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Alpha Management Incorporated v. Last Atlantis Capital Management

November 2, 2012


The opinion of the court was delivered by: Judge Feinerman


Plaintiff Alpha Management Incorporated filed this suit against Defendants Last Atlantis Capital Management, LLC ("LACM"), Martin Allamian, Irwin Berger, Robert DeMeritt, Michael Elizondo, and Stig Ostgaard, alleging violations of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), § 12(a) of the Securities Act of 1933, 15 U.S.C. § 77l(a), and Illinois law. Doc. 1. All of those defendants except Allamian moved to dismiss the complaint under Federal Rule of Civil Procedure 12(b)(6). Doc. 8. Rather than respond to the motion, Alpha filed an amended complaint that added Last Atlantis Partners, LLC ("LAP") as a defendant. Doc. 13. All defendants except Allamian have moved to dismiss the amended complaint. Doc. 19; Doc. 30 at 2 n.1. The motion is granted as to both federal claims, although Alpha will be given leave to replead the § 10(b) claim. Because it presently is unclear whether subject matter jurisdiction lies over the state law claims, the court will reserve judgment as to whether those claims can survive dismissal.


In considering a Rule 12(b)(6) motion, the court assumes the truth of the complaint's well-pleaded factual allegations, though not its legal conclusions. See Munson v. Gaetz, 673 F.3d 630, 632 (7th Cir. 2012); Reger Dev., LLC v. Nat'l City Bank, 592 F.3d 759, 763 (7th Cir. 2010). The court must construe those facts in the light most favorable to the party opposing dismissal. See Gomez v. Randle, 680 F.3d 859, 864 (7th Cir. 2012). In addition to the complaint itself, the court must consider "documents attached to the complaint, documents that are critical to the complaint and referred to in it, and information that is subject to proper judicial notice." Geinosky v. City of Chicago, 675 F.3d 743, 745 n.1 (7th Cir. 2012). For claims not sounding in fraud, the court also must consider facts set forth in the plaintiff's opposition brief or supported by attachments to the brief, so long as those facts "are consistent with the pleadings." Ibid. The court may not consider those additional facts when evaluating a motion to dismiss claims that do sound in fraud. See Kennedy v. Venrock Assocs., 348 F.3d 584, 593 (7th Cir. 2003); Wine & Canvas Dev., LLC v. Weisser, __ F. Supp. 2d __, 2012 WL 3260234, at *10 (S.D. Ind. Aug. 7, 2012); Zandstra v. Fischer, 2012 WL 2421242, at *2 (N.D. Ind. June 26, 2012). The following sets forth the facts as favorably to Alpha as permitted by the amended complaint and the other materials that may be considered on a Rule 12(b)(6) motion.

LACM is a commodity trading advisor and commodity pool operator that offers investors onshore and offshore products and that manages futures accounts, such as LAP. Doc. 13 at ¶ 4. Allamian, Berger, DeMeritt, Elizondo, and Ostgaard are employed by or otherwise affiliated with LACM. Id. at ¶¶ 5, 7-9, 11. In 2006, Elizondo spoke to Alpha about investing with LACM, which resulted in Alpha buying $450,000 of Last Atlantis Partners, LLC-LACM Short Term Discretionary Futures Share Class N ("Share Class N"). Id. at ¶ 18. Elizondo then began promoting to Alpha-on telephone calls, in emails, and at meetings in Freeport, Bahamas-an investment in what the parties call Share Class I-2. Id. at ¶¶ 19, 21-22. The amended complaint describes the content of Elizondo's communications as follows:

Throughout these oral and written communications, Elizondo made the following admissions to Plaintiff: that investment in Share Class I-2 could be advanced for under $1,000,000 but was subject to both a one percent monthly management fee and a 50 percent performance fee; that Share Class I-2 is a futures system that used thousands of individual trading systems-which Elizondo claimed were consistently profitable-and applied those individual trading systems to many different futures markets throughout the world; that Share Class I-2 is a very advanced, high performance "money machine" that justified the high fees; that Elizondo controls hundreds of millions of US dollars in investments; and that Elizondo lives in a huge mansion in a suburb of Chicago where a bathroom is bigger than the apartment he was then renting in Freeport, Bahamas.

Id. at ¶ 23. Allamian, working on LACM's behalf, also promoted Share Class I-2 to Alpha. Id. at ¶ 24.

On May 1, 2008, "[b]ased on the repeated advice and representations of LACM," Alpha transferred its entire interest in Share Class N to Share Class I-2. Id. at ¶ 25. An account recap signed by Berger valued Alpha's Share Class I-2 investment at $307,564.75 as of October 31, 2008. Id. at ¶ 26. After receiving performance information from Ostgaard on October 9, 2009, Alpha was led to believe that Share Class I-2 stopped trading, though LACM continued to charge Alpha a one percent monthly management fee. Id. at ¶ 27. On December 21, 2009, Alpha filed a redemption request with LACM for the full amount of its Share Class I-2 investment. Id. at ¶ 28. On December 24, 2009, when Alpha followed up on its request, Berger said that "[o]ur accounting department is off for the holidays the remainder of the year. We will reply to you about your redemption request after the start of the New Year." Id. at ¶ 29. When Alpha followed up again after the New Year, Elizondo replied via email on January 14, 2010, that "[r]edemption is being processed." Id. at ¶ 30.

Alpha continued to inquire about the status of the redemption through a series of telephone calls, emails, and faxes, but LACM ignored those communications. Id. at ¶ 34. On some unspecified date in 2011, Alpha reached Allamian on his personal cell phone. Id. at ¶ 35. Allamian informed Alpha that he had left LACM because he was "disturbed by the fact that LACM was not returning money to customers with securities that were not being traded." Ibid. In April 2011, a financial investigation firm retained by Alpha was able to contact DeMeritt and obtained a $90,000 payment to Alpha. Id. at ¶ 37. Alpha then tried without success to obtain the balance of its funds by working through Allamian. Id. at ¶ 38.


I. Counts I and II: Federal Claims

A. Count I: Section 12(a) of the 1933 Act

Count I of the amended complaint alleges that Defendants violated § 12(a)(1) of the 1933 Act by selling unregistered securities to Alpha. Doc. 13 at ¶¶ 41-53. Section 12(a)(1) prohibits the offer or sale of a security "in violation of section 77e of this title." 15 U.S.C. § 77l(a)(1). Section 77e prohibits the sale or delivery of unregistered securities, meaning securities for which a registration statement has not been filed the Securities Exchange Commission ("SEC"). Id. § 77e(a). Section 77d, however, carves an exception to § 77e, stating that the "provisions of section 77e of this title shall not apply to . transactions by an issuer not involving any public offering." Id. § 77d(a)(2).

Alpha alleges that investments in Share Class I-2 were securities that were not registered with the SEC. Doc. 13 at ¶¶ 43, 45. While admitting that the Share Class I-2 investments were unregistered securities, Defendants contend they were exempt from the prohibition on selling unregistered securities, and thus from liability under § 12(a)(1), because the sale of those investments did not involve a public offering. Doc. 20 at 13-14. To support their submission that no public offering was involved, Defendants cite the Subscription Agreement and Private Placement Memorandum for the Share Class I-2 investments, both of which are attached to their motion to dismiss. Docs. 20-1, 20-2. The first amended complaint does not refer to those documents, so it is unclear whether Defendants may rely upon them in seeking a Rule 12(b)(6) dismissal. But Alpha does not object to Defendants' use of the documents, and in fact does not contest Defendants' submission that the sale of Share Class I-2 investments involved no public offering. Doc. 26 at 11-12. Nor does Alpha dispute Defendants' contention that the absence of a public offering defeats any § 12(a)(1) claim. Alpha has therefore forfeited its § 12(a)(1) claim. See Alioto v. Town of Lisbon, 651 F.3d 715, 721 (7th Cir. 2011); Wojtas v. Capital Guardian Trust Co., 477 F.3d 924, 926 (7th Cir. 2007); Stransky v. Cummins Engine Co., 51 F.3d 1329, 1335 (7th Cir. 1995). Defendants' argument would have prevailed even if Alpha had put up a fight, as Defendants unquestionably are correct on the law. See Holland v. GEXA Corp., 161 F. App'x 364, 366 (5th Cir. 2005) (rejecting a § 12(a)(1) claim where the plaintiff did not "allege[] any facts demonstrating the sale was actually a public offering"); Lewis v. Fresne, 252 F.3d 352, 357 (5th Cir. 2001) (affirming the dismissal of a § 12(a)(1) claim, reasoning that "Section 12 ...

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