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Johnson v. Oystacher

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

September 30, 2019

IGOR B. OYSTACHER, et al., Defendants.


          Andrea R. Wood United States District Judge

         Plaintiff Edwin Johnson is a former officer and managing member of Defendant 3Red Group of Illinois, LLC (“3Red”), a propriety trading firm. Besides Johnson, the only other member of 3Red was Defendant Igor B. Oystacher, who was also 3Red's principal trader. In 2011, government regulators began scrutinizing Oystacher's trading practices at 3Red. While Johnson initially believed Oystacher was acting within the law, he later came to harbor serious concerns regarding the legality of Oystacher's trading practices. When Johnson raised the issue with Oystacher, however, Oystacher formed a plan to force Johnson out of 3Red. Ultimately, Oystacher strong-armed Johnson into entering an agreement under which he was terminated from 3Red while also forgoing certain protections and benefits to which he would otherwise have been entitled upon termination. In his Second Amended Complaint (“SAC, ” Dkt. No. 77), Johnson asserts claims against Oystacher, 3Red, and Defendant Stephen Strohmer under the Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. § 1961 et seq., and state law. Defendants now ask this Court to dismiss the case, claiming that when Johnson agreed to resign, he also released any and all claims he had against Defendants that arose prior to his termination. (Dkt. No. 84.) For the reasons that follow, Defendants' motion to dismiss is granted.


         For purposes of deciding the motion to dismiss, the Court accepts the well-pleaded facts in the SAC as true and views them in the light most favorable to Johnson. See, e.g., Anicich v. Home Depot USA, Inc., 852 F.3d 643, 648 (7th Cir. 2017). The SAC alleges as follows.

         Prior to his termination, Johnson was the managing member and Chief Risk Officer for 3Red, a high-frequency proprietary trading firm. (SAC ¶¶ 5, 8, 10, 29.) Johnson owned 10% of 3Red; Oystacher owned the remaining 90% and was also the firm's principal trader. (Id. ¶¶ 6, 11.)

         Beginning in November 2011, government regulators and futures exchanges began to scrutinize 3Red's trading practices. (Id. ¶ 12.) Specifically, they believed Oystacher was engaged in “spoofing, ” an illegal trading practice whereby a trader manipulates the market by “placing bids or offers in a futures market with the intent to cancel said bid or offer prior to execution.” (Id.) Oystacher and other 3Red traders' spoofing allowed 3Red to reap substantial profits while causing significant losses to other market participants who joined the spoof orders. (Id. ¶¶ 22, 25.) In December 2012, in his capacity as 3Red's Chief Risk Officer, Johnson testified before the Commodity Futures Trading Commission (“CFTC”) that, in his opinion, Oystacher's trading practices did not constitute spoofing. (Id. ¶ 13.) His opinion was informed by industry and legal experts who told Johnson that Oystacher's method of trading was legal. (Id. ¶ 14.)

         But after the CFTC clarified the types of trading activities that constitute spoofing in May 2013, Johnson changed his mind concerning the legality of Oystacher's trading practices. (Id. ¶ 15.) Consequently, Johnson confronted Oystacher and demanded that he stop spoofing or else Johnson would use his power as Chief Risk Officer to suspend Oystacher's trading privileges. (Id. ¶ 16.) In response to that threat, Oystacher looked not only to remove Johnson as 3Red's Chief Risk Officer but also as its managing member. (Id. ¶ 28.) Standing in the way of Oystacher's objective was 3Red's operating agreement, which prevented Johnson's removal as Chief Risk Officer without his written consent. (Id. ¶ 29.) Moreover, the agreement provided that if Johnson was removed as managing member-whether for cause or without cause-Johnson would receive a severance payment equivalent to five times his salary and a buyout of his ownership interest equal to five times his highest capital distribution. (Id.)

         Oystacher and Strohmer[1] consulted 3Red's corporate counsel to devise a strategy to circumvent the provisions in the operating agreement hindering Johnson's ouster. (Id. ¶¶ 31-33.) 3Red's counsel advised against involuntarily terminating Johnson. (Id. ¶ 36.) Instead, the counsel recommended 3Red accuse Johnson of bad acts that could serve as the basis for his termination, threaten to terminate him because of those bad acts, and then convince Johnson to resign as Chief Risk Officer and managing member voluntarily and renegotiate his severance and buyout payments to a lower amount. (Id.) In carrying out those recommendations, Oystacher hired another law firm to investigate Johnson for wrongdoing that could serve as the basis for his termination. (Id. ¶¶ 37-38.) An attorney from that firm drafted a letter to Johnson accusing him of fraudulently misrepresenting his capital contributions to 3Red, improperly withdrawing over $120, 000 from 3Red, improperly using 3Red funds for unauthorized travel with family, and submitting a fake operating agreement to 3Red's accountants giving Johnson complete control over the company. (Id. ¶ 39.) Each of those accusations was false, ginned up for the purpose of supplying a basis for Johnson's termination. (Id. ¶¶ 40-41.)

         During a meeting with Oystacher, Strohmer, and 3Red's counsel, Johnson was informed of the accusations against him, threatened with criminal prosecution for fraud, and told that his employment with 3Red was being terminated. (Id. ¶¶ 7, 46.) Johnson demanded that he receive his severance and buyout payments as set out in 3Red's operating agreement. (Id. ¶ 48.) Over the ensuing days, the parties engaged in settlement negotiations. (Id. ¶¶ 65-66.) Facing threats of criminal prosecution and locked out of a distribution of 3Red profits to which he was entitled, Johnson ultimately executed a settlement agreement with Defendants on August 15, 2013 (“Settlement Agreement”). (Id. ¶¶ 55, 74.)

         By entering into the Settlement Agreement, Johnson relinquished his positions as Chief Risk Officer and managing member of 3Red along with his ownership interest in the company in exchange for $450, 000-far less than the buyout and severance payments to which he was entitled under 3Red's operating agreement-paid in installments of $10, 416.66 per month. (SAC ¶¶ 107-08; Defs.' Mot. to Dismiss, Ex. 1 § 1, Dkt. No. 83-1.)[2] The Settlement Agreement further provides that, if any regulatory body or governmental agency imposes a fine or penalty greater than $1, 000, 000 on 3Red or suspends its trading activities for longer than five months, 3Red will cease any further payments toward the $450, 000. (SAC ¶ 73; Defs.' Mot. to Dismiss, Ex. 1 § 1.) In addition, the Settlement Agreement contains a confidentiality provision that requires Johnson to notify Defendants in writing if he receives any subpoena, written demand, request for documents, or interview or deposition from any regulatory body regarding 3Red. (Defs.' Mot. to Dismiss, Ex. 1 § 11(f).) Johnson also must provide notification if he seeks to meet with, interview, or provide documents to any regulatory body or governmental agency. (Id.) And he agrees not to object to the presence of Defendants' counsel at any interview or deposition he gives to a regulatory body. (Id.) Finally, the Settlement Agreement contains a provision under which Johnson agrees to release “Oystacher and 3 Red Group . . . [3Red's] subsidiaries, parent and affiliated corporations, and [their] agents [and] employees . . . from any and all legal, equitable or other claims . . . existing from the beginning of the world to the date of this Settlement Agreement.” (Id. § 3.)

         On December 10, 2014, 3Red and Oystacher filed a lawsuit against Johnson in Illinois state court alleging, among other things, that Johnson breached certain provisions in the Settlement Agreement prohibiting him from disclosing the existence of the Settlement Agreement and other confidential information regarding 3Red and Oystacher.[3] (Defs.' Mot. to Dismiss, Ex. 2, Dkt. No. 84-4.) Several months later, Johnson filed the present lawsuit against Defendants 3Red, Oystacher, and Strohmer. In his First Amended Complaint, Johnson brought claims against Defendants under RICO § 1962(b), and the anti-retaliation provisions of the Commodity Exchange Act, 7 U.S.C. § 1 et seq., as well as a number of state law claims. (Dkt. No. 22.) Defendants then moved to dismiss the First Amended Complaint, a request which this Court granted. (Dkt. Nos. 70, 71.) Johnson was given leave to amend his complaint. Shortly thereafter, Johnson filed his SAC. (Dkt. No. 77.) The SAC sets forth four claims. First, Johnson again asserts a RICO claim, this time under § 1962(c), along with a RICO conspiracy claim under § 1962(d). Johnson also brings state law claims seeking declarations that the Settlement Agreement is illegal and void and that the 3Red's operating agreement was valid and enforceable at the time of Johnson's termination.


         To survive a motion under Federal Rule of Civil Procedure 12(b)(6), “a complaint must contain sufficient factual allegations, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). This pleading standard does not necessarily require a complaint to contain detailed factual allegations. Twombly, 550 U.S. at 555. Rather, “[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.” Adams v. City of Indianapolis, 742 F.3d 720, 728 (7th Cir. 2014) (quoting Iqbal, 556 U.S. at 678).

         While both Defendants and Johnson argue the merits of Johnson's claims at length in their briefs, this Court must first address the threshold issue of whether Johnson released his claims when he entered into the Settlement Agreement. Defendants contend that, other than the claim for a declaration that the Settlement Agreement is void and unenforceable, the claims in the SAC were released under that agreement. As to the enforceability of the Settlement Agreement, Defendants contend that Johnson is precluded (or, put another way, collaterally estopped) from relitigating the issue here because the state trial court has already ruled that the agreement is valid and enforceable. For his part, Johnson does not appear to dispute that the Settlement Agreement contains a broad release that covers his claims. Nonetheless, he argues that the state trial court's ruling on the enforceability of ...

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