Zurich Capital Markets, Inc. v. Coglianese, 03 C 7960.

Decision Date23 September 2004
Docket NumberNo. 03 C 7960.,03 C 7960.
Citation388 F.Supp.2d 847
PartiesZURICH CAPITAL MARKETS INC., et al., Plaintiffs, v. Michael COGLIANESE, et al., Defendants.
CourtU.S. District Court — Northern District of Illinois

David P. Sanders, Terence George Banich, II, Chadwick O. Brooker, Jenner & Block, LLC, Chicago, IL, Philippe Z. Selendy, Alan B. Vickery, Stephen A. Larson, Frank C. Moore, III [PhV], Howard Vickery, Boies, Schiller and Flexner LLP, New York, NY, Courtney R. Rockett, Boies, Schiller & Flexner LLP, Armonk, NY, for Plaintiffs.

Mark H. Carnow, Grippo & Elden, John Donovan Lien, Robert Montell Stephenson, Nathaniel Lee Strup, Foley & Lardner, Barry Francis Macentee, Hinshaw & Culbertson, Peter Vincent Baugher, Jason M. Rosenthal, Schopf & Weiss, Gerald Haberkorn, Robert Hill Smeltzer, Martin W. McManaman, Lowis & Gellen, Chicago, IL, Sheldon H. Elsen, John J. Montone, Orans, Elsen & Lupert, LLP, New York, NY, for Defendants.

MEMORANDUM OPINION AND ORDER

ST. EVE, District Judge.

This is a securities fraud action against multiple defendants in connection with Plaintiffs' investment in an allegedly fraudulent scheme executed by Defendants through M.J. Select Global Fund, Ltd. ("M.J.Select"), a Bahamian mutual fund. The Court previously addressed the motions to dismiss filed by multiple Defendants. See Zurich Capital Markets Inc. v. Coglianese, et al., No. 03 C 7960, 2004 WL 1881782 (N.D.Ill. Aug.2, 2004) (the "August 2, 2004 Opinion"). In this opinion, the Court rules on the issues raised by Defendants Oceanic Bank and Trust Limited, Kenneth Clowes, and Terah Rahming (collectively, the "Oceanic Defendants") in their motion to dismiss.

The Oceanic Defendants have moved to dismiss ZCM's Amended Complaint pursuant to Federal Rules of Civil Procedure 12(b)(1), 12(b)(2) and 12(b)(6). Defendants claim that the Court lacks subject matter jurisdiction over the Amended Complaint and personal jurisdiction over each of the Oceanic Defendants. They also argue that ZCM lacks standing to assert the claims, and that the Amended Complaint is untimely and fails to state a claim upon which relief can be granted. As discussed in detail below, Defendants' motion is granted in part and denied in part.

BACKGROUND

Plaintiffs allege that the Oceanic Defendants and their co-Defendants engaged in a complex scheme to defraud Plaintiffs out of over $24 million. The details of the alleged fraud are set forth in the Court's August 2, 2004 Opinion and will not be repeated here.

I. Factual Allegations

Plaintiff Zurich Capital Markets Inc. ("ZCM Inc.") is a Delaware corporation and was one of the world's largest custodians of hedge funds. Plaintiff ZCM Matched Funding Corp., a Delaware corporation, ("ZCM MFC") is a wholly owned subsidiary of ZCM Inc., and specializes in the offering and sale of derivative instruments. ZCM Bermuda is a Bermuda corporation and an affiliate of ZCM Inc. that operates as a holding company for offshore investments. Plaintiff ZCM Asset Holding Company LLC ("ZCM Asset") is a Delaware corporation and a wholly owned subsidiary of ZCM Inc. that operates as a holding company for offshore investments. Collectively, Plaintiffs are referred to as "ZCM."

Defendant Oceanic is the administrator, registrar, and transfer agent of M.J. Select, with its principal place of business in the Bahamas. ZCM alleges that Oceanic transacted business through its agents in Illinois, and had systematic and continuous contacts with Illinois. (Id.)

Defendant Terah Rahming, a citizen of the Bahamas, was a director of M.J. Select and was employed by Oceanic as the Manager of the Funds Department. ZCM alleges that Rahming transacted business through her agents in Illinois and had systematic and continuous contacts with Illinois.

Defendant Kenneth Clowes, also a citizen of the Bahamas, was a director of M.J. Select and the Chief Operating Officer of Oceanic. ZCM alleges that he transacted business through his agents in Illinois, and had systematic and continuous contacts with Illinois, in his role as M.J. Select Director and Oceanic's Chief Operating Officer.

A. Oceanic's Role in the Scheme

ZCM alleges that the Oceanic Defendants were integral to the fraudulent scheme carried out by all of the defendants in connection with the investment scheme in M.J. Select. Plaintiffs allege that Oceanic became administrator, registrar and transfer agent of M.J. Select in 1998. In that role, Oceanic was responsible for the day-to-day administration of M.J. Select, including the transfer of assets into and out of M.J. Select and the processing of redemption requests.

Asset Allocation Fund, L.P. ("Asset Allocation") was M.J. Select's first and largest investor. Martin James Capital Management, Inc. ("Martin James") served as the general partner of Asset Allocation, and Martin Allamian was the sole owner and principal of Martin James. Martin James also invested two other partnerships under its control — M.J. Diversified Fund, L.P. ("MJD") and M.J. Financial Arbitrage, L.P. ("MJFA") — in M.J. Select.

ZCM alleges that Oceanic appointed M.J. Select's board of directors in 1999. It named its employees — Defendants Rahming and Clowes — as the sole directors. In this capacity, Rahming and Clowes assumed control over M.J. Select.

B. The Assignment Recognition Letter

As discussed in detail in the August 2, 2004 Opinion, in May 2000, ZCM MFC entered into a call option transaction with Asset Allocation which was a derivative instrument. Under the terms of the call option, ZCM MFC agreed to accept an assignment of Asset Allocations' interests in various investments, including M.J. Select, MJD and MJFA, as an initial premium payment to acquire the option transaction. Before ZCM MFC would accept this assignment, however, it required, among other things, a written confirmation from Oceanic that it would recognize the assignments and ZCM MFC as the sole owner of 100% of the interests in these entities formerly held by Asset Allocation. In response, Coglianese arranged for Rahming to sign the confirmation on behalf of M.J. Select and Oceanic.

The confirmation — referred to as an "assignment recognition letter" — allegedly fraudulently induced ZCM into investing millions of dollars into M.J. Select. ZCM alleges that the May 31, 2000 "assignment recognition letter" falsely represented that Oceanic would recognize ZCM MFC as the sole owner of 100% of the shares in M.J Select that had previously been invested under the name of Asset Allocation. They further allege that Oceanic and Rahming falsely represented that ZCM MFC "as sole owner ... will have all of the rights and privileges that normally accompany such ownership." In addition, ZCM alleges that Rahming and Oceanic fraudulently omitted that M.J. Select had a discriminatory redemption policy and that ZCM's share interests were not effectively redeemable consistent with the offering documents.

Based, in part, on the assignment confirmation letter, ZCM MFC accepted an assignment of Asset Allocations interests in M.J. Select, MJD and MJFA. In 2001, ZCM instructed Oceanic to redeem its interests in M.J. Select. Contrary to its representations, Oceanic did not redeem ZCM's shares. Instead, Oceanic honored subsequently submitted redemption requests made on behalf of co-defendants Coglianese's and Martin James' friends, family and business associates. ZCM still has not received its redemptions.

II. The 2001 ZCM Action

On August 14, 2001, ZCM Bermuda filed a securities fraud action against Oceanic and various other defendants (the "2001 Action"). The 2001 Action was based on the defendants' "fraudulent offering, conversion, and transfer of limited partnership interests" in MJD, MJFA and M.J. Select. ZCM Bermuda alleged that Oceanic "affirmatively represented in the offering documents that the partnership interests and shares would be readily redeemable on short notice, and Plaintiff relied upon those representations of liquidity in making its investments."

Count I of the 2001 Action alleged that Oceanic and other defendants misrepresented that the plaintiff's shares in M.J. Select were redeemable within 30 days written notice. They alleged that defendants, including Oceanic, instead intended to control, convert, and transfer the plaintiff's interests regardless of Plaintiff's redemption demands.

On October 10, 2001, ZCM Bermuda filed an amended complaint adding ZCM, Inc., ZCM Matched Funding Corp. and ZCM Asset Holding Company LLC as plaintiffs to the 2001 Action and numerous defendants to that case. In addition, plaintiffs alleged in the amended complaint that Oceanic, with two of its co-defendants, controlled M.J. Select. On January 1, 2002, ZCM filed a second amended complaint in the 2001 Action.

On March 25, 2002, Judge Lindberg granted Oceanic's motion to dismiss the second amended complaint in the 2001 ZCM Action. The court dismissed the case with respect to Oceanic with prejudice on the ground that ZCM had failed to plead the Rule 10b-5 claim against Oceanic with particularity pursuant to Rule 9(b) and had failed to plead scienter under the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4(b) (the "PSLRA"). The court further found that ZCM had failed to plead that Oceanic had a duty to disclose.

On August 30, 2002, the 2001 Action was transferred to this Court. See 766347 Ontario Ltd. v. Zurich Capital Markets, Inc., 249 F.Supp.2d 974 (N.D.Ill.2003) for a discussion of the case.

ANALYSIS
I. Legal Standards

The Oceanic Defendants bring this motion pursuant to Rules 12(b)(1), 12(b)(2) and 12(b)(6). A Rule 12(b)(1) motion to dismiss tests the federal jurisdiction of a complaint. See Fed.R.Civ.P. 12(b)(1). Plaintiffs bear the burden of proving the existence of subject matter jurisdiction. Int'l Harvester Co. v. Deere & Co., 623 F.2d 1207, 1210 (7th Cir.1980). In analyzing a ...

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