The opinion of the court was delivered by: Judge Joan B. Gottschall
MEMORANDUM OPINION & ORDER
Plaintiffs Shailja Gandhi, Revocable Trust (November 6, 2002) (the "Trust"), Amit Vyas, M.D., and Mihir "Mick" Majmundar, M.D., brought this eighteen-count action asserting federal and state causes of action related to the loss of their investment in defendant Sitara Partners, L.P. ("Sitara Partners") which, they allege, was managed by defendants Rajiv Patel and Sitara Capital Management, LLC ("Sitara LLC"). Presently before the court is defendants' motion to dismiss plaintiffs' complaint. For the reasons stated herein, the court grants defendants' motion in part.
While plaintiffs' complaint ranges across thirty-seven pages and alleges facts relevant to some counts but not others, their core allegations, taken as true for purposes of the motion to dismiss, are substantially as follows. In 2005 and 2006, plaintiffs invested in Sitara Partners, which had been formed by defendant Patel, with Sitara LLC as its general partner. In addition to being the founder of Sitara Partners, Patel is the principal, managing director, and sole owner of Sitara LLC. According to plaintiffs, Patel structured both entities to be exempt from various federal and state securities laws. Patel allegedly made various promises to plaintiffs regarding their investment in and his management of Sitara Partners. For example, at some point, Patel promised plaintiffs a diversified portfolio with "quality securities," then, in October 2006, wrote a letter to Sitara Partners' investors, contrasting his operations with those of reckless hedge fund managers. On September 2, 2008, allegedly at odds with his previous representations, Patel fatefully invested 90% of Sitara Partners' assets in common stock of the Federal Home Loan Mortgage Corporation, better known as Freddie Mac. Freddie Mac's stock lost more than 90% of its value, taking Sitara Partners' assets, which lost over three quarters of their value, with it.
Defendants' motion initially runs into turbulence when they urge this court to focus on "evidence" and "facts." These arguments misconceive or ignore the purpose of a motion to dismiss, which is to test the sufficiency of allegations, not issues of fact or evidence. On a Rule 12(b)(6) motion, the court must accept as true the allegations of the complaint and draw all reasonable inferences in favor of plaintiff. Pisciotta v. Old Nat'l Bancorp, 499 F.3d 629, 633 (7th Cir. 2007) (internal citation omitted). Legal conclusions, however, are not entitled to any assumption of truth. Ashcroft v. Iqbal, 129 S.Ct. 1937, 1940 (2009).
The Federal Rules of Civil Procedure distinguish between general claims and those asserting fraud or mistake. Generally, to survive a Rule 12(b)(6) motion, "the complaint need only contain a 'short and plain statement of the claim showing that the pleader is entitled to relief.'" EEOC v. Concentra Health Servs., Inc., 496 F.3d 773, 776 (7th Cir. 2007) (quoting Fed. R. Civ. P. 8(a)(2)). The allegations must provide the defendant with "fair notice of what the . . . claim is and the grounds upon which it rests." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (citing Conley v. Gibson, 355 U.S. 41, 47 (1957)). Under Federal Rule of Civil Procedure 8(a)(2), the plaintiff bringing a general claim need not plead particularized facts, but the factual allegations in the complaint must be sufficient to "state a claim to relief that is plausible on its face[.]" Id. at 570. "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal, 129 S.Ct. at 1940 (citing Twombly, 550 U.S. at 556).
Plaintiffs pleading fraud or mistake, by contrast, must plead with particularity the facts constituting that fraud or mistake. See Fed. R. Civ. P. 9(b). "This means the who, what, when, where, and how: the first paragraph of any newspaper story." See DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir. 1990). The "who" in a multi-defendant fraud case such as this must itself be pled with particularity: "the complaint should inform each defendant of the nature of his alleged participation in the fraud," to the extent that such information is not uniquely within defendants' possession. Vicom, Inc. v. Harbridge Merchant Servs., Inc., 20 F.3d 771, 777-78 & n.5 (7th Cir. 1994) (quoting DiVittorio v. Equidyne Extractive Indus., Inc., 822 F.2d 1242, 1247 (7th Cir. 1987)).
Defendants assert that each plaintiff must allege his reliance on particular statements, an argument that finds support in a strong hint from the Seventh Circuit. See Ackerman v. Nw. Mut. Life Ins. Co., 172 F.3d 467, 470-71 (7th Cir. 1999) (noting that "compliance with Rule 9(b) is burdensome" with hundreds of plaintiffs, "[b]ut you cannot get around the requirements of the rule just by joining a lot of separate cases into one."). The Ackerman court's guidance is consistent with its "who, what, when" guidance and with a straightforward reading of Rule 9(b), and so the court will analyze plaintiffs' complaint in this case for specific allegations by each plaintiff in those counts where Rule 9(b) applies.
Finally, plaintiffs have appended multiple exhibits to their complaint. While a Rule 12(b)(6) motion normally tests only the complaint itself, the court properly considers these attachments as well. Forrest v. Universal Savings Bank, F.A., 507 F.3d 540, 542 (7th Cir. 2007).
Plaintiffs' complaint spans eighteen counts,*fn1 each of which defendants want dismissed.*fn2 The court addresses each in turn.
In Count I, plaintiffs allege that defendants sold unregistered securities, which is prohibited by § 5 of the Securities Act of 1933, as amended, 15 U.S.C. § 77e (2006). Section 5's general prohibition on the sale of unregistered securities is subject to exemptions outlined in § 4(2) of the Securities Act. 15 U.S.C. § 77d(2). Of particular relevance here, sales "by an issuer not involving any public offering" are exempt from § 5's general prohibition. Id. In their motion to dismiss, defendants maintain that their offering was made to thirty-five or fewer investors, and therefore non-public under Regulation D and exempt under § 4(2) from registration requirements. 17 C.F.R. § 230.506(b)(2)(i).*fn3
Courts have repeatedly recognized that § 4(2) of the Securities Act, as further elaborated upon in Regulation D, is an affirmative defense to violations of § 5. See W. Fed. Corp. v. Erickson, 739 F.2d 1439, 1442 (9th Cir. 1984); see also Swenson v. Engelstad, 626 F.2d 421, 425 (5th Cir. 1980); ABN AMRO, Inc. v. Capital Int'l Ltd., 595 F. Supp. 2d 805, 833 (N.D. Ill. 2008). An affirmative defense is generally not the basis for a motion to dismiss, unless the allegations of the complaint suffice to establish the affirmative defense. See Jones v. Bock, 549 U.S. 199, 215 (2007); see also Muhammad v. Oliver, 547 F.3d 874, 878 (7th Cir. 2008). Defendants urge that plaintiffs plead facts here sufficient to establish the Regulation D affirmative defense and therefore to merit dismissal of Count I. While plaintiffs have included in their complaint paragraphs that more resemble legal argument than factual allegations, see Compl. ¶¶ 84-87, those paragraphs do not establish the Regulation D affirmative defense. Specifically, plaintiffs have not alleged the number of investors to whom defendants sold, which is the basis for the Regulation D affirmative defense. Because the complaint does not reveal whether defendants' conduct was exempt from § 5, the motion to dismiss is denied as to Count I.
In Count II, plaintiffs allege that defendants violated § 12(2) of the Securities Act, enacted at 15 U.S.C. § 77l(2), by means of a false and misleading prospectus. Plaintiffs bring Count II "in the good faith belief that Gustafson v. Alloyd Company, Inc., 513 U.S. 561 (1995) was wrongly decided." (Compl. 18 n.1.) In Gustafson, the Court held that a "prospectus," as used in § 12(2), means only "documents related to public offerings by an issuer or its controlling shareholders." Gustafson v. Alloyd Co., 513 U.S. 561, 569 (1995) (emphasis added). Plaintiffs allege the relevant prospectus here was a Confidential Private Offering Memorandum that they attach to their complaint, a document that they concede was not a "related to [a] public offering." Id. Neither plaintiffs' belief nor their cited authority undermines the binding nature of Supreme Court precedent. Count II is therefore dismissed.
In Count III, plaintiffs allege fraud in connection with the sale of securities in violation of § 10(b) of the Securities Exchange Act of 1934, as amended, 15 U.S.C. § 78a et seq. and Rule 10b-5, codified at 17 C.F.R. § 240.10b-5. As defendants note:
To state a valid Rule 10b-5 claim, plaintiff must allege that the defendant (1) made a misstatement or omission, (2) of material fact, (3) with scienter, (4) in connection with the purchase or sale of securities, (5) upon which the plaintiff relied, and (6) that reliance proximately caused plaintiff's injuries.
In re HealthCare Compare Corp. Secs. Litig., 75 F.3d 276, 280 (7th Cir. 1996). Rule 10b-5 claims, like other fraud claims, are subject to the heightened pleading requirements of Federal Rule of Civil Procedure 9(b). See Roots P'ship v. Lands' End, Inc., 965 F.2d 1411, 1419 (7th Cir. 1992). Defendants argue that plaintiffs' Count III fails because plaintiffs allege that in investing in Sitara Partners they relied on certain statements by defendants that post-dated plaintiffs' investment. According to defendants, it is impossible that plaintiffs could have invested in reliance on statements not yet made at the time of investment. Plaintiffs, in response, do not contend that the representations of which they complain occurred before their investment (with the limited exception of certain secondary investments made by plaintiff Vyas, which are discussed at ...