Opinion
01 C 2670
July 13, 2001
Defendant Bradley Vallem moves to dismiss the SEC's complaint against him for failure to plead fraud with particularity. Fed.R.Civ.P. 9(b).
Mercury Finance Co. was a sub-prime lender engaged in extending short-term installment loans to consumers and acquiring installment loans previously issued to consumers by used car dealers and retail vendors. Mercury was financed by obtaining lines of credit from major lending institutions. From 1994-1996, Mercury overstated its earnings. In January, 1997 Mercury announced its accounting irregularities, trading in its stock was halted, and when trading resumed Mercury's market value dropped by 89% ($2.3 billion). Vallem was Mercury's Treasurer. He was responsible for its commercial paper activity; he negotiated commercial paper credit lines and monitored the commercial paper accounts and balances at Mercury closely. Mercury's commercial paper balance was understated, employees made fraudulent entries on the accounting system. Vallem either knew this or recklessly did not know this. In April or May, 1996 Vallem learned an employee had falsified a past bank statement to reflect a sham $30 million transaction. Vallem sought confirmation from a bank that Mercury's outstanding balance was $40 million, even though he knew (or was reckless in not knowing) that Mercury reported a balance of $10 million. (In other words, this is a specific example of Vallem knowing about understating commercial paper balances.) In 1996 someone asked Vallem to alter data on a report, and he did it. This was another instance of understating loan delinquencies. Vallem knew or was reckless in not knowing the falsity of this report. Vallem signed and caused to be filed with the SEC, and disseminated to the public, Mercury's 10-Qs. The 10-Qs included materially false financial statements misrepresenting Mercury's financial condition. Vallem knew or was reckless in not knowing that these statements were fraudulent. Finally, Mercury's CFO confessed to Vallem that he had been falsifying Mercury's financial statements, and Vallem failed to report this to anyone for several months.
All of the above allegations are in the complaint. This complaint satisfies Rule 9(b). Vallem is sufficiently on notice that he is accused of knowing or recklessly not knowing that Mercury was understating its commercial paper balance; the complaint tells him about a specific instance in 1996 involving a $30 million transaction; and it tells him about another specific instance in 1996 of a discrepancy ($40 million versus $10 million) in commercial paper balances. He is accused of altering a specific report in mid-1996. The "who" is Vallem, the "what" is understating commercial paper balances, the "when" is 1996-1997, and the "how" is failing to disclose other employee's false statements, altering documents, and filing false 10-Qs. This complaint is far from the deficient one in DiLeo v. Ernst Young, 901 F.2d 624, 627-628 (7th Cir. 1990). The SEC has alleged why it "must be" fraud — intentional misrepresentations of financial status. See Id.
What about scienter? Intent and knowledge can be averred generally, Fed.R.Civ.P. 9(b), and this complaint sufficiently paints a picture of Vallem either intentionally misrepresenting commercial paper balances, or recklessly doing so. The complaint alleges facts that depict Vallem as a reckless Treasurer who put his imprimatur on a fraud. That is all that is required.
Vallem finally argues that the request for injunctive relief is improper and should be stricken. He says there is no basis to claim that unless enjoined, Vallem will continue to violate the Act; he is not even an officer of a publicly traded company anymore. The request for relief stands. Vallem will be free to raise these arguments later, when I am actually asked to enter an injunction. For now, I defer to the SEC's allegations.
Vallem's motion to dismiss [5-1] is denied. Vallem shall have leave to answer the complaint by August 7, 2001.