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Waldock v. M.J. Select Global

November 7, 2005

JOHN H. WALDOCK,ET AL., PLAINTIFFS,
v.
M.J. SELECT GLOBAL, LTD., ET AL., DEFENDANTS.



The opinion of the court was delivered by: Amy J. St. Eve, District Court Judge

MEMORANDUM OPINION AND ORDER

Plaintiffs have filed a Third Amended Complaint ("TAC") against multiple Defendants alleging a fraudulent investment scheme in connection with the purchase of shares of M.J. Select Global, Ltd. ("M.J. Select"), a Bahamian mutual fund. Plaintiffs have sued Defendants Michael Coglianese and Michael Coglianese, C.P.A., P.C. (collectively, the "Coglianese Defendants"). Additionally, Plaintiffs have sued Gina Coglianese, Commodity Compliance Services, Inc., CCS, Inc., and GLC Services, Corp. (collectively, the "Gina Coglianese Defendants"), and others for losses resulting from their investments in M.J. Select. The Coglianese and Gina Coglianese Defendants move to dismiss all of the federal and state claims against them for failure to state a claim. As discussed below, their motions are granted in part and denied in part.

BACKGROUND

I. Plaintiffs

Plaintiffs in this case 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, III Trust, Andrew W. Waldock, Jr. Trust, Christopher J. Waldock Trust; 766347 Ontario Ltd., a Canadian Corporation; the James 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 Andrew Robert Warner, Account No. 180 in the name of 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, these individuals are referred to as "Plaintiffs." (R. 251-1; TAC at ¶¶ 16-45.)

II. The Coglianese Defendants

Michael Coglianese ("Coglianese"), a citizen of Illinois, is an Illinois certified public accountant. (Id. at ¶ 62.) Michael Coglianese, C.P.A., P.C. is an Illinois professional corporation of which Coglianese is the president, officer, director, agent, and sole shareholder. (Id. at ¶ 63.)

III. The Gina Coglianese Defendants

Gina Coglianese, a citizen of Illinois, is Coglianese's wife. (Id. at ¶ 64.) Commodity Compliance Services, Inc. is an Illinois Corporation that acted through its individual agents, Coglianese and Gina Coglianese, and through its corporate agents, CCS, Inc. and GLC Services, Corp. (Id. at ¶ 65.) CCS, Inc. ("CCS") is an Illinois corporation that acted through its individual agents, Coglianese and Gina Coglianese, and through its corporate agents, CCS and GLC Services, Corp. (Id. at ¶ 66.) GLC Services, Corp. ("GLC") is an Illinois corporation that acted through its individual agents, Coglianese and Gina Coglianese, and through its corporate agents, CCS and Commodity Compliance Services, Inc. (Id. at ¶ 67.)

IV. Other Relevant Parties

Sonic Investments, Ltd. ("Sonic"), a company organized under the laws of the Commonwealth of the Bahamas with its principal place of business in the Bahamas, deals with investments and the sale of investments for national and international investment funds. (Id. at ¶ 68.) Sonic acted through its individual agents, Coglianese and Gina Coglianese, and its corporate agents, CCS and GLC. (Id.) Global Arbitrage Development Limited ("GAD") is an open-end investment company/mutual fund that is not registered. (Id. at ¶ 80.) Southridge Capital Management, LLC ("Southridge") is a Connecticut corporation with its principal place of business in Connecticut. (Id. at ¶ 88.) Southridge is or was the organizer and sub-advisor of Dominion Capital Fund Limited ("Dominion"). (Id.) Dominion is an open-end investment company/mutual fund organized under the laws of the Commonwealth of the Bahamas with its principal place of business in the Bahamas. (Id. at ¶ 87.) Oceanic Bank and Trust Limited ("Oceanic") is a bank and trust company with its principal place of business in the Bahamas. (Id. at 47.) Oceanic transacted business in the United States through, among other things, its administration of M.J. Select. (Id.)

V. Alleged Scheme

The Court has set forth the alleged fraudulent scheme in other opinions in this case and its related case, Zurich Capital Markets Inc. v. Coglianese,No. 03 C 7960, (the "ZCM Case").

The Court will not restate the facts in detail here. For a complete factual background, see Waldock v. M.J. Select Global, Ltd., No. 03-5239, 2004 WL 2278549 (N.D. Ill. Oct. 7, 2004) (the "October 7, 2004 Opinion"); Waldock v. M.J. Select Global, Ltd., No. 03-5239, 2005 WL 2737502 (N.D. Ill. Oct. 24, 2005) (the "October 24, 2005 Opinion"); Zurich Capital Markets Inc. v. Coglianese, 388 F. Supp. 2d 847(N.D. Ill. 2004) (the "September 23, 2004 Opinion"); and Zurich Capital Markets Inc. v. Coglianese, 332 F. Supp. 2d 1087 (N.D. Ill. 2004) (the "August 2, 2004 Opinion").

In essence, Plaintiffs allege that they lost approximately $9.8 million through a complex fraudulent investment scheme carried out by all Defendants in this case, including the Coglianese and Gina Coglianese Defendants. (R. 251-1; TAC at ¶ 12.) They contend that the Coglianese and Gina Coglianese Defendants organized M.J. Select and directed the diversion of their investments into risky investments, contrary to their "market neutral" representations about M.J. Select. (Id. at ¶¶ 220-25, 277(c).) Specifically, Plaintiffs allege that, despite the representations in the offering memoranda that M.J. Select followed a "market neutral" trading approach, the Coglianese and Gina Coglianese Defendants directed the transfer of Plaintiffs' money to GAD, an illiquid investment fund. (Id. at ¶¶ 152, 220-25.) GAD, in turn, allegedly used Plaintiffs' money to invest in Dominion, a fund that purchased illiquid securities. (Id. at ¶ 165(a).) Plaintiffs further allege that the Coglianese and Gina Coglianese Defendants provided accounting services to M.J. Select, as well as the funds where they diverted the investments, and thus knew the investment strategies and terms and conditions of those funds. (Id. at ¶¶ 236, 237, 240, 241.) Furthermore, Plaintiffs allege that the Coglianese Defendants, Gina Coglianese and GLC received secret fees and commissions for their role in misappropriating Plaintiffs' investments in M.J. Select. (Id. at ¶¶ 261, 265.)

ANALYSIS

I. Legal Standard

The Coglianese and Gina Coglianese Defendants bring their motions pursuant to Federal Rule of Civil Procedure 12(b)(6). A Rule 12(b)(6) motion tests whether plaintiff has "state[d] a claim upon which relief can be granted." Fed. R. Civ. P. 12(b)(6). 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. Federal Securities Fraud Claims -- Count I

Count I is premised on a violation of Section 10(b) of the Securities and Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b), Rule 10b-5 promulgated thereunder, and Section 20(a) of the Exchange Act, 15 U.S.C. § 78t. The Coglianese and Gina Coglianese Defendants seek to dismiss these claims as untimely, failing to comply with pleading mandates, and failing to state a claim.

A. Section 10(b)

1. Statute of Repose

In its December 7, 2004 Opinion, the Court held that all but two of Plaintiffs' Section 10(b) claims, pled in their First Amended Complaint, were time-barred under the applicable statute of repose. (R. 190-1; Dec. 7, 2004 Op. at 6.) Specifically, the Court found the following claims timely: (1) the August 14, 2000 purchase as to John Copeland, and (2) the June 1, 2000 purchase as to Jack C. Kenning and Barbara Straka-Kenning. (Id.)

Plaintiffs reallege their time-barred claims in the TAC. The Coglianese and Gina Coglianese Defendants argue that the claims the Court dismissed as time-barred on December 7, 2004 remain time-barred. Plaintiffs essentially concede this point by stating "the timeliness of Count I -- is obviously governed by this Court's December 7 Opinion and other rulings." (R. 333-1; Pls.' Opp'n Gina Coglianese Defs.' Mot. Dismiss at 2.) The Coglianese and Gina Coglianese Defendants' motions are granted as to their statute of repose arguments as they pertain to Count I, and the Court's December 7, 2004 Opinion stands. The Court will analyze the Coglianese and Gina Coglianese Defendants' remaining arguments to dismiss Count I as to Copeland, Kenning and Straka-Kenning only.

2. PSLRA and Rule 9(b)

The "basic elements" of a Section 10(b) claim include: (1) a material misrepresentation or omission, (2) "scienter, i.e., a wrongful state of mind," (3) a connection with the purchase or sale of a security, (4) "reliance, often referred to in cases involving public securities markets (fraud-on-the-market cases) as 'transaction causation,'" (5) economic loss, and (6) loss causation. Dura Pharms., Inc. v. Broudo, --- U.S. ----, 125 S.Ct. 1627, 1631, 161 L.Ed.2d 577 (2005) (citations omitted).

The strict pleading mandates of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. § 78u-4, et seq., apply to Plaintiffs' complaint. "The PSLRA creates rules that judges must enforce at the outset of the litigation." Asher v. Baxter Int'l Inc., 377 F.3d 727, 728 (2004). The PSLRA requires a plaintiff to "specify each statement alleged to have been misleading, [and] the reason or reasons why the statement is misleading." 15 U.S.C. § 78u-4(b)(1). Further, a plaintiff 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).

Additionally, the heightened pleading requirements of Rule 9(b) apply. Fed. R. Civ. P. 9(b). Rule 9(b) requires that a plaintiff plead "the circumstances constituting fraud . . . with particularity." In re HealthCare Compare Corp. Sec. Litig., 75 F.3d 276, 281 (7th Cir. 1996). As the Seventh Circuit has explained, "this means the who, what, when, where, and how: the first paragraph of any newspaper story." DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir. 1990).

3. Misstatements or Omissions

Defendants Gina Coglianese, Commodity Compliance Services, Inc., and CCS argue that Count I fails to allege that they made any material misrepresentations or had any duty to disclose certain information.*fn1 In accordance with the PSLRA, Plaintiffs must "specify each statement alleged to have been misleading, [and] the reason or reasons why the statement is misleading."

15 U.S.C. § 78u-4(b)(1).

As an initial matter, Plaintiffs argue that Federal Rule of Civil Procedure 12(g) precludes Commodity Compliance Services, Inc. and CCS from attacking Count I on sufficiency grounds because they did not do so in their prior motion to dismiss. On December 7, 2004, the Court addressed whether Plaintiffs had alleged that Commodity Compliance Services, Inc. and CCS made false statements or omissions. (R. 190-1; Dec. 7, 2004 Op. at 7-8.) Because this issue was previously before the Court, Rule 12(g) does not bar the ...


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