actionable if they are made with the knowledge that they are incorrect or are otherwise without reasonable basis." Katz, 36 F.3d at 675; see generally, Thomas L. Hazen, The Law of Securities Regulation § 3.7 (2nd ed. 1990 & Supp. 19-94). The Court of Appeals indicated that the part of the complaint containing the alternative theory might not have been sanctionable under Rule 11.
We now understand that we gave inadequate attention to the collection of words in the complaint which established an alternative theory of securities fraud liability. We note that our expressed concern was to be faithful to the teachings of the Seventh Circuit that we should not tolerate the filing of frivolous complaints under Section 10(b) and Rule 10b-5. We presumed the Court of Appeals would recognize that we were giving effect to the policies behind those precedents summarized so admirably by Judge Easterbrook in DiLeo v. Ernst & Young, 901 F.2d 624, 626-28 (7th Cir.), cert. denied, 498 U.S. 941, 111 S. Ct. 347, 112 L. Ed. 2d 312 (1990). DiLeo urged us to be watchful about complaints that are filed with "no information other than the differences between  two statements of [a] firm's condition," and reminded us that "Rule 9(b) require[s] the district court to dismiss [a] complaint which discloses none of the circumstances that might separate fraud from the benefit of hindsight." Id. at 627-28. We were also mindful of then Justice Rehnquist's lengthy and cogent admonitions about Rule 10b-5 "strike suits" in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 739-48, 44 L. Ed. 2d 539, 95 S. Ct. 1917 (1975). Writing for the Court, Justice Rehnquist observed, "There has been widespread recognition that litigation under Rule 10b-5 presents a danger of vexatiousness different in degree and in kind from that which accompanies litigation in general." Id. at 739. Without animus, we assessed sanctions in part as compensation to the vexed defendant, and in part as deterrence to fulfill the goal of the reduction in the number of frivolous and merit less lawsuits which are filed without proper investigation, in tremendous haste, and on the barest whiff of a securities fraud claim.
We note, as the discussion below will illustrate, the Court of Appeals might have decided the merits of the alternative theory in this case without remanding that part of the case back to this Court. The DiLeo court, after reviewing the merits, affirmed the dismissal of a securities complaint extraordinarily similar to this one, stating, "A remand would prolong the case without contributing to accurate resolution. . . . We affirm the judgment in order to spare both the parties and the court gratuitous travail." DiLeo, 901 F.2d at 626. Understandably, in the case at bar, the Court of Appeals chose to remand the issue of sanctions so that we, as the court in closer proximity to the issues and parties involved, may ascertain whether the alternative theory as pled was sanctionable. They know that ten years on the federal bench has given this Court ample experience in securities law and that we always welcome the challenge and the inquiry that such cases bring.
Regrettably, we proceed in the absence of their input on the merits of the underlying securities theory which we overlooked.
We pause to wonder if the Seventh Circuit in remanding this case has repudiated Pritchard v. Rainfair, Inc., 945 F.2d 185, 192 (7th Cir. 1991). There, another panel of the Court of Appeals wrote, "the focus of a Rule 11 inquiry is generally 'on the motion or pleading as a whole, rather than on its parts,' and while we will not prohibit a district court from undertaking a point-by-point Rule 11 analysis, neither will we require it to do so." Id. (quoting Melrose v. Shearson/American Express, Inc., 898 F.2d 1209, 1217 (7th Cir. 1990)). We shall proceed with the claim-by-claim Rule 11 analysis required on remand by the Court of Appeals.
The Court of Appeals has provided us the opportunity to revisit our earlier ruling awarding fees in light of Katz' alternative theory of liability. They do not require this Court to revisit the award of fees in toto. They reached the same conclusion we did when they observed that Katz' primary theory was without reasonable basis. Katz, 36 F.3d at 675. They vacated the Order because they found that it "failed even to note Katz's alternative theory," Id. at 675. The Court of Appeals instructed us to decide what "portions of Katz' complaint [are] obviously without basis," id. at 676, and to set the award accordingly. We must "assess a sanction only in the amount of those fees reasonably incurred in responding to sanctionable filings." Id. (emphasis in original).
The issue before the Court is whether the alternative theory as contained in both the original and the amended complaint constituted a sanctionable filing when Katz filed its amended complaint in January, 1992. We note that the same defect which foretold the demise of the primary theory of active misrepresentation in Katz' complaint pertains to his alternative theory of fraudulent future projections. Accordingly, we find that the complaint and the amended complaint in their entirety are not reasonably grounded in fact or law.
I. The Merits of the Alternative Theory
To state a claim under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, a plaintiff must allege that "while buying or selling securities the defendant, acting with scienter, made a false material representation or omitted to disclose material information and that the plaintiff's reliance on the defendant's actions caused plaintiff's injury." Ziemack v. Centel Corp., 856 F. Supp. 430, 433 (N.D. Ill. 1994) (Duff, J.) (citing Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S. Ct. 1375, 47 L. Ed. 2d 668 (1976)). As to scienter, the plaintiff must allege that "the defendant acted with the intent to deceive, manipulate or defraud." 856 F. Supp. at 436 (citing Ernst & Ernst, 425 U.S. at 196; 96 S. Ct. at 1380-81). A plaintiff must plead scienter if the allegation of securities fraud concerns either a misrepresentation or an omission. See Ernst & Ernst, 425 U.S. at 212, 96 S. Ct. at 1390; Thomas L. Hazen, The Law of Securities Regulation § 13.4 (2nd ed. 1990 & Supp. 1994).
In the Seventh Circuit, scienter includes not only an intentional or knowing state of culpability, but also a reckless state of culpability. Rowe v. Maremont Corp., 850 F.2d 1226, 1238 (7th Cir. 1988); Sundstrand Corp. v. Sun Chemical Corp., 553 F.2d 1033, 1044 (7th Cir.), cert. denied sub nom Meers v. Sundstrand Corp., 434 U.S. 875, 98 S. Ct. 224, 54 L. Ed. 2d 155, 98 S. Ct. 225 (1977). Reckless conduct is defined as "a highly unreasonable omission, involving not merely simple, or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it." Id. at 1044-45.
Rule 9(b) of the Federal Rules requires that any allegation of fraudulent conduct be pled with particularity. See Jepson v. Makita Corporation, 34 F.3d 1321, 1327-28 (7th Cir. 1993) (Rovner, J.). A plaintiff alleging either intentional, knowing, or reckless conduct under Section 10(b) and Rule 10b-5 must plead in detail the circumstances surrounding the alleged scienter. See Fed. R. Civ. P. 9(b); DiLeo, 901 F.2d at 627; Hazen, § 13.2.1. "This means the who, what, when, where, and how: the first paragraph of any newspaper story." DiLeo, 901 F.2d at 627.
SEC Rule 175 affords further protection to the making of forward looking statements. It states,
(a) A statement within the coverage of paragraph (b) of this section [which includes any statement of future economic performance] which is made by or on behalf of an issuer . . . shall be deemed not to be a fraudulent statement (as defined in paragraph (d) of this section), unless it is shown that such statement was made or reaffirmed without a reasonable basis or was disclosed other than in good faith.