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SHIELDS v. ERICKSON

March 27, 1989

RODNEY B. SHIELDS, derivatively on Behalf of SUNDSTRAND CORPORATION, Plaintiff,
v.
EVANS W. ERICKSON, et al., Defendants


Paul E. Plunkett, United States District Judge.


The opinion of the court was delivered by: PLUNKETT

HONORABLE PAUL E. PLUNKETT, UNITED STATES DISTRICT JUDGE.

 This is a shareholder derivative action brought under Fed. R. Civ. P. 23.1 on behalf of Sundstrand Corporation and against eighteen officers and directors of Sundstrand, based on violations of the Racketeering Influenced and Corrupt Organizations Act ("RICO"), RICO conspiracy, violations of the Foreign Corrupt Practices Act (part of the Securities Exchange Act of 1934), § 14(a) of the Securities Exchange Act, and pendent state law claims. The complaint is based primarily on indictments against and guilty pleas entered by Sundstrand Corporation for defrauding the United States government by overcharging it on defense contracts, for bribery of Defense Department personnel, and for fraudulently taking tax write-offs to which Sundstrand was not entitled. As a result of the guilty pleas, Sundstrand and its subsidiary, Sundstrand Data Control, Inc. ("SDC"), have paid $ 127.3 million to the United States in civil settlements and criminal fines. The government may still be pursuing additional claims. Further, Sundstrand has been suspended from receiving any new government contracts, and its export licenses have been suspended.

 Plaintiff shareholders bring this action against the officer and director defendants for permitting and acquiescing in the wrongful acts resulting in the above criminal convictions, and for allowing Sundstrand to maintain an inadequate system of internal controls such that Sundstrand's assets could be misused. The "outside director" defendants, the "director-officer and officer" defendants, and nominal defendant Sundstrand Corporation all move to dismiss the complaint on numerous grounds. For the reasons stated below, defendants' motions are granted.

 Analysis

 For the purpose of deciding defendants' motions to dismiss, we take as true the allegations of the complaint, along with all reasonable inferences therefrom in the light most favorable to the plaintiff. Powe v. City of Chicago, 664 F.2d 639, 642 (7th Cir. 1981). The complaint should not be dismissed "unless it appears beyond doubt that the plaintiff is unable to prove any set of facts which would entitle the plaintiff to relief . . . . Nevertheless, a plaintiff must allege sufficient facts to outline the cause of action, proof of which is essential to recovery." Ellsworth v. City of Racine, 774 F.2d 182, 184 (7th Cir. 1985), cert. denied, 475 U.S. 1047, 89 L. Ed. 2d 574, 106 S. Ct. 1265 (1986) (citations omitted). Further, Fed. R. Civ. P. 9(b) requires that "in all averments of fraud . . . the circumstances constituting fraud . . . shall be stated with particularity." With these principles in mind, we consider the defendants' objections to the plaintiffs' complaint.

 1. Count III: Violation of the Foreign Corrupt Practices Act.

 Plaintiffs allege that the defendants violated Section 13(b)(2) of the Securities Exchange Act of 1934 (15 U.S.C. § 78m(b)(2)) and Rules 13b2-1 and 13b2-2 promulgated thereunder (17 C.F.R. §§ 240.13b2-1 and 240.13b2-2), also known as the Foreign Corrupt Practices Act, by failing to provide Sundstrand with adequate financial and accounting controls and by misrepresenting, concealing and falsifying information. Defendants respond that there is no private right of action under § 13(b)(2). We agree and dismiss this count of the complaint for failure to state a claim upon which relief may be granted.

 No court of appeals has yet ruled on whether § 13(b)(2) creates a private right of action. Only two district courts have considered the issue and both held that it does not. See Eisenberger v. Spectex Industries, Inc., 644 F. Supp. 48, 50-51 (E.D.N.Y. 1986); Lewis v. Sporck, 612 F. Supp. 1316, 1332-33 (N.D. Cal. 1985). We find that the district court for the Northern District of California has carefully analyzed the legislative history of § 13(b)(2), and considered all the factors set forth by the Supreme Court in Cort v. Ash, 422 U.S. 66, 45 L. Ed. 2d 26, 95 S. Ct. 2080 (1975) and Touche Ross & Co. v. Redington, 442 U.S. 560, 61 L. Ed. 2d 82, 99 S. Ct. 2479 (1979), as relevant to the question of whether a private right of action should be implied into a statute. The district court carefully reviewed the legislative history of the statute, including the specific portions cited by the plaintiffs in this case, and held that Congress did not intend to create a private right of action. We find the California court's reasoning persuasive and adopt it. We find no convincing evidence in the legislative history to support plaintiffs' contention that Congress intended this provision, which requires the corporation to use proper accounting methods and internal accounting controls, to create a private right of action. We therefore conclude that Count III of the complaint must be dismissed.

 Defendants allege numerous defects in plaintiffs' RICO count pleadings (Counts I and II) based on the Fed. R. Civ. P. 9(b) requirement, quoted above, that fraud must be plead with particularity. We find no merit to these claims.

 First, defendants complain that the pleadings on fraud are insufficiently particular in stating when the alleged activities occurred. Plaintiffs have alleged appropriate time periods, such as "from at least August 1981 to and including at least June 3, 1985, the defendants . . . devised . . . a scheme . . . to defraud" (Complaint, para. 34). Further, they have attached copies of the plea agreements entered by Sundstrand when it plead guilty to the underlying criminal charges. We believe that if the time periods alleged were sufficiently specific to support a corporate plea of guilt to criminal charges, they are also sufficiently specific to apprise the defendants here of plaintiffs' claims. Rule 9(b) must be read in conjunction with Fed. R. Civ. P. 8, which requires only that the complaint provide defendants with notice of plaintiffs' claims. See Tomera v. Galt, 511 F.2d 504, 508 (7th Cir. 1975). We think the complaint provides sufficient notice as to the time of the relevant acts. See Baselski v. Paine, Webber, Jackson & Curtis, Inc., 514 F. Supp. 535, 540 (N.D. Ill. 1981) ("when the transactions are numerous and take place over an extended period of time, less specificity is required").

 Defendants also allege that the complaint is deficient because it fails to sufficiently allege the use of wire communications and the mails for the predicate acts of wire and mail fraud. We note that plaintiffs' allegations as to these matters tend to be a bit conclusory and do not describe specific phone conversations or mailings. See, e.g., Complaint, para. 68 ("for the purpose of executing such scheme and artifice . . . the defendants, placed . . . matter to be sent and delivered by the Postal Service . . . .") However, based on the allegations of the complaint, it is clear that defendants would have had to use interstate mail and wire communications. For example, plaintiffs allege that fraudulent tax returns were filed. This would require the use of interstate mails. Similarly, plaintiffs allege numerous fraudulent transactions with Department of Defense personnel, including bribery, contract negotiations, and over-billing on government contracts, all of which would clearly necessitate the use of interstate mails and wire communications. While the complaint is not particularly well-pleaded with respect to the necessary allegations of the use of the mails and wire communications in furtherance of the scheme, we believe it is sufficient to satisfy the demands of notice pleading in the Federal Rules of Civil Procedure. See Systems Research, Inc. v. Random, Inc., 614 F. Supp. 494 (N.D. Ill. 1985) (no specific allegations of occurrences of mail and wire fraud, but plaintiffs did indirectly describe the contents of the mailings); Olympic Federal v. Remp, 1988 U.S. Dist. LEXIS 5579, slip opinion, No. 87 C 8705 (N.D. Ill. 1988). We believe that we can reasonably infer the existence of the necessary interstate communications from the complaint, particularly in light of plaintiffs' general averments that they occurred.

 Defendants further argue that the RICO claims are deficient because they fail to distinguish among the eighteen individual defendants by alleging any specific wrongdoing by any particular defendant or by alleging who in particular among the defendants participated in each of the predicate acts alleged. "Where there are multiple defendants, a pleading is sufficient when it reasonably notifies each defendant of the part he or she plays in the scheme." Morgan v. Kobrin Securities, Inc., 649 F. Supp. 1023, 1028 (N.D. Ill. 1986). We think that the complaint suffices to provide defendants with such notice. The complaint extensively describes all the alleged predicate acts of fraud. It further describes the role of each of the defendants as that of having acquiesced in the misconduct and, in ...


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