Full opinion text
ORDER EISELE, Chief Judge. Plaintiffs allege that defendants engaged in a scheme to sell stock in a financially troubled savings and loan. First Federal, the corporate defendant, is the savings and loan. The Individual Defendants are various officers and directors of First Federal. Defendants have moved to dismiss two of the Complaints in these consolidated actions, namely the Hagerty (LR-C-87-792) and Gitlin (LR-C-87-793) cases. They make a variety of arguments which, taken together, challenge all of the Counts in the two Complaints. I. SUMMARY OF REGULATORY PROVISIONS Savings and loans such as First Federal are insured and regulated by the Federal Savings and Loan Insurance Corporation (the “Corporation”), which is in turn under the direction of the Federal Home Loan Bank Board (the “Board”). 12 U.S.C. 1725. The issues raised in this case must be resolved in the context of the regulatory regime applicable to savings and loans. One cannot understand what is alleged to have happened in this lawsuit without an understanding of certain basic aspects of that regime. A savings and loan may have either of two forms of organization. Under the mutual form, the account holders (i.e., depositors) are the “owners,” with each account holder’s share of the institution proportional to the size of his or her account. Under the stock form, ownership is divided into shares of stock and the shares are sold to stockholders, who may or may not also be depositors in the savings and loan. From time to time, mutual form savings and loan associations decide to convert to the stock form. Generally, “no insured institution may convert from the mutual to the stock form except in accordance with the rules and regulations of the Corporation.” 12 U.S.C. 1725(j)(1). See 12 C.F.R. 563b.1(a) (“the provisions of this part shall exclusively govern the conversion of mutual insured institutions ... to capital stock insured institutions”). Of particular concern to the Board in promulgating the conversion regulations was avoiding the undesireable economic effects of “ ‘windfall’ distributions to the account holders of a converting mutual insured institution.” 12 C.F.R. 563b.3(a) (1980) (“Findings of Federal Home Loan Bank Board”). Consequently, “[t]he regulations contained in this part, while providing the account holder with rights to a share in the equity of the converting mutual insured institution in the event of a subsequent complete liquidation, are designed virtually to eliminate the ‘windfall’ aspect of conversion and the resulting disruptive effect on the economy.” Id. The regulations attempt to eliminate windfall distributions through two means. First, the price of the shares offered to the account holders is to be objectively set, based upon the market value of the savings and loan. Second, the ability of the account holders to buy shares other than on the open market is restricted. As to objective pricing, “the converting insured institution shall issue and sell its capital stock at a total price equal to the estimated pro forma market value of such stock in the converted insured institution, based on an independent valuation, as provided in 563b.7.” 563b.3(c)(1). The 563b.7 valuation is to be done by “persons independent of the applicant, experienced and expert in the area of corporate appraisal, and acceptable to the Corporation.” 563b.7(f)(1)(i). “[T]he sales price of the shares of capital stock to be sold in the conversion shall be a uniform price determined in accordance with 563.b.7 ...” 563b.3(10). Account holder ability to acquire newly issued shares is subject to a fairly complex system of restrictions intended to give account holders an opportunity to acquire an equity interest, without allowing them to obtain a windfall. These restrictions may be summarized as follows. Account holders are given “without payment, nontransferable subscription rights to purchase capital stock” up to an amount calculated according to the regulation. 563b.3(c)(2). Special limits are placed on the subscription rights of officers, directors and their associates, and supplemental subscription rights and other subscription rights are created for certain categories of persons. 563b.3(c)(3)-(5). “[A]ny shares of the converting insured institution not sold in the subscription offering shall either be sold in a public offering through an Underwriter or directly by the converting institution in a direct community marketing,” subject to Corporation approval and regulation. 563b.3(c)(6). The Corporation exercises supervision over the conversion process similar to that exercised by the Securities Exchange Commission (“SEC”) over the issuance of new stock. Pertinently here, 563b.3(h) provides that Manipulative and deceptive devices. In the offer, sale or purchase of securities issued incident to its conversion, no insured institution, or any director, officer, attorney agent or employee thereof, shall: (1) Employ any device, scheme, or artifice to defraud, or (2) obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (3) engage in any act, transaction, practice, or course of business which operates or would operate as a fraud or deceit upon a purchaser or seller. This section tracks exactly the substantive language of SEC rule 10b-5, 17 C.F.R. 240.10b-5. Once the savings and loan’s board of directors has voted to convert, specified steps must be taken to complete an appropriate application and to inform members of the proposed plan of conversion. 563b.4. The decision to convert must be approved by the institution’s members. The Corporation regulates proxy solicitation and the voting process pursuant to 563b.5 and 6. The actual sale of securities must be “by means of a final offering circular which has been declared effective by the Corporation.” 563b.7(a)(3). Each order form through which stock is purchased “shall be accompanied or preceded by the final offering circular for the subscription offering or the public offering, as the case may be, and a set of detailed instructions explaining how to properly complete such order forms.” 563b.7(g)(2). While the Corporation reviews the price information in the offering circular before declaring the circular effective, it does not inquire into the accuracy of that information: “No representations may be made in any manner that such price information has been approved by the Corporation or that the shares of capital stock sold pursuant to the plan of conversion have been approved or disapproved by the [Board] or the Corporation or that the Board or Corporation has passed upon the accuracy or adequacy of any offering circular covering such shares.” 563b.7(d). For the purposes of this decision, there are three key facts to be kept in mind concerning this regulatory scheme. (1) The offering price is set by an independent appraiser based on the market value of the institution. (2) Sales are (a) to account holders through the subscription offering, (b) to members of the community through a community offering, or (c) to members of the public through an underwriter and public offering. (3) In each case, the sale must be by means of a final offering circular which states the price at which the stock may be ordered. Having laid that groundwork, we may now turn to plaintiffs’ allegations. II. PLAINTIFFS’ CLAIMS Plaintiffs allege that First Federal was converted from a mutual to a stock savings and loan in March of 1986. Plaintiffs have sued First Federal and various named officers and directors (the “Individual Defendants”) for fraud in connection with that conversion. Taken together, the various named plaintiffs bought stock pursuant to the offering methods discussed above: subscription and community offering, and public offering. Proxy materials were used in connection with obtaining depositor approval of the conversion plan. A Subscription and Community Offering Circular and a Public Offering Circular were issued and utilized in connection with the offerings. Some of the plaintiffs also purchased stock on the open market. The gravamen of these actions is that the proxy statements and offering circulars failed to disclose material facts concerning problem real estate loans and other difficulties. It is asserted that such failure to disclose permitted First Federal to offer and sell stock which otherwise could not have been issued to the public or which would have been issued to the public at a dramatically lower price. First Federal’s financial problems have now become known, and those who bought the stock have taken a bath. The stock sold during the offerings at $10 per share is now worth much less, and may actually be essentially worthless. Plaintiffs assert a panoply of security law claims: section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b); Rule 10b-5 promulgated thereunder, 17 C.F.R. 240.10b-5; section 20 of the Exchange Act, 15 U.S.C. 78t; the Home Owner’s Loan Act of 1933, 12 U.S.C. 1461, et seq., and the rules and regulations promulgated thereunder, and the Arkansas Securities Act, Ark.Code Ann. 23-42-101, et seq. By means of an Amended Complaint, one of the named plaintiffs also asserts a claim under section 12(2) of the Securities Act of 1933, 15 U.S.C. 77l(2). III. DISMISSAL STANDARD For purposes of these dismissal motions, all the well-pled averments in plaintiffs’ Complaints are taken as true. Plaintiffs’ Complaints should not be dismissed for failure to state a claim unless it appears beyond a doubt that the plaintiffs can prove no set of facts in support of their claims which would entitle them to relief. Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-102, 2 L.Ed.2d 80 (1957). IV. DEFENDANTS’ GROUNDS FOR DISMISSAL Defendants urge five grounds for dismissal of various of plaintiffs claims; all the claims are covered by at least one of these. Those grounds are: (1) Plaintiffs do not allege reliance on any misrepresentations or omissions supposedly made by defendants, nor have they properly alleged any of the surrogates which may take the place of reliance in a securities fraud action. (2) Plaintiffs do not plead fraud with the particularity required by Fed.R.Civ.P. 9(b). (3) The attempt of certain plaintiffs to plead a claim based on alleged misrepresentations contained in the proxy materials is outside this Court’s jurisdiction because it involves matters related to the Board’s approval of the conversion. As to the 12(2) claim, (4) plaintiffs do not allege the required privity between plaintiffs and defendants and (5) by exempting federally chartered banks from its strictures and not affording the same exemption to federally chartered savings and loans, section 12(2) violates the equal protection component of the Fifth Amendment’s Due Process Clause. A. LACK OF RELIANCE In a securities fraud case, as in fraud cases generally, it is ordinarily essential for a plaintiff to show reliance on the fraudulent statements or omissions of the defendant. A securities fraud cause of action includes as an element causation, which is usually demonstrated by showing the materiality of the statement and the reliance of the plaintiff upon it. See, e.g., Harris v. Union Electric Co., 787 F.2d 355, 362 (8th Cir.1986) cert. denied, 479 U.S. 823, 107 S.Ct. 94, 93 L.Ed.2d 45 (1986) (elements of a 10b-5 claim include “causation, often analyzed in terms of materiality and reliance”). The reason for the reliance requirement is obvious: the plaintiff seeks to recover for the injury defendant’s statements have done to that plaintiff. If the plaintiff has taken no action in reliance on a particular statement, then the truth or completeness of that statement is of no consequence to the plaintiff. Plaintiffs in these actions do not allege that they directly relied on any statement by any of the defendants (including any statements or omissions in the proxy materials or the offering circulars) in purchasing First Federal stock. Instead, plaintiffs contend that they are entitled to a presumption of reliance under either of two theories: (1) this is a case involving primarily defendants’ failure to state material facts and (2) the “fraud on the market” theory is applicable in this case. These contentions will be taken in that order. 1. Omissions The courts have recognized an exception to the reliance requirement in cases where the plaintiff alleges that the defendant omitted to disclose material facts, rather than that the defendant affirmatively misrepresented material facts. This exception is justified on the grounds that it will ordinarily be impossible for a plaintiff to prove that he relied on the absence of disclosure. It was adopted by the Supreme Court in Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 153-54, 92 S.Ct. 1456, 1472, 31 L.Ed.2d 741 (1972): Under the circumstances of this case, involving primarily a failure to disclose, positive proof of reliance is not a prerequisite to recovery. All that is necessary is that the facts withheld be material in the sense that a reasonable investor might have considered them important in the making of this decision. The Court has explained that in Affiliated Ute, “we ... dispensed with a requirement of positive proof of reliance, where a duty to disclose material information had been breached, concluding that the necessary nexus between the plaintiffs’ injury and the defendant’s wrongful conduct had been established.” Basic, Inc. v. Levinson, 485 U.S. 224, 108 S.Ct. 978, 989, 99 L.Ed.2d 194 (1988). The plaintiff need only prove materiality of the omitted fact to receive the benefit of the presumption. “An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding” whether to purchase stock. TSC Industries v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 2132, 48 L.Ed.2d 757 (1976). “Put another way, there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information available.” Id. (TSC was a proxy solicitation case, but the definition of materiality there adopted has been applied equally to stock purchases. Basic Inc., 108 S.Ct., at 983 (10(b) and 10b-5); Austin v. Loftsgaarden, 675 F.2d 168, 176 n. 17 (8th Cir.1982) (all securities laws).) Defendants do not now deny that the omissions plaintiffs allege are material. Instead, they claim that plaintiffs primarily allege misrepresentations rather than omissions. This distinction is made crucial by the applicable Eight Circuit precedent. Of the several Eighth Circuit cases discussing the Affiliated Ute presumption, two frame the issue in this case and also form the foundations for the parties’ respective claims. These are Vervaecke v. Chiles, Heider & Co., 578 F.2d 713 (8th Cir.1978) and Harris v. Union Electric Co., 787 F.2d 355 (8th Cir.1986). Defendants’ argument rests almost entirely on their reading of Vervaecke, in which the Court refused to give the plaintiff the benefit of the Affiliated Ute presumption because it found that plaintiff's “chief complaint concerned alleged material misrepresentations, and omissions in the nature of misrepresentations, in two specific documents, the 1973 and 1976 offering statements which accompanied the respective bond offerings.” 578 F.2d, at 717. “Omissions in the nature of misrepresentations,” the Court explained, include “misleading statements” and “half-truths.” 578 F.2d, at 717 n. 2. Vervaecke is, apparently, still the Eighth Circuit’s basic exposition of the circumstances under which Affiliated Ute does and does not apply, so it will bear close study. On the other hand, its discussion of the key points is terse to the point of obscurity, and understanding the Court’s analysis depends, at least partially, on careful attention to its use of italics. Vervaecke affirms a summary judgment based principally on the complaint, and more particularly on the following portion of the complaint, which the Court set forth at 578 F.2d, at 717-18, with its own added emphasis: 13. The Defendants, singularly and in concert, by act and omission, prepared, reviewed, tolerated and distributed Offering Statements to Plaintiff and to those individuals who originally purchased such Bonds, which contained untrue statements of material facts and omitted to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made not misleading, which operated as a fraud and deceit on each purchaser in the manner and form set forth below: (a) The untrue statements of material facts contained in the Offering Statement included the following: ife ‡ * $ $ sj« (b) The material facts which the Defendant omitted to state which were necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, included the following: sje $ $ * * * Based on the italicized language, the Court concluded that “[tjhough other theories of this case might have been devised, we find that the thrust of what [plaintiff] actually pleaded was the use of fraudulent misstatement and omission within the four corners of an offering prospectus which mislead him and the other bond purchasers.” 578 F.2d, at 718 (emphasis in original). “We conclude that this is not a nondisclosure case, and will not compare the facts here with the facts in Affiliated Ute or with that case’s frame of reference.” 578 F.2d, at 718 n. 4. Defendants would read Vervaecke so as to prevent application of Affiliated Ute whenever the alleged omissions were from a written document, or to mean that whenever something has been said about a subject, any omissions to state other facts about the subject would be deemed misrepresentations. These readings find little support in logic, and not much in Vervaecke itself. Rather, what the Court in Vervaecke appears to have said is that the plaintiff there was mainly complaining about affirmative misrepresentations, and that whatever omissions were included in his complaint were omissions to make statements which would have exposed the affirmative misrepresentations as being untrue. Thus, if we add a clarifying word, the key language from the complaint was construed by the Court to mean that the Offering Statement included “untrue statements of material facts” and that the Offering Statement omitted to state facts which were “necessary in order to make the [untrue] statements made ... not misleading.” Defendants themselves provide the key to the Vervaecke puzzle when they observe that “[c]ertainly, every misrepresentation contains an omission in failing to state those facts which would have prevented the statement from being considered a misrepresentation.” What the decision means is that if the only omissions alleged are failures to state facts which would have prevented the affirmative misrepresentation from being considered a misrepresentation, then the omissions are in the nature of, or are part and parcel of, the misrepresentation. The opinion itself may not be crystal clear on this point, but cases from other courts have so read it. That reading is also the only one consistent with Harris, 787 F.2d 355. The few opinions from outside the Circuit which have explained Vervaecke have all construed it thus. In Lipton v. Documation, Inc., 734 F.2d 740, 743 (11th Cir. 1984), cert. denied 469 U.S. 1132, 105 S.Ct. 814, 83 L.Ed.2d 807 (1985), the Court understood Vervaecke to stand for the proposition that there is “no presumption of reliance where new issues are involved and claims are based on affirmative misrepresentations.” (Emphasis added.) Similarly, the Court in Grossman v. Waste Management, Inc., 589 F.Supp. 395, 409 (N.D.Ill. 1984) summarized Vervaecke as holding that “[s]ince the Affiliated Ute presumption of reliance exists primarily because of the practical impossibility of proving reliance where no statements are made, its underlying rationale does not logically apply in a case in which the “omissions" are the type that can be said to exist only because of other, positive statements the company has made.” (Emphasis added.) Accord, Rowe v. Maremont Corp., 650 F.Supp. 1091, 1105 (N.D.Ill.1986), aff'd 850 F.2d 1226 (7th Cir.1988). Courts within the Eighth Circuit are generally in accord. The allegations and circumstances in In re McDonnell Douglas Corp. Securities Litigation, 587 F.Supp. 625, 626-27 (E.D.Mo.1983) were closely analogous to those in this case. The Court concluded that “plaintiffs allegations and deposition testimony, as well as the relevant documents, indicate that the claims primarily focus on defendants’ alleged failure to disclose material information. Thus, the Ute exception of reliance applies here.” 587 F.Supp., at 628. In Dekro v. Stern Brothers, 540 F.Supp. 406 (W.D.Mo.1982), the Court rejected defendant’s claim that “the presence in the offering circulars of some references” to a problem project made the case one of misrepresentation. “It would defeat the flexible, remedial purposes of the federal securities laws to deny the plaintiffs the use of the Affiliated Ute presumption when they allege wholly inadequate disclosure of information concerning” the project. 540 F.Supp., at 411 n. 3. Vervaecke was distinguished, among other grounds, on the basis that “Vervaecke had pleaded a typical 10b-5 case of misrepresentation, even though other theories of the case might have been devised; ... Plaintiff here has pleaded an omissions theory, and this court will not convert it into a case of misrepresentation, just as the Vervaecke court would not convert a misrepresentation theory into one of omission.” 540 F.Supp., at 412. (Emphasis in original.) But see Gilbert v. Woods Marketing, Inc., 454 F.Supp. 745, 749 (D.Minn.1978) (“Each of them charges defendants with making implications contrary to fact or statements conveying deceptive half-truths. None of the allegations involves a complete failure to refer to a particular material fact____ the plaintiffs complain of misstatements and failures to convey complete pictures. Consequently, each plaintiff will be obliged at trial to establish his or her reliance on the alleged misrepresentations.”) The final indication that this Court’s interpretation of Vervaecke is correct will be found in the Eighth Circuit’s own decision in Harris, 787 F.2d 355, which plainly cannot be reconciled with defendants’ proposed reading of Vervaecke. In Harris, defendant issued bonds, then called those bonds prior to maturity. The call resulted in a sharp drop in the value of the bonds and plaintiffs, some of the bond-purchasers, sued. They claimed among other things that “the prospectus for the ... Bonds misrepresented and omitted material facts regarding the call-protection provisions of the bond contract.” 787 F.2d, at 360. In affirming a verdict in plaintiffs’ favor, the Court reviewed the prospectus and concluded that it is ambiguous and misleading in that it omits material facts concerning the call protection____ The prospectus is misleading in that it does not adequately disclose the authorization [for lower cost refunding at special redemption prices], while giving the impression that refunding the bonds at a lower rate of interest before March 1, 1985 is prohibited____ [A specified provision] renders the premium price list [in the prospectus] meaningless and misleading, since it represents prices that would never be paid. Finally, the prospectus is misleading in that it fails to disclose [defendant’s] right to directly call the bonds____ The jury could reasonably have found that the prospectus is misleading and ambiguous in that it omits material facts that would have adequately disclosed the call protection of the bonds. 787 F.2d, at 364-65. After a further review of the evidence, the Court reiterated that “the plaintiffs produced sufficient evidence for the jury to have found that the prospectus is ambiguous and misleading in that it omitted material facts that would have adequately disclosed [defendant’s] right to call the bonds, in violation of Rule 10b-5(b).” 787 F.2d, at 365-66. On the question of causation, the Court concluded that “[b]ecause the plaintiffs’ complaint consists primarily of allegations of a failure to adequately disclose the call-protection rights, reliance in this case can be inferred from materiality.” 787 F.2d, at 367. See also Barnes v. Resource Royalties, Inc., 795 F.2d 1359 (8th Cir.1986), where, as the district court explained, “[p]laintiff contended] that defendants misrepresented and omitted certain material facts concerning the exercise of plaintiff’s option and subsequent purchase of Resource Royalties shares. Primarily plaintiff argue[d] that defendants misrepresented themselves as the seller whereas [a third party] was the actual seller, that defendants failed to disclose that the monies paid for the shares were never invested in Resource Royalties, and the defendants failed to disclose that [one of the defendants] had been a respondent in administrative hearings in 1972 in Missouri and Oklahoma.” 610 F.Supp. 499, 504 (E.D.Mo.1985). The Court of Appeals reversed a judgment for the defendant based on non-reliance, finding that plaintiff “correctly argues that because his section 10(b) cause of action involves primarily a failure to disclose, he was not required to show reliance.” 795 F.2d, at 1367. “Because the district court found that the omissions were material, [plaintiff] is entitled to a presumption of reliance.” Id. With the relevant law in mind, it is now time to turn to plaintiffs’ allegations in order to ascertain whether they assert primarily affirmative misrepresentations (including half-truths and misstatements), or omissions so as to give rise to the Affiliated, Ute presumption of causation. There is no substitute for examining the precise language of the Complaint in order to determine what it is that plaintiffs complain of. See Defendants' Brief in Support, at 9-10 (reviewing Complaint paragraphs 42-51); Plaintiffs’ Memorandum in Opposition, at 31-4 (same). The key paragraphs may be summarized as follows: 42. The offering circulars disclosed that during a recent Board examination of First Federal, the examiner expressed serious concerns regarding certain loan underwriting and lending policies and procedures of First Federal, but the offering circulars and proxy statement did not disclose additional listed material facts about those concerns and about the questioned policies and procedures. 43. The offering circular disclosed that First Federal’s ratio of Scheduled Items to specific assets exceeded the limits of 2.5% set by the Board, but the offering circulars and the proxy statement did not disclose additional listed material facts about that ratio and the regulatory consequences of that ratio. 44. The offering circulars and proxy statement failed to disclose a problem in First Federal’s loan to value ratio in a large percentage of its commercial real estate loans because many properties were overvalued. 45. The offering circulars and the proxy statement failed to disclose that First Federal’s reserves were inadequate to cover expected losses. 46. Defendants wrongfully failed to disclose that First Federal’s earnings would deteriorate as a result of loan rewriting and modification procedures then contemplated and in process. 47. Defendants wrongfully failed to disclose that First Federal’s ratio of Scheduled Items to total assets was experiencing devastating deterioration which would accelerate in the future. 48. Defendants wrongfully failed to disclose that First Federal’s loan delinquency rates would continue to escalate dramatically, and such disclosures as were made failed to evidence the full extent of the delinquencies. 49. Defendants wrongfully failed to disclose that although First Federal’s controls and operating procedures were changed as a result of the Board’s investigation in 1985, the lack of proper controls in the period preceding the investigation had caused defendants to extend commercial real estate loans in amounts which materially impaired the reported value of First Federal’s loan receivables, which impairment was neither corrected nor disclosed by the reported prospective alterations in controls. 50. The offering circulars and the proxy statement failed and omitted to adequately disclose the effect of the fact that the Board required First Federal to change its estimates of the useful life of the excess of cost over fair value of net assets acquired in business combinations. 51. In the offering circulars, First Federal stated that based upon regulatory accounting principles, it had a regulatory net worth as of September 30, 1985, of $86.6 million, or approximately $40.3 million in excess of that required by the Board, but the offering circulars failed to disclose that the Board had placed limitations on the purposes for which certain of its assets could be counted towards net worth. 52. The enumerated failures to disclose are a result of a scheme to defraud. On their face, these allegations all refer to failures to disclose material facts. Defendants’ response is to label plaintiffs’ formulations “word games” because, defendants say, what is really complained of is the insufficiency or inadequacy of what was disclosed, not the complete failure to disclose. Defendants’ Brief in Support, at 9-10; Defendants’ Reply, at 9-11. Vervaecke and, most directly, Harris provide the answer to defendants’ arguments. In Vervaecke, as we have already seen, the Court apparently felt that the basic thrust of plaintiff’s claim was that defendants had made untrue statements, and that the alleged omissions were merely ancillary to the misrepresentations. 578 F.2d, at 717-18. In contrast, in Harris, the defendant had issued a prospectus which was “ambiguous and misleading in that it omit[ted] material facts concerning the call protection.” 787 F.2d, at 364. In other words, in Harris it was not what was said that was fraudulent, but what was not said, or what was not said adequately. Plaintiffs’ claims are more nearly akin to those in Harris than to those in Vervaecke. Plaintiffs do not allege that there were untrue statements in the offering circulars, so it cannot be contended that the thrust of the lawsuit is directed to affirmative fraudulent misrepresentations. To take an example, according to paragraph 42 the offering circulars say that the Board’s examiner had expressed serious concerns about First Federal’s loan underwriting and lending policies and procedures. Plaintiffs do not allege that this statement is untrue, or that it is misleading. Rather, they say that the statement is true, and provide a list of related facts which are, for purposes of this motion, deemed material and which were not disclosed. Nevertheless, defendants argue that what plaintiffs are asserting in paragraph 42 is, “[i]n other words, allegations of misrepresentations.” Elsewhere, as to different paragraphs of the Complaint, defendants say that “[a]n inadequate disclosure is most certainly not a nondisclosure.” It is apparently defendants’ position that if the offering circular says anything at all about a subject, then any incompleteness of disclosure must be deemed a misrepresentation rather than a nondisclosure. That argument is foreclosed by Harris, where the prospectus did say something about call protection, but did not say enough. Defendants assert that Harris is “readily distinguishable” from this case. First, they claim that in that case “there was a complete failure to disclose the defendant’s right to recall the bonds within ten (10) years after their issuance.” Defendants’ Reply, at 9. The already quoted language from Harris establishes that this proposed distinction is entirely without merit, as does a review of the excerpts from the prospectus set forth at 787 F.2d, at 362-63. Defendants’ second proposed distinction, that in Harris the plaintiffs were not contending that the prospectus misrepresented the condition of the defendant company, whereas that is the clear thrust of plaintiffs’ Complaints in this case, is even less to the point. It is true that in one case the fact omitted was the nature of the call protection, and in the other case it is the financial condition of the company. This no doubt constitutes a difference between the cases, as does the fact that the defendant in one case was a utility and in the other is a savings and loan. Defendants do not suggest any relevance to these differences, and none occurs to the Court. The dispositive fact is that plaintiffs’ claims in both cases rest principally on alleged failures to disclose material facts. To conclude as to the Affiliated TJte presumption, taking only the allegations in the Complaint as the basis for decision, the Court holds that plaintiffs allege primarily a case of nondisclosure of material facts. As they have pleaded their case, plaintiffs are entitled to invoke a presumption that they relied on the material omissions asserted. Whether defendants will be able to rebut that presumption, as well as other questions under this head, will await another day. 2. Fraud-on-the-Market As an alternative basis for presuming reliance, plaintiffs turn to the fraud-on-the-market theory. This theory was recently accepted as valid under the proper set of facts by the Supreme Court in Basic Inc. v. Levinson, 485 U.S. 224, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988). Basic Inc. provides sufficient legal framework for the purposes of ruling on these dismissal motions so that, with certain exceptions, it is not necessary to examine the many cases and voluminous body of scholarly works developing and explaining the notion of fraud on the market as a substitute for actual reliance. “Succinctly put, The fraud on the market theory is based on the hypothesis that, in an open and developed securities market, the price of a company’s stock is determined by the available material information regarding the company and its business____ Misleading statements will therefore defraud purchasers of stock even if the purchasers do not directly rely on the misstatements____ The causal connection between the defendants’ fraud and the plaintiffs’ purchase of stock in such a case is no less significant than in a case of direct reliance on misrepresentations.” Basic Inc., 108 S.Ct., at 989-90, quoting Peil v. Speiser, 806 F.2d 1154, 1160-61 (3d Cir.1986). As the Court observed, the driving reason for use of the fraud-on-the-market theory is that it is otherwise difficult to certify a class of defrauded stock purchasers (or sellers). “Requiring proof of individualized reliance from each member of the proposed plaintiff class effectively would have prevented [plaintiffs] from proceeding with a class action, since individual issues then would have overwhelmed the common ones.” Id., 108 S.Ct., at 989. While acknowledging that “reliance is an element of a Rule 10b-5 cause of action” because “[r]eliance provides the requisite causal connection between a defendant’s misrepresentations and a plaintiff’s injuries,” the Court warned that “[t]here is, however, more than one way to demonstrate the causal connection.” Id. An additional factor considered by the Court is that “[t]he modern securities markets, literally involving millions of shares changing hands daily, differ from the face-to-face transactions contemplated by the early fraud cases.” Id., at 989-90. The consequences of this shift to an impersonal market were explained as follows: In face-to-face transactions, the inquiry into an investor’s reliance upon information is into the subjective pricing of that information by that investor. With the presence of a market, the market is interposed between seller and buyer and, ideally, transmits information to the investor in the processed form of a market price. Thus the market is performing a substantial part of the valuation process performed by the investor in a face-to-face transaction. The market is acting as the unpaid agent of the investor, informing him that given all the information available to it, the value of the stock is worth the market price. Id., 108 S.Ct., at 990, quoting In re LTV Securities Litigation, 88 F.R.D. 134, 143 (N.D.Tex.1980). These facts weighed in favor of some modification of the traditional reliance requirement, at least in some instances. The particular modification adopted by the courts below in Basic Inc. was a presumption of reliance on the market price. These courts “accepted a presumption, created by the fraud-on-the-market theory and subject to rebuttal by [defendants], that persons who had traded Basic shares had done so in reliance on the integrity of the price set by the market, but because of [defendants’] material misrepresentations that price had been fraudulently depressed.” Id., 108 S.Ct., at 990. This presumption was consistent with “considerations of fairness, public policy, and probability, as well as judicial economy.” Id. It was consistent with the underlying purposes of Rule 10b-5 litigation. Id., 108 S.Ct., at 990-91. Furthermore, “[t]he presumption is also supr ported by common sense and probability. Recent empirical studies have tended to confirm Congress’ premise that the market price of shares traded on well-developed markets reflects all publicly available information, and, hence, any material misrepresentations.” Id., 108 S.Ct., at 991. In short, “[a]n investor who buys or sells stock at the price set by the market does so in reliance on the integrity of that price.” Id., 108 S.Ct., at 991-92. It is important to bear in mind that the presumption created by the fraud-on-the-market theory is rebuttable. “Any showing that severs the link between the alleged misrepresentation and either the price received (or paid) by the plaintiff, or his decision to trade at a fair market price, will be sufficient to rebut the presumption of reliance.” Id., 108 S.Ct., at 992. Defendants advance a three pronged attack on plaintiffs’ efforts to rely on the fraud-on-the-market theory here: (1) the presumption should not be allowed in cases of newly issued securities; (2) the presumption should not be allowed in cases arising under Rule 10b-5(b), and plantiffs do not adequately allege claims under Rules 10b-5(a) or (c); and (3) the presumption should not be allowed because the securities were not worthless when issued. (a) Newly Issued Securities Defendants first argue that the fraud on the market theory is inapplicable because the First Federal stock purchased was, at least as to some purchases by some plaintiffs, a new issue. Consequently, as to these purchases, there was no established market for the stock and there could be no reliance on the general integrity of the market price. In fact, defendants argue, the initial offering price is not set by the market at all, but is instead set by an independent appraiser pursuant to the 563b.7 appraisal mechanism discussed earlier in this Order. This argument may perhaps be characterized as half-hearted. The most that defendants say is that “some commentators have criticized the extension of the fraud on the market theory to cases involving newly issued securities” and that the Eighth Circuit has not expressly recognized its applicability in those circumstances. Defendants would perhaps concede that the real point they are making is that when there is no open and developed market for a security, as there would not be in the case of a new issue, then it makes no sense to talk of the market setting the price of a stock. The conclusion defendants wish to draw from this fact, that fraud on the market may never be used to create a presumption of reliance in the case of new issues, is answered by a case defendants themselves cite: “[t]here are arguably several fraud on the market theories, or at least several different categories of cases in which it may apply.” Nelson v. Craig-Hallum, Inc., 659 F.Supp. 480, 483 n. 2 (D.Minn. 1987). These categories include at least (1) manipulation of actively traded stock, sometimes called fraud on the open market, (2) fraudulent proxy statements designed to create an unfair exchange ratio in a forced merger situation and (3) newly issued stocks, sometimes called fraud on an undeveloped market. Id. Because there is no developed market for a new issue, it is true that the fraud on the market theory must be applied in a different way; this does not mean that it cannot be applied at all. See Shores v. Sklar, 647 F.2d 462 (5th Cir.1981) (en banc), cert. denied, 459 U.S. 1102, 103 S.Ct. 722, 74 L.Ed.2d 949 (1983). (The requisites for application of the fraud on the market theory to newly issued securities are discussed more fully below.) (b) Not Rule 10b-5(b) Defendants next argue that fraud on the market cannot be used to show causation in a new-issue case brought under Rule 10b-5(b), but only under Rules 10b-5(a) and (c). Furthermore, defendants contend, plaintiffs have not sufficiently alleged violations of Rules 10b-5(a) and (c), so they may not rely on the fraud on the market theory at all. It should be noted that some of the plaintiffs claim that they bought stock on the open market, after the public offering. As to those purchases, 10b-5(b) would be applicable and plaintiffs could rely on the presumption arising from the fraud-on-the-market theory. Basic Inc., 108 S.Ct., at 983 n. 6. Turning to the merits of the issue, the Court begins with the observation of the Third Circuit Court of Appeals that defendants’ argument “suffers from the difficulty of trying to pigeonhole a particular rule 10b-5 action into only one of the three paragraphs in rule 10b-5.” Sharp v. Coopers & Lybrand, 649 F.2d 175, 189 n. 19 (3d Cir.1981), cert. denied 455 U.S. 938, 102 S.Ct. 1427, 71 L.Ed.2d 648 (1982). However, defendants are correct, and plaintiffs implicitly concede, that the fraud-on-the-market theory may only be applied to new issues under Rules 10b-5(a) and (c), not under Rule 10b-5(b). The principle case is Shores, 647 F.2d 462, where the Court explained that, essentially for reasons already discussed, a plan-tiff may not assert that misrepresentations and omissions (Rule 10b-5(b)) affected the market price of the stock when there is as yet no market. However, the Court continued, a plaintiff could rely on fraud-on-the-market to support a claim alleging a fraudulent marketing scheme under Rules 10b-5(a) and (c). Such a claim would reach a scheme “so pervasive that without it the issuer would not have issued, the dealer would not have dealt in, and the buyer could not have bought [the securities] because they would not have been offered on the market at any price.” Id., 647 F.2d, at 464 n. 2. Plaintiff’s “burden of proof will be to show that (1) the defendants knowingly conspired to bring securities onto the market which were not entitled to be marketed, intending to defraud purchasers, (2) [plaintiff J reasonably relied on the [securities’] availability on the market as an indication of their apparent genuineness, and (3) as a result of the scheme to defraud, he suffered a loss.” 647 F.2d, at 469-70 (emphasis added). Simply looking at the averments, which is all that a court should do in resolving a motion to dismiss, and giving the plaintiff the benefit of every reasonable inference, which is the appropriate state of mind, this Court cannot comfortably say that the Complaint alleges only the omission to state material facts in violation of Rule 10b-5(b). The averments can reasonably be read to also allege that defendants employed a device, scheme or artifice to defraud (Rule 10b-5(a)) and that defendants engaged in acts, practices, or courses of business which operated or would operate as a fraud or deceit upon any person (Rule 10b-5(c)). What plaintiffs say is that the defendants converted a financially troubled savings and loan, what plaintiffs call a “sick” bank, to the stock form of ownership. In so doing, it is alleged, the defendants concealed the financial problems so as to be able to sell stock which would otherwise have been unmarketable. Under plaintiffs’ theory, the entire stock offering was a fraud, and the whole process by which the conversion was accomplished was a calculated effort to raise money to keep the savings and loan afloat. “Rather than containing the entire fraud, [the fraudulent proxy materials and offering circulars were] assertedly only ... step[s] in the course of an elaborate scheme.” Shores, 647 F.2d, at 468. The proxy materials were supposedly intended to persuade the account holders to approve the conversion and the offering circulars to persuade people to buy the stock. Of course, the court has no idea whether plaintiffs can prove any of this, but it is what they have alleged, and they should at least be given the opportunity. Defendants are correct when they note that mere conclusory allegations of a fraudulent scheme do not adequately plead a claim, and if the particular paragraphs on which defendants focus were all that plaintiffs said about these issues, plaintiffs would probably not have complied with Fed.R.Civ.P. 8, much less Rule 9(b). But the summary paragraphs to which defendants point [Gitlin Complaint, paragraph 45; Hagerty Complaint, paragraphs 52, 57] merely state legal conclusions which plaintiffs believe can be drawn from the substantive averments in earlier paragraphs. The Court is persuaded that those other paragraphs, particularly when read in the tolerant light of a motion to dismiss, do allege “a comprehensive scheme beyond the making of the alleged misrepresentations and omissions.” Defendants’ Brief in Support, at 20. (c) Stock was not worthless As their final argument on this head, defendants contend that “[i]n cases involving newly issued securities, courts ‘have required a showing that the fraud resulted in the marketing of a wholly worthless security.’ ” Though defendants put the crucial language in quotation marks, they do not identify the source of the quotation, nor do they identify any court which has required “a showing that the fraud resulted in the marketing of a wholly worthless security.” What the courts have required the plaintiff to show, as indicated in the excerpts from Shores already quoted, is that the securities “would not have been offered on the market at any price.” This, for example, is the thrust of the discussion of Shores in Lipton, 734 F.2d, at 743-47 (“it is reasonable to allow recovery on the fraud on the market theory where the securities could not have been marketed but for the fraud”). There is a difference between a security which is “worthless” and a security which is “unmarketable.” Defendants would limit the scope of the fraud on the market theory in new issue cases to instances where the buyers bought a share of nothing, to sale-of-the-Brooklyn-Bridge cases. There is no warrant in precedent or logic for that result. For example, in Shores the bondholders received back about one-third of their investment upon liquidation of the company for whose benefit the bonds were sold. Clearly, the bonds were not “worthless.” However, if the allegations in Shores are true, it seems quite likely that the bonds were unmarketable at any price absent fraudulent concealment of the true state of the company. Securities may be unmarketable because they are too speculative, or because the prospects of the company look too dim. The securities might nevertheless have some worth, but that is not the question. To return once again to Shores, the company there might, despite all the objective indications, have turned out to be a slam-bang manufacturer of mobile homes. If that had been the case, securities issued in the company would have turned out to have substantial value. But the securities would likely have also been unmarketable when issued if all the relevant facts were disclosed, because it is unlikely that any investors would have been willing to take the chance. Similarly, in the case now before the Court, the savings and loan may have positive net worth, so that there would be some break-up value for stockholders, but yet its shares might have been unmarketable when issued had the alleged omitted facts been known because investors would not have taken the risk if they had known the true financial conditions. The shares would be unmarketable, though not worthless. See Ross v. Bank South, N.A., 837 F.2d 980, 1001-02 (11th Cir.1988) (bonds could be unmarketable even though all bondholders recovered their entire investment plus a small amount of interest). Once again, the Court must conclude that plaintiffs have alleged enough to entitle them to go forward. B. RULE 9(b) The Individual Defendants allege that plaintiffs do not plead the circumstances constituting fraud with particularity, as required by Fed.R.Civ.P. 9(b). This rule is a qualification of the ordinary Fed.R.Civ.P. 8(a) requirement that a plaintiff need only make a short and plain statement of the claim showing that the plaintiff is entitled to relief, and there is obvious tension between the two rules. On the one hand, defendants should not be subjected to unsubstantiated or baseless charges of fraudulent conduct, nor should they be required to respond to accusations so vague that defendants cannot meaningfully answer them. On the other hand, wrongdoers should not be allowed to hide behind walls of secrecy and those injured should not be stopped at the threshold because they know only the general outlines, and not the hidden details, of schemes and conspiracies. The task of the court in ruling on a 9(b) motion is to balance those two competing interests. See generally, Form 13, Fed.R. Civ.P.; 5 Wright and Miller, sections 1297-98; Note, Pleading Securities Fraud with Particularity Under Rule 9(b), 97 Harv.L. Rev. 1432 (1984). As a preliminary matter, it should be noted that Rule 9(b) allows “[mjalice, intent, knowledge, and other condition of mind” to be averred generally. Consequently, the focus of an inquiry under Rule 9(b) is the sufficiency of the factual allegations which are supposed to show the fraud. Wright and Miller provide the following overview of the Rule’s requirement: The sufficiency of a particular pleading under Rule 9(b) depends upon a number of variables. For example, the degree of detail required often turns on the context in which the fraud is alleged to have occurred____ The sufficiency of a fraud pleading also varies with the complexity of the transaction in question. When the issues are complicated or the transactions cover a long period of time, courts tend to require less of the pleader____ Perhaps the most basic consideration in making a judgment as to the sufficiency of a pleading is the determination of how much detail is necessary to give adequate notice to an adverse party and enable him to prepare a responsive pleading. 5 Wright and Miller, sec. 1298, at 410-415. Particularly relevant in this case are those decisions which recognize that a plaintiff may not be able to plead the precise role of each defendant when a group of defendants has acted in concert to cause the complained of injury. Under those circumstances, it is appropriate to plead the actions of the group and leave development of individual liability questions until some discovery has been undertaken, rather than to dismiss the plaintiff because he does not have what may be concealed information. Typical of these decisions is Haroco v. American National Bank and Trust Co. of Chicago, 747 F.2d 384, 405 (7th Cir. 1984), aff’d 473 U.S. 606, 105 S.Ct. 3291, 87 L.Ed.2d 437 (1985), a RICO case: the complaint adequately specified the transactions, the content of the allegedly false representations, and the identities of those involved. In addition, the identification of the transactions and the description of the alleged scheme to defraud put the defendants on fair notice of the time and place of the false representations. See also, e.g., Wool v. Tandem Computers, Inc., 818 F.2d 1433, 1439-40 (9th Cir.1987); Fondren v. Schmidt, 626 F.Supp. 892, 898 (D.Nev.1986); Banowitz v. State Exchange Bank, 600 F.Supp. 1466, 1469 (N.D.Ill. 1985); Somerville v. Major Exploration, Inc., 576 F.Supp. 902, 910-11 (S.D.N.Y. 1983); Pridgen v. Farmer, 567 F.Supp. 1457, 1459 (E.D.N.C.1983); Merrit v. Libby, McNeill & Libby, 510 F.Supp. 366, 373-74 (S.D.N.Y.1981); Pellman v. Cinerama, Inc., 503 F.Supp. 107, 111 (S.D.N.Y.1980); Denny v. Carey, 72 F.R.D. 574, 579 (E.D. Pa.1976); B & B Investment Club v. Kleinert’s, Inc., 391 F.Supp. 720, 727 (E.D.Pa. 1975); Burkhart v. Allson Realty Trust, 363 F.Supp. 1286, 1289 (N.D.Ill.1973). Defendants rely on Bennett v. Berg, 685 F.2d 1053, 1062 (8th Cir.1982), cert. denied, 464 U.S. 1008, 104 S.Ct. 527, 78 L.Ed.2d 710 (1983), for the proposition that “ ‘[circumstances’ include such matters as the time, place and contents of false representations, as well as the identity of the person making the misrepresentation and what was obtained or given up thereby.” As a general statement of a general rule, which is all the Court intended when the statement was made, this is beyond dispute. However, it does not constitute the whole universe of possible Rule 9(b) authority, nor does it set forth a make-or-break criterion for evaluating a fraud complaint in light of the Rule. Applying the Berg test, it is apparent plaintiffs allege that the defendants collectively decided to defraud the stock-buying public by selling shares in an ailing savings and loan, while concealing crucial facts which, if known, would have made the stock unmarketable. Plaintiffs have alleged the facts which evidence the fraudulent scheme for which they seek to recover, they have alleged with specificity such details as time, place and contents of false representations, and they have, within the context of the presumptions the law entitles them to plead, stated what was obtained or given up thereby. Defendants apparently contend that plaintiffs do not adequately allege “the identity of the person making the representation,” but it is doubtful that that requirement can be meaningfully applied to this case. Plaintiffs’ allegations are that the Individual Defendants, who are the persons in charge of the savings and loan, made a decision to market stock by means of concealment of the facts set forth in the Complaint. Short of pleading detailed evidence which is, in any event, almost certainly not available to plaintiffs at this time, it is hard to see what more plaintiffs can plead. Defendants’ claim that they cannot respond to the allegations rings somewhat hollow. They are alleged to have held certain positions with the savings and loan; they must know whether they did or did not. Given those positions, they were presumably familiar with the decision to convert the savings and loan, which must be among the most important events which can occur in the life of such an institution. Plaintiffs allege that each of the defendants approved that conversion, and each defendant should know whether that averment is true as to himself. The Individual Defendants should also have some idea whether most of the substantive factual allegations set forth in detail in the Complaint are true, and if they do not know, they can plead lack of knowledge. Fed.R. Civ.P. 8(b). Each of them either had something to do with the proxy materials and offering circulars alleged to contain the fraudulent omissions, or he did not. (These documents were adequately enough identified that defendants attached them to their motion to dismiss, so there is not the problem with knowing what statements are referred to that the Court found in Berg, 685 F.2d, at 1062.) If each Individual Defendant was involved with the materials, he either believes that the omissions were made, or he does not, and he can plead accordingly. (If he does not have any knowledge, he can plead that.) Most importantly, each of the Individual Defendants can respond on his own behalf to the claim that he participated in the collective scheme plaintiffs allege. Given the detail of plaintiffs’ averments, it is not unreasonable to expect each Individual Defendant to deny those allegations which he contends are either not true at all or are not true as applied to that particular Individual Defendant. To summarize the Court’s holding on the Rule 9(b) claim, plaintiffs have sufficiently apprised the Individual Defendants of the collective scheme defendants are alleged to have launched. There may have been no scheme, or some or all of the Individual Defendants may not have been involved in whatever scheme there may have been, but those are matters to be addressed after defendants have answered. They have enough information to allow them to do that. C. PROXY MATERIALS The Hagerty plaintiffs allege that the proxy statement issued by First Federal in obtaining approval of the plan to convert contained material omissions. Defendants contend that the regulation of conversions is placed exclusively in the Board, and that therefore “to the extent the Plaintiffs are challenging the Proxy materials or the plan to convert,” such allegations are exclusively within the jurisdiction of the Board. This is a somewhat obscure argument and, since it is alleged that the Offering Circular repeated the fraudulent omissions which supposedly tainted the proxy materials, it seems doubtful that it makes any difference which way the argument is decided. Nevertheless, it must be addressed. Defendants are correct that “to the extent the Plaintiffs are challenging the ... plan to convert,” this Court lacks jurisdiction. Three appellate decisions cited by the parties have all explained that a party whose real grievance is the plan to convert must press his claims with the Board, and that judicial review is in the Court of Appeals. Rembold v. Pacific First Federal Savings Bank, 798 F.2d 1307 (9th Cir. 1986), cert. denied 482 U.S. 905, 107 S.Ct. 2480, 96 L.Ed.2d 373 (1987); Craft v. Florida Federal Savings & Loan Association, 786 F.2d 1546 (11th Cir.1986); Harr v. Prudential Federal Savings and Loan Association, 557 F.2d 751 (10th Cir.1977), cert. denied 434 U.S. 1033, 98 S.Ct. 766, 54 L.Ed. 2d 780 (1978). Moreover, these cases are all unanimous in supporting the view that a party may not avoid this rule by attempting to dress up a challenge to the conversion plan as a securities fraud case. Rembold, 798 F.2d, at 1312; Craft, 786 F.2d, at 1553-54; Harr, 557 F.2d, at 754. Finally, the three decisions all either imply or expressly hold that a legitimate securities fraud claim is not pre-empted by the fact that the fraud occurred in connection with the conversion of a savings and loan. Rembold, 798 F.2d, at 1313; Craft, 786 F.2d, at 1554; Harr, 557 F.2d, at 754. Plaintiffs disavow any intention to challenge the plan of conversion, and defendants do not deny that securities fraud claims may be brought for omissions occurring in the Offering Circular, so the issue appears to be whether it is true that “to the extent the Plaintiffs are challenging the Proxy materials ... said allegations must be dismissed.” Once it is understood what defendants are claiming, it is apparent that their contentions should only be accepted if the law absolutely compels that result. Appellate review of the Board’s approval of a conversion plan is exclusively pursuant to 12 U.S. C. 1730a(k), which calls for an aggrieved party to contest the Board’s order in a Court of Appeals, and to file its petition for review within thirty days of the date of publication of notice of the challenged order. It is apparently defendants’ contention that this mechanism is the on