Zurich Capital Markets Inc. v. Coglianese

332 F.Supp.2d 1087

ZURICH CAPITAL MARKETS INC., et al., Plaintiffs, v. Michael COGLIANESE, et al., Defendants.

No. 03 C 7960.

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

August 2, 2004.

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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, 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.

Plaintiffs commenced this action against Defendants alleging violations of Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b), Rule 10b-5 promulgated thereunder, the Investment Advisers Act of 1940, 15 U.S. §§ 80b-6 and 80b-15, and various state law claims. Plaintiffs base their claims on an alleged fraudulent investment scheme carried out by Defendants through a Bahamian mutual fund called M.J. Select Global Fund, Ltd.

Defendants¹ have moved to dismiss this securities fraud amended complaint pursuant to Federal Rules of Civil Procedure 12(b)(1), 12(b)(6) and 9(b). They also seek to dismiss Plaintiffs' federal securities law claims for failure to comply with the mandates of the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4(b). As discussed in detail below, the motions are granted in part and denied in part.

BACKGROUND

Plaintiffs allege that Defendants engaged in a complex scheme to defraud Plaintiffs out of over $24 million. They contend that Defendants orchestrated an elaborate scheme to defraud ZCM and other investors out of millions of dollars by fraudulently inducing Plaintiffs to invest in highly risky and illiquid funds, while defrauding Plaintiffs into believing that they were actually investing in an extremely safe and liquid fund.

I. The Parties

Plaintiff Zurich Capital Markets Inc. ("ZCM Inc.") is a Delaware corporation and was one of the world's largest custodians of hedge funds. (R. 15-1, Am.Compl.¶ 21.) 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. (Id. ¶ 24.) Plaintiff ZCM Bermuda is a Bermuda corporation and an affiliate of ZCM Inc. that operates as a holding company for offshore investments. (Id. ¶ 22.) 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. (Id. ¶ 23.) (collectively, the Plaintiffs are referred to as "ZCM.")

A. The Coglianese Defendants

Defendant Michael Coglianese ("Coglianese") is a certified public accountant licensed under the Illinois Public Accounting Act. (Id. ¶ 25.) Defendant Michael Coglianese, CPA, PC is an Illinois professional corporation of which Coglianese is the President, Secretary and sole owner. (Id. ¶ 26.) Gina Coglianese, Coglianese's wife, is a bookkeeper. (Id. ¶ 31.)

Defendant CCS Financial Services, Inc. f/k/a Commodity Compliance Services, Inc. ("CCS Inc."), is an Illinois corporation controlled by Coglianese. Gina Coglianese is the President and sole record owner of CCS, Inc. (Id. ¶ 27.) Defendant Commodity Compliance Services, International, Ltd. ("CCS Int'l") is a Bahamian corporation organized by Coglianese, David Lunn and John Burrows. (Id. ¶ 28.) (collectively, MC C.P.A., CCS Inc., and CCS Int'l are referred to as the "Coglianese Accounting Entities").

Defendant GLC Services, Corp., a/k/a GLC Services, Inc. f/k/a CCS Financial Services, Inc. ("GLC Services") is an Illinois corporation engaged in the business of making investment referrals for a fee and selling modified Microsoft software products. (Id. ¶ 30.) Gina Coglianese is the President and Secretary of GLC Services. (Id. ¶ 31.) (collectively, the Court refers to these Defendants as the "Coglianese Defendants").

B. The Oceanic Defendants

Defendant Oceanic is the administrator, registrar, and transfer agent of M.J. Select, with its principal place of business in the Bahamas. (Id. ¶ 32.) 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. (Id. ¶ 33.) ZCM alleges that Rahming transacted business through her agents in Illinois and had systematic and continuous contacts with Illinois. (Id. ¶ 33.)

Defendant Kenneth Clowes, also a citizen of the Bahamas, was a Director of M.J. Select and the Chief Operating Officer of Oceanic. (Id. ¶ 34.) 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. (Id. ¶ 34.) (Collectively, Oceanic, Rahming and Clowes, are referred to as the "Oceanic Defendants.") (Id. ¶ 35.)

C. The Vorisek Defendants

Defendant Vorisek & Company LLC is an Illinois limited liability company. (Id. ¶ 36.) Defendant Jeffrey Allen Vorisek, a certified public accountant licensed under the Illinois Public Accounting Act, founded Vorisek & Co. (Collectively, the Court refers to Vorisek and Vorisek & Co. as the "Vorisek Defendants"). (Id. ¶ 37.)

D. The Landmark Defendants

Defendant Relms Limited ("Relms") is a Bahamian corporation owned by David Lunn, a citizen of the Bahamas and employee of the New World Group. (Id. ¶¶ 43, 44.) Lunn incorporated Relms on or about February 20, 1998. (Id.) Relms' directors were Ambassador Directors Limited, followed by Marcus Mahy and other officers or directors of Landmark Bermuda or its affiliated law firm. (Id.)

Defendant Millennium Fund I, Ltd. ("Millennium") is a foreign investment company organized by David Lunn under the laws of the Commonwealth of the Bahamas. From its February 27, 1998 incorporation until approximately April 2000, Millennium's principal place of business was that of its administrator, Landmark Monaco in Monte Carlo, Monaco. (Id. ¶ 40.) From April 2000 to at least November, 2003, its principal place of business was located in Bermuda.

Defendant Global Arbitrage Development Limited ("GAD") is a foreign investment company, originally organized under the laws of the British Virgin Islands in 1995, and re-organized in or about February 2001 under the laws of the Commonwealth of the Bahamas. (Id. ¶ 39.) Ambassador Directors Limited and then John Caseley and Ian Ledger served as its directors. (Id. ¶ 39.)

Defendant Landmark Management, S.A.M. ("Landmark Monaco") is the successor-in-interest to New World Trust Corporation, NWT Gestion S.A.M. ("New World Monaco"), and provides administrative services to various off-shore funds including GAD and Millennium. (Id. ¶ 45.) Defendant Landmark Trust (Bermuda) Limited ("Landmark Bermuda") provides administrative services to various off-shore funds including Millennium and Relms with its principal place of business in Bermuda. (Id. ¶ 48.)

Defendant Ambassador Directors Limited ("Ambassador") is a present or former director of GAD and Millennium. Defendants Caseley, Ledger and/or Mahy were its directors. (Id. ¶ 50.)

Defendant John Caseley is a citizen and resident of Monaco. (Id. ¶ 46.) He is a principal of Landmark Monaco and former employee of the New World Group. Caseley also serves as a director of GAD, and a present or former director, principal, agent or representative of Millennium. (Id. ¶ 46.)

Defendant Ian Ledger is a citizen and resident of Monaco. He serves as the President of Landmark Monaco, a director of GAD and a present or former director, principal, agent or representative of Millennium. (Id. ¶ 47.)

Defendant Marcus J. Mahy ("Mahy") is a citizen and resident of Bermuda. He is the President and Managing Director of Landmark Bermuda, and a director of Millennium and Relms. (Id. ¶ 49.)

(Collectively, Defendants Relms, Millennium, Mahy, Landmark Bermuda, Caseley, Ambassador, Ledger and Landmark Monaco are the "Landmark Defendants.")

II. M.J. Select Global, Ltd. ("M.J.Select")

On February 3, 1994, Coglianese sent a letter to Lunn directing him to form M.J. Select as a multi-unit fund, with minimum capitalization, and to provide directors for M.J. Select. (¶ 81.) As a result, on approximately February 7, 1994, M.J. Select was incorporated, at the direction of Coglianese, under the International Business Companies Act of the Commonwealth of the Bahamas. (Id. ¶ 82.) Initially, two corporations served as M.J. Select's directors. (Id. ¶ 83.) In 1999, Rahming and Clowes served as M.J. Select's directors. (Id.)

Asset Allocation Fund, L.P. ("Asset Allocation") was M.J. Select's first and largest investor. (Id. ¶ 94.) Martin James Capital Management, Inc. ("Martin James") served as the general partner of Asset Allocation. (Id. ¶ 77.) Martin Allamian, a personal friend and business associate of Coglianese, was the sole owner and principal of Martin James. (Id. ¶ 77.) 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. (Id. ¶ 94.)

Plaintiffs allege that Coglianese essentially directed and ran M.J. Select. They contend that M.J. Select's administrator...