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Shirley v. JED Capital

July 8, 2010


The opinion of the court was delivered by: Hon. Harry D. Leinenweber


Before the Court is Defendants' Motion to Dismiss under Federal Rules of Civil Procedure 12(b)(1), 12(b)(6), 9(b), and 17. For the following reasons, the Motion to Dismiss is granted in part and denied in part.


Christopher Shirley ("Shirley"), a member of JED Capital, LLC ("JED"), is suing JED and its manager, John Harada, on seven counts:

(1) breach of contract, (2) fraud in the inducement, (3) breach of fiduciary duty under the Illinois Limited Liability Company Act, (4) for an accounting and damages, (5) violation of the Illinois Wage Payment and Collection Act, (6) violation of federal securities laws, and (7) violation of the Racketeer Influenced Corrupt Organizations Act ("RICO").

JED is an investment company that participates in, among other things, automated trading of futures, equities, and foreign exchange instruments. Before January 1, 2007, Plaintiff Christopher Shirley, while working for various investment companies, developed several methods and programs for automated securities trading, including a Liquidity Replenishment Program ("LRP"). In March 2007, Shirley began working full-time for JED. Shirley's efforts using LRP produced millions of dollars in income for JED.

In July 2007, John Harada ("Harada"), JED'S manager, persuaded Shirley to convert $200,000 owed to him by JED, plus up to $100,000 in future earnings, into equity in JED, making Shirley a 10% owner-member of the LLC. Shirley alleges that Harada promised to use the money to support LRP. Shirley alleges that Harada failed to tell him that JED could not pay its bills and had no revenues except those brought in by Shirley. Harada said that if Shirley did not agree, JED would fire him and continue to use LRP without him. Shirley reluctantly agreed to Harada's suggestion. Shirley became a member of JED, but Harada retained all decision-making authority for the LLC.

Shirley continued to work for JED, producing profits in the millions of dollars. In September 2008, Harada persuaded Shirley to invest an additional $250,000 into JED in order to expand the LRP trade to London, making Shirley a 20% member. Shirley made the investment on the specific agreement that the money would be used solely to expand the company's trading capabilities on the London stock exchange. Shirley alleges that Harada failed to tell him that JED was in the process of repaying an investment whereby it would become insolvent, that JED could not pay its bills, that Harada had "sucked" money out of JED to finance other ventures, and that JED needed Shirley's money for its daily survival. After Shirley made the additional investment, Harada allegedly failed to expand the company into the London market. Shirley alleges that this failure cost him and JED $3,000 daily in lost profits.

Shirley also alleges that Harada failed to pay him a $10,000 monthly salary that Shirley was contractually bound to receive in addition to his share of the profits he generated. Harada also failed to live up to his promises to provide financial and personnel support for the LRP program. Shirley alleges that this failure was based on JED's and Harada's intention to "freeze" Shirley out of JED and concentrate JED's resources on other ventures, in violation of their fiduciary and contractual obligations to Shirley.

Shirley decided to leave JED. On August 5, 2009, Shirley and Harada agreed to shut down the LRP program, close JED, and disburse JED's capital to the remaining members. Shirley received his share of the profits, but not his unpaid salary. Despite Shirley and Harada's agreements to shut down LRP and JED, JED allegedly recommenced running trades on the LRP program after Shirley left. JED has not accounted to Shirley for his share of the profits Shirley believes he should have received as a 20% member of JED.

Shirley alleges numerous improprieties committed by Harada as manager of JED, including using JED assets to fund Harada's other business ventures and borrowing JED funds for personal and family purposes.

Only Counts 6 (securities violation) and 7 (RICO) of the Amended Complaint are based on federal law. Defendants JED and Harada argue that Counts 6 and 7 do not state a claim for which relief may be granted and that the Court therefore does not have subject matter jurisdiction. Shirley responds that the Court has diversity jurisdiction even if it does not have federal issue jurisdiction -- a point that JED disputes. JED argues that, even if the Court does have jurisdiction, Counts 1 through 4 must be dismissed under Rule 12(b)(6) or Rule 17.


A. Subject Matter Jurisdiction

A federal court must have federal-question jurisdiction under 28 U.S.C. § 1331 or diversity jurisdiction under 28 U.S.C. § 1332. Arbaugh v. Y&H Corp., 546 U.S. 500, 513 (2006). If it has neither, it must dismiss the case under Federal Rule of Civil Procedure 12(b)(1) for lack of subject matter jurisdiction.

B. Rule 12(b)(6)

Under Rule 12(b)(6), a court must dismiss a plaintiff's claim if it does not include sufficient facts to state a claim to relief that is plausible on its face. Justice v. Town of Cicero, 577 F.3d 768, 771 (7th Cir. 2009). In considering a motion to dismiss, a court must accept a plaintiff's allegations as true and view them, along with any reasonable inferences drawn from them, in the light most favorable to the plaintiff. Id.

C. Rule 9(b)

Rule 9(b) provides, "In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake." A cause of action may be dismissed for failing to plead fraud or mistake with particularity. See Hayduk v. Lanna, 775 F.2d 441, 443-45 (1st Cir. 1985).


A. Subject Matter Jurisdiction

The Court addresses this threshold issue first. If Defendants are correct that Plaintiff fails to state a claim under federal securities laws or RICO, then there is no federal question jurisdiction. If this is so, the Court must consider whether it has diversity jurisdiction.

1. Federal Question Jurisdiction

a. Securities Violation (Count 6)

i. The Agreements as Investment ...

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