Borsellino, Lewis v. Goldman Sachs Group ( 2007 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 06-1384
LEWIS BORSELLINO and I.M. ACQUISITIONS, LLC,
Plaintiffs-Appellants,
v.
GOLDMAN SACHS GROUP, INCORPORATED,
Defendant-Appellee.
____________
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 05 C 4401—Charles R. Norgle, Sr., Judge.
____________
ARGUED SEPTEMBER 13, 2006—DECIDED FEBRUARY 20, 2007
____________
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 busi-
ness called Archipelago using this technology, and Gold-
man Sachs became a 25% owner. Archipelago was enor-
mously successful. Borsellino sued Goldman Sachs, con-
tending that it colluded with his former partners in CTA
2 No. 06-1384
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.
I. BACKGROUND
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 custom-
ers. 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
1
The viability of day trading as a profit generating strategy has
been widely discussed in the press. See generally Burton G.
Malkiel, Day Trading and its Dangers, Wall St. J., Aug. 3, 1999,
at A22.
No. 06-1384 3
traders access to CTA’s technology without actually hav-
ing 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, Archi-
pelago 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 Archipel-
ago through a series of “getting to know you” talks.
4 No. 06-1384
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 inter-
est in Archipelago, and the complaint alleges that Gold-
man Sachs conspired with Putnam and Townsend to wait
until the partnership with Borsellino could be termin-
ated before making an investment.
In the fall of 1997, Putnam and the Townsends told
Borsellino that they no longer wanted to be in the busi-
ness 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 settle-
ment 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 Gold-
man Sachs subsequently engaged in document destruction
and failed to disclose documents related to its involve-
ment 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 de-
frauded 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
No. 06-1384 5
second state suit, answered a discovery request and
produced documents dated between 1997 and 1998 per-
taining 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 North-
ern 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 height-
ened pleading requirement of Federal Rule of Civil Proce-
dure 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.
II. DISCUSSION
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).
6 No. 06-1384
B. Claims of interference with economic advantage,
interference with fiduciary relationship, and
civil conspiracy
Rule 9(b) of the Federal Rules of Civil Procedure pro-
vides: “In all averments of fraud or mistake, the circum-
stances 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 re-
sponsible and supported, rather than defamatory and
extortionate.” Id. A complaint alleging fraud must pro-
vide the “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 advan-
tage, 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 pre-
mised 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
No. 06-1384 7
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 advan-
tage and CTA’s fiduciary relationship; Goldman Sachs
allegedly conspired with Putnam and the Townsends to
commit the fraud. See Castillo v. First City Bancorporation
of Tex., Inc., 43 F.3d 953, 961 (5th Cir. 1994) (claim of civil
conspiracy to commit fraud falls under Rule 9(b)); Hayduk
v. Lanna, 775 F.2d 441, 443 (1st Cir. 1985) (same). Fur-
thermore, the appellants’ opening brief is riddled with
references to fraud, showing that this theory pervades
their entire case, but especially these three claims. See
Kennedy v. Venrock Assoc., 348 F.3d 584, 594 (7th Cir.
2003) (arguments in appellant’s brief can further shed
light on whether the complaint is grounded in fraud).
Perhaps recognizing this, the appellants concede that
Rule 9(b) applies to the factual allegations supporting
these three claims.
1. Tortious interference with economic advan-
tage
The Supreme Court of Illinois has laid out the elements
of a claim of tortious interference with prospective eco-
nomic advantage: “(1) a reasonable expectancy of entering
into a valid business relationship, (2) the defendant’s
knowledge of the expectancy, (3) an intentional and
unjustified interference by the defendant that induced
or caused a breach or termination of the expectancy, and
(4) damage to the plaintiff resulting from the defendant’s
interference.” See Voyles v. Sandia Mortgage Corp., 751
N.E.2d 1126, 1133-34 (Ill. 2001) (quoting Anderson v.
Vanden Dorpel, 667 N.E.2d 1296, 1299 (Ill. 1996)). In
Voyles, the Supreme Court of Illinois held that the plain-
tiff, a mortgagor, could not recover against the mort-
8 No. 06-1384
gagee bank because he could not demonstrate that the
third element was met. 751 N.E.2d at 1134. The plaintiff
had alleged that he was injured by the bank’s adverse
reports to credit agencies, but made clear that the reports
were true. See id. The court concluded that the plaintiff
could not demonstrate that any interference in his eco-
nomic advantage was unjustified because the reports were
“accurate and proper.” Id. Voyles was decided under
Illinois’s fact pleading regime, and Rule 9(b) does not
require fact pleading, Bankers Trust Co. v. Old Republic
Ins. Co., 959 F.2d 677, 683 (7th Cir. 1992), but the case is
nevertheless instructive, for the complaint must show
that the plaintiffs are entitled to relief.
Here, even accepting all of the plaintiffs’ allegations at
face value, there was no interference by the defendant
that could have induced a breach or termination of
Borsellino’s expectancy. In other words, the complaint
fails to describe any sort of plausible “what” of the fraud.
See DiLeo, 901 F.2d at 627. The plaintiffs accuse Goldman
Sachs of conspiring with Putnam and the Townsends to
cut Borsellino out of the deal, but this makes neither
economic nor common sense. Why would Goldman Sachs
prefer cutting Borsellino out—and creating a situation
in which he could, if he found out about the misuse of
CTA’s resources, threaten Goldman Sachs’s claim to
Archipelago—rather than allowing him into the venture?
Its investment and return would presumably have been
exactly the same whether Borsellino participated or not.
More fundamentally, if Goldman Sachs learned that
Putnam and the Townsends had built Archipelago upon a
fraud, why wouldn’t it walk away instead of joining the
fraud and going ahead with the investment? See
Tricontinental Indus. v. PricewaterhouseCoopers, LLP,
2007 WL 102985, at *6 (7th Cir. Jan. 17, 2007) (Rule 9(b)
does not require pleading state of mind, but complaint
must afford some basis for believing that plaintiffs can
No. 06-1384 9
prove scienter). The plaintiffs’ complaint does not shed
any light on the fundamental implausibility of the fraud,
and nor did plaintiffs’ counsel do so at oral argument in
this court.
2. Tortious inducement of a breach of fiduciary
duty
For similar reasons, the plaintiffs’ claim of tortious
inducement of a breach of fiduciary duty must fail. Under
Illinois law, a party is liable for tortious inducement if a
plaintiff demonstrates that the defendant (1) colluded
with a fiduciary in committing a breach; (2) knowingly
participated in or induced the breach of duty; and (3)
knowingly accepted the benefits resulting from that
breach. See Regnery v. Meyers, 679 N.E.2d 74, 80 (Ill. App.
Ct. 1997).
As described above, the plaintiffs have not alleged any
active misbehavior on the part of Goldman Sachs, and
they have failed to cite any cases prohibiting activity of
the sort described in the complaint. Moreover, it is unclear
how Goldman Sachs could have “accepted the benefits” of
a breach of a fiduciary duty, for the complaint does not
explain how a breach would have benefitted it in any
way. Goldman Sachs seemingly could have acquired its
25% stake in Archipelago whether Borsellino was entitled
to some of the remaining 75% or not. The claim fails
because of an overall lack of particularity in the allega-
tions of tortious inducement of a breach of fiduciary duty.
3. Civil conspiracy
The plaintiffs’ civil conspiracy claim was properly
dismissed because the complaint fails to state with par-
ticularity the circumstances constituting the conspiracy
10 No. 06-1384
between Goldman Sachs, Putnam and the Townsends. To
succeed in a claim of civil conspiracy under Illinois law,
the plaintiffs must eventually establish: (1) an agreement
between two or more persons for the purpose of accom-
plishing either an unlawful purpose or a lawful purpose
by unlawful means; and (2) at least one tortious act by
one of the co-conspirators in furtherance of the agreement
that caused an injury to the plaintiff. See McClure v.
Owens Corning Fiberglas Corp., 720 N.E.2d 242, 258 (Ill.
1999). “The agreement is a necessary and important
element of this cause of action.” Id. (internal quotations
omitted). “A defendant who innocently performs an act
which happens to fortuitously further the tortious pur-
pose of another is not liable under the theory of civil
conspiracy.” Adcock v. Brakegate, 645 N.E.2d 888, 894 (Ill.
1994).
Here, the complaint tells us nothing about the nature of
the purported agreement to defraud the plaintiffs, such as
when it was made or which individuals at Goldman Sachs
arranged the conspiracy. See Hefferman v. Bass, 467 F.3d
596, 601 (7th Cir. 2006) (“Rule 9(b) requires that facts
such as the identity of the person making the misrepresen-
tation, the time, place, and content of the misrepresenta-
tion, and the method by which the misrepresentation
was communicated to the plaintiff be alleged in detail.”)
(internal quotations omitted). Again, the factual allega-
tions as to Goldman Sachs are simply that it participated
in the testing of Archipelago for SEC compliance and that
it did not invest in Archipelago until Archipelago’s princi-
pals had cut off business ties with Borsellino. This fact
and a handful of unreasonable inferences are not enough
to satisfy Rule 9(b)’s particularity requirements. In short,
the plaintiffs have offered none of the critical details
regarding the alleged fraud conspiracy as it relates to
Goldman Sachs. The civil conspiracy claim was therefore
properly dismissed.
No. 06-1384 11
C. Spoliation of evidence
The plaintiffs also contend that the district court erred
in dismissing their claims for spoliation of evidence. The
parties disagree over whether the heightened pleading
requirements of Rule 9(b) apply to these claims, but we
need not decide that dispute, for the claims fail even
under the looser pleading requirements of Rule 8(a).
At the outset, we note that the plaintiffs brought their
spoliation charges in two separate claims—one for inten-
tional spoliation of evidence and one for negligent spolia-
tion. The Supreme Court of Illinois has emphasized,
however, that the state does not recognize a tort of inten-
tional spoliation of evidence, and that negligent spolia-
tion is not itself an independent tort but rather a type of
negligence. Boyd v. Travelers Ins. Co., 652 N.E.2d 267,
269-70 (Ill. 1995); see Cangemi v. Advocate S. Suburban
Hosp., 845 N.E.2d 792, 815 (Ill. App. Ct. 2006) (“Plaintiffs
cite to no case that specifically recognizes intentional
spoliation of evidence as a tort in Illinois. Neither have
we found such an Illinois case.”). We thus analyze the two
charges of spoliation as an ordinary negligence claim,
which to prevail will eventually require showing a duty (in
this case to protect documents), a breach of that duty,
causation, and damages. Boyd, 652 N.E.2d at 270.
A claim of spoliation of evidence is connected to the
merits of the underlying suit. See Gawley v. Ind. Univ.,
276 F.3d 301, 316 (7th Cir. 2001). If a plaintiff cannot
prevail in the underlying suit even with the allegedly
lost or destroyed evidence, then a claim for spoliation
will fail because the plaintiff cannot prove damages.
“This requirement prevents a plaintiff from recovering
where it can be shown that the underlying action was
meritless.” Boyd, 652 N.E.2d at 271 n.2; see also Kelly v.
Sears Roebuck & Co., 720 N.E.2d 683, 694-95 (Ill. App. Ct.
1999).
12 No. 06-1384
As the discussion above shows, the plaintiffs’ case is
indeed without merit. All of their other claims were
properly dismissed. The plaintiffs have defined the docu-
ments they seek as “documentation concerning Goldman
and Archipelago dated prior to June of 1998,” and contend
that, if produced, this paperwork would further demon-
strate the existence of a conspiracy between Goldman
Sachs and Borsellino’s former partners to defraud
Borsellino into prematurely selling his interest in CTA. At
the outset, the plaintiffs’ stated premise throughout
the complaint, that there must be substantial paperwork
prior to the signing of the letter of intent, is unsound.
Goldman Sachs has cited several business treatises
which explain that in a negotiated stock purchase, most
due diligence and records will follow the signing of a letter
of intent, not precede it. See Appellee’s Br. at 26-27.
Nevertheless, Goldman Sachs did produce pre-1998
documents in Borsellino’s second (and ongoing) state
court lawsuit. The plaintiffs acknowledge receipt of those
documents in their reply brief and concede that they do
not show any mischievous plotting that would allow them
to prevail in their claims of fraud. The plaintiffs cannot
now redefine the documents they seek as all pre-1998
paperwork concerning Goldman Sachs’s investment in
Archipelago that discusses a nefarious collaboration
between Goldman Sachs, Putnam, and the Townsends. Cf.
Cangemi, 845 N.E.2d at 815 (plaintiffs could not show
that but for destruction of document, they would have
prevailed in underlying suit because they possessed
document at one time). The plaintiffs ask us to assume
that even though they received the documents they
requested, other documents containing a smoking gun
admission by Goldman Sachs existed and were destroyed.
In light of the weakness of the plaintiffs’ other claims, this
invitation to stack inference upon inference is not a
reasonable one.
No. 06-1384 13
We finally offer a word as to the district court’s dismissal
of the plaintiffs’ claims with prejudice. By refusing to
submit amended pleadings after the district court indi-
cated that the original complaint was deficient, the
plaintiffs essentially conceded the futility of any amend-
ment. Such action was a reasonable basis for the district
court to dismiss the case with prejudice. See Forman v.
Davis, 371 U.S. 178, 182 (1962). The plaintiffs have not
demonstrated that the district court abused its discre-
tion in that decision.
III. CONCLUSION
The judgment of the district court is AFFIRMED.
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—2-20-07