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Cornielsen v. Infinium Capital Holdings, LLC

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

November 18, 2016

KURT V. CORNIELSEN, GARRETT FIFE, MIKE FOLEY, ALI GHAJARNIA, MARCUS HESS, LUCAS HULING, TIMOTHY KACMAR, THOMAS KANE, SARAH KETVIRTIS, MINJONG KIM, JOEL KOS, WILL KUHL, RAMESH KUMAR, BRUCE LAWRENCE JR., MATT LECH, JASON LEUNG, JUN LIU, DAVE LOHMANN, MOHAMMAD MALEK, RICHARD MARYNOWKSI, ADITYA MEHTA, DAVID MEINHART, ERIC MOLAS, WES NORDINE, LUIS RAMIREZ, IAN REID, MICHAEL RICHARDS, BRET RIETOW, BRUCE RISHER, NICK ROUPAS, ANDERSEN SCHNEIDER, RYAN SHERMAN, ERIC SZURGOT, ANDREA TERMINI, MITCH TYSON, ALAN URBAN, TONI VOLLMERS, GORDON WALLACE, JACK WEBER, and TIMOTHY WRZESINSKI, all individuals, Plaintiffs,
v.
INFINIUM CAPITAL HOLDINGS, LLC, a Delaware limited liability company, INFINIUM CAPITAL MANAGEMENT, LLC, a Delaware limited liability company, and CHARLES F. WHITMAN, GREGORY EICKBUSH, BRIAN JOHNSON, and SCOTT ROSE, all individuals, Defendants.

          MEMORANDUM OPINION AND ORDER

          Andrea R. Wood United States District Judge

         Plaintiffs are former employees of Defendants Infinium Capital Holdings, LLC (“Infinium Holdings”) and Infinium Capital Management, LLC (“Infinium, ” and along with Infinium Holdings, “Infinium Defendants”). Plaintiffs had loaned money to the Infinium Defendants and subsequently participated in what was known as the “Infinium Employee Capital Pool program” or the “Employee Equity Incentive Plan” (“Employee Program”), in which Plaintiffs' loans were converted into equity in the company. Soon after Plaintiffs participated in the plan, the Infinium Defendants failed. Plaintiffs subsequently filed the instant lawsuit against the Infinium Defendants, as well as Infinium board members Charles Whitman, Gregory Eickbush, Brian Johnson, and Scott Rose (collectively, “Individual Defendants, ” and along with Infinium Defendants, “Defendants”). Plaintiffs allege that Defendants violated securities laws, breached their fiduciary duties, and committed fraud. The Individual Defendants and the Infinium Defendants each filed a motion to dismiss the action. The Court granted the motions to dismiss. Thereafter, Plaintiffs filed its Fourth Amended Complaint (“FAC”). In response, Defendants again filed motions to dismiss, which are now before the Court. (Dkt. Nos. 82, 84.) For the reasons stated below, the Court grants these motions to dismiss as well.

         BACKGROUND[1]

         Plaintiffs were all employees of Infinium, a diversified alternative asset and risk management firm with offices in Chicago, Houston, New York, and London. (FAC ¶¶ 2, 11-46, 63, Dkt. No. 81.) The Individual Defendants were all Infinium officers or members of its Board of Managers. (Id. ¶¶ 50-54.) Whitman also served as CEO of Infinium. (Id. ¶ 51.)

         According to Plaintiffs, the Employee Program was designed to meet two goals: first, to replace capital that had been withdrawn from Infinium, and second, to have sufficient funds on hand for Infinium to purchase the equity interests of several of its members. (Id. ¶ 68.) Beginning in late 2011, Whitman and Johnson began to make private, undisclosed redemptions of Infinium equity. (Id. ¶ 86.) Additionally, in approximately November 2011, Infinium, through the Individual Defendants, began exploring the purchase of the equity interests of its member George Hanley, who served on the Advisory Board of Infinium, and his affiliates. (Id. ¶ 65.) Hanley and his affiliates owned a substantial equity stake in Infinium. (Id. ¶ 64.) By November 2011, Infinium had agreed to redeem the equity interest of its member Nathan Laurell, who also served on its Advisory Board, for $8, 604, 779. (Id. ¶ 66.) Prior to March 2, 2012, Plaintiffs made loans to Infinium collectively in the amount of approximately $5, 028, 373.37. (Id. ¶ 63.) These loans ranged in amounts from $5, 000 to $550, 000. (Id.)

         Beginning on or about January 1, 2012, Infinium and the Individual Defendants began to offer Plaintiffs an opportunity to participate in the Employee Program, under which Plaintiffs' loans to Infinium would be converted into equity. (Id. ¶ 68.) The objective of the Employee Program, according to Plaintiffs, was to allow Infinium and the Individual Defendants to replace a portion of the equity that Hanley, Laurell, and their affiliates were redeeming and to provide trading capital for the business. (Id.)

         Infinium first solicited participation in the Employee Program in an e-mail dated February 14, 2012. (Id. ¶¶ 69-70.) Infinium held three so-called “town-hall” meetings on February 16, February 17, and February 22, 2012, to discuss the details and merits of Plaintiffs' participation in the Employee Program. (Id. ¶ 71.) Each Plaintiff attended at least one of these three town-hall meetings, all of which were organized by Infinium purportedly to “provide [Plaintiffs] a high level overview of the goals and mechanics of the Employee [Program].” (Id. at 72 (internal quotations omitted).) During these town-hall meetings, and at other times prior to March 2, 2012, Defendants represented that if Plaintiffs elected to convert their loans to Infinium into equity or to purchase equity in Infinium, there would be a single class of equity in Infinium and that all equity holders-current and future-would be treated equally in all respects and at all times. (Id. ¶ 73.) During the town-hall meetings, Defendants also touted the availability of an untapped, $20 million dollar credit facility from Fifth Third Bank that would be available after the offering to fund Infinium's business and to pay down the debt due to Hanley, Laurell, and their affiliates. (Id. ¶ 77.)

         Infinium prepared and disseminated on February 14, 2012 a “Private Placement Memorandum” (“PPM”) to Plaintiffs. (Id. ¶ 78.) The PPM purportedly disclosed the risks associated with acquiring equity in Infinium. (Id.) The PPM addressed Infinium's acquisition of the equity ownership of Hanley, Laurell, and their affiliates as follows:

Redemption Debt. In connection with the redemption debt of the equity of interests of ICM held by George Hanley, Nathan Laurell, and their affiliates, which redemption was effective as of January 1, 2012, the Company will issue secured debt of approximately $53, 000, 000. The debt owed to George Hanley, Nathan Laurell and their affiliates will be payable over a period of five (5) years….

(Id. ¶ 79.)

         In the course of soliciting the conversion of their loans to equity through the Employee Program, on March 2, 2012, Infinium wrote to Plaintiffs and explained that any monies converted from debt to equity (or otherwise invested) in the Employee Program would be redeemable 50% in the first year (2013) and 50% in the following year (2014). (Id. ¶ 81.) The March 2, 2012 correspondence also told Plaintiffs that they would be able, if they desired, to withdraw all of their equity investments from the Employee Program in just two years. (Id.) Prior to March 2, 2012, Defendants also provided certain Plaintiffs with documents that represented that after Hanley, Laurell, and their affiliates redeemed their equity, Infinium would have remaining equity of $49, 987, 424. (Id. ¶ 83.) Based upon the representations made in the PPM, the town hall meetings, and other written communications, Plaintiffs each elected to convert their loans to equity and, in some cases, to invest additional funds and to participate in the Employee Program. (Id. ¶ 84.)

         On or about March 8, 2013, Infinium suspended Plaintiffs' redemption rights, claiming that Infinium was in default in its payment obligations to Hanley, Laurell, and their affiliates. (Id. ¶ 87.) On or about September 1, 2013, Infinium's acting Chief Executive Officer, Mark Palchak, revealed during an “investor call” with Plaintiffs that their investments through the Employee Program prior to March 2, 2012 had become “worthless” and were valued at “negative $18, 000, 000.” (Id. ¶¶ 88-90.) Palchak further represented that to avoid a takeover by Hanley, Infinium had converted a portion of Hanley's and Laurell's debt to equity and agreed to eliminate the Plaintiffs' right to redeem their investments in the Employee Plan. (Id. ¶ 89.) During the Investor Call, Palchak also revealed that although Plaintiffs' equity was now “worthless, ” there was another class of equity in Infinium, which he referred to as the “Family Office Equity.” Palchak claimed that this other class of equity was unaffected by the aforementioned events, as it was superior to Plaintiffs' equity interest and had been invested under an agreement which protected it from certain losses. (Id. ¶ 90.)

         Plaintiffs subsequently brought this lawsuit, asserting a number of claims based on the loss of their investments in the Employee Plan, including causes of action for federal securities fraud under Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C § 78j, and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder (Count I); common law breach of fiduciary duty (Count II); and common law fraud (Count III). Those claims are all repeated in Plaintiffs' Fourth Amended Complaint. Defendants again seek to have all of these claims dismissed in their entirety pursuant to Rules 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure.

         DISCUSSION

         “A motion under Rule 12(b)(6) tests whether the complaint states a claim on which relief may be granted.” Richards v. Mitcheff, 696 F.3d 635, 637 (7th Cir. 2012). In deciding such a motion, the Court must accept all factual allegations in the complaint as true. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007). Under Federal Rule of Civil Procedure 8(a)(2), a complaint must include “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 “plead[ ] 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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