ANCHORBANK v. HOFER (August 18, 2011)

Clark Hofer was an AnchorBank employee. Through his employer, he had an individual 401(k) account. One of the investment options in the account was the AnchorBank Unitized Fund, which consisted of cash and AnchorBank stock. In late 2008 and early 2009, Hofer and two colleagues, also bank employees, engaged in trades in the Fund. AnchorBank and the Trustee of the Fund brought suit against Hofer, alleging violations of Sections 9(a) and 10(b) of the Securities Exchange Act of 1934, Wisconsin securities law, and common law claims for breach of fiduciary duty and unjust enrichment. Magistrate Judge Crocker (W.D. Wis.) dismissed the complaint with prejudice. He concluded that plaintiffs failed to meet the loss causation pleading requirements. Plaintiffs appeal.

In their opinion, Seventh Circuit Judges Manion, Wood, and Williams reversed and remanded. The only issue on appeal was the sufficiency of the complaint. The Court noted that plaintiffs had to satisfy the Federal Rules of Civil Procedure 8(a) and 9(b) general pleading requirements, the Securities Exchange Act of 1934 sections 9(a) and 10(b) pleading requirements, and the Private Securities Litigation Reform Act pleading requirements. The Court concluded that plaintiffs satisfied the Rule 8(a) short and plain statement requirement and the Rule 9(b) fraud with particularity requirement. With respect to the latter, the Court noted that the complaint described the setup of the Fund, how it bought and sold stock on the open market, how it maintained its cash-to-stock ratio, how Hofer and his colleagues used their knowledge of Fund practices to buy and sell in ways that affected the price of the underlying stock, and how Hofer and his colleagues enjoyed extraordinary gains in doing so. The Court turned to the pleading requirements of the Securities Exchange Act and the PSLRA. On appeal, Hofer asserts that the complaint failed to adequately allege scienter, reliance, economic loss, and loss causation. The Court disagreed. It summarized the particular allegations of the complaint and found each of the elements adequately alleged. It noted that Hofer had competing explanations for his conduct that could affect scienter and reliance -- but rejected the assertion that they justified dismissal of the complaint. The Court also conceded that general economic conditions could have contributed to the dramatic decline in the value of AnchorBank stock. A plaintiff need not allege or prove that its entire loss is the result of the defendant's conduct -- only that it is a plausible cause of some of the loss.