Stern v. American Bankshares Corp., 75-C-730.

• Citation: 429 F. Supp. 818
• Decision Date: 29 March 1977
• Docket Number: No. 75-C-730.,75-C-730.
• Court: United States District Courts. 7th Circuit. United States District Court of Eastern District of Wisconsin
• Parties: Daniel C. STERN, Plaintiff, v. AMERICAN BANKSHARES CORPORATION, a Wisconsin Corporation, et al., Defendants.

429 F. Supp. 818

Daniel C. STERN, Plaintiff, v. AMERICAN BANKSHARES CORPORATION, a Wisconsin Corporation, et al., Defendants.

No. 75-C-730.

United States District Court, E. D. Wisconsin.

March 29, 1977.

COPYRIGHT MATERIAL OMITTED

Heiner Geise and Edward S. Levin, Milwaukee, Wis., for Daniel Stern.

Peter F. Wegmann, President, American Bankshares Corp., Milwaukee, Wis., for American Bankshares.

John J. Burke, Burke & Schoetz, Milwaukee, Wis., for American Hampton.

Brent E. Gregory, Gibbs, Roper, Loots & Williams, Milwaukee, Wis., for FDIC.

Lawton & Cates, Madison, Wis., for Cahill & Fox.

William H. Alverson, Godfrey & Kahn, Milwaukee, Wis., for Ernst & Ernst.

Davis, Kuelthau, Vergeront, Stover & Leichtfuss, S. C., Milwaukee, Wis., for Benz.

Russell R. Stepke, Stepke, Kossow, Trebon & Stadtmueller, Milwaukee, Wis., for Callen.

Elwin J. Zarwell, Quarles & Brady, Milwaukee, Wis., for DeBelak, Deshur, Lauterbach, Lesselyoung & Lichtsinn.

Gregory J. Harrold, Levin, Blumenthal, Herz & Levin, S. C., Milwaukee, Wis., for Erickson.

Lichtsinn, Dede, Haensel & von Bereghy, S. C., Milwaukee, Wis., for Kierstead.

Robert F. Cavanaugh, Milwaukee, Wis., for Sullivan.

David J. Cannon, Michael, Best & Friedrich, Milwaukee, Wis., for Wegmann.

MEMORANDUM AND ORDER

WARREN, District Judge.

There are several motions filed by the defendants in this action attacking the sufficiency of the complaint. The first of these motions was filed by defendant Erickson. This motion requests a dismissal of Count I on the grounds that it fails to state the circumstances constituting fraud with particularity, or, in the alternative, the motion requests a more definite statement of the fraud alleged. The majority of the remaining defendants have joined defendant Erickson in this motion.

Rule 9 of the Federal Rules of Civil Procedure require that "in all averments of fraud . . . the circumstances constituting fraud . . . be stated with particularity." This rule must be balanced against the general rule of pleading which requires only "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed.R.Civ.Proc. 8(a).

Count I of the complaint is asserted pursuant to sections 10(b), 20(a) and 29(b) of the Securities Exchange Act of 1934 (15 U.S.C. §§ 78j(b), 78t(a), 78cc(b)) and Rule 10(b)-5 (17 CFR 240.10b-5) and sections 12(2) and 15 of the Securities Act of 1933 (15 U.S.C. §§ 77l(2), 77o). While all of the defendants are alleged to be liable under this count, principle liability for perpetrating the fraud is asserted against American Bankshares Corporation and American City Bank. Liability as to the other defendants is asserted under the theories of vicarious liability under the control statutes (15 U.S.C. §§ 77o, 78t(a)) and/or the judicially derived theory of liability as an aider and abettor. It should be noted that the FDIC in its capacity as receiver of American City Bank is also named as a defendant herein. It is, for the purposes of this action, the successor in interest to the American City Bank and its liability is alleged to be coextensive with that of the Bank.

The complaint alleges that the plaintiff purchased securities from American Bankshares Corporation. Prior to that purchase, the plaintiff alleges that certain facts were told to him by agents of the seller. The complaint lists four such communications which are alleged to be materially false. Subsequently, allegations of omissions of facts are set forth. It appears to the Court that these allegations meet the requirements of Rule 9 insofar as they particularize the communications which the plaintiff contends are false and also with respect to the facts withheld from the plaintiff.

While the Court agrees with the holding in Rich v. Touche Ross & Co., 68 F.R.D. 243 (S.D.N.Y.1975), it finds the factual context of this case quite different from that in Rich. Where a plaintiff is alleging fraud in a financial statement, greater particularization is required since such statements would contain a multitude of facts.

Nor does the Court find the complaint inadequate in that it pleads knowledge of the facts which were not disclosed to the plaintiff on information and belief. The defendants have cited the case of Segal v. Gordon, 467 F.2d 602 (2d Cir. 1972) in support of their position in this regard. In the Segal case, the plaintiff had merely pleaded "fraud" and "conspiracy" in violation of the securities law on information and belief. The plaintiff has done considerably more in this instance. He has pleaded the specific facts which he contends were kept from him. The comment respecting the "information and belief" appears to apply to the knowledge of American Bankshares. Rule 9 itself allows knowledge to be averred generally.

The individual defendants have also attacked Count I under Rule 9 arguing that the claim is deficient in that it fails to name the individuals who actually made the misrepresentations alleged. A similar attack was made upon the complaint filed in Burkhart v. Allson Realty Trust, 363 F.Supp. 1286 (N.D.Ill.1973). The Court found the complaint sufficient in that case.

While allegations of fraud must be particularized, F.R.Civ.P. 9(b), they must also be as short, plain, simple, concise and direct as is reasonable under the circumstances. F.R.Civ.P. 8(a). The function of pleadings under the Federal Rules is to give fair notice of the claim asserted so as to enable the adverse party to answer and prepare for trial, to allow for the application of the doctrine of res judicata, and to show the type of case brought, so it may be assigned to the proper form of trial. 2A J. Moore, Federal Practice ¶ 8.13 at 1695 (2d ed. 1972). The test is whether the pleading in question gives notice and states the elements of the claim plainly and succinctly, and not whether as an abstract matter it states "conclusions" or "facts." Federal Practice, supra at 1700. Id. at 1289.

The Court is satisfied that the notice requirement of the rules have been met. The factual basis which the defendants seek through these motions can better be obtained through utilization of the discovery process. The motions by the individual defendants which are based on an argument of an insufficient allegation of fraud under Rule 9 must, therefore, be denied.

Several motions also seek to dismiss Count I on the basis that there is an insufficient allegation of interstate commerce. The argument set forth states that the complaint shows that all parties are residents of Wisconsin and, therefore, only intrastate activity is involved. The grounds for the motion will not support dismissal. "Intrastate use of the telephone may confer federal jurisdiction over a private action alleging violation of § 10 of the Securities Exchange Act of 1934 and S.E.C. Rule 10(b)-5." Dupuy v. Dupuy, 511 F.2d 641 (5th Cir. 1975). The Court is satisfied that the allegations are sufficient, and for purposes of this motion, must be taken as true.

Other motions filed by the defendants attacking Count I would require the plaintiff to allege that he acted with due diligence in making his demand for rescission and that he had no knowledge of the alleged untruths and omissions at the time he purchased the securities. The Court views these issues as a matter which is more properly raised in the answer as matters of affirmative defenses and will not require that they be specifically pleaded in the complaint.

The individual defendants have also moved to dismiss Count I arguing that the allegations as to them are insufficient to state a cause of action. The arguments are not altogether clear to the Court.

Defendant Callen asserts in his brief that the plaintiff is required to "select either the primary participant theory or the aider and abettor theory" in his allegations asserted under section 10(b) and Rule 10b-5. As stated above, the Court views the complaint as asserting primary liability against American Bankshares Corporation and American City Bank only. Liability is asserted against the individual defendants only on the basis that (1) they controlled Bankshares and/or (2) they aided and abetted Bankshares and American City Bank in the violations.

An election between the latter two theories of liability is not required to be made in the complaint. Even if this Court were to view the theories as inconsistent Rule 8(e)(2) of the Federal Rules of Civil Procedure would allow such inconsistency. Regardless of the need for an election, the complaint must state a claim for relief under each theory if it is to survive the instant motion.

The Court will first address itself to the claims of liability asserted against the individual defendants on the theory of control.

Title 15 U.S.C. §§ 77o and 78t(a) state:

§ 77o. Liability of controlling persons

Every person who, by or through stock ownership, agency, or otherwise, or who, pursuant to or in connection with an agreement or understanding with one or more other persons by or through stock ownership, agency, or otherwise, controls any person liable under sections 77k or 77l of this title, shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person had no knowledge of or reasonable ground to believe in the existence of the facts by reason of which the liability of the controlled person is alleged to exist.

§ 78t. Liabilities of controlling persons

(a) Every person who, directly or indirectly, controls any person liable under any provision of this chapter or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action.

The complaint alleges...