Facts Within the Defendant's Control

Facts Within the Defendant's Control

Rule 9(b) requires a party alleging fraud to state with particularity the circumstances constituting the fraud, and apart from its allowance for conditions of mind, its text excuses nothing.¹ Courts have supplied an exception anyway. They may relax Rule 9(b) when the plaintiff makes an adequate showing that necessary information is within the defendant's control, so that particularized pleading cannot be fully accomplished before discovery.²

The demand for particularity rests on an assumption about access. A buyer who took part in a transaction can be expected to know what statement induced her reliance and why it was incorrect, so it is fair to make her plead those facts. She cannot be expected to know what the seller was thinking.³ Rule 9(b) therefore assumes that, for certain kinds of facts, plaintiff and defendant have equal access to the information, and that assumption cannot be presumed in other civil actions.⁴ When it fails in a fraud case because the key facts sit only on the defendant's side, a demand for detail asks the plaintiff for what it cannot supply.

Two accommodations follow from that assumption, and they differ in source and scope. The second sentence of Rule 9(b) appears in the rule's text and covers one category of fact, a person's state of mind.⁵ The relaxation in this unit appears nowhere in the text, reaches the circumstances of the fraud themselves, and depends on a showing the plaintiff must make in the complaint.⁶ Both answer the same problem: an outsider can say what the defendant told the outsider, but cannot see what the defendant said to others, wrote down, or planned.

The difficulty is one of timing. The facts at issue are typically in the defendant's exclusive control, and the plaintiff first finds them through discovery after pleading, not before.⁷ A court that demanded them in the complaint would dismiss the claim before discovery, the one tool able to produce them, had begun. It would also penalize the plaintiff for the defendant's possession of the facts.

Corporate fraud shows the difficulty most sharply. Plaintiffs cannot be expected to have personal knowledge of the details of corporate internal affairs, and so, as the court explained in In re ValueVision, courts have relaxed the rule when factual information is peculiarly within the defendant's knowledge or control.⁸ The relaxation there postponed the plaintiffs' burden without removing it. The plaintiffs alleged that the defendants intended from the beginning to pursue only junk bond financing, and the court cautioned that to survive summary judgment they would have to produce sufficient facts to support that allegation.⁹ The sequence keeps the exception from becoming a free pass: leniency at the pleading stage, proof at summary judgment.

The Seventh Circuit's version has two clauses, as the court states it in Ridgelawn Cemetery Association, Inc. v. Granite Resources Corporation. When the details of the fraud are within the defendant's exclusive knowledge, the specificity requirements are less stringent, but the complaint must plead the grounds for the plaintiff's suspicions of fraud.¹⁰ The first clause grants the relief and the second sets the limit. Without the second, a plaintiff could file first and look for fraud afterward. With it, the plaintiff who invokes the exception must show a reason for suspecting fraud and cannot simply declare the facts to be in someone else's hands.

Other courts reach the same limit in different words. In Greenstone v. Cambex Corp., the court cited Second and Third Circuit decisions holding that, even for matters peculiarly within the opposing party's knowledge, the pleader must allege that the necessary information lies within the defendants' control and must accompany the allegations with a statement of the facts on which they are based.¹¹ Control alone cannot carry the load. What executives knew, and when, is a fact about the executives' own affairs. If control excused detail, every investor who watched a forecast miss could plead that the officers knew and stop there, and the first sentence of Rule 9(b) would do no work in claims built on knowledge. The statement of facts is what separates a suspicion with a footing from a conclusion drawn backward from a bad result.

Securities litigation supplies a familiar setting. Rule 10b–5 is the leading anti-fraud weapon in the federal securities laws, its reach embraces fraud in the largest public corporations as well as the smallest close corporations, and investors enforce it through individual and class actions.¹² The plaintiff in O'Connor & Associates v. Dean Witter Reynolds, Inc. asked for the relaxation on a single missing detail. The defendants claimed the complaint lacked specificity only on which insiders tipped which customers or representatives, and O'Connor answered that the question had to be developed through discovery, since by the nature of the wrong alleged it had no way yet of learning the answer.¹³ It added that dismissing the complaint under Rule 9(b) would frustrate the policies underlying the antifraud provisions of the federal securities law where the precise information lacking was peculiarly within the defendants' knowledge.¹⁴ The dispute had narrowed to the one fact only the defendants could know, which is the posture in which the relaxation does its best work.

A complaint that offers a belief without facts fails. In Druyan v. Jagger, the court applied the Second Circuit rule that when a plaintiff makes fraud allegations on information and belief, meaning on what she has been told or infers rather than knows first-hand, as to matters peculiarly within the opposing party's knowledge, she must accompany them with a statement of the facts on which the belief is founded.¹⁵ The plaintiff alleged on information and belief that the defendants were aware of Jagger's sore throat and that he would choose not to perform at the Concert, and the court noted that she did so “without providing an iota of factual basis for her belief.”¹⁶ What the performer's health and plans were is the kind of matter the defendants would know, and that is the setting the relaxation addresses. It still did not rescue the pleading, because the complaint never said why the plaintiff thought the defendants knew.

The relaxation operates alongside the ordinary plausibility requirement and does not displace it. A complaint must contain sufficient factual matter, accepted as true, to state a claim for relief that is plausible on its face, and a claim has facial plausibility when the plaintiff pleads factual content that allows the reasonable inference that the defendant is liable for the misconduct alleged.¹⁷ Rule 9(b)'s particularity requirement may be relaxed in addition, but only where the plaintiff makes an adequate showing that necessary information is within the defendant's control, so that particularized pleading cannot be fully accomplished before discovery.¹⁸ A plaintiff who already holds the information, from earlier litigation or from its own files, cannot show that inability. G-I Holdings, Inc. v. Baron & Budd illustrates the line: the plaintiff there argued that the dates and times of the allegedly fraudulent conduct were exclusively within the defendants' knowledge, and the court refused to treat that argument as a reason to plead generally.¹⁹

To treat information asymmetry as a general excuse from detail is to misread the doctrine. The relaxation reduces how much the plaintiff must say about the hidden facts. The plaintiff still owes the facts it does possess, an allegation that the remaining information is in the defendant's control, and the grounds for its suspicion.