United States District Court, N.D. Illinois, Eastern Division
MEMORANDUM OPINION AND ORDER
M. ROWLAND United States Magistrate Judge.
case arises from an alleged violation of the federal
securities laws, the sale of unsuitable securities, violation
of the antifraud provisions of the Illinois Securities Act,
breach of contract, common law fraud, and breach of fiduciary
duty. (Dkt. 24 at 1). Before this Court is Defendants'
motion for summary judgment. (Dkt. 100). This Court has
jurisdiction pursuant to the Securities Exchange Act of 1934,
15 U.S.C. § 78aa; 28 U.S.C. § 1331. This Court has
supplemental jurisdiction over Plaintiff's state and
common law claims pursuant to 28 U.S.C. § 1367. The
parties have consented to proceed before a magistrate judge
pursuant to 28 U.S.C. § 636(c)(1). For the reasons set
forth below, Defendants' motion is granted in part and
denied in part.
SUMMARY JUDGMENT STANDARD
judgment is appropriate if the movant shows that there is no
genuine dispute as to any material fact and the movant is
entitled to judgment as a matter of law. Spurling v. C
& M Fine Pack, Inc., 739 F.3d 1055, 1060 (7th Cir.
2014); Fed.R.Civ.P. 56(a). A genuine dispute as to any
material fact exists if “the evidence is such that a
reasonable jury could return a verdict for the nonmoving
party.” Anderson v. Liberty Lobby, Inc., 477
U.S. 242, 248 (1986). The party seeking summary judgment has
the burden of establishing that there is no genuine dispute
as to any material fact. See Celotex Corp. v.
Catrett, 477 U.S. 317, 323 (1986). In determining
whether a genuine issue of material fact exists, this Court
must construe all facts and reasonable inferences in the
light most favorable to the nonmoving party. See CTL ex
rel. Trebatoski v. Ashland School District, 743 F.3d
524, 528 (7th Cir. 2014).
Calhoun Asset Management LLC (Calhoun) was an Illinois
limited liability company registered with the Securities and
Exchange Commission as an investment adviser from August 31,
2007, until April 22, 2010. (Am. Compl., Dkt. 24, ¶ 5).
Calhoun was the investment adviser to several offshore funds
including the Calhoun Market Neutral Fund (Calhoun Fund), a
Cayman Islands company. (Id.). Defendant Krista Ward
was the sole member, owner, and only full time employee of
Calhoun at all relevant times. (Id. ¶ 6).
Plaintiff David Meyer is the trustee of his Individual
Retirement Account; Centennial Bank originally held the funds
owned by Plaintiff's IRA. (Stmt. of Facts ¶¶
16-17). On February 26, 2007, Plaintiff instructed
Centennial Bank to purchase 134, 825 shares in the Calhoun
Fund for $134, 825.06. (Id. ¶ 18). On June 27,
2007, Plaintiff instructed Centennial Bank to purchase an
additional 75, 000 shares in the Calhoun Fund for $75, 000
for a total investment of $209, 825.06. (Id. ¶
undisputed that Ward provided a Due Diligence Questionnaire
(DDQ) to Plaintiff. (Stmt. of Facts ¶ 17). Plaintiff
testified that the DDQ improperly reflected that Defendant
Ward had a ten-year history of successful investing and
growth of assets dating back to 1997; Plaintiff relied on the
information contained in the DDQ and on Ward's
representations of her professional investment track record
when deciding to invest in the Calhoun Fund. (Id.
¶¶ 25-27). Plaintiff disputes these allegations.
(Id.). It is undisputed that Defendant Ward filed a
personal bankruptcy petition in 2002. (Stmt. of Add. Facts
¶ 5). It is also undisputed that Plaintiff was not
advised, prior to investing with Defendants, that Ward had
filed a personal bankruptcy action. (Id. ¶ 7).
terms of damages from the misrepresentations, it is
undisputed that Plaintiff has no evidence that Ward's
alleged misrepresentations about her past performance or
assets under her management caused his losses. (Stmt. of
Facts ¶ 39). Plaintiff has since transferred his IRA
funds to Millennium Trust and has received $142, 213.33, plus
$2, 110.91, of his funds back. (Id. ¶¶
20-21). As of September 10, 2015, approximately 72% of
Plaintiff's funds have been returned. (Id.
¶ 23). Further, the S&P 500 index lost approximately
40% from the high point in 2008 to the low point in 2009.
(Id. ¶ 48). Plaintiff's account suffered
losses less than 40% from the high point in 2008 to the low
point in 2009. (Id. ¶ 49).
February 14, 2014, Plaintiff filed an eight-count amended
complaint. (Dkt. 24). Count one seeks damages suffered by
Plaintiff through the purchase of unregistered securities
from Defendants (Stmt. of Facts ¶ 6); count two seeks
damages suffered by Plaintiff through Defendants'
violation of the anti-fraud provisions of Section 10(b)(5) of
the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b)
(id. ¶ 7); count three alleges violations of
the anti-fraud provisions of the Illinois Securities Law of
1953 (id. ¶ 8); count five alleges common law
fraud through material mis-statements of fact and omissions
of material facts (id. ¶ 9); count seven seeks
rescission due to Defendants' lack of registration as
investment advisors and the unregistered nature of the
securities sold to Plaintiff (id. ¶ 10); and
count eight alleges unjust enrichment (id. ¶
11). On June 18, 2014, the Court dismissed counts four
(breach of fiduciary duty) and six (breach of contract) and
ordered Defendants to answer the remaining six counts of the
amended complaint by July 9, 2014. (Dkt. 38). On November 5,
2015, Defendants filed an Answer and Affirmative Defenses to
the Amended Complaint contemporaneously with the instant
motion for summary judgment. (Dkt. 100-102).
Sales of Unregistered Securities (Counts I and VII)
alleges that the shares in the Calhoun Fund were not properly
registered under the United States securities law. Count I
alleges a violation of Section 12(a)(1) of the Securities Act
of 1933, 15 U.S.C. § 77l(a)(1), resulting from
the sale of unregistered securities. (Dkt. 24, ¶ 43).
Plaintiff asserts that each of the securities sold to him
were not registered or exempt from registration pursuant to
Section 5 of the Securities Act, 15 U.S.C. § 77e.
(Id. ¶¶ 43-45). The related Count VII
asserts Plaintiff is entitled to rescission because
Defendants were not properly licensed to sell securities and
the Calhoun Fund was not properly registered as a security or
exempt from registration. (Id. ¶ 91);
see 15 U.S.C. § 77l(a) (The remedy for
selling unregistered securities is “the consideration
paid for such security with interest thereon, less the amount
of any income received thereon.”).
the Securities Act of 1933 generally prohibits the sale of an
unregistered security, 15 U.S.C. § 77e, it creates an
exemption for “transactions by an issuer not involving
any public offering, ” id. § 77d(a)(2);
see Marks v. CDW Computer Centers, Inc., 901 F.Supp.
1302, 1311 (N.D. Ill. 1995) (“The 1933 Act's
registration requirements are to ensure that investors have
adequate information upon which to base their investment
decisions. Federal securities laws exempt from registration
requirements certain private placements by the issuer and
other ‘downstream investors.'”) (citations
omitted). The Supreme Court has determined that this private
placement exemption applies in “[a]n offering to those
who are shown to be able to fend for themselves.”
SEC v. Ralston Purina Co., 346 U.S. 119, 125 (1953).
Further, the party asserting the private placement exemption
bears the burden of proof on the issue. Id. at 126.
Calhoun Fund is a Cayman Island Exempted Limited Company.
(Dkt. 101, Ex. 1). Defendants contend that the offering
memorandum of the Calhoun Fund states that it is exempt from
registration. (Id. at 3). While that is accurate,
this statement is insufficient to establish the private
placement exemption. Instead, “courts have relied on
four factors in determining whether an offering is a private
placement: (1) the number of offerees and their relationship
to the issuer; (2) the number of units offered; (3) the size
of the offering; and (4) the manner of the offering.”
ABN AMRO, Inc. v. Capital Int'l Ltd., 595
F.Supp.2d 805, 833 (N.D. Ill. 2008); accord Feldman v.
Concord Equity Partners, LLC, 2010 WL 1993831, at *3
(S.D.N.Y. May 19, 2010). Defendants have failed to offer any
evidence on these factors.
also argue that the securities sold to Plaintiff were exempt
from registration because they were issued by a foreign
private entity. (Dkt. 101 at 3-4). Securities registered by a
“foreign private issuer” are exempt from the
registration requirements of the United States securities
laws. 17 C.F.R. § 240.3a12-3. However, the term
“foreign private issuer” does not include a
“foreign issuer” where “[t]he ...