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LEVINE v. PRUDENTIAL-BACHE PROPS.

June 3, 1994

RICHARD LEVINE, POLLY S. GUTMAN, HARLEY KRAVITZ, JAMI LYNN LEVY, JOEL A. LEVY, TODD MIDDLETON, ANDREW W. GALLOPO, Plaintiffs,
v.
PRUDENTIAL-BACHE PROPERTIES, INC. AND PRUDENTIAL-BACHE SECURITIES, INC., Defendants.



The opinion of the court was delivered by: JOHN F. GRADY

 Before the court is the motion of defendants Prudential-Bache Properties, Inc. and Prudential-Bache Securities, Inc. ("the Prudential defendants") to dismiss the 45-count first amended complaint ("the complaint"). For the reasons discussed in this opinion, the motion is granted.

 BACKGROUND

 This lawsuit concerns three limited partnerships in which the plaintiffs invested. The partnerships, known collectively as the Summit Funds (and individually as "LPI," "LPII" and "LPIII"), were organized for the purpose of investing in certain real-estate projects financed by municipal bonds. Defendant Prudential-Bache Properties, Inc. was the general partner in the partnerships, and defendant Prudential-Bache Securities, Inc. served as the sales agent for the partnerships. Several other defendants, including Norman Tandy and Norman Tandy Associates ("the Tandy defendants"), and the Related Companies, Inc. ("the Related defendants," together with several affiliated entities named in the suit), have exited this litigation by way of settlement, while the Prudential defendants remain in the case.

 In the alleged scheme, the Prudential defendants conspired with the Tandy defendants to shake down the third-party developers of the bond-financed construction projects. The Tandy defendants acted as a construction consultant for the projects, overseeing the work and the expenditure of the limited partnerships' funds. The complaint alleges that the Tandy defendants, while acting in concert with the Prudential defendants, used their position to coerce the developers into buying labor and materials from "affiliates" of the Tandy defendants. Through this alleged "kickback" scheme, development costs rose and investment return declined. The complaint also alleges that when developers did not cooperate with the Tandy defendants' shakedown attempts, the Prudential or other defendants would drive those projects into default and take control of the projects themselves. Once in control, the defendants would pocket additional management and construction fees, again to the detriment of the Summit Funds' investment return, the complaint alleges.

 The gravamen of the complaint, which is a putative class and derivative action, charges that by not disclosing the foregoing scheme, the defendants violated:

 
(1) Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j, and Rule 10b-5 (Count I);
 
(2) The Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962(c) (Count II);
 
(3) The securities laws of 40 states (Counts III-XLII); and
 
(4) State common law against fraud, breach of fiduciary duty and negligence (Counts XLIII, XLIV and XLV, respectively).

 The complaint names the Prudential defendants in all counts, and the Tandy defendants in Count II only.

 In their motion to dismiss the complaint, the Prudential defendants have raised numerous grounds, including:

 
(1) The complaint's allegations fail to state the circumstances of the charged fraud with sufficient particularity under Fed. R. Civ. P. 9(b);
 
(2) The complaint's 10b-5 claims are legally inadequate because, among other reasons, the plaintiffs lack standing, the claims are time-barred, and plaintiffs purchased in the aftermarket and therefore could not have relied on the allegedly misleading prospectuses;
 
(3) The RICO claims are insufficiently pleaded for reasons including standing, time bar, and lack of specificity as to the predicate acts of mail and wire fraud;
 
(4) The state law claims should be dismissed largely on the same grounds as the federal claims, or for lack of supplemental federal jurisdiction.

 The court will proceed to analyze these arguments, starting with the first, which concerns all of the fraud allegations and thus has the broadest application to the complaint as a whole.

 ANALYSIS

 I. Particularity Under Rule 9(b)

 Rule 9(b) requires litigants to plead the "circumstances" of alleged fraud with particularity, while allegations of motive, knowledge and intent may be pleaded generally. Fed. R. Civ. P. 9(b). The rule serves three purposes: (1) informing defendants of the nature of the alleged wrong, so they may mount an adequate defense; (2) eliminating conclusory complaints filed as a pretext for using discovery to uncover heretofore unknown wrongs; and (3) protecting defendants from spurious fraud charges that might be particularly damaging to reputation. Vicom, Inc. v. Harbridge Merchant Servs., Inc., 20 F.3d 771, slip op. at 9-10 (7th Cir. 1994); Reshal Assoc., Inc. v. Long Grove Trading Co., 754 F. Supp. 1226, 1230 (N.D. Ill. 1990); Coronet Ins. Co. v. Seyfarth, 665 F. Supp. 661, 666 (N.D. Ill. 1987); McKee v. Pope, Ballard, Shepard & Fowle, Ltd., 604 F. Supp. 927, 932 (N.D. Ill. 1985). The particularity requirement of Rule 9(b) nonetheless must be read in conjunction with Rule 8, which provides that complaints should contain a "short and plain statement of the claim." Fed. R. Civ. P. 8; Tomera v. Galt, 511 F.2d 504, 509 (7th Cir. 1975). In Tomera, the Seventh Circuit stated that Rules 8 and 9(b) are satisfied in fraud cases by "a brief sketch of how the fraudulent scheme occurred, when and where it occurred, and the participants." Id. Since Tomera, our appeals court has elaborated somewhat on that standard. Pleading the "circumstances" of fraud with particularity "means the who, what, when, where, and how: the first paragraph of any newspaper story." DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir.), cert. denied, 498 U.S. 941, 112 L. Ed. 2d 312, 111 S. Ct. 347 (1990). The plaintiff alleging fraud must state the identity of the person making the misrepresentation; the time, place and content of such misrepresentation; and the method by which it was communicated to the plaintiffs. Vicom, slip op. at 11; Uni* Quality, Inc. v. Infotronx, Inc., 974 F.2d 918, 923 (7th Cir. 1992).

 In the instant case, the Prudential defendants do not dispute the plaintiffs' pleading of the time, place, content and manner of communication of the statements they allege to be fraudulent, although the complaint does not completely clarify those issues. *fn1" The dispute concerns the plaintiffs' leveling of fraud charges against all defendants collectively, without a detailed description of what role each individual defendant played. The complaint specifically avers that the Tandy defendants used their influence as construction consultant to steer business toward their friends and affiliates. Complaint at P 23. But as to the Prudential defendants, the complaint simply lumps them together with the Tandy defendants by stating that each defendant "participated" in the kickback scheme, and by attributing the scheme to "defendants." Id. at PP 21, 22. The Prudential defendants argue that Rule 9(b)'s particularity requirement requires that the complaint give more specifics as to what role each defendant played, especially the Prudential defendants.

 The Seventh Circuit recently spoke approvingly of a line of cases interpreting Rule 9(b) and holding that when a complaint implicates multiple defendants, it should not "lump together" the defendants but should inform each defendant of the nature of his or her participation in the alleged fraud. See Vicom, slip op. at 11-12 (citing DiVittorio v. Equidyne Extractive Indus., Inc., 822 F.2d 1242, 1247 (2d Cir. 1987)). The appeals court recognized, though, that a plaintiff need not individualize the role of multiple defendants when the necessary information is "uniquely within the defendant's knowledge." Vicom, slip op. at 12 n.5 (citing Midwest Grinding Co. v. Spitz, 976 F.2d 1016, 1020 (7th Cir. 1992)).

 The court believes the sufficiency of the pleaded link between the Prudential defendants and the overall fraudulent scheme should be governed by the liberal standard articulated by the Seventh Circuit in Tomera. Here, the plaintiffs have made particular allegations as to how the scheme worked. They have made general allegations that the Prudential defendants knowingly participated in the scheme. Rules 8 and 9(b) do not require more, *fn2" and the information that would permit a more individualized pleading would appear to lie in the exclusive possession of the defendants. Pleading of specific facts showing the Prudential defendants' participation in the alleged fraud, or their possible motives for participating, also sound more in the nature of evidentiary details under a regime of "full-scale fact pleading" that Rule 9(b) does not impose on fraud complaints. Bankers Trust Co. v. Old Republic Ins. Co., 959 F.2d 677, 683 (7th Cir. 1992). The Seventh Circuit has never held that Rule 9(b) requires the parties to plead their theory of the case; they generally need not make allegations detailing the parties' relationship or the falsity of the misrepresentations or omissions. See Midwest Commerce Banking Co. v. Elkhart City Centre, 4 F.3d 521, 523 (7th Cir. 1993).

 Moreover, a complaint does not run afoul of Rule 9(b) if the defendants can make enough sense of it so that they may mount an answer or defense. See Douglas v. Tonigan, 830 F. Supp. 457, 462 (N.D. Ill. 1993) (Grady, J.) ("The allegations are sufficient if the defendant is in a position to understand the nature of the [allegedly fraudulent] conduct . . . and can defend against the allegations."). This court concurs with the plaintiffs' assertion that "it cannot be that difficult for these defendants to either admit or deny that they knowingly made misrepresentations or took kickbacks." Plaintiffs' Consolidated Response to Motions to Dismiss the First Amended Class Action Complaint ("Response"), at 18. The allegations are not too cryptic, vague or conclusory for the defendants to understand them and to determine whether they are chimerical. See Reshal Assoc., Inc. v. Long Grove Trading Co., 754 F. Supp. 1226, 1232 (N.D. Ill. 1990) (finding that fraud allegations involved a relatively small number of defendants and were not excessively cryptic or conclusory so as to warrant dismissal under Rule 9(b)); Uniroyal Goodrich Tire Co. v. Mutual Trading Corp., 749 F. Supp. 869, 872 (N.D. Ill. 1990) (holding that although general rule requires that a complaint against multiple defendants must give notice of each defendant's role, complaint may be less specific as long as defendants are not "left guessing" about the general nature of the alleged fraud and have sufficient information to answer the allegations).

 The Prudential defendants' motion to dismiss the complaint for failure to plead fraud with particularity must be denied.

 II. Count I: The Securities Fraud Claims

 The Prudential defendants advance several arguments for their proposition that Count I of the complaint fails to state a claim under the federal securities laws. They argue that Count I should be dismissed: (1) for reasons of standing and limitations; (2) because Count I inadequately pleads scienter, and; (3) because Count I does not properly plead reliance or causation with respect to these securities transactions, which took place in the aftermarket rather than in an initial public ...


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