Norman S. Gottreich and Margareta E. Gottreich v. San Francisco Investment Corporation

The Gottreichs filed a complaint and an amended complaint alleging violations of (1) § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b); (2) SEC Rule 10b-5, 17 C.F.R. § 240 .10b-5 (1976); and (3) state law. The district court dismissed the action on the ground that the amended complaint failed to state a claim upon which relief could be granted. The amended complaint is hardly a model, but it is sufficient.

Rule 9(b), F.R.Ciy.P., with its requirement of pleading with particularity, applies to Rule 10b-5 cases, but a pleading is sufficient under Rule 9(b) if it identifies “the circumstances constituting fraud so that the defendant can prepare an adequate answer from the allegations.” Walling v. Beverly Enterprises, 9 Cir., 1973, 476 F.2d 393, 397 .

The Gottreichs do state the alleged misrepresentations with particularity — the defendants’ claims of expertise and special knowledge, as bases for predictions that the price of shares in Educational Development, Inc., and other companies would rise, thus providing capital gains. The Gottreichs further allege that the defendants knew, or should have known, that the representations were false. That conclusion may also be…