Anchorbank v. Hofer

• Court: U.S. Court of Appeals — Seventh Circuit
• Writing for the Court: Before MANION, WOOD, and WILLIAMS, Circuit Judges.
• Citation: Anchorbank v. Hofer, 649 F.3d 610, 80 Fed.R.Serv.3d 385 (7th Cir. 2011)
• Decision Date: 18 August 2011
• Docket Number: No. 10–3935.,10–3935.
• Parties: ANCHORBANK, FSB, et al., Plaintiffs–Appellants,v.Clark A. HOFER, Defendant–Appellee.

649 F.3d 610

80 Fed.R.Serv.3d 385

ANCHORBANK, FSB, et al., Plaintiffs–Appellants,

v.Clark A. HOFER, Defendant–Appellee.

No. 10–3935.

United States Court of Appeals, Seventh Circuit.

Argued May 5, 2011.Decided Aug. 18, 2011.

Melissa H. Burkland (argued), Daniel J. Vaccaro, Attorneys, Michael Best & Friedrich, Monica Riederer, Attorney, Hansen Riederer Dickinson Crueger, Milwaukee, WI, for Plaintiffs–Appellants.Lauri D. Morris (argued), Attorney, L.D. Morris Law S.C., Madison, WI, for Defendant–Appellee.Before MANION, WOOD, and WILLIAMS, Circuit Judges.WILLIAMS, Circuit Judge.

AnchorBank and Plumb Trust Company, the Trustee for an AnchorBank investment fund, filed a civil suit against Clark A. Hofer, an employee of AnchorBank, alleging that Hofer engaged in a collusive trading scheme in violation of the Securities Exchange Act of 1934. Hofer moved to dismiss, asserting that the complaint was inadequately pleaded, and the court granted the motion to dismiss with prejudice. AnchorBank and Plumb appealed, and we find that the plaintiffs' complaint sufficiently pleads a violation pursuant to Federal Rules of Civil Procedure 8(a) and 9(b), the Securities Exchange Act of 1934, and the Private Securities Litigation Reform Act. The complaint adequately stated with particularity the circumstances constituting the securities fraud, and the economic loss impact on the plaintiffs as a result of the fraud. Therefore, we reverse the decision of the district court and remand the case for further proceedings consistent with this opinion.

I. BACKGROUND

AnchorBank FSB and AnchorBank Unitized Fund (the Fund), whom we will refer to collectively as AnchorBank, filed a complaint against Clark Hofer on October 5, 2009. The complaint alleged that Hofer and two co-conspirators, all of whom were employees of AnchorBank, violated sections 9(a) and 10(b) of the Securities Exchange Act of 1934 when they engaged in a collusive trading scheme by coordinating their purchase and sale of units in the Fund, which was an investment option in their individual 401(k) accounts. The complaint also alleged violations of Wisconsin's securities law and brought common law claims for breach of fiduciary duty and unjust enrichment. The two co-conspirators were not named in the suit against Hofer because they settled with AnchorBank before it initiated suit. Hofer moved to dismiss the complaint against him under Federal Rules of Civil Procedure 9(b) and 12(b)(6). Seeking to remedy the deficiencies Hofer cited in his motion to dismiss, AnchorBank filed an amended complaint. Hofer then moved to dismiss the first amended complaint. The district court granted the motion, dismissing the first amended complaint without prejudice.

AnchorBank filed a second amended complaint, adding Plumb Trust Company, the Trustee for the Fund, as an additional plaintiff. AnchorBank and Plumb also added, among other things, a paragraph describing examples of trading activity by Fund participants “M” and “H”, and stated that both M and H sold their Fund shares “at a lower price as a direct result of the Collusive Trading Activity by Hofer and the other co-conspirators.” Second Am. Compl. at ¶ 66. Hofer moved to dismiss the second amended complaint. The district court granted the motion, and dismissed the plaintiffs' complaint with prejudice. It found that AnchorBank and Plumb had satisfied all of the pleading requirements except for loss causation. It also found that it was improper for the plaintiffs to include the references to M and H because it amounted to an attempt to pursue a claim on behalf of other individuals. The court also declined to exercise supplemental jurisdiction over the plaintiffs' state law claims. AnchorBank and Plumb appealed. At issue before us is whether the court erred in granting Hofer's motion to dismiss AnchorBank and Plumb's second amended complaint.¹

II. ANALYSIS

Motion to Dismiss Should Not Have Been Granted

We review de novo a district court's decision to dismiss a complaint for failure to state a claim on which relief can be granted. Stayart v. Yahoo! Inc., 623 F.3d 436, 438 (7th Cir.2010). In evaluating the sufficiency of the complaint, we view it in the light most favorable to the plaintiff, taking as true all well-pleaded factual allegations and making all possible inferences from the allegations in the plaintiff's favor. Wilson v. Price, 624 F.3d 389, 391 (7th Cir.2010). Our task in reviewing the sufficiency of a complaint is “necessarily a limited one. The issue is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims.” Caremark, Inc. v. Coram Healthcare Corp., 113 F.3d 645, 648 (7th Cir.1997) (citation omitted).

“Although the bar to survive a motion to dismiss is not high, the complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.” Bonte v. U.S. Bank, N.A., 624 F.3d 461, 463 (7th Cir.2010) (internal citations and quotations omitted). A “plaintiff must do better than putting a few words on paper that, in the hands of an imaginative reader, might suggest that something has happened to her that might be redressed by the law.” Swanson v. Citibank, N.A., 614 F.3d 400, 403 (7th Cir.2010) (emphasis in original). And to survive a motion to dismiss in a complex case, a complaint must sufficiently plead allegations to allow a judgment that the claim has the possible merit that justifies the time and expense required in litigating the case. Stark Trading v. Falconbridge Ltd., 552 F.3d 568, 574 (7th Cir.2009).

In their second amended complaint, AnchorBank and Plumb alleged that Hofer engaged in a collusive trading scheme in violation of sections 9(a) and 10(b) of the Securities Exchange Act of 1934. To satisfy the pleading requirements in their case, AnchorBank and Plumb had to meet the general pleading requirements of Federal Rules of Civil Procedure 8(a) and 9(b). See Smith v. Medical Benefit Adm'rs Group, Inc., 639 F.3d 277, 281 (7th Cir.2011); Tricontinental Indus., Ltd. v. PricewaterhouseCoopers, LLP, 475 F.3d 824, 833 (7th Cir.2007). They also needed to satisfy the pleading requirements of sections 9(a) and 10(b) of the Securities Exchange Act of 1934. Sullivan & Long, Inc. v. Scattered Corp., 47 F.3d 857, 864–65 (7th Cir.1995). And they had to satisfy the requirements of the Private Securities Litigation Reform Act (PSLRA). Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 320–21, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007).

Under Federal Rule of Civil Procedure 8(a), the plaintiffs-appellants had to provide short and plain statements of jurisdiction and entitlement to relief, and a demand for the relief sought. They satisfied these requirements by stating that: this action was brought under federal securities laws; AnchorBank allowed its employees to invest in its Unitized Fund, which is an investment option within AnchorBank's 401(k) retirement plan; Hofer was employed by AnchorBank; Plumb Trust is the Trustee for the Fund and is pursuing the claims on behalf of all Fund participants; ² and they demanded judgment in their favor on the raised claims and were thus entitled to damages, punitive damages, restitution, disgorgement, costs, disbursements, and attorneys' fees. Second Am. Compl. at ¶¶ 1–6, 8, 101A–I.

Under Federal Rule of Civil Procedure 9(b), the plaintiffs-appellants had to state with particularity the circumstances constituting fraud. This ordinarily requires describing the “who, what, when, where, and how” of the fraud, although the exact level of particularity that is required will necessarily differ based on the facts of the case. Pirelli Armstrong Tire Corp. Retiree Medical Benefits Trust v. Walgreen Co., 631 F.3d 436, 441–42 (7th Cir.2011). In their complaint, the plaintiffs-appellants alleged that Hofer and two co-conspirators, A and B, were allowed to invest in the Fund because they were all employees of AnchorBank. Second Am. Compl. at ¶ ¶ 8, 20–21. The Fund is comprised of a combination of cash and AnchorBank stock. The Fund's Trustee manages the Fund, and it is required to maintain a cash-to-stock ratio of 5–to–11%. Second Am. Compl. at ¶¶ 9–11. When Fund participants purchase and sell Fund units, the Trustee is required to buy and sell AnchorBank stock on the open market, at exact times and in specific amounts to be made at its discretion, in order to achieve the requisite cash-to-stock ratio of the Fund. Second Am. Compl. at ¶¶ 14–19. Fund participants, including each of the co-conspirators, were notified of the cash-to-stock ratio requirement of the Fund. Second Am. Compl. at ¶¶ 12, 13. AnchorBank discovered in June of 2009 that Hofer was the mastermind of a plan to knowingly and deliberately coordinate trades in Fund units that would result in large gains for the co-conspirators and losses to the Fund and other Fund participants. Second Am. Compl. at ¶¶ 20–21. Hofer knew that the coordinated trading activity had the ability to, and was intended to, affect the Fund unit prices and the AnchorBank stock prices. Second Am. Compl. at ¶¶ 44–46.

The complaint painted a sufficiently detailed picture of the alleged scheme. For the first step, Hofer and at least one of the co-conspirators would coordinate their sale of Fund units. This triggered a payout from the Fund's cash reserves to the co-conspirators. Because the Trustee was required to maintain its cash-to-stock ratio of 5–to–11%, it was forced to sell AnchorBank stock on the open market, at market prices, to replenish the Fund's cash reserves. This heightened activity as a result of the collusive trading by the co-conspirators caused the volume of AnchorBank stock on the market to be relatively high as compared to the average daily trading volume of AnchorBank stock, and, given the large volume of AnchorBank stock being sold at or around the same time, the AnchorBank stock price declined. The second step...