Monday, December 10, 2007

S.D. Fla. Discusses Fraud Pleading Standard under Rule 9(b); Disapproves Use of Passive Voice

Per Cordova v. Lehman Bros., Inc., --- F.Supp.2d ----, 2007 WL 4287729 (S.D. Fla. Dec. 07, 2007):

To survive a motion to dismiss, a plaintiff's claims of fraud under § 10(b) and Rule 10b-5 must satisfy the requirements of Fed.R.Civ.P. 9(b), which requires that “the circumstances constituting fraud or mistake shall be stated with particularity.” Ziemba, 256 F.3d at 1202. “The particularity rule serves an important purpose in fraud actions by alerting defendants to the ‘precise misconduct with which they are charged’ and protecting defendants ‘against spurious charges of immoral and fraudulent behavior.’ “ Ziemba, 256 F.3d at 1202 (citing Durham v. Bus. Management Assocs., 847 F.2d 1505, 1511 (11th Cir.1988)). “The application of Rule 9(b) ... ‘must not abrogate the concept of notice pleading.’ “ Id. Further, “Rule 9(b) must be read in conjunction with Rule 8(a) [of the Federal Rules of Civil Procedure], which requires a plaintiff to plead only a short, plain statement of the grounds upon which he is entitled to relief.”

Rule 9(b) is satisfied if the complaint sets forth ‘(1) precisely what statements were made in what documents or oral representations or what omissions were made, and (2) the time and place of each such statement and the person responsible for making (or, in the case of omissions, not making) same, and (3) the content of such statements and the manner in which they misled the plaintiff, and (4) what the defendants obtained as a consequence of the fraud.’ “

Most of Plaintiffs' allegations of misrepresentations and omissions in the Second Amended Complaint do not satisfy the particularity requirement of Rule 9(b). Many allegations do not satisfy the particularity requirement because those allegations lump multiple defendants together. “Rule 9(b) does not allow a complaint to merely ‘lump’ multiple defendants together but ‘require[s] plaintiffs to differentiate their allegations when suing more than one defendant ... and inform each defendant separately of the allegations surrounding his alleged participation in the fraud.’" Throughout the Second Amended Complaint, Plaintiffs refer to Defendants collectively as the “Financial Institution Defendants,” refer to more than one Defendant, or combine Defendants with PFA when alleging a fraud, rather than identifying specific misrepresentations, omissions, or actions and stating clearly how they are attributable, on which occasions or in which documents, to specific individual Defendants. Such allegations are insufficient to state a claim under § 10(b) and Rule 10b-5.

Also, a plaintiff's use of the passive voice in alleging a fraud can impermissibly obscure allegations such that the allegations fail to satisfy the particularity requirements of Rule 9(b). Plaintiffs' repeated use of the passive voice when describing misrepresentations or fraudulent acts obscures exactly who made the statements or committed the fraudulent acts. In many instances, it appears that the representations or fraudulent acts are properly attributable to PFA but, by using the passive voice (e.g., stating that misrepresentations “were made” to investors), Plaintiffs attempt to broaden responsibility and make it appear that each Defendant is responsible for each of PFA's and/or another Defendants' statements, misrepresentations, and fraudulent acts or omissions. See e.g. 2nd Amend. Compl. ¶ 24 (Plaintiffs “were assured”), ¶ 27 (“investors were promised”), ¶ 28 (“were promised”), ¶ 32 (“marketing materials were used”), ¶ 55 (“investors were told”), ¶ 57 (“were marketed”), ¶ 60 (“Agreements were entered into”). Similarly, in other instances, Plaintiffs allege that marketing materials or documents made the representations, which also obscures who was responsible for a given representation, because Plaintiffs do not identify specific wording or indicate to whom the statement was attributable.


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