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KOULOURIS v. ESTATE OF CHALMERS

March 25, 1992

TOM KOULOURIS, Plaintiff,
v.
ESTATE OF HYMEN P. CHALMERS and ELECTRONICS, MISSILES & COMMUNICATIONS, INC., Defendants.



The opinion of the court was delivered by: MARVIN E. ASPEN

 MARVIN E. ASPEN, District Judge:

 Along with a number of other lawsuits filed in the Northern District of Illinois, this action arises from the sale of stock of Electronics, Missiles & Communications, Inc. ("EMC") in the mid-1980s. Plaintiff Tom Koulouris brings this two-count amended complaint against EMC and the Estate of Hymen P. Chalmers, alleging violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961-1968, and common-law fraud. EMC and the Estate now move to dismiss Koulouris' amended complaint for failure to state a claim. For the reasons set forth below, we grant the motions.

 I. Background *fn1"

 Beginning on or about January 14, 1984, Chalmers, who was a director, treasurer and shareholder of EMC, together with Andrew Nanos, an EMC shareholder, conducted an aggressive sales campaign to promote the sale of EMC stock in the Chicago metropolitan area. In an effort to arouse investor interest and to induce Koulouris and other individuals to purchase EMC stock, Chalmers and Nanos purportedly made false representations and omissions of fact regarding EMC's financial status and the market value of the stock. Koulouris purchased approximately 14,800 shares of EMC common stock between 1982 and 1985 at prices ranging from $ 5 to $ 16-1/2 per share, *fn2" partly as a result of the alleged misrepresentations and omissions of material fact.

 Finding itself in a precarious financial condition, in September 1984, EMC obtained an exemption from the registration requirements of the federal securities laws, pursuant to "Regulation A: promulgated under § 3(b) of the Securities Exchange Act of 1933, 15 U.S.C. § 77c(b), clearing the way for an offering of common stock to be sold to the public. Despite the funds raised through this Regulation A offering, EMC's financial status remained dire. Indeed, in January 1985, EMC defaulted on a $ 2 million revolving line of credit, prompting the Board of Directors to consider filing for protection under Chapter 11 of the Bankruptcy Act. In a desperate attempt to raise funds, EMC initiated another Regulation A offering in February 1985, consisting of 1,242,000 shares of common stock at $ 1 per share. Koulouris claims that the February 1985 offering violated Regulation A in that it was commenced in less than twelve months after the previous offering. Moreover, as the market price at the time of the offering ranged between $ 4-3/4 and $ 6-3/4 per share, Koulouris maintains that EMC further violated Regulation A by offering the stock at a price in disregard of its market value.

 On October 14, 1985, Barron's, a weekly financial newspaper, reported that the market price for EMC stock was inflated in light of EMC's financial difficulties. As a result of the article, on October 15, 1985, EMC stock dropped from an opening bid of $ 14 per share to $ 11-1/4 in less than an hour. In order to support the price of the stock, Chalmers, Nanos and other unnamed individuals placed purchase orders for approximately 152,000 shares, allegedly with no intention of payment. Nevertheless, on October 22, 1985, the market price of EMC stock plunged to $ 2-1/2 per share.

 Koulouris contends that from October 25, 1985, until January 27, 1989, the date he filed this action, Nanos and Chalmers lulled him into inaction "by blaming the fall in the price of EMC stock, among other reasons, on unknown persons who were trying to hurt the defendants by selling EMC stock short." In his initial complaint, Koulouris charged EMC, Chalmers and Nanos with violations of federal securities laws, RICO and common-law fraud. On December 3, 1991, this court dismissed Koulouris' securities claims, concluding that they were barred under the applicable statute of limitations. Accordingly, we granted Koulouris leave to file the current amended complaint, which withdraws all securities claims, removes Nanos as a defendant and substitutes the Estate of Hymen P. Chalmers as a defendant in place of Chalmers, now deceased.

 II. Discussion

 EMC and Chalmers' Estate raise several challenges to Koulouris' amended complaint. First, both defendants contend that the RICO and other fraud claims are not pled with the particularity required by Fed. R. Civ. P. 9(b). Second, respecting the RICO count, EMC and the Estate argue that Koulouris failed to allege: (1) that either EMC or Chalmers committed a predicate act under RICO; (2) that either EMC or Chalmers engaged in a "pattern of racketeering activity," as required by § 1962(a)-(c) and defined in § 1961(5); and (3) that either EMC or Chalmers conspired to violate any of the provisions of RICO, as required by § 1962(d). Third, EMC maintains that Koulouris' claim under § 1962(c) must be dismissed, as EMC cannot be liable as both a "person" and "enterprise" under that section. Fourth, the Estate asserts that Koulouris' § 1962(a) claim must be dismissed because Koulouris has failed to allege that Chalmers received or invested income from racketeering activity in an enterprise, as required under that section. Finally, defendants argue that Koulouris' common-law fraud claim should be dismissed for lack of supplemental jurisdiction. We address each argument in turn.

 A. Rule 9(b) Particularity

 Defendants argue that Koulouris' RICO and other fraud claims are not pled with the particularity required by the Federal Rules of Civil Procedure. Fed. R. Civ. P. 9(b) ("in all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity"). We disagree.

 Rule 9(b)'s requirements are certainly applicable to fraud claims in civil RICO complaints. See Haroco, Inc. v. American Nat'l Bank & Trust Co., 747 F.2d 384, 405 (7th Cir. 1984), aff'd, 473 U.S. 606, 105 S. Ct. 3291, 87 L. Ed. 2d 437 (1985); Uniroyal Goodrich Tire Co. v. Mutual Trading Corp., 749 F. Supp. 869, 872 (N.D. Ill. 1990). These requirements, however, are not absolute or unbounded; defendants need not be given a "pretrial memorandum containing all the evidentiary support for plaintiff's case." Uniroyal Goodrich, 749 F. Supp. at 872 (citing Pellman v. Cinerama, Inc., 503 F. Supp. 107, 111 (S.D.N.Y. 1980); Bruss Co. v. Allnet Communication Servs., Inc., 606 F. Supp. 401, 405 (N.D. Ill. 1985)).

 Koulouris' complaint need only set forth "a brief sketch of how the fraudulent scheme operated, when and where it occurred, and the participants." Tomera v. Galt, 511 F.2d 504, 509 (7th Cir. 1975); Uniroyal Goodrich, 749 F. Supp. at 872. Koulouris' amended complaint contains specific allegations concerning two sets of purported fraud. First, Koulouris maintains that the circumstances surrounding the February 1985, Regulation A offering are tantamount to fraud. In support of this allegation, Koulouris states that the offering was commenced in less than twelve months after the previous offering, and was priced in disregard to the market price for EMC stock -- clear violations of ...


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