Emjayco v. Morgan Stanley & Co., Inc.

• Decision Date: 04 October 1995
• Docket Number: No. 95-3158.,95-3158.
• Parties: EMJAYCO, for Benefit of BART L. TROY, M.D. P.C., PROFIT SHARING PLAN, M.M. Sternstein, D.D.S., Ltd. Employee Profit Sharing Plan, Southern Illinois Head, Neck & Hearing SC Profit Sharing Savings Plan And Trust, Joel Sternstein, Michele K. Troy, for themselves, individually, and on behalf of all others similarly situated, Plaintiffs, v. MORGAN STANLEY & CO., INC., a Delaware corporation, John M. LeFrere, the Estate of William H. Gregory, III, and John or Jane Does One Through Five, Defendants.
• Court: U.S. District Court — Central District of Illinois

901 F. Supp. 1397

EMJAYCO, for Benefit of BART L. TROY, M.D. P.C., PROFIT SHARING PLAN, M.M. Sternstein, D.D.S., Ltd. Employee Profit Sharing Plan, Southern Illinois Head, Neck & Hearing SC Profit Sharing Savings Plan And Trust, Joel Sternstein, Michele K. Troy, for themselves, individually, and on behalf of all others similarly situated, Plaintiffs, v. MORGAN STANLEY & CO., INC., a Delaware corporation, John M. LeFrere, the Estate of William H. Gregory, III, and John or Jane Does One Through Five, Defendants.

No. 95-3158.

United States District Court, C.D. Illinois, Springfield Division.

October 4, 1995.

George B. Gillespie, Hinshaw & Culbertson, Springfield, IL, Bradford J. Lam, Cairns Dworkin & Chambers P.C., Denver, CO, for plaintiffs.

Paul Brown, Brown Hay & Stephens, Springfield, IL, Roger J. Hawke, I. Scott Bieler, Cathleen N. Tiernan, Brown & Wood, New York City, for Morgan Stanley & Company, Inc.

Thomas J. Thomas, Juno Beach, FL, John M. LeFrere, West Palm Beach, FL, pro se, Robert B. McKay, Carney & McKay, Garden City, NY, for John LeFrere.

OPINION

RICHARD MILLS, District Judge:

Venue.

Keep it, or transfer?

Alas, we must transfer to our sister court in New York.

I. BACKGROUND

This case involves a dispute between investors, an investment manager, and a brokerage house. During the 1980s, the Plaintiffs, primarily physicians, office profit sharing plans, and pension trusts, invested in two partnerships, which in turn invested in Delta Capital Management, a limited partnership. Plaintiffs allege that although Delta held itself out as fundamentally conservative, it, unbeknownst to its investors, shifted from a conservative investment strategy to a high risk strategy. The focus of this strategy shift was massive investment in First Executive, a company which eventually collapsed. Plaintiffs claim that Delta conspired with its broker, Morgan Stanley, and unspecified others to make First Executive seem to be something it was not: a desirable takeover target. This was done, claim the Plaintiffs, by stock churning and other deceptive practices.

As to the parties, Plaintiffs were partners of Springfield Associates or Springfield Retirement Associates. These two partnerships were limited partners in Delta. Delta was a Delaware limited partnership with offices in New York. Morgan Stanley is a Delaware Corporation with its principal place of business in New York, New York. John LeFrere is either a Florida or New York resident and a general partner of Delta Capital Management, L.P. (Delta), The Estate of William H. Gregory III succeeds William H. Gregory III, a former general partner of Delta.

Morgan Stanley moves for transfer of venue and asserts that no substantial acts or omissions giving rise to the claims against it occurred in this district. Plaintiffs, to successfully oppose Morgan Stanley's motion, must prove that venue is proper in this district.

Plaintiffs' lengthy complaint contains very few factual allegations regarding Morgan Stanley's¹ conduct. The section of the complaint entitled "Course of Wrongful Conduct" describes Morgan Stanley's alleged role in the scheme to defraud.

According to the Complaint, Morgan Stanley was engaged in the business of trading securities for LeFrere and his associates. Morgan Stanley "and/or its agents" made recommendations to LeFrere and his associates regarding trading in accounts alleged to be the Plaintiffs'. Morgan Stanley had actual or constructive knowledge of Plaintiffs' desire to invest conservatively in a diversified portfolio. Morgan Stanley knew that LeFrere, Gregory, and Delta were unlicensed to act as either investment advisors, an investment company, or an introducing broker-dealer. Morgan Stanley prepared account statements that indicated numerous trades in First Executive securities over repeated one-month intervals. Morgan Stanley did not disclose to Plaintiffs various pieces of information regarding Delta, LeFrere and First Executive.

Morgan Stanley submitted an affidavit with its motion to transfer. This affidavit states that Morgan Stanley acted as a prime broker for Delta. Prime brokers provide a variety of services for large investors who deal with several broker-dealers. Morgan Stanley served Delta through its New York, New York, office.

II. VENUE AND TRANSFER

Plaintiffs argue that venue is proper in this district because "a substantial part of the events or omissions giving rise to the claim occurred" in this district. 28 U.S.C. 1391(a)(2). Morgan Stanley moves for transfer pursuant to 28 U.S.C. § 1406(a), which provides: "The district court of a district in which is filed a case laying venue in the wrong division or district shall dismiss, or if it be in the interest of justice, transfer the case to any district or division in which it could have been brought." When a defendant challenges venue, the plaintiff bears the burden of establishing that its chosen venue is proper. Sheppard v. Jacksonville Marine Supply, Inc., 877 F.Supp. 260, 269 (D.S.C. 1995); Reed v. Brae Railcar Management, Inc., 727 F.Supp. 376, 377 n. 1 (N.D.Ill.1989). The purpose of general venue statutes² is to protect defendants from litigation in inconvenient fora. Leroy v. Great Western United Corp., 443 U.S. 173, 183-84 (1979). But see Carty v. Health-Chem Corp., 567 F.Supp. 1 (E.D.Pa.1982) (discussing venue under the Securities Exchange Act of 1934, which requires only an act in furtherance of an unlawful scheme in the forum). Plaintiffs must, therefore, show that venue is proper as to all defendants and all claims. Jarrett v. North Carolina, 868 F.Supp. 155, 158 (D.S.C.1994); Payne v. Marketing Showcase, Inc., 602 F.Supp. 656, 658 (N.D.Ill.1985) ("Where multiple causes of action are joined, venue must be proper as to each one."). Despite the venue statute's recent revision, Pub.L.Judicial Improvements Act of 1990, No. 101-650, Title III, § 311, which replaced venue based on where the cause of action arose with venue based on substantial acts, venue must still be established as to each defendant. See Sheppard, 877 F.Supp. at 269, Shuman v. Computer Associates International, Inc., 762 F.Supp. 114, 115 (E.D.Pa. 1991). But see Magic Toyota, Inc. v. Southeast Toyota Distributors, Inc., 784 F.Supp. 306, 317 n. 19 (D.S.C.1992) (asserting that by shifting the emphasis from contacts to events, the venue statute's amendment supplanted the rule that venue must be proper as to each defendant). The purpose of the venue statute is still to protect defendants, but the statute does not protect defendants if it allows plaintiffs to establish venue as to several defendants simply because venue is proper there as to one defendant.

Courts decide questions of venue largely on the basis of the pleadings. Because venue and personal jurisdiction are similar, it is appropriate to apply the same evidentiary standard to both issues. Reed, 727 F.Supp. at 377 n. 1. "The allegations in Plaintiffs' complaint are to be taken as true unless controverted by the defendant's affidavits; and any conflicts in the affidavits are to be resolved in Plaintiffs' favor." Turnock v. Cope, 816 F.2d 332, 333 (7th Cir. 1987). The Court is not obliged, however, to treat all allegations as true, no matter how speculative, conclusory, or lacking of necessary supporting factual allegations. Matter v. Williams, 832 F.Supp. 244, 246 (C.D.Ill. 1993). Instead, the Court's function in deciding factual questions related to venue is similar to its function when reviewing a motion to dismiss. To survive a motion to dismiss, a complaint must allege a factual basis for its legal claims. Cushing v. City of Chicago, 3 F.3d 1156, 1161 n. 5 (7th Cir.1993) ("`Conclusory allegations unsupported by any factual assertions will not withstand a motion to dismiss.' Briscoe v. LaHue, 663 F.2d 713, 723 (7th Cir.1981), aff'd 460 U.S. 325, 103 S.Ct. 1108, 75 L.Ed.2d 96 (1983)."). Therefore, to defeat a motion for transfer, a plaintiff must allege or establish facts to support venue in its chosen district.

Ill. ANALYSIS

A. Plaintiffs Must Connect Morgan Stanley to Actions Taken Within This District

Plaintiffs have alleged only one act by Morgan Stanley outside of New York: the appearance of a representative of Morgan Stanley at one of Delta's annual meetings in Springfield, Illinois. Plaintiffs make no allegation as to what Morgan Stanley's representative said or did at that meeting. The substance of Plaintiffs' complaint is that a series of fraudulent misrepresentations and improper securities transactions caused their losses. A single appearance by a representative of Morgan Stanley, at which Plaintiffs do not allege the representative took any significant action, cannot possibly constitute "a substantial part of the events or omissions giving rise" to the claim against Morgan Stanley. Plaintiffs, therefore, must demonstrate how various actors' conduct within this district can be imputed to Morgan Stanley, whose only substantial acts occurred in New York.

Plaintiffs' first attempt to justify venue in this district is the "conspiracy theory of personal jurisdiction." Assuming Plaintiffs mean the co-conspirator theory of venue, they quickly, and wisely, abandon this theory. Except for some specialized venue provisions, the co-conspiracy theory of venue is invalid. Sportmart, Inc. v. Frisch, 537 F.Supp. 1254, 1259-60 (N.D.Ill.1982) ("Most courts that have considered the so-called co-conspirator theory of venue after the Supreme Court's dictum in Bankers Life & Casualty Co. v. Holland, 346 U.S. 379, 74 S.Ct. 145, 98 L.Ed. 106 (1953) , have also declined to find venue appropriate over a non-resident corporate defendant solely on the basis of the alleged conduct of its co-conspirators in the forum state.") (further citations omitted). The co-conspirator theory is available under Section 27 of the Securities Exchange Act of 1934, 15 U.S.C. § 78aa (1994). See Securities Investor Protection Corp. v. Vigman, 764 F.2d 1309, 1317 ...