United States District Court, N.D. Illinois, Eastern Division
September 22, 2004.
ZURICH CAPITAL MARKETS INC., et al., Plaintiffs,
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
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.
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
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
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.
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
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.
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
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 forum." Helicopteros Nacionales de Colombia, S.A.,
466 U.S. at 414 n. 8, 104 S. Ct. at 1872 n. 8.
ZCM argues that Oceanic's minimum contacts with the United
States are met through the following: 1) Oceanic communicates with investment managers and
related personnel in the United States regarding the funds at
issue in this case; 2) Oceanic administers investment funds
totaling approximately $5 billion in assets in the United States,
including M.J. Select and two funds in New York; 3) Oceanic
advertises through a Client Information Package that "Oceanic
works with domestic advisors to preserve wealth and minimize
estate taxes for U.S. residents;" 4) Oceanic derives
approximately 20-25% of its overall income from administering
funds with U.S. investment managers; 5) many of the trusts
administered by Oceanic have United States beneficiaries; 6)
Oceanic deals with major banks, money managers' dealers in the
United States; 7) Oceanic advertises that it "works with domestic
advisors to preserve wealth and minimize estate taxes for United
States residents; 8) Clowes testified that "senior management [of
Oceanic] are constantly making client relationship management
trips to the USA;" 9) Oceanic maintains accounts at eight
brokerage firms in the United States with monthly balances in
each account exceeding $10,000; 10) many wire transfers to and
from Oceanic were routed through a correspondent bank account in
New York; and 11) Oceanic has an interactive website located at
www.oceanic.bs on which it actively advertises and promotes its
services to residents of the United States.*fn3 These
contacts with the United States justify the Court's exercise of
personal jurisdiction over Oceanic. See Cromer Fin. Ltd. v.
Berger, 137 F.Supp.2d 452, 474-79 (S.D.N.Y. 2001); Samuel H. Esterkyn, M.D., Inc. Pension Sharing
and Profit Sharing Plan v. Van Hedge Fund Advisors, Inc.,
108 F.Supp.2d 876, 890 (M.D. Tenn. 1999).
ZCM also has identified Rahming and Clowes' contacts with the
United States. ZCM has established that Rahming has attended
various conferences in the United States for business purposes.
Rahming sent electronic mail to United States residents
soliciting them to visit Oceanic's website; frequently
communicated via telephone, e-mail, facsimile and mail with the
Coglianese co-defendants in Illinois; is licensed by the Colorado
Board of Accountancy as a Certified Public Accountant, sat for
her Certified Public Accountant exam in California, attended
Florida Memorial College in Florida, regularly visited the State
of Floria; transmitted or caused to be transmitted information on
redemption requests to the Coglianese defendants in Illinois for
clearance and approval; contacted the Coglianese defendants and
Martin James in Illinois to obtain contact information for the
other M.J. Select shareholders; sent or caused to be sent
performance evaluation and monthly and annual account statments
and financial statements to M.J. Select shareholders residing in
the United States; issued the fraudulent assignment recognition
agreement to ZCM in New York; and communicated with ZCM in New
York via faxes, phone calls and e-mails to falsely confirm that
M.J. Select would honor ZCM's redemption requests.
ZCM argues that Clowes made seven trips to the United States
from 1999 to the present, including one to Illinios. They also
contend that Clowes sent e-mail to United States residents to
advertise Oceanic's website and solicit them to visit the
website; directed wire transfers through Oceanic's and M.J.
Select's correspondent bank account at Barclays Bank in New York,
including funds at issue in this case that originated and ended
in Illinois; communicated with the Coglianese Defendants in Illinois regarding the daily operations
of M.J. Select, the termination of M.J. Select's trading advisor
and the liquidation of M.J. Select; communicated with the
Coglianese Defendants in Illinois regarding numerous other funds
administered by Oceanic for which Clowes served as Director; and
filed numerous declarations in the 2001 Action to conceal the
true facts of this case. Clowes' actions were purposely directed
toward the United States.
These contacts with the United States satisfy the due process
clause and establish personal jurisdiction over the securities
fraud claims with respect to Rahming and Clowes. See San Mateo
County Transit Dist. v. Dearman, Fitzgerald and Roberts, Inc.,
979 F.2d 1356, 1358 (9th Cir. 1992); United Phosphorous,
Ltd. v. Angus Chem. Co., 43 F.Supp.2d 904, 912 (N.D. Ill. 1999).
B. Fair Play and Substantial Justice
The Court must next determine whether its exercise of personal
jurisdiction over the Oceanic Defendants comports with
"traditional notions of fair play and substantial justice."
Asahi Metal Indus. Co., Ltd. v. Superior Court of California,
480 U.S. 102, 113, 107 S. Ct. 1026, 1033, 94 L. Ed. 2d 92 (1987)
(quoting Int'l Shoe Co., 326 U.S. at 316). See also Jennings,
2004 WL 1965661, at *2. A party's assertion of jurisdiction must
be reasonable in light of the burden on the defendant, the
plaintiff's interest in obtaining relief, the interests of
Illinois, the judicial system's interest in efficiently resolving
controversies, and the "shared interest of the several States in
furthering fundamental substantive social policies." Asahi,
480 U.S. at 113 (citations omitted). The Court must determine whether
this is "one of these rare cases in which minimum requirements
inherent in the concept of fair play and substantial justice
. . . defeat the reasonableness of jurisdiction." Id. at 116,
107 S. Ct. at 1034 (Brennan, J., concurring) (citations omitted).
Exercise of the Court's jurisdiction in this case is fair and
just. "The United States has a substantial interest in the
enforcement of its securities laws and the protection of
investors in the United States securities markets." Cromer Fin.,
Ltd., 137 F.Supp.2d at 479. Illinois also has an interest in
enforcing its securities laws. Further, the burden on Oceanic is
small given that it has continuous business in the United States.
Given the Defendants' substantial contacts with the forum and
their systematic and continuous business in the United States,
the Court will exercise its jurisdiction over them.
C. Fiduciary Shield Doctrine
Defendants Clowes and Rahming argue that they are protected
under the fiduciary shield doctrine because their only connection
to this case is through their work as Oceanic's employees. In
Illinois, the "fiduciary shield doctrine" precludes courts from
exercising jurisdiction over a non-resident corporate official
when the only contacts that individual has with Illinois are made
in his or her corporate capacity. See Rice v. Nova Biomedical
Corp., 38 F.3d 909, 912 (7th Cir. 1994) ("This doctrine
. . . denies personal jurisdiction over an individual whose
presence and activity in the state in which the suit is brought
were solely on behalf of his employer or other principal.")
(internal citations omitted). Where an individual defendant's
conduct in Illinois "was a product of, and was motivated by, his
employment situation and not his personal interests, . . . it
would be unfair to use this conduct to assert personal
jurisdiction over him as an individual." Rollins v. Ellwood,
141 Ill. 2d 244, 280, 152 Ill. Dec. 384, 400, 565 N.E.2d 1302,
1318 (1990). The fiduciary shield doctrine, however, "is a matter
of state law only," not federal law. Hardin Roller Corp. v.
Universal Printing Mach., Inc., 236 F.3d 839, 842 (7th Cir.
2001). Accordingly, it does not apply to ZCM's federal securities fraud
Even if the doctrine applies, Clowes and Rahming are not
protected by it based on the allegations in the Amended
Complaint. It is clear that the fiduciary shield doctrine is
discretionary or equitable, rather than an absolute entitlement.
See Burnhope v. National Mortgage Equity Corp., 208 Ill. App.3d 426,
439-40, 153 Ill. Dec. 398, 405-06, 567 N.E. 2d 356, 363-64
(1st Dist. 1990). There are two exceptions to the doctrine:
"(1) the shield is removed if the individual's personal interests
motivated his actions, and (2) the shield generally does not
apply when the individual's actions are discretionary." Jones v.
Sabis Educ. Sys., Inc., 52 F.Supp.2d 868, 883 (N.D. Ill. 1999)
(internal citations omitted). But see Robinson v. Sabis Educ.
Sys., Inc., 1999, No 98 C 4251, WL 412642, at *3 (N.D. Ill. May
28, 1999) (questioning whether these exceptions exist without the
corporation also being a sham entity).
ZCM alleges that both Clowes and Rahming served as the two most
senior persons in Oceanic's fund administration department.
Rahming served as the Manager of the Fund, and Clowes served as
the Chief Operating Officer of Oceanic. The allegations in the
Amended Complaint are sufficient to infer that Rahming and Clowes
had significant discretion at Oceanic, including discretion in
determining whether to conduct business in the United States.
Accordingly, the doctrine does not apply to them. See Minkus v.
Los Alamos Technical Assoc. Inc., No. 03 C 4216, 2004 WL
1459499, at *3 (N.D. Ill. June 28, 2004); Brujis v. Shaw,
876 F. Supp. 975, 978-80 (N.D. Ill. 1995).
D. Pendent Personal Jurisdiction
Because the Court has personal jurisdiction over the Oceanic
Defendants, it also can assert personal jurisdiction over the
state law claims under the doctrine of "supplemental" or "pendent" personal jurisdiction. Robinson Eng'g. Co., Ltd.
Pension Plan & Trust v. George, 223 F.3d 445, 449-50 (7th
Cir. 2000). Oceanic's motion to dismiss for lack of personal
jurisdiction is therefore denied.
IV. Statute of Limitations
In its August 2, 2004 Opinion, the Court set forth in detail
the law governing statute of limitations in federal securities
fraud actions. As the Court noted, if a "plaintiff pleads facts
that show its suit [is] barred by a statute of limitations, it
may plead itself out of court under a Rule 12(b)(6) analysis."
Whirlpool Fin. Corp. v. GN Holdings, Inc., 67 F.3d 605, 608
(7th Cir. 1995). "[B]ecause the question of whether a
plaintiff had sufficient facts to place it on inquiry notice of a
claim for securities fraud is one of fact, it may be
`inappropriate for resolution on a motion to dismiss under Rule
12(b)(6).'" Kauthar SDN BHD v. Sternberg, 149 F.3d 659, 669-70,
(citing Marks v. CDW Computer Ctrs., Inc., 122 F.3d 363, 367
(7th Cir. 1997)).
The Oceanic Defendants argue that Plaintiffs' federal
securities law claims are barred by the statute of limitations
because they are reasserting the same claims they filed against
Defendant Oceanic in the 2001 action. Because ZCM filed the 2001
Action on November 7, 2003 more than two years before they
filed this case the Oceanic Defendants argue that this case is
A. The Applicable Limitations Period
The Court must first determine the applicable statute of
limitations period. Prior to July 30, 2002, a plaintiff had to
file a Section 10(b) action "within one year after the discovery
of the facts constituting the violation and within three years
after such violation." Lampf, Pleva, Lipkind, Prupis & Petigrow
v. Gilbertson, 501 U.S. 350, 364, 111 S. Ct. 2773, 2782, 115
L.Ed. 2d 321 (1991). On July 30, 2002, Congress enacted the
Sarbanes-Oxley Act and expanded the limitations period for such
claims involving "fraud, deceit, manipulation, or contrivance in
contravention of a regulatory requirement concerning the
securities laws" to two years after the discovery of the facts
constituting the violation and within five years after such
violation. Sarbanes-Oxley Act of 2002, Pub.L. No. 107-204, §
804, 116 Stat. 745, 801 (2002) (to be codified at
28 U.S.C. 1658(b)). Section 804(b) of the Sarbanes-Oxley Act specifically
provides that the expanded limitations period "shall apply to all
proceedings addressed by this section that are commenced on or
after the date of enactment of this Act." Id.
The Seventh Circuit has embraced the concept that courts may
not apply a statute that lengthens an applicable statute of
limitations to revive claims that are otherwise time-barred under
the old statute of limitations because "to do so would `alter the
substantive rights' of a party and `increase a party's
liability'" Stone v. Hamilton, 308 F.3d 751, 757 (7th Cir.
2002) (quoting Chenault v. United States Postal Serv.,
37 F.3d 535, 539 (9th Cir. 1994)). Numerous courts have applied this
concept to the Sarbanes-Oxley extension of the statute of
limitations in securities fraud cases, and held that the extended
limitations period does not apply to claims that were time-barred
when Congress enacted Sarbanes-Oxley. See e.g., In re ADC
Telecomm., Inc., Sec. Litig., No. CIV. 03-1194, 2004 WL 1898469,
at **3-5 (D. Minn. May 17, 2004) (Sarbanes-Oxley does not apply
retroactively to revive time-barred claims); Ato Ram, II, Ltd.
v. SMC Multimedia Corp., No. 03 Civ. 5569, 2004 WL 744792, at *5
(S.D.N.Y. Apr. 7, 2004) ("Plaintiff's claims were not yet barred
when Sarbanes-Oxley was enacted and, accordingly, the amended
statute of limitations applied"); In re Enron Corp. Sec.,
Derivative & Erisa Litig., No. MDL-1446, Civ.A. H-01-3624, 2004
WL 405886, at *12 (S.D. Tex. Feb. 25, 2004) (same); Glaser v. Enzo Biochem, Inc., No. CIV.A. 02-1242-A, 2003 WL
21960613, at *5 (E.D. Va. July 16, 2003); In re Heritage Bond
Litig., 289 F.Supp. 2d 1132, 1148 (C.D. Cal. Jan. 6, 2003); but
see Roberts v. Dean Witter Reynolds, Inc., No.
8:02-CV-2125-T-26, 2003 WL 1936116, at *3 (M.D. Fla. Mar. 31,
2003) (applying Sarbanes-Oxley retroactively to all claims,
including time-barred claims because "Congress intended to
lengthen the statute of limitations to enable people who lost
their life-savings to companies like Enron to recover some of
their investments"). The Court agrees with the reasoning of these
decisions. The plain language of the statute does not clearly
reflect a Congressional intention to apply the extended
limitations period retroactively to revive time-barred claims.
See INS v. St. Cyr, 533 U.S. 289, 316, 121 S. Ct. 2271, 2288,
150 L.Ed. 2d 347 (2001) ("A statute may not be applied
retroactively  absent a clear indication from Congress that it
intended such a result").
As discussed in the next section of this opinion, the Court
cannot conclude at this stage that Plaintiffs' claims were barred
as a matter on law on July 31, 2002 when Congress passed
Sarbanes-Oxley. Plaintiffs' Section 10b-5 claim accrued by August
14, 2001 when Plaintiffs filed the August 2001 Action. Under the
one year statute of limitations, the period would not have
expired until August 14, 2002 after Congress passed the
Sarbannes-Oxley Act. Because it was not time-barred as a matter
of law at that time, the amended statute of limitations and its
two year time period applies to Plaintiffs' securities fraud
claims in this case.
Defendants' heavy reliance on In re Enterprise Mortgage
Acceptance Co. L.L.C. Sec. Litg., 295 F. Supp.2d 307, 312-17
(S.D.N.Y. 2003), is misplaced. In Enterprise, the court held
that the two years statute of limitations under Sarbanes-Oxley
did not apply to the plaintiff's securities fraud claims because
such claims were already time-barred prior to the effective date
of Sarbanes-Oxley. Here, ZCM's claims were not time-barred as a
matter of law when Sarbanes-Oxley became effective. The
Enterprise reasoning, therefore, does not apply to this case.
Because it is often difficult for a plaintiff to know that he
or she has been the victim of securities fraud until years after
the commission of the fraud, the statute of limitations for
federal securities fraud claims commences under the doctrine of
"inquiry notice." Fujisawa Pharm. Co., Ltd., v. Kapoor,
115 F.3d 1332, 1334 (7th Cir. 1997). Under inquiry notice, the
"statute of limitations applicable to suits under Rule 10b-5
begins to run not when the fraud occurs, and not when the fraud
is discovered, but when (often between the date of occurrence and
the date of the discovery of the fraud) the plaintiff learns, or
should have learned through the exercise of ordinary diligence in
the protection of one's legal rights, enough facts to enable him
by such further investigation as the facts would induce in a
reasonable person to sue within a year." Id., citing Law v.
Medco Research, Inc., 113 F.3d 781, 785 (7th Cir. 1997). For
inquiry notice, more than "merely suspicious circumstances" must
exist. Fujisawa, 115 F.3d at 1337. "The facts constituting such
notice must be sufficiently probative of fraud sufficiently
advanced beyond the stage of a mere suspicion, sufficiently
confirmed or substantiated not only to incite the victim to
investigate but also to enable him to tie up any loose ends and
complete the investigation in time to file a timely suit." Id.
One important factor courts consider in determining when the
statute of limitations begins is a party's ease of access to
evidence that would trigger an appropriate inquiry. See Marks v.
CDW Computer Ctrs., Inc., 122 F.3d 363, 368 (7th Cir. 1997).
Additionally, "[t]here must also be a suspicious circumstance to
trigger a duty to exploit the access; an open door is not by
itself a reason to enter a room. . . . How suspicious the circumstance
need be to set the statute of limitations running . . . will
depend on how easy it is to obtain the necessary proof by a
diligent investigation aimed at confirming or dispelling the
suspicion." Fujisawa, 45 F.3d at 1335.
1. Claims Against Oceanic
ZCM Bermuda sued Oceanic and others in the 2001 Action for
securities fraud on August 14, 2001. The Oceanic Defendants argue
that the 2001 Action clearly demonstrates that Plaintiffs had
actual notice of the alleged violations as of August 14, 2001.
a. Section 10(b) Claim
Both the 2001 Action and this case are based on a complex
fraudulent investment scheme involving M.J. Select. Both actions
involve ZCM's injury arising from their investment in M.J.
Select. ZCM alleges in both cases that it reasonably relied on
alleged misrepresentations regarding redemption of interest in
M.J. Select when it purchased the partnership interests.
Similarly, ZCM alleges in both actions that it suffered its
losses as a result of the defendants' failure to redeem ZCM's
partnership interests and shares, and because the defendants
fraudulently converted and transferred ZCM's interests.
The 2001 Action alleged that Oceanic had made false and
material misrepresentations in M.J. Select's Private Placement
Memorandum ("PPM"). Although ZCM bases the case before the Court
on a May 31, 2000 "assignment recognition agreement," Plaintiffs
had that agreement as early as September 2001. (2001 Action, 01 C
6250, R. 134-1, Ex.B3 at 568-69, Tr. Of 9/24/01 Martin Allamian
Dep.). In the 2001 Action and this case, Plaintiffs allege that
Oceanic was the administrator, registrar, and transfer agent of
M.J. Select. In both cases, Plaintiffs allege they demanded that
Oceanic pay ZCM the proceeds from the redemption of its limited
partnership interests, and that Oceanic failed to recognize ZCM Bermuda as
the owner of certain shares because it failed to process ZCM
Bermuda's redemption request.
Even though in 2001 ZCM did not have all of the details of the
alleged fraud committed by Oceanic, the allegations in the 2001
Action demonstrate that it knew enough facts to enable it to
further investigate when it filed the 2001 Action. ZCM was on
inquiry notice of its Section 10(b) claim when it filed the 2001
Action. The allegations against Oceanic are based on the same
fraudulent scheme, the same injury, the same theories, the same
cause of action, and the same omissions. The Court holds that as
a matter of law Plaintiffs were on inquiry notice of their
Section 10(b) claim when they filed the 2001 Action.
Although Plaintiff claims that Oceanic fraudulently concealed
some crucial facts in this case, "when knowledge or notice is
required to start the statute of limitations running, there is no
room for equitable tolling." Tregenza v. Great Am.
Communications Co., 12 F.3d 717, 721 (7th Cir. 1993)
(emphasis omitted). Equitable tolling does not apply to the
statute of limitations in the securities fraud case. Whirlpool,
67 F.3d at 610. See Lampf, 501 U.S. at 363-64 ("[T]he equitable
tolling doctrine is fundamentally inconsistent with the 1- and
3-year structure [of the statute of limitations]. . . . The
3-year limit is a period of repose inconsistent with
tolling. . . . Because the purpose of the 3-year limitation is
clearly to serve as a cutoff, we hold that tolling principles do
not apply to that period."); In re Merrill Lynch & Co., Inc.
Research Reports Sec. Litig., 289 F.Supp.2d 416, 426 (S.D.N.Y.
2003) ("Equitable tolling is inconsistent with the discovery
period because if a defendant actively conceals a fraud, then
plaintiff will not discover the facts suggesting the violation
and the statute will not begin to run, making tolling
unnecessary. . . . Equitable tolling is also fundamentally
inconsistent with the repose period because that limit is `clearly to serve as a cutoff' and it would have no
significance as an outside limit if it could be tolled'").
b. Section 20(a) Claim
A Section 20(a) claim includes different elements than a
Section 10(b) claim. In the amended complaint to the 2001 Action,
ZCM alleged that Oceanic controlled M.J. Select. Although this
allegation suggests ZCM was on inquiry notice regarding the
general control element of a Section 20(a) claim, the Court
cannot conclude as a matter of law that ZCM was on inquiry notice
two years in advance of November 7, 2003 when it filed this suit
of the specific control element of its Section 20(a) claim
against ZCM. The Court admits that this issue is a close one, but
at this stage, the Court cannot conclude "definitively" that ZCM
has pled itself out of court as to the Section 20(a) claim
against Oceanic. See Barry Aviation Inc. v. Land O'Lakes
Municipal Airport Com'n, 377 F.3d 682, 688 (7th Cir. 2004).
Accordingly, that claim remains.
2. Claims Against Rahming and Clowes
In contrast to Oceanic, the 2001 Action does not demonstrate
that ZCM was on inquiry notice regarding Rahming and Clowes. The
2001 Action does not mention either individual nor detail their
roles in the alleged fraud. At this stage of the litigation, the
Court cannot conclude that the statute of limitations accrued as
to Rahming and Clowes when ZCM filed the 2001 Action.
C. Statute of Repose
The Sarbanes-Oxley five year statute of repose applies at this
stage of the litigation for the same reasons the two year statute
of limitations applies. ZCM's securities fraud claims involve
alleged misrepresentations on May 31, 2000 and April 1, 2000.
Because ZCM filed this action on November 7, 2003, these dates comfortably fall within the five
year statute of repose.
The Court addressed the standing issue in its August 2, 2004
Opinion. Defendants' motion to dismiss for lack of standing is
denied for the reasons set forth in that Opinion.
VI. Plaintiffs Sufficiently Allege Federal Securities Fraud
A. Count II Section 10(b)
Although the Court is dismissing Count II against Oceanic as
time-barred, Plaintiffs' Count II claim for securities fraud
under Section 10(b) and Rule 10b-5 remains against Rahming.
Plaintiffs must allege that Defendant Rahming (1) made a false
statement or omission; (2) of a material fact; (3) with scienter;
(4) in connection with the purchase or sale of securities; (5)
upon which Plaintiffs justifiably relied; and (6) the reliance
proximately caused Plaintiffs' damages. In re HealthCare Compare
Corp. Sec. Litig., 75 F.3d 276, 280 (7th Cir. 1996).
Both Federal Rule of Civil Procedure 9(b) and the PSLRA apply
to these allegations and impose heightened pleading requirements
on Plaintiffs. Rule 9(b) requires that Plaintiffs plead fraud
allegations with particularity. Fed.R. Civ. P. 9(b). In addition
to Rule 9(b), the strict pleading mandates of the PSLRA apply to
Plaintiffs' complaint. In order to meet the PSLRA's dictates for
a securities fraud claim, "the complaint shall specify each
statement alleged to have been misleading, the reason or reasons
why the statement is misleading, and, if an allegation regarding
the statement or omission is made on information and belief, the
complaint shall state with particularity all facts on which that
belief is formed." 15 U.S.C. § 78u-4(b)(1) (2000).
1. Alleged Misrepresentations and Omissions
Count II against Rahming is premised on the May 31, 2000
"assignment recognition agreement," signed by Rahming. Plaintiffs allege that Rahming
made false and misleading statements in this May 31 letter in
connection with the purchase and sale of securities issued by
M.J. Select. Plaintiffs allege that the assignment recognition
agreement is false and misleading because 1) it falsely
represented that Oceanic would recognize ZCM MFC as the sole
owner of 100% of M.J. Select's shares assigned to ZCM MFC and
subsequently ZCM Bermuda; 2) it falsely represented that ZCM MFC,
and subsequently ZCM Bermuda, would have all the rights and
privileges that normally accompany sole ownership; 3) it failed
to disclose the existence of a discriminatory redemption policy;
and 4) it failed to disclose that ZCM's share interest were not
redeemable in accordance with the Offering Memoranda because
Oceanic and Rahming intended to retain control over them. They
further allege that ZCM MFC and ZCM Bermuda would not have
accepted the assignment of, or purchased, the M.J Select
securities if they had known the true facts or the existence of
the omitted facts. These allegations sufficiently state a
misrepresentation in Count II. Although Rahming characterizes
this letter as "a perfunctory two-sentence form letter" that does
not contain any misrepresentations, that issue is not properly
decided at this stage of the litigation.
Rahming, relying on Chiarella v. United States, 445 U.S. 222,
228, 100 S. Ct. 1108, 63 L.Ed.2d 348 (1980), argues that she did
not have a duty to disclose the allegedly omitted information in
the assignment recognition letter. Such a duty arises if a
defendant makes a statement that would be misleading without
disclosing certain other information. "If one speaks, he must
speak the whole truth." Stransky v. Cummins Engine Co., Inc.,
51 F.3d 1329, 1331 (7th Cir. 1995) (citations omitted). ZCM
alleges that Rahming made certain representations in the
assignment agreement, and therefore had a duty to disclose the
omitted information because such information was necessary to make Rahming's statements not
misleading. At this stage, these allegations are sufficient to
survive a motion to dismiss.
Rahming also argues that Plaintiffs have failed to adequately
plead scienter in Count II. Plaintiffs must "state with
particularity facts giving rise to a strong inference that the
defendant acted with the required state of mind."
15 U.S.C. § 78u-4(b)(2) (2000). Plaintiffs may use "motive and opportunity"
or "circumstantial evidence" to establish scienter under the
PSLRA, as long as the allegations support a strong inference that
the defendants acted recklessly or knowingly when they made the
alleged misrepresentations. 766347 Ontario Ltd. v. Zurich
Capital Mkts., Inc., 249 F.Supp.2d 974, 987 (N.D. Ill. 2003).
See also Chu v. Sabratek Corp., 100 F.Supp.2d 815, 823 (N.D.
ZCM alleges that Rahming knew or recklessly disregarded the
falsity of the misrepresentations because she knew that Defendant
Michael Coglianese and representatives of Martin James controlled
the redemptions of share interests, she had followed each and
every direction of Coglianese and Martin James regarding
redemption payments without questioning whether such redemptions
complied with M.J. Select's Offering Memorandum, and she had
authorized payments from M.J. Select's account at Coglianese's
direction without approval from Oceanic or Martin James. ZCM also
alleges that Rahming had a motive to make the alleged
misrepresentations and omissions because she "had the opportunity
to realize monetary gains from these investments."
These scienter allegations focus primarily on the alleged
omissions in the assignment recognition letter. They fail to give
rise to a strong inference that Rahming knew or recklessly disregarded the alleged misrepresentations regarding recognizing
ZCM MFC as the sole owner of the shares with all of the rights
and privileges that normally accompany such ownership. Plaintiffs
do not allege with any particularity how Rahming knew in May 2000
that statements about ZCM Bermuda's ownership rights were false.
Furthermore, as Rahming points out, ZCM has not alleged with any
particularity how increasing the investments of M.J. Select would
motivate Rahming when Oceanic received a flat $5,000 fee per year
for its administrative services.*fn4
With regard to the omission regarding the alleged
discriminatory redemption policy, ZCM also has not alleged facts
that satisfy the scienter requirements regarding Rahming.
Accordingly, Count II is dismissed without prejudice.
B. Control Person Liability (Count III)
In Count III, ZCM alleges that Oceanic, Rahming and Clowes were
control persons pursuant to Section 20(a) of the Exchange
Act.*fn5 In order to allege a Section 20(a) claim,
Plaintiffs must allege (1) a primary securities violation; (2)
each of the individual defendants exercised general control over
the operations of M.J. Select; and (3) each of the individual
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). Rule 9(b)'s particularity requirements apply to Count III.
1. General Control
The Oceanic Defendants challenge Plaintiffs' allegations of
general and specific control. General control requires ZCM to
allege that the Oceanic Defendants "actually participated in,
that is, exercised control over, the operations of [M.J. Select]
in general." Harrison v. Dean Witter Reynolds, Inc.,
79 F.3d 609, 614 (7th Cir. 1996). Defendants correctly point out that
alleging mere titles does not suffice to establish control person
liability. ZCM's allegations, however, go beyond mere titles. ZCM
alleges that Oceanic had the power to appoint and did appoint
M.J. Select's entire Board of Directors. They contend that
Oceanic issued account and financial statements for M.J. Select.
ZCM also alleges that Oceanic had the responsibility for
processing all subscriptions, redemptions, transfers and
assignments of M.J. Select's shares and issuing monthly financial
statements, had the authority to request checks drawn on M.J.
Select's bank accounts and direct wire transfers from such
accounts to redeem shares, had the authority to refuse to comply
with redemption requests, and had the power to place (and in fact
placed) M.J. Select into liquidation. These allegations satisfy
ZCM's burden regarding Oceanic's general control over M.J.
Regarding Rahming and Clowes, ZCM alleges that they served as
directors of M.J. Select from 1999 forward. Rahming requested
legal opinions for M.J. Select, issued account and financial
statements, and issued audited financial statements confirming
fraudulent results. ZCM alleges that Rahming had the authority to
place M.J. Select into liquidation and to delegate M.J. Select's
business affairs. These allegations particularize Rahming's
general control over the operations of M.J. Select. In addition to being an M.J. Select director, ZCM alleges that
Clowes was the Chief Operating Officer of Oceanic. ZCM alleges
that Clowes maintained a correspondent bank account on behalf of
M.J. Select in the United States and directed the wire transfer
of funds through this bank account. Plaintiffs contend that
Clowes communicated frequently with Michael Coglianese regarding
the daily operations of M.J. Select, issued account and financial
statements to M.J. Select's shareholders, and issued audited
financial statements confirming fraudulent results. ZCM has
alleged Clowes' general control over M.J. Select's operations.
The Oceanic Defendants ask the Court to consider a declaration
from Defendant Clowes regarding Oceanic's role as administrator.
At the motion to dismiss stage, the Court cannot consider this
2. Specific Control
ZCM alleges that the Oceanic Defendants had specific control
over M.J. Select's offering documents that are the focus of the
alleged primary violation in Count III. ZCM does not allege that
any of the Oceanic Defendants drafted M.J. Select's Offering
Memoranda. Instead, ZCM contends that the Oceanic Defendants had
the power and ability to suspend the operations of M.J. Select
unless it corrected the false statements in M.J. Select's
Offering Memoranda or discontinued their use in soliciting new
investors. They allege that Rahming and Clowes, as sole directors
of M.J. Select, had this control. ZCM alleges that each of the
Oceanic Defendants had the power to control the day-to-day
operations of M.J. Select which gave them control over the
Offering Memoranda. ZCM also contends that Oceanic, Rahming, and
Clowes had the statutory and common law duty under Bahamian law
to require the issuance of corrected offering documents. The
Oceanic Defendants argue that the Administration Agreement did
not give them the authority to do so. This contention, however, raises an issue
of fact that is not appropriate for the Court to resolve at this
stage. ZCM has met its pleading burden.
VII. Illinois Securities Law (Count VII)
Count VII alleges that Oceanic violated the Illinois Securities
Law of 1953 (the "Act"). 5 ILCS 5/1-5/19 (2002). The Act provides
that "[e]very sale of a security made in violation of the
provisions of this Act shall be voidable at the election of the
purchaser . . . and the issuer, controlling person, underwriter,
dealer or other person by or on behalf of whom said sale was
made, and each underwriter, dealer, or salesperson who shall have
participated or aided in any way in making the sale . . . shall
be jointly and severally liable to the purchaser."
815 ILCS 5/13A. Oceanic must fall within the definition of an "issuer,
controlling person, underwriter, dealer or other person by or on
behalf of whom said sale was made" or that of an "underwriter,
dealer or salesperson" who participated in the sale. ZCM alleges
that Oceanic is a "controlling person" or a "primary violator."
Oceanic argues that because it merely served as the administrator
of M.J. Select, it cannot be held liable as either a principal
violator or a control person under the Act.
The Act defines a "controlling person" as "any person offering
or selling a security, or group of persons acting in concert in
the offer or sale of a security, owning beneficially . . . either
(i) 25% or more of the outstanding voting securities of the
issuer of such security" or (ii) "such number of outstanding
securities of the issuer of such security as would enable such
person, or group of persons, to elect a majority of the board of
directors or other managing body of such issuer." 815 ILCS 5/2.4.
"[U]nlike the 1934 Exchange Act, where `controlling persons' may
be read broadly to reach many parties, the Illinois Act has been
applied only to persons playing `central and specialized roles.'" Carlson v. Bear, Stearns & Co.
Inc., 906 F.2d 315, 318 (7th Cir. 1990) (citation omitted).
Moreover, "[w]hile overt action by a member of a controlling
group would not always be required, there must be some showing of
assent, approval or concurrence, albeit tacit approval, in the
action of the group in selling securities, before an individual
will be held liable for the actions of the controlling group. A
person is not liable merely because one can add his shareholding
onto the holdings of a controlling group and they still remain a
controlling group. Some connection with the sale, or decision to
sell, securities is required under the statute. . . ." Froehlich
v. Matz, 93 Ill. App. 3d 398, 406, 48 Ill. Dec. 781, 788,
417 N.E.2d 183, 190 (1981).
ZCM does not allege that Oceanic owned any shares in M.J.
Select. Instead, they argue that because Oceanic selected the
directors for M.J. Select, the Court can infer that it owned
sufficient shares in M.J. Select to do so. Based on the
allegations in the Amended Complaint, the Court will not make
this jump in logic. See Purmal v. Supreme Ct. of Ill., No. 03 C
6061, 2004 WL 542528 at *1 (N.D. Ill. Feb. 26, 2004). Count VII
is dismissed without prejudice.
Oceanic correctly points out that the term "primary violator"
does not appear in the statute. ZCM does not allege that Oceanic
was an underwriter, issuer, dealer or salesperson. They have not
satisfied the pleading requirements.
VIII. Fraud and Conspiracy to Defraud (Counts VIII and IX)
Count VIII alleges common law fraud and Count XI alleges a
conspiracy to defraud. The Oceanic Defendants seek to dismiss
Counts VIII and IX for failure to plead fraud with the requisite
particularity required under Rule 9(b).
The elements of a claim for fraud in Illinois are: (1) a false
statement of material fact; (2) knowledge or belief of the falsity by the party making the
statement; (3) intention to induce the other party to act; (4)
action by the other party in reliance on the truth of the
statements; and (5) damage to the other party resulting from such
reliance. WTM, Inc. v. Henneck, 125 F.Supp.2d 864, 869 (N.D.
Ill. 2000). Plaintiffs have satisfied the mandates of Rule 9(b)
with respect to each of the Oceanic Defendants in Count VIII.
Regarding Count IX, in order to state a claim for conspiracy to
defraud in Illinois, ZCM must allege "(1) a conspiracy; (2) an
overt act of fraud in furtherance of the conspiracy; and (3)
damages to the plaintiff as a result of the fraud." Bosak v.
McDonough, 192 Ill. App. 3d 799, 803, 139 Ill. Dec. 917, 920,
549 N.E. 2d 643, 646 (1989). The Court agrees that the
allegations in Count IX regarding Defendants Oceanic, Rahming and
Clowes do not meet Rule 9(b)'s particularity requirements. Count
IX is dismissed without prejudice.
VIII. Unjust Enrichment (Count X)
The Oceanic Defendants argue that the Court should dismiss
Count X because Plaintiffs have failed to allege that they
retained a benefit to Plaintiffs' detriment. The Court addressed
this issue in its August 2, 2004 Opinion, and denies the motion
on this basis.
In addition, the Oceanic Defendants argue that the Court should
dismiss the unjust enrichment count because Plaintiffs allege
that an express contract governs their relationship, and thus
unjust enrichment does not apply. Even if the the Oceanic
Defendants' premise is accurate, a plaintiff may plead in the
alternative. See Fed.R. Civ. P. 8(e)(2); Pickrel v. City of
Springfield, Ill., 45 F.3d 1115, 1119 (7th Cir. 1995). If a
contract did not exist between the parties, then, assuming
Defendants are correct, Plaintiffs could proceed on this count. IX. Conversion (Count XI)
Plaintiffs allege conversion against Defendant Oceanic in Count
XI. "A conversion is any unauthorized act that deprives a person
of his or her or its property permanently or for an indefinite
time." Turner Investors v. Pirkl, 338 Ill. App. 3d 676, 681,
273 Ill. Dec. 423, 427, 789 N.E. 2d 323, 327 (2003) (citations
omitted). In order to state a claim for conversion in Illinois,
Plaintiff must allege that (1) it has a right to the property at
issue; (2) it has an absolute and unconditional right to the
immediate possession of that property; (3) it made a demand on
the defendant for possession of the property; and (4) the
defendant wrongfully and without authorization assumed control,
dominion, or ownership over the property. Cirrincione v.
Johnson, 184 Ill. 2d 109, 114, 234 Ill. Dec. 455, 458,
703 N.E.2d 67, 70 (1998). As explained by the Seventh Circuit, "[a]n
asserted right to money normally will not support a claim for
conversion. Only if the money at issue can be described as
`specific chattel,' . . . in other words, `a specific fund or
specific money in coin or bills,' . . . will conversion lie.
Moreover, the plaintiff's right to the money must be absolute. It
must be shown that the money claimed, or its equivalent, at all
times belonged to the plaintiff and that the defendant converted
it to his own use." Horbach v. Kaczmarek, 288 F.3d 969, 978
(7th Cir. 2002) (citations and quotations and emphasis
Here, the money at issue was used to purchase share interests
in M.J. Select. Plaintiffs' interests did not represent the only
purchased shares of M.J. Select. Further, ZCM has not alleged
that its interests were separated in a specific fund from other
interests in M.J. Select. Its interests, therefore cannot be
deemed specific for conversion purposes. See Fogel v. Gordon &
Glickson, P.C., No. 03 C 1617, 2003 WL 22057194, at *3 (N.D.
Ill. Sept. 3, 2003). Count XI is dismissed.
X. Breach of Contract (Count XII)
For the reasons set forth in the Court's August 2, 2004
Opinion, Count XII stands.
XI. Intentional Interference with Contract (Count XIII)
In order to state a claim in Illinois for tortious interference
with a contract, a plaintiff must allege the following elements:
(1) the existence of a valid and enforceable contract between
plaintiffs and another, (2) the defendant's awareness of the
contract; (3) an intentional interference by the defendant
inducing breach of contract; (4) a breach of contract caused by
the defendant's acts; and (5) damages to the plaintiff. Smock v.
Nolan, 361 F.3d 367, 372 (7th Cir. 2004). See also
Fieldcrest Builders, Inc. v. Antonucci, 311 Ill. App. 3d 597,
611, 243 Ill. Dec. 740, 752, 724 N.E.2d 49, 61 (1999). Plaintiffs
have alleged each of these elements. Count XIII stands.
XII. Breach of Fiduciary Duty (Count XIV)
For the reasons set forth in the Court's August 2, 2004 Opinion
regarding Defendant Coglianese, Count XIV stands.
XIII. Breach of Contract (Count XVI)
Plaintiffs allege that Defendant Oceanic entered into a written
contract with ZCM MFC on May 31, 2000 in which it promised to
recognize ZCM MFC as the sole owner of 100% of the shares that
Martin James had invested with them, and confirmed that ZCM MFC
would have all the rights and privileges that accompany such
ownership. ZCM MFC thereafter transferred its rights under this
contract to ZCM Bermuda, and Oceanic expressly recognized these
assignments to ZCM Bermuda. Plaintiffs allege that Oceanic
breached this contract with ZCM Bermuda by refusing to honor its valid redemption requests and converting
ZCM Bermuda's interests in M.J. Select at the request of Martin
James. Plaintiffs sufficiently allege a breach of contract claim
based on the May 31, 2000 assignment recognition agreement.
XIV. Bahamian Law
ZCM premises Counts XVII and XVIII on violations of Bahamian
law. In Count XVII, ZCM Bermuda alleges that the Oceanic
Defendants violated the Bahamian Mutual Funds Act, 1995, and
regulations thereunder. In Count XVIII, ZCM alleges that the
Oceanic Defendants breached their common law duty of care under
Bahamian law. The Oceanic Defendants argue that ZCM's Bahamian
law claims do not apply outside the Bahamas.
Regarding Count XVII, the Oceanic Defendants argue that no
legislation is presumed to operate outside the territorial
jurisdiction of the country enacting it. Although "under
international law, a state may not exercise authority to enforce
law that it has no jurisdiction to prescribe," Restatement
(Third) of Foreign Relations Law § 431 (1987) (comment a), for
the purposes of this § 431, a "judgment of a court awarding or
denying damages in a civil action would generally not be seen as
enforcement." Restatement (Third) of Foreign Relations Law § 431
(comment b). Further, ZCM may raise, and this Court is authorized
to determine, an issue concerning the law of a foreign country.
Fed.R. Civ. P. 44.1; See, e.g., Spinozzi v. ITT Sheraton
Corp., 174 F.3d 842 (7th Cir. 1999) (Mexican law governed
substantive issues); Cummings v. Club Mediterranee, S.A., No.
01 C 6455, 2003 WL 22462625 (N.D. Ill. Oct. 29, 2003) (court
applied Bahamian law on all substantive issues). Indeed, Federal
Rule of Civil Procedure 44.1 provides that "[a] party who intends
to raise an issue concerning the law of a foreign country shall
give notice by pleadings or other reasonable written notice."
This rule contemplates that federal courts can entertain questions of foreign law.
Accordingly, ZCM may plead this cause of action.
Count XVIII alleges that Oceanic breached its common law duty
of care. This cause of action is not based in statute, but the
common law. Thus, Oceanic's argument regarding statutory effect
does not apply to this cause of action. Additionally, as
discussed in the previous paragraph, this Court is authorized to
determine issues of foreign law. Accordingly, ZCM may plead this
cause of action. CONCLUSION
The Oceanic Defendants' motion to dismiss is granted in part
and denied in part. It is granted with respect to Count II. Count
II is dismissed with prejudice as to Oceanic, and without
prejudice as to Rahming. It is also granted without prejudice as
to Counts VII, IX and XI. It is denied as to Counts III, VIII, X,
XII through XV, XVII and XVIII. Plaintiffs have until October 22,
2004 to file a Second Amended Complaint consistent with this
opinion and the Court's August 2, 2004 Opinion.