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ZURICH CAPITAL MARKETS INC. v. COGLIANESE

September 22, 2004.

ZURICH CAPITAL MARKETS INC., et al., Plaintiffs,
v.
MICHAEL COGLIANESE, et al., Defendants.



The opinion of the court was delivered by: AMY J. ST. EVE, District Judge

MEMORANDUM OPINION AND ORDER

This is a securities fraud action against multiple defendants in connection with Plaintiffs' investment in an allegedly fraudulent scheme executed by Defendants through M.J. Select Global Fund, Ltd. ("M.J. Select"), a Bahamian mutual fund. The Court previously addressed the motions to dismiss filed by multiple Defendants. See Zurich Capital Markets Inc. v. Coglianese, et al., No. 03 C 7960, 2004 WL 1881782 (N.D. Ill. Aug. 2, 2004) (the "August 2, 2004 Opinion"). In this opinion, the Court rules on the issues raised by Defendants Oceanic Bank and Trust Limited, Kenneth Clowes, and Terah Rahming (collectively, the "Oceanic Defendants") in their motion to dismiss.

The Oceanic Defendants have moved to dismiss ZCM's Amended Complaint pursuant to Federal Rules of Civil Procedure 12(b)(1), 12(b)(2) and 12(b)(6). Defendants claim that the Court lacks subject matter jurisdiction over the Amended Complaint and personal jurisdiction over each of the Oceanic Defendants. They also argue that ZCM lacks standing to assert the claims, and that the Amended Complaint is untimely and fails to state a claim upon which relief can be granted. As discussed in detail below, Defendants' motion is granted in part and denied in part.

  BACKGROUND

  Plaintiffs allege that the Oceanic Defendants and their co-Defendants engaged in a complex scheme to defraud Plaintiffs out of over $24 million. The details of the alleged fraud are set forth in the Court's August 2, 2004 Opinion and will not be repeated here.

  I. Factual Allegations

  Plaintiff Zurich Capital Markets Inc. ("ZCM Inc.") is a Delaware corporation and was one of the world's largest custodians of hedge funds. Plaintiff ZCM Matched Funding Corp., a Delaware corporation, ("ZCM MFC") is a wholly owned subsidiary of ZCM Inc., and specializes in the offering and sale of derivative instruments. ZCM Bermuda is a Bermuda corporation and an affiliate of ZCM Inc. that operates as a holding company for offshore investments. Plaintiff ZCM Asset Holding Company LLC ("ZCM Asset") is a Delaware corporation and a wholly owned subsidiary of ZCM Inc. that operates as a holding company for offshore investments. Collectively, Plaintiffs are referred to as "ZCM."

  Defendant Oceanic is the administrator, registrar, and transfer agent of M.J. Select, with its principal place of business in the Bahamas. ZCM alleges that Oceanic transacted business through its agents in Illinois, and had systematic and continuous contacts with Illinois. (Id.)

  Defendant Terah Rahming, a citizen of the Bahamas, was a director of M.J. Select and was employed by Oceanic as the Manager of the Funds Department. ZCM alleges that Rahming transacted business through her agents in Illinois and had systematic and continuous contacts with Illinois. Defendant Kenneth Clowes, also a citizen of the Bahamas, was a director of M.J. Select and the Chief Operating Officer of Oceanic. ZCM alleges that he transacted business through his agents in Illinois, and had systematic and continuous contacts with Illinois, in his role as M.J. Select Director and Oceanic's Chief Operating Officer.

  A. Oceanic's Role in the Scheme

  ZCM alleges that the Oceanic Defendants were integral to the fraudulent scheme carried out by all of the defendants in connection with the investment scheme in M.J. Select. Plaintiffs allege that Oceanic became administrator, registrar and transfer agent of M.J. Select in 1998. In that role, Oceanic was responsible for the day-to-day administration of M.J. Select, including the transfer of assets into and out of M.J. Select and the processing of redemption requests.

  Asset Allocation Fund, L.P. ("Asset Allocation") was M.J. Select's first and largest investor. Martin James Capital Management, Inc. ("Martin James") served as the general partner of Asset Allocation, and Martin Allamian was the sole owner and principal of Martin James. Martin James also invested two other partnerships under its control — M.J. Diversified Fund, L.P. ("MJD") and M.J. Financial Arbitrage, L.P. ("MJFA") — in M.J. Select.

  ZCM alleges that Oceanic appointed M.J. Select's board of directors in 1999. It named its employees — Defendants Rahming and Clowes — as the sole directors. In this capacity, Rahming and Clowes assumed control over M.J. Select.

  B. The Assignment Recognition Letter

  As discussed in detail in the August 2, 2004 Opinion, in May 2000, ZCM MFC entered into a call option transaction with Asset Allocation which was a derivative instrument. Under the terms of the call option, ZCM MFC agreed to accept an assignment of Asset Allocations' interests in various investments, including M.J. Select, MJD and MJFA, as an initial premium payment to acquire the option transaction. Before ZCM MFC would accept this assignment, however, it required, among other things, a written confirmation from Oceanic that it would recognize the assignments and ZCM MFC as the sole owner of 100% of the interests in these entities formerly held by Asset Allocation. In response, Coglianese arranged for Rahming to sign the confirmation on behalf of M.J. Select and Oceanic.

  The confirmation — referred to as an "assignment recognition letter" — allegedly fraudulently induced ZCM into investing millions of dollars into M.J. Select. ZCM alleges that the May 31, 2000 "assignment recognition letter" falsely represented that Oceanic would recognize ZCM MFC as the sole owner of 100% of the shares in M.J. Select that had previously been invested under the name of Asset Allocation. They further allege that Oceanic and Rahming falsely represented that ZCM MFC "as sole owner . . . will have all of the rights and privileges that normally accompany such ownership." In addition, ZCM alleges that Rahming and Oceanic fraudulently omitted that M.J. Select had a discriminatory redemption policy and that ZCM's share interests were not effectively redeemable consistent with the offering documents.

  Based, in part, on the assignment confirmation letter, ZCM MFC accepted an assignment of Asset Allocations interests in M.J. Select, MJD and MJFA. In 2001, ZCM instructed Oceanic to redeem its interests in M.J. Select. Contrary to its representations, Oceanic did not redeem ZCM's shares. Instead, Oceanic honored subsequently submitted redemption requests made on behalf of co-defendants Coglianese's and Martin James' friends, family and business associates. ZCM still has not received its redemptions. II. The 2001 ZCM Action

  On August 14, 2001, ZCM Bermuda filed a securities fraud action against Oceanic and various other defendants (the "2001 Action"). The 2001 Action was based on the defendants' "fraudulent offering, conversion, and transfer of limited partnership interests" in MJD, MJFA and M.J. Select. ZCM Bermuda alleged that Oceanic "affirmatively represented in the offering documents that the partnership interests and shares would be readily redeemable on short notice, and Plaintiff relied upon those representations of liquidity in making its investments."

  Count I of the 2001 Action alleged that Oceanic and other defendants misrepresented that the plaintiff's shares in M.J. Select were redeemable within 30 days written notice. They alleged that defendants, including Oceanic, instead intended to control, convert, and transfer the plaintiff's interests regardless of Plaintiff's redemption demands.

  On October 10, 2001, ZCM Bermuda filed an amended complaint adding ZCM, Inc., ZCM Matched Funding Corp. and ZCM Asset Holindg Company LLC as plaintiffs to the 2001 Action and numerous defendants to that case. In addition, plaintiffs alleged in the amended complaint that Oceanic, with two of its co-defendants, controlled M.J. Select. On January 1, 2002, ZCM filed a second amended complaint in the 2001 Action.

  On March 25, 2002, Judge Lindberg granted Oceanic's motion to dismiss the second amended complaint in the 2001 ZCM Action. The court dismissed the case with respect to Oceanic with prejudice on the ground that ZCM had failed to plead the Rule 10b-5 claim against Oceanic with particularity pursuant to Rule 9(b) and had failed to plead scienter under the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4(b) (the "PSLRA"). The court further found that ZCM had failed to plead that Oceanic had a duty to disclose. On August 30, 2002, the 2001 Action was transferred to this Court. See 766347 Ontario Ltd. v. Zurich Capital Markets, Inc., 249 F.Supp.2d 974 (N.D. Ill. 2003) for a discussion of the case.

  ANALYSIS

  I. Legal Standards

  The Oceanic Defendants bring this motion pursuant to Rules 12(b)(1), 12(b)(2) and 12(b)(6). A Rule 12(b)(1) motion to dismiss tests the federal jurisdiction of a complaint. See Fed.R. Civ. P. 12(b)(1). Plaintiffs bear the burden of proving the existence of subject matter jurisdiction. Int'l Harvester Co. v. Deere & Co., 623 F.2d 1207, 1210 (7th Cir. 1980). In analyzing a Rule 12(b)(1) motion, the Court may look beyond the pleadings. See Long v. Shorebank Dev. Corp., 182 F.3d 548, 554 (7th Cir. 1999); Int'l Harvester, 623 F.2d at 1210. The Court must accept all well-pleaded factual allegations as true and draw all reasonable inferences in favor of the plaintiff. Long, 182 F.3d at 554.

  A Rule 12(b)(2) motion to dismiss for lack of personal jurisdiction tests whether a federal court has personal jurisdiction over a defendant. See Fed.R. Civ. P. 12(b)(2). Similar to subject matter jurisdiction, a plaintiff has the burden of demonstrating the existence of personal jurisdiction over a defendant. Jennings v. AC Hydraulic A/S, No. 03-2157, 2004 WL 1965661, at * 1 (7th Cir. Sept. 2, 2004); RAR, Inc. v. Turner Diesel, Ltd., 107 F.3d 1272, 1276 (7th Cir. 1997). A plaintiff need only make a prima facie case that jurisdiction over a defendant is proper. Hyatt Int'l Corp. v. Coco, 302 F.3d 707, 713 (7th Cir. 2002). In determining whether a plaintiff has met this burden, a court may consider affidavits from both parties. Turnock v. Cope, 816 F.2d 332, 333 (7th Cir. 1987). The court must accept as true all allegations in the complaint which are not challenged by a defendant's affidavit; any conflicts in the affidavits must be resolved in favor of the plaintiff. Id.

  The purpose of a motion to dismiss under Rule 12(b)(6) is to "test the sufficiency of the complaint, not to decide the merits" of the case. Triad Assocs., Inc. v. Chicago Housing Auth., 892 F.2d 583, 586 (7th Cir. 1989). When deciding a motion to dismiss pursuant to Rule 12(b)(6), the Court views "the complaint in the light most favorable to the plaintiff, taking as true all well-pleaded factual allegations and making all possible inferences from those allegations in his or her favor." Lee v. City of Chicago, 330 F.3d 456, 459 (7th Cir. 2003). Dismissal is appropriate only where it appears beyond doubt that under no set of facts would plaintiff's allegations entitle him or her to relief. See Henderson v. Sheahan, 196 F.3d 839, 846 (7th Cir. 1999).

  II. Subject Matter Jurisdiction

  The Court will first address the issue of subject matter jurisdiction. The Oceanic Defendants argue that the Court lacks subject matter jurisdiction over ZCM's federal securities fraud claims because the dispute exists between ZCM Bermuda, a Bermuda corporation, and Oceanic, a Bahamian corporation. As addressed in the Court's August 2, 2004 Opinion, a securities fraud claim involving foreign transactions must comply with either the "conduct" or the "effects" approach in order to confer subject matter jurisdiction on a federal court. See Kauthar SDN BHD v. Sternberg, 149 F.3d 659, 665 (7th Cir. 1998). "These two approaches . . . focus on whether the activity in question has had a sufficient impact on or relation to the United States, its markets or its citizens to justify American regulation of the situation. Specifically, one approach focuses on the domestic conduct in question, and the other focuses on the domestic effects resulting from the transaction at issue." Id. Under the effects approach, "courts have looked to whether conduct occurring in foreign countries had caused foreseeable and substantial harm to interests in the United States." Tamari v. Bache & Co. (Lebanon) S.A.L., 730 F.3d 1103, 1108 (7th Cir. 1984). As for the conduct approach, "federal courts have jurisdiction over an alleged violation of the antifraud provisions of the securities laws when the conduct occurring in the United States directly causes the plaintiff's alleged loss in that the conduct forms a substantial part of the alleged fraud and is material to its success. This conduct must be more than merely preparatory in nature; however, we do not go so far as to require that the conduct occurring domestically must itself satisfy the elements of a securities violation."*fn1 Kauthar, 149 F.3d at 667.

  ZCM alleges in Count II that Rahming and Oceanic made false and misleading statements and omissions on or about May 31, 2000 in connection with the purchase and sale of securities issued by M.J. Select. ZCM alleges that M.J. Select's shares were offered and sold in the United States to United States' investors as a premium payment from Asset Allocation, an Illinois limited partnership. ZCM alleges that Coglianese and/or Martin James prepared the fraudulent assignment recognition agreement in Illinois, and that Martin James faxed a copy of the blank assignment confirmation to Coglianese, an Illinois resident, who arranged for Rahming to sign it. The Court draws the reasonable inference that one of these Illinois residents contacted Rahming for the purpose of signing it. ZCM further alleges that Oceanic and Rahming mailed the May 31, 2000 letter to ZCM in New York in order to induce them to invest in M.J. Select. They allege that Oceanic and Rahming had frequent communications with Coglianese, an Illinois resident, and the Coglianese Accounting Entities, one of which is an Illinois professional corporation and one is an Illinois corporation, regarding the promotion of M.J. Select securities and the daily operations of M.J. Select. Plaintiffs allege that Oceanic and Rahming conspired with Martin James in Illinois to treat Martin James and Asset Allocation, Illinois entities, as the owners of ZCM's shares and to improperly convert ZCM's redemption proceeds to insiders in the United States. These allegations are sufficient to confer subject matter jurisdiction over Count II.

  Regarding ZCM's control person claim in Count III, ZCM has alleged both that Defendants caused foreseeable harm to United States' interests and that conduct within the United States was material to Defendants' successful completion of the allegedly fraudulent scheme. ZCM alleges that the Oceanic Defendants were control persons of M.J. Select. They allege that defendants in Illinois prepared and circulated the false misrepresentations in the M.J. Select offering materials, and that various co-defendants who are Illinois residents offered and sold M.J. Select's shares in the United States. ZCM alleges that Illinois accountants and auditors sent fraudulent M.J. Select financial statements to the Oceanic Defendants, who in turn sent them to United States' investors. ZCM further alleges that ZCM MFC, a Delaware corporation, accepted shares in M.J. Select as a premium payment from Asset Allocation, an Illinois limited partnership, in exchange for carrying out the call option transaction. Defendants, according to Plaintiffs, funneled substantial sums from the fraudulent scheme to the Coglianese Defendants in Illinois. Based on these allegations, this Court has subject matter jurisdiction over Count III.

  III. Personal Jurisdiction

  The Oceanic Defendants also seek to dismiss the complaint for lack of personal jurisdiction. They argue that they did not have continuous and systematic business contacts that would provide this Court with personal jurisdiction over them.

  A. Federal Claims

  Because Count III remains against Oceanic, Clowes, and Rahming,*fn2 the jurisdictional provisions of the Securities Exchange Act apply. Specifically, Section 27 of the Act provides, in relevant part:
Any suit or action to enforce any liability or duty created by this chapter or rules and regulations thereunder, or to enjoin any violation of such chapter or rules and regulations, may be brought in any . . . district [wherein any act or transaction constituting the violation occurred] or in the district wherein the defendant is found or is an inhabitant or transacts business, and process in such cases may be served in any other district of which the defendant is an inhabitant or wherever the defendant may be found.
15 U.S.C. § 78aa (2000). "Service of process is how a court gets jurisdiction over the person." Lisak v. Mercantile Bancorp, Inc., 834 F.2d 668, 671 (7th Cir. 1987). Because the Act provides for nationwide service of process, it confers personal jurisdiction in federal court over defendants with minimum contacts with the United States, as long as the mandates of constitutional due process are met. Id. (emphasis added); Fitzsimmons v. Barton, 589 F.2d 330, 332 (7th Cir. 1979). See also Kundrat v. Chicago Bd. Options Exch., No. 01 C 9456, 2002 WL 31017808, at *3 (N.D. Ill. Sept. 6, 2002). See also Fed.R. Civ. P. 4(k)(2) ("If the exercise of jurisdiction is consistent with the Constitution and laws of the United States, serving a summons . . . is also effective, with respect to claims arising under federal law, to establish personal jurisdiction over the person of any defendant who is not subject to the jurisdiction of the courts of general jurisdiction of any state"); Action Embroidery Corp. v. Atlantic Embroidery, Inc., 368 F.3d 1174, 1180 (9th Cir. 2004). Thus, the Court will analyze the limitations of federal constitutional due process to determine if personal jurisdiction exists over each of the Oceanic Defendants. United Rope Distribs., Inc. v. Seatriumph Marine Corp., 930 F.2d 532, 534 (7th Cir. 1991).

  Federal due process requires that each Defendant have "certain minimum contacts with [the United States] such that the maintenance of the suit does not offend `traditional notions of fair play and substantial justice.'" RAR, 107 F.3d at 1277 (quoting Int'l Shoe Co. v. Washington, 326 U.S. 310, 316, 66 S. Ct. 154, 158, 90 L.Ed. 95 (1945)). The Oceanic Defendants' contacts with the United States must be such that they "should reasonably anticipate being haled into court there." Burger King Corp. v. Rudzewicz, 471 U.S. 462, 474, 105 S. Ct. 2174, 2183 (1985) (citations omitted). Each Defendant must have purposefully availed himself or herself of the privilege of conducting activities in the forum state, invoking the benefits and protections of its laws. Id. at 475, 105 S. Ct. at 2183. Given Section 78aa, the Court will focus its due process analysis on whether the Oceanic Defendants have minimum contacts with the United States. The minimum contacts standard varies depending on whether the plaintiff asserts general or specific jurisdiction. Here, Plaintiffs argue that the Court has both general and specific jurisdiction.

  General jurisdiction is proper when the defendant has "continuous and systematic general business contacts" with the forum. RAR, 107 F.3d at 1277 (quoting Helicopteros Nacionales de Colombia, S.A. v. Hall, 466 U.S. 408, 416, 104 S. Ct. 1868, 1875, 80 L. Ed. 2d 404 (1984)). Specific jurisdiction exists if the claims "arise out of or relate to the defendant's contacts with the ...


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