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STUART-JAMES CO. v. ROSSINI

March 13, 1990

THE STUART-JAMES COMPANY, INCORPORATED, Plaintiff,
v.
ALBERT M. ROSSINI, CAROLINE DANFORTH, BASINGSTOKE HOLDINGS, LTD., BARCAN COMMUNICATIONS, INC., AMR ASSOCIATES, MRO CAPITAL PARTNERS REAL ESTATE, and ERGO ASSET MANAGEMENT, Defendants


Charles P. Kocoras, United States District Judge.


The opinion of the court was delivered by: KOCORAS

CHARLES P. KOCORAS, UNITED STATES DISTRICT JUDGE

 This matter is before the court on Defendants Caroline Danforth and Barcan Communications, Incorporated's motion to dismiss this action as it applies to them on the ground that this court lacks personal jurisdiction over them. Plaintiff The Stuart-James Company not only opposes this motion but also itself moves this court to impose Rule 11 sanctions on Danforth and Barcan, claiming that they have made false statements of fact in their pleadings on this issue. Danforth and Barcan, not to be out-done, move for the imposition of sanctions against Stuart-James on similar grounds. For the following reasons, we deny all three motions.

 BACKGROUND

 The dispute in this case revolves around certain stock purchases as well as the events following them. During the two-week period beginning January 15, 1990, and ending January 30, 1990, Stuart-James, an investment banking firm, purchased 795,000 shares of Barcan stock on behalf of the holders of various stock accounts. Stuart-James contends that all of the named defendants, working together, fraudulently induced these sales and made other fraudulent misrepresentations in connection with them. In addition, Stuart-James alleges that the defendants failed to pay for the stock as promised. Accordingly, Stuart-James seeks relief under § 10(b) of the Securities Exchange Act of 1934 (codified at 15 U.S.C. § 78j(b) (1988)) and Rule 10b-5 as promulgated thereunder, as well as under the state common law doctrines of fraud and breach of contract pursuant to this court's pendent jurisdiction. Defendants Danforth and Barcan, however, have moved to dismiss, claiming that we have no in personam jurisdiction over them.

 Stuart-James's complaint alleges the following. On January 15, 1990, Defendant Albert J. Rossini, purporting to be connected with Danforth as well as with Barcan and Defendant Basingstoke Holdings, Ltd, both Canadian corporations, opened a series of accounts with the Illinois office of Stuart-James. Danforth is the president and a director of both Barcan and Basingstoke. These accounts were opened on behalf of various entities, including corporate Defendants Basingstoke, AMR Associates, MRO Capital Partners Real Estate and Ergo Asset Management, as well as on behalf of Rossini himself. Through these accounts, the named entities were entitled to place orders for stock which Stuart-James would then go out and purchase in the market. Once purchased, the owners of the accounts were expected to pay for the stock within a prescribed contractual period.

 Beginning on January 15, the day the accounts were opened, the account holders all began placing orders for Barcan stock, although the principal purchases were made through the Basingstoke account. Per their agreement, Stuart-James promptly began to purchase Barcan stock from the marketplace to fill these orders. This buying spree continued until January 30, 1990, when Stuart-James executed its last order for Barcan stock on behalf of the account holders. When the dust had settled, Stuart-James had reason to be concerned: it found itself the owner of 795,000 shares of Barcan stock obtained at a cost of over $ 550,000, but for which it had not yet received any payment from the account holders. Further, as a result of this massive buying effort, the price of Barcan stock soared from a price of $. 27-1/2 per share as of January 15 to $.91 per share on January 30 when the last share was purchased by Stuart-James.

 The fact that Stuart-James had not yet received any money, however, was not due to a lack of effort on its part. It had been sent several checks by both Rossini and Danforth, the latter's efforts being taken on behalf of an entity called Argonaut Management, Incorporated. But to date, none of these checks has cleared and the only money that has been paid on this $ 550,000 debt is $ 24,000 received by wire transfer.

 After trying and failing to obtain payment from Rossini and Danforth amicably, it brought this action on February 15, 1990. The complaint is comprised of three counts. Count I is a securities fraud claim under SEC Rule 10b-5. It alleges that the named defendants were involved in a scheme to manipulate the price of Barcan stock to their advantage and induced Stuart-James to purchase massive quantities of Barcan stock in furtherance of this fraudulent goal. Indeed, Stuart-James contends that the defendants were selling the very shares of Barcan stock which Stuart-James was purchasing in the market for the defendants. Jurisdiction over this federal statutory cause of action is asserted under 15 U.S.C. § 78aa (§ 27 of the SEA) and, of course, 28 U.S.C. § 1331, which provides federal jurisdiction over federal questions generally. Counts II and III are pendent state claims for common law fraud and breach of contract. Stuart-James also asserts the Illinois long-arm statute, presumably as an alternative source for in personam jurisdiction over the defendants on the state claims.

 Concerned that the defendants would begin disposing of assets as well as selling off Barcan stock in a manner which would destroy its artificially inflated market price, Stuart-James immediately moved for a temporary restraining order enjoining the defendants from accomplishing any of the above-mentioned acts. The motion was granted as to all named defendants on February 26th and the order's effect has been extended to March 13, 1990.

 Defendants Danforth and Barcan, pursuant to Rule 12(b)(2) of the Federal Rules of Civil Procedure, have now moved to dismiss the complaint and dissolve the restraining order as it applies to them on the theory that this court lacks in personam jurisdiction over them. Stuart-James not only vigorously opposes this claim but also moves in its response brief for Rule 11 sanctions on the theory that the Danforth and Barcan's motion contains demonstrably false assertions of fact. In their reply brief, Danforth and Barcan make the identical claim against Stuart-James and also move for the imposition of Rule 11 sanctions.

 DISCUSSION

 I. Personal Jurisdiction

 A. The Legal Standard

 Before reaching the actual issue of whether this court has personal jurisdiction over Danforth and Barcan, we must clarify the statutory source for the assertion of in personam jurisdiction and the legal standard under that source. Such clarification is necessary because the movants' entire jurisdictional argument is premised on the assumption that the Illinois long-arm statute governs in this federal securities fraud action with pendent state claims. We find, however, that the Illinois long-arm statute has absolutely no relevance to this case. In addition, we note that ...


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