Gandhi v. Sitara Capital Mgmt., LLC

Decision Date09 July 2013
Docket NumberNo. 12–3105.,12–3105.
Citation721 F.3d 865
PartiesShailja GANDHI, Revocable Trust (November 6, 2002), et al., Plaintiffs–Appellants, v. SITARA CAPITAL MANAGEMENT, LLC and Rajiv Patel, Defendants–Appellees.
CourtU.S. Court of Appeals — Seventh Circuit

721 F.3d 865

Shailja GANDHI, Revocable Trust (November 6, 2002), et al., Plaintiffs–Appellants,
v.
SITARA CAPITAL MANAGEMENT, LLC and Rajiv Patel, Defendants–Appellees.

No. 12–3105.

United States Court of Appeals,
Seventh Circuit.

Argued April 2, 2013.
Decided July 9, 2013.


[721 F.3d 866]


James A. McGurk, Chicago, IL, J. Moylan, James J. Moylan (argued) and Associates, P.C., Steamboat Springs, CO, for Plaintiffs–Appellants.

Daryl M. Schumacher (argued), Kopecky Schumacher Bleakley Rosenburg PC, Chicago, IL, for Defendants–Appellees.


Before ROVNER, WILLIAMS, and SYKES, Circuit Judges.

[721 F.3d 867]



WILLIAMS, Circuit Judge.

Plaintiffs, investors in a hedge fund, filed suit against those responsible for managing the fund, Defendants Sitara Capital Management, LLC and Rajiv Patel, after a bad investment by the fund resulted in significant financial losses for its investors. The district court gave Plaintiffs multiple chances to select a legally cognizable theory of recovery; although the court dismissed the Plaintiffs' first two complaints, it granted leave to amend following each dismissal. On the day that dispositive motions were due, Plaintiffs sought to file another amended complaint to introduce various fraud-based causes of action arising out of purported newly discovered misrepresentations. The district court awarded summary judgment to Defendants on all outstanding claims and denied Plaintiffs leave to submit a fourth complaint with new causes of action. We affirm. The district court properly exercised its discretion in rejecting Plaintiffs' new claims because they suffered from deficiencies that rendered the proposed amendment futile.

I. BACKGROUND

After accumulating a personal fortune in the technology business, Rajiv Patel thought he would try his luck as a hedge fund manager. In 2005, Patel formed Sitara Partners, L.P. (“Sitara Partners,” or the “Fund”). Patel also formed another entity, Sitara Capital Management, LLC, (“Sitara Capital”) to serve as an investment adviser to the Fund. Patel installed himself as managing director of Sitara Capital in order to implement his trading strategy for the Fund. Soon after forming the Fund, Patel began offering interests in it to his family, friends, and neighbors. Many of them purchased limited partnership interests in Sitara Partners using their own personal funds or funds from their retirement plans.

After enjoying some initial success in the market, Patel made one unfortunate investment that resulted in serious losses for interest holders in the Fund. Sitara Partners invested $6.8 million, nearly all of its assets, in Freddie Mac common stock. Although this investment may appear innocuous when viewed in isolation, in the stock market, as in most parts of life, timing is everything. In this case, the Fund made its investment in Freddie Mac in early September 2008, after the market had already begun to feel the effects of the subprime mortgage crisis. On September 8, 2008, Freddie Mac stock suffered the largest single-day price drop in its history and the Fund incurred a devastating loss.

Some months later, Plaintiffs (owners of limited partnership interests in Sitara Partners) filed an eighteen-count complaint against Patel and Sitara Capital (collectively, “Defendants”). The initial filing alleged various acts of wrongdoing by Defendants arising out of the Plaintiffs' purchase of interests in Sitara Partners. Among the causes of action Plaintiffs asserted were claims for federal securities fraud and state securities fraud, as well as common-law claims for fraudulent misrepresentation and fraudulent inducement.

The Plaintiffs struggled to find a legally cognizable theory to pursue against Defendants despite receiving a commendable degree of latitude from the district court. After granting Defendants' motion to dismiss 16 of the 18 counts of the initial complaint, the court granted leave to file an amended complaint. The Plaintiffs then filed their First Amended Complaint in which they reasserted most of the deficient claims from their original filing. The district court dismissed these claims as well. In dismissing Plaintiffs' claims for securities and common-law fraud, the district court relied upon Plaintiffs' failure to sufficiently allege reliance upon the various

[721 F.3d 868]

alleged misrepresentations and to supply the requisite specificity to substantiate Patel's fraudulent conduct under Federal Rule of Civil Procedure 9(b). Despite these deficiencies, the district court again granted Plaintiffs leave to amend. Plaintiffs' Second Amended Complaint asserted only three counts: failure to register securities in violation of federal law, failure to register as an investment advisor under Illinois law, and breach of fiduciary duty under the Employee Retirement Income Security Act (“ERISA”), 29 U.S.C. § 1109(a). The parties proceeded to discovery on these three causes of action and the district court set a deadline for submission of dispositive motions by December 15, 2011.

On that day, as Defendants filed their motion for summary judgment consistent with the court's schedule, Plaintiffs filed a motion for leave to file a third amended complaint. In their motion, Plaintiffs attempted to assert new securities fraud and common-law fraud claims based upon purported misrepresentations that they discovered while deposing Patel on December 12, just three days earlier. Plaintiffs identified two misrepresentations as the bases for these claims: (1) Defendants' statement in an...

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