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Greer v. Advanced Equities

June 19, 2009

CARL C. GREER AND THOMAS A. FLOYD, PLAINTIFFS,
v.
ADVANCED EQUITIES, INC., KEITH DAUBENSPECK, AND DWIGTH BADGER, DEFENDANTS.



The opinion of the court was delivered by: Judge Blanche M. Manning

MEMORANDUM AND ORDER

This is a case about alleged fraud in the sale and transfer of securities. The plaintiffs, Carl Greer and Thomas Floyd, allege that they purchased stock in a company called Pixelon, Inc. on the advice of Keith Daubenspeck and Dwight Badger, two officers at defendant Advanced Equities, Inc. ("AEI"). According to the Corrected Amended Complaint ("CAC"), the defendants "induced Greer and Floyd to invest sizeable amounts of money in a venture Defendants knew or should have known was a sham."

Included in the CAC are three counts under federal securities laws: Count III alleges a violation under Section 12(a)(2) of the Securities Exchange Act of 1933 and Counts IV and V allege violations under Section 10(b) of the Securities Exchange Act of 1934. The remaining three counts allege state law claims for breach of contract, breach of fiduciary duty, and common law fraud. The defendants have moved to dismiss the federal securities law counts on the grounds that they are barred by the statute of limitations and, in the alternative, are not pleaded with sufficient particularity. The defendants further move to dismiss the state law claims on the ground that the court should decline to exercise supplemental jurisdiction given the failure of the federal claims. For the reasons stated below, the motion to dismiss is granted in part. The plaintiffs are given 21 days from the date of entry of this order to replead.

I. Background

Briefly, the plaintiffs allege that in the fall of 1999, they were approached by an agent of AEI, Paul Wilkowski, to become customers of AEI based on AEI's "superior knowledge regarding potentially lucrative investments." According to the plaintiffs, they, in reliance on the defendants' advice and counsel, invested a total of $4,083,345 in several opportunities recommended by AEI. One of these opportunities was Pixelon, Inc., which was claimed to be the first full-screen, full-motion, TV-quality internet broadcaster.

AEI prepared an Amended and Restated Private Placement Memorandum dated August 25, 1999 ("Placement Memorandum"), to solicit investors to purchase Series A Preferred Stock in Pixelon. On October 22, 1999, Greer and Floyd paid $1,942,500 for 1,110,000 shares of Pixelon stock.

In December 1999, the defendants issued a Supplement to the August Placement Memorandum, in which AEI disclosed that Pixelon would need an additional $21.5 million to fund operations through June 2000--more than twice the amount originally represented to the plaintiffs. The Supplement also disclosed, among other things, that: (1) Pixelon's capitalization had changed dramatically since the August Placement Memorandum; (2) the costs of an event to launch the Pixelon network substantially exceeded the expected costs; (3) there were nine material contracts that Pixelon had entered into that had not been previously disclosed; (4) material litigation, including employment disputes involving significant managerial positions, had been filed against Pixelon prior to the date of the plaintiffs' investment; (5) Pixelon had borrowed $3.55 million from company investors in October and November 1999 to fund its operations; and (6) David Stanley, the founder, Chief Technology Officer and Chairman of the Board, who had been represented to the plaintiffs as integral to the success of Pixelon, had terminated his relationship with Pixelon. The plaintiffs later discovered that Stanley was a convicted embezzler and a fugitive from the law.

After receiving the supplement, the plaintiffs met with the defendants because they were "concerned about the condition of Pixelon as disclosed in the Supplement and wanted their money back." CAC, ¶ 83. While the defendants indicated that they could not give the plaintiffs their money back, they proposed an arrangement whereby the plaintiffs could recoup their money through a consulting agreement. According to the plaintiffs, in addition to compensating the plaintiffs for their initial investment, the consulting agreement included the transfer of certain securities and equity interests to the plaintiffs in consideration for their not filing suit against the defendants. The defendants did not perform their obligations under the consulting agreement and Pixelon ended up filing for bankruptcy.

The parties executed several tolling agreements and extensions of the tolling agreements addressing various aspects of their dispute. However, at the time of the filing of the complaint in the instant suit, all of the tolling agreements had expired.

II. Standard

On a motion to dismiss under Fed. R. Civ. P. 12(b)(6), the court accepts the allegations in the complaint as true, viewing all facts, as well as any inferences reasonably drawn therefrom, in the light most favorable to the plaintiff. See Marshall-Mosby v. Corporate Receivables, Inc., 205 F.3d 323, 326 (7th Cir. 2000). "While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligation to provide the 'grounds' of his 'entitle[ment] to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 553-54 (2007)(citations omitted).

The Seventh Circuit has interpreted Bell Atlantic as follows:

Rule 12(b)(6) permits a motion to dismiss a complaint for failure to state a claim upon which relief can be granted. To state such a claim, the complaint need only contain a "short and plain statement of the claim showing that the pleader is entitled to relief." Fed.R.Civ.P. 8(a)(2). The Supreme Court has interpreted that language to impose two easy-to-clear hurdles. First, the complaint must describe the claim in sufficient detail to give the defendant "fair notice of what the... claim is and the grounds upon which it rests." Bell Atlantic Corp. v. Twombly, --- U.S. ----, ----, 127 S.Ct. 1955, 1964, 167 L.Ed.2d 929 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957)) (alteration in Bell Atlantic ). Second, its allegations must plausibly suggest that the plaintiff has a right to relief, raising that possibility above a "speculative level"; if they do not, the plaintiff pleads itself out of court. Bell Atlantic, 127 S.Ct. at 1965, 1973 n. 14.

E.E.O.C. v. Concentra Health Services, Inc., 496 F.3d 773, 776 (7th Cir. 2007). See also Killingsworth v. HSBC Bank Nevada, N.A., 507 F.3d 614, 618-19 (7th Cir. 2007) (observing that Supreme Court in Bell Atlantic "retooled federal pleading standards" such that a complaint must now contain "enough facts to state a claim for relief that is plausible on its face.").

As noted recently by the United States Supreme Court, "Rule 8 marks a notable and generous departure from the hyper-technical, code-pleading regime of a prior era, but it does not unlock the doors of discovery for a plaintiff armed with nothing more than conclusions." Ashcroft v. Iqbal, 129 S.Ct. 1937, 1950 (2009).

III. Analysis

A. Count III--Section 12(a)(2) of the Securities Act of 1933, 15 U.S.C. § 771

Section 12(a)(2) of the Securities Act of 1933, 15 U.S.C. § 77l, creates liability for any person who "offers or sells a security... by the use of any means or instruments of transportation or communication in interstate commerce or of the mails, [or] by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading...." The plaintiffs allege that AEI's August Placement Memorandum for Pixelon contained numerous misleading statements as well as omitted numerous material facts.

1. Statute of Limitations

The defendants first contend that this claim is barred by the statute of limitations. "A statute of limitations defense, while not normally part of a motion under Rule 12(b)(6), is appropriate where 'the allegations of the complaint itself set forth everything necessary to satisfy the affirmative defense, such as when a complaint plainly reveals that an action is untimely under the governing statute of limitations.'" Andonissamy v. Hewlett-Packard Co., 547 F.3d 841 (7th Cir. 2008)(citation omitted).

The statute of limitations for a claim under Section 12(a)(2) is "one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence." 15 U.S.C. § 77m; see also Whirlpool Financial Corp. v. GN Holdings, Inc., 67 F.3d 605, 609 (7th Cir. 1995)("Inquiry notice starts the running of the statute of limitations 'when the victim of the alleged fraud became aware of facts that would have led a reasonable person to investigate whether he might have a claim.'")(citation omitted). In other words, the statute of limitations begins to run when "the plaintiff learns or should have learned through the exercise of ordinary diligence... enough facts to enable him by such further investigation as the facts would induce in a reasonable person to sue within a year." Fujisawa Pharm. Co. v. Kapoor, 115 F.3d 1332, 1334 (7th Cir. 1997)(citation omitted).

A plaintiff may plead himself out of court by pleading facts sufficient to show that his claim is time-barred. Whirlpool, 67 F.3d at 608. The defendants note that the plaintiffs alleged that they became "concerned" about the financial condition of Pixelon and indeed, asked for their money back, as early as December 1999, just two months after they initially invested. Accordingly, the defendants contend that the plaintiffs claim under Section 12(2) of the 1933 Act was barred within one year of that time, or as of December 2000. The defendants further note that the tolling agreement referred to in the CAC does not save the plaintiffs because it was executed in October 2001, ten months after the plaintiffs' claim had expired.*fn1

The plaintiffs, however, do not rely on the alleged tolling agreements. Rather, the plaintiffs argue that the defendants' statute of limitations defense is barred by the doctrine of equitable estoppel. According to the plaintiffs, the defendants, starting in December 1999, "actively and intentionally induced Greer and Floyd not to file suit through Defendants' admission of responsibility and repeated promises to make Greer and Floyd whole for their losses." Plaintiffs' Response at 4, Dkt. #34. Apparently, Greer and Floyd allegedly relied on oral representations by the defendants to make them whole for several months. See CAC ¶ 84 ("[The defendants] promised to continue to try to find ways to make Green and Floyd whole and, as an alternative to immediate litigation, the parties continued these discussions for several months.").

Then, "[i]n September 2000, the defendants finally proposed an arrangement that they said would give Greer and Floyd the opportunity to recoup their investments." Id. at ¶ 85. Specifically, the plaintiffs allege that the defendants proposed that the parties enter into a consulting agreement that would serve as a vehicle to repay Greer and Floyd for their lost investments and expenses, and compensate them for deferring suit, by transferring to them various equity interests and rights to equity interests in exchange for the plaintiffs' consulting services to AEI ("Consulting Agreement"). Id. at ¶ 86. The parties entered into the Consulting Agreement on September 18, 2000, but the plaintiffs never received any of the securities that were purportedly promised to them under the terms of the Consulting Agreement and subsequent amendments.

"The doctrine of equitable estoppel allows the plaintiff to extend the statute of limitations if the defendant has done something that made the plaintiff reasonably believe that he had more time to sue." Teamsters & Employers Welfare Trust of Illinois v. Gorman Bros. Ready Mix, 283 F.3d 877, 881 (7th Cir. 2002)(citations omitted). Under the doctrine of equitable estoppel, a plaintiff has the burden to demonstrate that the defendant took "active steps to prevent the plaintiff from suing in time" and the plaintiff actually and reasonably relied on the defendant's conduct or representations. Smith v. Potter, 445 F.3d 1000, 1010 (7th Cir. 2006)(citations and internal quotation marks omitted).

With respect to the plaintiffs' equitable estoppel argument, the defendants contend that the plaintiffs have pled themselves out of court because they "have not alleged any action by Defendants that would have prevented Plaintiffs from bringing their suit in a timely manner, nor do they articulate anything done by Defendants to conceal information needed by Plaintiffs to assert their claims." Reply at 3, Dkt. #37. The defendants further contend that the plaintiffs cannot rely on the Consulting Agreement because any purported representations made in the Consulting Agreement did not prevent the plaintiffs from filing suit. Finally, the defendants argue that the plaintiffs have not alleged actual and reasonable reliance.

Contrary to the defendants' assertions, "complaints need not anticipate and attempt to plead around defenses." U.S. v. Northern Trust Co., 372 F.3d 886, 888 (7th Cir. 2004)(citations omitted). Instead, "[r]esolving defenses comes after the complaint stage." Id. While it is true that the plaintiffs could have pled themselves out of court based on the allegations of the complaint, Foss v. Bear, Stearns & Co., Inc., 394 F.3d 540, 542 (7th Cir. 2005)("Unless the complaint alleges facts that create an ironclad defense, a limitations argument must await factual development.")(citations omitted), their purported failure to properly allege facts necessary to establish equitable estoppel is not a basis for dismissal because, as already noted, the plaintiffs need not attempt to plead around anticipated defenses. Because the ...


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