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DAMATO v. MERRILL LYNCH

March 8, 1995

GLENN DAMATO, DEBORAH DAMATO, ANN DE LA GARZA, RUDOLPH DE LA GARZA, ANDREW KALLAS, KATHERINE KAPLAN, RICHARD KAPLAN, and WILLIAM KEELEY, Plaintiffs,
v.
MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., JOHN HERMANSON, FIRST COMMERCIAL FINANCIAL GROUP, INC., BUFF HOFFBERG, ECHO TRADING, INC., and DENNIS TROMPETER, Defendants.



The opinion of the court was delivered by: JAMES F. HOLDERMAN

 JAMES F. HOLDERMAN, District Judge:

 Plaintiffs brought this action against defendants Merrill Lynch, Pierce, Fenner & Smith, Inc. ("Merrill Lynch"), John Hermanson, First Commercial Financial Group, Inc. ("First Commercial"), Buff Hoffberg, Echo Trading, Inc., and Dennis Trompeter alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 ("1934 Act") (Counts I - III); violations of Sections 4b and 4o of the Commodity Exchange Act ("CEA") (Counts IV - VIII); conspiracy to defraud (Count IX); violations of the Illinois Consumer Fraud Act (Count X); violations of Section 1962(d) of the Racketeering Influenced and Corrupt Organization Act ("RICO") (Count XI); and common law fraud (Count XII).

 Defendants Merrill Lynch, John Hermanson and First Commercial have filed separate motions to dismiss plaintiffs' claims. For the reasons stated below, defendant Merrill Lynch's motion to dismiss is granted, defendant Hermanson's motion to dismiss is granted, and defendant First Commercial's motion to dismiss is granted.

 BACKGROUND

 Plaintiffs were a group of investors in the Echo One Trading Pool operated by defendant Buff Hoffberg. Plaintiffs claim that the Echo One Trading Pool was an illegal commodities pool which was established by defendant Hoffberg to further another of Hoffberg's fraudulent schemes and to pay Hoffberg's personal debts. Plaintiffs allege that defendant Hoffberg's misrepresentations and omissions regarding the risks and true nature of their investment fraudulently induced them to purchase interests in the Echo One Trading Pool.

 Plaintiffs also allege that defendant Merrill Lynch facilitated Hoffberg's fraudulent scheme by knowingly accepting third party checks for deposit into Echo Trading's account in violation of Merrill Lynch's internal rules and policies; knowingly sending its customers to Hoffberg without advising them of the reasons for his termination from Merrill Lynch; and knowingly permitting Echo Trading to act as an unregistered futures commission merchant and Hoffberg as an unregistered commodity pool operator and commodity trading advisor.

 In addition, plaintiffs allege that defendants First Commercial and Hermanson facilitated Hoffberg's allegedly fraudulent activities by knowingly accepting loans from Hoffberg consisting of his customer's investing funds; knowingly preparing false confirmation reports for Hoffberg's customers; and knowingly permitting Hoffberg to act as an unregistered futures commission merchant, commodity pool operator and commodity trading advisor. Plaintiffs claim that 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.

 ANALYSIS

 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. *fn2" 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 ...


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