recommendation would likely lead to fewer investment
banking opportunities," id. ¶ 89, but they have been "confronted
with enormous pressure to issue favorable recommendations regarding
shares underwritten by the various Underwriter Defendants," id. ¶
The Master Allegations allege three types of perceived conflicts.
"[M]any, if not most, of the Underwriter Defendants tied their analysts'
compensation to the performance of the investment banking section of the
Underwriter Defendants so that the winning of new investment bank
business would directly inure to the pecuniary benefit of the analyst."
Id. ¶ 88. "Many analysts also suffered from conflicts of interest
due to their ownership of stock in companies they were recommending."
Id. ¶ 90. Finally, "analysts frequently had equity interests in
entities including venture capital funds and partnerships which had
investment interests in these issuers." Id. ¶ 104.
5. Motivations of the Underwriters, Issuers and Individual Defendants
The last four paragraphs of Part I, see id. ¶¶ 109-12, allege the
motivations that the various Defendants had in carrying out these Tie-in
Arrangements. In addition to receiving various forms of Undisclosed
Compensation, see id. ¶¶ 41-43, "the Underwriter Defendants were
[also] able to parlay the spectacular increase in market capitalization
attendant to each offering into additional and highly lucrative
investment banking opportunities for themselves," id. ¶ 109.
"Examples of these additional opportunities include the underwriting of
add-on offerings such as secondary and tertiary equity offerings (for
which the Underwriter Defendants typically were paid a fixed percentage
of the offering price), the underwriting and sales of debt and
convertible offerings and advisory services including financial
consulting and advising on mergers and acquisitions." Id. Likewise,
during the late 1990s, "the Underwriter Defendants marketed themselves by
emphasizing the prospect of substantial market gains, including the first
day gains, of IPO Offerings to entice potential clients to retain those
underwriters." Id. ¶ 110.
The last paragraph contains the only reference to the alleged
motivation of the Issuers and the Individual Defendants to participate in
this scheme. See id. ¶ 112. "The Issuers, as new publicly held
corporations, benefitted financially from the misconduct as the run up of
their respective stock prices afforded them with substantial
opportunities to utilize their stock as currency in connection with
corporate acquisitions, and to raise even more money through add-on
offerings." Id. As far as the Individual Defendants are concerned,
"[they] were motivated to and did benefit financially as a result of the
sharp appreciation in value of the respective Issuer's stock price." Id.
C. Part II and Part III of the Master Allegations
Although the second and third part of the Master Allegations fill
hundreds of pages, they are easily summarized. Part II has twenty-two
sections, each of which is tabbed to one particular Underwriter
Defendant.*fn38 All of the sections contain
(1) background information
on that Underwriter, (2) quotations from various newspaper articles
reporting on perceived abuses in the IPO allocations by that investment
bank, and (3) a list of the IPOs and their offering price that the
Underwriter led or co-led, First Day High Price, and the percentage
increase that the First Day High represents when compared to the IPO
price. In addition, the twenty-one page section on CSFB restates facts
revealed from the government's investigation into the IPO allocation
practices of that bank as well as its subsequent settlement with the SEC.
Part III is marked with two tabs. After Tab A, Plaintiffs have listed
each of the fifty-five investment banks and provided several paragraphs
of information about the bank's corporate structure. After Tab B,
Plaintiffs have listed the IPOs the Underwriter participated in, the IPO
price and the number of shares that investment bank was allocated in that
IPO. In addition, Plaintiffs have included estimates as to the amount of
additional compensation that customers were required to pay in order to
receive the IPO stock. For example, one summary reads:
Banc of America
IPO IPO Price Shares
Apropos $22.00 2,000
Digital Insight $15.00 2,000
Digitas $24.00 4,000
DrKoop.com $9.00 20,000
High Speed Access $13.00 8,000
Modem Media $16.00 1,000
NetRatings $17.00 2,000
Oni Systems $25.00 2,000
Repeater $9.00 1,000
Saba Software $15.00 1,000
Ticketmaster $14.00 9,000
Utstarcom $18.00 2,000
In order to receive the above listed and other IPO allocations of
securities from Banc of America, the recipients of such allocations were
required or induced to pay in excess of $3.7 million in commissions to
Banc of America during 1999 and 2000. These commissions were generated
from trades that would not have occurred but for the allocations, and
which were created predominately for the purpose of compensating Banc of
America for the allocations received. All of these commissions are
referred to herein as "Undisclosed Compensation". Id. Sect. III, Tab B,
at 1. A similar chart and allegation follows the listing of each
GOVERNING LEGAL PRINCIPLES
V. PLEADING UNDER THE FEDERAL RULES OF CIVIL PROCEDURE
The individual Complaints average more than thirty pages each,
comprising a total of nearly 11,355 pages. Defendants have challenged
these Complaints as insufficient. The parties have submitted over 500
pages of legal briefing along with thousands of additional pages of
attachments, appendixes and letters to support their arguments. Given the
seriousness of these allegations, the extent of the briefing, and the
fact that there are more than one thousand parties, a thorough discussion
of the pleading requirements of the
Federal Rules of Civil Procedure and the PSLRA is in order.
A. Rule 8(a)
Under the Federal Rules it is remarkably easy for a plaintiff to plead
a claim: Unless the claim falls into one of the two exceptions set forth
in Rule 9, a plaintiff must simply provide "(1) a short and plain
statement of the grounds upon which the court's jurisdiction depends . . .
(2) a short and plain statement of the claim showing that the pleader
is entitled to relief, and (3) a demand for judgment for the relief the
pleader seeks." Fed.R.Civ.P. 8(a). Almost five decades ago, in Conley v.
Gibson, 355 U.S. 41 (1957), the Supreme Court first considered the
argument that a plaintiff must also "set forth specific facts to support
[the complaint's] general allegations." Id. at 47. The Supreme Court
The decisive answer to this is that the Federal Rules of
Civil Procedure do not require a claimant to set out in
detail the facts upon which he bases his claim. To the
contrary, all the Rules require is "a short and plain
statement of the claim" that will give the defendant fair
notice of what the plaintiff's claim is and the grounds
upon which it rests. . . . Such simplified "notice
pleading" is made possible by the liberal opportunity for
discovery and the other pretrial procedures established
by the Rules to disclose more precisely the basis of both
claim and defense and to define more narrowly the
disputed facts and issues.
Id. at 47-48. "The Federal Rules reject the approach that pleading is a
game of skill in which one misstep by counsel may be decisive to the
outcome and accept the principle that the purpose of pleading is to
facilitate a proper decision on the merits." Id. at 48.
In Leatherman v. Tarrant County Narcotics Intelligence &
Coordination Unit, 507 U.S. 163 (1993), the Supreme Court rebuked the
lower courts for imposing a more demanding rule of pleading on certain
types of cases that are sometimes disfavored by the courts (e.g., section
1983 claims against municipalities, prisoner litigation, and civil rights
cases). The Court (again unanimous) reaffirmed its previous decision by
stating: "In Conley v. Gibson, we said in effect that the Rule meant what
it said." Leatherman, 507 U.S. at 168 (citation omitted). Moreover, as if
to warn the lower courts not to stray from the Rules, the Court held that
heightened pleading "is a result which must be obtained by the process of
amending the Federal Rules, and not by judicial interpretation. In the
absence of such an amendment, federal courts and litigants must rely on
summary judgment and control of discovery to weed out unmeritorious
claims sooner rather than later." Id. at 168-69.*fn39
Nonetheless, last term in Swierkiewicz v. Sorema N.A., 534 U.S. 506
(2002), the Supreme Court found occasion to again remind the lower courts
not to raise the bar for pleading. This time reversing a case that
originated from this district, the Court (still unanimous) reiterated
that "Rule 8(a)'s simplified pleading standard applies to all civil
actions, with limited exceptions." Id. at 513 (emphasis added). "This
simplified notice pleading standard relies on liberal discovery rules and
summary judgment motions to define disputed
facts and issues and to
dispose of unmeritorious claims." Id. at 512. "Given the Federal Rules'
simplified standard for pleading, `[a] court may dismiss a complaint only
if it is clear that no relief could be granted under any set of facts
that could be proved consistent with the allegations.'" Id. at 514
(quoting Hishon v. King & Spalding, 467 U.S. 69, 73 (1984)) (emphasis
added). "Rule 8(a) establishes a pleading standard without regard to
whether a claim will succeed on the merits." Swierkiewicz, 534 U.S. at
While the meaning of "a short and plain statement of the claim" is
clear on its face, Fed.R.Civ.P. 8(a)(2), the drafters removed any
conceivable ambiguity by including more than a dozen sample complaints in
the Appendix. See Fed.R.Civ.P.App. Forms 3-18. According to Rule 84,
"[t]he forms contained in the Appendix of Forms are sufficient under the
rules and are intended to indicate the simplicity and brevity of
statement which the rules contemplate."*fn40 Fed.R.Civ.P. 84. It is
worth emphasizing that not one of these exemplar complaints is more than
half a page in length.
"For example, Form 9 sets forth a complaint for negligence in which
plaintiff simply states in relevant part: `On June 1, 1936, in a public
highway called Boylston Street in Boston, Massachusetts, defendant
negligently drove a motor vehicle against plaintiff who was then crossing
said highway.'" Swierkiewicz, 534 U.S. at 513 n. 4 (quoting Fed.R.Civ.P.
App. Form 9). As the Supreme Court recognized in Swierkiewicz, one clearly
written sentence can satisfy Rule 8(a)(2). See id.; see also Walker v.
Thompson, 288 F.3d 1005, 1011 n. 2 (7th Cir. 2002).
If the complaint also includes statements "of the grounds upon which
the court's jurisdiction depends" and "the relief the pleader seeks," the
plaintiff has satisfied Rule 8.*fn41 Fed.R.Civ.P. 8(a)(1),(3).
Rule 8(a) does not require plaintiffs to plead the legal theory, facts
or elements underlying their claim. There is nothing in Form 9, for
example, to support plaintiff's accusation of negligence. "It does not
say, for example, whether the hypothetical defendant was speeding,
driving without lights, or driving on the wrong side of the road."
Atchinson v. District of Columbia, 73 F.3d 418, 423 (D.C. Cir. 1996). Nor
does it outline the four elements of negligence and explain how each is
satisfied. "Form 9 thus treats the mere allegation of negligence as
sufficient." Id. (emphasis added). Form 9's allegations are wholly
conclusory: by simply describing the claim in a short and plain fashion,
Form 9 satisfies the Federal Rules. See Fed.R.Civ.P. 84.
"A complaint that complies with the federal rules of civil procedure
cannot be dismissed on the ground that it is conclusory or fails to
allege facts." Higgs v.
Carver, 286 F.3d 437, 439 (7th Cir. 2002). "The
courts keep reminding plaintiffs that they don't have to file long
complaints, don't have to plead facts, don't have to plead legal
theories." Id. (quotation marks and citation omitted). To comply with
Rule 8, plaintiffs need not provide anything more than sufficient notice
to permit defendant to file an answer.*fn42 In this regard, Form 9 is
the definition of short and plain: "It can be read in seconds and
answered in minutes." McHenry v. Renne, 84 F.3d 1172, 1177 (9th Cir.
Indeed, plaintiffs who want to provide something more than a short
complaint should be cautious because "[a] party's assertion of fact in a
pleading is a judicial admission by which it normally is bound throughout
the course of the proceeding." Bellefonte Re Ins. Co. v. Argonaut Ins.
Co., 757 F.2d 523, 528 (2d Cir. 1985).*fn43 Plaintiffs may even plead
themselves out of court at the outset of their lawsuit by pleading
information that defeats their legal claim, thereby "thwarting what
might, for all we know, have been a fruitful program of pretrial
discovery for the plaintiff." Conn v. GATX Terminals Corp., 18 F.3d 417,
419 (7th Cir. 1994) (citing examples). See also Stone Motor Co. v.
General Motors Corp., 293 F.3d 456, 464 (8th Cir. 2002) ("[A] dismissal
under Rule 12(b)(6) should be granted only in the unusual case in which a
plaintiff includes allegations that show, on the face of the complaint,
that there is some insuperable bar to relief.") (quoting Schmedding v.
Tnemec Co., 187 F.3d 862, 865 (8th Cir. 1999)).
Given these incentives, it is no surprise that courts "continue to be
puzzled why lawyers insist on writing prolix complaints that can only get
them into trouble." Hammes v. AAMCO Transmissions, Inc., 33 F.3d 774, 778
(7th Cir. 1994). Plaintiffs would do well to remember that in law, as in
life: "He who guards his mouth and his tongue keeps himself from
calamity." Proverbs 21:23 (New International Version).
B. Rule 9(b)
"Rule 9(b) does impose a particularity requirement in two specific
instances." Leatherman, 507 U.S. at 168. It states in full: "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."
Fed.R.Civ.P. 9(b). Of these two exceptions, fraud is far more important
— courts and commentators rarely discuss the failure to plead a
claim of mistake with particularity (much less dismiss a case for that
reason). See Bankers Trust Co. v. Old Republic Ins. Co., 959 F.2d 677,
682 (7th Cir. 1992).
1. Why Rule 9(b) Requires Particularity
There are two main reasons why fraud claims must be pled with
particularity: notice and deterrence.*fn44 With respect to the former,
general accusations of fraud are thought to be too amorphous to provide
defendants with sufficient notice to permit a response. See Novak v.
Kasaks, 216 F.3d 300, 314 (2d Cir. 2000) ("`The primary purpose of Rule
9(b) is to afford defendant fair notice of the plaintiff's claim and the
factual ground upon which it is based.'") (quoting Ross v. Bolton,
904 F.2d 819, 823 (2d Cir. 1990)). "Fraud . . . embrace[s] such a wide
variety of potential conduct that a defendant needs a substantial amount
of particularized information about plaintiff's claim in order to enable
him to understand it and effectively prepare his response."*fn45 5
Charles Alan Wright & Arthur R. Miller, Federal Practice and
Procedure ("Fed. Prac.") § 1296 ("Pleading the Circumstances of Fraud
or Mistake — History and Purpose").
Requiring particularity may also deter plaintiffs from filing frivolous
fraud claims. Courts and commentators have offered several explanations
for why fraud claims require more deterrence than other claims. One of
the most common is that lawsuits based on fraud are more likely to harm a
defendant's reputation than a typical lawsuit. "Accusations of fraud,"
even if proven to be untrue, "can do serious damage to the goodwill of a
business firm or a professional person." Bankers Trust Co., 959 F.2d at
683. In addition, fraud claims should be deterred because "assertions of
fraud . . . often are involved in attempts to reopen completed
transactions or set aside previously issued judicial orders." 5 Fed.
Prac. § 1296. Because finality has value, courts will not lightly
reexamine completed transactions because one party has claimed fraud. See
Ackerman v. Northwestern Mut. Life Ins. Co., 172 F.3d 467, 469 (7th Cir.
1999) (citing Stearns v. Page, 48 U.S. (7 How.) 819, 828-30 (1849)); see
also Chamberlain Mach. Works v. United States, 270 U.S. 347, 348-49
Another explanation is that fraud claims deserve more deterrence than
because plaintiffs frequently file fraud claims for the
wrong reasons. See generally 5 Fed. Prac. § 1297. For example, some
fraud claims are nothing more than "strike suits" — that is,
attempts by plaintiffs to extract settlements from defendants who would
rather pay the plaintiff than face the cost of discovery and trial.
Plaintiffs may also sue defendants in order to conduct "fishing
expeditions" where a party files a complaint containing general
allegations of fraud in hopes that subsequent discovery will uncover
enough evidence to substantiate allegations.*fn46 Finally, "fraud is
frequently charged irresponsibly by people who have suffered a loss and
want to find someone to blame for it." Ackerman, 172 F.3d at 469 (citing
Denny v. Barber, 576 F.2d 465, 470 (2d Cir. 1978) (Friendly, J.) (coining
the phrase "fraud by hindsight")).
2. How Particularity Deters Claims of Fraud
Rule 9(b) deters plaintiffs from filing fraud claims in two ways.
First, by requiring plaintiffs to state their claim with particularity,
the Rule creates a disincentive to the filing of claims for an improper
reason. For example, the claim's particularity narrows the potential
scope of discovery. Likewise, because pleadings are binding judicial
admissions, see supra note 43, plaintiffs cannot easily change their
claims based on what they discover during litigation. Thus, requiring
plaintiffs to state their claims with particularity has a certain salutary
Second, particularity increases the cost of filing the complaint by
forcing a plaintiff to conduct a more substantial investigation of the
grounds for her claim before bringing suit. See Ackerman, 172 F.2d at
469. Because "factual contentions [must] have evidentiary support,"
Fed.R.Civ.P. 11(b)(3), claims that are stated with particularity will
necessarily require the plaintiffs to make inquiries that are more
extensive than usual. See also Fed.R.Civ.P. 11(b) (stating that attorneys
must certify that they have made their pleadings to "the best of [their]
knowledge, information, and belief, formed after an inquiry reasonable
under the circumstances").
3. Rule 9(b) Must Be Read in Harmony with Rule 8(a)
It is worth emphasizing that Rule 9(b) and Rule 8(a) are children of
the same parents: their pleading requirements only differ in degree, not
in kind. "[T]his bite of Rule 9(b) was part of the pleading revolution of
1938" in which the drafters rejected arduous fact pleading in favor of
providing simple notice. Williams v. WMX Techs., Inc., 112 F.3d 175, 178
(5th Cir. 1997). "[I]n applying rule 9(b) we must not lose sight of the
fact that it must be reconciled with rule 8 which requires a short and
concise statement of claims." Felton v. Walston & Co., 508 F.2d 577,
581 (2d Cir. 1974). Thus, in various ways, courts in this circuit and
others have repeatedly emphasized that Rule 9(b) must be read in harmony
with the principles established by Rule 8(a). See, e.g., Ouaknine v.
MacFarlane, 897 F.2d 75, 79 (2d
Cir. 1990) ("Rule 9(b) . . . must be read
together with rule 8(a) which requires only a `short and plain statement'
of the claims for relief."); DiVittorio, 822 F.2d at 1247 (same); Credit
& Fin. Corp. v. Warner & Swasey Co., 638 F.2d 563, 566 (2d Cir.
While a complaint may properly plead a cause of action under Rule 8(a)
by stating "defendant negligently drove a motor vehicle against
plaintiff," Fed.R.Civ.P. App. Form 9, plaintiff's mere incantation of
"fraud" will not satisfy Rule 9(b)'s requirement of particularity. See,
e.g., Segal v. Gordon, 467 F.2d 602, 606 (2d Cir. 1972). The additional
requirements of Rule 9(b) were well described by Judge Frank Easterbrook
when he wrote that "[particularity] means the who, what, when, where, and
how: the first paragraph of any newspaper story." DiLeo v. Ernst &
Young, 901 F.2d 624, 627 (7th Cir. 1990) (emphasis added).
While Judge Easterbrook seems to suggest that good lawyers (or at least
good reporters) should be able to write a claim of fraud in one
paragraph, the Appendix to the Rules shows that it can be done in one
sentence. Form 13 alleges fraud and satisfies Rule 9(b) by stating:
Defendant C. D. on or about [date given] conveyed all his
property, real and personal [or specify and describe] to
defendant E. F. for the purpose of defrauding plaintiff
and hindering and delaying the collection of the
indebtedness evidenced by the note above referred to.
Fed.R.Civ.P. App. Form 13. In less than fifty words, this model complaint
answers the five questions posed by Judge Easterbrook:
• who: Defendant C. D.
• what: committed fraudulent conveyance (a type
• when: on or about (date given)