The opinion of the court was delivered by: JOAN GOTTSCHALL, District Judge
MEMORANDUM OPINION AND ORDER
Plaintiffs Premier Capital Management, LLC ("Premier Capital"),
TMB, LLC, and Xen Investors, LLC have sued defendants Xentex
Technologies ("Xentex"), Xentex's individual officers and
directors (Larry Cohen, Brian Flanagan, Wan Hee Kim and Michael
Turcotte), a Xentex shareholder (Ron Falese), Northview Bank and
Trust, and the bank's president Blair Robinson, claiming that
defendants violated federal securities laws, as well as several
state statutes and common law prohibitions, when they
fraudulently induced plaintiffs to invest in Xentex.*fn1
Among other claims in their prodigious 39-count complaint,
plaintiffs have brought several state law claims against Xentex's
officers and directors for (1) violations of the Virginia
Securities Act ("VSA"), Va. Code Ann. § 13.1-522, (2) common law
fraud, (3) br each of fiduciary duty, (4) negligent
misrepresentation (against defendant Turcotte), and (5)
accounting malpractice (against Turcotte). Before the court are
two motions to dismiss: the motion of defendants Cohen, Kim,
Turcotte and Falese (the "Xentex defendants") to dismiss
plaintiffs' state law claims, and defendant Flanagan's separate
motion to dismiss plaintiffs' state law claims.*fn2 For the
reasons stated below, both motions to dismiss are granted in part and denied in part.
According to the complaint, plaintiffs made two investments in
Xentex, the first through a stock purchase, the second in the
form of a promissory note. Xentex, through its CEO Jeff Batio and
its Vice Chairman and Executive Vice President Douglas Tucker,
first presented plaintiffs with an opportunity to invest at a
meeting on November 1, 2000. At that time, Xentex was in the
process of developing and launching a flip-pad computer known as
the Voyager. During that meeting, plaintiffs received an
Information Statement dated November 1, 2000 (the "Information
Statement"), which contained numerous representations relating to
Xentex, the Voyager computer, Xentex's plans for launching the
Voyager into the market, and the ability of Xentex's supplier,
Korean Data Systems ("KDS"), to finance, manufacture and service
necessary hardware. In reliance on the representations made in
the Information Statement, as well as certain oral
representations made by Batio and Tucker at the November 1st
meeting, plaintiffs invested more than $3.3 million in Xentex
stock. Subsequently, on June 4, 2001, after certain additional
representations by various members of Xentex's Board of
Directors, plaintiffs loaned Xentex $650,000 in return for a
promissory note. Plaintiffs now claim that the representations
made in the Information Statement, the oral representations made
at the November 1st meeting, and various other representations
made in connection with the execution of the promissory note were
false, and that, as a result, defendants have violated federal
and state securities laws and breached various common law duties.
Plaintiffs claim that defendants hid Xentex's deteriorating
financial condition from plaintiffs, thereby obscuring the true
value of plaintiffs' investment.
In evaluating a motion to dismiss, the court generally accepts
all of plaintiffs' well-pled allegations as true and draws all
reasonable inferences in plaintiffs' favor, Stachon v. United
Consumers Club, Inc., 229 F.3d 673, 675 (7th Cir. 2000).
Ordinarily, a plaintiff need only plead facts sufficient to place defendants on notice of the nature of
the claims against them and the court will not grant the motion
to dismiss unless it is "beyond doubt that the plaintiff can
prove no set of facts in support of his claim which entitles him
to relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957);
Fed.R.Civ.P. 8(a).
However, when pleading claims of fraud, plaintiffs must do more
than merely place defendants on notice of their claims. Under
Rule 9(b), a plaintiff must plead "the circumstances constituting
fraud . . . with particularity." In re HealthCare Compare Corp.
Secs. Litig., 75 F.3d 276, 281 (7th Cir. 1996). Specifically,
the complaint must allege "the identity of the person making the
misrepresentation, the time, place, and content of the
misrepresentation, and the method by which the misrepresentation
was communicated to the plaintiff." Sears v. Likens,
912 F.2d 889, 893 (7th Cir. 1990). In other words, a plaintiff must allege
"the who, what, when, where and how" of the fraud.*fn3
DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir. 1990).
Before turning to the substance of defendants' motions to
dismiss, the court must determine the appropriate pleading
standard by which to measure plaintiffs' claims. As they must,
plaintiffs agree that their common law fraud claims are subject
to Rule 9(b)'s particularity requirements. However, plaintiffs
argue that their remaining state law claims are subject to the
less stringent notice pleading standard of Fed.R.Civ.P. 8(a)
because fraud is not an element of those claims. Plaintiffs'
argument ignores the fact that their VSA claims and breach of
fiduciary duty claims are each premised on the same factual
allegations that defendants fraudulently induced plaintiffs to
invest in Xentex by knowingly making false representations
regarding Xentex's financial condition, current performance and business prospects. Although plaintiffs couch
their VSA and breach of fiduciary duty claims under different
legal theories, allegations of fraud lie at the core of each
claim and, therefore, those claims are subject to Rule 9(b).
Robison v. Caster, 356 F.2d 924, 925 (7th Cir. 1966)
(holding that if a breach of fiduciary duty claim is based on
allegations of a "scheme to defraud," the claim must be pled with
particularity); Stephenson v. Hartford Life and Annuity Ins.
Co., 02-C-3917, 2003 WL 22232968, *5-6 (N.D. Ill. Sept. 26,
2003) (subjecting plaintiffs' claims to Rule 9(b) standard
because, although pled under different legal theories, each claim
arose from the same allegations of fraud). With that standard in
mind, the court will separately evaluate plaintiffs' claims.
I. Plaintiffs' Claims Under The Virginia Securities Act
As discussed above, plaintiffs' claims under the Virginia
Securities Act must be pled with particularity pursuant to
Fed.R.Civ.P. 9(b) as they are based on allegations of fraud.
Plaintiffs' response briefs state their VSA claims quite clearly:
plaintiffs argue that (1) Xentex made several specific
misrepresentations in the sale of securities in violation of VSA
§ 13.1-522(A) and (2) Xentex's individual board members are
liable for Xentex's misrepresentations under Section 13.1-522(C).
However, plaintiffs' complaint is not so plain. Plaintiffs argue
in their brief that their VSA claims against the individual
directors spring directly from their VSA claims against Xentex.
However, their complaint does not provide such a convenient
cross-reference and the specific misrepresentations at the heart
of each VSA claim are often unclear. For example, the VSA claims
against Turcotte purport to hold Turcotte jointly and severally
liable "for the conduct alleged in this Complaint" without
specifying the "conduct" at issue or referring to any "primary
violation" by Xentex. Rather, defendants and the court are left
to comb through the remaining 116 pages of the complaint to
determine the potential universe of misrepresentations for which
Turcotte is allegedly liable under the VSA.
Moreover, plaintiffs' allegations regarding their theory of
liability are often ambiguous. In their brief, plaintiffs clearly
state that, as "control persons," Xentex's directors are liable
for misrepresentations that Xentex made to plaintiffs in the course
of selling shares of Xentex. However, plaintiffs' VSA counts
often focus on allegations of wrongdoing by the individual
defendant including alleged misrepresentations that appear
unrelated to plaintiffs' November, 2000 purchase of securities.
Plaintiffs' VSA counts rarely mention any misconduct by the
alleged "primary violator," Xentex. For example, plaintiffs' VSA
counts against Turcotte (Counts XI and XII) appear to be based on
the "representations of Defendant" and list several specific
misrepresentations and GAAP errors made by Turcotte. Counts XI
and XII make no mention of any VSA violations by Xentex and do
not refer to specific misrepresentations made by Xentex. At the
end of Counts XI and XII the question remains: do plaintiffs seek
to hold Turcotte directly liable under the VSA only for his own
misrepresentations or do plaintiffs seek to hold him liable as a
"control person" for Xentex's misrepresentations (which
presumably include misrepresentations made by Xentex's individual
directors)?
Plaintiffs must plead the "who, what, when, where and how" of
the fraud at the heart of each VSA claim. In other words, each
defendant is entitled to know (1) the specific representations
that form the basis of the claims against them, and (2)
plaintiffs' theory for holding that defendant liable for those
misrepresentations. As currently pled, plaintiffs' complaint
falls short of that standard. Plaintiffs must either enumerate
the specific misrepresentations that underlie each count or
provide convenient cross-references that allow each defendant to
locate those alleged misrepresentations. Moreover, the basis of
each defendants' liability, whether as a "primary violator" or
"control person" must be made clear. Based on the relative
clarity of plaintiffs' briefs, the court believes that plaintiffs
are fully capable of remedying the deficiencies described herein.
Plaintiffs' claims under the Virginia Securities Act (Counts XI,
XII, XX, XXI, XXVII, XXVIII, XXXI, XXXII, XXXIII, and XXXIV) are,
therefore, dismissed without prejudice. Plaintiffs may amend
their VSA counts in accordance with this opinion.*fn4
II. Plaintiffs' Common Law Fraud Claims
In contrast to plaintiffs' VSA claims, plaintiffs' common law
fraud claims meet the particularity ...