Has Cap. v. Ill. Sec. Dep't of Sec'y of St.

230 N.E.3d 182

2023 IL App (1st) 230002

HAS CAPITAL, LLC; HAS Capital Advisors, LLC; HAS Capital Income Opportunity Fund I, LLC; HAS Capital Income Opportunity II, LLC; HAS Capital Income Opportunity Fund, LLC; HASCAP Investments, LLC; HASCAP Investments Trust; HASCAP Investments Trust II; HASCAP International, LLC; HAS Capital MMA Fund II, LLC; Agre ??? Platform JV, LLC; Agre ??? Platform Reit, LLC; AMS Family Holdings, LLC; Agre ??? TRS, LLC; Linway RE, LLC; Colonial Home Sales, LLC; Alpine RE, LLC; Paradise RE, LLC; and Weatherstone RE, LLC, Plaintiffs,

v.The ILLINOIS SECURITIES DEPARTMENT OF THE SECRETARY OF STATE of the State of Illinois, Defendant-Appellee.

(HAS Capital, LLC; HAS Capital Advisors, LLC; HAS Capital Income Opportunity Fund I, LLC; HAS Capital Income Opportunity II, LLC; HAS Capital Income Opportunity Fund, LLC; HASCAP Investments, LLC;

HASCAP Investments Trust; HASCAP Investments Trust II; HASCAP International, LLC; HAS Capital MMA Fund II, LLC; AMS Family Holdings, LLC; and Colonial Home Sales, LLC, Plaintiffs-Appellants).

No. 1-23-0002

Appellate Court of Illinois, First District, Third Division.

Filed December 13, 2023

Appeal from the Circuit Court of Cook County. No. 10 CH 11691, Honorable Thaddeus L. Wilson, Judge, presiding.

Harris L. Kay and William E. Walsh, of Davis Wright Tremaine LLP, of Chicago, for appellants.

Kwame Raoul, Attorney General, of Chicago (Jane Elinor Notz, Solicitor General, and Evan Siegel, Assistant Attorney General, of counsel), for appellee.

OPINION

JUSTICE LAMPKIN delivered the Judgment of the court, with opinion.

¶ 1 Plaintiffs, HAS Capital, LLC, and 18 other entities (collectively, the HAS entities), filed a complaint seeking a declaratory judgment to quash a subpoena issued to their bank by defendant, the Illinois Securities Department of the Secretary of State (Department). The Department moved for summary judgment, and the circuit court granted summary judgment in favor of the Department.

¶ 2 On appeal, plaintiffs argue that (1) the doctrine of res judicata barred the issuance of the subpoena and (2) the subpoena was invalid because its scope was unreasonable and the information it sought was not relevant to the Department’s investigation.

¶ 3 For the reasons that follow, we affirm the judgment of the circuit court.¹

¶ 4 I. BACKGROUND

¶ 5 In February 2014, plaintiff HAS Capital Advisors, LLC, created plaintiff HAS Capital Income Opportunity Fund I, LLC (Fund), a hedge fund that raised more than $19 million over the next four years. Acting as investment advisors, HAS Capital Advisors, LLC, and other related entities sought to secure investments through the sale of securities in the Fund, including limited liability interests.

¶ 6 In 2010, the Department began investigating whether the Fund and others violated the Illinois Securities Law of 1953 (Act) (815 ILCS 5/1 et seq. (West 2018)), by selling unregistered securities in the Fund. The Department’s investigation of the financial activities of the Fund and related entities was prompted by information that Fund management may have engaged in "related-party transactions" with Fund insiders—individuals or other entities who controlled the other funds. The Department was aware that such transactions, which can benefit insiders at the expense of investors, can defraud investors if not disclosed and conducted on fair terms.

¶ 7 During its investigation, the Department obtained evidence of at least three such related-party transactions. One transaction involved a loan to Eric Decator, an attorney acting as general counsel for the HAS Capital, LLC, investment vehicles. A second possible loan of $1.7 million was made to Stephen A. Wheeler, HAS Capital, LLC’s managing director, chairman, and chief executive officer. And a third loan was made to Adam Peterson, who provided asset valuation and investment analysis services to HAS Capital, LLC.

¶ 8 Besides the related-party transactions, the Department investigated the Fund’s failure to provide audited financial statements to investors, per the Fund’s written representations in a placement memorandum. The investigation further focused on the Fund’s failure to make a final distribution of assets despite its stated intent to remain active only through March 2019.

¶ 9 In August 2019, the Department served on BMO Harris Bank, which is not a party to this case, a subpoena requesting information and records regarding the identification of accounts maintained or controlled by some of the HAS entities, Wheeler, and Decator, along with the account opening agreements on those accounts. Specifically, the subpoena sought a list of any and all accounts maintained by the bank since January 2014 for seven entitles (HAS Capital, LLC; HAS Capital Interests, LLC; HAS Capital Partners, LLC; HAS Capital Advisors, LLC; HASCAP Acquisitions; HASCAP Investments Trust; and the Fund) and two individuals (Wheeler and Decator). In addition, the subpoena sought a list of accounts for which either Wheeler or Decator were signatories. The subpoena also requested a copy of the opening account agreements for the preceding accounts.

¶ 10 In October 2019, the HAS entities moved the circuit court to quash the subpoena. Between December 2019 and March 2020, the Department moved to strike that motion, arguing that the Code of Civil Procedure (Code) (735 ILCS 5/1-101 et seq. (West 2018)) required the HAS entities to file a complaint, not Just a motion to quash. Between May and June 2021, the HAS entities filed an amended motion to quash, and the Department moved to strike and dismiss that motion, arguing that the HAS entities again violated the Code by failing to state a cause of action against the Department In June 2021, the circuit court granted the Department’s motion, interpreting the amended motion to quash as a complaint and giving the HAS entities until July 2021 to file an amended complaint.

¶ 11 In July 2021, the HAS entities filed an amended complaint seeking a declaratory judgment, claiming that the Department went "rogue" and that the subpoena had no legitimate purpose. In February 2022, the Department moved for summary judgment, arguing that it was authorized under the Act to issue administrative subpoenas to facilitate its investigations and that the subpoena issued to BMO Harris Bank was valid. The HAS entities responded, arguing in part that a separate determination by the Secretary of State (Secretary) in April 2022 against HAS Capital Advisors, LLC, the Fund, Wheeler, and Keith Cooper (prohibition order) following an administrative hearing precluded the Department from pursuing this subpoena based on res judicata principles. The Department replied, arguing that res judicata did not apply and the subpoena was proper.

¶ 12 On November 2, 2022, the circuit court granted the Department’s motion for summary judgment, concluding that res judicata did not bar the subpoena due to a lack of identity between the issues and parties. The circuit court also held that the Department’s "contemplated proceedings f[e]ll within its authority under the Act," the scope of the subpoena was reasonable, and the information sought was relevant to the Department’s investigation.

¶ 13 The HAS entities appealed.

¶ 14 II. ANALYSIS

[1–3] ¶ 15 This court reviews de novo the circuit court’s grant of summary judgment. Williamson v. Evans Nails & Spa Corp., 2023 IL App (1st) 220084, ¶ 5, 468 Ill.Dec. 452, 220 N.E.3d 1231. The circuit court’s grant of "[s]ummary judgment is appropriate where the pleadings, depositions, admissions, and affidavits show that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law." (Internal quotation marks omitted.) Hawkins v. Capital Fitness, Inc., 2015 IL App (1st) 133716, ¶ 10, 390 Ill.Dec. 510, 29 N.E.3d 442; see 735 ILCS 5/2-1005 (West 2020). On de novo review, this court may affirm the circuit court’s grant of summary judgment "on any basis apparent in the record, regardless of, whether [it] relied on that basis or whether [its] reasoning was correct." Shared Imaging, LLC v. Hamer, 2017 IL App (1st) 152817, ¶ 13, 416 Ill.Dec. 416, 84 N.E.3d 398. This court also reviews de novo a circuit court’s decision on whether the doctrine of res judicata precludes a claim. Hayashi v. Illinois Department of Financial & Professional Regulation, 2014 IL 116023, ¶ 45, 388 Ill.Dec. 878, 25 N.E.3d 570.

[4] ¶ 16 The Act, which the Department administers, protects individuals "who may be induced to invest [their money] in speculative enterprises over which they have little control." Van Dyke v. White, 2019 IL 121452, ¶ 47, 433 Ill.Dec. 153, 131 N.E.3d 511. Given this protective purpose, courts liberally interpret the Act to prevent fraud in the sale of stocks, bonds, and other securities, construing the meaning of a "security" broadly. Id.; Carpenter v. Exelon Enterprises Co., 399 Ill. App. 3d 330, 334, 337, 340 Ill.Dec. 29, 927 N.E.2d 768 (2010) (discussing the Act’s "paternalistic" intent to protect unwary investors); Boatmen’s Bank v. Durham, 203 Ill. App. 3d 921, 926, 148 Ill.Dec. 900, 561 N.E.2d 206 (1990) (court liberally construes the Act "to protect *** public from deceit").

¶ 17 Relevant here, the Act’s antifraud provisions apply to investment advisers, including federally covered investment advisers. 815 ILCS 5/12(J) (West 2020). And the Secretary may suspend, revoke, or deny the registration of both securities firms and individuals and may prohibit the activities of, or fine, firms or individuals that violate the Act. Id. §§ 8(E)(1), 11, 12. To facilitate the ability to determine whether such steps are necessary, section 11 of the Act grants the Secretary the authority to investigate, issue subpoenas, conduct administrative hearings, and refer potential criminal violations to prosecutors. Id. § 11(D)(1). The Department is part of the Secretary’s office and, as the Secretary’s agent, is authorized under the Act to issue subpoenas and...