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SECURITY & EXCH. COMM'N v. JAKUBOWSKI

January 2, 1996

SECURITY AND EXCHANGE COMMISSION, Plaintiff,
v.
STEVEN R. JAKUBOWSKI, Defendant.



The opinion of the court was delivered by: WILLIAMS

 Defendant Steven R. Jakubowski moves the court to dismiss Plaintiff Security and Exchange Commission's complaint against him pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. For the reasons set forth below, the court denies Jakubowski's motion.

 Background

 For the purposes of this motion to dismiss, the Court accepts the following facts as true. At all times relevant to this case, Defendant Steven R. Jakubowski was an attorney at a law firm in Chicago. (Complaint P 8.) *fn1" Frank Hart was president of Generation Capital Associates ("GCA"), a venture capital firm headquartered in New York. (Complaint P 11.)

 Approximately five days before the Cragin subscription offering closed, Hart and Jakubowski formed a plan to buy Cragin stock using the conversion rights given to valid Cragin accountholders. Jakubowski, Hart, and GCA were not eligible Cragin accountholders at the time of the subscription offering, and were therefore not personally eligible for conversion rights. (Complaint P 11.)

 Jakubowski located a secretary in the law firm where he worked who was an eligible Cragin accountholder. He explained to the secretary that he wanted to use her conversion rights to buy Cragin stock on behalf of an unnamed individual. He further explained that she would incur no risk in the transaction, and would receive a percentage of any profit made on the sale of the stock. (Complaint P 13.) The secretary agreed to participate, and shortly thereafter Jakubowski filled out a Stock Order Form for 35,000 shares of Cragin stock. (Complaint P 14.) This stock order form contained language directly above the signature line that stated: "All rights exercisable hereunder are not transferable and shares purchased upon exercise of such right must be purchased for the account of the person exercising such rights." Although the stock order form listed the secretary as the actual purchaser of the stock, Jakubowski indicated that the stock was to be sent directly to him at the law firm. The secretary signed the form, and Jakubowski took the form to Cragin on May 25, 1991. (Complaint P 14.) At no time before the conversion did Cragin learn that Jakubowski, Hart and GCA were using the valid accountholder's Conversion Subscription Rights so that Hart and GCA could buy the stock themselves. (Complaint P 18.)

 Jakubowski further instructed the secretary to turn control of the Cragin Stock over to GCA and Hart by signing a blank stock power form. He sent a copy of the form to Hart who then wired $ 350,000 to Cragin to pay for the stock ordered in the secretary's name. (Complaint P 15.) Jakubowski prepared an agreement between Hart and the secretary formalizing their understanding that the secretary would receive a fixed percentage of any profits made on the sale of the Cragin stock. (Complaint P 16.)

 Cragin made the conversion from mutual to stock ownership on June 6, 1991. (Complaint P 17.) Cragin Stock was oversubscribed, and therefore some accountholders were not able to buy any Cragin Stock and others could only buy a portion of what they had requested. However, GCA and Hart did buy the entire 35,000 shares they had ordered at $ 10 per share. In contrast, the members of the general public who did not have conversion rights were not able to purchase any shares in the initial offering, and instead had to buy the stock when it opened for public trading at $ 13.50 per share. (Complaint P 17.) When Jakubowski received the stock certificate from Cragin, he forwarded it to Hart, who sold the stock for a profit. Pursuant to their earlier agreement, Hart gave Jakubowski approximately $ 10,000 for his participation in the plan. (Complaint P 20.)

 Several months later, Calumet Federal Savings and Loan Association of Chicago ("Calumet") announced that it would be converting to a stock form of ownership, and in conjunction with this conversion would be offering 2,050,000 shares of stock ("Calumet stock") to eligible accountholders at approximately $ 15 per share. Eligible accountholders had until February 6, 1992 to exercise their Conversion Subscription Rights. (Complaint P 19.) While neither Jakubowski, nor Hart, nor GCA was a Calumet accountholder, Jakubowski was able to find the father of a secretary at his firm who was an eligible accountholder. (Complaint PP 20, 21.)

 Jakubowski had the accountholder sign a stock order form which Jakubowski then completed and submitted to Calumet's holding company. (Complaint P 21.) This stock order form contained language specifying that:

 
All rights exercisable hereunder are not transferable and shares purchased upon exercise of such rights must be purchased for the account of the person exercising such rights. The undersigned certifies that the Stock Order is for my account only and there is no agreement or understanding regarding the transfer of my subscription rights or any further sale or transfer of these shares.

 (Complaint P 21.) Jakubowski again prepared a written agreement between Hart and GCA and the secretary's father promising that the father would get a certain percentage of any profits on the sale of the Calumet stock. (Complaint P 22.) Calumet did not become aware that GCA and Hart were the true purchasers of the stock until after the conversion. (Complaint P 24.)

 The Calumet Stock was oversubscribed, and consequently, some accountholders did not get a chance to purchase the stock they had ordered, and no non-accountholders were legally able to buy any stock until after trading began. (Complaint P 23.) GCA and Hart, by using the secretary's father's conversion rights did receive all of its requested shares at $ 15 per share. (Complaint P 23.) GCA and Hart later sold those shares at a profit and provided Jakubowski with a $ 5,000 share. (Complaint P 24.)

 In addition to the preceding transactions, Jakubowski, Hart and GCA participated in similar plans when AmeriFed Financial Corporation ("AmeriFed") and Plains Spirit Financial Corporation ("Plains Spirit") converted to stock ownership. (Complaint P 25.) In the case of the AmeriFed transaction, Jakubowski personally borrowed money from Hart so that he could purchase stock for himself by using a valid accountholder's Conversion Subscription Rights. (Complaint P 25.) As in the Cragin and Calumet transactions, Jakubowski completed stock order forms signed by the eligible accountholders so that he, Hart or GCA could purchase conversion stock. (Complaint P 26.) Both the AmeriFed and the Plains Spirit offerings were also oversubscribed, resulting in a shortage of stock for the accountholders.

 In total, Jakubowski used accountholder's Conversion Subscription Rights to purchase approximately 172,050 shares of Conversion Stock for himself, Hart and GCA for a total price of nearly $ 2 million. (Complaint P 27.) Jakubowski himself made at least $ 49,500 as the result of his participation in the plans. (Complaint P 28.)

 Analysis

 Jakubowski moves the court to dismiss the complaint against him pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure for failure to state a claim upon which relief can be granted. The court will dismiss a complaint for failure to state a claim only where "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Chaney v. Suburban Bus Div., 52 F.3d 623, 627 (7th Cir. 1995) (quoting Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957)). In deciding whether the complaint states a claim, the court "accept[s] as true the factual allegations of the complaint and draw[s] all reasonable inferences in favor of the plaintiff[]." Lashbrook v. Oerkfitz, 65 F.3d 1339, 1343 (7th Cir. 1995) (citing Zinermon v. Burch, 494 U.S. 113, 118, 108 L. Ed. 2d 100, 110 S. Ct. 975 (1990)).

 In its Amended Complaint the Securities and Exchange Commission ("the Commission") alleges that Jakubowski violated Section 10(b) of the Securities Exchange Act of 1934 ("1934 Act"), 15 USC § 78j, as well as Rule 10b-5 promulgated thereunder, 17 CFR § 240.10b-5. The fundamental purpose of the 1934 Act "was to substitute a philosophy of full disclosure for the philosophy of caveat emptor and thus to achieve a high standard of business ethics in the securities industry." Basic Inc. v. Levinson, 485 U.S. 224, 234, 99 L. Ed. 2d 194, 108 S. Ct. 978 (1988) (citations omitted). Consistent with this purpose, Section 10(b) states:

 
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange . . . to use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.

 Rule 10b-5, entitled "Employment of manipulative and deceptive devices," states:

 
It shall be unlawful for any person, directly or indirectly . . .
 
(a) To employ any device, scheme, or artifice to defraud,
 
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
 
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud ...

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