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March 19, 1992

IN RE: FIRST CHICAGO CORPORATION SECURITIES CORPORATION; JEROME HARRIS, individually, and on behalf of all others similarly situated, Plaintiff,

The opinion of the court was delivered by: JAMES B. MORAN


 After we dismissed without prejudice the original complaint, plaintiff Jerome Harris, on behalf of himself and all others similarly situated, filed this amended complaint against First Chicago Corporation (First Chicago) and its officers and directors, *fn1" alleging violations of Section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b) and the Securities and Exchange Commission Rule 10b-5, 17 C.F.R. 240.10b-5, and Section 20 of the Securities and Exchange Act, 15 U.S.C. § 78t. Before us now is defendants' motion to dismiss pursuant to Rule 9(b) of the Federal Rules of Civil Procedure. For the reasons set forth below, we grant defendants' motion.


 The original complaint was filed by Edward J. Kunze, Rodney B. Shields and Harris, on behalf of persons acquiring First Chicago common stock through purchase on the open market or in exchange for Ravenswood Financial Corp. (Ravenswood) common stock between January 13, 1989 and March 29, 1990. It charged First Chicago and its officers and directors with knowingly and recklessly misrepresenting the health of the corporation. In our memorandum and order of May 1, 1991, In re First Chicago Corp. Secur. Litigation, 769 F. Supp. 1444, we summarized these charges. *fn2" As a recap, plaintiffs charged defendants with making fraudulent statements in various press releases, letters to shareholders, annual and quarterly financial reports, and in dividend announcements. More specifically, plaintiffs cited First Chicago's 1988 annual report, which boasted the corporation's high performance and included statements downplaying minor setbacks in the third quarter of 1989. Plaintiffs also attacked several statements by defendants lauding their credit management process as being strict and disciplined. Defendants stated that loan portfolios and credit risks were closely monitored and continually reviewed, and that estimates of losses were made quarterly in order to properly assess the adequacy of the allowance for credit losses. First Chicago attributed much of its 1988 success and its overall strength to this process. Although defendants described their highly leveraged transaction portfolio as requiring special attention, they stated that rigorous top management and their conservative practices with respect to the portfolio made them confident that these loans did not present excessive risks to the shareholders. In their real estate portfolio defendants again admitted that special attention was required but, as in the highly leveraged transaction portfolio, exposure and risk were considered minimal because of their strict lending practices. Plaintiffs alleged that defendants failed to disclose that their commercial loans were not diversified, as touted, but instead were concentrated in risky transactions. As an example, plaintiffs cited a $ 200 million loan to VMS Realty Partners (VMS), one of the nation's largest real estate firms, which plaintiffs claimed was initiated without adequate collateral, guarantees, or assurances that it could be syndicated.

 Defendants made statements expressing their aggressive approach to handling specific credit problems in their loan portfolio. Their financial report for the second quarter of 1989 was very optimistic about First Chicago's continued progress toward its financial goals. Consistent with this optimism, they announced two stock dividend increases in 1989. These statements, plaintiffs asserted, were "with knowledge or reckless disregard of the true financial and operating condition of First Chicago . . . ." 769 F. Supp. at 1448. On March 29, 1990, the outlook was not so optimistic. First Chicago announced serious problems in its real estate portfolio which caused the loan loss reserve for the first quarter of 1990 to triple to between $ 150-$ 160 million. Also, the net income for the quarter would be 50 per cent of the 1989 level. It was estimated that non-performing assets would rise about 15 per cent from the 1989 year-end level of $ 1.1 billion.

 Although we considered plaintiffs' allegations sufficient to withstand a motion to dismiss under Rule 12(b)(6), *fn3" the complaint failed under the more rigorous standard of Rule 9(b), which requires that "circumstances constituting fraud or mistake [to] be stated with particularity." The rule serves three purposes: "(1) the filing of 'strike suits' or complaints as pretext's for the discovery of unknown wrongs is inhibited; (2) defendants are protected from the harm that results from charges of serious wrongdoing; and (3) defendants are ensured notice of the conduct complained of, enabling them to prepare a defense." 769 F. Supp. at 1452-53 (citing Coronet Ins. Co. v. Seyfarth, 665 F. Supp. 661, 666 (N.D. Ill. 1987)).

 In DiLeo v. Ernst & Young, 901 F.2d 624 (7th Cir. 1990), cert. denied, 111 S. Ct. 347, 112 L. Ed. 2d 312 (1990), the court explained that Rule 9(b) requires a showing of "the who, what, when, where, and how," so that the complaint reads like "the first paragraph of any newspaper story." Id. at 627. Applying DiLeo to the original complaint, we stated that "with one exception, plaintiffs' allegations of misrepresentations and omissions in paragraphs 73 and 74 are, in essence, merely conclusory assertions that defendants' statements . . . are false." 769 F. Supp. at 1453. The one exception to plaintiffs' otherwise conclusory allegations was the $ 200 million loan to VMS, which plaintiffs claimed was made "without adequate collateral, guarantees, or assurances that it could be syndicated." This claim, we stated, was close to satisfying Rule 9(b)'s particularity requirement because it involved a particular speculative and risky transaction. Nevertheless, the allegation fell short of supporting "plaintiffs' much broader allegations of false and misleading statements and omissions regarding the quality of First Chicago's loan portfolios, its conservative lending policies and rigorous credit management, and its confidence that it would achieve its financial goals." 769 F. Supp. at 1454. This was largely because the $ 200 million VMS loan was only a small portion of First Chicago's real estate portfolio ($ 4.472 billion at the end of 1989) and its total commercial loan exposure ($ 20.561 billion at the end of 1989).

 In order for plaintiffs to survive Rule 9(b) scrutiny, we stated that they

 769 F. Supp. at 1454-55 (citing DiLeo, 901 F.2d at 627).

 We also explained that plaintiffs could meet Rule 9(b)'s requirement by establishing scienter circumstantially, i.e., by showing that the fraud was in defendants' interests, or by other "circumstances indicating conscious behavior by defendant." 769 F. Supp. at 1455. Because plaintiffs failed to show directly or indirectly that their claims were not baseless, we dismissed the complaint without prejudice.


 In an attempt to cure the deficiencies of the original complaint plaintiff Harris filed the amended complaint. *fn4" This complaint, being much narrower in scope, is on behalf of persons acquiring First Chicago's common stock between October 13, 1989 and March 29, 1990. *fn5" It focuses on the VMS transaction, charging, in essence, that First Chicago failed to adequately increase its loan loss reserve during the third and fourth quarters of 1989 to account for the increased risk of the loan. Delaying the increase of the loan loss reserve until the first quarter of 1990, according to plaintiff, "had the effect of increasing materially the earnings reported by First Chicago and, in turn, caused First Chicago's stock price to be inflated" (am. cplt. P1).

 To shore up his Rule 10(b)(5) claim, plaintiff attempts to establish scienter by showing a self-interest on the part of defendants in delaying the loan loss increase. Plaintiff alleges that defendants' motive for the delay was to increase First Chicago's 1989 earnings in order to increase their executive bonus compensation, which is tied, in substantial part, to ...

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