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Prestwick Capital Management Ltd. v. Peregrine Financial Group

November 12, 2010


The opinion of the court was delivered by: Elaine E. Bucklo United States District Judge


Plaintiffs Prestwick Capital Management Ltd., Prestwick Capital Management 2 Ltd., and Prestwick Capital Management 3 Ltd. (collectively, "Prestwick"), sued defendants Peregrine Financial Group, Inc. ("PFG"); Acuvest Inc.; Acuvest's President, John Caiazzo; and one of Acuvest's Vice Presidents, Philip Grey ("Grey"). The complaint alleges that the defendants are liable for commodities fraud under various sections of the Commodity Exchange Act ("CEA"), 7 U.S.C. § 1, et seq. In addition, Prestwick asserts a common law breach of fiduciary duty claim against Acuvest, Caiazzo, and Grey.*fn1 The defendants have filed three separate motions to dismiss pursuant to Fed. R. Civ. P. 12(b)(6) -- one motion has been filed by Acuvest and Caiazzo, one by Grey, and one by PFG. For the reasons discussed below, the motions are denied.


During the years 2005 and 2006, Prestwick invested approximately $7 million in a limited partnership and commodity pool called Maxie Partners L.P. ("the pool"). The pool was created by Howard Winell ("Winell") and was operated by Winell's corporation, Winell Associates, Inc.*fn2 Prestwick was originally introduced to Winell by Acuvest. In addition to acting as an introducing broker, the complaint alleges that Acuvest provided Prestwick with advice regarding its investment in Maxie Partners L.P.

In April 2007, Prestwick told Grey at Acuvest that it wanted to redeem its investment in the pool. Grey told Prestwick that its investment would be valued by an accountant in the second week of June 2007 and that the funds would be wired between June 10 and June 15, 2007. Prestwick alleges that it had also been told that its redemption would be effective as of June 30, 2007. As a result, Prestwick says that it assumed that Grey had likely meant to say that its funds would be wired by July 15, 2007. The complaint alleges that Prestwick's funds (or some portion thereof) were removed from the pool and that about $3 million was returned to Prestwick.

However, in August 2007, Winell told Prestwick that, due to severe market conditions, the remaining amount of the investment was not presently available. Prestwick alleges that during the month of July 2007, Winell and Acuvest engaged in frequent trading that caused the pool to incur substantial losses, and that Prestwick's funds consequently were redeposited in the pool to cover margin calls. Although Winell told Prestwick that the remaining funds would become available over the next several weeks, the money has not been forthcoming. Although the exact amount outstanding is not known, Prestwick alleges, based on representations by Winell and Acuvest, that it is owed at least $4 million.


A motion to dismiss pursuant to Rule 12(b)(6) tests the sufficiency of the complaint, not its merits. See, e.g., Gibson v. City of Chicago, 910 F.2d 1510, 1520 (7th Cir. 1990). In resolving a Rule 12(b)(6) motion, all well-pleaded allegations in the complaint are taken as true, and all reasonable inferences are drawn in favor of the nonmoving party. See, e.g., McMillan v. Collection Prof'ls, Inc., 455 F.3d 754, 758 (7th Cir. 2006).

Count I

In Count I of its complaint, Prestwick asserts that the defendants*fn3 are liable for commodities fraud under three separate provisions of the CEA: (1) section 4o, which prohibits fraud committed by Commodity Trading Advisors (CTAs);*fn4 (2) section 4b, the CEA's general anti-fraud provision; and (3) section 22(a), which prohibits aiding and abetting commodities fraud committed by others. The defendants argue that none of these claims has been pleaded properly.

Section 4o of the CEA "makes it unlawful 'for any commodity trading advisor or commodity pool operator... (A) to employ any device, scheme, or artifice to defraud any client or participant or prospective client or participant; or (B) to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or participant or prospective client or participant.'" Stotler and Co. v. Commodity Futures Trading Com'n, 855 F.2d 1288, 1291 (7th Cir. 1988) (quoting 7 U.S.C. § 6o (1976)). Acuvest argues that Prestwick's section 4o claim fails because, by its plain terms, the provision applies only to commodity trading advisors. Acuvest claims that it is not a CTA and that it is therefore not subject to section 4o.

This argument simply ignores the complaint's allegations. Prestwick specifically asserts that Acuvest is a CTA. Compl. ¶¶ 4, 16. The complaint also alleges that Caiazzo and Grey individually are CTAs. Compl. ¶¶ 5, 6. Acuvest insists that the latter allegations are untrue -- it claims, for example, that it is not registered with the National Futures Association ("NFA") as a CTA. But as Acuvest itself later seems to acknowledge, formal registration is not determinative of whether a party may be deemed a CTA under the CEA. See, e.g., United States v. Ramunno, 289 Fed. App'x. 359, 361 (11th Cir. 2008); Commodity Futures Trading Commission v. Savage, 611 F.2d 270, 282 (9th Cir. 1979). Rather, a party may be deemed a CTA where the party has acted as a CTA. See, e.g., In the Steven Matrix, CFTC No. 04-01, 2003 WL 22251452, at *3 (CFTC Oct. 2, 2003); see also Ghouth v. Conticommodity Services, Inc., 642 F. Supp. 1325, 1330 (N.D. Ill. 1986) (abrogated on other grounds). This is precisely what the complaint alleges of Acuvest. See Compl. ¶¶ 4, 7, 16, 17, 44. It is true that Acuvest denies ever having provided Prestwick with such advice. At this stage of the litigation, however, I am bound to accept the complaint's allegations as true.

Acuvest also argues that the complaint's allegations regarding its advice to Prestwick lack sufficient detail. For example, Acuvest argues that Prestwick fails to specify the advice that it received from Acuvest; it also claims that Prestwick has not alleged that Acuvest offered its advice "for compensation or profit," which is part of the definition of "commodity trade advisor" under the CEA. See 7 U.S.C. § 1a(6)(A)(I).

Prestwick's complaint is adequate without such factual enhancement. To be sure, claims asserted under section 4o are subject to Rule 9(b)'s heightened pleading requirements; but these requirements should not be overstated. "Although Rule 9(b)'s special pleading standard is undoubtedly more demanding than the liberal notice pleading standard which governs most cases, Rule 9(b)'s special requirements should not be read as a mere formalism, decoupled from the general rule that a pleading must only be so detailed as is necessary to provide a defendant with sufficient notice to defend against the pleading's claims." U.S. ex rel. SNAPP, Inc. v. Ford Motor Co., 532 F.3d 496, 503 (6th Cir. 2008). "Rule 9(b) should be applied with an eye towards its 'three main purposes: (1) protecting a defendant's reputation from harm; (2) minimizing strike suits and fishing expeditions; and (3) providing notice of the claim to the ...

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