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Stewart Antelis v. Michael Freeman

June 29, 2011


The opinion of the court was delivered by: Magistrate Judge Nan R. Nolan


Plaintiff Stewart Antelis initiated this lawsuit against Defendant Michael Freeman alleging various securities fraud violations. In his Amended Complaint, Plaintiff claims violation of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §§ 78a-78mm et seq., and Rule 10b-5, 17 C.F.R. § 240.10b-5 in Count I; violation of the Illinois Securities Law of 1953 ("Illinois Securities Act"), 815 ILCS § 5/1 et seq., in Count II; violation of the Illinois Consumer Fraud and Deceptive Business Practices Act ("Illinois Consumer Fraud Act"), 815 ILCS § 505/2, in Count III; violation of common law fraud standards in Count IV; and violation of common law securities fraud standards in Count V. (Am. Compl. ¶¶ 43--66.) The parties have consented to the jurisdiction of the United States Magistrate Judge pursuant to 28 U.S.C. § 636(c).

Defendant has moved to dismiss Count I pursuant to Federal Rules of Civil Procedure 12(b)(6) and 9(b), and the Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. § 78u-4. (Mot. to Dismiss 12--36.) Additionally, Defendant has moved to dismiss Counts II--V pursuant to Rules 12(b)(6) and 12(b)(1). (Id. 37--43.) Plaintiff has agreed to voluntarily dismiss Counts II and V, but argues that Defendant's motion must be denied as to Counts I, III and IV. (Resp. 22.) For the reasons set forth below, Defendant's Motion to Dismiss is granted in part.

I. FACTS*fn1

This suit stems from Plaintiff's investment of over $500,000 in promissory notes ("Notes"), constituting securities pursuant to the Exchange Act, which were sold by Bruce Teitelbaum and guaranteed by Teitelbaum's company, Vision Realty Partners, Ltd. ("Vision Realty"). (Am. Compl. ¶¶ 1, 30.) When Teitelbaum declared bankruptcy in 2010, Plaintiff lost his investment, which constituted nearly all of his lifesavings. (Id. ¶ 2.) Plaintiff alleges that Defendant made numerous material misrepresentations and concealed material facts from Plaintiff in order to induce Plaintiff to loan money to Teitelbaum for the operation of Vision Realty. (Id. ¶¶ 1--2.) In reality, Plaintiff contends that Vision Realty was a shell corporation designed to allow Teitelbaum to defraud investors with Defendant's assistance. (Id. ¶¶ 34--35.)

Prior to the Notes becoming worthless, Plaintiff and Defendant had been business partners and lifelong friends. (Am. Compl. ¶¶ 7, 8.) Since 1996, Plaintiff and Defendant had bought, sold and managed real estate together, and Plaintiff often relied on Defendant for financial and investment advice. (Id.) Plaintiff placed a great deal of trust in Defendant and allowed Defendant to receive Plaintiff's mail, pay Plaintiff's bills, and maintain power of attorney for Plaintiff in certain matters. (Id. ¶¶ 9, 10.) Plaintiff believes that beginning in October 2005, Defendant began abusing this position of trust by working with Teitelbaum to defraud Plaintiff out of his lifesavings. (Id. ¶¶ 1, 11.)

In an October 2005 meeting, Defendant spoke with Plaintiff and Plaintiff's cousin Mark Malen about purchasing promissory notes from Teitelbaum worth $333,333.33. (Am. Compl. ¶ 12.) Defendant explained that he would also be purchasing a note from Teitelbaum for $333,333.33 such that all three individuals would be equal investors. (Id. ¶¶ 13, 14, 24.) According to Plaintiff, Defendant repeatedly emphasized that Defendant, Plaintiff and Malen would all be treated the same with respect to their Teitelbaum investments. (Id.) During the meeting, Defendant also stated that the invested money would be used only for commercial and residential real estate development and that Plaintiff and Malen would receive a guaranteed return of 10 percent on their investment. (Id. ¶¶ 15, 16.) Defendant stressed that the investment was a "sure thing" because Teitelbaum was personally worth $42 million and was therefore "bullet proof." (Id. ¶¶ 17-20.) Based on Defendant's assurances, Plaintiff and Malen agreed to invest, and Defendant delivered their checks, along with his own, to Teitelbaum later that month. (Id. ¶ 23.)

Around October 18, 2005, Teitelbaim signed a promissory note for $333,333.33 payable to Plaintiff. (Am. Compl. ¶ 25.) Acting upon the advice of Defendant, Plaintiff agreed to renew this note in 2006, 2007 and again in 2008. (Id. ¶ 26.) On De- cember 22, 2006, Defendant persuaded Plaintiff to purchase a second promissory note from Teitelbaum worth $250,000. (Id. ¶ 28.) This second promissory note was renewed in part for $125,000 around October 1, 2008. (Id. ¶ 29.)

On April 30, 2010, Teitelbaum filed for bankruptcy, and Plaintiff has been denied payment on both Notes. (Am. Compl. ¶¶ 32, 34.) Plaintiff alleges that he has since learned that Defendant made material misrepresentations and failed to disclose material facts to Plaintiff at the time Plaintiff agreed to purchase the first Note from Teitelbaum. (Id. ¶¶ 1, 2, 11, 12, 31, 33--42.) Specifically, Plaintiff claims that in 2005, Teitelbaum was not worth $42 million as Defendant stated, but was in fact insolvent. (Id. ¶¶ 33, 40.) Therefore, Plaintiff maintains that everything Defendant told Plaintiff regarding Teitelbaum's excessive wealth and the security and likely success of his investment was false. (Id. at ¶¶ 33, 36, 40.) Further, Plaintiff asserts that his investment was not used for commercial and residential real estate as Defendant led him to believe; instead, Vision Realty was in actuality a shell corporation for Teitbaum's "[P]onzi-style scheme." (Id. ¶¶ 34, 35, 40.) Finally, Plaintiff claims that Defendant received in excess of $100,000 from Teitelbaum as a "kick-back" in exchange for inducing Plaintiff and Malen to purchase and renew the promissory notes at issue. (Id. ¶¶ 31, 37, 39, 40.) Plaintiff contends Defendant never disclosed this arrangement to Plaintiff and instead falsely held himself out as an equal investor with Plaintiff and Malen. (Id. ¶¶ 1, 2, 11, 12--14, 24, 31, 33--42.)

Plaintiff asserts that Defendant knew his misstatements were false when he made them, or that at least Defendant had no factual basis for making the representations, and that Defendant intentionally withheld information about the "kick-back" he was to receive from Teitelbam. (Am. Compl. ¶¶ 36, 40.) Plaintiff was unaware of the concealment of facts by Defendant and asserts that he would not have purchased or renewed the Notes had Defendant disclosed the misrepresentations and revealed the material facts. (Id. ¶ 41.) As a result, Plaintiff claims damages in excess of $500,000 for Defendant's allegedly fraudulent conduct. (Id. ¶¶ 46, 50, 56, 60, 66.)


Defendant moves to dismiss Plaintiff's Amended Complaint in its entirety. (Mot. to Dismiss 7, 44.) In his response to Defendant's motion, Plaintiff voluntarily dismisses Counts II and V. (Resp. 22.) The remaining issues involve Counts I, III and IV, which allege violations of the Exchange Act, the Illinois Consumer Fraud Act, and common law fraud standards. (Amended Compl. ¶¶ 43--46, 51--60.)

A. Count I-The Exchange Act

In Count I, Plaintiff seeks recovery under the Exchange Act and the corresponding regulations contained in Rule 10b-5. (Am. Complaint ¶¶ 43--46.) Defendant contends that Count I should be dismissed because: (1) the applicable statute of limitations has run, and (2) Plaintiff has failed to adequately plead the necessary elements of a cause of action under the Exchange Act. (Mot. to Dismiss 9.) The Court will address each argument in turn.

1. Statute of Limitations

As of 2002, all actions alleging a violation of the Exchange Act and Rule 10b-5 are required to be commenced "not later than the earlier of: (1) 2 years after the discovery of the facts constituting the violation; or (2) 5 years after such violation." 28 U.S.C. §§ 1658(b)(1)--(2). The complaint in this case was filed on August 31, 2010, and the parties do not dispute that the action was brought within five years of the alleged fraud, which began in October 2005. However, Defendant contends that Count I is barred by the 2-year statutory period contained in § 1658(b)(1) because Plaintiff should have discovered "the facts constituting the violation" at the time he made the initial loan to Teitelbaum in October 2005. (Mot. to Dismiss 10--12.) Accordingly, Defendant states that the statute of limitations ran in October 2007, and Count I must be dismissed as untimely. (Id. 11--12.) The Court disagrees.

As a preliminary matter, a statute of limitations defense is not typically part of a Rule 12(b)(6) motion because complaints are not required to anticipate such affirmative defenses to survive a motion to dismiss. Andonissamy v. Hewlett-Packard Co., 547 F.3d 841, 847 (7th Cir. 2008); U.S. v. Lewis, 411 F.3d 838, 842 (7th Cir. 2005); see also Tregenza v. Great Am. Commc'ns Co., 12 F.3d 717, 718 (7th Cir. 1993) ("The statute of limitations is an affirmative defense, and a plaintiff is not required to negate an affirmative defense in his complaint."). A Plaintiff in a securities fraud action is therefore not expected to include facts in his complaint showing that his suit has been timely filed. Great Neck Capital Appreciation Inv. P'ship, L.P. v. PricewaterhouseCoopers, L.L.P., 137 F. Supp.2d 1114, 1125 (E.D. Wis. 2001) (citing Tregenza, 12 F.3d at 718). It is only in cases where a plaintiff has affirmatively pleaded facts indicating his suit is time barred that a judge should grant a defendant's motion to dismiss. Id.; see also Whirlpool Fin. Corp. v. GN Holdings, Inc., 67 F.3d 605, 608 (7th Cir. 1995) ("[I]n the context of securities litigation, if a plaintiff pleads facts that show its suit is barred by a statute of limitations, it may plead itself out of court under a Rule 12(b)(6) analysis.") Thus, in assessing Defendant's motion to dismiss, the statute of limitations analysis is strictly limited to whether the facts Plaintiff pleaded in his Amended Complaint show that Count I was filed in violation of the 2-year statutory period described in § 1658(b)(1).

As stated above, § 1658(b)(1) requires federal securities fraud cases to be brought within "2 years after the discovery of the facts constituting the violation." 28 U.S.C. § 1658(b)(1). The Seventh Circuit test for determining the time at which such a discovery of the violation took place has long been held to be the point at which a plaintiff was put on "inquiry notice" of the fraud. E.g., Fujisawa Pharmaceutical Co. v. Kapoor, 115 F.3d 1332, 1334 (7th Cir. 1997); Whirlpool, 67 F.3d at 609. "Inquiry notice" has been defined as when a potential plaintiff learns, or should have learned through the exercise of ordinary diligence, facts sufficiently probative of fraud that would induce a reasonable person to investigate whether he might have a claim. Law v. Medco Research, Inc., 113 F.3d 781, 785 (7th Cir. 1997); In re Motorola Sec. Litig., 505 F. Supp. 2d 501, 526 (N.D. Ill. 2007) (citing Fujisawa, 115 F.3d at 1334--35.). Such ...

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