United States District Court, N.D. Illinois, Eastern Division
October 6, 2004.
JOHN H. WALDOCK, solely as Trustee of the John H. Waldock Trust, et al., Plaintiffs,
M.J. SELECT GLOBAL, LTD., a Bahamian investment company now in Liquidation, et al., Defendants.
The opinion of the court was delivered by: AMY J. ST. EVE, District Judge
MEMORANDUM OPINION AND ORDER
Plaintiffs have filed a First Amended Complaint ("FAC") against
multiple Defendants alleging a fraudulent investment scheme in
connection with the purchase of shares in M.J. Select Global,
Ltd. ("M.J. Select"), a Bahamian mutual fund. Plaintiffs have
sued Defendants Oceanic Bank and Trust, Ltd., Kenneth Clowes,
Terah Rahming and others for losses resulting from their
investments in the fund. Defendants Oceanic, Clowes and Rahming
have moved to dismiss the FAC. The Oceanic Defendants seek to
dismiss the FAC for lack of personal jurisdiction, lack of
standing and failure to state a claim. The Court grants their
motion in part and denies it in part.
This case is related to Zurich Capital Markets Inc. v.
Coglianese, et al., No. 03 C 7960, (the "ZCM Case"), also
pending before this Court. The Court recently addressed similar
motions in that case. See Zurich Capital Markets Inc. v.
Coglianese, et al., No. 03 C 7960, 2004 WL 2191596 (N.D. Ill.
Sept. 22, 2004). (the "September 22, 2004 Opinion") and 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"). Although the ZCM Case involves
different plaintiffs and a different complaint, because many of
the allegations are similar to the ones in this case and because
both cases are based on investments in the same allegedly
fraudulent scheme, the Court's reasoning in its September 22,
2004 and August 2, 2004 Opinions applies equally to many of the
issues in this case.
I. The Plaintiffs
The Plaintiffs in this case all invested in M.J. Select, and
lost all or substantial portions of their investments. Plaintiffs
include: John H. Waldock, solely as Trustee of the John H.
Waldock Trust; Mary Jane S. Hill and John E. Rosino, solely as
Trustees of the Andrew W. Waldock Trust, John H. Waldock, Jr.
Trust, Julia Wright Waldock Trust, Cameron Douglas Waldock Trust,
Gary Phillip Liebenthal, II Trust, Samuel Louis Waldock Trust,
Benjamin Nicholas Waldock Trust, Dustin J. Houck Trust, Daniel R.
Houck Trust, Erik J. VanDootingh Trust, Ian A. VanDootingh Trust,
John H. Waldock, II Trust, Andrew W. Waldock, Jr. Trust,
Christopher J. Waldock Trust; 766347 Ontario Ltd., a Canadian
corporation; The James F. Boughner Foundation, a Canadian
corporation; Ed Pettegrew, Sr., a citizen of Florida; David
Miller a citizen of California, John A. Copeland, as Trustee
under a trust agreement dated April 18, 1988; Jack C. Kenning and
Barbara Straka-Kenning, citizens of Ohio; Robert M. Warner, Sr.
individually and as beneficiary of Independent Trust Corporation
Trust, for Adam Scott Warner and for Robert Warner, Account No.
263 in the name of Adam S. Warner and Account No. 264 in the name
of Andrew Robert Warner; and George Lukas, a citizen of New
Jersey. Collectively, Plaintiffs are referred to as the "Waldock
Plaintiffs" or "Plaintiffs." II. The Oceanic Defendants
Plaintiffs have sued multiple Defendants, including Oceanic
Bank and Trust Limited ("Oceanic"), Terah Rahming and Kenneth
Clowes. Defendants Oceanic, Clowes, and Rahming are collectively
referred to as the "Oceanic Defendants." Oceanic is a bank and
trust company with its principal offices located in Nassau,
Bahamas. It acquired New World Trustees Limited, effective May 1,
1998. Effective December 31, 1999, Oceanic and New World merged
under the name of Oceanic Bank and Trust Limited.
Rahming was an officer and employee of Oceanic. In 1997,
Oceanic appointed Rahming as its Manager of Fund Services. She
also served as a director of M.J. Select, and administered its
affairs. She is a graduate of Florida Memorial Collect and
licensed as a certified public accountant by the Board of
Accountancy of the State of Colorado.
Clowes was the Chief Operating Officer of Oceanic. In addition,
he served as a director of M.J. Select, and administered its
III. The Alleged Scheme*fn1
The Waldock Plaintiffs allege that Defendants participated in a
complex scheme to defraud M.J. Select's investors. They contend
that Defendants used false and misleading offering materials to
induce Plaintiffs to invest in M.J. Select. Plaintiffs allege
that Defendants falsely represented that M.J. Select followed a
"market neutral" trading approach and that its investors could
redeem their investments on fifteen days notice. Plaintiffs
further allege that Defendants funneled their investments through
a series of foreign entities, and then illegally placed them into illiquid investments. In total, Plaintiffs
assert that they lost approximately $9.8 million through the
allegedly fraudulent scheme.
Plaintiffs allege that Defendants violated Section 10(b) of the
Securities Exchange Act of 1934 (the "Exchange Act"),
15 U.S.C. § 78j(b), Rule 10b-5 promulgated thereunder, Section 20(a) of the
Exchange Act, the Investment Company Act of 1940,
15 U.S.C. §§ 80a-7, 80a-46 and 80a-47, and various state law claims. The
Oceanic Defendants seek to dismiss each of the claims stated
I. Legal Standards
The Oceanic Defendants bring this motion pursuant to Rules
12(b)(2) and 12(b)(6). 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). 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).
A Rule 12(b)(6) "test[s] the sufficiency of the complaint."
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. Personal Jurisdiction
The Court addressed the issue of personal jurisdiction in its
September 22, 2004 Opinion. Each of the Oceanic Defendants has
sufficient contacts with the United States to satisfy the due
process clause and to establish this Court's personal
jurisdiction over Plaintiffs' securities fraud claims. See
Zurich Capital Markets, Inc. v. Coglianese, No. 03 C 7960, 2004
WL 2191596, at **5-7 (N.D. Ill. Sept. 22, 2004). As noted in that
Opinion, the Court also will assert personal jurisdiction over
the state law claims under the doctrine of "supplemental" or
"pendent" personal jurisdiction. Id. See also Robinson Eng'g.
Co., Ltd. Pension Plan & Trust v. George, 223 F.3d 445, 449-50
(7th Cir. 2000). Finally, Rahming's and Clowes's claims for
protection under the fiduciary shield doctrine fail. Id. at
The Court addressed the standing issue in its September 22,
2004 Opinion and its August 2, 2004 Opinion. Defendants' motion
to dismiss for lack of standing is denied.
IV. Federal Securities Fraud Claims
In Count I, Plaintiffs have included both Section 10(b) primary
liability and Section 20(a) control person allegations against
the Oceanic Defendants.
A. Section 10(b) Liability
In order to state a claim for securities fraud under Section
10b, Plaintiffs must allege that Defendants made (1) 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). The Section 10(b)
liability in Count I is premised on allegedly false statements in
M.J. Select's offering memorandum. The Oceanic Defendants
correctly note that Plaintiffs have failed to attribute any of
these allegedly false statements to the Oceanic Defendants.
Plaintiffs' allegations that Oceanic distributed the false
offering memorandum, participated in the distribution of the
false offering documents, and had involvement in the promotion
and sale of M.J. Select's shares do not suffice to attribute any
misrepresentations to Oceanic, Rahming or Clowes. See Central
Bank of Denver, N.A. v. First Interstate Bank, 511 U.S. 164,
114 S.Ct. 1439, 128 L.Ed. 2d 119 (1994) (no aiding and abetting
liability exists under Section 10(b)). Plaintiffs Section 10(b)
claim in Count I against the Oceanic Defendants is dismissed
B. Section 20(a)
In Count I, Plaintiffs also allege that the Oceanic Defendants
were control persons of M.J. Select pursuant to Section 20(a) of
the Exchange Act. 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). Plaintiffs' allegations must comply with
Rule 9(b)'s particularity mandates. Defendants challenge each
element of Plaintiffs' Section 20(a) claim.
The primary securities violation is premised on false and
misleading statements made in the M.J. Select Offering Memorandum
and in connection with the purchase of M.J. Select shares.
Although Plaintiffs have not alleged a Section 10(b) violation
against the Oceanic Defendants, they have stated with sufficient
particularity a primary violation against co-defendant Michael
Plaintiffs' specific and general control allegations are
equivalent to those in the Amended Complaint in the ZCM Case. For
the reasons set forth in the Court's September 22, 2004 Opinion,
Plaintiffs have adequately alleged general and specific control
on behalf of each of the Oceanic Defendants.
C. Statute of Repose
The Sarbanes-Oxley Act provides the limitations period for
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)). Because Plaintiffs commenced this action on July 30,
2003, the five year statute of repose bars any claim based on a
"violation" occurring before July 30, 1998.
Plaintiffs have conceded that the statute of repose bars their
federal securities claims based on purchases of M.J. Select made
prior to July 30, 1998. Accordingly, the claims of Waldock, Mary
Jane S. Hill and John E. Rosino, 766347 Ontario Ltd., Ed
Pettegrew and George Lukas that are based on pre-July 30, 1998
purchases are dismissed with prejudice. With respect to post-July 30, 1998 purchases, the parties
dispute the triggering event for the statute of repose. Namely,
they argue over the meaning of "violation." There is a dispute
among courts in this district regarding the definition of a
violation and the commencement of the statute of repose. Compare
Wafra Leasing Corp. v. Prime Capital Corp., 192 F.Supp.2d 852,
864 (N.D. Ill. 2002) ("[V]iolation for the purpose of the Rule
10b-5 statute of repose occurs when the defendant makes a
misrepresentation in connection with the sale or purchase of
securities; the sale itself need not have occurred to start the
running of the repose period."); Antell v. Arthur Andersen LLP,
No. 97 C 3456, 1998 WL 245878 at *5-6 (N.D. Ill. May 4, 1998)
(holding that "the three-year repose period for Section 10(b) and
Rule 10b-5 claims begins to run when a defendant makes an
affirmative mispresentation"), with Otto v. Variable Annuity
Life Ins. Co., 816 F.Supp. 458, 461 n. 3 (N.D. Ill. 1992) ("[A]
violation of § 10(b) and Rule 10b-5 is comprised not only of a
misrepresentation or omission of material fact, but also includes
the purchase or sale of any security.") (citations and quotations
omitted). The Court agrees with the reasoning of those cases
holding that the statute of repose is triggered for a Section
10(b) and Rule 10b-5 violation when the defendant makes the
misrepresentation or omission in connection with the sale or
purchase of a security to a particular plaintiff. See also Bovee
v. Coopers & Lybrand, 216 F.R.D. 596, 604 (S.D. Ohio 2003).
Plaintiffs filed their complaint in this case on July 30, 2003.
Any claims based on misrepresentations made to a Plaintiff before
July 30, 1998 are therefore barred under the five year statute of
repose. As pled in the FAC, Plaintiffs allege that Defendants
made multiple misrepresentations that some Plaintiffs received
before July 30, 1998. Accordingly, the following claims are
barred by the statute of repose: Section 10(b) claims based on
the July 29, 1997 misrepresentations made to Plaintiff John Waldock; those
based on the August 28, 1997 misrepresentations to Mary Jane S.
Hill and John E. Rosino; those based on the October 1, 1997
misrepresentations to 766347 Ontario; Section 10(b) claims based
on the October 1, 1997 misrepresentations to Jame Boughner
Foundation; those based on the May 1998 misrepresentations to Ed
Pettegrew, Sr.; and claims based on the March 1996
misrepresentations made to George Lukas.
D. Investment Company Act
Count II seeks rescission and recovery of damages under an
unjust enrichment theory pursuant to Section 47(b) of the
Investment Company Act of 1940 ("ICA"). 15 U.S.C. §§ 80a-7,
80a-46 & 80a-47. Section 7(d) of the ICA provides that
No investment company, unless organized or otherwise
created under the laws of the United States or of a
State . . . shall make use of the mails or any means
or instrumentality of interstate commerce, directly
or indirectly, to offer for sale, sell, or deliver
after sale, in connection with a public offering, any
security of which such company is the issuer.
15 U.S.C. § 80a-7(d). Section 47 of the ICA provides that "[a]
contract that is made, or whose performance involves a violation
of this subchapter, is unenforceable by either party."
15 U.S.C. § 80a-46(b)(1). It further provides that to the extent that such
a contract has been performed "a court may not deny rescission at
the insistence of any party unless such court finds that under
the circumstances denial of rescission would produce a more
equitable result than its grant and would be inconsistent with
the purposes of this subchapter." 15 U.S.C. § 80a-46(b)(2).
Oceanic argues that it was not an "issuer" under the ICA. The
ICA defines "issuer" as "every person who issues or proposes to
issue any security, or has outstanding any security which it has issued." 15 U.S.C. § 80a-2(22). Plaintiffs do not allege
that the Oceanic Defendants issued or proposed to issue the
shares of the securities at issue in this case. Even though
Plaintiffs allege that the Oceanic Defendants were part of an
organized group of persons including some "persons" who issued
the securities in question such allegations do not make the
Oceanic Defendants the issuers of the securities. Accordingly,
Count II fails.
V. Illinois Securities Act (Count III)
Count III alleges that the Oceanic Defendants violated the
Illinois Securities Law of 1953 (the "Act"), 815 ILCS 5/12 & 5/13
(2002). Under the Act, "[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. Because Plaintiffs allege that
Oceanic, Rahming and Clowes "owned beneficially such number of
outstanding securities that enabled them to elect a majority to
the board of directors of M.J. Select," Plaintiffs have alleged
that each of the Oceanic Defendants is a "controlling person" as
defined by the Act.*fn2 See 815 ILCS 5/2.4 (defining
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 . . . 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"). Defendants' allegations
that they did not own any shares of M.J. Select raise an issue of fact that is not appropriate for
the Court to determine at this stage.
Oceanic also contends that Plaintiffs failed to provide timely
notice as required under the Act. The Act requires Plaintiffs to
give notice of election to void and rescind their purchase or
sale of securities "to each person from whom recovery will be
sought" within six months after they have knowledge that the
purchase or sale is voidable. 815 ILCS 5/13(B). "The six month
rule regarding notice is not a statute of limitations, but
rather, an equitable feature built into the statute to protect
against stale claims." Martin v. Orvis Bros. & Co.,
25 Ill. App. 3d 238, 246, 323 N.E.2d 73, 79 (1974). A complaint
containing sufficiently specific allegations may serve as notice
of an election to void and rescind the purchase or sale of
securities. Norville v. Alton Bigtop Restaurant, Inc.,
22 Ill. App. 3d 273, 384, 317 N.E.2d 391 (5th Dist. 1974).
Defendants correctly note that the allegations in the FAC
establish that Plaintiff Miller failed to provide timely notice.
David Miller admits that he knew the sales were voidable as of
December 20, 2001, yet he did not provide notice to the Oceanic
Defendants until July 30, 2003. Accordingly, Count III is
dismissed regarding Miller. Furthermore, Plaintiffs 766347
Ontario Ltd., James Boughner Foundation, John H. Waldock, Mary
Jane S. Hill and John E. Rosino had knowledge of their right to
rescind on April 5, 2000, but they failed to give Defendant
Clowes notice until July 30, 2003. Accordingly, these Plaintiffs'
claims in Count III are dismissed as to Defendant Clowes.
Based on the allegations in the FAC, Plaintiffs Ed Pettegrew,
Sr., Jack C. Kenning and Barbara Straka-Kenning, Robert M.
Warner, Sr. and George Lukas provided timely notice to each
Defendant of their right to rescind. Thus, Count III stands as to
Finally, both parties agree that the limitations period for
rescission under the Act is five years. Any purchases made before July 30, 1998 are therefore
VI. Unjust Enrichment (Count VII)
For the reasons set forth in the Court's September 22, 2004
Opinion, the Oceanic Defendants' motion to dismiss on this count
VII. Equitable Accounting (Count VIII)
In Count VIII, Plaintiffs seek the equitable remedy of an
equitable accounting. To state a claim for equitable accounting,
Plaintiffs "must allege the absence of an adequate remedy at law
and one of the following: (1) a breach of fiduciary relationship
between the parties; (2) a need for discovery; (3) fraud; or (4)
the existence of mutual accounts which are of a complex nature."
Hartigan v. Candy Club, 149 Ill. App. 3d 498, 501,
501 N.E.2d 188, 190, 103 Ill. Dec. 167 (1st Dist. 1986). Defendants
argue that Plaintiffs have alleged an adequate remedy at law and
have failed to allege a fiduciary duty.
Courts have broad discretion to determine whether an equitable
accounting is warranted. First Commodity Traders, Inc. v.
Heinold Commodities, Inc., 766 F.2d 1007, 1011 (7th Cir.
1985). A court may order an equitable accounting when "the
computation of damages involves complexities that would baffle a
jury." Williams Elecs. Games, Inc. v. Garrity, 366 F.3d 569,
577 (7th Cir. 2004) (citing Kirby v. Lake Shore & Mich.
S.R.R., 120 U.S. 130, 134, 7 S. Ct. 430, 30 L.Ed. 569 (1887)).
Even if Plaintiffs had alleged an adequate remedy at law, 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). See also Enter. Warehousing Solutions,
Inc. v. Capital One Servs., No. 01 C 7725, 2002 WL 406976, at *4
(N.D. Ill. Mar. 15, 2002).
Finally, as discussed below, Plaintiffs have alleged a
fiduciary duty. Count VIII stands. VIII. Breach of Contract (Counts IX and X)
Oceanic seeks to dismiss Counts IX and X, alleging breach of
contract. Count IX is premised on Plaintiffs' Subscription
Agreement with Oceanic, and Count X is based on a third-party
beneficiary theory under the Administration, Registrar & Transfer
Agency Agreement between Oceanic and M.J. Select.
To state a breach of contract claim, Plaintiffs must allege
that: (1) a valid and enforceable contract existed; (2) the
plaintiff performed according to the contract; (3) the defendant
breached the contract; and (4) the breach resulted in damages.
D.S.A. Fin. Corp. v. County of Cook, 345 Ill. App. 3d 554, 559
134, 801 N.E.2d 1075, 1079 280 Ill. Dec. 130, (1st Dist. 2003)
(citations omitted). In Count IX, Plaintiffs allege that Oceanic
entered into subscription agreements with Plaintiffs pursuant to
M.J. Select's offering documents, and that Oceanic breached its
obligations under the subscription agreements. This allegation,
however, is contradictory to the content of the subscription
agreements, which the Court can review on a motion to dismiss.
See Albany Bank & Trust Co., v. Exxon Mobil Corp.,
310 F.3d 969, 971 (7th Cir. 2002) (courts can consider both facts
alleged in complaint and documents attached to or incorporated
into a complaint when considering motion to dismiss). Where a
plaintiff "relies upon the documents to form the basis for a
claim or part of a claim, dismissal is appropriate if the
document negates the claim." Thompson v. Illinois Dep't. of
Prof'l Regulation, 300 F.3d 750, 754 (7th Cir. 2002).
Oceanic is not a party to the subscription agreements, and
Plaintiffs have not alleged any other basis to support their
breach of contract claim in Count IX. Accordingly, Count IX is
dismissed without prejudice.
The third-party beneficiary contract claim in Count X stands
for the reasons set forth in the Court's August 2, 2004 Opinion.
IX. Fiduciary Duty (Count XI)
For the reasons set forth in the Court's September 22, 2004
Opinion and August 2, 2004 Opinion regarding Defendant
Coglianese, Count XI stands.
X. Conspiracy to Defraud (Count XII)
In order to state a claim for conspiracy to defraud in
Illinois, Plaintiffs 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, 549 N.E.2d 643, 646, 139 Ill. Dec. 917,
920 (1989). Count XII pleads a conspiracy to defraud case against
Defendant Oceanic, but not against Defendants Rahming and Clowes.
Accordingly, Count XII is dismissed without prejudice against
Rahming and Clowes.
XI. Bahamian Law Claims (Counts XVII and XVIII)
As set forth in the Court's September 22, 2004 Opinion, these
counts stand CONCLUSION
The Oceanic Defendants' motion to dismiss is granted in part
and denied in part. Plaintiffs have until 30 days after the Court
rules on all Defendants' outstanding motions to dismiss in this
case to file a Second Amended Complaint addressing the
deficiencies identified in this memorandum. The Oceanic
Defendants do not have to answer the First Amended Complaint.