fraud...be stated with particularity.” The Private Securities Litigation Reform Act (“PSLRA”)
contains an even more rigorous pleading standard, requiring plaintiffs in securities fraud cases to
“state with particularity facts giving rise to a strong inference that the defendant acted with the
required state of mind.” 15 U.S.C. § 78u-4(b)(2).

The Seventh Circuit has yet to address just how rigorous the PSLRA’s pleading standard
is. Cases in the Northern District of Illinois generally have followed the Second Circuit’s
pleading standard, which requires plaintiffs to allege facts either (1) showing that the defendant
had both motive and opportunity to commit fraud; or (2) constituting strong circumstantial

evidence of conscious misbehavior or recklessness. See, e.g., In re Westell Techs., Inc., No. 00

C 6735, 2001 WL 1313785, at *10 (N.D. Ill. Oct. 26, 2001); Danis v. USN Communications.

Inc., 73 F. Supp. 2d 923, 937 (N.D. Ill. 1999); Rehm vy. Eagle Fin, Corp., 954 F. Supp. 1246,
1253 (N.D. Ill. 1997). For the purposes of showing strong circumstantial evidence of
recklessness, reckless conduct is “highly unreasonable [conduct]” — “an extreme departure from
the standards of ordinary care...to the extent that the danger was either known to the defendant or

so obvious that the defendant must have been aware of it.” Rehm, 954 F. Supp. at 1255.

Here, the complaint alleges that defendant is an international science and engineering
company that conducts science and technology research. According to the complaint, defendant
falsely represented to plaintiffs that it had validated the efficacy of the Purizer Vapor, that the
technology contained the singlet oxygen ion and hydrox! radicals, and that the Purizer Vapor was
five times more effective than ozone. These allegations are sufficient at this early stage of
litigation to plead strong circumstantial evidence of conscious misbehavior or recklessness, and
to satisfy the pleading requirement of Federal Rule of Civil Procedure 9(b).

B. Loss Causation

Defendant next argues that the fraud claims should be dismissed because plaintiffs failed
to adequately plead loss causation. Loss causation is the standard common law fraud rule, and

has been borrowed by the federal courts for use in federal securities fraud cases. Bastian v.


are the subject of the action. According to defendant, plaintiffs are “insiders” in Purizer that
cannot maintain a suit against another insider such as defendant. See Harnett v. Ryan Homes,
Inc., 360 F. Supp. 878, 885 (W.D. Pa. 1973) (“{i]t is axiomatic that one insider cannot maintain a
suit against another”). “Insiders,” however, are simply “people who, by reason of their activities
within a corporation, have access to information capable of being exploited, or information that
would negate the harmful effects of a nondisclosure or misrepresentation.” Rosenbloom v.
Adams, Scott & Conway, Inc., 552 F.2d 1336, 1339 (9" Cir. 1977). Directors and officers of a
corporation, or even the president, will often have such knowledge and information, but “neither
the knowledge nor the information invariably attaches to those positions.” Wright v. National
Warranty Co., 953 F.2d 256, 261 (6" Cir. 1992). Whether plaintiffs had knowledge that would
be relevant to the misrepresentations of which they complain is an issue more properly handled at
a later stage of litigation.

ORDERED: The motion to dismiss is denied.

ENTER:

George W. Lindberg
Senior United States District Judge

JAN 0 4 2001

DATED:



The business plan further states that it should not be relied upon for purposes of making a
decision to invest in Purizer.

Defendant cites Carr y. CIGNA Sec., Inc., 95 F.3d 544 (7" Cir. 1996), in support of its

argument. However, that case stands for the proposition that clear written warnings control over
conflicting oral statements. See Carr, 95 F.3d at 547 (where oral statement that investment is
safe contradicts written disclaimer that investment is risky, written disclaimer controls). Carr is
inapplicable where the alleged misrepresentations do not specifically conflict with the disclaimer.
See Fugman v. Aprogenex, Inc., 961 F. Supp. 1190, 1197-98 (N.D. Ill. 1997) (false oral
statement that flaws in diagnostic test system had been fixed and that the system was ready for
market did not contradict written disclaimer that investment was risky). Moreover, boilerplate
disclaimers are ineffective as a shield from liability for affirmative misrepresentations. See

Xerox Fin. Servs. Life Ins. Co. v. Salomon Bros., Inc., 1992 WL 151923, at *7 (N.D. Ill. June 19,

1992).

Here, the business plan’s disclaimer is a general one, and does not address specific
statements in the business plan, such as that “Battelle has validated the efficacy of Purizer
technologies,” that the Purizer Vapor is composed of the singlet oxygen ion and hydroxyl
radicals, and that defendant “has determined that the Purizer Vapor is five times more effective
than an equivalent amount of ozone.” In addition, the alleged misrepresentations appear in
writing, in the same document that contains the disclaimer, a circumstance that does not raise the
danger of imposing liability based on later-misremembered or invented oral statements that are

inconsistent with written warnings. See Associates in Adolescent Psychiatry v. Home Life Ins.

Co., 941 F.2d 561, 571 (7" Cir. 1991); Carr, 95 F.3d at 547.
Nor does the fact that plaintiffs were directors, and Beedie an officer, automatically

render any reliance they may have placed on the business plan invalid as a matter of law. The

the court can consider it without converting the motion to dismiss to one of summary judgment.
See Venture Assocs. Corp. v. Zenith Data Sys. Corp., 987 F.2d 429, 431 (7" Cir. 1993).

6


Petren Res. Corp., 892 F.2d 680, 683 (7" Cir. 1990). A plaintiff bringing a securities fraud case

under Rule 10b-5 must plead loss causation by alleging that the defendant’s misrepresentations

caused the plaintiff's injuries.' Caremark, Inc., 113 F.3d at 648. That is, plaintiffs must allege
that they would not have suffered a loss on their investment if the facts were as they believed
them to be when they purchased the securities. In re VMS Sec. Litig., 752 F. Supp. 1373, 1399
(N.D. Ill. 1990).

Here, plaintiffs have alleged that the success or failure of their investment in Purizer
preferred stock depended on the commercial viability of the Purizer Vapor, that defendant falsely
represented that the Purizer Vapor had considerable commercial potential because it was more
effective than competing technologies, and that in actuality the process was no more effective
than existing technologies. Plaintiffs allege that the effect of defendant’s “scheme” was that
plaintiffs purchased Purizer stock at artificially elevated prices. Viewing these allegations in a
light most favorable to plaintiffs, it is reasonable to conclude that the true value of plaintiffs’
investment is lower than the price they paid, as a result of defendant’s misrepresentations.
Plaintiffs have adequately alleged loss causation.

C. Disclaimers

Defendant next argues that disclaimers contained in the business plan bar plaintiffs’ fraud
claims based on that document, especially given plaintiffs’ status as officers and directors of
Purizer, the company that issued the business plan. The business plan states:

While Purizer believes the information herein to be accurate, Purizer does not

make any representations or warranties with respect to its accuracy or

completeness, and expressly disclaims any and all liability for any representations

or warranties, express or implied, contained in or omitted from, this Business Plan
or any other written or oral communication transmitted or made available.

! “Transaction causation,” by contrast, requires an allegation that the plaintiff would not
have invested but for the defendant’s misrepresentations. Caremark, 113 F.3d at 648.

? Defendant attaches a copy of the business plan to its motion to dismiss. Because
plaintiffs refer to this document in the amended complaint and it is central to plaintiffs’ claims,

5


law. Plaintiffs respond that the economic loss doctrine does not apply because defendants are in
the business of supplying information for the guidance of others in their business transactions.

Illinois law generally prohibits recovery in tort for purely economic loss. Moorman Mfy.
Co. v. National Tank Co., 435 N.E.2d 443, 448 (Ill. 1982). An exception is made, however, for
negligent misrepresentations made by defendants who are in the business of supplying
information for the guidance of others. Id. at 452. Where a defendant provides information that
is merely ancillary to a service or the sale of a product, it is not in the business of supplying

information for the guidance of others in their business dealings. Tolan and Son, Inc. v. KLLM

Architects, Inc., 719 N.E.2d 288, 296 (Ill. App. Ct. 1 Dist. 1999). On the other hand, where the

value of a defendant’s services lies in the analytical work, that is, where the end product is the
ideas themselves, it is in the business of supplying information for the guidance of others in their
business dealings. Id, at 297. Where a defendant supplies both information and non-
informational services or goods, “[t]he critical question...is whether the information is an
important part of the product offered.” Id.

The question of whether defendant qualifies as being in the business of supplying
information for the guidance of others is a difficult one because its responsibilities appear to
encompass a mixture of informational and non-informational services. The negligent
misrepresentation claim characterizes defendant’s primary business as “provid[ing} scientific
advice and scientific information to clients and assist[ing] clients to develop and commercialize
products and services,” and other portions of the complaint make clear that defendant’s
responsibilities included designing and building generators. At this stage, however, it would be
premature to determine whether defendant’s act of supplying information was merely incidental
to its non-informational services. Accordingly, the motion to dismiss Count III is denied.

E. Standing

Finally, defendant argues that plaintiffs do not have standing to bring this cause of action,

since as directors of Purizer, they were involved in the issuance of the stock and documents that


Minate Order Form (06/97)

>

United States District Court, Northern District of Illinois

Name of Assigned Judge ‘ Sitting Judge if Other
or Magistrate Judge George W. Lindberg than Assigned Judge
CASE NUMBER 01 C 6740 DATE 1/4/2002
CASE David J. Beedie, et al. Vs. Battelle Memorial Institute
TITLE
{In the following box (a) indicate the party filing the motion, ¢.g., plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the nature
MOTION: of the motion being presented.]
DOCKET ENTRY:
qd) Q Filed motion of [ use listing in “Motion” box above.]}
(2) Oo Brief in support of motion due
(3) a Answer brief to motion due. . Reply to answer brief due.
(4) a Ruling/Hearing on set for at
(5) oO Status hearing[held/continued to] [set for/re-set for] on set for at
(6) Oo Pretrial conference[held/continued to] [set for/re-set for] on__ set for at
(7) o Trial{set for/re-set for] on at
(8) a [Bench/Jury trial] [Hearing] held/continued to at
(9) oO This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to]
CIFRCP4(m) General Rule 21 CIFRCP41(a)(1) Cl FRCP41(a)(2).
(10) «xi [Other docket entry] Defendant’s motion to dismiss (3-1) is denied. Enter memorandum opinion
and order.
(1) [For further detail see order attached to the original minute order.]
No notices required, advised in open court. Document
. . Number
No notices required.
Notices mailed by judge's staff.
Notified counsel by telephone. rte docketed
v | Docketing to mail notices.
Mail AO 450 form. baer ey tig dept initials
Copy to judge/magistrate judge.
JAN 0 7 2002
Wado feu datqumaled notice
courtroom pa TET TE Gus
SLB deputy’s
initials

‘V — Dateltiine received in
central Clerk’s Office

JU



complaint is silent regarding plaintiffs’ individual participation in the preparation of the business
plan and regarding what, if any, knowledge plaintiffs had by virtue of their positions. Taking the
allegations of fraud based on misrepresentations in the business plan in the light most favorable
to plaintiffs, as the court must, they survive the motion to dismiss.

Defendant also argues that its representatives’ oral statements at the investor
presentations were projections, and thus are not actionable. Predictions and forecasts typically
are not actionable under section 10(b). Arazie v. Mullane, 2 F.3d 1456, 1468 (7" Cir. 1993).
However, the oral statements attributed to defendant’s representatives were not such forward-
looking statements. The slide presentations, to which defendant is alleged to have contributed,
included representations that the Purizer Vapor contains the singlet oxygen ion and hydroxy!
radicals, and that it is five times more powerful than ozone. The complaint alleges that Battelle
representatives made similar statements in speeches at investor presentations. These
representations were statements of present fact.

Nor does qualifying these statements by stating that they were matters of the speaker’s
belief transform the statements into predictions, as defendant suggests. Although predictions
may not constitute fraud, “intentions and beliefs are ‘facts’ for this purpose when they are open to

objective verification.” Eckstein y. Balcor Film Investors, 8 F.3d 1121, 1132 (7" Cir. 1993).

Defendant’s statement that the Purizer Vapor is up to five times more effective than ozone is a
statement that is open to objective verification, however defendant’s representative styled it.
Defendant’s alleged oral misrepresentations thus are actionable.’

D. Economic Loss Doctrine

Defendant argues that Count III, alleging negligent misrepresentation, should be

dismissed because it seeks the recovery of economic loss, which is not recoverable under Illinois

> Given that the court has found that a number of alleged misrepresentations in the
business plan and oral presentations survive the motion to dismiss, the court does not address the
operation of warnings and disclaimers in the information statement.

7


The offering memorandum did not contain a statement that defendant had no scientifically
supported data demonstrating that the Purizer Vapor was more effective than other processes.

In July 2000, Beedie invested $250,000 in Purizer preferred stock by forgiving a loan he
had previously made to Purizer, in exchange for the stock. Gorman invested $1,000,000 in
Purizer preferred stock by forgiving a loan he had made to Purizer, in exchange for the stock.

In late 2000 or early 2001, an independent researcher retained by Purizer determined that
the Purizer Vapor did not contain any highly reactive oxidative species of short-lived oxygen
ions, and that the Purizer Vapor was no more effective than ozone.

Plaintiffs filed this action, alleging a violation of section 10(b) of the Securities Exchange
Act of 1934, 15 U.S.C. § 78j(b) and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5; common law fraud;
and negligent misrepresentation.

Il. Discussion

When ruling on a motion to dismiss under Fed. R. Civ. P. 12(b)(6), the court must
consider “whether relief is possible under any set of facts consistent with the allegations of the

plaintiff's complaint.” Pokuta v. Trans World Airlines, Inc., 191 F.3d 834, 839 (7" Cir. 1999).

That is, if it is possible to hypothesize a set of facts that would entitle the plaintiff to relief,
consistent with the allegations in the complaint, dismissal under Rule 12(b)(6) is inappropriate.
Graehling v. Village of Lombard, 58 F.3d 295, 297 (7" Cir. 1995).

A. Scienter

Defendant first argues that the fraud claims in Counts I and II should be dismissed for
failure to adequately plead scienter. To establish liability under section 10(b) and Rule 10b-5, a
plaintiff must prove that “(1) the defendant made a false statement or omission (2) of material
fact (3) with scienter (4) in connection with the purchase or sale of securities (5) upon which the
plaintiff justifiably relied (6) and that the false statement proximately caused the plaintiff's

damages.” Caremark, Inc. v. Coram Healthcare Corp., 113 F.3d 645, 648 (7" Cir. 1997).

Federal Rule of Civil Procedure 9(b) requires that, in fraud cases, “the circumstances constituting


including a Master Research and Development Agreement. Pursuant to the original December
1998 agreement, defendant designed and built generators to produce the Purizer Vapor, and
developed formulas for the production of the Purizer Vapor. On December 31, 1999, defendant
advised Purizer that the Purizer Vapor was significantly superior to other types of disinfecting
processes.

On March 1, 2000, Purizer’s officers and directors, working with defendant, decided to
raise capital by issuing a class of preferred stock in Purizer. Purizer and defendant prepared a
business plan, which identified defendant as Purizer’s research and development partner. The
business plan stated that defendant had validated the efficacy of the Purizer technologies, and
that defendant had determined that the Purizer Vapor is five times more effective than ozone.
The statements regarding the effectiveness of the Purizer Vapor, and defendant’s validation of it,
were false. In addition, defendant failed to advise Purizer to include a statement in the business
plan that defendant had no scientifically supported data demonstrating that the Purizer Vapor was
more effective than ozone. The business plan was distributed to potential investors.

In April and May 2000, defendant participated in presentations to potential investors,
including plaintiffs. In at least one of the investor presentations, a Battelle representative stated
that the Purizer Vapor is up to five times more powerful than ozone; potential investors at that
presentation were not told that defendant had no scientifically supported data demonstrating that
the Purizer Vapor was more effective than other processes. Defendant also either prepared or
contributed materially to slide presentations that were included in each of the investor
presentations. The slide presentations contained statements that the Purizer Vapor is composed
in part of singlet oxygen ions and hydroxyl radicals, that the Purizer Vapor is five times more
powerful than ozone, and that it is less corrosive and has a lower capital cost and power
consumption than ozone. The statements regarding the effectiveness of the Purizer Vapor as
compared to ozone, and regarding the composition of the Purizer Vapor, were false.

On June 12, 2000, Purizer distributed an offering memorandum to plaintiffs and others.


IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION
DAVID J. BEEDIE and JOHN GORMAN, )
)
Plaintiffs, )
) 01 C 6740

v. )

) Judge George W. Lindberg
BATTELLE MEMORIAL INSTITUTE, )
)
Defendant. )

MEMORANDUM OPINION AND ORDER
Defendant Battelle Memorial Institute has moved pursuant to Federal Rules of Civil

Procedure 12(b) and 9(b) to dismiss plaintiffs’ complaint. For the reasons stated below, the

motion to dismiss is denied. DOCKETED
I. Factual Background JAN 07 2002

In considering a motion to dismiss, the court must accept as true all well-pleaded facts
and must draw all reasonable inferences from those allegations in plaintiff's favor. MCM

Partners, Inc. v. Andrews-Bartlett & Assoc., Inc., 62 F.3d 967, 972 (7" Cir. 1995). According to

the allegations in the complaint, plaintiff David Beedie has served as a director and officer of
Purizer Corporation (“Purizer”) from December 31, 1999 to the present. Plaintiff John Gorman
has served as a director of Purizer from August 31, 1999 to the present. Defendant is a science
and engineering company that conducts science and technology research for customers for the
development and commercialization of their products and services.

Prior to the time when plaintiffs became affiliated with it, Purizer acquired the rights to
an oxidation purification technology (the “Purizer Vapor”). In December 1998, Purizer retained
defendant to test the efficacy of the Purizer Vapor. Defendant and Purizer eventually entered

into numerous other research and development services agreements through June 8, 2000,