Tirapelli v. Advanced Equities, Inc.

• Decision Date: 30 July 2004
• Docket Number: No. 1-03-2463.,1-03-2463.
• Parties: Ronald R. TIRAPELLI and Michael Webb, Plaintiffs-Appellants, v. ADVANCED EQUITIES, INC., Lee Wiskowski, Jack Pressman, Communication Infrastructure Development Corporation, OptimalPath Digital Network, and Telecom Capital Group, LLC, Defendants-Appellees.
• Court: United States Appellate Court of Illinois

813 N.E.2d 1138

351 Ill. App.3d 450

286 Ill.Dec. 445

Ronald R. TIRAPELLI and Michael Webb, Plaintiffs-Appellants, v. ADVANCED EQUITIES, INC., Lee Wiskowski, Jack Pressman, Communication Infrastructure Development Corporation, OptimalPath Digital Network, and Telecom Capital Group, LLC, Defendants-Appellees.

No. 1-03-2463.

Appellate Court of Illinois, First District, Sixth Division.

July 30, 2004.

Gerald B. Mullin, P.C., Chicago (Gerald B. Mullin, Richard Larson, of counsel), for Appellants.

Freeborn & Peters, LLP, Chicago (Michael D. Freeborn, Douglas A. Albritton, Catherine A. Miller, of counsel), for Appellees Lee Wiskowski, Communication Infrastructure Development Corporation and Telecom Capital Group, LLC.

Joseph E. Tighe, P.C., Chicago (Joseph E. Tighe, of counsel), for Appellee Advanced Equities, Inc.

Burris Wright Slaughter & Tom, L.L.C., Chicago (Darryl Tom, of counsel), for Appellees Jack Pressman and OptimalPath Digital Network.

Justice GALLAGHER delivered the opinion of the court:

Plaintiffs Ronald Tirapelli and Michael Webb brought suit against defendants Lee Wiskowski, Jack Pressman, Advanced Equities (Advanced), OptimalPath Digital Network (Optimal), and Telecom Capital Group (TCG) seeking rescission and damages based on alleged violations of sections 12(F), 12(G), and 12(I) of the Illinois Securities Law of 1953 (Illinois Securities Law) (815 ILCS 5/12(F), (G), (I) (West 1998)), as well as common law fraud. Plaintiffs alleged that they purchased shares of TCG in reliance on oral statements not found in the written agreement for the sale of the shares and that those statements were fraudulent. The trial court granted summary judgment in favor of defendants because the presence of "nonreliance" and "integration" clauses in the agreement made plaintiffs' reliance on oral statements not found in the agreement unreasonable as a matter of law. We affirm.

BACKGROUND

Plaintiffs each own Ford dealerships and have experience investing in securities. Tirapelli has a net worth of over $5 million and has more than $1 million worth of investments. Webb has approximately $5 million worth of investments and has accounts with three different stock brokers.

Wiskowski was a founder and executive of Advanced and TCG. TCG retained Advanced to solicit investment in TCG through private placement subscription.¹ When TCG later converted from a limited liability company to Communications Infrastructure Development Corporation (CIDC), a corporation, in an effort to secure investment from institutions not permitted to invest in limited liability companies, Wiskowski served as the president of CIDC. Pressman was a founder, board member and officer of Optimal, a company in which TCG invested.

In March, 2000, Advanced broker Ronald Stuppy approached Tirapelli about investing in TCG. Tirapelli had previously invested through Stuppy. Upon Stuppy's suggestion, Tirapelli attended a meeting with Stuppy, Wiskowski and Pressman during which Wiskowski and Pressman explained that TCG was formed primarily to invest in and make loans to "young," technology-oriented companies in exchange for equity in those companies, and that part of TCG's plan was to purchase and renovate property for use by those companies. Pressman also explained that Optimal was created to provide integrated technology infrastructure to commercial and residential properties. Following the meeting, Tirapelli, Stuppy, Wiskowski, and Pressman toured a building at 2233 South Throop Street in Chicago (Throop Street property).

Tirapelli recorded the meeting and later played the tape for Webb. After Tirapelli and Webb discussed the opportunity, Tirapelli arranged a second meeting with Webb, Wiskowski, Pressman, and himself. Wiskowski and Pressman gave a presentation at the second meeting, after which plaintiffs agreed to purchase 2½ shares of TCG each at $100,000 per share. On March 24, 2000, plaintiffs signed the subscription documents which served as the contract for the sale of the shares, and later transferred the funds for the purchase. The subscription documents stated in the "Terms of the Offering" section:

"The Company [TCG] has been formed to invest in one or more telecommunications, internet, information technology or other technology based companies * * * In addition, the Company anticipates that it will invest in a limited liability company or other entity which will hold the real estate and improvements located at 2233 S. Throop, Chicago, Illinois * * * (the `Commonwealth Edison Property'). The Commonwealth Edison property is currently under contract to Jack Pressman or an affiliate. The Company [TCG] will also purchase up to 2,500,000 Series A Preferred Shares * * * of OptimalPATH Digital Network, Inc."

In addition, the subscription documents contained both a nonreliance clause and an integration clause. The nonreliance clause stated:

"[I]n evaluating the suitability of an investment by the undersigned Company, the undersigned has relied solely upon the materials made available to the undersigned at the undersigned's request and independent investigations made by the undersigned in making the decision to purchase the Preferred Membership Interests subscribed for herein, and acknowledges that no representations or warranties (oral or written), have been made to the undersigned with respect thereto."

The integration clause stated:

"The Subscription Documents constitute the entire agreement among the parties hereto with respect to the subject matter hereof and may be amended only by a written execution of all parties."

The subscription documents contained several warnings about various risks involved with the investment and required plaintiffs to verify that they were "accredited investors," which the subscription documents defined, inter alia, as persons with net worths exceeding $1 million at the time of purchase. According to the subscription documents, the investment was not registered under the federal Securities Act of 1933 (15 U.S.C. § 77(a), et seq. (2000)) and, thus only accredited investors could purchase shares.

In May 2001, plaintiffs tendered their shares to Advanced and sought a return of the money they had invested after plaintiffs allegedly learned that some representations made by defendants regarding TCG were false. Defendants refused to rescind the transaction or return the money. Plaintiffs ultimately lost all of their investment. Plaintiffs brought suit in federal court, asserting claims against defendants for: (1) violation of section 10(b) of the Securities Exchange Act of 1934 (Securities Exchange Act) (15 U.S.C. § 78j(b) (2000)) and Rule 10b-5 of the Securities and Exchange Commission (Rule 10b-5) (17 C.F.R. § 240.10b-5 (2000)), which was promulgated under the Securities Exchange Act; (2) violation of sections 12(F), 12(G), and 12(I) of the Illinois Securities Law (815 ILCS 5/12(F), (G), (I) (West 1998)), and (3) Illinois common law fraud.

The federal court granted summary judgment in favor of defendants on the federal securities fraud count because the nonreliance and integration clauses made reliance on alleged oral misrepresentations unreasonable as a matter of law. The federal court dismissed plaintiffs' state claims.

Plaintiffs then filed a complaint in the circuit court of Cook County. Plaintiff's complaint was based on the same allegations that they had made in federal court. Count I sought recovery under the Illinois Securities Law (815 ILCS 5/12(F), (G), (I) (West 1998)). Count II was based on common law fraud. Both counts were based upon the following representations that plaintiffs alleged Wiskowski and Pressman made during the two meetings with plaintiffs before plaintiffs signed the subscription documents:

(1) that TCG owned the Throop Street property, having purchased it for $8 million;

(2) that TCG had entered into a lease for a portion of the Throop Street property;

(3) that TCG had completed design work and entered into construction contracts for renovation of the Throop Street property for use by high-tech companies;

(4) that TCG had completed all preliminary work for an initial public issue²; and

(5) that few shares of TCG remained and that unless plaintiffs invested immediately they would lose the opportunity to invest.

None of those statements are found in the subscription documents.

The trial court granted summary judgment in favor of defendants for the same reason as the federal court: the nonreliance and integration clauses made plaintiffs' reliance on the oral representations unreasonable as a matter of law. Plaintiffs filed this timely appeal.

ANALYSIS

Plaintiffs assert that defendants' alleged misrepresentations constitute common law fraud under Illinois law and also violate sections 12(F), 12(G), and 12(I) of the Illinois Securities Law (815 ILCS 5/12(F), (G), (I) (West 1998)). Section 12 of the Illinois Securities Law provides:

"It shall be a violation of the provisions of this Act for any person:

* * *

F. To engage in any transaction, practice or course of business in connection with the sale or purchase of securities which works or tends to work a fraud or deceit upon the purchaser or seller thereof.

G. To obtain money or property through the sale of securities by means of any untrue statement of a material fact * * *.

* * *

I. To employ any device, scheme or artifice to defraud in connection with the sale or purchase of any security, directly or indirectly." 815 ILCS 5/12 (West 1998).

Because sections 12(F), 12(G), and 12(I) of the Illinois Securities Law are modeled after sections 17(a)(1) through (a)(3) of the federal Securities Act of 1933 (Securities Act) (15 U.S.C. § 77q(a)(1) through (a)(3) (2000)), Illinois courts look to federal securities fraud case law in interpreting those sections of the Illinois Securities Law. People v. Whitlow, 89 Ill.2d 322, 333-34, 60 Ill.Dec. 587, 433 N.E.2d 629 (1982); Foster v. Alex, 213 Ill.App.3d 1001, 1005, 157 Ill.Dec. 778, 572 N.E.2d...