In the
United States Court of Appeals
For the Seventh Circuit
No. 10-3935
A NCHORB ANK, FSB, et al.,
Plaintiffs-Appellants,
v.
C LARK A. H OFER,
Defendant-Appellee.
Appeal from the United States District Court
for the Western District of Wisconsin.
No. 3:09-CV-00610—Stephen L. Crocker, Magistrate Judge.
A RGUED M AY 5, 2011—D ECIDED A UGUST 18, 2011
Before M ANION, W OOD , and W ILLIAMS, Circuit Judges.
W ILLIAMS, 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 col-
lusive trading scheme in violation of the Securities Ex-
change Act of 1934. Hofer moved to dismiss, asserting
that the complaint was inadequately pleaded, and the
court granted the motion to dismiss with prejudice.
2 No. 10-3935
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 ade-
quately stated with particularity the circumstances con-
stituting 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-conspir-
ators, all of whom were employees of AnchorBank, vio-
lated 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
No. 10-3935 3
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.” Sec-
ond 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 be-
fore us is whether the court erred in granting Hofer’s
motion to dismiss AnchorBank and Plumb’s second
amended complaint.1
1
Hofer moved for attorneys’ fees after the court granted his
motion to dismiss the second amended complaint against him.
(continued...)
4 No. 10-3935
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 com-
plaint, we view it in the light most favorable to the plain-
tiff, 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
1
(...continued)
This fee request is still pending in the district court, but is a
collateral issue that does not divest us of appellate jurisdiction
over the district court’s final order dismissing the complaint.
Budinich v. Becton Dickinson and Co., 486 U.S. 196, 199-200
(1988); WMS Gaming Inc. v. WPC Prods. Ltd., 542 F.3d 601, 605
(7th Cir. 2008).
No. 10-3935 5
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 origi-
nal). 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 Securi-
ties Exchange Act of 1934. To satisfy the pleading re-
quirements 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
(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
6 No. 10-3935
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 circum-
stances constituting fraud. This ordinarily requires de-
2
We note here that the district court was correct in finding
that the plaintiffs-appellants could not bring claims in place
of individual Fund participants M and H. Constitutional
considerations generally impose limitations on the class of
persons who may invoke federal jurisdiction on behalf of
another, and the practice is especially disfavored where, as
here, the complaint “contains no hint” that the third party is
prevented from asserting her or his own rights. Massey v.
Helman, 196 F.3d 727, 741-42 (7th Cir. 1999). However, it was
not improper for the plaintiffs-appellants to file suit on behalf
of all Fund participants, and use M and H as examples of
the effect of Hofer’s alleged activities on the Fund. See Peoria
Union Stock Yards Co. Retirement Plan v. Penn Mut. Life Ins. Co.,
698 F.2d 320, 325-26 (7th Cir. 1983) (trustee can sue on behalf
of the trust and plan participants).
No. 10-3935 7
scribing 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
8 No. 10-3935
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 col-
lusive 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 of the alleged scheme involved a coordinated pur-
chase of Fund units by Hofer and at least one of the co-
conspirators, which again upset the balance of the
Fund’s cash-to-stock ratio. Seeking to maintain the ratio
as it was required to do, the Trustee bought AnchorBank
shares on the open market, and, given the large volume
of stock being purchased at or around the same time, the
AnchorBank stock price increased. After the AnchorBank
stock price was artificially inflated because of the col-
lusive trading activity, the co-conspirators would again
conduct a coordinated sale of Fund units, repeating the
illicit cycle. Second Am. Compl. at ¶¶ 22-30, 35-40.
Between September 2008 and June 2009, Hofer engaged
in 36 collusive trades with his co-conspirators, and, much
of the time, the trades represented 100% of the Fund’s
daily trading activity. Second Am. Compl. at ¶¶ 33-34, 39.
These synchronized trades were not coincidental. Sec-
ond Am. Compl. at ¶ 54. Before or during each of the co-
No. 10-3935 9
ordinated transactions, Hofer communicated with the
other co-conspirators either in person, by phone, or by
email. And on several occasions Hofer would forward
the Fund’s electronic unit trade confirmation to his co-
conspirator, or the co-conspirator would forward the
confirmation to Hofer. Second Am. Compl. at ¶¶ 40-41.
Once they realized that their collusive trading scheme
was working, the co-conspirators traded in increasingly
higher volumes and with greater frequency. Second Am.
Compl. at ¶¶ 49, 39. By June 29, 2009, the trio owned
72% of the Fund’s unit shares. Hofer alone came to hold
nearly 34% of the Fund’s shares by that date. And while
the value of the Fund’s units tumbled from $11 a share
to 49 cents a share (a 95% decline), Hofer and the two co-
conspirators increased the value of their Fund holdings
by 230-to-270%, all without increasing the contributions
to their 401(k) accounts. Second Am. Compl. at ¶¶ 61, 50.
On June 29, 2009, AnchorBank suspended the trading
capabilities of Hofer and his two co-conspirators after
the three Fund participants purchased approximately
1,943,986 Fund units, which represented 100% of the
Fund’s trading that day and 782% of the average trading
volume of AnchorBank stock over the next five days.
Second Am. Compl. at ¶ 55.
The net result of the collusive trading, according to the
complaint, is that Hofer and the co-conspirators enjoyed
extraordinary gains as a result of their collusion, while
the Fund and other Fund participants, who were not
part of the scheme, relied on the artificially high and low
Fund unit and stock prices to their financial detriment.
10 No. 10-3935
Second Am. Compl. at ¶¶ 31, 32, 47-48, 53. For example,
the Fund’s Trustee, who was required to determine
when and how many AnchorBank stock shares to pur-
chase and sell on the open market to maintain a Fund
unit cash-to-stock ratio of 5-to-11%, relied on the fraudu-
lently manipulated Fund values in making its decisions.
And Fund participants M and H sold their Fund units at
a price that had been artificially deflated as a direct
result of the clandestine collusion that was spearheaded
by Hofer. Second Am. Compl. at ¶¶ 63-66. We find
that the detailed allegations presented in the plaintiffs-
appellants’ second amended complaint stated with par-
ticularity the circumstances constituting a scheme to
defraud, and thus satisfied the pleading requirements
of Federal Rule of Civil Procedure 9(b).
To show a violation of section 9(a) of the Securities
Exchange Act, a private plaintiff must plead and prove
that: (1) a series of transactions in a security created
actual or apparent trading in that security or raised or
depressed the market price of that security; (2) the trans-
actions were carried out with scienter; (3) the purpose
of the transactions was to induce the security’s sale or
purchase by others; (4) the plaintiffs relied on the trans-
actions; and (5) the transactions affected the plaintiff’s
purchase or selling price. Chemetron Corp. v. Business Funds,
Inc., 682 F.2d 1149, 1164 (5th Cir. 1982), vacated on other
grounds, 460 U.S. 1007 (1983); see also GFL Advantage Fund,
Ltd. v. Colkitt, 272 F.3d 189, 203-06 (3d Cir. 2001) (com-
paring requirements of §§ 9(a) and 10(b) of the Securities
Exchange Act). The elements of a section 10(b) Securities
Exchange Act claim are: (1) a material misrepresenta-
No. 10-3935 11
tion or omission by the defendant in connection with the
purchase or sale of securities; (2) scienter; (3) reliance;
(4) economic loss; and (5) loss causation. Schleicher v.
Wendt, 618 F.3d 679, 681-82 (7th Cir. 2010) (citing Dura
Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 341-42 (2005));
see also Bastian v. Petren Resources Corp., 892 F.2d 680, 683-84
(7th Cir. 1990) (analyzing loss causation). Pursuant to
the PSLRA, securities fraud complaints must also be
able to: (1) specify each misleading statement; (2) set
forth the facts on which a belief that a statement is mis-
leading is formed; (3) state with particularity facts
giving rise to a strong inference that the defendant acted
with scienter; and (4) prove loss causation. Dura
Pharmaceuticals, Inc., 544 U.S. at 345-46; Higginbotham v.
Baxter Intern., Inc., 495 F.3d 753, 756 (7th Cir. 2007). “The
inference of scienter must be more than merely rea-
sonable or permissible—it must be cogent and com-
pelling, thus strong in light of other explanations.” Tellabs,
Inc., 551 U.S. at 324 (internal punctuation omitted).
We find that the plaintiffs-appellants met the stringent
pleading requirements that were required of them in
filing their suit against Hofer. On appeal, Hofer argues
that AnchorBank and Plumb failed to adequately plead
scienter and reliance. We disagree with Hofer’s conten-
tion that the plaintiffs-appellants failed to adequately
plead these elements. The plaintiffs-appellants alleged
that Hofer concocted and executed a scheme whereby
he would act in cahoots with two other AnchorBank
employees to artificially inflate and deflate the value of
Fund unit and AnchorBank stock values; the Fund Trustee
relied on this manipulation when it decided how to
12 No. 10-3935
purchase and sell stock to maintain its required cash-to-
stock ratio; and unwitting Fund participants relied on
the manipulated Fund unit and AnchorBank stock
values when they made their comparatively uninformed
purchase and sale decisions. Second Am. Compl. at ¶¶ 20-
32. The inference of scienter that is raised in the com-
plaint remains strong in light of competing, plausible
explanations offered by Hofer, such as that he was
simply following the rudimentary investment strategy
of buying low and selling high. And while the com-
peting explanations regarding scienter and reliance
could be useful to the trier of fact, they are insufficient
in this case to justify dismissal for failure to state a
claim on which relief can be granted.
Hofer also argues on appeal that AnchorBank and Plumb
failed to adequately allege economic loss and loss causa-
tion. The district court, in dismissing the plaintiffs-appel-
lants’ claims, also found that the plaintiffs-appellants
failed to adequately allege that Hofer caused them to
suffer a loss. Hofer and the district court are correct that
loss causation is a requisite element in any successful
private securities fraud action. Erica P. John Fund, Inc. v.
Halliburton Co., 131 S.Ct. 2179, 2183 (2011). We find that
AnchorBank and Plumb’s second amended complaint
adequately alleged economic loss and loss causation.
The complaint alleges that the Fund’s Trustee traded
AnchorBank stocks on the open market in the wake of
fraudulent, coordinated purchases and sales of Fund
units by Hofer and his co-conspirators; the heightened
activity on the market caused drastic increases and de-
No. 10-3935 13
creases in the AnchorBank stock price; Hofer and his co-
conspirators caused and amplified the dramatic stock
fluctuations by repeating their Fund unit scheme 36 times
between September 2008 and June 2009; because of the
scheme they were able to amass nearly 72% of the
Fund’s unit shares; and that while the value of the Fund
units plummeted 95%, the trio of co-conspirators were
each able to increase the value of their Fund holdings
by 230-to-270%. Second Am. Compl. at ¶¶ 20-21, 26, 33-40,
50, 61-64. It is true, as the district court noted in dis-
missing the plaintiffs-appellants’ complaint, that the
Trustee had some discretion on how to space out its
purchase and sale of AnchorBank stock to maintain the
Fund’s requisite cash-to-stock ratio. And it is true, as
Hofer notes on appeal, that the dramatic decrease in
the value of AnchorBank stock could have been in-
fluenced by the general economic downturn that
impacted the financial services industry. However, we
do not require that a plaintiff plead that all of its loss
is necessarily attributed to the actions of the defendant,
only that it plead that the defendant is at least one plausi-
ble cause of the economic loss. Caremark, Inc., 113 F.3d
at 649 (“[I]t is possible for more than one cause to affect
the price of a security and, should the case survive to
that point, a trier of fact can determine the damages
attributable to the fraudulent conduct.”); see also Ray v.
Citigroup Global Markets, Inc., 482 F.3d 991, 994-95 (7th Cir.
2007) (analyzing loss causation requirement and noting
that a plaintiff must be able to plead and prove that “the
defendant’s actions had something to do with the drop
in value” of the stock).
14 No. 10-3935
AnchorBank and Plumb satisfied the applicable
pleading standards in bringing their complaint against
Hofer. Whether they are able to support the complaint’s
allegations and raise a genuine issue of material fact
for trial, or whether they will ultimately prevail in their
suit against Hofer, are separate questions that are not
properly decided under the procedural vehicle of a
Federal Rule of Civil Procedure 12(b)(6) motion to dismiss.
III. CONCLUSION
The district court’s order dismissing AnchorBank and
Plumb’s second amended complaint is R EVERSED, and the
case is R EMANDED for further proceedings consistent
with this opinion.
8-18-11