allege mere legal conclusions. Kunick v. Racine County, 946 F.2d

1574, 1579 (7th Cir. 1991). To withstand a motion to dismiss, a
complaint must allege facts which sufficiently set forth the
essential elements of the cause of action. Gray v. County of
Dane, 854 F.2d 179, 182 (7th Cir. 1988). With these principles
in mind, we turn to the motion presently before the court.

Il. “Offer or Sale” of Securities

Counts I and II of the Complaint allege that Defendants
violated Sections 17(a)(1) and (3) of the Securities Act.
Sections 17(a) (1) and (3) make it unlawful for:

“any person in the offer or sale of any
securities or any security-based swap
agreement . . .by the use of any means
or instruments of transportation or
communication in interstate commerce or
by the use of the mails, directly or
indirectly -

(1) to employ any device, scheme, or
artifice to defraud [or]

(3) to engage in any transaction,
practice or course of business which
operates or would operate as a fraud

or deceit upon the purchaser.

15 U.S.C. 77q(a) (1) and (3)



“Welchko and Figurelli for violations of Sections 17(a) (1) and

(3).
Conclusion

For the reasons set forth above, Putnam, Welchko and

Figurelli’s motion to dismiss the Complaint is denied.

ENTER:

. P77) POUL hee hy

colege/w Marovich

United States District Judge

DATED: c=

/1 200%
0



statute and the rule.” Sec. & Exch. Comm’n v. Nat’l Sec., Inc.,

393 U.S. 453, 467 (1968).

SEC alleges that Putnam, Welchko and Figurelli have
committed the type of fraudulent behavior which the statute meant
to forbid. Defendants operated Anicom with recklessness and
disregard for the safety of its shareholders, costing more than
$80 million in losses. With the ambition of selling Anicom to a
larger contingency in the future, Putnam, Welchko and Figurelli
engaged in a systematic manipulation of Anicom’s sales figures to
achieve their goal. They falsified quarterly reports to the SEC
and developed a ghost customer called SCL Integration, solely to
remedy an earlier impropriety by realizing $11.7 million in
fictitious sales. Furthermore, Welchko and Figurelli, with the
knowledge of Putnam, fraudulently made journal entries to
improperly charge expenses to, among other things, accelerate the
recognition of sales for Anicom.

The deception by Putnam, Welchko and Figurelli negatively
affected shareholders and employees of Anicom. Putnam, Welchko
and Figurelli made an “offer or sale” of stock through the
purchase of sixteen smaller companies. Putnam, Welchko and
Figurelli made an “offer or sale” of stock in exchange for
business entities, while committing fraudulent activities within
their corporation. These actions are of the type which the anti-

fraud provisions of the statute were meant to prohibit. And,



.

. Putnam, Welchko and Figurelli claim they should not be
subject to suit under Sections 17(a) (1) and (3) because they did
not “offer or sell” securities in a fraudulent manner. Section
17(a) cannot be read restrictively and technically, but instead

must be read flexibly. Occidental Life Ins. v. Ryan & Assocs,

496 F.2d 1255, 1262 (4th Cir. 1974). The Securities Act is
couched in language which implies these particular section are
designed to include the protection of buyers and sellers in the
securities market, and not limited to preserving the market’s
integrity. Id. The Seventh Circuit’s interpretation of the
Securities Act, for the purposes of these antifraud provisions,
is that sales and purchases of securities in the course of
mergers satisfy the requirements of the statute. Dasho v.
Susquehanna Co., 380 F.2d 262, 268. (7th Cir. 1968).

Although the legislative history, administrative
construction, and judicial decisions do not produce a clear
answer as to what exactly constitutes an “offer or sale” for
purposes of Section 17(a) (1) and (3), Id. Courts have found that
when there is a transfer of stock, along with evidence of fraud
in connection with the transfer, there is sufficient evidence to
satisfy the statutory requirements. Occidental, at 1262. The
Supreme Court has held that a court need only determine if the
defendants’ conduct, alleged in the complaint, “is the type of

fraudulent behavior which was meant to be forbidden by the


‘sufficiently detailed Putnam, Welchko and Figurelli’s active,
daily role in guiding the company, as well as their fraudulent
involvement with quarterly reports, press releases and annual
reports. Putnam was President, a director and then CEO of
Anicom. During this period, Putnam signed all of Anicom’s annual
reports, along with making public statements about them. Welchko
served as Anicom’s CFO and a director, signing annual reports as
well as the quarterly reports. Figurelli served as Vice
President and provided false information for Anicom’s periodic

reports, press releases, and annual reports.

Additionally, the Complaint alleges enough specific,
fraudulent activity by Putnam, Welchko and Figurelli to state a
claim against them under the heightened pleading standard of
knowledge and participation adopted by some circuits. During the
period when Putnam, Welchko and Figurelli were officers and
directors of Anicom, they inflated sales numbers of Anicom,
directed other employees to do the same, provided credit
extensions knowing there were no sales figures for these credit
extensions, and developed a fictitious company with fictitious
sales to mask fraudulent figures in their annual reports and
quarterly reports. This fraudulent information was provided by
Putnam, Welchko and Figurelli in the course of their daily,
active roles as officers of Anicom, with full knowledge of these

transactions. Thus, SEC has stated a claim against Putnam,



‘Minute Order Form (06/97)

United States District Court, Northern District of Iinois

——— 2
Naine of Assigned Judge George M. Marovich Sitting Judge if Other
> or Magistrate Judge than Assigned Judge
CASE NUMBER 02 C 3235 DATE 6/20/2003
CASE Securities and Exchange vs. Putnam, et al.
TITLE

of the motion being presented.)

[In the following box (a) indicate the party filing the motion, e.g., plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the nature

MOTION:

DOCKET ENTRY:

(1) Oo Filed motion of [ use listing in “Motion” box above.]

(2) Oo Brief in support of motion due

(3) Oo Answer brief to motion due__. Reply to answer brief due___.

(4) QO Ruling/Hearingon___setfor___—at__

(5) a Status hearing set for 7/23/03 at 11:00AM.

(6) o Pretrial conference[held/continued to] [set for/re-set for]on__setfor___—at__
(7) Qo Trial[set for/re-set for] on __at

(8) o [Bench/Jury trial] [Hearing] held/continued to____at

(9) o This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to}

OOFRCP4(m) CO Local Rule 41.1 CFRCP41(a)(1) © FRCP41(a)(2).

Figurelli’s motion to dismiss the complaint is denied.

dl) ff [For further detail see order attached to the original minute order.]

(10) Ml [Other docket entry) ENTER MEMORANDUM OPINION AND ORDER. Putnam, Welchko and

No notices required, advised in open court,

No notices required. umber of notices

Notices mailed by judge’s staff.

3
Notified counsel by telephone. JUN 230

wv | Docketing to mail notices,
Mail AO 450 form.

Luna

Copy to judge/magistrate judge.

WUN 23 2083

date muited notice

ate

wit y

OF G5-037y poate ie ence

courroom £04 by >
iD deputy O° Ha Oe
initials



therefore, they fall within the present interpretation adopted by

the Supreme Court and this Circuit. Securities and Exchange

Commission, at 467; Dasho, at 269.

III. Directors and Officers Liability

Defendants also argue that they did not personally “offer or
sell” stock. The court has already held that Anicom did “offer
or sell” securities during various acquisitions and mergers based
on fraudulent reports and press releases issued by its officers,
Putnam, Welchko and Figurelli. Where corporate fraud is alleged
in prospectuses, annual reports, press releases, or other “group
published information” it can be presumed that these are the
collective actions of the corporate officers. Wool v. Tandem
Computers, Inc., 818 F.2d 1433, 1440 (9th Cir. 1987); Morse v.
Abbott Laboratories, 756 F. Supp. 1108, 1111 (N.D. Ill. 1991).
Some circuits have adopted a further requirement that there be
sufficiently particularized allegations that each individual
officer knew about the fraud and had an active daily role in the

company. See e.g., Wool, at 1439.

When applying the “group publish doctrine” to the present
case, it is clearly evident that Putnam, Welchko and Figurelli

can be held liable for Anicom’s fraudulent activity. SEC has

' The Seventh Circuit has yet to address this issue, much
less adopt this standard. However, even assuming that this
standard should be applied, this Court finds that SEC has met
even this heightened pleading standard.

7



‘sales. " Welchko and Figurelli, with Putnam’s knowledge, also made
journal entries to improperly charge expenses. At one point,
Figurelli acknowledged that about twenty percent of Anicom’s
sales were improper or uncollectible.

By 1999, Anicom had grown to more than sixty-one locations
and nearly 1200 employees, in part by purchasing sixteen wire and
cable companies through cash and stock transactions. However,
through reports filed with the SEC, along with press releases of
annual and quarterly earnings in 1998, 1999 and 2000, Anicom’s
revenues were overstated by $13.6 million, $15.2 million and $9.8
million, respectively. All of these fraudulent reports were
signed by Putnam and Welchko. In 2001, Anicom was forced to file
bankruptcy, costing Anicom shareholders over $80 million in
losses.

DISCUSSION

I. Standard for a Motion to Dismiss

When considering a motion to dismiss, a court must view the
complaint’s allegations in the light most favorable to the
plaintiffs, and all well-pleaded facts in the complaint must be
accepted as true. Wilson v. Formigoni, 42 F.3d 1060, 1062 (7th
Cir. 1994). Dismissal is proper only if it appears beyond a
doubt that plaintiff can prove no set of facts in support of a
Claim which would entitle them to relief. Conley v. Gibson, 355

U.S. 41, 45-46 (1957). Plaintiffs are not, however, entitled to



X
offering in February 1995. Defendants’ intention, as corporate

officers of Anicom, was to build it into a company with
approximately $1 billion in annual revenues, then sell Anicom to
a larger company within five years. As part of this process,
Putnam, Welchko and Figurelli created a scheme to inflate sales
figures of Anicom and increase the stock price. Putnam, Welchko
and Figurelli entered into transactions (or instructed employees
to do so) for sales as “booked”, when the purchasing company had
no intention of purchasing from Anicom. In one instance, Putnam,
as CEO of Anicom, requested that a customer submit an order that
it did not intend to honor in an attempt to recognize revenue for
Anicom’s financial statements filed with the SEC. Furthermore,
when there was a need for extending a customer’s credit for a
fictitious sale, Figurelli, as Vice President of Credit Services
and Operations, provided the necessary credit approval.

Putnam, Welchko and Figurelli knew and disregarded the fact
that employees, under their instructions, were entering false
information into the billing system to show orders were shipped,
when in fact they had not. With regard to companies such as
Spanpro and GIT Electronics, Putnam, Welchko and Figurelli
entered into transactions for sales with them that never
materialized. In once instance, Welchko and Figurelli, with
Putnam’s knowledge, created a fictional company, SCL Integration,

for the sole purpose of realizing $11.7 million in fictitious



- UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

SECURITIES AND EXCHANGE
COMMISSION,

Plaintiff,

v. 02 C 3235
CARL E. PUTNAM, DONALD C.

WELCHKO, JOHN P. FIGURELLI,
DARYL T. SPINELL, RONALD M.
BANDYK AND RENEE L. LEVAULT,

Judge George M. Marovich

DOCKETED

)
)
)
)
)
)
)
)
)
)
)
)
) JUN 2 3 2003

Defendants.

MEMORANDUM OPINION AND ORDER

Plaintiff Securities and Exchange Commission (“SEC”) filed a
lawsuit against defendants Carl E. Putnam (“Putnam”), Donald Cc.
Welchko (“Welchko”), John P. Figurelli (“Figurelli”), Daryl T.
Spinell, Ronald M. Bandyk and Renee L. Levault, (collectively
“Defendants”). SEC alleges, inter alia, violations of Section
17(a) (1) and (3) of the Securities Act, 15 U.S.C. Sections
77q(a) (1) and (3) (“Sections 17(a)(1) and (3)”). Putnam, Welchko
and Figurelli now move to dismiss Counts I and II of the
Complaint, pursuant to Fed R. Civ. P. 12(b) (6). For the reasons
set forth below, the Court denies Defendants’ motion.

BACKGROUND

The Complaint alleges the following relevant facts which,
for purposes of deciding this motion, are taken as true. Hishon
v. Kemp & Spalding, 467 U.S. 69, 73 (1984). Anicom, a national

distributor of wire and cable products, had its initial public