477 F.3d 502 (7th Cir. 2007), 06-1384, Borsellino v. Goldman Sachs Group, Inc.

Docket Nº:06-1384.
Citation:477 F.3d 502
Party Name:Lewis BORSELLINO and I.M. Acquisitions, LLC, Plaintiffs-Appellants, v. GOLDMAN SACHS GROUP, INCORPORATED, Defendant-Appellee.
Case Date:February 20, 2007
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit

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477 F.3d 502 (7th Cir. 2007)

Lewis BORSELLINO and I.M. Acquisitions, LLC, Plaintiffs-Appellants,



No. 06-1384.

United States Court of Appeals, Seventh Circuit.

Feb. 20, 2007

Argued Sept. 13, 2006.

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[Copyrighted Material Omitted]

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Michael Kanovitz (argued), Loevy & Loevy, Chicago, IL, for Plaintiffs-Appellants.

Melanie E. Walker, Sidley Austin, Chicago, IL, Richard D. Bernstein (argued),

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Sidley Austin, Washington, DC, for Defendant-Appellee.

Before BAUER, WOOD, and WILLIAMS, Circuit Judges.

WILLIAMS, Circuit Judge.

Lewis Borsellino was a one-third partner in Chicago Trading and Arbitrage ("CTA"), a company that facilitated stock trading through remote access to the electronic stock exchange NASDAQ. His partners, whom he accused of acting behind his back and improperly using CTA resources, developed a technology to allow remote trading to occur without having to visit CTA's offsite trading location. They started a new business called Archipelago using this technology, and Goldman Sachs became a 25% owner. Archipelago was enormously successful. Borsellino sued Goldman Sachs, contending that it colluded with his former partners in CTA to defraud him of his rightful interest in the new venture. The district court dismissed the complaint under Federal Rule of Civil Procedure 9(b), which contains heightened pleading requirements for fraud, and the plaintiffs now challenge that decision. Because the complaint does not adequately allege with any specificity a fraud or other misbehavior on the part of Goldman Sachs, we affirm the judgment of the district court.


We draw the following allegations from the complaint. In 1996, Lewis Borsellino, Gerald Putnam, Marrgwen Townsend, and Stuart Townsend formed CTA. The planned business of CTA was selling access to a "day trading room" in which individuals could access NASDAQ electronically for the purpose of engaging in multiple, short-term stock transactions. 1 The technology that facilitated this activity was known as a Small Order Execution System ("SOES"). Borsellino's main role as a partner at CTA was recruiting day traders to be customers. The business formally opened in May of 1996.

The key aspect of CTA's SOES was its "point & click" software, which allowed CTA day traders easy access to NASDAQ. The point & click software was developed by the Townsends through the use of CTA's financial and technological resources.

In 1996, Putnam began to network day trading rooms around the country into CTA's system, giving numerous traders access to CTA's technology without actually having to be physically present at CTA's day trading room. This activity continued until some point in either late 1997 or early 1998. During this period, Putnam and the Townsends took millions of dollars in commissions from this networking; these funds were not shared with Borsellino or with CTA. The plaintiffs allege that the federal wire fraud statute, 18 U.S.C. § 1343, was violated each time a commission was sent to Putnam or one of the Townsends.

Using the new technology, Putnam and the Townsends started an Electronic Communication Network ("ECN") in 1997 called Archipelago. Like other ECNs, Archipelago allowed day traders to make electronic trades on the NASDAQ in much the same way that CTA's SOES did. Archipelago's technological infrastructure was built on top of CTA's. The plaintiffs allege that Archipelago could not have functioned during its initial stages without

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parasitically drawing off the resources of CTA's SOES.

During the first two weekends in January 1997, Archipelago underwent and passed several tests conducted by NASDAQ and the Securities Exchange Commission ("SEC") to assess the effectiveness of its ECN technology. Upon passing the tests, Archipelago became one of only four companies approved by the SEC to operate an ECN business. The plaintiffs allege that Putnam and the Townsends arranged for the testing to occur when Borsellino was not likely to be present. They also contend that the testing constituted a violation of the federal wire fraud statute, 18 U.S.C. § 1343, and was in violation of federal prohibitions on misuse of telecommunications access devices, 18 U.S.C. § 1029(a).

Around the time of the 1997 testing, Goldman Sachs began investigating the possibility of investing in Archipelago through a series of "getting to know you" talks. Goldman Sachs employees participated in the NASDAQ and SEC testing phase of Archipelago. After Goldman Sachs saw Archipelago's success in the testing phase, it agreed to invest tens of millions of dollars in the venture. The talks leading up to the investment took place in 1997 and 1998 at dates unknown to the plaintiffs. At this point, Goldman Sachs was aware that CTA had an interest in Archipelago, and the complaint alleges that Goldman Sachs conspired with Putnam and Townsend to wait until the partnership with Borsellino could be terminated before making an investment.

In the fall of 1997, Putnam and the Townsends told Borsellino that they no longer wanted to be in the business of operating a day trading room and stated that they did not believe CTA could be run as a profitable venture. Borsellino filed a shareholder's derivative suit in state court seeking an accounting, and Putnam and the Townsends offered to settle for $250,000--the amount of Borsellino's original investment in CTA. Borsellino agreed, and on March 4, 1998, he entered into a settlement agreement foreclosing all of his claims against Putnam and the Townsends.


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