Cummings v. Partners
Decision Date | 25 May 2010 |
Docket Number | Civil No. 09-847(RHK/JJK). |
Citation | 715 F.Supp.2d 880 |
Parties | Steven B. CUMMINGS, et al., Plaintiffs, v. PARAMOUNT PARTNERS, LP, et al., Defendants. |
Court | U.S. District Court — District of Minnesota |
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George H. Frisch, West St. Paul, MN, Michael L. Puklich, Patrick J. Neaton, Neaton & Puklich, P.L.L.P, Chanhassen, MN, for Plaintiffs.
John R. Neve, Neve Law, PLLC, Minneapolis, MN, Joseph W. Anthony, Steven Kerbaugh, Steven M. Phillips, Anthony Ostlund Baer & Louwagie PA, Minneapolis, MN, Bryan R. Feldhaus, Phillip A. Cole, Lommen, Abdo, Cole, King & Stageberg, PA, Minneapolis, MN, for Defendants.
Before the Court are the Objections of certain defendants to the March 1, 2010 Report and Recommendation of Magistrate Judge Jeffrey J. Keyes. Judge Keyes has recommended that the pending Motion to Dismiss portions of the Second Amended Complaint be denied. Having reviewed de novo the Report and Recommendation, and Defendants' Objections thereto, and upon all of the files, records, and proceedings herein, IT IS ORDERED:
1. Defendants' Objections (Doc. No. 63) are OVERRULED;
2. The Report and Recommendation (Doc. No. 60) is ADOPTED;
3. Defendant Charles T. Thompson's Motion to Dismiss Second Amended Complaint (Doc. No. 27), and Defendants' Michael W. Bozora's, Timothy R. Redpath's, Capital Solutions Distributors, LLC's, and Capital Solutions Management, LP's, Amended Motion to Dismiss (Doc. No. 28), are GRANTED IN PART and DENIED IN PART as follows:
REPORT AND RECOMMENDATION
This matter is before the Court on Defendant Charles T. Thompson's Motion to Dismiss Second Amended Complaint (Doc. No. 27), and Defendants' Michael W. Bozora's, Timothy Redpath's, Capital Solutions Distributors, LLC's, and Capital Solutions Management, LP's, Amended Motion to Dismiss (Doc. No. 28). The case has been referred to this Court for a Report and Recommendation pursuant to 28 U.S.C. § 636 and D. Minn. Loc. R. 72.1. For the reasons that follow, this Court recommends that the motions be granted in part and denied in part. 1
I. Introduction
In this case, Plaintiffs allege that Defendants are various individuals and entities affiliated with Paramount Partners, L.P. (“Paramount”), which is a limited partnership hedge fund. Paramount raised capital by selling limited-partnership interests to investors, including Plaintiffs. Paramount told its investors that it would actively invest the funds received from their limited partnership investments in the stock market pursuant to a proprietary trading strategy designed to take advantage of stocks it believed would outperform or underperform the market.
Plaintiffs describe a network of business relationships between Defendants Paramount, Crossroad Capital Management, LLC (“Crossroad”), Lawton, Capital Solutions Management, LP (“CSM”), Capital Solutions Distributors, LLC (“CSD”), Timothy R. Redpath (“Redpath”), Charles T. Thompson (“Thompson”), and Michael W. Bozora (“Bozora”). Plaintiffs allege that these Defendants unlawfully sold unregistered securities, the Paramount limited-partnership interests, and made material misrepresentations and omissions in public advertisements and personal solicitations regarding those securities. According to Plaintiffs, Defendants represented Paramount to be a successful and well informed hedge fund and that Defendants closely monitored stock-market trends to engage in aggressive trading strategies that ensured a high return on its limited partners' investments. Plaintiffs say that, contrary to those and other representations, Paramount was not successful and the funds Plaintiffs believed to be investing in Paramount's trading activities by purchasing limited-partnership interests were not invested in the stock markets as Defendants represented they would be. Instead, those funds were allegedly misappropriated by one or more Defendants.
These events led to the Securities and Exchange Commission (“SEC”) launching an investigation of Defendants Paramount, Lawton, and Crossroad, earlier this year, which resulted in the SEC filing a separate civil-enforcement action. In that SEC action, the District Court froze Paramount's assets. ( See Sec. and Exch. Comm'n v. Lawton, et al., Civ. No. 09-368 (ADM/AJB), Doc. No. 34, July 13, 2009 Order.) In this case, Plaintiffs now seek repayment of the price they paid for their limited-partnership interests in Paramount, statutory doubling of those amounts, compensation for taxes they paid on the fraudulently reported earnings their investments produced, with interest, and their attorneys' fees.
II. Factual BackgroundA. Paramount's Business Prior to July 12, 2006
In November 2001, Lawton organized a private hedge fund under the name The Crossfire Trading Fund, L.P. Lawton used the limited liability corporation Crossroad, as the organizing entity for the Crossfire Trading Fund. ( Id. ¶ 3.) On November 1, 2001, Lawton and Crossroad adopted a Limited Partnership Agreement in which Crossroad became the general partner of the hedge fund and the “attorney-in-fact” for all of its limited partners. ( Id. ¶ 14.) It appears that, at the start, the Crossfire Trading Fund was a one-man project, as Lawton obtained investors through his personal contacts. ( Id. ¶ 12.)
On June 11, 2003, the name of the hedge fund was changed from Crossfire to Paramount. ( Id. ¶ 13.) Simultaneously with the name change, Lawton and Crossroad adopted an amended limited-partnership agreement. ( Id. ¶ 14.) At that time, Lawton, through Crossroad, allegedly ‘... ” ( Id. ( ).)
From November 1, 2001, through July 12, 2006, Lawton, Crossroad, and the hedge fund (as both Paramount and The Crossfire Trading Fund), sold a total of only $928,636 limited-partnership interests to investors in the hedge fund. ( Id. ¶ 12.)
B. The Other Defendants Enter Paramount's Business in 2006.
Lawton entered into a new business relationship with the other Defendants in this matter in mid-June 2006. (SAC ¶ 15.) Pursuant to a July 12, 2006 agreement, CSM, which is founded and owned by Defendants Bozora and Redpath ( Id. ¶¶ 7-8), and managed by Defendant Thompson ( Id. ¶ 6), acquired a minority-ownership interest in Crossroad, the general partner of the Paramount limited partnership. ( Id. ¶ 15.) Under that agreement, CSM initially owned 10 percent of Crossroad and “[f]or each $2,000,000 in new assets [Crossroad] t[ook] under management, [CSM] w[ould] own an additional 10 percent of [Crossroad] up to a maximum of 50 percent.” ( Id. ¶ 16.) In exchange for this ownership interest, CSM agreed to “advise and assist [Crossroad] in business planning, business management, business development, and fundraising, and [Crossroad agreed to] pay [CSM] a monthly fee for services rendered.” ( Id.)
According to another July 12, 2006 agreement, CSD, which is an “ ‘NASD member and wholly owned subsidiary of [CSM]’ ” ( Id. ¶ 15), and managed by Thompson ( Id. ¶ 6), agreed to be the “ ‘exclusive distributor’ ” of Paramount's limited-partnership interests. ( Id. ¶ 15.) In this role, CSD would act as an exclusive sales agent by soliciting and referring prospective limited partners to Crossroad and Paramount. ( Id. ¶ 6.)
After CSM, CSD, Thompson, Redpath, and Bozora became affiliated with Lawton, Paramount, and Crossroad, “public solicitation and sales of Paramount limited partnership interests increased dramatically, to the point that Paramount succeeded in the approximate 2-1/2 years from July 12, 2006 through December 2008, in obtaining $9,911,046 from investors who purchased Paramount's limited partnership interests[.]” ( Id. ¶ 15.) Prior to CSM, CSD, Thompson, Redpath, and Bozora's involvement, Paramount's sales of limited-partnership interests (including the sales of Paramount's predecessor) averaged approximately $16,500 per month. ( Id.) After these Defendants became involved with Paramount and its limited-partnership sales campaign, the hedge fund's sales increased dramatically to an average of over $300,000 per month. ( Id.)
C. Statements and Representations to Plaintiffs
Beginning in 2002, investments in Paramount were solicited by use of a prospectus and through oral and written statements regarding the past performance of the hedge fund. (SAC ¶ 19.) Defend...
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