The opinion of the court was delivered by: MILTON I. SHADUR
Investors in two commodity pool limited partnerships, Advanced Portfolio Management, Limited Partnership ("Advanced") and Compass Futures Fund ("Compass"), bring this class action against numerous defendants related in various ways to Stotler Funds, Inc. ("S Funds"), general partner and operator of the two pools. In an action that stems from the assertedly fraudulent diversion of several million dollars in pool funds, plaintiffs invoke a wide array of federal and state statutes.
Their federal claims are brought under Commodity Exchange Act ("CEA") §§ 4b, 4o, 13(a) and 22 (7 U.S.C §§ 6b, 6o, 13c(a) and 25); Securities Exchange Act of 1934 ("1934 Act") §§ 10(b) and 20(a) (15 U.S.C. §§ 78j(b) and 78t(a)) and Securities and Exchange Commission ("SEC") Rule 10b-5 (17 C.F.R. § 240.10b-5); Securities Act of 1933 ("1933 Act") §§ 11, 12 and 15 (15 U.S.C. §§ 77k, 77l and 77o); and the Racketeer Influenced and Corrupt Organizations Act ("RICO") (18 U.S.C. §§ 1961-1968). They also sue under several Illinois statutes--the Illinois Consumer Fraud and Deceptive Practices Act (Ill. Rev. Stat. ch. 121-1/2, PP261-72); the Illinois Securities Law of 1953 (id. PP137.1-137.19); the Illinois Uniform Fraudulent Transfer Act (Ill. Rev. Stat. ch. 59, PP101-112); and the Illinois Fraudulent Conveyance Act (id. PP4-7
)--and under the common law of Illinois.
Various of the defendants now move to dismiss plaintiffs' 17-count Second Amended Class Action Complaint (the "Complaint") under Fed. R. Civ. P. ("Rule") 12(b)(6) and 9(b). For the reasons stated in this memorandum opinion and order, those motions are granted in part and denied in part, while ruling must be deferred as to yet other parts pending further discovery.
Allegations of the Complaint2
Defendants and Related Parties
This lawsuit grew out of the financial downfall of Stotler Group, Inc. ("Stotler") and its numerous subsidiaries.
One of those subsidiaries (P19), Stotler and Company ("S & Co."), was a Commodities Futures Trading Commission ("CFTC")-registered futures commission merchant ("FCM").
It acted as a broker for public investors in commodity futures transactions and in that capacity served as a clearing broker for Advanced and Compass (PP25, 51, 65). S Funds, which was general partner and operator of the two commodity pools during the relevant time frame, is a CFTC-registered commodity pool operator ("CPO") and also a Stotler subsidiary (PP20-21). None of those corporate entities is itself a defendant in this action.
R.G. Dickinson & Co. ("Dickinson"), also a Stotler subsidiary, is an NASD-registered securities broker-dealer as well as a CFTC-registered FCM (P26). Dickinson sold Compass limited partnership interests and was also the recipient of the diverted pool funds (PP27, 82, 84). LaSalle St. Securities, Inc. ("LaSalle") is also a registered securities broker-dealer and also sold Compass limited partnership interests (PP36, 39). Both Dickinson and LaSalle are defendants in this action, and each has filed a motion to dismiss.
M. Eugene Bogner ("Bogner") is a director of both Stotler and S Funds, an executive vice president and director of S & Co. and a partner in Stotler Partnership ("S Partnership"), which owns 77.5% of Stotler's outstanding stock (P29). Thomas Egan ("Egan") is president and chief executive officer of Stotler, an officer and director of S Funds, president and a director of S & Co., a partner in S Partnership and a vice president and director of LaSalle (PP29, 37). Karsten Mahlmann ("Mahlmann") is chairman of the board and a director of Stotler, a vice president and director of S Funds, a director of S & Co. and a partner in S Partnership (PP29, 31). Vincent Ciaglia ("Ciaglia") is an executive vice president and director of Stotler and a partner in S Partnership (P29). Robert Stotler ("Robert") is an executive vice president and director of Stotler, secretary, treasurer and a director of S Funds, an executive vice president and director of S & Co. and a partner in S Partnership (P29). All those individuals are defendants in this action and have filed a joint motion to dismiss.
Defendant Phillip Zarcone ("Zarcone") is the chief financial officer of Stotler, chief financial officer, secretary and treasurer of S Funds and an officer of S & Co. (P29). Zarcone has filed a separate motion to dismiss.
Howard Stotler ("Howard") is chairman of the Executive Committee and a director of Stotler, a vice president and director of S Funds, a director of S & Co. and a partner in S Partnership (PP29, 31). Attorney Thomas Kolter ("Kolter") is a director of Stotler and president, general counsel and chief operating officer of S Funds. During the relevant time period he was also general counsel to both Advanced and Compass (PP29, 42). Attorney John Dolkart ("Dolkart") is a director of Stotler (PP29, 43). Although Howard, Kolter and Dolkart are defendants, none of them has filed a motion to dismiss. Hence the claims against them are not separately considered in this opinion.
Finally, defendant Coopers & Lybrand ("Coopers") is a public accounting firm that performed accounting services for Stotler, S & Co., S Funds, Dickinson, Advanced and Compass (PP35, 126-28) during the relevant time frame. Coopers too has filed a motion to dismiss.
S & Co., in connection with its registration as an FCM, and Dickinson, in connection with its registration as an FCM and a broker-dealer, were subject to various regulatory minimum net capital requirements (PP52-54). Because it was a publicly held corporation, Stotler was subject to similar requirements imposed by the SEC (P57). "At some time within the past three years" Stotler, S & Co. and Dickinson began to suffer financial problems and had difficulty maintaining those minimum capital requirements (PP60-61).
According to plaintiffs, the individual defendants therefore schemed to raise the needed funds by selling limited partnership interests in commodity pools through S Funds. Advanced and Compass were among the pools organized in that manner (PP63-64). Although defendants allegedly intended to divert pool funds from the time of the pools' inception, the pools did engage in commodities and commodity futures trading (PP65, 67, 73).
On various dates between September 1987 and March 1990 "Stotler Funds and/or APM" issued and filed with CFTC disclosure documents for Advanced that stated that pool funds would be either used for commodities trading or held as reserves for margin payments (PP75-76). Plaintiffs also relied on those statements in making their investment decisions (P77).
At apparent odds with plaintiffs' earlier theory that the conspiracy began when the pools were first organized, Complaint PP79 and 80 allege that in late 1989, when Stotler's financial situation "reached crisis proportions," the individual defendants (P80):
agreed and conspired to purloin, steal and convert the funds of APM [Advanced] and Compass in a desperate attempt to shore up the deteriorating financial conditions of Stotler and Company, R.G. Dickinson & Co., and/or Stotler Group. . . .
In December 1989 $ 1 million of Advanced's funds and $ 3 million of Compass' funds
were sent to Dickinson by interstate wire pursuant to the orders of Egan, Kolter, Bogner and Zarcone (PP79-84). In exchange for those funds Stotler issued a promissory note to Advanced and commercial paper to Compass
(PP88, 92-93). Given Stotler's financial situation, however, the promissory note and commercial paper were worth substantially less than their facial value from the time they were issued, and the pool funds were essentially lost to plaintiffs at that time. Only $ 450,000 of the commercial paper was ever redeemed (PP98, 102).
Because those transactions violated the Advanced and Compass partnership agreements, the individual defendants, assisted by Coopers, attempted to conceal them from the investors by issuing a series of allegedly fraudulent documents (P99). Between January and July 1990 they sent the investors monthly financial statements that failed to disclose the commercial paper and promissory note transactions and that falsely represented the financial situation of the pools (P100). They also filed federal tax returns and sent Schedule K-1 tax forms to investors that failed to disclose the partnerships' losses (P102). During that six month period between January and July 1990 the various individual defendants also filed numerous forms and documents with CFTC and SEC on behalf of Compass, Stotler and S & Co. that failed to disclose the transfer of funds (PP112, 117-24).
Rule 9(b): Pleading Fraud "with Particularity"
As a preliminary matter, each of LaSalle (its Mem. 3), Coopers (its Mem. 12-15), Dickinson (its Mem. 5-6) and Zarcone (his Mem. Ex. A 5-8) argues that plaintiffs have failed to satisfy Rule 9(b)'s requirement that "the circumstances constituting fraud . . . shall be stated with particularity." As Sears v. Likens, 912 F.2d 889, 893 (7th Cir. 1990) (quoting the court below in that case) teaches:
To meet the particularity requirements of Rule 9(b), a complaint must specify the identity of the person making the misrepresentation, the time, place, and content of the misrepresentation, and the method by which the misrepresentation was communicated to the plaintiff.
Although the Complaint is for the most part sufficiently specific as to the time, place and content of the misrepresentations as well as the method by which they were communicated,
plaintiffs' allegations identifying the persons involved are less precise. Their Complaint tends to aggregate the defendants and in many instances fails to specify for which particular acts or in what capacity the various defendants are potentially liable.
Application of Rule 9(b) to such allegations raises competing considerations.
First, a complaint's allegations obviously must be sufficiently specific to allow both defendants and this Court to respond. Thus, as Sears, 912 F.2d at 893 (continuing to quote the district court) points out:
A complaint that attributes misrepresentations to all defendants, lumped together for pleading purposes, generally is insufficient.
Instead a complaint must specify "who was involved in what activity" (id. in the Court of Appeals' own language) so that each defendant is notified of the charges targeting that defendant and can respond accordingly ( Wislow v. Wong, 713 F. Supp. 1103, 1105-06 (N.D.Ill. 1989); Coronet Ins. Co. v. Seyfarth, 665 F. Supp. 661, 666 (N.D.Ill. 1987); Kennedy v. Nicastro, 503 F. Supp. 1116, 1122 (N.D.Ill. 1980)).
At the same time, some degree of confusion may be unavoidable when particularly complex transactions with multiple participants are involved. As this Court has stated in an earlier case, that Rule 9(b) "requirement is tempered by the fact that with complex transactions over an extended period of time, somewhat less specificity is required" ( Mutuelle Generale Francaise Vie v. Life Assurance Co. of Pennsylvania, 688 F. Supp. 386, 393 (N.D.Ill. 1988); see also Wislow, 713 F. Supp. at 1105 n. 4). Thus Moore v. Kayport Package Express, Inc., 885 F.2d 531, 540 (9th Cir. 1989) has said:
Instances of corporate fraud may also make it difficult to attribute particular fraudulent conduct to each defendant as an individual. To overcome such difficulties in cases of corporate fraud, the allegations should include the misrepresentations themselves with particularity and, where possible, the roles of the individual defendants in the misrepresentations.
In addition, "plaintiffs are not required to allege facts that are in the exclusive possession of the defendants" ( Wislow, 713 F. Supp. at 1105), as appears to be the case with many of the missing facts here. Earlier opinions by this Court have made the point that a strict application of Rule 9(b) to situations where defendants are in sole possession of some specifics about the alleged fraud may put plaintiffs in an untenable Catch-22 situation: They are unable to gain access to those facts unless they are allowed to stay in court and proceed with discovery, and they are unable to stay in court if they cannot allege the yet-to-be-discovered facts ( Refco, Inc. v. Troika Inv. Ltd., 702 F. Supp. 684, 689 (N.D.Ill. 1988); Ramson v. Layne, 668 F. Supp. 1162, 1171 (N.D.Ill. 1987)).
Commodity Exchange Act (Counts I and II)
Complaint Counts I and II, brought against all defendants, allege fraud in violation of CEA PP4b, 4o, 13(a) and 22, 7 U.S.C. PP6b, 6o, 13c(a) and 25.
Count I P175 charges that defendants "deceived . . . and wilfully cheated and defrauded" plaintiffs by using pool funds intended for trading in commodities and commodities futures to make loans and purchase debt instruments, and by thereafter concealing those transactions. Count II PP177 alleges a violation of CFTC Regulations §§ 4.21(g)(2) and 4.21(h),
17 C.F.R. §§ 4.21(g)(2) and 4.21(h), which require pool operators (1) to amend disclosure documents within 21 days after they either know or have reason to know that the documents contain inaccuracies (Reg. § 4.21(g)(2)) and (2) to disclose all material information to existing and prospective pool participants (Reg. § 4.21(h)).
Private Right of Action under CEA
Although defendants with one exception (Coopers Mem. 18-19) have failed to raise it in their arguments for dismissal, the most significant problem with plaintiffs' CEA claims is that they far exceed the limited scope of the private right of action under that statute. Here are the relevant provisions of CEA § 22(a), part of the section that was added to CEA by the Futures Trading Act of 1982:
(1) Any person . . . who violates this chapter or who willfully aids, abets, counsels, induces, or procures the commission of a violation of this chapter shall be liable for actual damages resulting from one or more of the transactions referred to in clauses (A) through (D) of this paragraph and caused by such violation to any other person--
(C) who purchased from or sold to such person or placed through such person an order for the purchase or sale of--
(iii) an interest or participation in a commodity pool. . . .
By its literal and plain language, the "such person" specification in CEA § 22(a)(1)(C) limits the statutory remedy to obtaining damages from the persons who sold or took orders for interests in the commodity pool ( In re ContiCommodity Services, Inc. Securities Litigation, 733 F. Supp. 1555, 1567 (N.D. Ill. 1990); Grossman v. Citrus Assocs. of the New York Cotton Exch., Inc., 706 F. Supp. 221, 230-31 (S.D.N.Y. 1989)).