Alonso v. Weiss

• Decision Date: 22 July 2013
• Docket Number: No. 12 C 7373.,12 C 7373.
• Citation: 958 F.Supp.2d 922
• Parties: Michael ALONSO, et al., Plaintiffs, v. Leslie J. WEISS, et al., Defendants.
• Court: U.S. District Court — Northern District of Illinois

958 F.Supp.2d 922

Michael ALONSO, et al., Plaintiffs,

v.Leslie J. WEISS, et al., Defendants.

No. 12 C 7373.

United States District Court,

N.D. Illinois,

Eastern Division.

July 22, 2013.

Eric W. Berry, Berry Law PLLC, New York, NY, Adam B. Goodman, Goodman Tovrov Hardy & Johnson LLC, Chicago, IL, for Plaintiffs.

Stephen Novack, Rebekah Hava Parker, Timothy John Miller, Novack and Macey LLP, Chicago, IL, for Defendants.

OPINION AND ORDER

JOAN HUMPHREY LEFKOW, District Judge.

Plaintiffs, limited partners in one or more investment funds (collectively, the “Funds”) managed by The Nutmeg Group, LLC (“Nutmeg”), filed suit on their own behalf and derivatively on behalf of the Funds against Leslie J. Weiss, the court-appointed receiver for Nutmeg and the funds; Barnes & Thornburg, LLP (“Barnes & Thornburg”), the law firm retained by the receiver to perform legal services; Nutmeg; and the Funds. In a twenty-one count complaint, plaintiffs allege, among other things, that Weiss, Barnes & Thornburg, and Nutmeg violated § 206(a)(4) of the Investment Advisors Act and SEC Rule 206(4)–2, breached their fiduciary duties, and committed legal malpractice.¹ Before the court is defendants' motion to dismiss the complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). For the following reasons, their motion [# 11] is granted.

BACKGROUND²

Nutmeg, a registered investment adviser established in 2003, was owned and managed by Randall Goulding. Nutmeg formed the Funds, which are limited partnerships under either Illinois or Minnesota law in which plaintiffs are investors. Nutmeg was the sole general partner of each of the Funds and had written advisory agreements with each Fund. Plaintiffs are investors in the Funds. Among other things, the Funds entered into private investments in public equity (“PIPE”) transactions, providing funding to a public company in exchange for convertible debentures that could be converted to stock in that company according to an agreed formula.

On March 23, 2009, the Securities & Exchange Commission (“SEC”) sued Nutmeg, Goulding, and others in this court. See SEC v. Nutmeg Grp., LLC, No. 09–CV–1775. The SEC obtained a temporary restraining order that prohibited Nutmeg and Goulding from managing the Funds and froze Nutmeg's accounts. The SEC then sought appointment of a receiver. With the SEC's and Nutmeg's approval, Weiss, a partner at Barnes & Thornburg, was appointed receiver on August 6, 2009.

Pursuant to the appointment order, Weiss, as receiver, was to “oversee all aspects of Nutmeg's operations and business,” including “serving as general partner and investment adviser” to the Funds. Ex. A to Defs.' Mem. (“Appointment Order”) § II.B.1. She was given “the authority to sell or liquidate any assets, property, holdings, or positions of Nutmeg and the Funds, and ... full power to monitor and approve transactions, disbursements or receipt of funds, or any other disposition relating to such funds, assets or property, and with full power to take such steps as she deems necessary to secure such premises, funds and property.” Id. § II.B.3. She further had authority to continue Nutmeg's business “in such manner, to such extent, and for such duration as [she] may in the exercise of her business judgment and in good faith deem to be necessary or appropriate.” Id. § II.B.4. A decision to liquidate and close Nutmeg or the Funds or petition for bankruptcy required the court's approval. Id. Weiss was given authority to engage Barnes & Thornburg and other professionals (“Retained Personnel”) to assist her in her duties as receiver, including “as needed ... possible substitute advisers or general partners for the Funds.” Id. § II.B.9. Crowe Horwath LLP (“Crowe”) was to continue as the court-appointed accountant for Nutmeg and the Funds. Id. § II.B.7.

The appointment order provided that Weiss “shall be the agent of this Court and solely the agent of this Court in acting as Receiver under this Order.” Id. § II.A. Weiss and any Retained Personnel received the following protection:

The Receiver and Retained Personnel are entitled to rely on all outstanding rules of law and Court orders and shall not be liable to anyone for their own good faith compliance with any order, rule, law, judgment or decree. In no event shall the Receiver or Retained Personnel be liable to anyone (1) with respect to the performance of their duties and responsibilities as Receiver or Retained Personnel, or (2) for any actions taken or omitted by them, except upon a finding by this Court that they acted or failed to act as a result of malfeasance, bad faith, gross negligence, or in reckless disregard of their duties.

Id. § II.G. All investors and limited partners, among others, were prohibited from “[a]sserting any claim against Nutmeg's or the Funds' property other than in the manner for making claims established by the Receiver.” Id. § II.M.4.

After her appointment as receiver, Weiss took various actions as general partner and investment advisor of Nutmeg. She pursued certain opportunities, while declining to pursue others. Goulding providedher with his advice as to items of business that needed to be addressed, but Weiss did not follow all of Goulding's suggestions. No quarterly account statements were disseminated to the limited partners in the Funds after Weiss became receiver. At some point, Weiss deregistered Nutmeg as an investment adviser. ³ A claims process was established in early January 2011, with all claims required to be submitted to Weiss by March 9, 2011. Notice of this process was sent to all known investors in the Funds and also published in the Wall Street Journal. Weiss filed reports with the court providing information regarding the actions she was taking as receiver and sought the court's approval of certain actions, including, for example, employing an investment banker to advise her with regard to the Funds and distributing funds to certain investors. The motion for distribution of funds was withdrawn, however, and no distribution has yet been made to the investors. Weiss, Barnes & Thornburg, and other Retained Personnel have received payment for their fees.⁴

LEGAL STANDARD

A motion to dismiss under Rule 12(b)(6) challenges a complaint for failure to state a claim upon which relief may be granted. Fed.R.Civ.P. 12(b)(6); Gen. Elec. Capital Corp. v. Lease Resolution Corp., 128 F.3d 1074, 1080 (7th Cir.1997). In reviewing a Rule 12(b)(6) motion, the court takes as true all facts in the complaint and draws all reasonable inferences in favor of the plaintiff. Dixon v. Page, 291 F.3d 485, 486–87 (7th Cir.2002). To survive a Rule 12(b)(6) motion, the complaint must not only provide the defendant with fair notice of the claim's basis but must also establish that the requested relief is plausible on its face. Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009); see Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). The allegations in the complaint must be “enough to raise a right of relief above the speculative level.” Twombly, 550 U.S. at 555, 127 S.Ct. 1955. At the same time, the plaintiff need not plead legal theories. Hatmaker v. Mem'l Med. Ctr., 619 F.3d 741, 742–43 (7th Cir.2010). Rather, it is the facts that count.

ANALYSIS

I. Investment Advisers Act Claim (Count I)

In Count I, the only count supporting federal question jurisdiction, plaintiffs assert that since Weiss's appointment as receiver in August 2009, Weiss and Nutmeg have failed to disseminate quarterly account statements to the limited partners of the Funds in violation of § 206(4) of the Investment Advisers Act of 1940 (“IAA”), 15 U.S.C. § 80b–6, and SEC Rule 206(4)–2. Plaintiffs seek rescission of the advisory agreements between Nutmeg and the Funds pursuant to § 215(b) of the IAA, 15 U.S.C. § 80b–15(b). ⁵

Section 206(4) makes it unlawful for an investment adviser “to engage in any act, practice, or course of business which is fraudulent, deceptive, or manipulative.” 15 U.S.C. § 80b–6(4). Prior to April 1, 2010, SEC Rule 206(4)–2 made it a “fraudulent, deceptive, or manipulative act, practice or course of business” for a registered investment adviser (or an adviser who is required to be registered) to have custody of client funds or securities if quarterly account statements were not sent to each limited partner or the adviser did not have a reasonable basis to believe that the qualified custodian sent an account statement to the limited partners. As of April 1, 2010, the rule requires an investment adviser to determine, after due inquiry, that there is a reasonable basis to believe that the qualified custodian was providing quarterly account statements to the limited partners. Although speaking of “fraudulent, deceptive, or manipulative” practices, Section 206(4), the only section of the IAA at issue here, does not require a finding of fraudulent intent. See SEC v. Steadman, 967 F.2d 636, 647 (D.C.Cir.1992); SEC v. Householder, No. 02 C 4128, 2002 WL 1466812, at *7 (N.D.Ill. July 8, 2002).

Among other proffered reasons for dismissal of the IAA claim, defendants argue that it is barred by the statute of limitations. They contend that the statute of limitations for rescission pursuant to the IAA is the earlier of one year from discovery or three years from the violation, a period borrowed from the 1933 and 1934 Securities Acts. See, e.g., Kahn v. Kohlberg, Kravis, Roberts & Co., 970 F.2d 1030, 1033–39 (2d Cir.1992) (applying one year/three year period to IAA actions for rescission); Derby v. Perschke, No. 88C3835, 1990 WL 179868, at *5 (N.D.Ill. Nov. 8, 1990) (same). Plaintiffs allege that they did not receive quarterly statements after Weiss was appointed receiver in August 2009, and the parties agree that the injury should have been discovered once plaintiffs did not receive a quarterly statement after the third quarter of 2009 closed. Plaintiffs only sought leave to sue defendants i...