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SCHLUETER v. COZAD

December 9, 1987

WILLIAM SCHLUETER, ET AL., PLAINTIFFS,
v.
DALE COZAD, COZAD INVESTMENT SERVICES, INC., DEFENDANTS.



The opinion of the court was delivered by: Baker, Chief Judge.

ORDER

INTRODUCTION

On April 15, 1987, the plaintiffs filed a complaint against the defendant, Dale Cozad and Cozad Investment Services, Inc., alleging violations of both Illinois and federal securities laws. On May 20, 1987, the defendants filed a "motion to strike, dismiss and for partial summary judgment." On September 17, 1987, the Honorable Robert J. Kauffman, United States Magistrate, issued a recommendation regarding the defendants' motion of May 20, 1987. On September 30, 1987, the defendants filed an objection to the Magistrate's recommendation. The matter is presently before the district judge upon the defendants' objections to the magistrate's recommendation. See Fed.R.Civ.P. 72(b).

FACTS

On numerous occasions between November 1981 and December 1983, the plaintiffs purchased interests in limited partnerships from the defendants. All of these securities were interests in limited partnerships formed and managed by Donald R. Walker. Sometime around 1985, Mr. Walker and all of the limited partnerships he managed filed for bankruptcy. The plaintiffs' complaint alleges that the defendants, as the "underwriter" of these limited partnership interests and as the agent of Donald R. Walker, violated both Illinois and federal securities laws when they sold these interests to the plaintiffs. The magistrate's recommendation of September 17, 1987, granted the defendants' motion to dismiss and for partial summary judgment with respect to some of the claims and denied the defendants' motion to dismiss and for summary judgment with respect to other claims. The defendants object to the portion of the magistrate's recommendation denying their motion to dismiss and for partial summary judgment.

DISCUSSION

1) FEDERAL RULE OF CIVIL PROCEDURE § 9(b)

The defendants' motion to dismiss contends that the plaintiffs have failed to allege fraud with the requisite specificity. See Fed.R.Civ.P. 9(b). Fed.R.Civ.P. 9(b) states that "in all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. . . ." The particularity requirement of Rule 9(b) does not, however, render the general principles of Rule 8 inapplicable to pleadings alleging fraud. The two rules must be read in conjunction with each other. 5 Wright & Miller, Federal Practice and Procedure, § 1298 (1969). Rule 9(b) does not require fact pleading. It merely requires pleading "circumstances." 5 Wright & Miller, Federal Practice and Procedure, § 1298 (1969).

In the case at hand, the plaintiffs allege that the defendants violated state and federal securities laws through their omissions as opposed to their misrepresentations. On pages 9 through 13 of their complaint, the plaintiffs list eight omissions by the defendant that the plaintiffs contend were fraudulent. A plaintiff must allege more than conclusory statements that the defendants' conduct constitutes fraud. Onesti v. Thompson McKinnon Securities, Inc., 619 F. Supp. 1262, 1267 (N.D.Ill. 1985). The complaint in this case alleges more than mere conclusions of fraud. The allegations on pages 9 through 13 of the complaint describe the alleged omissions of the defendant which the plaintiffs contend violate state and federal securities laws. Those allegations more than satisfy the requirements of Fed.R.Civ.P. 9(b) when read in conjunction with Fed.R.Civ.P. 8. D & G Enterprises v. Continental Illinois Nat. Bank & Trust Co. of Chicago, 574 F. Supp. 263 (N.D.Ill. 1983).

The complaint satisfies the goals of Fed.R.Civ.P. 9(b) and Fed.R.Civ.P. 8 in that it provides the defendants with notice of the claims against them and evidences a reasonable belief on the plaintiffs' part that the complaint has merit. Gilbert v. Bagley, 492 F. Supp. 714 (M.D.N.C. 1980). The plaintiffs' complaint alleges fraud with sufficient particularity to satisfy the requirements of Fed.R.Civ.P. 9(b). Therefore, the defendants' motion to dismiss for failure to allege fraud with the requisite specificity is denied.

2) THE INTEGRATION DOCTRINE AND STATUTES OF LIMITATION

The defendants' further contend that all but two of the plaintiffs' claims are barred by the statute of limitations. The plaintiffs admit that all but two of the sales they contend were tainted by fraud would be barred by the statute of limitations if they were "single" sales. However, the plaintiffs contend that the court should consider all of the sales as a single "integrated" sale occurring on the date of the last sale. The defendants argue that the integration doctrine does not apply to cases involving statutes of limitations. At this point in the proceedings, the court is only able to decide whether the integration doctrine applies to statutes of limitations. If the doctrine does apply to limitation questions, the court will need more information in order to determine whether the doctrine applies in this case.

The integrated offering theory was adopted by the Securities Exchange Commission (SEC) as a guideline to determine whether an offering is "public" under § 4(2) of the 1933 Act, 15 U.S.C. § 77d(2) (1982). Flinn Foundation v. Petro-Lewis Corporation, (CCH) Fed.Sec.L.Rep. ยง 92449 (D.Colo. 1985). The plaintiffs contend that the integration theory ...


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