The opinion of the court was delivered by: BRIAN BARNETT DUFF
This case comes before this court on defendant's Motion to Dismiss for failure to state a claim and failure to plead fraud pursuant to Fed.R.Civ.P. 12(b)(6) and 9(b), respectively. For the reasons stated below, this court grants the motion without prejudice. We grant plaintiff leave to file an amended complaint if he can plead facts that enable him to surmount the obstacles this opinion discusses in detail.
For the purposes of this Motion to Dismiss, we take the facts that the plaintiff alleges in the complaint as true. Hishon v. King & Spalding, 467 U.S. 69, 73, 81 L. Ed. 2d 59, 104 S. Ct. 2229 (1984). The plaintiff, John Marks, began working for defendant, CDW Computer Centers, Inc. ("CDW"), f/k/a MPK Computing, Inc., in September 1985. CDW and its predecessor, MPK Computing, Inc., are collectively referred to hereinafter in this opinion as CDW. CDW sells microcomputers. CDW was incorporated under the laws of the State of Illinois in 1984 and reincorporated in 1993 under the laws of Delaware. Marks began his tenure at CDW as a commission-paid salesperson. Defendant Michael Krasny was at all relevant time the Chairman of the Board of Directors, Chief Executive Officer, and majority shareholder of CDW.
Approximately three months after Marks began working for CDW, Krasny discussed with Marks the possibility of expanding Marks' duties. Krasny suggested that Marks accept a promotion to sales manager and head of purchasing and assume substantial managerial responsibilities for CDW. In return, Krasny discussed giving Marks an equity position in CDW at some point in the future. Marks agreed to the proposal. Marks subsequently undertook his new responsibilities.
In early 1988, Krasny and Marks consummated Krasny's promise to give Marks equity in CDW. On January 15, 1988, Marks and Krasny signed a Stock Purchase Agreement ("Purchase Agreement") according to which Marks purchased 250 shares of voting common stock of CDW. Marks' equity position represented 20 percent of CDW's shares. In return, Marks paid to CDW $ 124,[ILLEGIBLE TEXT]0 in cash and issued a promissory note for $ 42,100 plus interest. Marks also agreed to lend CDW $ 112,100.
Also on January 15, 1988, Marks, Krasny and CDW entered into another agreement--a Stockholder Agreement. This agreement granted to CDW and Krasny successive options to buy Marks' shares upon his termination of employment, either voluntarily or for cause, with CDW. Under the Stockholder Agreement, Krasny and CDW had 60 days from Marks' termination of employment from CDW in which to exercise these options.
Starting in 1989, Krasny began relieving Marks of his responsibilities at CDW. In November 1989, Krasny approached Marks about the possibility of Marks transferring from CDW headquarters in Northbrook, Illinois to the company's showroom in Chicago. Part of the deal was for Marks to assume a new position as sales manager in Chicago. Marks agreed to the transfer.
Marks attended a meeting with Krasny and CDW's accountant in March 1990. To Marks' surprise, Krasny indicated that he wanted to terminate Marks' association with CDW. At that time, Krasny allegedly told Marks that Marks would see no benefit from his shares in CDW unless he sold them on terms that Krasny dictated. Krasny mailed a letter to Marks on May 14, 1990, notifying Marks of his immediate termination of employment.
Sometime on or about March 1990, Krasny proposed paying himself an enormous bonus. This bonus, Marks believed, would increase Krasny's compensation six-fold to a total of $ 1.55 million for the year ending March 31, 1990. Krasny introduced a resolution to ratify the $ 1.55 million compensation package at a special meeting of the board of directors on June 12, 1990. Marks, as a director of CDW, voted against the resolution.
Starting in March 1990, Marks, Krasny and CDW conducted negotiations for the redemption of CDW shares. Marks attempted to investigate the value of his shares in CDW. Marks asked Krasny for information regarding the value of CDW and Northbrook Ad Agency, Inc. ("NAA") that Krasny owned. CDW placed a major portion of its advertising business with NAA. Marks alleges that Krasny informed him in a telephone conversation in June 1990 that NAA made almost no profit; any such profits had been reinvested in CDW or spent by NAA for CDW's benefit. Marks maintains that he received no other information regarding the financial performance of NAA or the substance or structure of transactions between CDW and NAA except gross amounts paid by CDW to NAA.
Marks alleges that Krasny placed conditions on the buy-back of CDW's shares from Marks. As a condition to the stock redemption, Krasny required Marks to approve the June 12, 1990 resolution to increase Krasny's compensation to $ 1.55 million for the year ending March 31, 1990. On July 27, 1990, Marks signed a document approving the June 12, 1990 resolution. On or about July 27, 1990, Marks and CDW executed a Stock Purchase Agreement ("Buyout Agreement"), involving the sale of Marks' shares for $ 470,028. This sale left Krasny as the sole shareholder of CDW.
In 1993, CDW prepared for an initial public offering. On March 19, 1993, CDW filed with the Securities and Exchange Commission a registration statement on Form S-1. CDW proposed to offer approximately 16 percent of its outstanding common stock to the public in an initial public offering. The registration statement indicates that subsequent to the execution of the Buyout Agreement, Krasny was paid large amounts of cash from CDW, including a cash bonus of over $ 7 million in 1992.
After reading the registration statement, Marks learned more information about NAA and CDW. Marks learned that during the years ending March 31, 1991 through March 31, 1993, CDW made payments to NAA in amounts exceeding the amounts that NAA paid to magazines and other media by between $ 300,000 and $ 700,000 per year. Marks also discovered that between April 1, 1987 and March 31, 1990, NAA accumulated net profits of approximately $ 380,000, which Krasny subsequently withdrew.
Marks filed a complaint before this court in June 1993. The complaint contains two counts. Count I alleges violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 against Krasny and CDW. Count II alleges state law claims of fraud and deceit against CDW and Krasny. The defendants filed the instant motion to dismiss.
The standard governing this court's decision on a Rule 12(b)(6) motion is well settled. Only if the allegations of the complaint, and all reasonable inferences drawn therefrom, could not support any cause of action may this court grant the motion. See generally 5A Charles Wright & Arthur Miller, Federal Practice and Procedure: Civil 2d § 1357 (2d ed., 1990). The court must interpret ambiguities in the complaint in favor of the plaintiff, and the plaintiff is free, in defending against the motion, "to allege without evidentiary support any facts [it] pleases that are consistent with the complaint, in order to show that there is a state of facts within the scope of the complaint that if proved (a matter for trial) would entitle [it] to judgment." Early v. Bankers Life and Casualty Co., 959 F.2d 75, 79 (7th Cir. 1992). In reviewing the claims here, we keep in mind that the plaintiff is not required to prove that he can win on the pleadings, but only that his allegations are sufficient to state a cause of action. Rankow, et al., v. First Chicago Corp., 870 F.2d 356, 366 (7th Cir. 1989).
I. RELIANCE ON MATERIALS NOT ATTACHED TO THE COMPLAINT
Rule 12(b)(6) motions address the face of the complaint. See Goldman v Belden, 754 F.2d 1059, 1065 (2nd Cir. 1985) The complaint is deemed to include documents attached to it as an exhibit or documents incorporated in it by reference. Id., Fed.R.Civ.P. 10(c) and Wright & Miller, § 1327. Rule 12(b)(6) provides that when a court decides to consider matters outside of the complaint, the "motion shall be treated a one for summary judgment and disposed of as provided in Rule 56, and all parties shall be given reasonable opportunity to present all material made pertinent to such a motion by Rule 56." The United States Supreme Court has long held that this conversion provision of Rule 12(b)(6) from a motion to dismiss to a summary judgment motion is mandatory when a federal court considers matters outside of the complaint. Carter v. Stanton, 405 U.S. 669. 671, 31 L. Ed. 2d 569, 92 S. Ct. 1232 (1972) (per curiam).
The Seventh Circuit has established a narrow exception to the "four corners of the complaint" doctrine regarding Rule 12(b)(6) motions. In Venture Associates v. Zenith Data Systems, 987 F.2d 429 (7th Cir. 1993), the Seventh Circuit determined that district courts may in limited circumstances examine documents that the plaintiff failed to attach to the complaint and the defendant attached to its motion to dismiss. The Court of Appeals explained that a "plaintiff is under no obligation to attach to her complaint documents upon which her action is based, but a defendant may introduce certain documents if the plaintiff failed to do so." Id. at 431. The Court of Appeals held that "documents that a defendant attaches to a motion to dismiss are considered part of the pleadings if they are referred to in the plaintiff's complaint and are central to her claim." Id. In Venture Associates, the Court of Appeals concluded that the district court properly refused to exclude documents neither attached to nor incorporated by the complaint as the district court considered the pending motion as a motion to dismiss for failure to state a claim rather than as a motion for summary judgment. Id. at 432. The Seventh Circuit reaffirmed this narrow exception more recently in Wright v. Associated Insurance Companies, Inc., 29 F.3d 1244 (7th Cir. 1994) (Court of Appeals affirmed the consideration by the district court of an agreement, which the complaint did not contain nor incorporate, because the document was central to the plaintiff's claims and the plaintiff referred to the document in the complaint.)
In the instant motion to dismiss, the defendants refer to documents not attached to the complaint. In the defendants' Memorandum of Law In Support of their Motion to Dismiss, they filed multiple exhibits: (a) the original Stock Purchase Agreement; (b) the Stock Purchase Agreement of 1990 ("Buyout Agreement"); (c) MPK Computing Inc., Report on Audit of Financial Statements for the years ended March 31, 1990 and 1989; (d) Tregenza v. Great American Communications Company, 823 F. Supp. 1409, (N.D.Ill. 1993), aff'd., 12 F.3d 717 (7th Cir. 1993), cert. denied, 128 L. Ed. 2d 465, 114 S. Ct. 1837 (1994); and (e) Vassilatos v. Ceram Tech International Ltd., 1993 U.S. Dist. LEXIS 15823, 1993 WL 177780 (S.D.N.Y.). In their motion to dismiss and supporting briefs, the defendants frequently refer to several of these exhibits. The plaintiff did not attach any of the exhibits to the complaint nor did he incorporate these documents into the complaint. This court will not convert the motion to dismiss into summary judgment motion at the present because we have not given the parties adequate notice. As far as exhibits are concerned, in analyzing the instant motion to dismiss this court will consider those exhibits, which the defendants supplied along with their motion, that meet the standard of Venture Associates.
Exhibit B contains the July 27, 1990 Stock Purchase Agreement and various attachments. The Stock Purchase Agreement of 1990 obligates Marks to sell his shares to CDW's predecessor. The Complaint refers to this Stock Purchase Agreement as a "Buyout Agreement." See Complaint at PP 25, 35-37, 39, 42. The Stock Purchase Agreement of 1990 memorializes Marks' sale of his minority shares to CDW's predecessor. Marks' claims of securities and common law fraud arise out of that transaction. Since the 1990 Stock Purchase Agreement is central to Marks' claims and is referred to in the Complaint, we will consider this document as we decide the instant motion to dismiss.
Exhibit C contains a Report on audit of Financial Statements for the defendant corporation for the years 1989-90. Since the Complaint does not refer to this report, Exhibit C fails to meet the Venture Associates standard. Consequently, we will disregard this exhibit.
Exhibits D and E contain judicial opinions in other cases. This court will take judicial notice of these two cases contained in Exhibits D and E. See, Retired Chicago Police Association, et al. v. City of Chicago, et al., 7 F.3d 584, nt. 30 (7th Cir. 1993) (Courts can take judicial notice of the decisions of federal and state courts.)
II. FEDERAL SECURITIES ACTS--Section 10b and Rule 10b-5
In the 1930s Congress enacted two landmark pieces of legislation to regulate securities markets. The Securities Act of 1933 ("1933 Act") was designed to "provide full and fair disclosure of the character of securities sold in interstate and foreign commerce and through the mails, and to prevent frauds in the sale thereof, and for other purposes." Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 727-28, 44 L. Ed. 2d 539, 95 S. Ct. 1917 (1975), reh'g. denied, 423 U.S. 884, 46 L. Ed. 2d 114, 96 S. Ct. 157 (1975). The 1933 Act establishes federal requirements for registration statements and prospectuses and also creates private civil causes of action. Id. at 728. The Securities and Exchange Act of 1934 ("1934 Act") "provide[s] for the regulation of securities exchanges and of over-the-counter markets operating in interstate and foreign commerce and through the mails, prevent[s] inequitable and unfair practices on such exchanges and markets, and for other purposes." Id. The 1934 Act is divided into two sections: Title I concerns regulations of securities exchanges and Title II amends the 1933 Act. Id.
The Securities Acts proscribe fraud in connection with securities transactions. In particular, Section 10(b) of the 1934 Act provides that it is unlawful for any person "to use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance" in contravention of SEC rules that were promulgated in the interest of the investing public. 15 U.S.C. § 78j(b). The Securities and Exchange Commission's Rule 10b-5, which was promulgated pursuant to § 10(b), states:
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
(a) To employ any device, scheme or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, ... in connection with the purchase or sale of any security. 17 C.F.R. § 240.10b-5.