Court Opinion

ID: 2999617
Source: CourtListenerOpinion
Date Created: 2015-09-24 19:56:01.503669+00
Date Added: 2024-06-11T09:19:08.255766
License: Public Domain

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 law-
suit revolves around Conseco’s ill-fated purchase of Green
Tree, a company whose main business focused on pur-
chasing and servicing trailer home mortgages. In April
1998, Conseco retained defendant Merrill Lynch to pro-
vide an opinion pertaining to Conseco’s proposed valua-
tion 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 approxi-
mate 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 deter-
mine: 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 disre-
garded 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 unmiti-
gated 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 en-
tered 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 pur-
chase large stock through personal loans provided by a
bank. The bank loans were collateralized by the pur-
chased Conseco stock. But the banks were not financially
foolish: they required Conseco to guarantee the loans
(and Conseco generously did so, although it retained re-
course 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 share-
holders who participated in the D&O Program. See gener-
4                                              No. 05-3459

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 approxi-
mately $100 million and Massey’s balance was approxi-
mately $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 reorganiza-
tion, 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 Pricewater-
houseCoopers),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

1
 The plaintiffs are pursuing separate claims against Price-
waterhouseCoopers in state court.
No. 05-3459                                                  5

individually by the plaintiffs. They now appeal this deci-
sion.

                      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 infer-
ences 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. Centen-
nial Mortg., Inc., 398 F.3d 930, 933 (7th Cir. 2005). Thus, a
plaintiff “may plead himself out of court by attach-
ing 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 plain-
tiffs 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 deter-
mine 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

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 corpora-
tion and a third person, surrender their personal or individ-
ual entities to the corporation in which they are stockhold-
ers.” 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 share-
holders, 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

2
  There are certain exceptions under Indiana law for closely-held
corporations, but these do not apply in the context of a publicly-
traded company like Conseco. See Marcuccilli, 766 N.E.2d at
450; Barth, 659 N.E.2d at 562.
No. 05-3459                                                7

shareholder has suffered a distinct personal injury that
is different from the type experienced by the other share-
holders. 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 corpora-
tion if the shareholder had a separate con-
tractual 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 sharehold-
ers 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 propor-
tionate 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 essen-
tially 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 stock-
holder 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 ratio-
nale 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 distin-
guishing 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 share-
holder 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 Recom-
mendations, § 7.01 (1992); Frank v. Hadesman and Frank,
Inc., 83 F.3d 158, 160 (7th Cir. 1996). As a result, disguis-
ing 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); Mid-
State 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, allow-
ing 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 deriva-
tive 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 plain-
tiffs’ 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, gener-
alized 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 sharehold-
ers—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 stock-
holder 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 mismanage-
    ment, 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 liabil-
    ity 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 in-
jury 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 plain-
tiffs 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 out-
of-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 invest-
ments. 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 communica-
tions. That is, according to the plaintiffs, during its presen-
tation to the Board, Conseco allegedly made numerous
misrepresentations relating to its investigation of Green
Tree’s financials. The plaintiffs, in turn, retained or pur-
chased 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 general-
ized 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

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 consis-
tently 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 capac-
ity 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

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).
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 ad-
    dresses only the financial fairness of the Ex-
    change 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 ex-
hibits 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 require-
ment 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 corpora-
tion. 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 secu-
rities fraud laws, particularly the prohibitions on insider
trading, which generally aim to curtail trading advan-
tages by corporate insiders and protect investors from
16                                                   No. 05-3459

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.

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.
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