scheme that coincided with the sale of securities satisfied the “in connection with” requirement
of Rule 10(b). Zandford, 535 U.S. at 825.

Bums and Hollendoner argue that since the SEC has not alleged any fraudulent practices
with respect to the securities transactions themselves, “the in connection with” requirement has
not been met, However, as was pointed out by the Court in Zandford, the “in connection with”
requirement is met where the defendant engages in a scheme to defrauds his client even though
the related securities transactions were completely legitimate. Jd. In this case, Burns and
Hollendoner allegedly made illegal payments to Santos to secure the City’s investment business,
invested the City money allocated to them by Santos, and made commissions on those
investments. Bums and Hollendoner’s alleged fraudulent payment scheme, thus, directly
coincided with the security transactions made on behalf of the City. Therefore, I find the
Complaint properly alleges that Burns and Hollendoner’s improper payment scheme was “in
connection with” the purchase or sale of securities.

Rule 9(b): Pleading the Fraudulent Scheme with Particularity

Lastly, Burns and Hollendoner contend the Complaint should be dismissed for failure to
plead fraud with the particularity required by Fed. R. Civ. P. 9(b). Rule 9(b) requires a complaint
to allege the “who, what, when, where, and how of the fraud.” SEC v. Sys. Software Assocs.,
Inc., 145 F.Supp. 2d 954, 957 (N.D. Ill. 2001).

Paragraph 22 of the Complaint clearly meets the particularity requirement. It details
when the improper payment was made (in or about March 1998), by whom it was made (Burns
and Hollendoner), and how it was paid (through Santos’s first deputy). The complaint further

specifies (i) when other brokers were pressured by Santos for payments; (ii) when they declined;



form of RFPs given by Burns and Holiendoner’s brokerage firms to the City in order to qualify as
a City broker. (Compl. 14).

Additionally, Burns and Hollendoner’s violations of subsections (a) and (c) of Rule 10b-5
“creates an independent duty to disclose. Failure to do so thus gives rise to a violation of Rule
10b-5(b).” In re Initial Pub. Offering Sec. Litig., 241 F. Supp.2d 281, 381-82 (S.D.N.Y. 2003).
Burns and Hollendoner’s attempt to distinguish this case by arguing Jn re Initial Pub. Offering
Sec. Litig. is limited to market manipulation, is unpersuasive. Although the defendant’s violation
in that case was related to market manipulation, the district court’s reasoning supports the
conclusions that the rule is not so limited. The court reasons, “...participants in the securities
market are entitled to presume that all of the actors are behaving legally; silence that conceals
illegal activity is therefore intrinsically misleading and (presuming the illegality is also material)
is always violative of Rule 10b-5(b). Jd. at 382 (emphasis added). Therefore, I find the
Complaint properly alleges a cause of action under subsection Rule 10b-5(b).

3. Section 10(b): Connection with the Purchase or Sale of Securities

Section 10(b) requires that a fraudulent device or scheme be “used or employed, in
connection with the purchase or sale of any security....” 17 U.S.C. § 78j(b). Rule 10b-5 also
requires a connection with the purchase or sale of securities. 17 C.F.R. § 240.10b-5. The
Supreme Court has adopted a broad reading of the “in connection with” test, reasoning that “the
statute should be construed ‘not technically and restrictively, but flexibly to effectuate its
remedial purposes.” SEC v. Zandford, 535 U.S. 813, 819 (2002) (quoting SEC v. Capital Gains

Research Bureau, Inc., 375 U.S. 180, 195 (1963)). In Zandford, the Court found that a fraudulent


UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

UNITED STATES SECURITIES AND

EXCHANGE COMMISSION,
Plaintiff,
No. 02 ¢ 8236
v. Judge James B. Zagel

MIRIAM SANTOS, PETER J. BURNS, and
MICHAEL F. HOLLENDONER,

Defendants.

MEMORANDUM OPINION AND ORDER

Plaintiff, Securities Exchange Commission, has filed a Complaint against Miriam Santos,
Peter J. Burns, and Michael F, Hollendoner alleging securities fraud under Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Defendants, Burns
and Hollendoner, now move to dismiss the complaint pursuant to Fed. R. Civ. P. 12(b)(6) for
failing to state a claim upon which relief may be granted and Fed. R. Civ. P. 9(b) for failing to
plead fraud with particularity.

The facts alleged in the Complaint are as follows. Miriam Santos, then City Treasurer
(“Treasurer”) of the City of Chicago, was responsible for overseeing the investment, through the
purchase and sale of securities, of approximately two and one half billion dollars in City funds.
Investments by the Treasurer’s Office were supposed to be allocated pursuant to a competitive
bidding process. In May of each year, the City would investigate and approve broker-dealers
who submitted and retumed a Request for Proposal (“RFP”) to the City. The RFP included a
provision that required the firm to comply with the Chicago Municipal Code, which contained a

prohibition against exchanging value for official influence. Once a broker-dealer was authorized
j


and (iii) how this caused Santos to cut them off from the City’s security investments. Compl. 4
23-27.

Burns and Hollendoner argue that each security transaction has not been separately
identified, that specific dates for each transaction have not been stated, and that the Complaint
does not distinguish between the conduct of Burns and Hollendoner. These particulars, however,
are not necessary to provide them with fair notice of this particular fraud, but are evidentiary
matters appropriate for discovery and trial. See SEC v. Feminella, 947 F. Supp. 722, 733
(S.D.N.Y. 1996); Dunham v. Independence Bank of Chicago, 629 F. Supp. 983, 987 (N.D. Ill.
1986) (Rule 9(b) motion denied where plaintiffs alleged “the range of dates” on which the fraud
occurred because “[n]Jo pleading need set out the detailed evidence plaintiffs would use to
support the claim at a later date”); Onesti v. Thomson McKinnon Secur., Inc., 619 F. Supp. 1262,
1264 (N.D. Ill. 1985) (“Plaintiffs cannot be expected to specify the exact time and particular

999

place of each factual omission and misrepresentation”” complaint complied with Rule 9(b) by
specifying the “approximate time frame” of the transactions).

Moreover, when information giving rise to securities fraud is exclusively held by
defendants, the particularity requirement of Rule 9(b) is relaxed. See Corley v. Rosewood Care
Ctr., Inc. of Peoria, 142 F.3d 1041, 1051 (7th Cir. 1998); see also Reshal Assoc., Inc. v. Long
Grove Trading Co., 754 F. Supp. 1226, 1231 (N.D. Ill. 1990) (plaintiff is required to distinguish
among defendants “to the extent that they may reasonably be expected to be able to do so,” but
the complaint need not attribute specific acts to specific defendants “if the complaint sufficiently

describes the fraudulent acts and provides the individuals with sufficient information to answer

the allegations”). To the extent details are not alleged in the complaint, Burns, Hollendoner, and


scheme that coincided with the sale of securities satisfied the “in connection with” requirement
of Rule 10(b). Zandford, 535 U.S. at 825.

Burns and Hollendoner argue that since the SEC has not alleged any fraudulent practices
with respect to the securities transactions themselves, “the in connection with” requirement has
not been met. However, as was pointed out by the Court in Zandford, the “in connection with”
requirement is met where the defendant engages in a scheme to defrauds his client even though
the related securities transactions were completely legitimate. Jd. In this case, Burns and
Hollendoner allegedly made illegal payments to Santos to secure the City’s investment business,
invested the City money allocated to them by Santos, and made commissions on those
investments. Burns and Hollendoner’s alleged fraudulent payment scheme, thus, directly
coincided with the security transactions made on behalf of the City. Therefore, 1 find the
Complaint properly alleges that Burns and Hollendoner’s improper payment scheme was “in
connection with” the purchase or sale of securities.

Rule 9(b): Pleading the Fraudulent Scheme with Particularity

Lastly, Burns and Hollendoner contend the Complaint should be dismissed for failure to
plead fraud with the particularity required by Fed. R. Civ. P. 9(b). Rule 9(b) requires a complatnt
to allege the “who, what, when, where, and how of the fraud.” SEC v. Sys. Software Assocs.,
Inc., 145 F.Supp. 2d 954, 957 (N.D, lil. 2001).

Paragraph 22 of the Complaint clearly meets the particularity requirement. It details
when the improper payment was made (in or about March 1998), by whom it was made (Burns
and Hollendoner), and how it was paid (through Santos’s first deputy). The complaint further

specifies (i) when other brokers were pressured by Santos for payments; (ii) when they declined;


ra

Minute Order Form (05/97)

United States District Court, Northern District of Illinois

vi Magitrate Judge James B. Zagel “than Aosigned Judge

CASE NUMBER 02 C8236 DATE 11/4/2003
CASE S.E.C. vs. SANTOS, ET AL
TITLE

{In the following box (a) indicate the party filing the motion, ¢.g., plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the nature
of the motion being presented,]

MOTION:
DOCKET ENTRY:

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

(2) Qa Brief in support of motion due

(3) go Answer brief to motion due. . Reply to answer brief due___.

(4) Oo Ruling/Hearingon____setfor__—__aat

(5) oO Status hearing[held/continued to] [set for/re-set for]on__—ssetfor_——_at

(6) Oo Pretrial conference[held/continued to] (set for/re-set for]on___—_—esetfor__———sat__
(7) o Trial[set for/re-set for]on__at

(8) oO [Bench/Jury trial] [Hearing] held/continued to at

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

OFRCP4(m) Local Rule 41.1 CFRCP41(a)(1) [1 FRCP41(a)(2).

ao) «olf (Other docket entry) Motion (4-1 and 5-1) to dismiss is denied. Enter memorandum opinion
and order.

a1) ff [For further detail see order attached to the original minute order.]

No notices required, advised in open court.

lo notices required.
No notices requi umber of notices

Notices mailed by judge’s staff.

Notified counsel by telephone.

~ [| Docketing to mail notices.
Mail AO 450 form,

docketing deputy initials

Copy to judge/magistrate judge.

date mailed not
courtroom se mules nove

Dw deputy's
initials

Date/time received in ;
central Clerk’s Office mailing deputy initials



‘Minute Order Form (06/97)

United States District Court, Northern District of Illinois

Name of Assigned Jud; 6 Sitting Judge if Other
nye Magistrate Judge James B. Zagel than Assigned Judge
CASE NUMBER 02 C8236 DATE 11/4/2003
CASE S.B.C. vs. SANTOS, ET AL
TITLE

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

MOTION:

DOCKET ENTRY:

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

(2) a) Brief in support of motion due

(3) oO Answer brief to motion due___- Reply to answer briefdue___.

(4) a Ruling/Hearing on setfor____at

(5) oO Status hearing[held/continued to] [set for/re-set for]on___——ssetfor__— at

(6) a] Pretrial conference[held/continued to] [set for/re-set for]on__setfor__—sat__.
(7) o Trial[set for/re-set for] ona

(8) a [Bench/Jury trial] [Hearing] held/continued to at

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

OFRCP4(m) OLocal Rule 41.1 QO FRCP41(a)(1) O FRCP41(a)(2).

ao [Other docket entry] Motion (4-1 and 5-1) to dismiss is denied. Enter memorandum opinion
and order.

(1) of (For further detail see order attached to the original minute order.]

No notices required, advised in open court. Document

Number

No notices required.

umber of notices

Notices mailed by judge's staff.

Notified counsel by telephone.

a | Docketing to mail notices,

Mail AO 450 form. JVANT LAMECTT ST scckating debuNnitals

Copy to judge/magistrate judge.

7

f Pa fe late mailed nolic
i courtroom co date mailed notise
DW: deputy's
initials

Date/time received in
central Clerk's Office” * mailing deputy initials



1. Rules 10b-5(a) and (c): Duty to Disclose

Burns and Hollendoner say they had no duty to disclose the alleged illegal payments
under Rules 10b-5(a) and (c). To support this contention, Bums and Hollendoner cite to
Chiarella v. U.S., 445 U.S. 222, 228 (1980) and argue that fraud liability under Rule 10b-5 does
not attach for failure to disclose material information unless a party is under a duty to do so.

Burs and Hollendoner’s reliance on Chiarella is misplaced. In that case, the Court
decided on the question of whether one who learns from confidential documents of an impending
corporate takeover violates § 10(b) if he fails to disclose his knowledge before trading in the
target company’s securities. The issue, therefore, was whether the non-disclosure itself
constituted a violation of subsections (a) and (c) of Rule 10b-5.

In this case, the SEC alleges that Burns and Hoilendoner participated in a “scheme to
defraud” and engaged in “practices” that “operated” to deceive the City. These allegations satisfy
the plain Janguage of Rule 10b-5(a) and (c). Here, the violation (the scheme to defraud) itself
attaches liability. Therefore, I find the Complaint property alleges a cause of action under
subsection (a) and (c) of Rule 10b-5.

2. Rule 10b-5(b): Material Misrepresentations or Omissions

Bums and Hoilendoner contend that the Complaint alleges no statement by either
defendant which is false and no statement which is misleading due to an omission of a material
fact, as required by Rule 10b-5(b). Burns and Hollendoner are incorrect. The complaint does
allege that Burns and Hollendoner, through their brokerage firms, did make express statements to

the City that omitted reference to their fraudulent scheme. These express statements were in the


to do business with the City, he was then allowed to submit his firm’s daily investments rates to
the Treasurer’s Office. According to the terms of the competitive bidding process, the Treasurer
would then invest any available City funds with the broker-dealer offering the best daily rate.
Burs and Hollendoner were registered representatives of authorized broker-dealers.

From 1995 to 1999, Santos, Burns, and Hollendoner were allegedly involved in a scheme
to defraud the City. During that time, Santos directly and indirectly demanded illegal cash
payments and campaign donations from Burns and Hollendoner in exchange for the City’s
investment business. In one instance, Santos demanded that defendants purchase $7,500 worth
of office furniture for her campaign headquarters. Burns and Hollendoner complied with Santo’s
demands and thus remained two of the City’s top broker-dealers. Also during that time, Santos
refused to give any business to brokerage firms who did not make the payments she requested.

In deciding a motion to dismiss, all well-pleaded factual allegations in the complaint must
be accepted as true, and all reasonable inferences from those facts must be drawn in the light
most favorable to the plaintiff. Szumny v. American Gen. Fin., Inc., 246 F.3d 1065, 1067 (7th
Cir. 2001). A complaint should not be dismissed for failure to state a claim unless it appears
beyond doubt that the plaintiff can prove no set of facts in support of its claim that would entitle
it to relief. Id.

Section 10(b) of the Federal Securities Laws
Burns and Hollendoner argue that the SEC fails in three ways to state a claim under

Section 10(b) of the federal securities law as well as Rule 10b-5 promulgated thereunder.


Santos have exclusive control over those precise facts surrounding the fraudulent scheme. For

these reasons, I find the Complaint meets the pleading requirement of Fed. R. Civ. P. 9(b).
For the aforementioned reasons, Burns and Hollendoner’s Motion to Dismiss is DENIED.

ENTER:

on Sf

Jamés B. Zagel U
ited States District (ad

DATE: { Vow 2007


1. Rules 10b-5(a) and (c): Duty to Disclose

Burns and Hollendoner say they had no duty to disclose the alleged illegal payments
under Rules 10b-5(a) and (c). To support this contention, Burns and Hollendoner cite to
Chiarella v. U.S., 445 U.S. 222, 228 (1980) and argue that fraud liability under Rule 10b-5 does
not attach for failure to disclose material information unless a party is under a duty to do so.

Burns and Hollendoner’s reliance on Chiarella is misplaced. In that case, the Court
decided on the question of whether one who learns from confidential documents of an impending
corporate takeover violates § 10(b) if he fails to disclose his knowledge before trading in the
target company’s securities. The issue, therefore, was whether the non-disclosure itself
constituted a violation of subsections (a) and (c) of Rule 10b-5.

In this case, the SEC alleges that Bums and Hollendoner participated in a “scheme to
defraud” and engaged in “practices” that “operated” to deceive the City. These allegations satisfy
the plain language of Rule 10b-5(a) and (c). Here, the violation (the scheme to defraud) itself
attaches liability. Therefore, I find the Complaint property alleges a cause of action under
subsection (a) and (c) of Rule 10b-5.

2. Rule 10b-5(b): Material Misrepresentations or Omissions

Burns and Hollendoner contend that the Complaint alleges no statement by either
defendant which is false and no statement which is misleading due to an omission of a material
fact, as required by Rule 10b-5(b). Burns and Hollendoner are incorrect. The complaint does
allege that Burns and Hollendoner, through their brokerage firms, did make express statements to

the City that omitted reference to their fraudulent scheme. These express statements were in the



and (iii) how this caused Santos to cut them off from the City’s security investments. Compl.
23-27.

Bums and Hollendoner argue that each security transaction has not been separately
identified, that specific dates for each transaction have not been stated, and that the Complaint
does not distinguish between the conduct of Burns and Hollendoner. These particulars, however,
are not necessary to provide them with fair notice of this particular fraud, but are evidentiary
matters appropriate for discovery and trial. See SEC v. Feminella, 947 F. Supp. 722, 733
(S.D.N.Y. 1996); Dunham v. Independence Bank of Chicago, 629 F. Supp. 983, 987 (N.D. Il.
1986) (Rule 9(b) motion denied where plaintiffs alleged “the range of dates” on which the fraud
occurred because “[n]o pleading need set out the detailed evidence plaintiffs would use to
support the claim at a later date”); Onesti v. Thomson McKinnon Secur., Inc., 619 F. Supp. 1262,
1264 (N.D. Ill. 1985) (“Plaintiffs cannot be expected to specify the exact time and particular
place of each factual omission and misrepresentation’’ complaint complied with Rule 9(b) by
specifying the “approximate time frame” of the transactions).

Moreover, when information giving rise to securities fraud is exclusively held by
defendants, the particularity requirement of Rule 9() is relaxed. See Corley v. Rosewood Care
Ctr., Inc, of Peoria, 142 F.3d 1041, 1051 (7th Cir. 1998); see also Reshal Assoc., Inc. v. Long
Grove Trading Co., 754 F. Supp. 1226, 1231 (N.D. Ill. 1990) (plaintiff is required to distinguish
among defendants “to the extent that they may reasonably be expected to be able to do so,” but
the complaint need not attribute specific acts to specific defendants “if the complaint sufficiently
describes the fraudulent acts and provides the individuals with sufficient information to answer

the allegations”). To the extent details are not alleged in the complaint, Burns, Hollendoner, and


to do business with the City, he was then allowed to submit his firm’s daily investments rates to
the Treasurer’s Office. According to the terms of the competitive bidding process, the Treasurer
would then invest any available City funds with the broker-dealer offering the best daily rate.
Burns and Hollendoner were registered representatives of authorized broker-dealers.

From 1995 to 1999, Santos, Burns, and Hollendoner were allegedly involved in a scheme
to defraud the City. During that time, Santos directly and indirectly demanded illegal cash
payments and campaign donations from Burns and Hollendoner in exchange for the City’s
investment business. In one instance, Santos demanded that defendants purchase $7,500 worth
of office furniture for her campaign headquarters. Burns and Hollendoner complied with Santo’s
demands and thus remained two of the City’s top broker-dealers. Also during that time, Santos
refused to give any business to brokerage firms who did not make the payments she requested.

In deciding a motion to dismiss, all well-pleaded factual allegations in the complaint must
be accepted as true, and all reasonable inferences from those facts must be drawn in the light
most favorable to the plaintiff. Szumny v. American Gen. Fin., Inc., 246 F.3d 1065, 1067 (7th
Cir. 2001). A complaint should not be dismissed for failure to state a claim unless it appears
beyond doubt that the plaintiff can prove no set of facts in support of its claim that would entitle
it to relief. Id.

Section 10(b) of the Federal Securities Laws
Burns and Hollendoner argue that the SEC fails in three ways to state a claim under

Section 10(b) of the federal securities law as well as Rule 10b-5 promulgated thereunder.


UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

UNITED STATES SECURITIES AND
EXCHANGE COMMISSION,

Plaintiff,

No. 02 c 8236
v. Judge James B. Zagel

MIRIAM SANTOS, PETER J. BURNS, and
MICHAEL F, HOLLENDONER, DOCK ETED

Defendants. NOV 1 0 2003

MEMORANDUM OPINION AND ORDER

Plaintiff, Securities Exchange Commission, has filed a Complaint against Miriam Santos,
Peter J. Burns, and Michael F. Hollendoner alleging securities fraud under Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Defendants, Burns
and Hollendoner, now move to dismiss the complaint pursuant to Fed. R. Civ. P. 12(b)(6) for
failing to state a claim upon which relief may be granted and Fed. R. Civ. P. 9(b) for failing to
plead fraud with particularity.

The facts alleged in the Complaint are as follows. Miriam Santos, then City Treasurer
(“Treasurer”) of the City of Chicago, was responsible for overseeing the investment, through the
purchase and sale of securities, of approximately two and one half billion dollars in City funds.
Investments by the Treasurer’s Office were supposed to be allocated pursuant to a competitive
bidding process. In May of each year, the City would investigate and approve broker-dealers
who submitted and returned a Request for Proposal (“RFP”) to the City. The RFP included a
provision that required the firm to comply with the Chicago Municipal Code, which contained a

prohibition against exchanging value for official influence. Once a broker-dealer was authorized
i



form of RFPs given by Burns and Hollendoner’s brokerage firms to the City in order to qualify as
a City broker. (Compl. 14).

Additionally, Burns and Hollendoner’s violations of subsections (a) and (c) of Rule 10b-5
“creates an independent duty to disclose. Failure to do so thus gives rise to a violation of Rule
10b-5(b).” Jn re Initial Pub. Offering Sec. Litig., 241 F. Supp.2d 281, 381-82 (S.D.N.Y. 2003).
Burns and Hollendoner’s attempt to distinguish this case by arguing Jn re Initial Pub Offering
Sec. Litig. is limited to market manipulation, is unpersuasive. Although the defendant’s violation
in that case was related to market manipulation, the district court’s reasoning supports the
conclusions that the rule is not so limited. The court reasons, “...participants in the securities
market are entitled to presume that all of the actors are behaving legally; silence that conceals
illegal activity is therefore intrinsically misleading and (presuming the illegality is also material)
is always violative of Rule 10b-5(b). Jd. at 382 (emphasis added). Therefore, I find the
Complaint properly alleges a cause of action under subsection Rule 10b-5(b).

3. Section 10(b): Connection with the Purchase or Sale of Securities

Section 10(b) requires that a fraudulent device or scheme be “used or employed, in
connection with the purchase or sale of any security...” 17 U.S.C. § 78j(b). Rule 10b-5 also
requires a connection with the purchase or sale of securities. 17 C.F.R. § 240.10b-5. The
Supreme Court has adopted a broad reading of the “in connection with” test, reasoning that “the
statute should be construed ‘not technically and restrictively, but flexibly to effectuate its
remedial purposes.” SEC v. Zandford, 535 U.S. 813, 819 (2002) (quoting SEC v. Capital Gains

Research Bureau, Inc., 375 U.S. 180, 195 (1963)). In Zandford, the Court found that a fraudulent


Santos have exclusive control over those precise facts surrounding the fraudulent scheme. For

these reasons, I find the Complaint meets the pleading requirement of Fed. R. Civ. P. 9(b).
For the aforementioned reasons, Burns and Hollendoner’s Motion to Dismiss is DENIED.

ENTER:

> Sf

Jamés B. nm f?
ited States District e

pate: { Mew 2o07