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FRANK E. BASIL, INC. v. LEIDESDORF

May 16, 1989

FRANK E. BASIL, INC.; GUINNESS FLIGHT TRUST CORPORATION, (GUERNSEY) LIMITED, as Trustee of Trust 320; MAURICE LENACK; ADELE LENACK; and JACK LENACK, Plaintiffs,
v.
ARTHUR D. LEIDESDORF; JOHN J. ROBINSON; ALLAN ESRINE; and (ITI) GLENDALE, INC., Defendants



The opinion of the court was delivered by: DUFF

 BRIAN BARNETT DUFF, UNITED STATES DISTRICT JUDGE:

 Frank E. Basil, Inc., the Guinness Flight Trust Corporation, and the Lenacks (Maurice, Adele and Jack) filed suit against Arthur D. Leidesdorf, John J. Robinson, Allan Esrine, and (ITI) Glendale, Inc. in this court on December 4, 1987. They amended their complaint on March 17, 1988, which this court dismissed for want of specificity on May 5. The plaintiffs filed their Second Consolidated Amended Complaint on July 14, 1988, and the defendants have made several motions to dismiss this one too.

 The suit concerns the sale of convertible income debentures by R.V. Finance Corporation, N.V. and Rio Verde Energy Corporation. These debentures were to pay 7.5% interest and carried a right to receive 2.5 cents per ton of coal mined from properties owned by Heather Mining Company, Inc., a wholly owned subsidiary of Rio Verde. The plaintiffs allege that Leidesdorf, a Florida citizen and chairman of the boards of both of the debenture-issuing companies, and Robinson, the president of the companies, retained Esrine and Glendale as agents and financial advisors for the companies in the sale. Esrine and Glendale prepared an analysis of the operations and financial performance of Rio Verde, describing how the debentures would work and what they would yield. This analysis allegedly contained false and misleading statements. Leidesdorf and Robinson then mailed the Esrine/Glendale analysis to prospective purchasers of the debentures, many of whom acted upon its information (as well as other materials, some of them allegedly fraudulent) to purchase debentures between November 1981 and February 1982.

 The Second Consolidated Amended Complaint (hereafter the "Complaint") consists of four counts. Count 1 is a claim of securities fraud under § 10(b) of the Securities Exchange Act of 1934 ("'34 Act"), 15 U.S.C. § 78j(b) (1982), and Rule 10b-5 issued thereunder, 17 C.F.R. § 240.10b-5 (1987). Count 2 is a claim under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962 (1982). Count 3 alleges fraud in violation of the Illinois Consumer Fraud and Deceptive Business Practices Act, Ill.Rev.Stat. ch. 121-1/2, Para. 262 (Smith-Hurd Ann. 1988 supp.), while Count 4 alleges common law fraud.

 Venue

 The first motion comes from Leidesdorf, who contends that venue is improper here. Leidesdorf is correct, in a sense. The strongest argument that this venue is proper stems from the '34 Act. The venue provision of the '34 Act reads in part:

 
Any suit or action to enforce any liability or duty created by this chapter or rules or regulations thereunder . . . may be brought in any . . . district [wherein any act or transaction constituting a violation of the '34 Act occurred] or in the district wherein the defendant is found or is an inhabitant or transacts business . . . .

 15 U.S.C. § 78aa. The plaintiffs concede that Leidesdorf is neither found in nor inhabits this district, and that he does not transact business here. They rely principally on § 78aa's provision for venue where "any act or transaction constituting a violation" of the '34 Act occurs in the district.

 When § 78aa speaks of "any act or transaction" constituting a violation, it does not mean any act. That act must be an act "'which represents more than an immaterial part of the allegedly illegal events.'" Bath Industries, Inc. v. Blot, 427 F.2d 97, 114 (7th Cir. 1970), quoting Puma v. Marriott, 294 F. Supp. 1116, 1120 (D.Del. 1969). The Complaint states that the following acts occurred in Illinois: (1) Leidesdorf and Robinson "enlisted the aid and assistance of Moshe Shaltiel, a broker whose principal place of business is in Chicago, Illinois . . . to identify and introduce the defendants to prospective purchasers of the Debentures, including [the] plaintiffs." Complaint, Para. 16. (2) The defendants transmitted false and misleading statements to Shaltiel, with the intent that Shaltiel pass them to the plaintiffs and others. One transmission was the mailing of the Esrine/Glendale analysis in 1981. The defendants allegedly sent the analysis "to Shaltiel in Chicago, and through Shaltiel to plaintiffs and other persons residing in this district and elsewhere . . . ." Id. at Para. 17. (3) Leidesdorf, Robinson, and Esrine misrepresented Rio Verde's having secured $ 4.5 million in outside financing "during the course of telephone conversations with Shaltiel in Chicago;" Shaltiel passed these misrepresentations to the Lenacks and Guinness. *fn1" Id. at Para. 21. Shaltiel passed on other misrepresentations as well. Id. at Paras. 22-24.

 None of these acts forms a material part of the scheme that is alleged to have violated the '34 Act. The essence of the plaintiffs' '34 Act claims is that the defendants misrepresented certain facts to the plaintiffs. How the defendants got to know the plaintiffs, as alleged in (1) above, is immaterial to this scheme. Similarly, the route which the misrepresentations took is immaterial to the scheme for purposes of venue under the '34 Act. The plaintiffs never suggest that Shaltiel was privy to the defendants' misrepresentations. There are hints that he mailed fraudulent materials to persons in this district, but none of those persons is a plaintiff here, nor do the plaintiffs suggest how a mailing to other persons, some of whom may live in this district, was a material part of a scheme to defraud them.

 The plaintiffs cite many cases in which a single mailing from or to a district helped establish venue in that district, but in all of these cases the mailing was one of many factors that made for proper venue. See Lefever v. Vickers, 613 F. Supp. 352, 353 (D. Colo. 1985) (venue existed where defendant wrote letter to stock transfer service which operated in forum's district; transfer service followed instructions in the letter, which resulted in an illegal benefit to defendant); City of Harrisburg v. Bradford Trust Co., 621 F. Supp. 463, 467-68 (M.D. Pa. 1985) (defendant misrepresented fact to plaintiff over telephone lines; plaintiff resided in forum's district); Savin v. CSX Corp., 657 F. Supp. 1210, 1215 (S.D.N.Y. 1987) (venue proper in forum where some of the members of plaintiff class received allegedly fraudulent material, and where events which defendant misrepresented actually took place).

 This district is thus an improper venue under the '34 Act, when one looks at Leidesdorf alone. *fn2" This said, Leidesdorf should not think that he has prevailed. This is because defendants Robinson, Esrine, and Glendale have not objected to venue. Their acquiescence puzzled this court, and thus it asked Esrine and Glendale if they indeed wished to abide by the plaintiffs' choice of forum (defendant Robinson was missing when the court made this query). They replied yes, a trial in Chicago or New York would suit them fine. This court takes this as an admission that Esrine and Glendale are found, inhabit, or transact business in this district, as 15 U.S.C. § 78aa defines those terms. In Burkhart v. Allson Realty Trust, 363 F. Supp. 1286, 1292-93 (N.D. Ill. 1973), the court determined that where venue was proper for one defendant in a case brought under the '34 Act, venue was ...


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