Howe v. Shchekin

• Decision Date: 03 March 2017
• Docket Number: 15–cv–8675
• Citation: 238 F.Supp.3d 1046
• Parties: William HOWE, an Individual, and D & D Auto Resort, LLC, an Illinois limited liability company, Plaintiffs, v. Alexandr SHCHEKIN a/k/a Alexandre Shchekin, an Individual, Defendant.
• Court: U.S. District Court — Northern District of Illinois

238 F.Supp.3d 1046

William HOWE, an Individual, and D & D Auto Resort, LLC, an Illinois limited liability company, Plaintiffs,

v.Alexandr SHCHEKIN a/k/a Alexandre Shchekin, an Individual, Defendant.

15–cv–8675

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

Signed March 3, 2017

Dean William Farley, Raseq Moizuddin, Riordan, Fulkerson, Hupert & Coleman, Chicago, IL, for Plaintiffs.

Louis David Bernstein, James David Trail, The Bernstein Law Firm, LLC, Chicago, IL, for Defendant.

MEMORANDUM OPINION AND ORDER

John Z. Lee, United States District Judge

Plaintiffs William Howe ("Howe") and D&D Auto Resort, LLC ("D&D") (together, "Plaintiffs") filed suit against Defendant Alexandr Shchekin ("Shchekin"), alleging that Shchekin violated federal securities law and committed common law fraud in connection with selling Howe membership units in ReadOz, LLC ("ReadOz"). Shchekin now moves to dismiss Plaintiffs' Amended Complaint under Federal Rule of Procedure ("Rule") 12(b)(6). For the reasons that follow, Shchekin's motion [51] is granted.

Background

Beginning in May 2008, Shchekin—an owner and manager of digital publisher ReadOz—began soliciting Plaintiffs' investment in the company. Am. Compl. ¶¶ 8, 16, ECF No. 47. His solicitation was successful. On three occasions, Plaintiffs purchased "membership units" in ReadOz. First, on May 27, 2008, D&D purchased 47,666 and 2/3 units for $71,500.00. Id. ¶ 17. Later, on September 15, 2009, Howe made an individual investment of an undisclosed amount and received 21,399.92 units. Id. ¶ 19. Finally, on April 8, 2011, Howe made another individual investment of an undisclosed amount and received 8750 units in return. Id. ¶ 22.

In connection with these purchases, Plaintiffs allege that Shchekin made a number of misrepresentations and omissions "[b]etween April 2008 and present." Id. ¶ 25. First, in connection with all three sales, Shchekin failed to advise Plaintiffs that the units were not registered with the Securities Exchange Commission (SEC). Id. ¶ 25(a). He also "never presented or delivered" a prospectus and "failed to ensure that [Plaintiffs] were accredited investors." Id. ¶¶ 25(b), 45.¹ Additionally, in connection with the 2009 and 2011 sales, Shchekin "failed to advise Howe that ReadOz could only accept investments over $50,000." Id. ¶ 25(c).²

Plaintiffs also identify a number of misrepresentations that Shchekin made on various dates from on or about February 17, 2010, to August 1, 2011, in the course of securing their investments. See id. ¶ 25. In general terms, the statements sought to reassure Plaintiffs of ReadOz's growth and solvency. See, e.g. , id. ¶ 25(m) ("In the same August, 17, 2010 correspondence, Shchekin claimed that ReadOz was experiencing 1,000% growth and in excess of 750,000 readers on the ReadOz site monthly."). Plaintiffs further allege that, following their investments, Shchekin continued to reassure them of ReadOz's value. Id. ¶¶ 26–27. According to Plaintiffs, their "suspicions of fraud were confirmed in 2015 when they discovered Shchekin's continued efforts to solicit additional investment." Id. ¶ 28.

Plaintiffs filed their initial complaint before this Court on October 1, 2015. On May 13, 2016, the Court granted Plaintiffs' motion to file an amended complaint, and Plaintiffs filed their amended complaint thereafter, naming Shchekin and Andrew Menasce as Defendants. Andrew Menasce has since been dismissed. Plaintiffs' Amended Complaint contains two counts. Count I, brought solely by Howe, is titled "Violation of § 10(b)(5) of the Securities Act of 1934" and is based on Howe's April 8, 2011 investment in ReadOz. Count II is titled "Common Law Fraud" and is based on each of Plaintiffs' investments in ReadOz.

Legal Standard

To survive a motion to dismiss pursuant to Rule 12(b)(6), a complaint must "state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). "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." Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). Additionally, when considering motions to dismiss, the Court accepts "all well-pleaded factual allegations as true and view[s] them in the light most favorable to the plaintiff." Lavalais v. Vill. of Melrose Park , 734 F.3d 629, 632 (7th Cir. 2013) (citing Luevano v. Wal–Mart Stores, Inc. , 722 F.3d 1014, 1027 (7th Cir. 2013) ). At the same time, "allegations in the form of legal conclusions are insufficient to survive a Rule 12(b)(6) motion." McReynolds v. Merrill Lynch & Co., Inc. , 694 F.3d 873, 885 (7th Cir. 2012) (citing Iqbal , 556 U.S. at 678, 129 S.Ct. 1937 ). As such, "[t]hreadbare recitals of the elements of the cause of action, supported by mere conclusory statements, do not suffice." Iqbal , 556 U.S. at 678, 129 S.Ct. 1937.

In ruling on a motion to dismiss pursuant to Rule 12(b)(6), a district court should not require a plaintiff to "anticipate or overcome affirmative defenses such as those based on the statute of limitations." O'Gorman v. City of Chi. , 777 F.3d 885, 889 (7th Cir. 2015). But where a plaintiff "plead [s] himself out of court by including factual allegations that establish that the plaintiff is not entitled to relief as a matter of law," the court can dismiss the complaint accordingly. Id.

Analysis

I. Count I: Section 10(b) of the Securities and Exchange Act of 1934

A. Statute of Repose

Shchekin initially moves to dismiss Count I to the extent it relies on fraudulent misrepresentations or omissions occurring prior to October 1, 2010. He argues that any such reliance is barred by the applicable statute of repose. Claims under Section 10(b) of the Securities and Exchange Act of 1934 are subject to the limitations and repose periods stated in 28 U.S.C. § 1658(b). Merck & Co. v. Reynolds , 559 U.S. 633, 638, 130 S.Ct. 1784, 176 L.Ed.2d 582 (2010).

Section 1658(b) requires that a cause of action be brought within two years after discovery of facts constituting the violation (i.e. , the statute of limitations), or five years after the violation (i.e. , the statute of repose). 28 U.S.C. § 1658(b). The parties agree that the "violation" that triggers § 1658(b)'s limitations and repose periods is the date of a misrepresentation or omission made in connection with a sale that gives rise to a claim, rather than the date of the sale itself. Resp. at 3–4; Reply at 2; see also McCann v. Hy–Vee, Inc. , 663 F.3d 926, 932 (7th Cir. 2011) (holding that "violation" for the purposes of § 1658(b)(2) is the date of the "misrepresentation," triggering the period "from the date of the fraud rather than the date of the injury"). The parties disagree, however, on how the repose period should apply to the facts of this case.

Here, Plaintiffs filed suit initially on October 1, 2015. Thus, the repose period would seem to bar Howe from relying on any misrepresentations or omissions that occurred prior to October 1, 2010. Seeking to avoid this result, Howe asks this Court to apply a "continuing fraudulent scheme theory." Some district courts outside of this circuit have applied such a theory to blunt the statute of repose where a plaintiff alleges a series of misrepresentation or omissions, some inside and some outside the repose period. In such circumstances, these courts have held that the statute of repose " ‘runs from the date of the last alleged misrepresentation regarding related subject matter.’ " In re Beacon Assocs. Litig. , 282 F.R.D. 315, 324 (S.D.N.Y. 2012) (quoting Plymouth Cty. Ret. Ass'n v. Schroeder , 576 F.Supp.2d 360, 378 (E.D.N.Y. 2008) ); see also Resp. at 3 (collecting cases). Support for the theory, however, is tenuous. One court applying the theory has noted that "jurisdictions have arrived at varying and inconsistent results on this issue," Plymouth Cty. Ret. Ass'n , 576 F.Supp.2d at 378, and the Court has found scant reasoning that supports the theory.

A majority of courts across circuits, however, have rejected the continuing fraudulent scheme theory. Carlucci v. Han , 886 F.Supp.2d 497, 514 & n.9, 515 (E.D. Va. 2012) (collecting cases). These courts have relied on two different arguments, both based on statements by the Supreme Court that undercut the theory. First, to permit the repose period to run only from the date of the last misrepresentation in a series of misrepresentations would read into the statute a form of equitable tolling that preserves earlier misrepresentations. Carlucci , 886 F.Supp.2d at 515. The Supreme Court, however, has held that a bar virtually equivalent to § 1658(b)(2) is not subject to equitable tolling. Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson , 501 U.S. 350, 363, 111 S.Ct. 2773, 115 L.Ed.2d 321 (1991), superseded on other grounds as stated in Merck , 559 U.S. at 647–78, 130 S.Ct. 1784. Additionally, the Supreme Court has elsewhere characterized § 1658(b)(2) as "unqualified" and "giving defendants total repose after five years." Merck , 559 U.S. at 650, 130 S.Ct. 1784 (emphasis added). The Supreme Court offered this characterization in order to defuse concerns that predicating the running of the statute of limitations in § 1658(b)(1) upon a reasonable investor's discovery of pertinent facts would permit "stale claims." Id. The Court agrees with the reasoning of Carlucci and similar cases and concludes that reading the continuing fraudulent scheme theory into § 1658(b)(2) would unjustifiably qualify the repose period and permit stale claims. See Carlucci , 886 F.Supp.2d at 515.

Applying the statute of repose to Howe's claim in Count I, § 1658(b)(2) bars Howe from relying on any misrepresentations or omissions in support of his claim that occurred before the filing of his initial complaint on October 1, 2015. Howe's complaint identifies various misrepresentations and omissions that predate ...