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766347 ONTARIO LTD. v. ZURICH CAPITAL MARKETS

January 1, 2003

766347 ONTARIO LTD.; THE JAMES F. BOUGHNER FOUNDATION; ELLEN FRYMIRE; AND SALATEEN INTERNATIONAL LTD., PLAINTIFFS,
v.
ZURICH CAPITAL MARKETS INC., ET AL., DEFENDANTS.



The opinion of the court was delivered by: Amy J. St. Eve, District Judge.

MEMORANDUM OPINION AND ORDER
Defendants have moved to dismiss Plaintiffs' First Amended Complaint for failure to state a claim upon which relief can be granted. For the reasons set forth below, Defendants' motion is granted in part and denied in part.

BACKGROUND

This is an action arising out of Plaintiffs' purchase of various interests in a limited partnership called Asset Allocation. Plaintiffs lost the majority of their investments in Asset Allocation and now seek to recover them. Plaintiffs allege in essence that they were defrauded by Asset Allocation, its general partner and employees, and Defendants into purchasing limited partnership interests, and that Plaintiffs would not have purchased those interests had they known the details of Defendants' agreements with Asset Allocation.

Plaintiff's First Amended Complaint contains eight counts. Count One alleges control person liability in violation of Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934 and Rule 10b-5. Count Two is a claim for liability under the Illinois Securities Law of 1953, 815 ILCS 5/12 and 5/13. Count Three alleges that Defendants aided and abetted a commodity pool fraud in violation of the Commodity Exchange Act, 7 U.S.C. § 60 and 25(a)(1). Count Four alleges that Defendants breached their fiduciary duties. Count Five alleges that Defendants participated in or induced a breach of fiduciary duties owed to Plaintiffs. Count Six is a claim for intentional interference with contractual relations, and Count Seven is based on negligent interference with contracts. Finally, Count Eight alleges that Defendants aided and abetted common law fraud and deceit.

The following are plaintiffs in this case: 766347 Ontario Ltd., ("Ontario"), The James F. Boughner Foundation ("Boughner Foundation"), Ellen Frymire ("Frymire") and Salateen International Ltd. ("Salateen"). Ontario and Boughner Foundation are Canadian corporations. James Boughner is the principal officer of both of these corporations. Frymire is a citizen of the State of Illinois and a resident of the Bahamas. James Cone is Frymire's husband. Salateen is a Bahamian corporation with Cone as one of its principal officers. Each Plaintiff is a limited partner that invested in the Asset Allocation Fund, L.P. ("Asset Allocation").

Defendants Zurich Capital Markets Inc. ("Zurich"), ZCM Matched Funding Corp. ("ZCM MFC"), ZCM Asset Holding Company LLC ("ZCM Asset") are Delaware corporations. Defendant ZCM Asset Holding Company (Bermuda) Ltd. ("ZCM Bermuda") is a Bahamian corporation. ZCM MFC, ZCM Asset, ZCM Bermuda are wholly owned subsidiaries of Zurich, and ZCM Asset Holding Company is an affiliate of Zurich. Defendants M.J. Diversified Fund, L.P. ("MJD") and M.J. Financial Arbitrage, L.P. ("MJFA") are dissolved limited partnerships. (Collectively, all of the Defendants are referred to as "ZCM" or the "Defendants").

A. The Asset Allocation Limited Partnership

Asset Allocation is a limited partnership with Martin James Capital Management, Inc. ("MJCM") as its general partner. Martin James Allamian owned and operated MJCM, and James Manning and Robert Paszkiet were its officers and employees. Asset Allocation traded commodity futures contracts and other securities. Asset Allocation sold limited partnership interests to each of the Plaintiffs. It used various documents in selling and marketing these interests, including a Prospectus or Confidential Private Placement Memorandum ("PPM") and a limited partnership agreement. Plaintiffs allege that they relied on this documentation in purchasing their interests.

The PPM represented that Asset Allocation's investment decisions had been delegated to MJCM. "Currently [Asset Allocation] is invested with M.J. Select Global, Ltd., Piedmont Partners, L.P. and M.J. Financial Arbitrage, L.P. All the investments are funds." (R. 15-1, Pls.' First Am. Compl. ¶ 29.) It also noted that "[t]he General Partner will notify the Limited Partners of changes in Advisors, in advance when feasible." (Id.) Furthermore, the PPM explained that the limited partners could redeem their investments "as of the end of any month with 30 business days prior written notice to the [Asset Allocation]." (Id.)

The limited partnership agreement explained that MJCM "shall conduct and manage the business" of Asset Allocation "to the exclusion of all other partners," including "the investment of the funds of the partnership." (R. 15-1, Pls.' First Am. Compl. ¶ 31.) It also represented that Asset Allocation's assets "will not be commingled with assets of any other party." (Id.)

B. Commodity Pool

Asset Allocation was a commodity pool regulated under the Commodity Exchange Act, 7 U.S.C. § 1 et seq. (R. 15-1, Pls.' First Am. Compl. ¶ 15.) Indeed, the PPM describes Asset Allocation as "a limited liability, open-ended investment company/commodity pool." The PPM describes MJCM as Asset Allocation's "General Partner and Commodity Pool Operator." (Id. ¶ 24.) MJCM was registered with the National Futures Association ("NFTA") and the Commodity Futures Trading Commission ("CFTC") as a "commodity pool operator." (Id. ¶ 25.) Pursuant to the requirements of the CEA, Allamian, the owner/operator of MJCM, was registered with the CFTC as an "associated person" and "principal" of MJCM. (Id. ¶ 26.) The PPM, Plaintiffs allege, is a commodity pool disclosure document as defined by the CFTC's commodity pool regulations. (Id. ¶ 18.) Plaintiffs allege that none of the Defendants registered with the CFTC or the NFTA as required under the CEA.

C. The Swap Agreement

On May 31, 2000, after the PPM was created but before the Plaintiffs invested in Asset Allocation, ZCM and Asset Allocation entered into a "Swap Agreement." Plaintiffs allege that the purpose and effect of the Swap was "to transfer ownership and control of all of Asset Allocation's investments to ZCM." (R. 15-1, Pls.' First Am. Compl. ¶ 32.) The subject of the Swap was the "Reference Portfolio," which consisted of all of the assets of Asset Allocation. The Swap Agreement "vested absolute control in ZCM over Asset Allocation investment decisions by providing that ZCM `shall have absolute control over allocation decisions with respect to the Reference Portfolio.'" (Id. ¶¶ 34-35.) The Swap Agreement also "required Asset Allocation to obtain the consent of ZCM before making any proposed changes to the Reference Portfolio." (Id. ¶ 35.) Plaintiffs further contend that this transfer was "[c]ontrary to the provisions of the Asset Allocation offering documents." (Id.)

Pursuant to the Swap Agreement, ZCM "gained control and ownership of the Asset Allocation funds without any exposure to downside risk, while earning excessive interest rates substantially over the market rate." (R. 15-1, Pls.' First Am. Compl. ¶ 37.) Plaintiffs allege that ZCM used Asset Allocation's funds to make "extensive additional investments in various assets in their own name, but at the sole and exclusive risk of Asset Allocation and the limited partners therein." (Id. ¶ 39.) ZCM "possessed actual ownership of Asset Allocation's entire investment portfolio, possessed absolute discretion over any and all investment allocation decisions by MJCM on Asset Allocation's behalf, and in fact exercised that discretion and control by making and managing those investments of Asset Allocation." (Id. ¶ 42.)

D. Plaintiffs' Purchase of Partnership Interests

In 2000, Plaintiffs purchased substantial limited partnership interests in Asset Allocation without knowledge of the Swap Agreement, its terms, or any involvement of ZCM. On June 20, 2000, Ontario invested $500,000 in Asset Allocation, and in August 2000, it invested $159.94. (R. 15-1, Pls.' First Am. Compl. ¶ 53.) On August 1, 2000, The Boughner Foundation invested $510,548.66. (Id. ¶ 53.) On October 1, 2000, Frymire invested $336,862.52. (Id. ¶ 57.) On November 1, 2000, Salateen International invested $999,985. (Id. ¶ 58.)

Plaintiffs allege that MJCM, Martin James Allamian, James Manning and Robert Paszkiet solicited them to invest in Asset Allocation after the Swap Agreement was effective. (R. 15-1, Pls.' First Am. Compl. ¶ 50.) "Those solicitations included, among other things, the delivery of the Asset Allocation offering documents, and limited partnership agreements . . ." (Id. ¶ 51.) None of these documents disclosed the Swap Agreement or ZCM's involvement with Asset Allocation's investment decisions. Accordingly, Plaintiffs allege that Asset Allocation's offering documents were materially false and incomplete. (Id. ¶ 63.) They further allege that the ZCM Defendants were aware of the terms, conditions and limitations of the Asset Allocation offering documents, and were aware that the Swap Agreement violated the terms of these documents. (Id. ¶ 45). Nonetheless, Plaintiffs claim that Defendants did nothing to correct the material misrepresentations and omissions in the offering documents.

In addition, Plaintiffs allege that they relied on various oral representations regarding Asset Allocation. James Boughner claims that he relied on representations made by John Waldock who "spoke repeatedly with agents and employees of" MJCM. (R. 15-1, Pls.' First Am. Compl. ¶¶ 54-55.) Similarly, James Cone asserts that he relied on representations made by agents and employees of MJCM, including Allamian and Manning. (Id. ¶ 59.) None of the MJCM agents or employees informed Waldock or Cone of the nature of Asset Allocations' relationship with the ZCM Defendants. (Id. ¶¶ 56, 60). In addition, in at least June and October 2000, Plaintiffs were informed that no more than 15% of the assets of Asset Allocation were invested with any one trading advisor. (Id. ¶ 61.) In fact, at the time these representations were made, "(1) ZCM owned and controlled 100% of Asset Allocations investments, and (2) substantially more than 15% of the assets held by ZCM had been invested in PinnFund and its related entities through a series of pyramiding investments using either defendants MJD or MJFA or both." (Id. ¶ 62.)

Finally, Plaintiffs allege that the representations in the limited partnership disclosure documents and limited partnership agreement that each limited partner could redeem all or part of the units that partner held as of the end of any month with 30 days prior notice were false. Plaintiffs argue that ZCM controlled all assets held by Asset Allocation and that the Swap Agreement could only terminated quarterly. (R. 15-1, Pls.' First Am. Compl. ¶ 64.) Plaintiffs assert that no one informed them of ZCM's control prior to investing in the limited partnership.

ANALYSIS

I. LEGAL STANDARD

The purpose of a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6) is to test the legal sufficiency of a complaint, not the merits of the case. Triad Assocs., Inc. v. Chicago Hous. Auth., 892 F.2d 583, 586 (7th Cir. 1989); Majchrowski v. Norwest Mortgage, Inc., 6 F. Supp.2d 946, 952 (N.D.Ill. 1998). When considering a motion to dismiss pursuant to Rule 12(b)(6), the Court considers "whether relief is possible under [any] set of facts that could be established consistent with [the] allegations." Bartholet v. Reishauer A.G. (Zurich), 953 F.2d 1073, 1078 (7th Cir. 1992).

The Court views all the facts alleged in the complaint, as well as any reasonable inferences drawn from those facts, in the light most favorable to the plaintiff. Stachon v. United Consumers Club, Inc., 229 F.3d 673, 675 (7th Cir. 2000); Tatz v. Nanophase Techs. Corp., No. 01 C 8440, 2002 WL 31269485, at *3 (N.D.Ill. Oct. 9, 2002). Dismissal is appropriate only where it appears beyond doubt that under no set of facts would plaintiff's allegations entitle him to relief. Henderson v. Sheahan, 196 F.3d 839, 846 (7th Cir. 1999); Kennedy v. National Juvenile Detention Ass'n, 187 F.3d 690, 695 (7th Cir. 1999). The complaint, however, must allege that each element of a cause of action exists in order to withstand a motion to dismiss. Lucien v. Preiner, 967 F.2d 1166, 1168 (7th Cir. 1992). Furthermore, a plaintiff "cannot satisfy federal pleading requirements merely by attaching bare legal conclusions to narrated facts which fail to outline the bases of their claims." Collins v. Snyder, No. 02 C 4493, 2002 WL 31749173, at *1 (N.D.Ill. Dec. 2, 2002) (citations and quotations omitted).

II. COUNT ONE — CONTROL PERSON LIABILITY

Count One alleges a violation of Section 20(a) of the Securities and Exchange Act of 1934. Section 20(a) provides: "Every person who, directly or indirectly, controls any person liable under any provision of this chapter or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action." 15 U.S.C. § 78t(a).

In order to state a Section 20(a) claim, Plaintiffs must allege: (1) a primary securities violation; (2) that the ZCM Defendants exercised general control over the operations of Asset Allocation and/or MJCM; and (3) that the ZCM Defendants "possessed the power or ability to control the specific transaction or activity upon which the primary violation was predicated, whether or not that power was exercised." Harrison v. Dean Witter Reynolds, Inc., 974 F.2d 873, 881 (7th Cir. 1992). See also Donohoe v. Consol. Operating & Prod. Corp., 982 F.2d ...


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