without the defendants' alleged assistance, Hoffberg would not have been able to perpetrate his fraudulent scheme and plaintiffs would not have lost their investment funds.
I. Standard of Review
In ruling on a motion for dismissal, the court must presume all of the well-pleaded allegations of the complaint to be true. Miree v. DeKalb County, 433 U.S. 25, 27 n.2, 97 S. Ct. 2490, 2492 n.2, 53 L. Ed. 2d 557 (1977). In addition, the court must view those allegations in the light most favorable to the plaintiff. Gomez v. Illinois State Bd. of Educ., 811 F.2d 1030, 1039 (7th Cir. 1987). Dismissal is proper only if it appears "beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S. Ct. 99, 102, 2 L. Ed. 2d 80 (1957).
II. Rule 9(b) of the Federal Rules of Civil Procedure1
Defendants Hermanson and Merrill Lynch argue that plaintiffs have failed to comply with the pleading requirements of Rule 9(b) because plaintiffs' allegations of fraud lack the necessary particularized detail regarding the events that took place and the parties involved. Federal Rule of Civil Procedure 9(b) imposes stringent pleading requirements for claims based upon allegations of fraud. Most other claims need only comply with the general pleading requirements of Rule 8(a) of the Federal Rules of Civil Procedure.
The Seventh Circuit has interpreted the "particularity" requirement of Rule 9(b) as requiring parties pleading fraud to state the circumstances constituting fraud in detail--the "who, what, when, where, and how." Arazie v. Mullane, 2 F.3d 1456, 1465 (7th Cir. 1993).
Rule 9(b) does not require, however, "that the complaint explain the plaintiff's theory of the case, but only that it state the misrepresentation, omission, or other action or inaction that the plaintiff claims was fraudulent." Midwest Commerce Banking v. Elkhart City Centre, 4 F.3d 521, 523 (7th Cir. 1993). To comply with the requirements of both Rule 8(a) and Rule 9(b), a party must ensure that its pleadings are "a short and plain statement of the claim showing that the pleader is entitled to relief," and also contain detail "stated with particularity" regarding the events surrounding the alleged fraudulent activities. See Midwest Grinding, 976 F.2d 1016, 1020 (7th Cir. 1992) and Dudley Enterprises v. Palmer Corp., 822 F. Supp. 496, 500-01 (N.D. Ill. 1993).
This court finds that plaintiffs have successfully balanced the requirements of both Rule 8(a) and Rule 9(b). Throughout their complaint, plaintiffs provide specific details regarding the parties involved in the alleged fraudulent investment scheme and their alleged actions which contributed to the fraud; the events surrounding the alleged fraudulent activities; and the time period during which the scheme occurred. Plaintiffs' pleadings are clearly sufficient to reasonably notify each individual defendant of its purported role in the alleged fraudulent scheme. See Midwest Grinding, 976 F.2d at 1020. Therefore, defendants' motion to dismiss plaintiffs' complaint for failure to comply with Rule 9(b) is denied.
II. Control Person Liability Under § 20(a)
Count III of plaintiffs' amended complaint purports to allege a violation of § 20(a) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78t, against defendant Merrill Lynch. Plaintiff claims that under § 20(a), Merrill Lynch is liable for defendants Hoffberg's and Echo Trading's alleged violations of the 1934 Act because Merrill Lynch was a controlling person of Hoffberg and Echo Trading. Defendant Merrill Lynch argues that plaintiffs' § 20(a) claim should be dismissed because plaintiffs have failed to allege sufficient facts to establish control person liability.
Section 20(a) of the 1934 Act establishes liability as follows:
Every person who, directly or indirectly, controls any person liable under any provision of this chapter or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action.
15 U.S.C. § 78t.
In determining control person liability under § 20(a), the Seventh Circuit has looked to whether the alleged control person actually exercised general control over the operations of the person in general, and whether the alleged control person had the power or ability to control the specific transaction or activity upon which the primary violation giving rise to liability is based even if that power was never exercised. Transportation Communications, Int'l v. CSX Transp. Inc., 30 F.3d 903 (7th Cir. 1994) (citing Harrison v. Dean Witter Reynolds, Inc., 974 F.2d 873, 881 (7th Cir. 1992), cert. denied, 125 L. Ed. 2d 688, 113 S. Ct. 2994 (1993)).
Under the standards established by the Seventh Circuit, the court finds that plaintiffs have not alleged sufficient facts to establish that Merrill Lynch had the power to control the activities of defendant Hoffberg in selling the interests in the Echo One Pool to plaintiffs. Plaintiffs merely allege that Merrill Lynch permitted Hoffberg and Echo Trading to deposit money in and withdraw money from the Echo Trading account. The mere fact that Merrill Lynch had the power to refuse to process Hoffberg's transactions is insufficient to establish control person liability on the part of Merrill Lynch. Carlson v. Bear Stearns & Co., 906 F.2d 315, 318 (7th Cir. 1990) ("Under federal securities law, clearing agents performing operational or ministerial duties have not been considered controlling persons nor subject to liability."). Therefore, Count III of plaintiffs' amended complaint must be dismissed.
III. Commodity Exchange Act
Counts V - VIII of plaintiffs' amended complaint purport to allege fraud in violation of §§ 2(a)(1), 4b, 4o, 13(a) and 22 of the CEA, 7 U.S.C. §§ 6b, 6o, 13c(a) and 25. Counts V and VI are based upon § 13(a) of the CEA, 7 U.S.C. § 13c(a), and purport to allege claims against defendants Merrill Lynch, Hermanson and First Commercial for aiding and abetting defendant Hoffberg's alleged fraudulent scheme by permitting defendant Hoffberg to operate as an unregistered commodities pool operator. Count VII asserts that defendant Hermanson allegedly directly violated § 4b of the CEA, 7 U.S.C. § 6b, by creating fraudulent confirmations and sending them to investors in the Echo One Pool. Count VIII purports to allege a claim under against defendant First Commercial under § 2(a)(1) of the CEA for a derivative violation of § 4b. Defendants Hermanson, Merrill Lynch and First Commercial have separately moved to dismiss Counts V - VIII of plaintiffs' amended complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state valid CEA claims.
Section 22(a) of the CEA provides a private right of action for damages resulting from violations of the substantive provisions of the CEA. Section 22(a)(1) states in relevant part:
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 form 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--