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Waldock v. M.J. Select Global

December 27, 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 Landmark Management, S.A.M. ("Landmark") and John Caseley ("Caseley"), (collectively, the "Landmark Defendants"). Additionally, Plaintiffs have sued Oceanic Bank and Trust Limited ("Oceanic"), Terah Rahming ("Rahming") and Kenneth Clowes ("Clowes"), (collectively, the "Oceanic Defendants"), and others for losses resulting from their investments in M.J. Select. The Landmark Defendants*fn1 and Oceanic 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 Landmark Defendants

Landmark is a corporation with its principal place of business in Monte Carlo, Monaco. (Id. at ¶ 83.) Landmark operates and administers Global Arbitrage Development, Ltd. ("GAD"), which is an unregistered open-end investment company/mutual fund. (Id. at ¶¶ 80, 83.) Caseley, a domiciliary and citizen of Monaco, is or was a director and principal of Landmark. (Id. at ¶ 85.)

III. The Oceanic Defendants

Oceanic is a bank and trust company that has its principal offices in the Bahamas. (Id. at ¶ 47.) Oceanic acquired New World Trustees Limited ("New World"), effective May 1, 1998. (Id.) Oceanic and New World merged under the name of Oceanic Bank and Trust Limited, effective December 31, 1999. (Id.) Rahming, a resident, domiciliary and citizen of the Bahamas, was an officer and employee of Oceanic. (Id. at ¶ 49.) In 1997, Oceanic appointed Rahming as its Manager of Fund Services. (Id.) Rahming was also a director of M.J. Select, and administered its affairs. (Id.) Additionally, Rahming is a graduate of Florida Memorial College and licensed as a certified public accountant by the Board of Accountancy of the State of Colorado. (Id.) Clowes, a resident, domiciliary and citizen of the Bahamas, was the Chief Operating Officer of Oceanic. (Id. at ¶ 50.) Clowes also served as a director of M.J. Select, and administered its affairs. (Id.)

IV. 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 Zurich Capital Markets Inc. v. Coglianese, 332 F. Supp. 2d 1087 (N.D. Ill. 2004) (the "August 2, 2004 Opinion"); Zurich Capital Markets Inc. v. Coglianese, 388 F. Supp. 2d 847(N.D. Ill. 2004) (the "September 22, 2004 Opinion"); Waldock v. M.J. Select Global, Ltd., No. 03-5239, 2004 WL 2278549 (N.D. Ill. Oct. 6, 2004) (the "October 6, 2004 Opinion"); Zurich Capital Markets Inc. v. Coglianese, No. 03-7960, 2005 WL 1950653 (N.D. Ill. Aug. 12, 2005) (the "August 12, 2005 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"); and Waldock v. M.J. Select Global, Ltd., No. 03-5239, 2005 WL 2978895 (N.D. Ill. Nov. 7, 2005) (the "November 7, 2005 Opinion").

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 Landmark and Oceanic Defendants. (R. 251-1, TAC at ¶ 12.) They contend that Michael Coglianese ("Coglianese") and other Defendants organized M.J. Select, (id. at ¶ 277(c)), Oceanic was the administrator of M.J. Select, (id. at ¶ 47), and Rahming and Clowes served as directors of M.J. Select. (Id. at ¶¶ 49, 50.) Plaintiffs allege that Defendants used false and misleading offering memoranda and marketing materials to induce Plaintiffs to invest in M.J. Select. (Id. at ¶ 9.) Plaintiffs further allege that Defendants falsely represented that M.J. Select invested in liquid investments and that investors could redeem their investments upon fifteen days notice. (Id. at ¶ 10.) According to Plaintiffs, Defendants transferred their investments to foreign entities that then placed Plaintiffs' investments into illiquid investments. (Id.) Specifically, they contend that certain Defendants directed the transfer of Plaintiffs' investments in M.J. Select into GAD. (Id. at ¶¶ 152, 220-25.) Landmark operated and administered GAD, and Caseley was a director and principal of GAD. (Id. at ¶¶ 83, 85.) GAD, in turn, allegedly used Plaintiffs' money to invest in Dominion Capital Fund Limited ("Dominion"), a fund that purchased illiquid securities, even though M.J. Select's offering memoranda represented that its investments would be placed in liquid, market neutral securities that its investors could redeem on fifteen days notice. (Id. at ¶ 165(a).)

ANALYSIS

I. Legal Standard

The Landmark and Oceanic 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).

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), Rule10b-5 promulgated thereunder, and Section 20(a) of the Exchange Act, 15 U.S.C. § 78t.

A. Statute of Repose

Both the Landmark and Oceanic Defendants argue that many of Plaintiffs' claims under Count I are time-barred.*fn2 For the reasons set forth in the Court's Order dated December 7, 2004, (R. 190-1, Dec. 7, 2004 Order at 6), and the November 7, 2005 Opinion, Waldock, 2005 WL 2978895, at *3, with the exception of the August 14, 2000 purchase as to John Copeland and the June 1, 2000 purchase as to Jack C. Kenning and Barbara Straka-Kenning, Plaintiffs' Section 10(b) and 20(a) claims are time-barred. Accordingly, the Court will analyze the Landmark and Oceanic Defendants' remaining arguments to dismiss Count I only as to Copeland, Kenning and Straka-Kenning.

B. Section 10(b)

The Landmark Defendants argue that Plaintiffs have not adequately pleaded a Section 10(b) violation. 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 here. "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 (7th Cir. 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). Additionally, 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).

Furthermore, the heightened pleading requirements of Rule 9(b) apply to the TAC. Fed. R. Civ. P. 9(b). Rule 9(b) dictates 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) (citing Fed. R. Civ. P. 9(b)). According to the Seventh Circuit, "[t]his 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).

1. Whether Plaintiffs Have Alleged a Section 10(b) Violation by the Landmark Defendants Through the Purported Agency of Coglianese

Plaintiffs allege that the Landmark Defendants have violated Section 10(b) through the agency of Michael Coglianese. (R. 251-1, TAC at ¶ 273(c).) An agency relationship results from the "manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act."*fn3 Rest. 2d Agency § 1. "[W]hen the plaintiff relies upon the same circumstances to establish both the alleged fraud and the agency relationship of a defendant," plaintiff must plead agency with particularity. Lachmund v. ADM Investor Servs., Inc., 191 F.3d 777, 783 (7th Cir. 1999). Furthermore, the Court has previously explained that

[t]he mere use of the label "agent" does not sufficiently establish an agency relationship in order to impose liability under Rule 9(b) or the PSLRA where the agency relationship and the fraud claims are intertwined. A plaintiff must plead facts showing the existence and scope of the agency relationship in order to establish primary liability under Section 10(b), especially where, as here, the agency relationship is not based on the classic corporation/employee model where a corporation can only act[] through its employees and agents.

ZCM, 332 F. Supp. 2d at 1106; see also Waldock, 2005 WL 2737502 at *3.

According to Plaintiffs, the basis for the alleged agency relationship is as follows: (1) Coglianese was an investment advisor for the Landmark Defendants; (2) the Landmark Defendants granted Coglianese the authority to investigate and recommend funds for investment in GAD; (3) Coglianese located investments, such as Dominion, into which he recommended the Landmark Defendants place GAD's funds and assets; and (4) Coglianese received compensation for referring investments to Dominion. (R. 251-1, TAC at ¶¶ 185-89.) Because these agency allegations are intertwined with Plaintiffs' fraud allegations, Plaintiffs must plead agency with particularity. See Lachmund, 191 F.3d at 783; see also Waldock, 2005 WL 2737502 at *4.

Plaintiffs have not pleaded with particularity facts alleging the existence of an agency relationship. Plaintiffs have failed to allege, even in a conclusory manner, that the Landmark Defendants had the power to control Coglianese, which is an essential component of an agency relationship. See Rest. 2d Agency § 1. Moreover, Plaintiffs concede that their "factual allegations concerning Coglianese's agency for Landmark . . . [are] not as detailed as those against Southridge." (R. 322-1, Pls.' Opp'n Landmark Defs.' Mot. at 4.) On October 24, 2005, the Court held that the Southridge Defendants did not establish an agency relationship with Coglianese. Waldock, 2005 WL 2737502, at *4. Accordingly, Plaintiffs have not adequately pleaded the existence of an agency relationship, and the Court will not impute Coglianese's alleged violations of Section 10(b) to the Landmark Defendants.

2. Whether Plaintiffs Have Alleged a Section 10(b) Violation by the Landmark Defendants as Principals

Additionally, Plaintiffs assert that the Landmark Defendants have violated Section 10(b) on their own accord. (R. 251-1, TAC at ¶ 273(c).) The Landmark Defendants argue that Plaintiffs have not adequately pleaded that the they, as principals, committed any Section 10(b) violations. The Court disagrees.

(a) Scienter

The Landmark Defendants argue that Plaintiffs have "fail[ed] to allege scienter with the particularity required by the PSLRA." (R. 287-1, Landmark Defs.' Mot. Dismiss at 4.) The PSLRA requires that a plaintiff "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). As the Court has previously held, "a plaintiff may use 'motive and opportunity' or 'circumstantial evidence' to establish scienter under the PSLRA, so long as Plaintiffs' allegations support a strong inference that the defendant acted recklessly or knowingly." 766347 Ontario Ltd. v. Zurich Capital Markets Inc., 249 F. Supp. 2d 974, 987 (N.D. Ill. 2003) (citations omitted). The allegations must support a strong inference of scienter as to each Defendant. Johnson v. Tellabs, Inc., 303 F. Supp. 2d 941, 953 (N.D. Ill. 2004).

Plaintiffs' allegations, viewed in the light most favorable to Plaintiffs, support a strong inference of scienter as to the Landmark Defendants. See Lee, 330 F.3d at 459. Plaintiffs have alleged that the Landmark Defendants "were specifically aware of, or recklessly disregarded, facts and information from which they knew that the M.J. Select Global, Ltd. offering documents and other marketing materials were false and materially incomplete." (R. 251-1, TAC at ¶ 177.) In particular, the Court infers from Plaintiffs' allegations that the Landmark Defendants knew that M.J. Select's offering memoranda and marketing materials represented that all investments in M.J. Select would be invested in liquid securities and redeemable within fifteen days. (Id. at ¶¶ 179, 180.) According to Plaintiffs, the Landmark Defendants, despite having this knowledge, submitted to certain Defendants performance figures, track records and monthly financial information regarding GAD that failed to disclose that GAD invested in illiquid securities. (Id.) The Landmark Defendants allegedly provided this information to these Defendants with the understanding that it would be included in M.J. Select's offering memoranda and marketing documents that were sent to Plaintiffs. (Id. at ¶¶ 164(a), 168(a).) Additionally, Plaintiffs have alleged that GAD's redemption policy allowed for the investment in illiquid securities, in direct conflict with M.J. Select's offering memoranda and other marketing materials. (Id. at ¶¶ 156-57, 179(a), 180(a).) Plaintiffs have further alleged that the Landmark Defendants submitted to Coglianese and other Defendants the following false and materially incomplete statement: "GAD strictly limits their trading activities to arbitrage type trades, or the simultaneous purchase of one instrument and sale of another which produces a locked in profit, with no risk of market direction ...


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