The opinion of the court was delivered by: Judge Joan B. Gottschall
MEMORANDUM OPINION & ORDER
Plaintiffs Shailja Gandhi Revocable Trust; Amit D. Vyas, M.D., and Trupti Vyas ("the Vyases"); and Mick and Mita Majmundar ("the Majmundars") sued Rajiv Patel and Sitara Capital Management, LLC ("Sitara Capital") for violations of the Federal Securities Act of 1933 and the Illinois Securities Law of 1953. The Vyases and Majmundars also sued on behalf of their profit-sharing plans for violations of the Employee Retirement Income Security Act ("ERISA").*fn1 Plaintiffs' claims arise from their participation in Sitara Partners, LP ("Sitara Partners" or "the Fund"), a limited partnership in which Defendants managed their money, the vast majority of which was lost in September 2008, when the single stock in which Defendants had invested the partnership funds crashed. Now before the court are Defendants' motion for summary judgment on the three remaining counts of Plaintiffs' Second Amended Complaint and Plaintiffs' motion for leave to file a Third Amended Complaint. The court concludes that, construing the evidence in Plaintiffs' favor, Plaintiffs have failed to establish a genuine issue of material fact as to whether Defendants violated federal and Illinois securities laws, and the Vyases and Majmundars have not established a question of fact as to the ERISA claim. Defendants' motion for summary judgment is granted. The court also concludes that further amendment of Plaintiffs' complaint would be futile and denies Plaintiffs leave to file a Third Amended Complaint.
The following facts are undisputed, except where otherwise indicated.*fn2 Sitara Partners and Sitara Capital were Delaware entities formed in April 2005. Sitara Capital was the general partner of Sitara Partners. Rajiv Patel was the principal and managing director of Sitara Capital, and Sitara Capital was the investment advisor to Sitara Partners.
A. Creation of the Sitara Entities
Prior to forming the Sitara entities, Patel operated BIT Software, an Internet company that provided companies with on-line catalog and e-commerce software and services. BIT Software was renamed Maestro Commerce and subsequently sold. (Defs.' SOF Ex. 2 ("Patel Dep.") 104:19-20, ECF No. 68.) Patel's 50 percent interest in the sale of Maestro Commerce yielded $9 million, including $3 million in cash and the rest in shares in a South African company known as GoldMine Software (now FrontRange Solutions).
In 1999, Patel opened a personal account to trade securities. He gave securities advice to his father-in-law and two close friends and achieved some success. Patel then founded Sitara Capital and Sitara Partners. Between 2005 and 2008, Patel offered and sold limited partnership interests in Sitara Partners to investors, including Plaintiffs, to raise capital to trade securities. The majority of investors in Sitara Partners were Patel's family members and close friends. Fewer than twenty non-accredited investor households purchased interests in Sitara Partners; Patel did not keep track of the number of individual investors who participated. (Patel Dep. 40:4-13.) Patel and Sitara Capital did not provide investment advisory services directly to Plaintiffs, only to Sitara Partners.*fn3
In soliciting Plaintiffs' initial and subsequent investments in Sitara Partners, Patel told them that his own capital would be invested in the Fund. Specifically, in Sitara Partners' Confidential Private Offering Memorandum ("CPOM"), Patel represented: "Mr. Patel intends to contribute no less than one hundred thousand dollars to the partnership." (Defs.' SOF Ex. 6 ("CPOM"), ECF No. 68.) Patel did not invest any of his own money at the inception of Sitara Partners and did not tell Plaintiffs that he had not done so. He did, however, accumulate management and incentive fees which were rolled over into the Fund, which he claims totaled between $100,000 and $500,000. Patel claims that he was entitled to withdraw that money from the Fund at will. (Patel Dep. 58:25--59:14.) Plaintiffs contend that this was Patel's only contribution to the Fund, but Patel states that his 0.25 percent management fee did not cover the full operating costs of Sitara Capital, and that he made up some of the cost of running the Fund with his private investment account. (Id. at 99:14-23.) Plaintiffs claim that "Mr. Patel invested less of his own money than he led us to believe" he would before they invested. (Pls.' App'x Ex. 1 ("Gandhi Interrog. Resp.") 5, ECF No. 93.)
Throughout the Fund's operating history, Patel maintained a personal account with between $1 and $2 million, and a retirement account with between $50,000 and $100,000, with which he executed trades identical to those he executed on behalf of Sitara Partners. Patel claims that he maintained his personal funds in separate accounts, mirroring the Fund's trading activity, so that he could easily withdraw funds for his family's expenses.*fn4
At all times, less than 25 percent of the funds held by Sitara Partners were in ERISA-covered benefit plans. Sitara Partners declined investments to avoid increasing the percentage of ERISA-covered assets beyond 25 percent. The CPOM states that "[i]f the assets of the Partnership [are] regarded as 'plan assets' of an ERISA Plan, an IRA, or a Keogh Plan . . . the General Partner would be a 'fiduciary' (as defined in ERISA) with respect to such Plans and would be subject to the obligations and liabilities imposed on fiduciaries by ERISA." (CPOM 11.) It further explains that Sitara Capital "intends to limit the participation in the Partnership by Benefit Plan investors to the extent necessary so that participation by Benefit Plan investors will not be 'significant' within the meaning of" Department of Labor regulations such that the Fund would have "to comply with the applicable provisions of ERISA." (Id. at 11-12.)
B. Defendants' Investment Strategy
Sitara Partners' trading strategy focused on concentrated holdings, whereby the Fund would hold large positions of a small number of securities.*fn5 In his deposition, Patel testified that "there is no rule of thumb as to whether" a concentrated fund will hold "two, five, ten or twenty or thirty" securities, but that Sitara Partners "typically held ten or fewer and in some cases twenty or fewer stocks at any given time." (Patel Dep. 97:6-7, 50:11-12.) The CPOM states that "[i]t is not a goal of the Partnership to maintain a highly diversified portfolio," that the Fund practices a "philosophy of concentrating our investments," which will be "concentrated in less than twenty positions," and that Sitara Capital "may feel that it is in the best interest of the Partnership to effect a transaction outside of these guidelines," which "may represent a special risk in that the level of diversification of the Partnership's portfolio may be lower than a well-diversified portfolio." (CPOM 13-15.) The CPOM further explains:
[T]he Partnership Agreement imposes no limits on the concentration of the
Partnership's investments in particular securities, industries, or sectors and at times the Partnership may hold a relatively small number of securities positions, each representing a relatively large portion of the Partnership's assets. The Partnership Agreement does not limit the amount of the Partnership's capital that may be committed to any single investment, industry, or sector. (Id. at 15, 30.) The CPOM articulated the broad and absolute discretion with which Defendants could make investment decisions as follows:
All investment decisions will be made exclusively by the General Partner, in its sole and absolute discretion.
The General Partner will be free to pursue such investment strategies, as it deems fit or appropriate at any given time.
Moreover, the General Partner may change, in its absolute discretion, the investment objectives and policies of the Partnership and there can be no assurance that it will not exercise such power.
The Limited Partnership Agreement gives the General Partner broad discretion to expand, revise or contract the Partnership's business without the consent of the Limited Partners. Thus, the investment strategies of the General Partner may be altered without prior approval by, or notice to, the Limited Partners if the ...