The opinion of the court was delivered by: MATTHEW KENNELLY, District Judge
MEMORANDUM OPINION AND ORDER
Plaintiff, Kenneth Foss, is the administrator of the Estate of
Vincent P. Koth; he has filed suit against Patrick O'Meara under Section
10(b) of the Securities Exchange Act and Rule 10b-5(a) and 10b-5(c) in
connection with an alleged scheme to defraud Koth's estate of millions of
dollars in securities. 17 C.F.R. § 240.10b-5(a), (c). Foss claims
that O'Meara along with Authur McDonnell, who is not a party to this
case, stole, converted, and sold securities belonging to Koth's estate,
and kept the proceeds. Foss has also brought a common law claim against
Bear, Sterns for negligent supervision of its employee, O'Meara, who was
an account executive at Bear Sterns throughout most of the time period
relevant to this suit. Bear, Sterns and O'Meara have moved to dismiss
pursuant to Rule 12(b)(6). For the reasons stated below, the Court grants
Vincent P. Koth died on May 19, 1998, having accumulated a substantial
amount of assets, which were represented by physical certificates of
various corporations and governmental authorities. These certificates
were registered in his name, or were in "bearer" form, and kept in safe deposit boxes in Chicago. He also maintained accounts with
various issuers of securities where he owned a substantial amount of
assets in the form of securities.
After hearing of Koth's death, Authur McDonnell, a distant relative of
Koth, and not an heir to his estate, applied to the Probate Division of
the Circuit Court of Cook County to be appointed as administrator of the
estate. On July 29, 1998, McDonnell was appointed the administrator of
Koth's estate. According to plaintiff, McDonnell discovered the
aforementioned certificates but did not report their existence to the
In November 1998, McDonnell formed International Investments of Elgin,
Inc. ("IIE"), which he incorporated in the state of Nevada. That same
month McDonnell, along with his son-in-law, Patrick O'Meara, an account
executive at Bear Stearns, caused a securities account to be opened at
Bear Stearns for IIE. O'Meara, served as the account executive for the
IIE account at Bear Stearns.
Shortly after the account was opened, certificates representing assets
of Koth's estate were received into the account of IIE. These
certificates were registered on their face in the name of "Vincent P.
Koth," "Vincent Koth," or "Vincent Patrick Koth." McDonnell obtained
possession of these certificates in Chicago, and had them delivered to
Bear Stearns in Boston. These certificates represented approximately
$1,400,000 in assets of the Estate. Thereafter, additional assets of the
Estate with an aggregate value of approximately $600,000 were received
into the IIE account at Bear Stearns.
Beginning on November 20, 1998, Bear Stearns performed the functions
necessary to transfer record ownership of the assets of the Estate from
the name of Vincent Koth, into an ownership form which permitted Bear
Stearns to deliver the securities to complete a sale in the account for the exclusive benefit of IIE. On November 23, 1998,
McDonnell and O'Meara began to sell the securities in the IIE account. By
December 31, 1998, McDonnell and O'Meara had sold $1,101,411 of the
securities in the account. According to plaintiff, McDonnell and O'Meara
caused the proceeds received by HE from the sale of the securities to be
transferred by Bear Stearns from the account of IIE to other accounts at
Bears Stearns which were not for the benefit of the Estate.
According to the plaintiff, McDonnell also discovered that Koth held
assets in accounts at the issuers of securities or their agents which
also belonging to the Estate. In order to gain control of these
securities, McDonnell and O'Meara instructed Bear Sterns to again perform
the functions necessary to have them transferred into an ownership form
which permitted Bear Stearns to receive them directly into the account of
HE, and to deliver them to complete their sale in the account of IIE for
its exclusive benefit. Plaintiff asserts that during the period from
November 20, 1998 to June 30, 2000, securities belonging to the Estate
were received into the account of IIE at Bear Stearns, and sold for
proceeds of $2,000,909, all of which have been disbursed from the
account, and none of which returned to the Estate.
Plaintiff further asserts that from November 1998 until April 2000,
McDonnell and O'Meara used the proceeds from the sale of the assets of
the Estate in the IIE account to purchase and sale securities in that
account. The account was then liquidated, and the resulting cash balance
was wire transferred by Bear Stearns to an account at First National Bank
of Naples, Florida. McDonnell and O'Meara also caused Bear Stearns to
finance the purchase and sale of securities by extending credit to IIE
secured by the assets in the account which were not yet sold, or
securities purchased with proceeds of the sale of those assets. During
the period from November 1998 through September 1999, an aggregate of
approximately $13,348,049 in securities were purchased in approximately
275 transactions. O'Meara, as the agent of Bear Stearns for the IIE
account received substantial compensation from the transactions.
In September 1999, O'Meara's association with Bear Stearns terminated.
That same month, O'Meara became associated with R.K. Grace & Company
in their Miami, Florida office. In October 1999, McDonnell opened an
account at R.K. Grace in his own name. O'Meara was the agent for R.K.
Grace for McDonnell's account. On October 20, 1999, approximately $50,000
of assets of the Estate were received into McDonnell's personal account
at R.K. Grace.
According to the plaintiff, McDonnell concealed the existence of assets
of the Estate and their subsequent theft by, among other things, filing
one or more false inventories with the Probate Court, and falsifying tax
returns for Koth in order to conceal the fact of the investment income
received by Koth from his large securities portfolio. During the winter
of 2002, however, information came to the attention of an attorney for an
heir of the Estate that Koth had an investment portfolio at the time of
his death which had not been reported by McDonnell. Thereafter, an
investigation was conducted which disclosed the existence of the IIE
account at Bear Stearns.
On May 30, 2002, McDonnell was removed as administrator and replaced by
Calvin Foss, an heir to the Estate. Around September, 30, 2002, Foss
obtained the account statements for IIE from Bear Stearns, as well as
documents concerning the opening of the account. Using the identification
from the account statements of the securities received into the account
of IIE at Bear Stearns, he sought to establish the ownership by Koth of
the securities contributed to the account. On December 10, 2002, Foss
filed a Citation for Recovery of Property from Arthur McDonnell, alleging that McDonnell had converted or embezzled
assets from the Estate. Calvin Foss died on January 28, 2003, and was
replaced by Kenneth Foss on April 4, 2003. Kenneth Foss filed an amended
Citation for Recovery of Property from McDonnell. On May 23, 2003 a
judgment order was entered against McDonnell in favor of Koth's estate in
the amount of $3,476,709.26. The amount represented the dollar value of
assets found by the Probate Court to have been unlawfully converted and
embezzled from the estate by McDonnell, plus pre-judgment interest.
Kenneth Foss brings the current suit alleging that the defendants'
conduct with respect to the securities belonging to the estate violated
the federal securities laws promulgated in the Securities Exchange Act of
1934. Foss also contends that Bear Stearns breeched their common law duty
to supervise O'Meara in order to avoid the conversion and theft of the
Estate's assets. Bear Stearns and O'Meara contend that Foss's federal
securities law claim as well as his common law claim are time-barred.
Alternatively, they ...