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
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.
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.
Because Count III remains against Oceanic, Clowes, and
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 ...