238 F. Supp. 3d 1046
N.D. Ill.2017Background
- Between 2008 and 2011 plaintiffs William Howe and D&D Auto Resort purchased ReadOz membership units after solicitations by defendant Alexandr Shchekin. Purchases occurred in 2008 (D&D), 2009 (Howe), and April 8, 2011 (Howe).
- Plaintiffs allege Shchekin made misrepresentations and omissions about ReadOz’s growth and failed to disclose that the units were unregistered, that purchasers had to be accredited, and that ReadOz purportedly accepted minimum investments of $50,001 per its earlier Regulation D filing.
- Howe asserted a federal claim under §10(b)/Rule 10b-5 based on the April 8, 2011 purchase; both plaintiffs asserted a state-law common-law fraud claim based on all investments.
- Defendant moved to dismiss under Rule 12(b)(6), arguing (inter alia) that many alleged misstatements/omissions are time-barred by the five-year statute of repose, that the federal claim fails to meet Rule 9(b) and PSLRA pleading requirements (specificity and scienter), and that the court should relinquish supplemental jurisdiction over state claims.
- The court dismissed with prejudice Count I to the extent it relied on misrepresentations before October 1, 2010 (five-year repose), dismissed the remainder of the §10b-5 claim without prejudice for failure to satisfy PSLRA/Rule 9(b), and declined supplemental jurisdiction over the state-law fraud claim (dismissed without prejudice). Plaintiffs were given leave to amend by a date certain.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Applicability of five-year statute of repose to pre‑2010 misrepresentations | Howe sought application of a "continuing fraudulent scheme" to make earlier misrepresentations timely | Repose runs from date of the misrepresentation; continuing-scheme theory improperly erodes repose | Court rejected continuing-scheme theory; pre‑Oct‑1‑2010 misrepresentations barred (dismissed with prejudice) |
| Pleading sufficiency under Rule 9(b) and PSLRA for remaining §10b‑5 allegations | Howe contended omissions/actions (no prospectus, unregistered securities, unaccredited investor, $50k minimum) support claim | Such allegations are not pleaded with required particularity and do not establish specific misleading statements or a strong inference of scienter | Court found allegations deficient under PSLRA/Rule 9(b); dismissed remaining §10b‑5 claim without prejudice |
| Scienter requirement under PSLRA | Howe alleged intentional conduct generally | Defendant argued plaintiff failed to plead facts creating a strong, cogent inference of intent to defraud | Court held plaintiff's conclusory scienter allegations insufficient under Tellabs; no strong inference of scienter shown |
| Supplemental jurisdiction over state common‑law fraud claim after dismissal of federal claim | Plaintiffs wanted state claims to proceed in federal court | Defendant argued court should decline to exercise supplemental jurisdiction | Court declined supplemental jurisdiction and dismissed state-law fraud claim without prejudice |
Key Cases Cited
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (plausibility pleading standard applies)
- Ashcroft v. Iqbal, 556 U.S. 662 (legal conclusions insufficient for pleading)
- Merck & Co. v. Reynolds, 559 U.S. 633 (statute of repose under §1658 governs securities fraud claims)
- Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350 (equitable tolling not available for similar repose-like bars)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (PSLRA scienter inference standard)
- Stoneridge Inv. Partners, LLC v. Scientific‑Atlanta, 552 U.S. 148 (elements of a §10b‑5 claim)
- O'Gorman v. City of Chicago, 777 F.3d 885 (plaintiff can plead himself out of court by alleging facts establishing no relief)