Borsellino v. Goldman Sachs Group, Inc., 06-1384.

Citation477 F.3d 502
Decision Date20 February 2007
Docket NumberNo. 06-1384.,06-1384.
PartiesLewis BORSELLINO and I.M. Acquisitions, LLC, Plaintiffs-Appellants, v. GOLDMAN SACHS GROUP, INCORPORATED, Defendant-Appellee.
CourtUnited States Courts of Appeals. United States Court of Appeals (7th Circuit)

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 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.

Three months later, in June 1998, Goldman Sachs and Archipelago signed a letter of intent, whereby Goldman Sachs promised to invest $25 million in exchange for a 25% interest in Archipelago. The plaintiffs allege that Goldman Sachs subsequently engaged in document destruction and failed to disclose documents related to its involvement in the Archipelago testing phase in 1997. In 2000, the plaintiffs filed another lawsuit against Putnam and the Townsends in state court, claiming that they defrauded Borsellino into prematurely settling his first lawsuit, and improperly diverted CTA's assets in forming Archipelago. According to a motion for judicial notice filed with this court, Goldman Sachs, which is not a party to the second state suit, answered a discovery request and produced documents dated between 1997 and 1998 pertaining to its decision to invest in Archipelago. The second state court suit is currently pending.

On August 1, 2005, the plaintiffs filed this suit against Goldman Sachs in the U.S. District Court for the Northern District of Illinois, claiming: (1) violations of the Racketeer Influenced and Corrupt Organizations (RICO) Act, 18 U.S.C. §§ 1029 & 1343; (2) tortious interference with economic advantage; (3) tortious interference with fiduciary relationship; (4) civil conspiracy; (5) willful and wanton spoliation of evidence; and (6) negligent spoliation of evidence.

The district court dismissed all of the plaintiffs' claims with a citation to several cases arising under the heightened pleading requirement of Federal Rule of Civil Procedure 9(b). After the initial dismissal, the court offered the plaintiffs an opportunity to replead, but the plaintiffs asserted that they could not. The court then dismissed the case with prejudice and the plaintiffs appeal the dismissal of all claims except the RICO claim.

A. Standard of review

We review the district court's dismissals, whether under Rule 9(b) or the less rigorous pleading standard contained in Rule 8(a), de novo. Gen. Elec. Capital Corp. v. Lease Resolution Corp., 128 F.3d 1074, 1078 (7th Cir.1997). We take the plaintiffs' factual allegations as true, and draw all reasonable inferences in their favor. Goren v. New Vision Int'l, Inc., 156 F.3d 721, 725-26 (7th Cir.1998).

B. Claims of interference with economic advantage, interference with fiduciary relationship, and civil conspiracy

Rule 9(b) of the Federal Rules of Civil Procedure provides: "In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." This heightened pleading requirement is a response to the "great harm to the reputation of a business firm or other enterprise a fraud claim can do." See Payton v. Rush-Presbyterian-St. Luke's Med. Ctr., 184 F.3d 623, 627 (7th Cir.1999) (internal quotations omitted). Thus, "[a] plaintiff claiming fraud or mistake must do more pre-complaint investigation to assure that the claim is responsible and supported, rather than defamatory and extortionate." Id. A complaint alleging fraud must provide "the who, what, when, where, and how." See U.S. ex rel. Gross v. AIDS Research Alliance-Chicago, 415 F.3d 601, 605 (7th Cir. 2005) (quoting DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir.1990)).

Although claims of interference with economic advantage, interference with fiduciary relationship, and civil conspiracy are not by definition fraudulent torts, Rule 9(b) applies to "averments of fraud," not claims of fraud, so whether the rule applies will depend on the plaintiffs' factual allegations. In re Daou Sys., Inc., 411 F.3d 1006, 1027-28 (9th Cir.2005); Cal. Pub. Employees' Ret. Sys. v. Chubb Corp., 394 F.3d 126, 160-61 (3d Cir.2004). A claim that "sounds in fraud"—in other words, one that is premised upon a course of fraudulent conduct—can implicate Rule 9(b)'s heightened pleading requirements. Rombach v. Chang, 355 F.3d 164, 170-71 (2d Cir.2004); see Sears v. Likens, 912 F.2d 889, 893 (7th Cir.1990). The first paragraph of the complaint begins: "This action arises out of a pattern of fraud and racketeering activity," and the complaint goes on to accuse Goldman Sachs of being "a conspirator with Putnam in defrauding Plaintiff into abandoning his interest in CTA, and thus his rights to one-third of Archipelago." This fraud, it is charged, was a tortious interference with the plaintiffs' economic advantage and CTA's fiduciary...

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