United States District Court, N.D. Illinois, Eastern Division
MEMORANDUM OPINION AND ORDER
MILTON I. SHADUR, Senior District Judge.
This opinion need not engage in any revisit to the unsuccessful state court efforts by plaintiffs Patricia Pomeroy and Enoch Anderson to recoup the losses they sustained as victims of the fraudulent cherry-picking scheme devised and implemented by Charles Dushek Sr. and Jr. and their investment advisory firm Capital Management Associates ("CMA").Now plaintiffs (both individually and on behalf of a proposed class of such victims) have turned to the federal courts, seeking to invoke the United States securities laws as their jurisdictional predicate.
GreatBanc Trust Company ("GreatBanc"), targeted by plaintiffs as a codefendant with CMA and the Dusheks (very likely because its pockets are deeper than theirs), has filed a Fed.R.Civ.P. ("Rule") 12(b)(6) motion for its dismissal from the action. As Complaint ¶¶ 138-41 have set out, the Securities and Exchange Commission earlier filed a civil action (Case No. 13 C 3669) in this District Court, also alleging Securities Exchange Act § 10(b) and Rule 10b-5 violations by CMA and the Dusheks via the same cherry-picking scheme (notably the SEC did not name GreatBanc as a defendant in that action). When the three culpable defendants agreed to the entry of a judgment in that case, this Court's colleague Honorable Gary Feinerman entered a consent judgment against the Dusheks and CMA under Securities Exchange Act § 21(d)(3), with the resulting disgorgement order extending to at least as much as $2, 058, 514 in ill-gotten profits gained and losses avoided. As this opinion's earlier "deep pocket" reference suggests, that overhanging liability has obviously served as an additional impetus for plaintiffs' attempt to extend securities law liability to GreatBanc in this lawsuit.
In brief, the cherry-picking scheme at issue in both the SEC's lawsuit and this action involved an abuse of the powers granted to Charles Sr. as plaintiffs' investment advisor pursuant to Investment Advisory Agreements ("Advisory Agreements") that plaintiffs entered into with CMA. In part CMA required in the Advisory Agreements that plaintiffs enter into a Custodial Agreement with GreatBanc, and plaintiffs would not have opened accounts with GreatBanc in the absence of that requirement.
In essence the Dusheks-CMA cherry-picking activities were really easy pickings. Dusheks, who were themselves investors for their own accounts, would make block purchases of securities - but instead of allocating those purchases among the third-party investors and themselves at the times that the purchases were made, they would wait several days, then allocate profitable trades to their own personal accounts and unprofitable trades to the accounts of CMA clients such as plaintiffs. According to Complaint ¶¶ 84-85, during the 2008-12 period Dusheks made something in excess of $2 million in profits through the scheme, while CMA clients such as plaintiffs suffered corresponding aggregate losses.
As for GreatBanc, it is not asserted by plaintiffs to have either directed or decided how to allocate the trades. Instead Complaint ¶ 100 charges that GreatBanc's asserted role in the scheme comprised these activities:
a. Provided securities execution services relative to all securities transactions in the GreatBanc accounts;
b. Consummated all portfolio transactions in the Plaintiff's GreatBanc accounts through payment and delivery of securities purchased and sold;
c. Processed all securities settlements for the GreatBanc accounts on a transactional fee basis;
d. Represented that the allocation of securities would be performed on a fair and equitable basis;
e. Made block purchases of securities in the GreatBanc Master Account and GreatBanc Omnibus Account.
Those activities must be evaluated in terms of plaintiffs' acknowledged sole ticket of entry to this federal court, as stated in the "Procedural Posture" prelude to plaintiffs' Response to GreatBanc's current motion:
As a result, Plaintiffs have filed the present Complaint before this Court based solely on Rule 10b-5.
At the outset that Rule 10b-5 limitation cabins plaintiffs' claim against GreatBanc, for they make no allegations that it made any misrepresentations or omissions that caused plaintiffs to invest in the Dusheks-CMA cherry-picking scheme. But black letter securities law for almost four decades has imposed a purchaser-seller requirement for any implied private right of action under Section 10(b): Blue Chip Stamps v. Manor Drugstores, 421 U.S. 723, 749 (1975) expressly held that misrepresentations or omissions that ...