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Iles v. Swank

June 28, 2006


The opinion of the court was delivered by: Judge Virginia M. Kendall


Plaintiff Roger Iles ("Plaintiff") brings this action against Ralph Swank, Jr., Michael C. Deininger and Roger J. Swarat (collectively "Defendants") for alleged violations of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b); the Securities and Exchange Commissioner's Rule 10b-5, 17 C.F.R. § 240.10b-5; and section 12(2) of the Securities Act of 1933, 15 U.S.C. § 771(a)(2); as well as state common law and statutory claims. On March 18, 2005, this Court issued a Memorandum Opinion and Order dismissing, without prejudice, certain counts of Plaintiff's First Amended Complaint pursuant to Federal Rule of Civil Procedure 9(b) for failure to plead the alleged fraud with particularity. Plaintiff's state law negligent misrepresentation count was dismissed with prejudice for failure to state a claim under Rule 12(b)(6). Based on the applicable statute of limitations period, the Court also limited any allegations in a re-filed complaint to claims related to Plaintiff's renewed investments of $50,000 on December 1, 2000 and $100,000 on June 1, 2001. Plaintiff filed a Second Amended Complaint and Defendants again have moved to dismiss for failure to plead with the particularity required by Rule 9(b) and for failure to state a claim under Rule 12(b)(6).

Taking as true all facts alleged in the complaint, and construing all reasonable inferences in favor of Plaintiff, it is not beyond doubt that Plaintiff can prove a set of facts which would entitle him to relief from Ralph Swank, Jr. Plaintiff has pleaded with particularity the circumstances of the fraud and facts giving rise to a strong inference that Defendant Swank acted with the required state of mind. Plaintiff's allegations also support a reasonable inference that Defendant Swank's representations and omissions were material and that the representations were not made in good faith or with a reasonable basis. As to Defendants Deininger and Swarat though, Plaintiff has not alleged that they made any misrepresentations nor alleged any facts from which it reasonably can be inferred that they had a duty to disclose the material facts allegedly omitted from Defendant Swank's statements. Accordingly, Defendant Swank's Motion to Dismiss is denied and Defendants Deininger's and Swarat's Motions to Dismiss are granted.

Plaintiff's Allegations

Plaintiff resides in Waukegan, Illinois, where he is president of Carriage Auto Body, a business specializing in automobile collision repair. Defendants were officers of Statewide Holding Company ("Statewide Holding") located in Waukegan. Defendants were also officers and employees of Statewide Insurance Company, an asset of Statewide Holding. Plaintiff developed a relationship with Statewide Insurance through his course of business, as he often performed estimates and repair work for car owners insured by the company. Statewide Insurance also insured Plaintiff.

In Spring 1991, Defendants marketed subordinate debentures*fn1 in Statewide Holding to Plaintiff. Plaintiff invested $100,000 and was issued Debenture No. 101 in May 23, 1991. In April 1992, Statewide informed Plaintiff that it intended to redeem its debenture, but told him he could reinvest in a new subordinated debenture at a lower rate of return. Plaintiff renewed his $100,000 investment. Defendants urged Plaintiff to purchase more subordinated debentures in the fall of 1995, which he did on December 1, 1995. Plaintiff invested $50,000 more and was issued five debentures for $10,000 each. Plaintiff renewed his $100,000 investment two more times on June 1, 1998 and June 1, 2001. He renewed his $50,000 investment on December 1, 2000.

On June 9, 1992, Ralph Swank, Sr., father of Defendant Swank, sent Plaintiff a letter with a brochure and combined financial statement for Statewide Holding. At the time, as in 1991 when the debentures first were sold to Plaintiff, Statewide Holding's assets consisted of: Statewide Insurance Company, Swank Insurance Company, Statewide Financial Company, Statewide Risk Management & Adjustment Corporation and Swank Excess Brokers, Inc. At no time did Defendants advise Plaintiff that Statewide Holding had lost some of its assets or that businesses that comprised the holding company were defunct and no longer in business.

In or around November or December 2000, Plaintiff and Defendant Swank met several times at a local Waukegan restaurant and discussed Plaintiff's renewal of his investment. During these conversations, Defendant Swank did not provide Plaintiff with any current financial or other information regarding Statewide Holding or its assets. Defendant Swank, however, reassured Plaintiff that all was fine with Statewide Holding and that Statewide Holding was intending "to go public." Defendant Swank represented to Plaintiff during these conversations that Statewide Holding "remained profitable, was a safe investment, and emphasized the profitability of Statewide Insurance Company." In spring of 2001, before Plaintiff's June 1st renewal, Defendant Swank telephoned Plaintiff and again told him that "the company was doing great and assured him his investment was safe."

Plaintiff first learned of Statewide Holding's financial difficulties in December 2003, when he did not receive his biannual dividends for the debentures. By that point, Statewide Holding's principal asset, Statewide Insurance Co., had been in serious financial trouble for many years and subsequently became insolvent. The other businesses comprising Statewide Holding's portfolio of assets already had ceased business operations. Statewide Holding itself had sought bankruptcy protection.


When considering a motion under Rule 12(b)(6), a court must take as true all facts alleged in the complaint, and construe all reasonable inferences in plaintiff's favor. See Murphy v. Walker, 51 F.3d 714, 717 (7th Cir. 1995). A Rule 12(b)(6) motion will not be granted "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claims which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957).Rather than requiring particular facts to be pleaded, Rule 12(b)(6) requires only that a complaint must "provide the defendant with at least minimal notice of the claim." Kyle v. Morton High School, 144 F.3d 448, 454-55 (7th Cir. 1998); Sanjuan v. American Bd. of Psychiatry and Neurology, Inc., 40 F.3d 247, 251 (7th Cir. 1994) (stating that "[o]ne pleads a 'claim for relief' by briefly describing the events . . . [m]atching facts against legal elements comes later").

Rule 9(b), however, sets a heightened pleading standard for most civil cases involving allegations of fraud.*fn2 See Ackerman v. Northwestern Mutual Life Insur. Co., 172 F.3d 467, 470 (7th Cir. 1991) ("Rule 9(b) requires heightened pleading of fraud claims in all civil cases brought in federal courts, whether or not the applicable state or federal law requires a higher standard of proving fraud, which sometimes it does and sometimes it does not"). But in securities fraud cases, the Private Securities Litigation Reform Act ("PSLRA") requires pleading that "exceeds even the particularity requirement of Federal Rule of Civil Procedure 9(b)." Makor Issues & Rights, Ltd. v. Tellabs, Inc., 437 F.3d 588, 594 (7th Cir. 2006). The PSLRA requires a securities fraud complaint to: (1) "specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed" and (2) "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(1), (2).

I. Defendant Ralph Swank, Jr.

To establish liability on his § 10(b) and Rule 10b-5 securities fraud claims, Plaintiff must prove that "the defendant either made a false statement of material fact or failed to make a statement of material fact thereby rendering the statements which were in fact made misleading."*fn3 Searls v. Glasser, 64 F.3d 1061, 1065 (7th Cir. 1995); see 17 C.F.R. § 240.10b-5 (forbidding the making of "any untrue statement of a material fact or [omitting] 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"). A statement is material if a reasonable investor would view the misrepresented or omitted fact as "having significantly altered the 'total mix' of information made available." Basic Inc. v. Levinson, 485 U.S. 224, 232 (1988), quoting ...

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