On January 8, 2015, the Court of Appeals issued its decision in Dr. Michael B. Shapiro v. Rick Vanden Heuvel CPA, et al., 2014AP1338, reinforcing the longstanding principle that claims of fraud must be supported by specific allegations in the complaint.
Dr. Shapiro alleged in his Complaint that the defendants, Rick Vanden Heuvel and Dan McGown (and their accounting firm), and attorneys Patrick Sweeney and Cory Buye (and their law firm), fraudulently induced him to make or maintain investments in companies controlled by an unnamed party, Christian Peterson, at times when the defendants were providing professional services to Mr. Peterson and his companies. Specifically, he alleged common law fraud, conversion, misrepresentation-intentional deceit, civil conspiracy, and violations of Wis. Stat. § 895.446 (action for property damage or loss caused by crime, based on alleged violations of Wis. Stat. § 943.20 (theft)). Dr. Shapiro did not make any claims directly against Mr. Peterson, but alleged that the defendants defrauded him in connection with his own investment in Mr. Peterson’s controlled business entities.
The Complaint, which was over 100 paragraphs in length, alleged with specificity the series of investments Dr. Shapiro made, and alleged that Dr. Shapiro lost money on the investments when, as one example, a company he invested in defaulted on loans and was dissolved. The Complaint also alleged the following:
“10. At all times relevant, Defendants knew or had reason to know that Peterson had… serious addiction[s] to alcohol and gambling; and that unless [the defendants] enabled and facilitated Peterson’s gross mismanagement and self-dealing related to the entities owned in part and controlled by him, Peterson would no longer engage [the defendants] to provide professional services to him and to those business entities, in exchange for which professional services defendants received compensation substantially in excess of the value thereof.”
“11. At all times relevant, Defendants knew or had reason to know that in order for them to continue to benefit financially from the gross mismanagement and self-dealing related to Peterson’s control of the business entities that [Peterson] owned in part and controlled, it was necessary for Dr. Shapiro to continue to invest substantial amounts into those business entities and to provide his personal guarantees to lenders that extended millions of dollars of credit thereto.”
According to the circuit court, the Complaint did not, however, allege with specificity any allegation “that either group of defendants [accountants or attorneys] were in any way covering up or not disclosing things that they knew about, and that Dr. Shapiro didn’t or, with reasonable diligence, couldn’t have easily found out.”[i] The circuit court, therefore, held that there were no facts to support the allegations of fraud, and dismissed the case on summary judgment. Dr. Shapiro appealed.
In determining whether summary judgment was properly awarded to the defendants, the Court of Appeals noted that “special rules apply” because the Complaint sounded in fraud. [ii] Pursuant to Wis. Stat. § 802.03(2), the circumstances constituting fraud must have been stated with particularity – the “who, what, when, where and how,” including “the time, place, and content of an alleged misrepresentation”.[iii] It has long been accepted that the purpose of this heightened pleading standard for allegations of fraud is to give defendants an opportunity to meaningfully respond to fraud allegations, and to discourage the filing of reputation-harming, meritless actions. It requires plaintiffs to conduct a pre-complaint investigation in sufficient depth to make sure that the allegation of fraud is supported by facts, rather than being merely defamatory and extortionate.
The Court of Appeals held that, “At best, the complaint generally describes a context in which various defendants at various times might have had a motive to mislead or provide false information to Shapiro, a potential opportunity to do so, or perhaps both, but that the complaint falls short of alleging what it was that Shapiro was specifically told, or specifically not told, by any defendant during any specific time period that could constitute a fraudulent misrepresentation.”[iv] For example, in his reply brief, Dr. Shapiro argued that paragraph 67 of the Complaint sufficiently alleged fraud:
“67. Throughout 2007, when the Peterson-controlled businesses owned in party by Dr. Shapiro, including Maverick, experienced serious financial hardship, Buye and Sweeney strongly encouraged Dr. Shapiro to continue investing with Peterson by making statements such as: ‘keep aligned with Chris’ and to ‘stay with Chris.’”
The Court of Appeals disagreed. While somewhat more specific than other allegations, the Court of Appeals held that these general statements of support to invest in entities owned by Peterson were not representations of any fact regarding a specific investment or set of investments. The allegation that defendants Sweeney and Buye, on various days in 2007, using unknown modes of communication, in unknown places, each made the above statements, was not specific enough under the heightened pleading standard.
Further, because the remainder of Dr. Shapiro’s claims – conversion, civil conspiracy, and violations of Wis. Stat. §§ 895.446 and 943.20 (theft) – rested on the same grounds that Dr. Shapiro used to support his claims of common law fraud and misrepresentation-intentional deceit, the Court of Appeals held that they were also insufficiently pled. In other words, where a claim is premised upon a course of fraudulent conduct, it must be pled with the specificity required of a claim for fraud.
The Court of Appeals affirmed Judge Markson’s dismissal of the case.
This case serves as a reminder to defense counsel that we must review all complaints carefully to make sure claims of fraud have been adequately pled. This includes claims that may be characterized or called something else, but are based upon or arise from fraudulent actions. It is not sufficient for a plaintiff to develop the facts supporting the allegations of fraud through discovery or through summary judgment materials submitted by parties subsequent to the filing of the complaint. Rather, plaintiffs must allege with specificity in the complaint, enough facts to support an allegation of fraud, including who and what action(s) were involved, and when, where, and how the fraudulent action(s) took place. Further, plaintiffs must provide the time, place, and content of an alleged misrepresentation. If the plaintiff has failed to adequately allege these facts, defense counsel should move for dismissal for failure to adhere to the heightened pleading requirements pursuant to Wis. Stat. § 802.03(2).
[i] Shapiro v. Vanden Heuvel, et al., 2014AP1338 at ¶6.
[ii] The Court of Appeals decided the issue of whether fraud was sufficiently pled even though it acknowledged that Dr. Shapiro failed to properly brief this issue.
[iii] Id. at ¶9 (citing Friends of Kenwood, 239 Wis. 2d 78, ¶14).
[iv] Id. at ¶14.
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