United States District Court, N.D. Illinois, Eastern Division
May 10, 2005.
WACHOVIA SECURITIES, L.L.C., a Delaware corporation, Plaintiff,
DAVID NEUHAUSER, ANDREW A. JAHELKA, RICHARD O. NICHOLS, LEON A. GREENBLATT, III, Defendants.
The opinion of the court was delivered by: WILLIAM HART, Senior District Judge
MEMORANDUM OPINION AND ORDER
Plaintiff Wachovia Securities LLC*fn1 contends that
defendants David Neuhauser, Andrew Jehelka, Richard Nichols, and
Leon Greenblat misused Wachovia margin accounts opened in the
names of Loop Corp. and NOLA, LLC. Loop and NOLA are not
defendants in the present lawsuit. The accounts allegedly were
being used to surreptitiously obtain a controlling interest in
Health Risk Management, Inc. ("HRMI"). When NASDAQ, discontinued
trading of HRMI stock, Wachovia was left with a $2,900,000 margin
call that has not been paid. Wachovia contends Loop and NOLA were
shell companies and that defendants are liable for the unpaid
margin accounts either directly or as alter egos of the two entities. Following this court's previous ruling on
defendants' motion to dismiss, the following claims remain
pending against defendants. See Wachovia Securities, LLC v.
Neuhauser, 2004 WL 2526390 (N.D. Ill. Nov. 5, 2004) ("Wachovia
I"). Plaintiff claims common law fraud, federal securities
fraud, and state law conspiracy, the limited to promissory fraud
based on a fraudulent representation that defendants would use
the Loop account for lawful purposes. Plaintiff also alleges
alter ego/piercing the corporate veil claims based on Loop and
NOLA being shell companies. Additionally, there is a state law
breach of contract claim based in part on alter ego/piercing the
corporate veil liability.
Presently pending before the court is plaintiff's motion to
compel discovery. Plaintiff moves to compel answers to certain
interrogatories and document production requests. The parties
dispute the scope of appropriate discovery. The parties have
identified certain general and basic discovery issues on which
Defendants contend that plaintiff seeks discovery that is
broader than that permitted under the current version of
Fed.R.Civ.P. 26(b)(1). In 2000, that Rule was amended to provide that
discovery must be "relevant to the claim or defense of any
party." Formerly discovery was permitted as to "any matter
relevant to the subject matter involved in the action." Presently, the latter discovery is only permitted on order of the
court if good cause is shown. Defendants contend that some of the
discovery requested by plaintiff is of the broader, latter type,
that is, relevant to the subject matter, but not relevant to a
claim or defense. As is discussed below, defendants take too
narrow a view of relevance of plaintiff's claims.
Plaintiff has information indicating that Loop and NOLA also
purchased HRMI stock through brokerage firms other than Wachovia.
Also, plaintiff has information that defendants also used other
entities and brokerage firms to purchase HRMI stock. Plaintiff
seeks documents related to those transactions and accounts.
Plaintiff seeks this discovery because the other transactions
allegedly are part of the overall scheme to surreptitiously
obtain control of HRMI. Also, these documents may support that
other entities were shells or used as alter egos for defendants'
transactions. Such evidence may be admissible to show defendants'
intent in setting up Loop and NOLA and allegedly using them as
shells. The requested information is evidence relevant to
plaintiff's existing claims, not merely evidence relevant to the
general subject matter. Also, contrary to defendants' assertion,
plaintiff is not precluded from obtaining discovery because the
Complaint contains no specific allegations regarding the other
entities. The Federal Rules of Civil Procedure only require notice pleading, not fact
pleading.*fn2 Plaintiffs are not required to include in the
complaint all facts and evidence supporting their claims.
Discovery will not be limited to evidence specifically referenced
in the Complaint. Defendants will be required to provide
discovery regarding the other entities.
Another issue is the time period for discovery. Plaintiff has
conceded it generally is not entitled to discovery from the time
period preceding January 1, 2000, which is approximately when the
scheme is alleged to have begun. Plaintiff seeks discovery from
then until its April 29, 2004 filing of the complaint. Trading of
HRMI stock, however, ended in May 2001. In June 2001, Wachovia
made a margin call on the Loop and NOLA accounts. Discovery
through December 31, 2001 will be sufficient except as to
particular issues. To the extent necessary to calculate damages
until the present date, post-2001 discovery will be permitted.
Also, to the extent relevant to show that they were used as shell
corporations, plaintiff may seek post-2001 discovery regarding
Loop and NOLA financial transactions. For the time period January 1, 1995 to the present, plaintiff
has requested discovery regarding essentially all lawsuits
involving defendants, Loop, NOLA, and other entities defendants
allegedly used to purchase HRMI shares. Plaintiff also requests
discovery regarding exchange investigations, administrative
investigations, or criminal investigations regarding the same
time period and entities. Defendants seek to narrow these
requests, including limiting it to cases that have reached final
judgments. These requests will be limited to proceedings that
were instigated from January 1, 2000 to the present. Proceedings
that occurred after December 31, 2001 need not be included unless
at least part of the subject matter of that proceeding included
events that occurred between January 1, 2000 and December 31,
2001. Responses will not be limited to cases that have reached
final judgment. Defendants must respond as to all the persons and
entities listed in the requests.
Defendants must fully respond to the requests regarding
relationships between the parties and the entities listed in
Defendants will be required to answer Interrogatory 16. It is a
permissible request and the number of interrogatory requests is
not found to be excessive.
Each party shall bear its own costs and expenses regarding this
discovery dispute. IT IS THEREFORE ORDERED that plaintiff's motion to compel 
is granted in part and denied in part. Consistent with today's
ruling, defendants shall respond to the interrogatories and
document requests within 20 days.