In the

United States Court of Appeals

For the Seventh Circuit ____________

No. 05-3459

JAMES D. MASSEY AND DENNIS E. MURRAY, SR.

Plaintiffs-Appellants,

v.

MERRILL LYNCH & CO., INC.,

Defendant-Appellee.

____________

Appeal from the United States District Court

for the Southern District of Indiana, Indianapolis Division.

No. 04-C-1409—Richard L. Young, Judge.

____________

ARGUED APRIL 5, 2006—DECIDED SEPTEMBER 14, 2006

____________

Before EVANS, WILLIAMS, and SYKES, Circuit Judges.

WILLIAMS, Circuit Judge. Plaintiffs-appellants James

Massey and Dennis Murray, former directors of Conseco,

Inc., sued appellee Merrill Lynch, claiming that Merrill

Lynch committed fraud and breached its fiduciary duty

by providing an intentionally misleading opinion to

Conseco’s Board of Directors (the “Board”) pertaining to the

financial soundness of Conseco’s proposed acquisition of

Green Tree Financial Corporation (“Green Tree”). Because

the plaintiffs’ claims are solely derivative claims and can

only be brought on behalf of the corporation (Conseco), we

affirm the district court’s dismissal of the plaintiffs’ claims.
2 No. 05-3459

I. BACKGROUND

During the time period pertinent to this lawsuit, Conseco

was a large-scale Indiana corporation that sold, among

other things, insurance, annuities, and other financial

services. From 1994 through 2000, Massey and Murray

served as outside directors on Conseco’s Board and also

served on Conseco’s audit committee. The present lawsuit revolves around Conseco’s ill-fated purchase of Green

Tree, a company whose main business focused on purchasing and servicing trailer home mortgages. In April

1998, Conseco retained defendant Merrill Lynch to provide an opinion pertaining to Conseco’s proposed valuation of the Green Tree acquisition. The parties hotly dispute

the scope and nature of Merrill Lynch’s opinion, but at the

motion to dismiss stage we must credit the plaintiffs’

version of the events.

According to the plaintiffs, Merrill Lynch knew that its

so-called fairness opinion pertaining to Conseco’s proposed

valuation of Green Tree was “essential” to the Green Tree

purchase, and that Conseco’s Board would rely upon it. On

April 6, 1998, Merrill Lynch provided an opinion letter

in which it stated that Conseco’s proposed exchange ratio of

stock (which implicitly valued Green Tree in the approximate range of $7 billion) was “fair from a financial point of

view.” The plaintiffs allege that on that same day, Merrill

Lynch made an oral presentation to Conseco’s Board to

“induce Conseco to complete” the Green Tree acquisition.

Significantly, “Merrill Lynch purported to completely and

expertly examine the operations of Green Tree to determine: the viability of its business model; the value of its

assets; the availability of financial wherewithal to operate

the business of Green Tree” and other in-depth financial

analyses. (None of these purported analyses were included

in the opinion letter provided by Merrill Lynch.) The

plaintiffs also allege, on information and belief, that there

was an “internal debate” and “serious doubts” among
No. 05-3459 3

Merrill Lynch personnel as to whether it could issue such

a fairness opinion in light of the “dismal underlying facts

concerning the proposed Green Tree Acquisition.” According

to the plaintiffs, these well-founded doubts were disregarded by Merrill Lynch in favor of securing a $22 million

fee, as well as ensuring future underwriting and investment

banking opportunities.

The Green Tree acquisition turned out to be an unmitigated disaster for Conseco. Within two years of Conseco’s

purchase, Green Tree (now renamed “Conseco Finance”)

had suffered catastrophic losses, losing over 90% of its

original $7 billion-plus valuation. In 2002, Conseco entered bankruptcy proceedings. According to the plaintiffs,

the Green Tree acquisition was the pivotal event that

precipitated Conseco’s bankruptcy.

The plaintiffs claim they suffered damages because they

purchased and/or retained large amounts of Conseco stock

(which has since become worthless) based upon Merrill

Lynch’s alleged misrepresentations. Specifically, the

plaintiffs purchased large amounts of stock through

Conseco’s stock purchase program (the “D&O Program”),

which allowed directors and officers of Conseco to purchase large stock through personal loans provided by a

bank. The bank loans were collateralized by the purchased Conseco stock. But the banks were not financially

foolish: they required Conseco to guarantee the loans

(and Conseco generously did so, although it retained recourse to recover funds from the employee participants

if it incurred a loss under the guarantee). In addition,

Conseco fronted the interest payments for the loans. Thus,

through the D&O Program, participants were able to

purchase huge amounts of Conseco stock with apparently

no money upfront.

Perhaps not surprisingly, Conseco’s D&O Program was a

financial disaster, at least for the company and the shareholders who participated in the D&O Program. See gener-
4 No. 05-3459

1 The plaintiffs are pursuing separate claims against PricewaterhouseCoopers in state court.

ally Mitchell Pacelle and Joseph T. Hallinan, Dispute

Breaks Out Over Conseco Loans, Wall St. J., Oct. 22, 2002,

at C1. In total, Conseco guaranteed approximately $557.6

million in bank loans for 170 Conseco executives and

directors to buy shares. But these numbers are deceiving:

although 170 individuals participated in the program, the

vast majority of the shares (approximately 17.3 million of

the 19 million shares acquired under the D&O Program)

were purchased by only fifteen individuals, the majority

of whom were either directors or high-ranking executives.

As of 2002, Murray’s outstanding loan balance was approximately $100 million and Massey’s balance was approximately $15 million. Very little of the $500 million-plus

outstanding amount was repaid by directors and officers

and, due to Conseco’s guarantee, banks turned directly to

Conseco for repayment. During the bankruptcy reorganization, the “new” (post-bankruptcy) Conseco acquired (or

subrogated) the rights to collect on the outstanding loans

provided to the plaintiffs, and now seeks repayment from

the plaintiffs.

The present complaint is the plaintiffs’ third attempt

to draft a viable complaint. The first two complaints were

dismissed because the plaintiffs included either a party

in bankruptcy (Conseco), which would have converted

this case to an adversary proceeding in bankruptcy court, or

non-diverse parties (certain partners from PricewaterhouseCoopers),1

 which defeated federal jurisdiction. The

district court dismissed the present amended complaint

with prejudice, holding that the plaintiffs’ claims were

based solely on the diminution of Conseco’s stock value and,

as a result, their claims were derivative in nature— i.e.,

could be brought only on behalf of Conseco itself

and therefore could not support a direct action brought
No. 05-3459 5

individually by the plaintiffs. They now appeal this decision.

II. ANALYSIS

We review the district court’s grant of a Rule 12(b)(6)

motion to dismiss de novo, examining only the pleadings,

taking all the facts pled as true, and construing all inferences in favor of the plaintiffs. Thompson v. Illinois Dep’t of

Prof’l Regulation, 300 F.3d 750, 753 (7th Cir. 2002). A

complaint should only be dismissed if there is no set of

facts, even hypothesized, that could entitle a plaintiff to

relief. See generally Xechem, Inc. v. Bristol-Myers Squibb

Co., 372 F.3d 899, 901-02 (7th Cir. 2004). In addition, we

will consider the exhibits attached to a complaint, but,

where an exhibit conflicts with the allegations of the

complaint, the exhibit typically controls. Centers v. Centennial Mortg., Inc., 398 F.3d 930, 933 (7th Cir. 2005). Thus, a

plaintiff “may plead himself out of court by attaching documents to the complaint that indicate that he or she

is not entitled to judgment.” Id.

The central issue in this appeal is whether the plaintiffs have standing to bring these claims as a direct action,

or, put another way, whether their claims are solely

derivative in nature and therefore belong (or belonged) to

Conseco or the bankruptcy trustee. We look to the state law

of Conseco’s incorporation (Indiana, in this case) to determine whether the plaintiffs’ claims are derivative or direct.

See Boland v. Engle, 113 F.3d 706, 715 (7th Cir. 1997).

Indiana law adheres to the well-established corporate law

principle “that shareholders of a corporation may not

maintain actions at law in their own names to redress an

injury to the corporation even if the value of their stock is

impaired as a result of the injury.” Barth v. Barth, 659

N.E.2d 559, 560 (Ind. 1995) (citing Moll v. S. Cent. Solar

Systems, Inc., 419 N.E.2d 154, 161 (Ind. 1981)); Knauf Fiber
6 No. 05-3459

2 There are certain exceptions under Indiana law for closely-held

corporations, but these do not apply in the context of a publiclytraded company like Conseco. See Marcuccilli, 766 N.E.2d at

450; Barth, 659 N.E.2d at 562.

Glass, GMBh v. Stein, 622 N.E.2d 163, 165 (Ind. 1993);

Mid-State Fertilizer Co. v. Exchange Nat’l Bank of Chicago,

877 F.2d 1333, 1335-37 (7th Cir. 1989); Twohy v. First Nat’l

Bank of Chicago, 758 F.2d 1185, 1194 (7th Cir. 1985); see

generally A.L.I., Principles of Corporate Governance:

Analysis and Recommendations § 7.01 (1992); 12 B. W.

Fletcher Cyclopedia of the Law of Private Corporations, §

5911 (rev. perm. ed. 1984). That is, “[g]enerally speaking,

the stockholders of a corporation for the purposes of

litigation growing out of the relations between the corporation and a third person, surrender their personal or individual entities to the corporation in which they are stockholders.” Scott v. Anderson Newspapers, Inc., 477 N.E.2d 553,

563 (Ind. App. Ct. 1985). As a result, when a corporation

suffers injury, either from corporate insiders or, as in this

case, from a third party, it is the corporate entity—not the

individual shareholders—who retains the cause of action.

Id. As a result, any claims that belong to the corporation

must be made derivatively (i.e., brought in the name and on

behalf of a corporation), and any resulting recovery flows to

the corporate coffers.

In contrast, a shareholder may bring a direct action (i.e.,

an action on behalf of an individual shareholder or a

class of shareholders) to vindicate rights that belong to

shareholders. For instance, a shareholder can generally

bring an action to enforce voting rights, compel dividends,

prevent oppression or fraud against minority shareholders, inspect corporate books, or compel shareholder

meetings. See, e.g., Marcuccilli v. Ken Corp., 766 N.E.2d

444, 449 (Ind. App. Ct. 2002).2

 In addition, Indiana law

allows a shareholder to bring a direct action when the
No. 05-3459 7

shareholder has suffered a distinct personal injury that

is different from the type experienced by the other shareholders. Knauf, 622 N.E.2d at 165; Sacks v. Am. Fletcher

Nat’l Bank & Trust Co., 279 N.E.2d 807, 811-12 (Ind. 1972);

Buschmann v. Prof’l Men’s Ass’n, 405 F.2d 659, 662 (7th

Cir. 1969). For instance, a shareholder may maintain a

direct action against a third party who harmed a corporation if the shareholder had a separate contractual agreement with the third party or the corporation

that exposed the shareholder to a unique harm, different

than general diminution of share price, such as personal

exposure on a loan guarantee. See, e.g., Sacks, 279 N.E.2d

at 811-12; Buschmann, 405 F.2d at 662.

Determining when a shareholder has suffered a distinct

and separate injury from that suffered by other shareholders is not without complication. As an initial matter,

whenever a corporation is harmed by a third party, the

shareholders are also harmed, albeit indirectly. Corporate

losses are investor losses as well, even though the losses

may not be equal across the investors, but rather proportionate to the number (or type) of shares an investor holds.

Nonetheless, the long-standing rule is that a harm to a

corporation that harms a shareholder only through a

diminution in share price cannot amount to “a distinct

and separate injury” because all shareholders are essentially harmed in the same manner. See Twohy, 758 F.2d

at 1194 (7th Cir. 1985) (“Under general principles of United

States corporate law . . . a stockholder of a corporation has

no personal or individual right of action against third

persons for damages that result indirectly to the stockholder because of an injury to the corporation.”); Flynn v.

Merrick, 881 F.2d 446, 449 (7th Cir. 1989).

There are sound policy considerations to support a firm

distinction between direct and derivative actions. See

generally Barth, 659 N.E.2d at 561 (detailing policy rationale for shareholder standing rule); Huffman v. Ind. Office
8 No. 05-3459

of Env. Adjudication, 811 N.E.2d 806, 814 (Ind. 2004)

(same); Pfaffenberger v. Brooks, 652 N.E.2d 884, 886 (Ind.

Ct. App. 1995) (same). For instance, prior to filing

a derivative lawsuit, a plaintiff must typically surmount

several procedural hurdles, including placing a formal

demand upon the corporation’s board of directors, or,

alternatively, establishing that such a demand would be

futile. See generally In re Guidant Shareholders Derivative

Litigation, 841 N.E.2d 571, 572 (Ind. 2006). The underlying

rationale for these requirements is that corporate directors

are presumed to have the best interests of a corporation in

mind and therefore should have an initial opportunity to

investigate the merits of a potential lawsuit and respond

accordingly. See Huffman, 811 N.E.2d at 814. This demand

requirement is not an empty formality: the interests of a

shareholder seeking to vindicate corporate rights may well

diverge from the best interests of a corporation (and,

indeed, this is one of the principle justifications for distinguishing between direct and derivative actions). Id.

(“[T]here is a concern that the real party’s interests will not

be taken into account if that party is not represented in the

action. The shareholder and the corporation may have

different interests and goals in litigation, and the shareholder could act in ways that harm the corporation, even if

unintentionally.”).

In contrast, a direct action circumvents these predicate

procedural requirements and, importantly, provides

recovery directly to the plaintiff, rather than recovery

filtered through the corporate coffers. See generally A.L.I.,

Principles of Corporate Governance: Analysis and Recommendations, § 7.01 (1992); Frank v. Hadesman and Frank,

Inc., 83 F.3d 158, 160 (7th Cir. 1996). As a result, disguising derivative actions as direct ones is a particularly

appealing strategy to circumvent the recovery priorities

of corporate creditors established in the bankruptcy code.

See Kagan v. Edison Bros. Stores, Inc., 907 F.2d 690, 692
No. 05-3459 9

(7th Cir. 1990) (noting that direct recovery improperly

circumvents creditors in bankruptcy proceedings); MidState Fertilizer Co., 877 F.2d at 1335-37 (same). But,

irrespective of the bankruptcy context, allowing direct

recovery when the action is properly a derivative one

fails to protect corporate creditors because the proceeds

avoid the legal ordering of creditors and investors. See

Kagan, 907 F.2d at 692. (“Recovery by the corporation

ensures that all of the participants—stockholders, trade

creditors, employees and others—recover according to their

contractual and statutory priorities.”) Furthermore, allowing a derivative action to proceed as a direct one allows for

the possibility of multitudinous litigation brought by

shareholders and the corporation, with the corresponding

risk of double-counting (and double-punishment). See

Huffman, 811 N.E.2d at 814. Thus, maintaining a clear

distinction between direct and derivative actions keeps

everything in its right place.

Against this legal and policy backdrop, it is clear that the

plaintiffs’ claims here are properly characterized as derivative in nature. On its face, the plaintiffs’ complaint alleges

a near-classic derivative injury: a third party (Merrill

Lynch) allegedly caused harm to a corporate

entity (Conseco), resulting in a diminution in the value of

the corporation’s stock, which in turn caused the plaintiffs’ harm. Although the plaintiffs add some wrinkles to

this classic scenario (which we address below), their

allegations nonetheless fall squarely within the types of

harm that affect all shareholders. Put another way, generalized declines in a corporation’s share price based upon

third party acts are harms to the corporation, and are

therefore properly redressed solely through a derivative

action brought on behalf of the corporation. See, e.g., Kagan,

907 F.2d at 692; Mid-State Fertilizer Co., 877 F.2d at 1335.

The plaintiffs attempt to circumvent these fundamental

corporate law principles by arguing that they are not
10 No. 05-3459

“ordinary shareholders” and, moreover, have suffered

an injury separate and distinct from other shareholders—that is, an injury that is not solely based upon a

general decline in the value of Conseco’s stock. The crux of

the plaintiffs’ argument is that their participation in

Conseco’s D&O Program created a separate and distinct

injury. Specifically, they contend that they were damaged

because, as participants in the D&O Program, they are now

“at risk of personal liability on loans for which they and

Conseco assumed responsibility.” But the fact that

the plaintiffs borrowed money to purchase stock (with

the interest charges fronted by Conseco) and are now on the

hook to pay those personal debts does not alter the nature

of their claims. The method by which a shareholder funds

a stock transaction does not alter the fundamental nature

of the injury, which remains the critical inquiry here. The

injury experienced by the plaintiffs was the diminution in

Conseco’s share price. Without the plunge in share prices,

the plaintiffs would have no damages because the collateral

on their loans (i.e., the Conseco shares) would have value.

And although the plaintiffs tip-toe around this fundamental

problem in their briefs, the allegations in their complaint

forthrightly acknowledge this: “Plaintiffs were damaged by

Merrill Lynch’s misrepresentations and omissions because

they are exposed to potential liability on the D&O Loans

because the stock which the loans were used to purchase

became worthless as a result of the Green Tree purchase.”

Pls. App. at A-23 (Compl. at ¶ 78) (emphasis added).

The authority that the plaintiffs cite to support their

position is inapposite. Instead, these cases stand only

for the well-established proposition that a plaintiff may

bring a direct action when the plaintiff has a separate

contractual agreement that exposes the plaintiff to an

injury that is distinct (i.e., personal) from the injury

suffered by other shareholders. For instance, in Sacks, 279

N.E.2d at 809, the plaintiff shareholder provided a personal
No. 05-3459 11

guaranty to a corporate loan, purportedly under the

assumption that a third-party bank would continue funding

the corporation. The bank did not continue funding, the

guaranty was called upon, and the plaintiff brought both a

derivative and direct action against the third-party bank.

Id. The Indiana Supreme Court held that the plaintiff could

maintain a direct action because the personal guaranty

arose from “a breach of a duty owed specially to the stockholder separate and distinct from the duty owed to the

corporation.” Sacks, 279 N.E.2d at 811. Similarly, in

Buschmann, 405 F.2d at 661, the plaintiff provided a

personal guaranty to a corporation’s debt, which was called

upon by the bank when the corporation’s indebtedness

reached excessive levels. Applying Indiana law, this court

held:

Notwithstanding the fact that the corporation has a

cause of action against the defendant for mismanagement, Buschmann has a personal cause of action

against the defendant to recover damages for breach

of the contract, even though the corporate cause of

action and Buschmann’s cause of action result from the

same wrongful acts. The defendant made promises

directly to Buschmann the breach of which gave rise

to a cause of action. Buschmann’s cause of action is

manifestly personal and not derivative since his liability to pay the corporation’s indebtedness to the Bank,

which is his principal item of damage, does not arise

from his status as a stockholder of the corporation.

Id. at 663.

Thus, Sacks and Buschmann fall squarely within the

general rule distinguishing direct and derivative actions: a

shareholder who suffers a separate and distinct injury

different from that of other shareholders may maintain

a direct action. In both Sacks and Buschmann the injury was based upon a contractual duty to guarantee
12 No. 05-3459

corporate loans, which was an entirely separate duty from

the ones owed by other shareholders. Here, the plaintiffs can point to no such agreement because they did not

agree to guarantee any of Conseco’s debts, nor did they

have any form of agreement with Merrill Lynch.

But we need not focus on the contractual formalities

because the more important distinction is not the form, but

rather the function of the plaintiffs’ obligations to the

corporation and the third party, from which springs their

injuries. In Sacks and Buschmann, the plaintiffs undertook

specific contractual duties primarily aimed at benefitting

the corporation (i.e., guaranteeing corporate loans). They

were injured in two ways when the corporation’s fortunes

turned south. First, like the plaintiffs in this case, they lost

the value of their shares. That is a generalized injury to all

shareholders and is properly considered a derivative injury.

Second, unlike the plaintiffs in this case, they suffered outof-pocket costs—additional losses from the diminution in

share price—because their guarantee of corporate loans was

called upon by either the corporation or the bank. It is this

separate and distinct injury that stands apart from the one

suffered by the other shareholders and which therefore

provides the toehold for a direct action. And the plaintiffs

here can show no such injury because they cannot claim any

cognizable injury aside from the diminution in share

value. Put another way, the plaintiffs have experienced

no out-of-pocket losses or other infringement of rights, aside

from the requirement to repay the funds that were loaned

to them to purchase stocks—and, as discussed above, this

injury is essentially indistinguishable from the injury

suffered by all shareholders.

To hold otherwise would lead to an absurd result. Under

the plaintiffs’ theory, any shareholder who funded a stock

purchase through any form of loan—whether a margin loan,

an advance on a home equity line or even a loan

from relatives—could claim a separate and distinct in-
No. 05-3459 13

jury because they were now “personally liable” on a loan

instrument. But merely being required to pay for the shares

that one purchased surely cannot be a distinct injury that

opens the doors to direct recovery, ahead of all the other

shareholders, who equally lost the value of their investments. If anything, the plaintiffs faired better than the

“ordinary shareholders” because they effectively lost their

money significantly later than the investors who paid cash

upfront for their shares. Thus, the plaintiffs at least enjoyed

the time-value benefit of their money, including the option

to place these funds in more lucrative investments—and, as

it turned out, virtually any investment other than tying up

cash in Conseco shares was a better investment alternative.

As a result, allowing the plaintiffs to skip now to the front

of the recovery line is not only contrary to controlling case

law, but would also be a highly inequitable result.

The plaintiffs offer a second, related argument as to

why they have suffered a separate and distinct injury. They

contend that they, unlike “ordinary shareholders,” acted in

reliance on Merrill Lynch’s alleged fraudulent communications. That is, according to the plaintiffs, during its presentation to the Board, Conseco allegedly made numerous

misrepresentations relating to its investigation of Green

Tree’s financials. The plaintiffs, in turn, retained or purchased additional shares through Conseco’s D&O Program

based upon Merrill Lynch’s statements. These allegations,

however, run headlong into the same difficulty outlined

above: irrespective of Merrill Lynch’s misrepresentations,

the plaintiffs’ damage is exclusively the result of a generalized decline in Conseco’s share price, which, again, is a

derivative injury.

Setting this aside, the plaintiffs also cannot prevail under

this theory because the allegations in their complaint, along

with the attached exhibits, plainly establish that Merrill

Lynch’s representations were to the corporation, via its

proxy, the Board, and not to the plaintiffs as individual
14 No. 05-3459

3 There are, of course, certain exceptions to this, such as the

particularity requirements for allegations of fraud under Rule

9(b). Because the plaintiffs here cannot plead any cause of action,

we need not address whether their allegations are sufficient under

Rule 9(b).

shareholders. Now, as a general concept, a party need not

plead much to survive a motion to dismiss: a party need not

plead specific facts,3

 legal theories, nor anticipate any

defenses. See generally, Xechem, Inc., 372 F.3d at 901-02;

Centers, 398 F.3d at 933. The dangers almost always come

from pleading too much—not too little. See id. Thus, a party

may plead itself out of court by either including factual

allegations that establish an impenetrable defense to its

claims or by attaching exhibits that establish the same. Id.

Here, the plaintiffs have done both.

The plaintiffs do not allege that Merrill Lynch made

any misrepresentations to them as individual shareholders.

To the contrary, the allegations in the complaint consistently state that Merrill Lynch was retained by Conseco

and made representations to Conseco or the Board. In other

words, the plaintiffs were acting solely in their capacity as

board members, and this is fatal to the plaintiffs’ claims

because misrepresentations to investors in their capacity as

corporate officers or directors are wrongs committed against

the corporation, not wrongs against the individuals. See

Kagan, 907 F.2d at 692. In addition, the plaintiffs allege

only that “[a]s a result of its relationship and superior

knowledge, Merrill Lynch owed a fiduciary duty to Conseco

and its Board.” Pls. App. at A-21 (Compl. at ¶ 64) (emphasis

added). To the extent that the allegations in the complaint

do not establish as a matter of law that Merrill Lynch’s

representations were to the plaintiffs solely in their capacity as board members, the exhibits to the complaint firmly

cement this. See Centers, 398 F.3d at 933. Merrill Lynch’s

retention and opinion letters, which are attached as
No. 05-3459 15

exhibits to the complaint, unambiguously establish that

Merrill Lynch’s duties ran exclusively to Conseco, not

the plaintiffs as individual investors. For instance, the

opinion letter states, in pertinent part:

This opinion is for the use and benefit for the Board of

Directors of the Acquiror [Conseco]. Our opinion addresses only the financial fairness of the Exchange Ratio, and does not address the merits of the

underlying decision by the Acquiror to engage in the

Merger, and does not constitute a recommendation

to any stockholder as to how such stockholder should

vote on the proposed merger or any matter related

thereto.

Pls. App. at A-32.

Thus, even when reading the allegations and the exhibits in the light most favorable to the plaintiffs, the

plaintiffs cannot establish that Merrill Lynch’s purported

misrepresentations breach a duty owed to them, rather

than to the corporation. And so, once again, we return to

the corporate nature of the alleged injury and the requirement of derivative action here.

As a final note, it would be a curious—and unfair—result

if, as the plaintiffs argue, corporate insiders were permitted

to maintain direct actions that “ordinary shareholders”

could not bring. Such a result would provide greater

protections to insiders, who presumably have the greatest

access to information on the future prospects of a corporation. Those with the most well-informed front-end risk

assessments would also receive the greatest financial

protections at the back-end of a deal gone wrong. This

would invert the basic structure of corporate and securities fraud laws, particularly the prohibitions on insider

trading, which generally aim to curtail trading advantages by corporate insiders and protect investors from
16 No. 05-3459

4 We note, in passing, that the plaintiffs’ allegations that, as

members of the Board, they relied upon confidential information

presented by Merrill Lynch to make trades in Conseco’s stock

could run headlong into the prohibited domain of insider trading.

Cf. 17 C.F.R. § 240.10b-5; see, e.g., Maio, 51 F.3d at 631 (7th Cir.

1995) (noting that “[t]rading on the basis of material nonpublic

information violates these sections where the trading arises

‘in connection with’ a breach of a fiduciary duty”). Because this

issue was unexplored in the briefing, we decline to address it here.

such abuses.4 See generally S.E.C. v. Maio, 51 F.3d

623, 630-31 (7th Cir. 1995); William M. Fletcher, Cyclopedia

of the Law of Private Corporations, § 900.65. (“Under

Section 10(b) and Rule 10b-5, a person trading in the

securities of a corporation who has access, directly or

indirectly, to information intended to be available only for a

corporate purpose and not for anyone’s personal benefit

may not take advantage of that information knowing that

it is unavailable to public investors.”); Ian B. Lee, Fairness

and Insider Trading, 2002 Colum. Bus. L. Rev. 119 (2002)

(discussing the negative effects of information disparity on

market “fairness”); cf. Henry G. Manne, Insider Trading:

Hayek, Virtual Markets, and the Dog that Did Not Bark, 31

J. Corp. L. 167 (2005) (discussing and collecting authority

supporting the argument that insider trading promotes

market efficiencies). We are not inclined to create such a

generous exception to bedrock corporate law principles, and

instead hold that the plaintiffs must take their proper place

in the recovery line along with all other investors.

III. CONCLUSION

For the foregoing reasons, we AFFIRM the district court’s

dismissal of the plaintiffs’ complaint.
No. 05-3459 17

A true Copy:

Teste: 

 ________________________________

Clerk of the United States Court of

Appeals for the Seventh Circuit 

USCA-02-C-0072—9-14-06