sorts of fraud claims. Id. Despite the wealth of detail about
options trading in this 44-page complaint, the actual fraud allegations
are vague, generic, and nonspecific.
The plaintiffs fail to identify any specific transactions constituting
the fraud, the "what" about which they complain. Fraud cases have been
dismissed for failure to satisfy the specificity requirements when the
plaintiff failed to provide "a single concrete example" of a particular
fraudulent activity. DiLeo, 901 F.2d at 626. The plaintiffs do not offer
any concrete examples. Plaintiffs are not required to `plead facts to
which they lack access prior to discovery," Katz v. Household Int'l.,
Inc., 91 F.3d 1036, 1040 (7th Cir. 1996), but here the plaintiffs claim
they have the information on which their claims are based. Also
unsatisfactory are allegations like those in ¶ 53, that, upon
"information and belief," the defendants bypassed the plaintiffs' retail
orders and failed to honor executed trades. "Allegations made upon
information and belief are insufficient [to allege fraud] . . . unless
the plaintiff states the grounds for his suspicions." See Uni*Quality,
Inc. v. Infotronx, Inc., 974 F.2d 918, 924 (7th Cir. 1992);
15 U.S.C. § 78u(b)(1)(B). The plaintiffs fail to do so here.
The PSLRA requires that the plaintiffs specify "each statement" alleged
to have been misleading. 15 U.S.C. § 78u-4 (b)(1). The plaintiffs do
quote two particular statements from literature published by the CBOE and
the OCC, i.e., that OBOE order handling, routing, and execution systems
"guarantee our customers the fastest and most equitable transactions,"
and that "trades automatically occur" when certain requirements are met,
Complaint ¶ 59, which if false and believed, would substantially
increase the risks of trading on the OBOE. These statements are not
puffery; they rule out deliberate discrimination against the plaintiffs,
and would clearly matter to an investor. See Searls v. Glasser,
64 F.3d 1061, 1066 (7th Cir. 1995) (standard for puffery). However,
"`plaintiff[s] alleging securities fraud cannot simply quote verbatim
from annual reports and press releases and assert that the statements are
untrue; [they] must explain in [their] complaint what is untrue about
each of the challenged statements.'" 15 U.S.C. § 78u-4 (b)(1)(B).
Clark v. TRO Learning, Inc., No. 97 C 8683, 1998 WL 292382, at *4 (N.D.
Ill. May 20, 1998). The plaintiffs fail to do this with reference to any
particular transaction with the level of detail that would allow me to
conclude that, if the specific allegations were true, the statement would
be false. The other alleged omissions and affirmative misstatements
characterized, e.g., as "various oral statements" and "misleading
explanations as to why trades were not executed," Complaint ¶ 56, are
too vague to be actionable. The plaintiffs must say what was said or
suppressed and why it was fraudulent to say or suppress it.
The "when" is not satisfactorily pleaded either. The plaintiffs
allege, basically, that the conduct of which they complain has been going
on since mid-1999. They do not give a specific date for any particular
act. But it is not enough to allege that the defendants defrauded the
plaintiffs in some way over a period of months or years. Servpro Indus.,
Inc. v. Schmidt, No. 94 C 5866, 1997 WL 361591, at *8 (N.D. Ill. June
20, 1997) (Ashman, M.J.) (Allegations of misrepresentations "in or about
1991," "prior to March of 1985," and "subsequent to the execution of the
agreement" not sufficiently specific); Brandt v. Jack Levy Assocs. Inc.,
No. 92 C 5075, 1993 WL 95383, at *1 (N.D. Ill. Mar. 30, 1993) (Duff., J.)
(Same with allegations of lies "in early 1991 (no later than July of
1991 . . . .")). Perhaps the plaintiffs
need not date every transaction.
DiLeo suggests that some representative dated examples may be enough. But
the plaintiffs must provide at least that much. Here they do not.
In view of the pleading defects in their complaint, the plaintiffs do
not allege facts to support a "strong inference of sciencer,"
15 U.S.C. § 78u-4 (b)(2).
Count II alleges that the defendants violated section 12(2) of the
Securities Exchange Act of 1933, 15 U.S.C. § 771 (a)(2), creating
liability for a person who "offers or sells a security . . . by means of
a prospectus or oral communication, which includes an untrue statement of
a material fact." A plaintiff has standing to sue under § 12(2) only
if he is a purchaser of securities. Section 12 "imposes liability on
persons who offer or sell securities and only grants standing to "the
person purchasing such security' from them." Akerman v. Onyx
Communications, Inc., 810 F.2d 336, 344 (2d Cir. 1987); accord Ballay v.
Legg Mason Wood Walker, Inc., 925 F.2d 682, 687 (3d Cir. 1991). The
plaintiffs allege that they were purchasers "the moment they clicked on
their computer screens and placed their orders." They therefore satisfy
this requirement for purposes of this motion.
However, there are pleading problems. Ordinarily, fraud and scienter
are not elements of a § 12(2) claim. See Wigand v. Filo-Tek, Inc.,
609 F.2d 1028, 1034 (2d Cir. 1979). However, the Third Circuit has held
that when a § 12(2) claim "`sounded in fraud' . . ., Rule 9(b)
applies." Shapiro v. UJB Fin. Corp., 964 F.2d 272, 288 (3d Cir. 1992). In
that case, the Third Circuit reasoned, the § 12 claim:
incorporate[d] by reference all preceding factual
allegations, including those delineating defendants
"intent." It also states that the . . . prospectus was
false and misleading "in the particulars previously
described, and mentions the false and misleading
nature "of the representations described above."
Although [the § 12(2) count] does not allege
fraudulent intent or recklessness (a prerequisite to a
successful fraud claim), neither does it allege
negligence. The specific factual allegations upon
which Count II is based do, however, repeatedly aver
that defendants "intentionally," "knowingly," or
"recklessly" misrepresented and omitted to represent
certain material information.
Id. at 287. Accord Melder v. Morris, 27 F.3d 1097, 1100 n. 6 (5th Cir.
1994); In re Stac Elec. Sec. Litig., 89 F.3d 1399, 1404-05 (9th hr.
1996); but see In re NationsMart Corp. Sec. Litig., 130 F.3d 309, 315
(8th Cir. 1997) (disagreeing). Most relevantly, here, the Seventh Circuit
has treated a § 12 case as a fraud case bound by the pleading
requirements of Rule 9(b). See Sears v. Likens, 912 F.2d 889, 892 (7th
Cir. 1990). The court did not set forth its reasoning in detail, but it
has held that a suitable § 12 claim may sound in fraud. The § 12
count before me is on all fours with the one in Shapiro. The claims of
intentional representation are incorporated by reference, and the
underlying facts of the § 12 and Rule 10b-5 claims are essentially
the same. Since the § 12 claim sounds in fraud it must meet the
heightened pleading requirements of the PSLRA of 1996. In view of that
determination, the plaintiffs' pleading is inadequate for the reasons
Count VI alleges a violation of the antitrust laws. The plaintiffs
claim that the defendants acted in concert and conspired with an
anticompetitive motive to unreasonably restrain price competition,
committed price discrimination, and engaged in anticompetitive conduct by
the order handling systems at the CBOE to the detriment of
retail customers like themselves in favor of the DMPs. Complaint ¶
91. The facts that support these charges are the same as discussed
elsewhere, i.e., that the defendants faded, failed to execute, and
"busted" the plaintiffs' trades. Id. ¶ 92. They claim as damages
$100,000,000, trebled under 14 U.S.C. § 15(a), in "lost profits,
loss of business, amounts of overpayment, and interest." Id. ¶ 95
ff. Although the complaint is vague about the legal basis of their
antitrust claim, the plaintiffs' response to the motion to dismiss
clarifies the theory, and explains that the defendants' refusal to sell
them options constitutes a per se illegal group boycott or concerted
refusal to deal in violation of § 1 of the Sherman Act,
15 U.S.C. § 1 (prohibiting "conspirac[ies] in restraint of . . .
trade"). Although group boycotts are often characterized as per se
violations, See, e.g., Fashion Originators' Guild of Am., Inc. v. FTC,
312 U.S. 457 (1941); Klor's, Inc. v. Broadway-Hale Stores, Inc.,
359 U.S. 207 (1959), an antitrust violation is per se illegal only if,
upon facial examination, "the practice at issue is the type that always or
almost always would tend to restrict competition." BMI v. Columbia
Broad, Sys., Inc., 441 U.S. 1, 19-20 (1979) (citations omitted).
To bring a private antitrust action for treble damages under § 4 of
the Clayton Act, the plaintiff must show: "(1) a duty recognized by the
antitrust laws; (2) a violation of the antitrust laws; (3) injury to an
interest protected by the antitrust laws and attributable to the
antitrust violation — that is, antitrust injury; and 4) a direct
link between the antitrust violation and the antitrust injury, that is to
say, standing." Greater Rockford Energy and Tech. Corp. v. Shell Oil
Co., 998 F.2d 391, 395 & n. 7 (7th Cir. 1993). The inquiry is fact
intensive and "no single factor is conclusive." Sanner v. Board of Trade
of City of Chicago, 62 F.3d 918, 927 (7th Cir. 1995). The plaintiffs fail
to satisfy these requirements.
First, there is no violation of any duty recognized by the antitrust
laws. Although an illegal boycott may be directed against customers, St.
Paul Fire & Marine Ins. Co. v. Barry, 438 U.S. 531, 552 (1978), to be per
se illegal, a boycott must have two essential elements: (1) at least some
of the boycotters were competitors of each other and the target, and (2)
the boycott was designed to protect the boycotters from competition with
the target. United States Trotting Ass'n v. Chicago Downs Ass'n, Inc.,
665 F.2d 781, 788 (7th Cir. 1981). The complaint does not allege either
prong, and when the defendants argue that the plaintiffs are, as pleaded
on the face of the complaint, consumers and not competitors, the
plaintiffs agree, saying that they are "consumers, the very persons that
are to be protected under the antitrust laws." The plaintiffs cite St.
Paul Fire for the proposition that "it is an offense for businessmen to
agree among themselves to stop selling to particular customers." Id. at
544. However, as the Seventh Circuit noted in United States Trotting
Association, while the Supreme Court in St. Paul Fire held that consumers
might maintain an action for anticompetitive boycott against competitors
(insurers who conspired to farce physicians to accept a particular kind
of insurance), "`the issue before us is whether the conduct in question
involves a boycott, not whether it is per se unreasonable.'" 665 F.2d at
788 n. 11 (citing 438 U.S. at 542). There is no per se violation here.
The plaintiffs request that I also analyze the case under a rule of
approach. However, the plaintiffs have not met the threshold
requirements for such an analysis. There is no allegation that the
defendants have any market power, and "[s]ubstantial market power is an
essential ingredient of every antitrust case under the Rule of Reason."
Sanjuan v. American Bd. of Psych. & Neurology, Inc., 40 F.3d 247, 251
(7th Cir. 1995). Neither, as I shall explain, is there any "showing of
anticompetitive market effect" that the rule of reason requires.
Lektro-Vend Corp. v. Vendo Co. 660 F.2d 255, 268 (7th Cir. 1981). The
plaintiffs cannot prevail under the rule of reason.
Second, there is no antitrust injury, i.e., "injury of the type the
antitrust laws were intended to prevent." Serfecz v. Jewel Food Stores,
67 E.3d 591, 597 (7th Cir. 1995) (citing Brunswick Corp. v. Pueblo
Bowl-O-Mat, Inc., 429 U.S. 477, 489 (1977). Such injury must be injury to
competition, e.g., "when consumers pay higher prices because of a market
monopoly or when a competitor is forced out of the market." Id. The
antitrust injury doctrine of Bowl-O-Mat "requires every plaintiff to show
that its loss comes from acts that reduce output or raise prices to
consumers." Chicago Prof'l Sports Ltd. P'ship v. National Basketball
Ass'n, 961 F.2d 667, 670 (7th Cir. 1992)
The plaintiffs' theory, raised in response, is that the defendants'
boycott interfered with price-setting by the free market. This would be
price-fixing, which is indeed per se illegal. Denny's Marina, Inc. v.
Renfro Prods., Inc., 8 F.3d 1217, 1221 (7th Cir. 1993) (citing United
States v. Socony-Vacuum 0il, 310 U.S. 150, 223 (1940)). However, there is
no economic theory of which I am aware on which the plaintiffs could
prove any set of facts that would show that the defendants' conduct
affected the price of options. The allegation here is essentially that
the defendants and the DPMs cut the plaintiffs out of trading at the OBOE
(but not elsewhere). But that could not affect options prices at all
unless, first, the CBOE had market power. The plaintiffs do not allege
this and indeed they do not even assert it in response when the
defendants deny it. Second, for the theory to make sense, the plaintiffs
would need the "weight" to move the market with their trades if they
participated. But they do not allege this either.*fn2 I accept all well
pleaded allegations in the complaint and draw every reasonable inference
in the plaintiffs' favor, Vickery v. Jones, 100 F.3d 1334, 1341 (7th
Cir. 1996), but it is not a reasonable inference to suggest that the
activity of Cathdral Trading, Elizabeth and Kristopher Smolinski, Ray
Barker, Brian Gill, Mathrew Kundrat, and Michael Powers on the OBOE, an
exchange that is not alleged to have market power, and which is only one
of several options exchanges, makes the difference between the entire
options market operating efficiently and its not doing so.
It is an old slogan that antitrust laws were enacted for the protection
of competition, not competitors. Bowl-O-Mat, 429 U.S. at 488 citing Brown
Shoe Co. v. United States, 370 U.S. 294, 320 (1961)). To vary the
slogan, the antitrust laws protect consumers by maintaining competition
for price, but they do not protect the ability of particular consumers to
take advantage of a business opportunity unless they can show that and
exclusion from that opportunity affects prices for everyone.
I DISMISS the plaintiffs' securities claims (counts I and II) for
failure to comply with the fraud pleading requirements. I DISMISS the
plaintiffs' antitrust claim (count VI) for failure to state a claim. The
state law claims (counts III, IV, V, VII, VIII, and IX) are therefore
dismissed as well.