. Price Waterhouse
2. Centerre Trust Company
3. Hospital Management Associates, Inc. (HMA) and H.M.A.,
4. The Jones, Bird & Howell Partners
5. Jones, Bird & Howell and Peter Wright
6. Alston and Bird
7. Jack Hereth; Futra Industries, Inc.; and Hereth Jones,
8. Gallop, Johnson & Neuman and J. Neil Huber
9. Donald Gallop, Allan Johnson, Sanford Newman, Thomas
Lewin, P. Terence Crebs, and Stephen Rovak
10. Mount Vernon Hospital, Inc.; Jefferson County Health
Facilities Authority, Inc.; Michael A. Alexander; Robert O.
Kent; Kenneth Martin, Jr.;
William D. Thackery; Floyd Collins and Max W. Schurtz.
The case arises from plaintiff's purchase of First Mortgage
Medical Facility Revenue Bonds ("the bonds") from the Jefferson
County Health Facilities Authority ("the Authority"). The
purpose of the bond issue was to acquire an existing health
care facility in Mount Vernon, Illinois and to convert it into
a combined acute care hospital and nursing home. The bond
offering closed on August 19, 1980.
Plaintiff seeks relief on behalf of a class of all persons who
purchased the bonds prior to their default in February, 1982.
Fifty-one defendants have been named in this suit. Plaintiff
alleges, in brief, that defendants engaged in a scheme to
market bonds on the tax exempt bond market, that the sale of
the bonds constituted a fraud on the tax exempt bond market,
and that plaintiff and the class relied upon the integrity of
the tax exempt bond market in making their investment decision.
(Plaintiff's Complaint ¶¶ 75 & 76). The complaint seeks relief
pursuant to section 17(a) of the Securities Act of 1933,
15 U.S.C. § 77q(a); section 10(b) of the Securities Exchange Act
of 1934, 15 U.S.C. § 78j(b) and Rule 10b-5; and the
Racketeering Influenced and Corrupt Organizations Act (RICO),
18 U.S.C. § 1962(a),(b) & (c). Plaintiff's complaint also sets
forth pendent state law claims against various defendants for
negligence and breach of contract.
There are certain issues that are common to all of the motions
to dismiss. Various other issues have been raised only by
certain individual defendants. The Court will first address
those particular issues raised by individual defendants, and
will then discuss those issues common to all of the motions.
The Court notes that for purposes of defendants' motions to
dismiss, all allegations in the complaint must be accepted as
true. The complaint should not be dismissed unless "it is clear
that no relief could be granted under any set of facts that
could be proved consistent with the allegations." Hishon v.
King and Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 2232, 81
L.Ed.2d 59 (1984).
According to the complaint, the alleged "scheme" originated
with the financial difficulties of a 50-bed hospital known as
Jefferson Memorial Hospital Association ("Jefferson Hospital")
located in Mount Vernon, Illinois. Jefferson Hospital
eventually filed for bankruptcy, and as of November, 1979, the
hospital was closed.
Jefferson Hospital, however, had previously obtained a permit
from the Illinois Department of Health to relocate to two
nearby nursing homes, Hickory Grove Manor and View Manor, with
plans to convert those facilities into a combined acute care
hospital and nursing home. Art Lewis and Glen Lewis, the
promoters of the alleged scheme, arranged an agreement between
Jefferson Hospital and two of their corporations, UDE
Corporation and UDE, Inc.,*fn1 pursuant to which 1) UDE
Corporation would develop the project and secure financing, and
2) UDE, Inc., its wholly owned subsidiary, would be retained as
general contractor. UDE Corporation, however, could not obtain
sufficient financing for the conversion. Art and Glen Lewis,
through the Grove Partnership and the View Partnership,
purchased the Hickory Grove Manor and the View Manor
facilities. (Art and Glen Lewis were each one of two general
partners of Grove Partnership and View Partnership.) The
purchase price for the properties was $1,326,000.
Art and Glen Lewis, with the aid of their attorneys, J. Neil
Huber and Gallop, Johnson and Neuman, then formed the Jefferson
County Health Facilities Authority, Inc. ("the Authority") to
issue bonds for the purpose of financing the renovation and
conversion of the properties by their construction firm. Art
Lewis, with the aid of his attorneys, also formed Mount Vernon
Hospital ("the Hospital"), a purported not-for-profit
corporation, to lease the facilities from the Authority. The
Hospital's lease payments were expected to provide for debt
service. The complaint alleges
that the Hospital then retained UDE, Inc. as the general
construction agent for a contract price of $3,600,000, and UDE
Corporation as the design architect for a contract price of
$440,000. Plaintiff alleges that neither contract was an
arms-length transaction. (Plaintiff's Complaint, ¶¶ 50 & 51).
Mount Vernon Hospital allegedly had no experience in managing
health facilities, and as a result, HMA was retained to manage
the facility. According to the complaint, UDE, Inc. agreed to
pay HMA $180,000 out of bond proceeds and to guarantee $250,000
in working capital. Centerre Trust provided a line of credit to
UDE, Inc. in order for it to meet its guarantee.
The project eventually ran into financial difficulties.
Plaintiff alleges, for example, that although Price
Waterhouse's financial forecast stated that the Hospital would
gross $4,215,135 and have an operating profit of more than
$1,000,000 for the nine months of operation in 1981, the
Hospital actually had an operating net loss of $2,396,252 for
an eleven month period from April, 1981 to March, 1982.
(Plaintiff's Complaint, ¶ 63). In February, 1982 the Hospital
defaulted on its debt service obligation to the bondholders.
Plaintiff alleges the following: 1) The financial forecast
prepared by Price Waterhouse was materially misleading; 2) the
legal opinion issued by Gallop, Johnson & Neuman stated that
Mount Vernon Hospital was a not-for-profit corporation, when in
fact Gallop, Johnson knew that the Hospital had not met the
requirements for notfor-profit status; 3) each bond certificate
and accompanying legal opinion contained a statement that the
bonds were tax exempt, when in fact they were not, since, among
other reasons, neither the issuer (the Authority) nor the
Hospital were nonprofit corporations; 4) the legal opinion
issued by Jones, Bird & Howell, bond counsel, falsely stated
that interest on the bonds was tax exempt; and 5) each bond
certificate and accompanying legal opinion contained a
statement that the bonds were exempt from registration with the
SEC, when in fact they were not.*fn2 Plaintiff further
alleges that because of the defendants' scheme, "the bonds are
worthless, and the holders of the bonds have been damaged."
(Plaintiff's Complaint, ¶ 71).
STATUTE OF LIMITATIONS
The applicable statute of limitations in the present case is
the three year limitation imposed by Ill.Rev.Stat. ch. 121 1/2,
§ 137.13(D). Suslick v. Rothschild Securities Corp.,
741 F.2d 1000, 1004 (7th Cir. 1984). Plaintiff alleges that he agreed to
purchase the bonds in July, 1980 and that he accepted them when
they were delivered after the August 19, 1980 closing. The
complaint was initially filed November 14, 1984. Plaintiff then
filed his First Amended Complaint, in which he named
thirty-eight additional defendants, on February 1, 1985.
Defendants Price Waterhouse; HMA; H.M.A., Inc.; Gallop,
Johnson, & Neuman; J. Neil Huber; D. Gallop; A. Johnson; S.
Neuman; T. Lewin; P. Terence Crebs; S. Rovak; J. Hereth; Futra
Industries, Inc.; and Hereth, Orr & Jones, Inc. contend that
the complaint should be dismissed since it was not filed within
the three year statute of limitations.
The Seventh Circuit, however, has held that "[t]he federal
doctrine of equitable tolling is available [in federal
securities violation cases] to determine when the limitations
period begins to run." Suslick, 741 F.2d at 1004. As stated
by the Court of Appeals in Suslick:
Equitable tolling applies in two situations. First, the
doctrine will toll the running of the statute of limitations
where the fraud goes undiscovered even though the defendant
does nothing to conceal it. The plaintiff, however, must
exercise due diligence in attempting to uncover the fraud. In
the second situation in which equitable tolling applies,
the fraud goes undiscovered because the defendant has taken
positive steps after commission of the fraud to keep it
concealed. This type of fraudulent concealment tolls the
limitations period until actual discovery by the plaintiff.
Id. In paragraph 70 of the complaint, plaintiff alleges as
Neither Plaintiff nor any other purchaser of the bonds had
discovered, nor could have discovered in the exercise of
reasonable diligence, the untrue or misleading statements of
material facts and material omissions prior to their actual
discovery in May, 1984. This was because of the fraudulent
concealment by the Defendants of the conspiracy and the false
and misleading nature of the statements made. The fraudulent
concealment included a series of letters written by the trustee
and the underwriter to the Plaintiff and members of the class
which had the purpose and effect of misleading them.
Defendants contend, nonetheless, that these allegations are
vague and ambiguous and do not meet the pleading requirements
of Rule 9(b) of the Federal Rules of Civil Procedure.
In Tomera v. Galt, 511 F.2d 504 (7th Cir. 1975), the court
held that the following allegation of fraudulent concealment
was sufficient to avoid summary disposition on a statute of
[D]uring the period commencing on or about January 1, 1968 and
continuing to the present, the defendants herein engaged in a
continuing scheme and artifice to defraud investors, including
plaintiffs, in connection with the purchase, solicitation,
offer and sale of the unregistered securities as aforesaid, in
further violation of Section 10-b[10(b)] of the Securities
Exchange Act of 1934 and Rule 10b-5 of the Securities and
Exchange Commission promulgated thereunder.
Id. at 509-10. Likewise, in the present case, the Court finds
that the complaint sufficiently alleges active concealment by
the defendants, and that under the doctrine of equitable
tolling, the statute of limitations did not begin to run until
In relation to the statute of limitations question, defendants
Gallop, Johnson, Neuman, Lewin, Crebs and Rovak ("Gallop
Partners") contend that 1) the three year limitations period
started to run, at the latest, in February, 1982 when the bonds
defaulted;*fn3 2) the Gallop Partners received service of
process on June 18, 1985; and 3) they were therefore not served
until four months after the statute of limitations had expired.
Defendants further contend that under Illinois law, if the
plaintiff fails to exercise reasonable diligence to obtain
service after the expiration of the statute of limitations, the
unserved defendants should be dismissed with prejudice. See
Ill.Rev. Stat. ch. 110A, § 103. Without deciding whether
Illinois law controls the question at issue, the Court finds
that defendants' argument has no merit. The Court has already
held that, based upon the allegations in the complaint, the
statute of limitations did not begin to run until May, 1984.
Therefore, the Court can only conclude, at this time, that the
Gallop Partners were served within the three year limitations
PERSONAL JURISDICTION AND VENUE
The law firm of Jones, Bird & Howell acted as bond counsel and
as counsel to the underwriter. Peter Wright, a partner of
Jones, Bird & Howell and a defendant in this suit, was in
charge of the firm's activities as bond counsel. The other
Jones, Bird & Howell partners ("JB & H Partners") apparently
rendered no legal assistance
and had no contacts with the State of Illinois in connection
with the bond issue. They are named as defendants solely to
permit enforcement of a judgment against their assets in the
event the assets of the Jones, Bird & Howell partnership are
insufficient to satisfy any judgment plaintiff may obtain.
(Plaintiff's Complaint, ¶ 8). The JB & H Partners contend that
this Court has no personal jurisdiction over them since they
were not involved in the instant transaction and since they
have no contacts with Illinois. (Jones, Bird & Howell appears
to raise the same argument in an Amended Motion to Dismiss.)
The same argument was raised by Jones, Bird & Howell in the
district court of Hawaii, and was expressly rejected by that
court. See Goldwater v. Alston & Bird, et al., CCH
Fed.Sec.L.Rep. ¶ 92,007 (D.Hawaii 1985) [Available on WESTLAW,
DCT database]. The Court finds that defendants' argument in the
present case should be rejected for the same reasons.
Section 27 of the Securities Exchange Act of 1934, alleged by
plaintiff as a basis for this Court's jurisdiction, authorizes
nationwide service of process. 15 U.S.C. § 78aa. As noted by
the Hawaii district court, "[s]everal courts of appeal . . .
have held that where a plaintiff is suing under a federal
statute in which Congress has authorized nationwide service of
process, due process requires only that the defendant have
minimum contacts with the United States." Id. at 90,988. The
Seventh Circuit has expressly so held. See Fitzsimmons v.
Barton, 589 F.2d 330, 332-34 (7th Cir. 1979). Jones, Bird &
Howell, as well as the JB & H Partners, clearly have sufficient
minimum contacts with the United States to permit this Court to
exercise personal jurisdiction over them.
The same defendants also move to dismiss the complaint on the
basis of improper venue. Venue in this case is governed by
section 27 of the Securities Exchange Act of 1934,
15 U.S.C. § 78aa.*fn5 Under that statute, venue is proper in the
district where any act or transaction constituting the
violation occurred, or in the district where the defendant is
found or is an inhabitant or transacts business. "Venue is
proper as to all defendants if one act in furtherance of
the alleged unlawful scheme is done in the forum district."
Stewart v. Fry, 575 F. Supp. 753, 755 (E.D.Mo. 1983) (emphasis
in original). "One act is sufficient, and that act need not be
the core of the claim but rather something more than an
immaterial part of the claim." Id. In the present case,
plaintiff alleges that venue is proper in this district "since
numerous acts and transactions constituting the violations that
are the basis of the complaint occurred in the Southern
District of Illinois." (Plaintiff's Complaint, ¶ 3). The Court
finds that plaintiff has therefore properly pled venue as to
Defendants contend that even if venue is proper as to
plaintiff's 10b-5 claims, it is not proper for the RICO claims.
Plaintiff alleges that venue is proper under 18 U.S.C. § 1965(a)
& (b) since defendants transacted business in this
district, and further alleges that the ends of justice require
that all parties be brought before this Court. The Court finds
that venue is proper as to Jones, Bird & Howell and as to the
JB & H Partners under section 1965(b), which provides:
In any action under section 1964 of this chapter in any
district court of the United States in which it is shown that
the ends of justice require that other parties residing in any
other district be brought before the court, the court may cause
such parties to be summoned, and process for that purpose may
be served in any judicial district of the United States by the
See also Farmers Bank v. Bell Mortgage Corporation,
577 F. Supp. 34, 35 (D.Del. 1978). Therefore, the motions to dismiss
for lack of personal jurisdiction and for improper venue are
Alston & Bird has moved for summary judgment on the basis that
the alleged acts upon which the liability of Alston & Bird is
premised occurred prior to the admission of Peter Wright to the
Alston & Bird partnership, and thus were not within the
legitimate scope of the partnership business. (Peter Wright, a
partner of Jones, Bird & Howell, was in charge of that firm's
activities as bond counsel. In December, 1982, as the result of
a merger, that partnership became Alston & Bird, and it was at
that time that Peter Wright was admitted to the Alston & Bird
partnership. Alston & Bird's liability is premised solely upon
the allegation that it is a successor to Jones, Bird & Howell.
Alston & Bird argues that it is not a successor and that Peter
Wright's activities as bond counsel occurred prior to his
admission into the Alston & Bird partnership in 1982.)
In a similar vein, Jones, Bird & Howell contends that the
complaint against it should be dismissed on the basis that it
cannot be served with process and no action can be maintained
against it since it was dissolved in June, 1983. The motions
raised by Alston & Bird and Jones, Bird & Howell involve
matters outside the pleadings and are therefore not properly
considered in a motion to dismiss. If defendants so desire,
they may resubmit these arguments to the Court in separately
filed motions for summary judgment.
FRAUD ON THE MARKET
Plaintiff alleges that the sale of the bonds constituted a
"fraud on the tax exempt bond market." Several federal courts
of appeals have recognized the "fraud on the market" theory of
liability in 10b-5 securities fraud cases. See, e.g., Lipton
v. Documation, Inc., 734 F.2d 740 (11th Cir. 1984); T.J.
Raney & Sons, Inc. v. Fort Cobb, Oklahoma Irrigation Fuel
Authority, 717 F.2d 1330 (10th Cir. 1983); Panzirer v. Wolf,
663 F.2d 365 (2d Cir. 1981), vacated as moot sub nom. Price
Waterhouse v. Panzirer, 459 U.S. 1027, 103 S.Ct. 434, 74
L.Ed.2d 594 (1982); Shores v. Sklar, 647 F.2d 462 (5th Cir.
1981) (en banc); Blackie v. Barrack, 524 F.2d 891 (9th Cir.
1975). See also Grossman v. Waste Management, Inc.,
589 F. Supp. 395 (N.D.Ill. 1984); Mottoros v. Abrams, 524 F. Supp. 254
(N.D.Ill. 1981). In a traditional 10b-5 case, the plaintiff
must prove actual reliance on defendant's deception. The fraud
on the market theory "allows a plaintiff to rely on the
integrity of the market rather than requiring direct reliance
on the defendant's conduct." T.J. Raney & Sons, Inc., 717
F.2d at 1332. More specifically:
The investor may rely on the expectation that securities
markets are free from fraud, that market prices are validly
set, and that there has been no market manipulation. In
essence, the fraud-on-the-market theory enables an investor to
assume that a security is accurately priced on the open market.
Wemple, Rule 10b-5 Securities Fraud: Regulating the
Application of the Fraud-on-the-Market Theory of Liability, 18
J.Mar.L.Rev. 733, 735 (1985). "The theory is grounded on the
assumption that the market price reflects all known material
information. Material misinformation will theoretically cause
the artificial inflation or deflation of the stock price."
T.J. Raney & Sons, Inc., 717 F.2d at 1332.
The Seventh Circuit has not addressed the validity of the fraud
on the market theory, although a fairly recent Seventh Circuit
case cites, with apparent approval, those cases that have
adopted the theory. See Teamsters Local 282 Pension Trust Fund
v. Angelos, 762 F.2d 522, 529 (7th Cir. 1985). The majority of
cases that have adopted and applied the theory involved
securities that were actively traded on open and developed
markets. The question in this case is whether the fraud on the
market theory should be applied to newly issued securities.
In Shores v. Sklar, 647 F.2d 462 (5th Cir. 1981) (en banc),
the Fifth Circuit, in a 12 to 10 decision, extended the fraud
on the market theory to a new industrial development bond
issue.*fn6 The court held that although
plaintiff could not prove reliance on the offering circular
since he had not read it, "[t]he securities laws allow an
investor to rely on the integrity of the market to the extent
that the securities it offers to him for purchase are entitled
to be in the market place." Id. at 471. The court further
held that in order to recover under the fraud on the market
theory in a case involving new issues, plaintiff must prove the
(1) [T]he defendants knowingly conspired to bring securities
onto the market which were not entitled to be marketed,
intending to defraud purchasers, (2) [the plaintiff] reasonably
relied on the Bonds' availability on the market as an
indication of their apparent genuineness, and (3) as a result
of the scheme to defraud, [the plaintiff] suffered a loss.
Id. at 469-70.
In all of the motions to dismiss, defendants argue that the
majority opinion in Shores is simply wrong, and that the
fraud on the market theory cannot logically be applied to newly
issued securities. Defendants contend that under the fraud on
the market doctrine, "[t]he market is acting as the unpaid
agent of the investor, informing him that given all the
information available to it, the value of the stock is worth
the market price." In Re LTV Securities Litigation, 88 F.R.D.
134, 142-44 (N.D.Tex. 1980). According to defendants, in a new
issue, there is no existing market. The price is set by the
underwriter, not by the market, and therefore, the rationale
for the fraud on the market theory simply does not apply.
(Memorandum of Price Waterhouse, p. 15). Commentators have also
criticized the reasoning and decision in Shores. See, e.g.,
Note, The Fraud on the Market Theory, 95 Harv.L.Rev. 1143,
At least one other circuit has adopted the Shores holding. In
T.J. Raney & Sons, Inc. v. Fort Cobb, Oklahoma Irrigation Fuel
Authority, 717 F.2d 1330 (10th Cir. 1983), a case also
involving a new bond issue, the court held that the plaintiff
stated grounds for relief by alleging that the defendants
"knowingly conspired to bring unlawfully issued . . . bonds to
market with the intent to defraud. . . ." Id. at 1333.
Similarly, other courts have either explicitly adopted Shores
or suggested, in dicta, that the reasoning and decision in
Shores is sound. See, e.g., Grossman v. Waste Management,
Inc., 589 F. Supp. 395, 402 (N.D.Ill. 1984), Rose v. Arkansas
Valley Environmental & Utility Authority, 562 F. Supp. 1180,
1205-06 (W.D.Mo. 1983).
This Court finds that the reasoning in Shores is persuasive,
and that the fraud on the market theory can, in appropriate
circumstances, be applied to newly issued securities. Although
defendants contend that this doctrine cannot logically be
applied to new issues since there is no existing market, both
Shores and T.J. Raney correctly suggest adoption of another
"form" of this theory. In a case under the Shores theory,
"since no market as such exists, the investor relies on the
fact that the securities would not have been offered absent the
scheme to defraud — in other words, upon the integrity of the
market itself, rather than the integrity of [the] market's
price." Grossman, 589 F. Supp. at 402.
Plaintiff alleges that defendants engaged in a scheme to market
bonds on the tax exempt bond market, that the sale of the bonds
constituted a fraud on the tax exempt bond market, that
plaintiff relied on the integrity of the market, and that as a
result of the scheme, plaintiff was damaged. Accepting these
allegations as true for present purposes, the Court finds that
plaintiff's complaint sufficiently states a claim for relief
based upon the fraud on the market theory.
The Court's discussion of this theory, however, cannot end
here. Defendants contend that even if Shores was correctly
decided, its application requires pleading and proof that the
bonds in question were "not entitled to be marketed." The Court
agrees. As stated by the court in Shores, "[i]f [plaintiff]
proves no more than that the bonds would have been offered at a
lower price or a higher rate, rather than that they would
never have been issued or marketed, he cannot recover."
Shores, 647 F.2d at 470 (emphasis added). In other words,
plaintiff must show that, absent the fraud, the bonds could not
have been sold at any price.
The Court disagrees, however, with defendants' interpretation
of this requirement. Defendants contend that the "not entitled
to be marketed" element requires pleading and proof that the
issuance of the bonds was illegal under substantive state law.
Defendants cite T.J. Raney in support of their argument. In
T.J. Raney, the court found that the bonds in question were
not entitled to be marketed since Oklahoma law prohibited
issuance of those particular bonds. The holding in that case
merely demonstrates one type of situation in which securities
are "not entitled to be marketed," and does not impose a
blanket requirement that the issuance of securities violates
substantive state law.
In the present case, plaintiff alleges that but for the
defendants' fraud, the bonds could never have been marketed.
(Plaintiff's Complaint, ¶ 69). Whether plaintiff can prove this
allegation remains to be seen. The Court finds, for present
purposes only, that this allegation, together with all of the
facts set forth in the complaint, satisfies the pleading
requirement suggested in Shores.
Defendants further contend that the fraud on the market theory
should not be applied to this case because the Financial
Forecast and the Offering Statement fully disclosed all
material facts and all substantial risks associated with the
investment. Defendants cite Zobrist v. Coal-X, Inc.,
708 F.2d 1511 (10th Cir. 1983) in support of their argument. In that
case, defendants verbally assured plaintiff that investment in
the proposed business venture was a "sure thing." The Private
Placement Memorandum, however, disclosed the substantial risks
associated with the investment. Although the Memorandum was
given to plaintiff prior to his investment, he failed to read
it. In holding that plaintiff could not rely on defendants'
oral representations of a "sure thing" since the written
memorandum disclosed all risks, the court stated, "[I]t is our
view that knowledge of information contained in a prospectus or
an equivalent document authorized by statute or regulation,
should be imputed to investors who fail to read such
documents." Id. at 1518.
Plaintiff alleges, however, that he did not receive an Offering
Statement, that he therefore could not have read it, and that
Zobrist is thus inapplicable. Whether plaintiff received the
Offering Statement is clearly a question of fact that cannot be
resolved on a motion to dismiss. Therefore, the Court will not,
at this time, address the issue of whether plaintiff's
complaint should be dismissed based upon the reasoning and
decision in Zobrist.*fn7
SECTION 17(a) OF THE SECURITIES ACT
Defendants argue that plaintiff's claim for violation of
section 17(a) of the 1933 Securities Act*fn8 should be
no private right of action exists under that section. Plaintiff
contends that in Daniel v. International Brotherhood of
Teamsters, etc., 561 F.2d 1223 (7th Cir. 1977), the Seventh
Circuit expressly held that section 17(a) does create a private
right of action. Recent Seventh Circuit decisions, however,
have specifically stated that "[w]hether section 17(a) can be
enforced by private damage suits is an open question in this
circuit. . . ." Peoria Union Stock Yards Co. v. Penn Mutual
Life Insurance Co., 698 F.2d 320, 323 (7th Cir. 1983). See
also Teamsters Local 282 Pension Trust Fund v. Angelos,
762 F.2d 522, 530-31 (7th Cir. 1985). With respect to the Daniel
decision, the court in Teamsters noted that "the [Supreme]
Court's reversal of our judgment [in Daniel], coupled with
its express refusal to decide the § 17(a) issue . . . removed
the authority of the discussion in Daniel." Id. It thus
appears that the decision in Daniel, while not expressly
overruled, is no longer authoritative. The question at issue is
obviously still an open one in this circuit.
The Fifth Circuit, however, has held that no private right of
action exists under section 17(a). See Landry v. All American
Assurance Co., 688 F.2d 381 (5th Cir. 1982). Likewise, at
least two district courts in this circuit have reached the same
conclusion. See Beck v. Cantor, Fitzgerald & Co., Inc.,
621 F. Supp. 1547, 1560 (N.D.Ill. 1985); Roskos v.
Shearson/American Express, Inc., 589 F. Supp. 627, 630
(E.D.Wis. 1984). This Court finds the decision in Landry to
be well reasoned and persuasive, and particularly agrees with
the observation in Roskos that "[t]o permit a private right
of action under § 17(a) would cause the statutory and
judiciallycrafted restrictions on § 10(b) of the 1934 Act and §§
11 and 12 of the 1933 Act to atrophy and fall away as
securities fraud cases hustled in the back door of § 17."
Roskos, 589 F. Supp. at 631. The Court therefore holds that no
private right of action exists under 17(a), and accordingly
dismisses plaintiff's section 17(a) claims.
Defendants contend that plaintiff has failed to plead fraud
with particularity as required by Rule 9(b) of the Federal
Rules of Civil Procedure. The same argument was raised by
defendants Gallop, Johnson & Neuman; J. Neil Huber; HMA; and
H.M.A., Inc. in the district court of Hawaii and was expressly
rejected by that court. See Goldwater v. Alston & Bird, et
al., CCH Fed.Sec.L.Rep. ¶ 92,007 at 90,989 (D.Hawaii 1985)
[Available on WESTLAW, DCT database].
This Court also finds that the complaint, which is 35 pages in
length, adequately satisfies the pleading requirements of Rule
9(b). As noted by the court in Onesti v. Thomson McKinnon
Securities, 619 F. Supp. 1262 (N.D.Ill. 1985), "Rule 9(b)'s
more stringent requirements must be read in conjunction with
Rule 8, which requires a short and plain statement of the
claim." Id. at 1265 (citing Tomera v. Galt, 511 F.2d 504,
508 (7th Cir. 1975)). See also Rose v. Arkansas Valley
Environmental & Utility Authority, 562 F. Supp. 1180 (W.D.Mo.
1983). In the present case, "[d]efendants have been given
notice of the alleged fraud sufficient to allow adequate
responsive pleading. . . . 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.'" Banowitz v. State Exchange Bank,
600 F. Supp. 1466, 1469 (N.D. Ill. 1985) (citations omitted).
The Court therefore denies defendants' motions to dismiss based
on failure to plead fraud with particularity.
Accordingly, defendants' motions to dismiss are GRANTED IN PART
and DENIED IN PART. Plaintiff's claims based on section 17(a)
of the 1933 Securities Act are hereby DISMISSED. Defendants'
motions to dismiss (Document Nos. 102, 105,
115, 116, 117, 120, 123, 124, 128, and 130) are otherwise
IT IS SO ORDERED.