Weiss v. Altholtz

• Decision Date: 29 September 2011
• Docket Number: No. 10 C 02609,10 C 02609
• Parties: LESLIE J. WEISS, as Receiver for The Nutmeg Group, LLC Plaintiff, v. HARVEY ALTHOLTZ, WEALTH STRATEGY PARTNERS, LLP, and ALTHOLTZ FAMILY LIMITED PARTNERSHIP, Defendants.
• Court: U.S. District Court — Northern District of Illinois

LESLIE J. WEISS, as Receiver for The Nutmeg Group, LLC Plaintiff,

v. HARVEY ALTHOLTZ, WEALTH STRATEGY PARTNERS, LLP,and ALTHOLTZ FAMILY LIMITED PARTNERSHIP, Defendants.

No. 10 C 02609

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION

Date: September 29, 2011

Judge Edmond E. Chang

MEMORANDUM OPINION AND ORDER

Plaintiff Leslie Weiss, a federally appointed receiver for The Nutmeg Group, alleges that Defendants Harvey Altholtz, Wealth Strategy Partners, and Altholtz Family Limited Partnership are liable for the finder's fees Nutmeg paid to Altholtz. Weiss's second amended complaint asserts claims under the Securities and Exchange Act of 1934 (Exchange Act), 15 U.S.C. § 78a et seq., the Florida Securities Act, F.S.A. § 517.01 et seq., and unjust enrichment.¹ R. 46. Defendant has moved to dismiss [R.51] all claims pursuant to Federal Rule of Civil Procedure 12(b)(6). For the following reasons, the Court grants the motion to dismiss with prejudice.

I.

In September 2003, Nutmeg and Harvey Altholtz entered into a letter agreement whereby Altholtz would find prospective investors for Nutmeg's investment funds in exchange for a set percentage fee. R. 46 ¶ 19.² Altholtz was the general partner, principal equity holder, and operator of both Wealth Strategy Partners, LLP (Wealth Strategy), and the Altholtz Family Limited Partnership (AF Partnership). Id. ¶¶ 2-3. Neither Altholtz nor the partnerships he controlled were registered broker-dealers with the Securities and Exchange Commission (SEC) or the Florida Securities Commission. Id. ¶¶ 16-17. Between 2006 and 2008, Nutmeg paid Altholtz a total of $125,995.65 in finder's fees based on the letter agreement. Id. ¶ 21.

In March 2009, the SEC filed suit against Nutmeg and the two individuals - Randall and David Goulding - who had controlled Nutmeg up until then. Id. ¶ 11. Five months later, the judge assigned to the SEC suit appointed Leslie Weiss as the receiver for Nutmeg. Id. ¶ 1 . As a court-appointed receiver, Weiss is authorized to oversee all aspects of Nutmeg's business. Id. ¶ 11.

In April 2010, Weiss filed this suit against Altholtz, based on the Exchange Act of 1934, the Florida Securities Act, and Illinois state law. R.1. After Altholtz moved to dismiss, R.27, Weiss amended the complaint twice. R. 43, R.46. Altholtz has filed a motion to dismiss the Second Amended Complaint, R.51, and that motion is now fully briefed.

II.

Under Federal Rule of Civil Procedure 8(a)(2), a complaint generally need only include "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). This short and plain statement must "give the defendant fair notice of what the claim is and the grounds upon which it rests." Bell Atl. v. Twombly, 550 U.S. 544, 555 (2007). The Seventh Circuit has explained that this rule "reflects a liberal notice pleading regime, which is intended to 'focus litigation on the merits of a claim' rather than on technicalities that might keep plaintiffs out of court." Brooks v. Ross, 578 F.3d 574, 580 (7th Cir. 2009) (quoting Swierkiewicz v. Sorema N.A., 534 U.S. 506, 514 (2002)).

"A motion under Rule 12(b)(6) challenges the sufficiency of the complaint to state a claim upon which relief may be granted." Hallinan v. Fraternal Order of Police Chicago Lodge No. 7, 570 F.3d 811, 820 (7th Cir. 2009). "[W]hen ruling on a defendant's motion to dismiss, a judge must accept as true all of the factual allegations contained in the complaint." Erickson v. Pardus, 551 U.S. 89, 94 (2007); McGowan v. Hulick, 612 F.3d 636 (7th Cir. 2010) (courts accept factual allegations as true and draw all reasonable inferences in plaintiff's favor). A "complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'"

III.

A. Exchange Act

1. Statute of Limitations

As a threshold matter, the Court addresses whether the Exchange Act claims meet the statute of limitations. The Exchange Act provides a number of express causes of action, and with one exception,³ all provide the same statute of limitations period: 1 year after discovery and 3 years after the violation. And although Section 29(b) does not set out a specific statutory limitations period, the Supreme Court instructs that the applicable limitations period should be determined from the most analogous federal statute. Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 362 (1991). Courts in this district have held that the 1-and-3-year statutory periods apply to Section 29(b) claims arising from violations of Section 15(a). E.g., Celsion Corp v. Stearns Mgt. Corp, 157 F.Supp. 2d 942, 947 (N.D. Ill. 2001). And those limitations periods, as relatively short as they are, were chosen by Congress specifically for securities cases. "The statute of limitations in securities fraud cases serves, as we have emphasized in other opinions, important public purposes." Law v. Medco Research, Inc., 113 F.3d 781, 786 (7th Cir. 1997). "Congress wrote inquiry notice into the one-year statute of limitations in that section. Three years is an age in the stock market. If thesuspicious investor had a wide choice of times at which to sue within a three-year period rather than being required to sue no more than one year after the earliest possible date, the opportunistic use of federal securities law to protect investors against market risk would be magnified." Tregenza v. Great American Communications Co., 12 F.3d 717, 722 (7th Cir. 1993).

Altholtz argues that the statute of limitations precludes the Section 29(b) claims for two reasons. First, he argues that some of the purported illegal sales — stretching from 2006 to 2008, according to Weiss — were made over three years before the filing of the complaint. R. 51 at 9. Second, Altholtz's failure to register with the SEC was easily discoverable by looking at the Financial Industry Regulatory Authority's (FINRA) website, which Weiss could have done more than a year before the complaint was filed. Because the discovery rule starts the clock based on "facts a reasonably diligent plaintiff would have known," Altholtz argues that Weiss is barred from bringing a claim. R. 51 at 10-11 (citing Merck & Co., Inc. v. Reynolds, 130 S. Ct. 1784, 1796 (2010)).

Weiss does not dispute Altholtz's interpretation of the limitations period or their applicability to this case.⁴ Instead, she requests that the Court apply the equitable tolling doctrine. R. 54 at 6. Equitable tolling "permits a plaintiff to avoid the bar of the statute of limitations if despite all due diligence he is unable to obtain vitalinformation bearing on the existence of his claim." Cada v. Baxter Healthcare Corp., 920 F.2d 446, 451 (7th Cir. 1990). Weiss explains that based on her diligence in bringing this suit just 9 months following her appointment as Nutmeg's receiver, this Court should toll the limitations period. R. 54 at 6.

But Weiss presents no authority indicating that the appointment of a receiver should permit her to invoke the equitable tolling doctrine. The cases she cites, In re Olsen, 36 F.3d 71 (9th Cir. 1994), and In re Stanwich Fin. Servs. Corp., 29 B.R. 25 (Bankr. D. Conn. 2003), were actions brought by trustees in the bankruptcy context. Altholtz, on the other hand, presents authority where the appointment of a receiver did not trigger equitable tolling. R. 51 at 11 (citing Wuliger v. Christie, 310 F.Supp. 2d 897, 909 (N.D. Ohio 2004) ("There is no basis in law which allows circumvention of the applicable statute of limitations in situations where a non-governmental receiver is appointed by the court.") Although this authority is not directly controlling, other courts have also adopted this line of reasoning. E.g., Friedlob v. Trustees of Alpine Mut. Fund Trust, 905 F.Supp. 843, 853 (D. Colo. 1995) (rejecting argument that equitable tolling would allow receiver to bypass the one-year/three-year limitations period). Therefore, this Court will not exercise its discretion to exercise equitable tolling.

Weiss argues next that the adverse domination doctrine applies here. R.54 at 7. Adverse domination allows the tolling of the statute of limitations "where the entity [to whom the cause of action belonged] is controlled by or dominated by wrongdoers." Freeland v. Enodis Corp., 540 F.3d 721, 741 (7th Cir. 2008) (citing Resolution TrustCorp. v. O'Bear, Overholser, Smith & Huffer, 840 F.Supp. 1270, 1284 (N.D. Ind.1993)). "The rationale behind the adverse domination doctrine is premised upon the principle that officers and directors who have harmed the entity cannot be expected to take legal action against themselves." Freeland, 540 F.3d at 741. But the rationale underlying the doctrine limits its application to suits against the officers and directors who controlled the entity. "It is an equitable doctrine . . . for claims by a corporation against its officers and directors . . ." Lease Resolution Corp. v. Larney, 719 N.E.2d 165, 170 (Ill. App. Ct. 1999) (emphasis added). Weiss has not alleged that the Defendants in this case have ever controlled or dominated Nutmeg. The adverse domination doctrine is inapplicable here. Because the 1-year-from-discovery limitations period applies, Weiss's Exchange Act claims are barred.

2. Failure to State a Claim

For the sake of completeness, the Court will address whether Weiss's Exchange Act claims state a claim. Weiss first alleges that Altholtz failed to register with the Securities and Exchange Commission. R. 46 ¶ 16. Weiss argues that this failure means that Altholtz violated Section 15(a), which provides, in pertinent part:

It shall be unlawful for any broker or dealer . . . to make use of the mails or any means or instrumentality of interstate commerce to effect any transactions in, or to induce or attempt to induce the purchase or sale of, any security . . . unless such broker or dealer is registered in accordance with subsection (b) of this section.

15...