WICHITA FEDERAL S. & L. ASS'N v. Landmark Group

• Decision Date: 14 April 1987
• Docket Number: No. 86-1938-K.,86-1938-K.
• Parties: WICHITA FEDERAL SAVINGS AND LOAN ASSOCIATION, Plaintiff, v. LANDMARK GROUP, INC., a Texas Corporation; Landmark Government Securities, Inc., a Texas Corporation; Landmark Securities Corporation, a Texas Corporation; Landmark Investments, Inc., a Texas Corporation; Iowa Grain Company, an Illinois Corporation; Richard Emmett Tisdale; Wayne Winston Moran; Reba Ann Byrd; Steven Martin Kane; Francis Edwin Carpenter; William Benson Stewart; and Emily B. Spencer, Defendants.
• Court: U.S. District Court — District of Kansas

657 F. Supp. 1182

WICHITA FEDERAL SAVINGS AND LOAN ASSOCIATION, Plaintiff, v. LANDMARK GROUP, INC., a Texas Corporation; Landmark Government Securities, Inc., a Texas Corporation; Landmark Securities Corporation, a Texas Corporation; Landmark Investments, Inc., a Texas Corporation; Iowa Grain Company, an Illinois Corporation; Richard Emmett Tisdale; Wayne Winston Moran; Reba Ann Byrd; Steven Martin Kane; Francis Edwin Carpenter; William Benson Stewart; and Emily B. Spencer, Defendants.

No. 86-1938-K.

United States District Court, D. Kansas.

April 14, 1987.

COPYRIGHT MATERIAL OMITTED

Alexander B. Mitchell of Sargent, Klenda, Mitchell & Austerman, Wichita, Kan., for plaintiff.

Donald R. Newkirk, John T. Conlee and Daniel G. Clothier of Fleeson, Gooing, Coulson & Kitch, Wichita, Kan., and John B. Maroney and Glenn Van Shellenbeck of Brown, Maroney, Rose, Barber & Dye, Austin, Tex., for Texas defendants.

Mikel L. Stout of Foulston, Siefkin, Powers & Eberhardt, Wichita, Kan., and John K. Eggers of Ruberry, Phares, Abramson & Fox, Chicago, Ill., for Iowa Grain.

MEMORANDUM AND ORDER

PATRICK F. KELLY, District Judge.

Plaintiff Wichita Federal Savings and Loan Association (WFSL) seeks to recover from 12 defendants for losses incurred from investments in government securities, repurchase agreements, and reverse repurchase contracts, and U.S. treasury bond futures contracts on the Chicago Board of Trade. The first set of defendants includes the Landmark Group, Inc., its subsidiaries, and certain employees and agents, all based in Austin, Texas (hereafter referred to as "the Texas defendants"). The remaining defendant is Iowa Grain Company, an Illinois corporation, which executed plaintiff's trades in Chicago, at the direction of one or more of the Landmark companies working directly with WFSL.

In its complaint, plaintiff seeks recovery under six counts. Count I, ¶¶ 26-28, alleges securities fraud by the Texas defendants in violation of Rule 10b-5 of the Securities and Exchange Commission, and 15 U.S.C. § 78j(b), by these defendants' alleged use of "manipulative or deceptive devices" in connection with the government securities, investments, repurchase agreements, and reverse repurchase agreements. Count II of the complaint, ¶ 29, alleges common law fraud by the Texas defendants in these same transactions, including allegations of fraudulent trading, excessive pricing and self-dealing. Counts I and II involve only the Texas defendants; but the remaining counts involve both the Texas defendants and Iowa Grain. Count III, ¶¶ 30-45, alleges violations of § 6(b) of the Commodity Exchange Act from defendants' fraudulent acts or omissions in the speculative buying and selling of U.S. treasury bond futures contracts, on plaintiff's account, during the spring and summer of 1985. Count IV, ¶¶ 46-47, alleges a violation of defendants' fiduciary duty to plaintiff, by permitting plaintiff to enter these short sales without regard for plaintiff's financial condition and in direct violation of the Federal Home Loan Bank Board regulations. Count V, ¶ 48, alleges common law fraud by defendants in these transactions. Finally, Count VI, ¶¶ 49-52, alleges RICO violations by all defendants.

Both the Texas defendants and Iowa Grain now seek to dismiss plaintiff's complaint for failing to allege fraud with the particularity required by Fed.R.Civ.P. 9(b); the absence of personal jurisdiction over the defendants; and the impropriety of venue in the District of Kansas. Alternatively, all defendants move for transfer of this case to another district.

Rule 9(b) and the Sufficiency of Plaintiff's Complaint

The Texas defendants challenge the sufficiency of all six counts of plaintiff's complaint under Rule 9(b); defendant Iowa Grain likewise challenges the sufficiency of Counts III through VI. Rule 9(b) provides:

In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally.

Plaintiff responds to defendants' challenges with a variety of case law, primarily Hagstrom v. Breutman, 572 F.Supp. 692 (N.D.Ill.1983), emphasizing that the allegations of a complaint are to be viewed in a light most favorable to plaintiff; federal statutes enacted to prevent fraud should be construed flexibly to effectuate their remedial purposes; the sufficiency of a fraud pleading varies with the complexity of the transaction; and all that is necessary is a showing of time, place and substance of the allegedly false representations.

A few recent opinions more fully indicate the standards by which the court must judge the adequacy of plaintiff's complaint. In Seattle-First National Bank v. Carlstedt, 800 F.2d 1008 (10th Cir.1986), the circuit analyzed this very issue in a securities fraud context. In that case the district court had dismissed a counterclaim alleging federal securities fraud violations, and the circuit reversed. For our present purposes, however, what the circuit did is less important than what it said. First, the court affirmed that the particularity requirement of Rule 9(b) applies to both securities fraud and common law fraud cases in this circuit. Carlstedt, 800 F.2d at 1010 (affirming its earlier decision in Utah State University v. Bear, Stearns & Co., 549 F.2d 164, 171 (10th Cir.), cert. denied 434 U.S. 890, 98 S.Ct. 264, 54 L.Ed.2d 176 (1977)). Noting further that a liberal approach is proper in securities fraud cases (in that case, a Rule 10b-5 allegation), the court then stated the following rules:

A court's function in dismissing a counterclaim on the pleadings is merely to determine whether the counterclaim itself is legally sufficient; a court may not dismiss at the pleading stage of the action by weighing the evidence that might be presented or by otherwise considering the counterclaimant's likelihood of success. Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir.1985).

. . . . .

In Trussell v. United Underwriters, Ltd., 228 F.Supp. 757, 774-75 (D.Colo. 1964), the court elaborated upon the Rule 9(b) requirements:

Rule 9(b) does not ... require the pleading of detailed evidentiary matter, nor does it require any particularity in connection with an averment of intent, knowledge, or condition of mind. It only requires identification of the circumstances constituting fraud or mistake. That requirement means ... that individual plaintiffs should identify particular defendants with whom they dealt directly, and from whom they purchased stock; that individual plaintiffs should designate the occasions on which affirmative statements were allegedly made to them — and by whom; and that individual plaintiffs should designate what affirmative misstatements or half-truths were directed to them — and how.

We believe this is a correct statement of Rule 9(b) requirements in securities fraud cases.

Carlstedt, 800 F.2d at 1011. Applying these rules, the circuit reversed Judge Bohanon because:

The counterclaims identify the counter-defendants with whom the counter-plaintiffs dealt directly, and from whom they purchased the stock; the occasions on which affirmative misstatements were allegedly made to counter-plaintiffs; and, what affirmative misstatements or half-truths were directed to counter-plaintiffs and how those statements were made.

Id., at 1011-12. Judge Moore dissented, finding the counterclaim was merely "a prolix tale of woe which requires an industrious effort to find the significant averments." Id.

Yet another statement of the applicable rules is found in Andreo v. Friedlander, Gaines, Cohen, etc., 651 F.Supp. 877, 879-80 (D.Conn.1986):

Failure to plead fraud with particularity justifies dismissing the complaint. Since Rule 9 is a rule of pleading, allegations made in briefs or affidavits do not satisfy the pleading requirements. Where the failure to plead fraud with the requisite particularity occurs after a second attempt to do so, the court may, in its discretion, dismiss with prejudice.

The case law has elaborated on the Rule 9(b) requirement. In order to state the "circumstances constituting fraud ... with particularity," a complaint must state who made the misrepresentations, when those misrepresentations were made, what the misrepresentations were, and how they were directed to the plaintiffs. In addition, although 9(b) allows general allegations as to knowledge and intent, such allegations must "supply a factual basis for the conclusory allegations" by pleading the specific "events which they assert give rise to a strong inference that the defendants had knowledge." Similarly, where allegations are based on information and belief the complaint must set forth the source of the information and the reasons for the belief. Thus, conclusory allegations that defendants participated in a scheme to defraud are insufficient.

(Citations omitted; emphasis added.) The court dismissed the complaint at issue in Andreo because it failed to allege when material misrepresentations were supposedly made by the defendant, and the complaint failed to contain allegations providing a factual basis for a strong inference that defendant knew the statements made were actually false. 651 F.Supp. at 880-82.

Following Carlstedt, the court must analyze plaintiff's complaint in this case and ask:

(1) Does it identify the particular defendants with whom plaintiff dealt directly?

(2) Does it identify the particular defendants from whom plaintiff purchased these investment products, and when?

(3) Does it identify the occasions on which affirmative statements were allegedly made to plaintiff, and by whom among the defendants?

(4) Does it designate what affirmative misstatements, or half-truths, were directed to plaintiff, when, and how?

And finally, regarding plaintiff's allegations of defendants' intent and knowledge, following Andreo the court must ask:

(5) Do the general allegations of the complaint

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