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Stewart Antelis v. Michael Freeman

November 30, 2011

STEWART ANTELIS, PLAINTIFF,
v.
MICHAEL FREEMAN, DEFENDANT.



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

MEMORANDUM OPINION AND ORDER

Plaintiff Stewart Antelis initiated this lawsuit against Defendant Michael Freeman alleging various securities fraud violations. In his Second 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 Consumer Fraud and Deceptive Business Practices Act ("Illinois Consumer Fraud Act"), 815 ILCS § 505/2, in Count II; and violation of common law fraud standards in Count III.*fn1 (Compl. ¶¶ 62--75.)*fn2 The parties have consented to the jurisdiction of the United States Magistrate Judge pursuant to 28 U.S.C. § 636(c).

On June 29, 2011, the Court dismissed, with leave to amend, Count I of the First Amended Complaint for failure to state a claim. On July 13, 2011, Plaintiff filed a Second Amended Complaint. On August 30, 2011, Defendant filed a Motion to Dismiss the Second Amended Complaint. Defendant moves to dismiss Count I pursuant to Federal Rules of Civil Procedure 12(b)(6). (Mot. 9--46.) Additionally, Defendant moves to dismiss Counts II and III pursuant to Rules 12(b)(6) and 12(b)(1). (Id. 46--54.) For the reasons set forth below, Defendant's Motion to Dismiss is granted.

I. FACTUAL ALLEGATIONS*fn3

Plaintiff and Defendant were lifelong friends. (Compl. ¶ 14.) Since 1996, Defendant was also Plaintiff's partner in numerous investments. (Id. ¶¶ 1, 14.) Beginning in 2005, Defendant convinced Plaintiff to invest 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.*fn4 (Id. ¶¶ 1, 23, 35, 36.) When Teitelbaum declared bankruptcy in 2010, Plaintiff lost his investment, which constituted nearly all of his lifesavings. (Id. ¶ 3.)

Plaintiff alleges that Defendant made numerous material misrepresentations and concealed material facts in order to induce Plaintiff to loan money to Teitelbaum for the operation of Vision Realty. (Compl. ¶ 2.) Plaintiff contends that Vision Realty was a shell corporation designed to allow Teitelbaum to defraud investors with Defendant's assistance. (Id. ¶¶ 20, 48--50.) Plaintiff also asserts that Defendant received hundreds of thousands of dollars in kickbacks and other payments from Teitelbaum as incentives to induce Plaintiff to purchase the Notes and renew them on an annual basis. (Id. ¶ 2)

Prior to the Notes becoming worthless, Plaintiff and Defendant had been business partners and lifelong friends. (Compl. ¶¶ 1, 14.) 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. ¶¶ 1, 14, 15, 17, 60.) 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. ¶ 17.) Beginning in October 2005, Plaintiff alleges that Defendant began abusing this position of trust by working with Teitelbaum to defraud Plaintiff out of his lifesavings. (Id. ¶¶ 1, 19--22.)

In an October 2005 meeting, Defendant spoke with Plaintiff and Plaintiff's cousin Mark Malen about purchasing promissory notes from Teitelbaum, which were each worth $333,333.33. (Compl. ¶ 23.) 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. ¶¶ 24, 25, 33.) 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 ten percent on their investment. (Id. ¶¶ 26, 27.) Defendant stressed that the investment was a "sure thing" because Teitelbaum was personally worth $42 million and was therefore "bullet proof." (Id. ¶¶ 28--31.) Based on Defendant's assurances, Plaintiff and Malen each agreed to invest, and later that month, Defendant delivered their checks, along with his own, to Teitelbaum. (Id. ¶¶ 32, 33.)

On or about October 18, 2005, Teitelbaim signed a promissory note for $333,333.33 payable to Plaintiff. (Compl. ¶ 35, Ex. E.) Acting upon the advice of Defendant, Plaintiff agreed to renew this note in 2006, 2007, and again in 2008. (Id. ¶¶ 38, 41.) On December 22, 2006, Defendant persuaded Plaintiff to purchase a second promissory note from Teitelbaum worth $250,000. (Id. ¶ 36, Ex. F.) This second promissory note was renewed in part for $125,000 on or about October 1, 2008. (Id. ¶¶ 40, 41.) Each time the Notes were due, Defendant induced Plaintiff to renew the Notes rather than collect payment on them. (Id. 41, 43.)

On April 30, 2010, Teitelbaum filed for bankruptcy, and Plaintiff has been denied payment on both Notes. (Compl. ¶¶ 3, 49.) Plaintiff has since learned that Defendant made material misrepresentations and failed to disclose material facts at the time Plaintiff agreed to purchase the first Note from Teitelbaum. (Id. ¶¶ 1, 23-- 31, 34, 46, 48--51, 55, 57--61.) Specifically, Plaintiff claims that in October 2005, Teitelbaum was not worth $42 million as Defendant stated, but was in fact insolvent. (Id. ¶¶ 28, 48, 50, 55, 57.) Therefore, Plaintiff maintains that everything Defendant told Plaintiff regarding Teitelbaum's wealth and the security and likely success of his investment was false. (Id. at ¶¶ 26, 28--31, 57.)

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 Teitelbaum's "[P]onzi-style scheme." (Compl. ¶¶ 27, 49, 50, 57.) Finally, Plaintiff claims that Defendant received in excess of $200,000 from Teitelbaum as "kickbacks" in exchange for inducing Plaintiff and Malen to purchase and renew the promissory notes. (Id. ¶¶ 2, 20--22, 34, 39, 42, 46, 52--56, 58 & Exs. B, C, J.) Defendant never disclosed this arrangement to Plaintiff and instead falsely held himself out as an equal investor with Plaintiff and Malen. (Id. ¶¶ 24, 25, 33, 34, 57.)

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-backs" he was to receive from Teitelbam. (Compl. ¶¶ 48, 51.) 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. ¶¶ 58, 51.) As a result, Plaintiff claims damages in excess of $500,000. (Id. ¶¶ 1, 3, 65, 71, 75.)

II. DISCUSSION

A. Applicable Legal Standard

The purpose of a motion to dismiss pursuant to Rule 12(b)(6) is to test the sufficiency of the complaint, not to decide its merits. Gibson v. City of Chicago, 910 F.2d 1510, 1520 (7th Cir. 1990). A Rule 12(b)(6) motion to dismiss must be considered in light of the liberal pleading standard of Rule 8(a)(2), which requires only "a short and plain statement of the claim showing that the pleader is entitled to relief." "Specific facts are not necessary; the statement need only give the defendant fair notice of what the claim is and the grounds upon which it rests." Erickson v. Pardus, 551 U.S. 89, 93 (2007) (per curiam) (internal citations and alterations omitted). Determination of the sufficiency of a claim must be made "on the assumption that all allegations in the complaint are true (even if doubtful in fact)." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007) (emphasis omitted).

Nevertheless, a motion to dismiss should be granted if the plaintiff fails to make allegations that are "enough to raise a right to relief above the speculative level" and are sufficient to show "a plausible entitlement" to recovery under a viable legal theory. Twombly, 550 U.S. at 555, 559 (While the court must accept factual allegations as true, it need not credit mere labels, conclusions or "formulaic recitation of the elements of a cause of action."); EEOC v. Concentra Health Svcs., Inc., 496 F.3d 773, 776 (7th Cir. 2007) (The complaint's "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."). However, "[a] plaintiff need not put all of the essential facts in the complaint," Hrubec v. Nat'l R.R. Passenger Corp., 981 F.2d 962, 963 (7th Cir. 1992); instead, the plaintiff "may add them by affidavit or brief in order to defeat a motion to dismiss if the facts are consistent with the allegations of the complaint," Help at Home Inc. v. Medical Capital, LLC, 260 F.3d 748, 752--53 (7th Cir. 2001); see Cruz v. Cross, 2010 WL 3655992, at *2 (N.D. Ill. 2010).

While "detailed factual allegations" are not required, the plaintiff must allege facts that, when "accepted as true, . . . state a claim to relief that is plausible on its face." Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009) (internal citation and quotation marks omitted). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. "[O]nce a claim has been stated adequately, it may be supported by showing any set of facts consistent with the allegations in the complaint." Twombly, 550 U.S. at 563.

Because Count I deals with the Exchange Act, the sufficiency of Plaintiff's claim is also governed by Rule 9(b). Sears v. Likens, 912 F.2d 889, 893 (7th Cir. 1990) ("It is well settled that Rule 9(b) . . . governs claims based on fraud and made pursuant to the federal securities laws."). Rule 9(b) is intended to force plaintiffs alleging fraud to do more than the usual investigation prior to filing a complaint, and therefore requires such plaintiffs to "state with particularity the circumstances constituting fraud or mistake." Fed. R. Civ. P. 9(b); accord Ackerman v. Northwestern Mut. Life Ins. Co., 172 F.3d 467, 469 (7th Cir. 1999). For a complaint to be sufficiently "particular" it must include "the identity of the person making the misrepresentation, the time, place, and content of the misrepresentation, and the method by which the misrepresentation was communicated to the plaintiff." Uni*Quality, Inc. v. Infotronx, Inc., 974 F.2d 918, 923 (7th Cir. 1992). In essence, this requires a plaintiff to plead the "who, what, when, where, and how" of the allegedly fraudulent actions. DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir. 1990); see Windy City Metal Fabricators & Supply, Inc. v. CIT Tech. Fin. Servs., 536 F.3d 663, 668 (7th Cir. 2008) (The circumstances of fraud or mistake include the identity of the person who made the misrepresentation, the time, place and content of the misrepresentation, and the method by which the misrepresentation was communicated to the plaintiff.") (citation omitted).

In addition, a complaint alleging securities fraud is also subject to the heightened pleading standards set forth in the PSLRA. Under this statute, a securities fraud complaint must specify "each statement alleged to have been misleading, the . . . reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed." 15 U.S.C. ยง 78u-4(b)(1). Further, the plaintiff must "state with ...


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