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RESHAL ASSOCS. v. LONG GROVE TRADING CO.

December 13, 1990

RESHAL ASSOCIATES, INC., RESHAL ASSOCIATES PENSION PLAN, RESHAL ASSOCIATES PROFIT SHARING PLAN, ROBERT REESE, DAVID HOIALMEN, and GLORIA SICILLIANO, Plaintiffs,
v.
LONG GROVE TRADING COMPANY, STERLING FINANCIAL ADVISORY SERVICES, INC., DAVID B. ROBERTS, and THOMAS A. HOPKINS, Defendants


Ilana Diamond Rovner, United States District Judge.


The opinion of the court was delivered by: ROVNER

ILANA DIAMOND ROVNER, UNITED STATES DISTRICT JUDGE

 I. INTRODUCTION

 Defendants in this case allegedly misrepresented the nature of various investments which they recommended and sold to plaintiffs, and plaintiffs have brought suit on a number of fraud-related theories. Pending is defendants' motion to dismiss the complaint. For the reasons stated below, defendants' motion is granted in part and denied in part.

 II. FACTS

 For purposes of considering defendants' motion to dismiss, the Court accepts as true the factual allegations of the complaint. See Mathers Fund, Inc. v. Colwell Co., 564 F.2d 780, 783 (7th Cir. 1977). Plaintiffs are a pension plan, a profit sharing plan, the administrator of the plans, and individual trustees and beneficiaries of the plans. Defendant Long Grove Trading Company ("Long Grove") is in the business of selling securities and providing investment advice. Defendant Sterling Financial Advisory Services, Inc. ("Sterling") is an investment advisor affiliated with Long Grove. Defendant Thomas A. Hopkins, the President of Long Grove, sells securities and provides investment advice. Defendant David B. Roberts sells securities and provides investment advice through Long Grove and Sterling.

 According to the complaint, in 1982 plaintiffs began a relationship with defendants in which defendants advised plaintiffs concerning the investments made with the funds contributed to the plans. From 1982 to 1988, plaintiffs made it clear to defendants that plaintiffs wanted the funds to be invested conservatively in investments which were readily marketable. During this same period, defendants continually represented to plaintiffs that the investments they were recommending satisfied these criteria. Notwithstanding defendants' representations, defendants advised plaintiffs to invest the funds in investments which were actually illiquid and speculative. When plaintiffs consulted with an independent investment adviser in May, 1989, they learned that defendants' representations concerning the nature of the investments had been false. As a result of defendants' misrepresentations, plaintiffs allege that they have suffered losses in excess of $ 130,000. The complaint lists certain communications from defendants to plaintiffs as examples of the alleged misrepresentations, and it lists a number of investments which were the subject of the alleged misrepresentations.

 Plaintiffs' complaint is brought in six counts. Count I alleges that defendants' conduct violated § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and S.E.C. Rule 10b-5, 17 C.F.R. 240.10b-5 (collectively, "§ 10(b)"). Count II alleges common law fraud. Count III alleges that defendants breached their fiduciary duties to plaintiffs. Count IV alleges fraudulent misrepresentation in violation of the Illinois Consumer Fraud and Deceptive Practices Act, Ill. Rev. Stat. Ch. 121-1/2 paras. 261 et seq. Count V alleges that defendants are liable for negligent misrepresentation. Count VI alleges that defendants violated the Illinois Securities Act, Ill. Rev. Stat. Ch. 121-1/2 paras. 137.1 et seq.

 A. Rule 9(b)

 Defendants argue that Counts I, *fn1" II, III, *fn2" IV and VI should be dismissed for failure to comply with Fed. R. Civ. P. 9(b), which requires that allegations of fraud be "stated with particularity." Rule 9(b) has generally been held to require specification of the time, place and contents of the misrepresentations, the identities of the persons who made the misrepresentations, and the manner in which the misrepresentations were communicated to the plaintiff. See Sears v. Likens, 912 F.2d 889, 893 (7th Cir. 1990); Coronet Insurance Co. v. Seyfarth, 665 F. Supp. 661, 666 (N.D. Ill. 1987) (Nordberg, J.); McKee v. Pope Ballard Shepard & Fowle, Ltd., 604 F. Supp. 927, 930 (N.D. Ill. 1985) (Getzendanner, J.). However, Rule 9(b) must also be read in conjunction with Rule 8, which requires a plaintiff "to make known his claims simply and concisely in short, plain statements." Tomera, 511 F.2d at 508. See also Coronet, 665 F. Supp. at 666; McKee, 604 F. Supp. at 930; Banowitz v. State Exchange Bank, 600 F. Supp. 1466, 1469 (N.D. Ill. 1985) (Rovner, J.). Furthermore, Rule 9(b) must not be applied blindly, but rather must be applied in view of its purposes, which are (1) to inform the defendants of the nature of the claimed wrong and enable them to formulate an effective response and defense; (2) to eliminate the filing of a conclusory complaint as a pretext for using discovery to uncover wrongs; and (3) to protect defendants from unfounded charges of fraud which may injure their reputations. See Coronet, 665 F. Supp. at 666; McKee, 604 F. Supp. at 930.

 Courts have generally rejected arguments that discovery will cure an otherwise vague complaint. Beck v. Cantor, 621 F. Supp. 1547, 1552 (N.D. Ill. 1985) (Rovner, J.); McKee, 604 F. Supp. at 932. This is because a plaintiff should not need discovery in order to identify the circumstances of representations to which it was a party, and because discovery should not be a tool for determining the existence of unknown wrongs. Beck, 621 F. Supp. at 1552; McKee, 604 F. Supp. at 932. However, "it is not necessary for plaintiffs to allege evidentiary details that will be used to support the claim of fraud at a later date." Banowitz, 600 F. Supp. at 1469. See also Coronet, 665 F. Supp. at 666.

 Defendants argue that the complaint is deficient because its descriptions of the alleged misrepresentations fail to distinguish between the various defendants. *fn3" The principal challenged allegations are the following:

 
"From in or about 1982 and continuing thereafter each year, up to and including in or about February 1988, Hopkins and/or Roberts represented to Plaintiffs that investments they recommended for the Pension and Profit Sharing Plans met such criteria." (Complaint para. 10 (emphasis added).)
 
"Between in or about November 1982 and continuing thereafter through in or about February 1988, Defendants advised Plaintiffs to invest the Plans' funds in illiquid and speculative investments, including, but not limited to the following . . . ." (Complaint para. 11 (emphasis added).)
 
"In or about February 1989, Defendants, through Roberts, again presented Plaintiffs with reports concerning the Pension Plan and the Profit Sharing Plan." (Complaint para. 13 (emphasis added).)
 
" Defendants each year from in or about November 1982 up to and including in or about February 1988, represented that securities they recommended to be purchased by the Plans were conservative investments and satisfied the liquidity objectives of Plaintiffs . . . ." (Complaint para. 19B (emphasis added).)

 Ordinarily, a plaintiff may not "lump together" multiple defendants in such a way that the defendants cannot discern from the complaint which defendant made each representation. Sears, 912 F.2d at 893; McKee, 604 F. Supp. at 931. "Where there are allegations of a fraudulent scheme with multiple defendants. . . . the complaint must inform each defendant of the specific fraudulent acts which constitute the basis of the action against the particular defendant." Coronet, 665 F. Supp. at 666. The strictness with which this rule is applied, however, varies according to the nature of the allegations; plaintiffs are required to distinguish among defendants to the extent that they may reasonably be expected to be able to do so. As stated in Lincoln National Bank v. Lampe, 414 F. Supp. 1270, 1279 (N.D. Ill. 1976) (Decker, J.):

 
It is obvious that a plaintiff may not be privy to the workings of a group of defendants who have acted in concert to defraud him, but he can at least identify the particular defendants who allegedly dealt with him, and he can describe the circumstances under which particular defendants dealt directly with him.

 See also McKee, 604 F. Supp. at 932. Furthermore, "even where the role of each defendant is a matter particularly within the knowledge of the defendants, plaintiffs must make allegations with a statement of facts upon which the belief is founded." Coronet, 665 F. Supp. at 666. However, where the facts necessary for more specific pleading are not immediately accessible to the plaintiffs, further detail is not required. See Coronet, 665 F. Supp. at 666 ("There may be specific matters as to which it is appropriate to refer to some defendants collectively"); Banowitz, 600 F. Supp. at 1469 ("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.'"), quoting Merrit v. Libby, McNeill & Libby, 510 F. Supp. 366, 373 (S.D.N.Y. 1981). In making this determination, courts should keep in mind Rule 9(b)'s purpose of allowing the defendants an opportunity to make an effective response:

 
The conduct of [corporate insiders] need not be specified and the fraudulent acts complained of need not be attributed to certain persons if the complaint sufficiently describes the fraudulent acts and provides the individuals with sufficient information to answer the allegations.

 Banowitz, 600 F. Supp. at 1469.

 In this case, plaintiffs have failed to distinguish among defendants with respect to allegations of misrepresentations which were communicated to plaintiffs. Because plaintiffs were the recipients of these allegations, they should be able to identify which defendants made the various representations. This is not a case, however, where plaintiffs' failure to be more specific implicates Rule 9(b)'s purposes to any substantial extent. Plaintiffs have provided several concrete examples of alleged misrepresentations, contained in documents attached to the complaint, and one reason for the lack of further specificity may be a desire to avoid overwhelming the complaint with impenetrable and complex details that could be more easily shared during discovery. Although plaintiffs refer to an ongoing pattern of misrepresentations over the course of several years, the number of defendants involved is very limited. Plaintiffs' allegations are not inconsistent or confusing. Cf. Coronet, 665 F. Supp. at 666 (allegations were inconsistent). They do not leave the reader without any basis for inferring that particular defendants were involved in the alleged wrongs. Cf. McKee, 604 F. Supp. at 931 ("the pleading fails to identify any activities by Pope and Lindgren that lead to the inference of their participation in fraudulent activity"). They are specific enough that the Court has no concern that the complaint is a pretext to force a quick settlement or to allow discovery which may uncover unknown wrongs. Cf. McKee, 604 F. Supp. at 932. The allegations of fraud are not cryptic or conclusory. Cf. Flynn v. Merrick, 881 F.2d 446, 449 (7th Cir. 1989) ("the cryptic statements found in the complaint do not establish fraud to the degree of particularity required"); Skycom Corp. v. Telstar Corp., 813 F.2d 810, 818 (7th Cir. 1987) (allegation which did not identify a single statement or specify why such a statement was fraudulent was not sufficiently particular). The scheme is sufficiently circumscribed that defendants should be able to respond effectively. Cf. Banowitz, 600 F. Supp. at 1469 ("Defendants have been given notice of the alleged fraud sufficient to allow adequate responsive pleading"). Thus unlike the usual case in which Rule 9(b) warrants dismissal of a complaint, plaintiffs' allegations do not raise substantial concerns that the allegation of fraud is frivolous or that defendants cannot adequately respond. Under these circumstances, dismissal of the complaint -- rather than a less drastic measure such as ordering a more definite statement -- is not in the financial interests of the parties, nor would it further judicial efficiency. Accordingly, defendants' motion to dismiss for lack of particularity is denied, but it shall be treated as seeking in the alternative a more definite statement, and that alternative request is granted.

 B. Secondary Liability

 Plaintiffs allege that defendants are jointly and severally liable pursuant to four distinct theories: that they directly or indirectly control persons who are primarily liable; that they aided and abetted one another; that they conspired with each other; and that Long Grove and Sterling are liable for the actions of Hopkins and Roberts on the basis of respondeat superior. (Complaint paras. 22-24.) *fn4" Because the issues in this case are similar with respect to each of the four theories, the Court shall briefly review the legal requirements of each theory before considering the sufficiency of plaintiffs' allegations.

 Various competing tests exist for determining control person liability pursuant to § 20(a) of the Securities Exchange Act, 15 U.S.C. § 78t(a). *fn5" In Schlifke v. Seafirst Corp., 866 F.2d 935 (7th Cir. 1989), the court stated:

 
Several circuits have adopted the two-prong test introduced in Metge v. Baehler, 762 F.2d 621 (8th Cir. 1985), cert. denied, 474 U.S. 1057, 106 S. Ct. 798, 88 L. Ed. 2d 774 (1986), requiring the plaintiff to establish "that the defendant lender actually participated in (i.e., exercised control over) the operations of the [borrowing entity] in general . . . [and] that the defendant possessed the power to control the specific transaction or activity upon which the primary violation is predicated." Other courts have applied a more rigorous test requiring "culpable participation" in the alleged illegal activity. We need not decide whether to adopt this more rigorous formulation . . . .

 866 F.2d at 949. For reasons that will be made clear below, this Court similarly need not choose among these tests at this point. To allege control person liability, a plaintiff must allege at least the potential for control over the specific acts constituting a primary violation; a vague allegation of general control is insufficient. See Schlifke, 866 F.2d at 949-50; Craig ...


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