A. Rule 9(b)
Rule 9(b) requires that "in all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." Fed. R. Civ. P. 9(b). This means that the complaint must state "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 . . . . " Schiffels v. Kemper Fin. Servs., Inc., 978 F.2d 344, 352 (7th Cir 1992) (quoting Bankers Trust Co. v. Old Republic Ins. Co., 959 F.2d 677, 683 (7th Cir. 1992)). See also DiLeo v. Ernst & Young, 901 F.2d 624, 626 (7th Cir. 1990) (the Seventh Circuit held that plaintiffs must plead the circumstances constituting fraud in detail -- the "who, what, when, where, and how . . ."), cert. denied, 498 U.S. 941, 112 L. Ed. 2d 312, 111 S. Ct. 347 (1990); Graue Mill Dev. Corp. v. Colonial Bank & Trust Co., 927 F.2d 988, 992 (7th Cir. 1991) ("Parties pleading fraud in federal court, must state the time, place and content of the alleged communications perpetrating the fraud"). Rule 9(b), however, must be read in conjunction with Rule 8, which requires a short and concise pleading. Tomera v. Galt, 511 F.2d 504, 508 (7th Cir. 1975); Fujisawa Pharmaceutical Co. v. Kapoor, 814 F. Supp. 720, 726 (N.D. Ill. 1993); Unytite, Inc. v. Lohr Structural Fasteners, Inc., 1992 U.S. Dist. LEXIS 13089, No. 91 C 2849, 1992 WL 220918, at *2 (N.D. Ill. Sept. 1, 1992) (Plunkett, J.).
Read together, these Rules require that the time, place and contents of fraud be plead, but the complainant need not plead evidence. Fujisawa, 814 F. Supp. at 726; Dynabest, Inc. v. Yao, 760 F. Supp. 704, 707 (ND. Ill. 1991). Rule 9(b) is not to be read blindly, but is to be applied in order to effectuate the purposes of the rule which are: (1) to inform the defendants of the claims against them and to enable them to form an adequate 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. Fujisawa, 814 F. Supp. at 726; Reshal Assoc., Inc. v. Long Grove Trading Co., 754 F. Supp. 1226, 1230 (N.D. Ill. 1990) (citations omitted). See also Bankers Trust Co. v. Old Republic Ins. Co., 697 F. Supp. 1483, 1484-85 (N.D. Ill. 1988) (Moran, J.) (citations omitted). Rule 9(b) applies both to common law fraud and allegations of federal mail fraud as predicate acts for a civil RICO claim. Graue Mill, 927 F.2d at 992.
We agree with Graffia that the Complaint's account of Graffia's statements on behalf of Hartford to the four lenders does not meet this test. The Complaint recites only that Hartford and Graffia represented to each lender that Dreamstreet and Marine were borrowers with strong financial positions that met the lender's creditworthiness standards. The representatives of the lenders receiving these communications were not named. Only the month, not the date, of each communication was given, and no location is mentioned. The content of each communication is given only in vague and general terms. There is no excuse for such vagueness, since, with the exception of the representations to non-party Multibank, these representations were made to the Plaintiffs themselves. If liability is to be predicated upon these communications the Plaintiffs will have to replead them.
Plaintiffs cite Capalbo v. Paine Webber, Inc., 672 F. Supp. 1048, 1050 (N.D. Ill. 1987 (Norgle, J.), which stated in a securities-fraud claim having several plaintiffs that the plaintiffs did not need to identify which particular misrepresentation was made to each plaintiff. The court stated that a complaint was sufficient if it sets forth (1) when the misrepresentations were made; (2) where they were made; (3) the particular contents of the misrepresentations; (4) the identity of the party making them; and (5) the consequences of the misrepresentations.
Even if Capalbo is correct and the plaintiffs did not need to plead to whom the misrepresentations were made, element (3) is doubtful here and element (2) is missing. But we also respectfully disagree with Capalbo on the basis of later authority. In Moore v. Kayport Package Express, Inc., 885 F.2d 531, 540 (9th Cir. 1989), the Ninth Circuit affirmed the district court's refusal to accept an amended complaint in a securities fraud suit, noting that the proposed complaint did not specify which plaintiffs received which prospectus. The court stated that "Rule 9(b) requires that the pleader state the time, place and specific content of the false representations as well as the identities of the parties to the misrepresentation." Id. at 541. See also Graue Mill, 927 F.2d at 992-93 (citing with approval Ninth's Circuit's requirement in Moore that complaint state the identities of the parties to the misrepresentations); QO Acquisition Corp. v. The Julien Co., No. 88 C 6050, 1990 U.S. Dist. LEXIS 1467 (N.D. Ill. 1990) (Plunkett, J.).
We also agree with Graffia and Hartford that the complaint does not adequately charge either of them with fraud in connection with the 1986 Dreamstreet financial statements. There are no allegations that either Hartford or Graffia knew that Dreamstreet's business depended upon cattle syndications, that changes in the tax laws had rendered its business uneconomical, and that makers of notes constituting a major portion of Dreamstreet's assets were likely to default. Although these financial statements were allegedly prepared by Dreamstreet's auditors "acting in concert" with Graffia and Hartford, (Compl. at P 26), there is no allegation that either Graffia or Hartford had any responsibility for verifying them. The Complaint alleges that the auditors were aware that the financial statements were false and misleading, (Compl. at P 30), but makes no such allegation as to Hartford or Graffia.
The Plaintiffs point to paragraph 79 which states that "Graffia and [Hartford] knew or should have known that the Dreamstreet Financial Statements, the Marine Capital Financial Statements, and the Hera Financial Statements contained false information . . . ." The bald statement that they knew or should have known about both frauds is doubly ambiguous. "Should have known" is a conclusion, but the Plaintiffs have not made allegations from which we may infer either notice or a duty of inquiry. And the only fraud that affected all three statements was the misrepresentation of Hera's sale of gas. The reasonable meaning of this paragraph in the context of the Complaint as a whole is that Graffia and Hartford knew or should have known that the Dreamstreet and Marine financial statements contained false information because they contained false information taken from the Hera statements. While we are required to draw all reasonable inferences in the Plaintiffs' favor, we do not think it reasonable to infer that Graffia or Hartford knew of the falsity of the other misrepresentations when there is nothing in the allegations of the Complaint explaining how they could have learned it.
B. Loss Causation
Without these allegations we are left with Graffia's preparation of fraudulent financial statements for Hera and Graffia's and Hartford's transmitting them to the Plaintiff lenders, together with the financial statements of Dreamstreet and Marine that were tainted by them. The Plaintiffs allegedly loaned money in reliance on these financial statements and were not repaid, a straightforward case of fraud. But Hartford and Graffia object that the Plaintiffs have not alleged "loss causation." Even if the Hera financial statements were true, they argue, Hera would not have received payment under the notes for ten years. Income resulting from the notes could not have reached Hera's shareholders, Dreamstreet and Marine, in time for them to pay their debts to the Plaintiffs. The Plaintiffs would have lost their money anyway, hence causation has not been shown. (Pl. Br. at 11-12.)
Loss causation is merely an exotic name for the tort concept of causation: the plaintiffs must show that, but for the defendant's wrongdoing, they would not have suffered the harm they complain of. Bastian v. Petren Resources Corp., 892 F.2d 680, 685 (7th Cir.), cert. denied, 496 U.S. 906, 110 L. Ed. 2d 270, 110 S. Ct. 2590 (1990); Fujisawa, 814 F. Supp. at 727. A plaintiff must allege that the loss would not have occurred if the facts were what he believed them to be. LHLC Corp. v. Cluett, Peabody & Co., 842 F.2d 928, 931 (7th Cir.), cert. denied, 488 U.S. 926, 102 L. Ed. 2d 329, 109 S. Ct. 311 (1988). In order to establish loss causation, a plaintiff must show that he would not have acted had he known the truth and also that the untruth was in some "reasonably direct or proximate way responsible for his loss." Lewis v. Hermann, 775 F. Supp. 1137, 1150 (N.D. Ill. 1991) (citations omitted).
The Plaintiffs have correctly stated the law of loss causation. However, in deciding a motion to dismiss we may not go beyond the pleadings without converting the motion to one for summary judgment. The loan documents are not part of the Complaint, and the Complaint does not state when the Plaintiffs' loans to Dreamstreet and Marine fell due. Hartford and Graffia have offered no evidence on the point, although their assertion that the loans had a shorter term is undisputed.
In any event, we think reasonable inferences from the alleged facts support a plausible theory of loss causation. True, by their terms, no payments would be made under the notes for ten years. But long-term obligations (of solvent and responsible obligors) are routinely discounted and sold in advance of their maturity. The financial statements did not disclose that the "purchaser" of Hera's gas was a related party with no business and no assets. Normally one does not accept notes for fifty million dollars when there is no reasonable prospect of payment. (The notes were secured by the gas to be sold, but it is hard to imagine a more fugacious collateral.) If the facts had been as impliedly represented, that the purchase was a bona fide transaction, it is reasonable to infer that the notes would have been worth something, and the fact that they were worthless could have caused at least some of the Plaintiffs' losses.
Further, assuming for the moment that Plaintiffs' losses resulted from misrepresentations relating to Dreamstreet's business rather than Hera's, Graffia and Hartford may nevertheless be liable for them as joint tortfeasors. Although the Complaint does not sufficiently allege either that Hartford and Graffia knew of the misrepresentations regarding Dreamstreet's business or made misrepresentations to the lenders other than those made in, or derived from, Hera's financial statements, it does allege that Hartford and Graffia were knowing participants in a scheme to defraud the plaintiffs. Normally one who participates in a tort may be held liable for the entire loss even though not all of it is proximately caused by him. See W.L. Prosser and W.P. Keeton, The Law of Torts 322-24 (5th ed. 1984). According to the Second Restatement:
For harm resulting to a third person from the tortious conduct of another, one is subject to liability if he