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SCHOLES v. STONE

May 12, 1993

STEVEN S. SCHOLES, as Receiver, et al., Plaintiffs,
v.
STONE, McGUIRE & BENJAMIN, et al., Defendants.


ALESIA


The opinion of the court was delivered by: JAMES H. ALESIA

At issue is defendants Rosenthal and Schanfield, P.C.'s, Leslie J. Weiss's and William P. Rosenthal's ("Rosenthal Defendants") Motion for Summary Judgment on Counts V and VI of the Amendment To Complaint filed by the Receiver, Steven S. Scholes ("Scholes"). *fn1" For the reasons stated below, defendants' motion is denied.

 I. FACTS

 The facts in this case are complex and well known to this Court. See Scholes v. Stone, McGuire & Benjamin, 143 F.R.D. 181 (N.D. Ill. 1992) (class plaintiffs' motion for certification); Scholes v. Stone, McGuire & Benjamin, 786 F. Supp. 1385 (N.D. Ill. 1992) (defendants' motions to dismiss); Scholes v. Tomlinson, et al., No. 90 C 1350 (N.D. Ill. July 29, 1991) (upholding appointment of the Receiver in these related actions). Therefore, for the purposes of this motion we will discuss only those facts which are relevant to our decision.

 Steven S. Scholes ("Scholes") was originally appointed by this Court to represent D&S Trading Group, Ltd., Analytic Trading Systems, Inc., Analytic Trading Service, Inc. and Market Systems, Inc. (hereinafter referred to as the "Receivership Entities"). These entities were established by Michael Douglas in furtherance of what was a continuing scheme to lure investors into investing their money in what were supposed to be legitimate limited partnerships.

 Michael Douglas, however, had unlawful intentions. Through a series of lies and concealment, he was successful in inducing investors to invest large sums of their money in these entities. Additionally, through a series of restructuring deals, he made it appear to the public that his entities were legitimate business operations when in fact they were solely vehicles through which he was able to perpetrate massive fraud. After luring investors into investing their money into these entities, Douglas used this money both to fund his lavish lifestyle and to pay earlier investors what were falsely represented as profits on their investments. This was a classic Ponzi scheme. According to Plaintiff's Amendment To Complaint, by the time the Securities and Exchange Commission ("SEC") shut down all of Douglas' operations, the public had invested over $ 30 million with Douglas and the Receivership Entities. Currently, the net loss to the Receivership Entities and the investors exceeds $ 24,000,000.

 The Rosenthal Defendants consist of attorneys and an Illinois professional corporation engaged in the practice of law who performed substantial legal work for Douglas and the Receivership Entities. It is Plaintiff's allegation that this legal work substantially furthered the fraud and misappropriation that gave rise to the original SEC Action. As such, Count V of the Amendment To Complaint asserts a claim for legal malpractice/negligence and asks for damages consisting of:

 
(1) the amounts paid by each of the members of the plaintiff class to purchase securities; and

 Amendment To Complaint, at pp. 29-30, P 105. Count VI of the Amendment To Complaint asserts a claim for breach of fiduciary duty and seeks identical damages as in Count V. Amendment To Complaint, at p. 30, P 110. Furthermore, in its Memorandum in Opposition to the present motion, the Receiver asserts that the damages suffered by the Receivership Entities also include

 
the liabilities defendants caused the estates to incur to trade creditors and others, in addition to the entities' liabilities to the investors. . . . In addition, [the Receivership Entities incurred damages consisting of] the Class 3 claims [which] are claims of neither investors nor trade creditors.

 Receiver's Memorandum in Opposition, at pp. 6-7.

 In support of their summary judgment motion, the Rosenthal Defendants argue that Scholes, as receiver for the Douglas entities, has no standing to bring this suit because this Court on July 26, 1991 ordered that Scholes could not represent those who had invested in the entities, nor could he recover for losses that the investors had suffered. The Rosenthal Defendants argue that this is exactly what Scholes is attempting to do in pursuing this action because the only damages alleged by Scholes are those suffered by the investors, not by the entities in receivership. Defendant's Memorandum in Support, at p. 2. The Defendants further assert that the Receivership Entities could under no circumstance claim damages, because the relevant allegations in the Amendment To Complaint repeatedly assert that the Receivership Entities were set up solely as Michael Douglas' fraudulent vehicles. ...


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