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Cox v. Jed Capital, LLC

United States District Court, N.D. Illinois, Eastern Division

July 11, 2014

GREGORIE COX, Plaintiff,
v.
JED CAPITAL, LLC, SARASTRO CAPITAL, LLC, NEED TO KNOW NEWS, LLC, and JOHN HARADA, Defendants.

MEMORANDUM OPINION AND ORDER

JAMES F. HOLDERMAN, District Judge.

On December 9, 2013, plaintiff Gregorie Cox ("Cox") filed a seven-count complaint against defendants JED Capital, LLC ("JED"), Sarastro Capital, LLC ("Sarastro"), Need to Know News, LLC ("NTKN"), and John Harada ("Harada") (collectively, "Defendants"), alleging a variety of fraud claims in connection with JED's 2008 purchase of Cox's stock in Sarastro. (Dkt. No. 1.) On March 27, 2014, Cox filed an amended complaint ("Amended Complaint") alleging a similar array of claims. (Dkt. No. 17.) On April 25, 2014, Defendants moved to dismiss Cox's Amended Complaint.[1] (Dkt. No. 21.)

On June 6, 2014, Cox's attorney-who did not file an appearance in this case in violation of Local Rule 83.16-filed a response (Dkt. No. 35 ("Pl.'s Resp.")) to Defendants' motion to dismiss. Cox's response is 15 single-spaced pages long, which is roughly twice the permissible length under Local Rules 5.2(c) and 7.1. Three days later, on June 9, Cox's attorney filed a motion seeking leave to file a second amended complaint. (Dkt. No. 36.) In keeping with his pattern of indifference to this court's rules, Cox's attorney simultaneously filed the second amended complaint, without permission from the court and in violation of Federal Rule of Civil Procedure 15(a)(2). (Dkt. No. 37.) As stated in open court on July 8, 2014, because the parties have already completed briefing on Defendants' motion to dismiss Cox's Amended Complaint, the court will first address the merits of Defendants' motion to dismiss. The court will then consider Cox's motion for leave to file a Second Amended Complaint.

The only federal claim alleged in Cox's Amended Complaint is Count V, which charges Defendants with having violated section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and the SEC's Rule 10b-5, 17 C.F.R. § 240.10b-5, by making misrepresentations and omissions in connection with the purchase of Cox's Sarastro stock. (Am. Compl. ¶¶ 53-57.) Cox also brings Illinois state law claims against Defendants for fraud in the inducement (Count I), breach of contract (Counts II and VIII), tortious "infringement" with contract (Count III), violations of the Illinois Limited Liability Company Act, 805 ILCS 180/15-2 (Count IV), fraudulent concealment (Count VII), and "breach of contract of covenant of good faith and fair dealing" (Count IX). (Am. Compl. ¶¶ 35-52, 64-82.) Cox finally seeks to compel Defendants to produce an accounting of NTKN's financial transactions during the "relevant time period, " which Cox styles as a "complaint for accounting" (Count VI).[2] (Am. Compl. ¶¶ 58-63.)

For the reasons explained below, Count V must be dismissed because it is untimely, the court declines to exercise supplemental jurisdiction over Cox's remaining state law claims, and Cox's motion for leave to file a second amended complaint-which contains no additional allegations that would change this court's determination on Count V-is denied.

RELEVANT FACTUAL BACKGROUND

JED is an Illinois limited liability company, (Am. Compl. ¶ 4), "that participates in, among other things, automated trading of futures, equities, and foreign exchange instruments." Shirley v. JED Capital, LLC, 724 F.Supp.2d 904, 908 (N.D. Ill. 2010) (Leinenweber, J.). It is a high-frequency trading ("HFT") firm. JED was formerly the controlling shareholder of Sarastro, which was a corporate entity formed to own and manage the third defendant, NTKN. (Am. Compl. ¶¶ 2, 4.) NTKN is a "news" organization but produces no original content; it sells an ultra-fast electronic news feed to HFT firms by leveraging its access to government "lock-up rooms" and embargoed news releases. (Am. Compl. ¶¶ 30.) Trading firms pay NTKN up to $31, 000 per month for faster access to the market-moving news, ( id. ), presumably to trade on the information before it reaches slower market participants. Harada is the controlling shareholder of JED. (Am. Compl. ¶ 5.)

Cox was an employee of NTKN from January 1, 2006 until his termination on August 8, 2006. (Am. Compl. ¶¶10, 13.) As part of his employment, Cox received a 5% equity interest in Sarastro, the shell company formed to own NTKN. ( Id. ¶ 1.) Sarastro's operating agreement granted JED an option to repurchase Cox's shares under a number of circumstances, including (1) if NTKN's monthly cash flow dropped below negative $5, 000 or (2) if Cox's employment was terminated for cause. (Dkt. No. 1 Ex. 1 ¶ 15.4(a)-(c).) The operating agreement required JED to pay Cox the book value of Sarastro as of the last day of the current fiscal quarter. ( Id. )

On November 1, 2006, nearly three months after Cox's termination, JED attempted to exercise its option to repurchase Cox's shares in Sarastro because NTKN's cash flow was purportedly less than negative $5, 000. (Dkt. No. 1 Ex. 3 ¶ 9.) Although JED claimed the book value of NTKN in September 2006 was negative $20, 484.48, JED graciously offered Cox $100 for his 5% equity interest. ( Id. ¶¶ 9, 11.) Cox suspected fraud and refused to sell. On August 21, 2007, JED filed a complaint for declaratory judgment in the Circuit Court of Cook County, Illinois seeking to enforce its repurchase right. ( Id. )

After conducting discovery, JED and Cox entered into settlement discussions, the purpose of which was to agree on a valuation of Cox's Sarastro shares. (Am. Compl. ¶ 22.) On March 13, 2008, Sarastro produced to Cox and his attorneys its financial statements for the years ended December 31, 2006 and December 31, 2007. ( Id. ¶ 22.) Sarastro's financial statements reported deferred revenue of $876, 158 for 2006 and $815, 994 for 2007. ( Id. ¶ 24.) Cox and his attorneys determined that the deferred revenue in both years supported a "significant" valuation of Cox's 5% equity interest well above JED's $100 offer. ( Id. ¶ 24.) When Cox communicated his position to JED, however, JED refused to shed light on the deferred revenue. ( Id. ) Instead, on May 28, 2008, Sarastro produced revised financial statements reducing deferred revenue to $178, 095 for 2006 and $2, 795 for 2007. ( Id. ¶ 25.)

On June 18, 2008, despite Sarastro's suspicious revision of its financial statements, Cox and JED reached a settlement agreement whereby Cox agreed to sell his 5% interest in Sarastro to JED for $15, 000. ( Id. ¶ 31.) Cox later learned that Harada and JED sold a 10% interest in Sarastro to another JED employee for $200, 000 around the same time they negotiated the purchase of Cox's 5% interest for $15, 000. ( Id. ¶ 28.)

On December 9, 2013, more than five years after Cox sold his interest in Sarastro to JED pursuant to the settlement agreement, Cox filed his lawsuit in this court alleging a number of fraud claims in connection with the sale. All of the allegations in Cox's Amended Complaint arise from his assertion, on information and belief, that Harada ordered Sarastro to revise its financial statements downward for the sole purpose of depriving Cox of the fair value of his shares. ( Id. ¶ 27.) Defendants have moved to dismiss all counts of Cox's Amended Complaint pursuant to Federal Rule of Civil Procedure 12(b)(6).

LEGAL STANDARDS

Under the Federal Rules of Civil Procedure, a complaint need contain only "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed.R.Civ.P. 8(a)(2). The complaint must "give the defendant fair notice of what the... claim is and the grounds upon which it rests." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)). Although "detailed factual allegations" are not required, "labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Twombly, 550 U.S. at 555. The complaint must "include sufficient facts to state a claim for relief that is plausible on its face.'" Cole v. Milwaukee Area Tech. Coll. Dist., 634 F.3d 901, 903 (7th Cir. 2011) (quoting Justice v. Town of Cicero, 577 F.3d 768, 771 (7th Cir. 2009)). "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." Ashcroft v. Iqbal, ...


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