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June 28, 2001


The opinion of the court was delivered by: Milton I. Shadur, Judge


This action, in which Nathan Dardick ("Dardick") charges seven individual defendants with securities fraud in connection with the sale of common stock and preferred stock (the latter via private placement) of publicly traded corporation LINC Capital, Inc. ("LINC"), has been met by defendants Fed. R. Civ. P. ("Rule") 12(b)(6) motion to dismiss. According to defendants, the tighter constraints that have been imposed on such private actions by the 1995 Private Securities Litigation Reform Act (the "Act," 15 U.S.C. § 78u-4*fn1) did away with what has become known as the Group Pleading Doctrine (as defendants are careful to add, they believe that no such doctrine ever existed even before the 1995 enactment). Dardick's counsel has responded with a vigorous "not so." This memorandum opinion and order addresses the viability of Dardick's Complaint in light of the positions staked out by the litigants memoranda.

There is always a degree of peril in adopting such shorthand expressions as "Group Pleading Doctrine," for the tyranny of labels can often deflect the required legal analysis from its proper course — in this instance, from an appropriate examination of the universal proposition that all individuals legal liability is indeed individual, based on a defendant's own conduct (or, where applicable, on respondent superior principles). That, coupled with the relevant pleading standard, forms the perspective that this Court will adopt here, rather than speaking in the generalities suggested by the term "group pleading."

Indeed, the adoption of such a perspective is particularly appropriate in view of the schism that has developed among district courts that have chosen to speak of the issue in the formulaic "group pleading" style. Perhaps because of the relative recency of the 1995 legislation, but probably more because matters of pleading sufficiency are almost always resolved at the District Court level and do not find their way into Courts of Appeals decisions, that schism (amply demonstrated by the multiple citations offered up by each side) has not generated any opinion from a source that makes precedent — as District Courts do not. In this instance the District Courts competing views are exemplified by Dardick's reliance on an opinion by this Court's colleague Honorable Suzanne Conlon (Danis v. USN Communications, Inc., 73 F. Supp.2d 923, 936-39 (N.D. Ill. 1999)) and by defendants counter reliance on the opinion of this Court's colleague Honorable Ruben Castillo in Chu v. Sabratek Corp., 100 F. Supp.2d 827, 835-37 (N.D. Ill. 2000))

Whatever side of that disagreement might seem more persuasive as an abstract matter, there is of course no question that it is not fatal for any complaint to collectivize "defendants" in certain respects — for example, in describing the duties of disclosure that defendants here shared with their principal LINC (see, e.g., Complaint ¶¶ 2 through 4). And as for the individual conduct of the named defendants here that could be actionable under Securities Exchange Act §§ 10(b) and 20(a) (15 U.S.C. § 78j (b) and 78t (a)) and Rule 10b-5:

1. Complaint ¶¶ 3 and 4 and 37-47 expressly refer to communications between Dardick and defendant Martin Zimmerman that would satisfy the most restrictive view.
2. Complaint ¶ 41 adverts to a conversation between Dardick and Allen Palles, during which the latter assertedly failed to disclose LINC's serious financial difficulties despite Dardick's direct question "whether LINC was in good financial condition." That too is beyond cavil.

As for the rest of the defendants, Dardick identifies no face-to-face communications with any of them (though it should be remembered that the principal gravamen of Dardick's claims is defendants failure to disclose assertedly material facts, rather than any affirmative misrepresentations). Instead Dardick relies on these allegations in Complaint Count I, which are in turn incorporated by reference into all other counts:

49. Although information showing that the Defendants acted knowingly or with reckless disregard for the truth is peculiarly within the Defendants' knowledge and control, as the senior officers and directors of the Company, the Defendants had knowledge of, or recklessly disregarded, the details of the Company's internal affairs.
50. The Defendants are liable both directly and indirectly for the wrongs complained of herein. Because of their positions of control and authority, the Defendants were able to and did, directly or indirectly, control the content of the statements of the Company. As the senior officers and directors of a publicly-held company, Defendants had a duty to disseminate timely, accurate, and truthful information with respect to the Company's businesses, operations, future financial condition and future prospects. As a result of the dissemination of the aforementioned false and misleading reports, releases and public statements, the market price of LIN'C common stock was artificially inflated from at least August 9, 1999 through and including March 31, 2000. In ignorance of the adverse facts concerning LINC's business and financial condition which were concealed by Defendants, Plaintiff purchased 58, 500 shares of LINC common stock at artificially inflated prices and relied upon the price of the stock, the integrity of the market for the stock and/or upon statements disseminated by Defendants, and was damaged thereby.

One essential part of the 1995 legislation's tightening-up approach to private securities actions such as this one is its insertion of Act Subsection (b)(2):

In any private action arising under this chapter in which the plaintiff may recover money damages only on proof that the defendant acted with a particular state of mind, the complaint shall, with respect to each act or omissions alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.

And in that respect, it is highly significant that what Dardick relies on is the failure of all defendants to have disclosed a deep and pervasive corporate illness — the existence of LINC's extraordinarily serious financial difficulties — rather than, for example, the assertedly flawed accounting practices that Judge Castillo addressed in Chu.*fn2 To the outsider looking in, it is surely strongly inferential that every officer or director of LINC either had the knowledge of such deep financial difficulties or, if not, that his failure to have such knowledge equated to reckless ...

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