The opinion of the court was delivered by: JOAN H. LEFKOW, District Judge
MEMORANDUM OPINION AND ORDER
On January 27, 2004, this court dismissed without prejudice the
First Amended Complaint of plaintiffs, Amzak Corporation
("Amzak"), Countryside Cable, Inc. ("Countryside"), and Gerald
Kazma ("Kazma"), against defendants, Reliant Energy, Inc. (and
its successor in interest CenterPoint Energy, Inc.) ("Reliant
Energy"), R. Steve Letbetter ("Letbetter"), Stephen W. Naeve
("Naeve") and Mary P. Ricciardello ("Ricciardello") (collectively
"defendants"). On March 3, 2004, plaintiffs filed their Second
Amended Complaint which, similar to the First Amended Complaint,
alleges that defendants (1) violated § 10(b) of the Securities
Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5
promulgated under § 78j(b), by knowingly making
misrepresentations and by failing to state material facts
concerning publicly traded securities in Reliant Energy; (2)
violated § 20(a) of the Securities Exchange Act of 1934,
18 U.S.C. § 78t(a); (3) committed fraudulent misrepresentation under Illinois law; and (4) violated the Illinois Consumer Fraud and
Deceptive Business Practices Act, 815 ILCS 505/1 et seq.
Defendants have moved to dismiss the Second Amended Complaint for
failure to state a claim upon which relief may be granted under
Federal Rule of Civil Procedure 12(b)(6) and for failure to
satisfy the pleading requirements of Federal Rule of Civil
Procedure 9(b) and the Private Securities Litigation Reform Act
of 1995, 15 U.S.C. § 78u-4(b) ("PSLRA"). For the reasons set
forth below, defendants' motion is granted.
MOTION TO DISMISS STANDARDS
A motion to dismiss under Federal Rule of Civil Procedure
12(b)(6) challenges the sufficiency of the complaint for failure
to state a claim upon which relief may be granted. General Elec.
Capital Corp. v. Lease Resolution Corp., 128 F.3d 1074, 1080
(7th Cir. 1997). Dismissal is appropriate only if it appears
beyond a doubt that the plaintiff can prove no set of facts in
support of its claim that would entitle it to relief. Conley v.
Gibson, 355 U.S. 41, 45-46 (1957); Kennedy v. Nat'l Juvenile
Det. Ass'n, 187 F.3d 690, 695 (7th Cir. 1999). In ruling on the
motion, the court accepts as true all well pleaded facts alleged
in the complaint, and it draws all reasonable inferences from
those facts in favor of the plaintiff. Jackson v. E.J. Brach
Corp., 176 F.3d 971, 977 (7th Cir. 1999); Zemke v. City of
Chicago, 100 F.3d 511, 513 (7th Cir. 1996).
In addition to the mandates of Rule 12(b)(6), Federal Rule of
Civil Procedure 9(b) requires "all averments of fraud" to be
"stated with particularity," although "[m]alice, intent,
knowledge, and other condition of mind of a person may be averred
generally." "The rule requires the plaintiff to state the
identity of the person who made the misrepresentation, the time,
place, and content of the misrepresentation, and the method by
which the misrepresentation was communicated to the plaintiff."
Vicom, Inc. v. Harbridge Merch. Servs., Inc., 20 F.3d 771,
777 (7th Cir. 1994); see also DiLeo v. Ernst & Young,
901 F.2d 624, 627 (7th Cir. 1990) ("Although states of mind may be pleaded
generally [under Rule 9(b)], the `circumstances' must be pleaded
in detail. This means the who, what, when, where, and how: the
first paragraph of any newspaper story."). "`Because only a
fraction of financial deteriorations reflects fraud,' . . .
plaintiffs in securities cases must provide enough information
about the underlying facts to distinguish their claims from those
of disgruntled investors." Arazie v. Mullane, 2 F.3d 1456,
1458 (7th Cir. 1993) (quoting in part DiLeo, 901 F.2d at 628).
Further, in addition to Rule 9(b), the PSLRA imposes
"heightened pleading requirements" to discourage claims of
"so-called `fraud by hindsight.'" In re Brightpoint, Inc. Sec.
Litig., No. IP99-0870-C-H/G, 2001 WL 395752, at *3 (S.D. Ind.
Mar. 29, 2001). Section 78u-4(b) "requires a court to dismiss a
complaint that fails to (1) identify each of the allegedly
material, misleading statements, (2) state facts that provide a
basis for allegations made on information and belief, or (3)
state with particularity `facts giving rise to a strong inference
that the defendant acted with the required state of mind.'" Id.
ALLEGATIONS OF THE COMPLAINT
Reliant Energy is an international energy services and energy
delivery company providing services in North America and Western
Europe. (Sec. Am. Compl. ¶ 5.) During the time periods relevant
to this action, Reliant Energy was the owner of approximately
82.4% of the stock of Reliant Resources, Inc. ("Reliant
Resources"), an energy services company marketing power and
natural gas in North America and Western Europe. (Sec. Am. Compl.
¶ 5.) Also, defendants Letbetter, Naeve, and Ricciardello
("individual defendants") were executive officers of Reliant
Energy and/or Reliant Resources. (Sec. Am. Compl. ¶¶ 7-9.) On May 10, 2002, Reliant Resources disclosed that it had
engaged in so-called "roundtrip transactions" in which "it had
engaged in transactions with other power traders to buy and sell
power to each other simultaneously, and at the same price. . . ."
(Sec. Am. Compl. ¶ 64.) Reliant Resources announced that it was
undertaking a review of these transactions. (Id.) On May 13,
2002, after the review had taken place, Reliant Resources
announced in a press release that the roundtrip transactions had
the effect of improperly increasing revenues and improperly
inflating trading volume. (Sec. Am. Compl. ¶ 65.)
Plaintiffs allege that defendants made materially false and
misleading statements in SEC filings, press releases and other
communications regarding Reliant Energy's revenues before the
disclosure of the round-trip trades, and that those statements
artificially inflated Reliant Energy's stock price during the
August 2, 1999 to May 10, 2002 time period. (Sec. Am. Compl. ¶
87.) Plaintiffs describe a numbers of actions they undertook with
respect to Reliant Energy stock during that time period. On or
about October 1, 2000, plaintiffs secured loans from Harris Bank
by pledging their Reliant Energy stock as collateral. (Sec. Am.
Compl. ¶ 14.) Plaintiffs allege that this transaction effected a
transfer to the bank of "conditional and defeasible interests" in
their Reliant Energy stock. (Id.) When the price of the Reliant
Energy stock fell in June and July of 2001 (due to normal market
forces and not fraud), the Reliant Energy stock became
insufficient collateral for plaintiffs' loans with their bank.
Rather than allow the bank to foreclose on the stock, plaintiffs
transferred to the bank additional assets to serve as additional
collateral. According to plaintiffs, by doing this they
"purchase[d] from Harris Bank with cash from assets other than
Reliant Energy stock the conditional and defeasible interests in
such pledged shares of Reliant Energy stock, thereby in effect
redeeming their interests." (Sec. Am. Compl. ¶ 15.)
Plaintiffs allege a second similar scenario that took place in
the fall of 2001 when the share price of Reliant Energy stock
once again dropped and rendered plaintiffs' collateral
insufficient. The loan agreements at this point were with LaSalle
Bank. Plaintiffs again point out that they posted additional
collateral to LaSalle Bank in order to avoid foreclosure on their
Reliant Energy shares. (Sec. Am. Compl. ¶ 18.)
Plaintiffs assert damages because, on May 10 and 13, 2002, in
the wake of the curative statements disclosing the round trip
trades, Reliant Energy's stock fell from $24.60 on May 9, 2002 to
$15.87 on May 14, 2002. (Sec. Am. Compl. ¶ 66.) Plaintiffs claim
that absent the alleged misrepresentations they would not have
transferred the additional collateral amounts to their banks and
would have instead allowed the banks to foreclose on the shares.
(Sec. Am. Compl. ¶¶ 87-88.) Plaintiffs also allege that they
would have sold their Reliant Energy shares to several buyers who
approached them during the time period, but did not do so because
of the alleged misrepresentations. (Sec. Am. Compl. ¶¶ 101-05.)
A. Count I: Section 10(b)
Section 10(b) of the Securities Exchange Act of ...