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Berg v. CI Investments, Inc

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

April 7, 2017

ELIZABETH BERG as trustee for the bankruptcy estate of John Wiesner, Plaintiff,
v.
CI INVESTMENTS, INC., Defendant.

          MEMORANDUM OPINION

          CHARLES P. KOCORAS, UNITED STATES DISTRICT JUDGE

         Now before the Court is Defendant CI Investments, Inc.'s (“CI”) motion for partial summary judgment on Counts IV-V of Plaintiff Elizabeth Berg's (“Berg”) Second Amended Complaint pursuant to Federal Rule of Civil Procedure 56; Berg's motion to strike certain paragraphs of Claudio Bufi's (“Bufi”) Declaration pursuant to Federal Rule of Civil Procedure 12(f); CI's motion to strike Berg's Local Rule 56.1 Materials pursuant to Federal Rule of Civil Procedure 12(f); and CI's motion to strike the affidavit of Ian Hamilton (“Hamilton”) and additional statements 46-48, which rely on the affidavit pursuant to Federal Rule of Civil Procedure 12(f). For the following reasons, the Court grants in part and denies in part the motions presented.

         BACKGROUND

         The following facts taken from the record are undisputed, except where otherwise noted. CI, a Canadian corporation, runs one of the largest investment fund companies in Canada. In 2009, CI began developing a new line of funds called the G5|20 mutual funds which were the first mutual funds of their type in Canada. The G5|20 funds were unique because they guaranteed to pay out for twenty years and that guarantee was backed by the Bank of Montreal (“BMO”). To reduce the cost of obtaining the guarantee from BMO, CI decided to contract with a third party to provide risk management overlay services (“hedging services”). This reduced the risk that the fund's net assets would decline to such an extent due to market volatility so as to trigger a transfer of the fund's assets from CI to a protection portfolio managed by BMO. The head of the G5|20 fund project was Claudio Bufi, Vice President of Product Development and management at CI. Bufi began discussions in 2009 with Charles Gilbert (“Gilbert”), founder and co-owner of Nexus Risk Management, Inc. (“Nexus”), regarding the possibility of engaging Nexus to provide hedging services for the G5|20 fund. In 2011, Nexus made several presentations at CI's offices regarding its ability to provide the hedging services for the G5|20 fund and in late 2011, CI decided to go forward with Nexus. At the time CI decided to go forward with Nexus, Nexus's risk management hedging strategy was not tailored to the G5|20 fund's requirements and required extensive modification. The first G5|20 fund went live on October 1, 2013. The G5|20 fund that launched October 1, 2013, was the first fund in the G5|20 fund series. A new fund in the series was created each quarter.

         A. Wiesner's Involvement with Nexus

         Gilbert met John Wiesner (“Wiesner”) in late 2008 or in 2009. At the time, Wiesner was a risk management strategist for the Chicago Board Options Exchange (“CBOE”). On March 17, 2010, Nexus contacted Wiesner for his expertise on an hourly payment basis as an independent contractor. Parties dispute when Wiesner became a Nexus employee. According to CI, Wiesner became a Nexus employee in November 2010. However, Berg contends that Wiesner was an independent contractor for Nexus from March 2010, until August 24, 2012, and did not become an employee until August 24, 2012 - when Wiesner signed an employment contract with Nexus. Berg further claims that Wiesner stopped working for Nexus and focused only on his work as an independent contractor for the CBOE in late October or in early November 2012. According to Berg, Wiesner returned to his employment at Nexus on February 28, 2013. CI disputes Berg's timeline, and maintains that Wiesner was an employee from November 2010 until his termination from Nexus on November 12, 2013.

         Wiesner had many different duties at Nexus and he worked on various software programming projects for several Nexus clients, including CI. Some of the duties Wiesner engaged in, aside from programming, included preparing presentations for potential clients, and creating materials for hedging and risk management courses that Nexus taught. Wiesner, as president of Nexus's Chicago office and managing director, negotiated, drafted, and signed several contracts on behalf of Nexus including the lease for Nexus's Chicago office, errors and omissions insurance (“E&O contract”), and contracts with data providers. Parties disagree over Wiesner's involvement in negotiating and drafting contracts between Nexus and CI, such as the January 2013 Loan Agreement and the parties' June 2013 Sub-Advisory Agreement.

         B. Development of the Hedging Strategy and Nexus Software

         From 2011 through October 2013, Wiesner worked to develop the hedging strategy and software. Wiesner was joined in his efforts by various Nexus employees including Gilbert, Jonathan Hede, Patrick Dunham, and Gilbert LaCoste. CI employees Bufi, Ryan Son-Kee, and John Murray also worked on the project. The parties dispute the type of software created and when it was created. CI claims Nexus, including Wiesner, created software that consisted of a C software program and several Excel spreadsheets known as the “Giant Spreadsheet, ” the “Realized Historical VIX, ” the “Weez-a-Tron, ” the “Validation Tool, ” and the “Live Trading Sheet” (the C program and spreadsheets are referred to collectively as the “Nexus Software”). According to CI, the Giant Spreadsheet was created in March 2011. It contained the hedging strategy for the G5|20 fund and served as the first prototype of the Nexus Software. Beginning sometime between March 2011 and June 2012 and continuing until the launch of the G5|20 fund, CI received a prototype of the Nexus Software. Nexus would make changes to the software based on CI's response and send it back to CI for further testing and feedback. Nexus and CI employees held telephonic or in-person meetings nearly every week to discuss the software and the changes needed to make the hedging strategy useable. Wiesner worked on the CI project at Nexus's offices at least part of the time and communicated with CI through his Nexus email account.

         In June 2013, CI and Nexus executed the Sub-Advisory Agreement which memorialized the terms of CI's engagement of Nexus and set forth each party's obligations and representations. The parties spent more than six months negotiating and drafting the agreement. While the parties dispute Wiesner's involvement in drafting and negotiating the Sub-Advisory Agreement, it is not disputed that Wiesner signed the Sub-Advisory Agreement on Nexus's behalf. The Sub-Advisory Agreement expressly represented that Nexus owned the Nexus Software. CI contends that the agreement also discussed the parties' Software License Agreement, which granted CI a license to use the software. Berg disagrees. In addition to executing these documents, CI received a copy of the Nexus Software source code. Providing CI with the software license was meant to prevent interruption in hedging services and ensure that the G5|20 would continue to receive such services if Nexus was unable to provide them in the future. CI argues that Wiesner raised no objections to these documents or providing the source code to CI.

         In August 2013, Wiesner prepared and delivered the final pieces of the Nexus Software to CI in the form of two Excel spreadsheets known as the “Validation Tool” and “Live Trading Sheet.” CI claims the Validation Tool's only use occurred in August 2013 when Wiesner used it to identify differences between the hedging trades called for by the C program and those called for by the Giant Spreadsheet. Nexus used the Live Trading Sheet in conjunction with the C program to verify the trades it made each day. Nexus would send a copy of the Live Trading Sheet to CI each day after the G5|20 fund went live so that CI could verify that Nexus had properly executed the hedging strategy.

         C. Wiesner Terminated From Nexus

         Wiesner and Gilbert's relationship began to deteriorate in the latter part of 2012 and ultimately resulted in Nexus terminating Wiesner in November 2013. In late 2012, Wiesner sought to renegotiate his terms with Nexus. The parties disagree as to the terms of any deal they reached during their business relationship. According to Berg, on July 9, 2013, Wiesner, Gilbert, and Hede executed a “Memorandum of Understanding” under which Wiesner would receive 20% ownership in Nexus in exchange for the use of his intellectual property. In contrast, CI claims that in early 2012, Gilbert, Hede, and Wiesner had negotiated an agreement to make Wiesner a 20% co-owner of Nexus in exchange for his sweat equity and any intellectual property he owned that Nexus used in its business. CI further claims that Wiesner opted to receive options for his 20% of Nexus instead of an immediate ownership interest for tax purposes. By taking options, he could delay paying taxes on the ownership interest until Nexus began earning fees from CI after the launch of the G5|20 fund.

         According to CI, by September 2013, Wiesner had unilaterally decided to form his own company and reclaim his intellectual property from Nexus. Wiesner then drafted a purported license agreement licensing his intellectual property to Nexus for a fee. He signed the purported license agreement for both Nexus and himself. However, Gilbert never agreed to the license agreement that Wiesner Dated: his behalf. CI maintains they were unaware of Wiesner's claim to own part of the Nexus Software at this time. CI argues that the first time they learned Wiesner claimed to own any part of the Nexus Software was on September 19, 2013, in an email Wiesner sent to Bufi. This email came a year after delivering the first prototype of the software to CI and a month after delivering the final pieces of the software. On November 12, 2013, Gilbert terminated Wiesner.

         D. CI Terminates Nexus

         CI and Nexus's relationship also began to strain. In January 2013, CI made a $500, 000 loan to Nexus so Nexus could pay its employees and overhead costs to finish developing the hedging strategy and software. In January 2014, CI made a $1.75 million purchase of Nexus stock to allow Nexus to remain viable. During this time, the quality of Nexus's services declined and CI became doubtful that Nexus could remain solvent. For that reason, CI decided to replace Nexus. In November 2014, CI terminated Nexus's services for the G5|20 fund.

         As part of the termination, and in addition to the monthly risk management fees that CI paid Nexus, CI paid Nexus a $100, 000 termination fee. CI also acquired the Nexus Software as part of the termination, in part, for accounting purposes so that CI could treat its $2.25 million financing of Nexus (the $500, 000 loan and $1.75 million stock purchase) as an asset purchase to be amortized over a period of ten years- instead of recognizing the entire $2.25 million as a loss in the fourth quarter of 2014. At the same time, CI licensed the software back to Nexus for $1.

         LEGAL STANDARD

         I. Motion to Strike

         A motion to strike is governed by Federal Rule of Civil Procedure 12(f). Under Rule 12(f), upon a motion by a party a court may strike from any pleading “any insufficient defense or any redundant, immaterial, impertinent, or scandalous matter.” Granting a motion to strike is a drastic measure. McDowell v. Morgan Stanley & Co., 645 F.Supp.2d 690, 693 (N. D. Ill. 2009). Furthermore, a motion to strike at the summary judgment stage is disfavored and generally unnecessary, because the Court may only consider admissible evidence when ruling on a motion for summary judgment. Gunville v. Walker, 583 F.3d 979, 985 (7th Cir. 2009). For those reasons, Courts generally do not grant motions to ...


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