Elipas et al v. Jedynak et al

Filing 432

MEMORANDUM OPINION signed by the Honorable John F. Grady on 5/5/2011. Mailed notice(cdh, )

07-3026.111-RSK

May 5, 2011

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
DR. JAMES ELIPAS, et al.,
Plaintiffs,
v.
JAMES K. JEDYNAK, B. GAIL HOWARD,
SCOTT H. CUMMINGS, et al.,
Defendants.

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No. 07 C 3026

MEMORANDUM OPINION
Before the court are: (1) the Elipas Plaintiffs’ motion for
partial summary judgment against defendant Betty Gail Howard; and
(2) the Elipas Plaintiffs’ and the King Plaintiffs’ renewed motions
for partial summary judgment against defendant Scott H. Cummings.1
For the reasons explained below we grant the Elipas Plaintiffs’
motion against Howard and grant in part, and deny in part, the
plaintiffs’ renewed motions for partial summary judgment against
Cummings.

1/
The “King Plaintiffs” consist of plaintiffs Brian A. King, Janice
Migon, Rosa and Tony Perez, Andrew Bennett, Larry J. Liebovich Living Trust,
Ronald Riegelhaupt, David Spinney, Joseph Lanzito, John Ohk, Adam and Dina
Skinner, P&P Holdings, Inc. and Claddagh Holdings, Inc. The King Plaintiffs
intervened in this lawsuit approximately six months after it was originally filed
by the “Elipas Plaintiffs:” James Elipas, Martha Ault, Wayne P. Endre, Katherine
H. Endre, JS Squared, LLC, Cuzins Four, LLC, Lewis Carrozza, Ivo Cozzini, John
Pavlopoulos, Thomas Pavlopoulos, and Dennis Pavlopoulos.

- 2 -

BACKGROUND
On March 26, 2010 we denied the plaintiffs’ motions for
summary judgment on their Illinois Securities Law claims against
Cummings.

Elipas v. Jedynak, No. 07 C 3026, 2010 WL 1286795, *7

(N.D. Ill. Mar. 26, 2010) (hereinafter, “Elipas I”).

We will

assume that the reader is familiar with that opinion, as well as
our opinion granting in part the King Plaintiffs’ motion for
partial summary judgment against Cummings’ co-defendant, Betty
Gail Howard.

See Elipas v. Jedynak, No. 07 C 3026, 2010 WL 1611024

(N.D. Ill. Apr. 20, 2010) (hereinafter, “Elipas II”).

At a status

hearing on April 14, 2010 we granted plaintiffs’ oral request to
“supplement” the summary judgment record, and we later gave the
Elipas Plaintiffs leave to file a motion for summary judgment
against Howard.

These matters are now fully briefed.

But before

addressing the plaintiffs’ motions, it will be helpful to briefly
revisit our previous rulings.
1.

Elipas I

Plaintiffs’

complaints

allege

that

Unified

Worldwide

Transport, LLC’s (“UWT”) offering materials were “riddled with
false statements concerning the company’s performance.”
2010 WL 1286795, *5.

Elipas I,

But in their original summary judgment

motions against Cummings plaintiffs did not seek to prove those
false statements.
theories.

Id.

Instead, they relied on two alternative

First, plaintiffs sought to hold Cummings liable as a

- 3 -

“controlling person” for the scheme perpetrated by Cummings’ codefendants, James Jedynak and Howard, whereby certain plaintiffs
were induced to pay Jedynak’s company (KKJ Holdings) for UWT
interests based upon Howard’s misrepresentation that KKJ Holdings
would remit the proceeds to UWT.

Id. at *3, *5; see also Elipas

II, 2010 WL 1611024, *2-4. Those plaintiffs were misled to believe
that they were investing directly in UWT when, in fact, Howard and
Jedynak were reselling their own UWT interests and using the
proceeds for personal expenses and unrelated investments.

Elipas

I, 2010 WL 1286795, *3; Elipas II, 2010 WL 1611024, *2.
theory,

rejected

plaintiffs’

grounds.

First, the plaintiffs failed to establish that they had

complied

with

Illinois

as

applied

Securities

Law’s

to

notice

necessary element of their rescission claims.
1286795, *4; see also 815 ILCS 5/13(B).

Cummings,

on

We
two

provision,

a

Elipas I, 2010 WL

Second, we concluded that

the parties genuinely disputed whether Cummings “acted in concert”
with Howard and Jedynak to make the fraudulent sales.

Elipas I,

2010 WL 1286795, *5.

Although Cummings generally supported and

encouraged

and

Jedynak’s

Howard’s

fund-raising

efforts,

concluded that the after-market sales were different.

we

Id. at *5

(“The fact that Cummings encouraged Howard and Jedynak to sell
interests in UWT does not necessarily show that he even tacitly
approved of secondary-market sales that did not benefit him or the
company in any way.”).

- 4 -

Plaintiffs also attempted to prove that Cummings violated the
Illinois

Securities

Law

by

failing

concerning UWT’s predecessor entities.

to

disclose

Id. at *6.

information
We concluded

that those omissions were not “so obviously important to an
investor that reasonable minds [could not] differ on the question
of materiality.”

Id. (quoting TSC Industries, Inc. v. Northway,

Inc., 426 U.S. 438, 450 (1976)).

We based our decision in large

part on the plaintiffs’ failure to cite relevant authority and to
address the omissions in context.

Id. (“[I]t is not clear to us

how relevant those previous operations were in late 2004 and early
2005, when plaintiffs invested in the company.”).
2.
In

Elipas II
Elipas

II

we

partially

granted

the

King

Plaintiffs’

unopposed motion for summary judgment against Howard, who has
invoked her Fifth Amendment privilege against self-incrimination.
That motion largely mirrored the theories that the plaintiffs
relied on in their motion against Cummings, except that Howard
played a direct role in the alleged fraud.

We held that the five

plaintiffs who paid KKJ Holdings for their UWT interests at
Howard’s direction were entitled to summary judgment on their Rule
10b-5 claims against her.

Elipas II, 2010 WL 1611024, *6.2

The

2/
Those plaintiffs are Andrew Bennett, Brian King, Joseph Lanzito, Janice
Migon, and P&P Holdings.
We mistakenly awarded summary judgment to Patrick
Shannon, Jr., see Elipas II, 2010 WL 1611024, *6, who was named as a plaintiff
in the King Plaintiffs’ original complaint but does not appear as a plaintiff in
their amended complaint. Shannon is a principal of plaintiff P&P Holdings, and
he was acting on that entity’s behalf in his interactions with Howard. We denied

- 5 -

same evidence supported those plaintiffs’ Illinois Securities Law
claims, except that the plaintiffs failed to establish that they
had provided the required notice to rescind the sales. Id. at *5.3
The remaining plaintiffs paid UWT directly for their interests.
Id.

The King Plaintiffs also sought to show that Howard was liable

for omitting information about UWT’s predecessor entities.

We

denied plaintiffs’ motion insofar as it was predicated on those
omissions for the same reasons we rejected the same argument with
respect to Cummings.

Id. at *5.
DISCUSSION

A.

Legal Standard
“The court shall grant summary judgment if the movant shows

that there is no genuine dispute as to any material fact and the
movant is entitled to judgment as a matter of law.”
P. 56(a).

Fed. R. Civ.

In considering such a motion, the court construes the

evidence and all inferences that reasonably can be drawn therefrom
in the light most favorable to the nonmoving party.

See Pitasi v.

Gartner Group, Inc., 184 F.3d 709, 714 (7th Cir. 1999).

“Summary

judgment should be denied if the dispute is ‘genuine’:

‘if the

plaintiff David Spinney’s motion because he failed to show that Howard and/or
Jedynak told him that KKJ Holdings would transfer his investment to UWT. See
Elipas II, 2010 WL 1611024, *2 n.4. Spinney has since submitted an unopposed
declaration stating that Jedynak and Howard did make that misrepresentation.
(See Spinney Decl. (02/04/2011) ¶ 4.) On that basis, he is also entitled to
judgment on his Rule 10b-5 claim against Howard.
3/

We gave these plaintiffs leave to file affidavits supporting their
assertions that they complied with § 13(B)’s notice requirement. They have not
done so.

- 6 -

evidence is such that a reasonable jury could return a verdict for
the nonmoving party.’”

Talanda v. KFC Nat’l Mgmt. Co., 140 F.3d

1090, 1095 (7th Cir. 1998) (quoting Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 248 (1986)).

The court will enter summary

judgment against a party who does not “come forward with evidence
that would reasonably permit the finder of fact to find in [its]
favor on a material question.” McGrath v. Gillis, 44 F.3d 567, 569
(7th Cir. 1995).
B.

The Elipas Plaintiffs’ Motion for Summary Judgment Against
Howard
The “Elipas Plaintiffs” consist of eleven individuals, but

evidently only five of those plaintiffs have obtained relief from
the stay imposed by Howard’s bankruptcy to pursue their claims in
this court.

(See Elipas Pls.’ Mot. for Leave to File Summ. J.

Against Betty Gail Howard ¶ 6; see also id. at 2-3 (requesting
leave for James Elipas, John Pavlopoulos, Thomas Pavlopoulos,
Dennis Pavlopoulos, and Ivo Cozzini to file a summary judgment
motion against Howard).)4

Nevertheless, a § 12(G) violation by

Howard is relevant to Cummings’ liability as a “controlling person”
under the Illinois Securities Law. See 815 ILCS 5/12(G) (making it
illegal

"[t]o

obtain

money

or

property

through

the

sale

of

securities by means of” material misstatements or omissions); id.

4/
The motion itself purports to be brought on behalf of those five
plaintiffs plus Wayne and Katherine Endre. But evidently the Endres have not
obtained relief from the stay.

- 7 -

at 5/13(A) (making “controlling persons,” among others, liable for
sales violating the Illinois Securities Law).

Therefore, we will

address each plaintiffs’ claims below, even though fewer than all
the plaintiffs are seeking (or are permitted to seek in this case)
relief from Howard.
1.

Rule 10b-5

Securities

and

Exchange

Commission

Rule

10b-5

makes

it

unlawful: “(a) To employ any device, scheme, or artifice to
defraud, (b) To make any untrue statement of a material fact or to
omit to state a material fact necessary in order to make the
statements made, in the light of the circumstances under which they
were made, not misleading, or (c) To engage in any act, practice,
or course of business which operates or would operate as a fraud or
deceit upon any person, in connection with the purchase or sale of
any security.”

17 CFR § 240.10b-5.

against

the

Howard

plaintiffs

To prevail on their claim

“must

prove

(1)

a

material

misrepresentation or omission by the defendant; (2) scienter; (3)
a connection between the misrepresentation or omission and the
purchase

or

sale

of

a

security;

(4)

reliance

upon

the

misrepresentation or omission; (5) economic loss; and (6) loss
causation.”

Stoneridge Inv. Partners, LLC v. Scientific-Atlanta,

552 U.S. 148, 157 (2008).
a.

Howard’s Misrepresentations and Omissions

- 8 -

Before discussing plaintiffs’ evidence in detail, we note
that some plaintiffs rely on documents that they received from
Jedynak (not Howard) to support their motion for summary judgment.
Whether or not Howard kept Jedynak in the dark about the company’s
actual

performance,

as

he

claimed,5

the

undisputed

evidence

supports the conclusion that Howard was the primary source for the
information he conveyed to investors about UWT.

Howard was UWT’s

President and CEO, a member of its two-person executive committee,
and by all accounts the individual closest to the company’s day-today operations.

(See King Pls.’ Stmt. (Howard) ¶ 9.)

“voice-over-internet-protocol”

(“VoIP”)

business,

UWT’s

described

in

various materials provided to investors, was her brainchild.
(Cummings Dep. at 20-22.) Jedynak evidently played no role in the
company’s operations, and was retained solely to sell securities.
(See, e.g., Cummings Dep. at 46-47.)

Insofar as the materials he

provided to investors were materially false, the evidence supports
the conclusion that Howard was responsible for their falsity.

Our

conclusion is bolstered by the “‘inference (permissible in a civil
case) of guilt’ from her refusal to participate in this litigation
on Fifth Amendment grounds.”

Elipas II, 2010 WL 1611024, *2

(quoting SEC v. Lyttle, 538 F.3d 601, 604 (7th Cir.2008)).
Even if Howard was not primarily liable for the contents of
the materials Jedynak distributed to investors, the record amply

5/

(See Letter from J. Jedynak to "UWT Investors," dated Jan. 23, 2008,
attached as Ex. 1 to Elipas Aff.)

- 9 -

supports control person liability under Section 20(a) of the 1934
Exchange Act.6

Jedynak was employed as an agent of UWT to sell

securities. (See Cummings Dep. at 46-47; see also Jedynak’s Answer
to Pls.’ Compl. ¶ 16 (“Jedynak further admits that he was employed
by UWT during the relevant time period and was authorized to act as
its agent.”).)

As UWT’s President and CEO, and a member of its

Executive Committee, Howard controlled UWT.

See 17 C.F.R. §

240.12b-2 (“The term ‘control’ (including the terms ‘controlling,’
‘controlled

by’

and

‘under

common

control

with’)

means

the

possession, direct or indirect, of the power to direct or cause the
direction of the management and policies of a person, whether
through

the

ownership

of

voting

securities,

by

contract,

or

otherwise.”). Consequently, Howard had direct or indirect power to
direct Jedynak’s activities, and she has, through her silence,
forfeited any good-faith defense she might have had. See 15 U.S.C.
§ 78t; see also Lyttle, 538 F.3d at 604.
(1) James Elipas
Before making his first $750,000 investment in February 2004
Elipas received an “External Business Forecast” showing a net
operating loss of $210,089 during the period June 2003 through

6/
Section 20(a) provides that “[e]very person who, directly or
indirectly, controls any person liable under any provision of this chapter or of
any rule or regulation thereunder shall also be liable jointly and severally with
and to the same extent as such controlled person to any person to whom such
controlled person is liable . . . unless the controlling person acted in good
faith and did not directly or indirectly induce the act or acts constituting the
violation or cause of action.” 15 U.S.C.A. § 78t.

- 10 -

October 2003.

(Elipas Pls.’ Stmt. ¶ 9.)

According to plaintiffs’

calculations UWT actually “lost $2,041,431.63” during that time
(See Elipas Pls.’ Stmt. of Supp. Facts in Supp. of Mot.

period.
for

Summ.

J.

Against

Scott

Cummings

and

(hereinafter, “Elipas Pls.’ Stmt.) ¶ 10.)7

Betty

Gail

Howard

Plaintiffs’ figure

includes a large “settlement expense,” which was non-recurring.
(See Profit & Loss Statement June through October 2003, attached as
Ex.

2

to

Collins

Aff.,

at

2.)

Undisclosed

expenses

not

attributable to the company’s operations do not necessarily make
the company’s reported operating-income figures misleading.

(For

reasons we will discuss later in this opinion, the decision not to
disclose
reasons.)

the

“settlement

expense”

is

significant

for

other

But even if we exclude the settlement expense, UWT’s

actual operating losses were significantly higher than reported in
the External Business Forecast.

A reasonable jury could only

conclude that the discrepancy was material.
v.

Northway,

Inc.,

426

U.S.

438,

450

TSC Industries, Inc.

(1976)

(“Only

if

the

established omissions [or misstatements] are so obviously important
to an investor that reasonable minds cannot differ on the question
of materiality is the ultimate issue of materiality appropriately
resolved as a matter of law by summary judgment.”) (citations and

7/

Plaintiffs did not retain an accountant to perform this calculation,
but their attorney states that he calculated UWT's actual performance using UWT's
own data and the commercial accounting software that UWT itself used. (Collins
Aff., attached as Ex. 15 to Elipas Pls.’ Stmt., ¶¶ 1-7.) His calculations are
roughly consistent with the financial statements that an accounting firm reviewed
for UWT in early 2004. (See Cummings Decl. ¶ 9; Financial Statements (Reviewed),
attached as Ex. 8 to Cummings Decl.) Cummings has not objected to plaintiffs’
calculations, and Howard has not responded at all.

- 11 -

internal quotation marks omitted).

This is fundamental investing

information that — if properly disclosed — would have significantly
altered the “total mix of information” available to investors.
Rowe v. Maremont Corp., 850 F.2d 1226, 1233 (7th Cir. 1988)
(citations and internal quotation marks omitted).
Elipas also received UWT’s “Business Plan,” dated August 2003,
and the company’s Amended and Restated Operating Agreement.
Plaintiffs renew their argument that these documents improperly
omitted information concerning UWT’s predecessor entities. We
previously concluded that the plaintiffs had not satisfied their
burden to show that there was no genuine dispute that the omissions
were material.

Elipas I, 2010 WL 1286795, *6; Elipas II, 2010 WL

1611024, *5. The Elipas Plaintiffs’ supplemental materials provide
much of the context that was missing from the plaintiffs’ original
motions.

They also cite for the first time relevant, persuasive

authority.

In Securities and Exchange Commission v. Merchant

Capital, LLC, 483 F.3d 747, 770-71 (11th Cir. 2007), the defendant
did not disclose his personal bankruptcy, which flowed from the
failure of a prior business, despite touting his credentials as the
former CEO of that business. The Eleventh Circuit Court of Appeals
held that it was clear error for the district court to conclude
that the omission was immaterial.

“Knowledge of [the defendant’s]

previous bankruptcy clearly would have been helpful to a reasonable
investor

assessing

the

quality

and

extent

of”

his

business

experience. Id. at 771. The Merchant Capital court relied in part

- 12 -

on Securities Exchange Commission v. Carriba Air, Inc., 681 F.2d
1318 (11th Cir. 1982), which is more directly pertinent to this
case.

There, the defendant formed a commuter airline business one

month after his previous commuter airline endeavor went bankrupt.
Id. at 1320. Despite the similarity of the two businesses, and the
fact that they employed “virtually all” the same principals, the
defendants did not fully disclose the prior business’s failure in
the new company’s prospectus.
affirming

the

district

Id.; see also id. at 1323.

court’s

decision

granting

the

In

SEC’s

preliminary injunction motion, the court held that “there can be no
doubt of the materiality of the errors and omissions in the
prospectus.”

Id. at 1324.

We now conclude that the Business Plan omitted material
information.

As in Carriba Air, UWT and its predecessors were

engaged in the same business. Howard was the driving force behind,
and Cummings was a substantial investor in, both companies.

The

predecessor entities lost money, see Elipas I, 2010 WL 1286795, *1,
but the Business Plan does not discuss or even mention them.
Instead, the document refers repeatedly to Howard’s previous and
purportedly successful company, “Northstar.”

These statements

create the false impression that Northstar was Howard’s most recent
experience relevant to the VoIP business.

Moreover, UWT had

continuing obligations stemming from the predecessor entities’
activities.

First, UWT executed “settlement agreements” with

investors in those entities in July 2003, before the date of the

- 13 -

Business Plan.8

The fact that UWT’s principals believed that

disgruntled investors in the predecessor entities might sue UWT
would be important to prospective investors in the new company.
And whether or not the proceeds of plaintiffs’ investments were
actually used to fund those settlement agreements, it is undisputed
that Cummings and Howard contemplated that they would be used for
that purpose. (Cummings Decl. ¶ 9.) Second, although the Business
Plan states that “debt repayment” was one of the reasons UWT was
seeking new investors, it did not disclose that the debt included
loans that Cummings made to UWT’s predecessor entities, which UWT
assumed after it was formed.

(See Business Plan at 42; Cummings

Decl. ¶ 5 (stating that the predecessor entities’ debt to Cummings
was “consolidated into UWT up on the expressed advice of counsel at
Loeb & Loeb”).)

The Business Plan creates the impression that UWT

was a start-up company, which was only partially true.

It was

formed in June 2003, but it carried on a business started before
that time.
8/
Cummings’ declaration is vague about the timing of these agreements —
he refers, for example, to a draft letter UWT’s in-house counsel sent to him in
November 2003. (Cummings Decl. ¶ 9; Email from R. Sherman to S. Cummings, dated
November 18, 2003, attached as Ex. 7 to Cummings Decl.; see also Cummings Dep.
at 29 ("The settlement agreement was drafted and, I believe, completed sometime
in late 2003.").)
That letter, which gave investors in UWT's predecessor
entities the opportunity to purchase equity in UWT, refers to preexisting
“repayment” agreements. (See Email from R. Sherman to Cummings, dated November
18, 2003, attached as Ex. 7 to Cummings Decl. (attaching the "UWT Opportunity
Letter".) Those “repayment” agreements are evidently the “settlement agreements”
discussed in UWT's Executive Committee Minutes and its reviewed Financial
Statements. (See Executive Committee Minutes, dated Jan. 8, 2004, attached as
Ex. 38 to King Pls.’ Rule 56.1 Stmt. (DKT #362), at "Topic 5;" Financial
Statements (Reviewed), attached as Ex. 8 to Cummings Decl., at 6.)
Those
documents indicate that the settlement or “repayment” agreements were executed
in July 2003. (See also UWT Capitalization Table, attached as Ex. 1 to Cummings
Decl., at 1 (showing “Settlement Liability” to investors in UWT’s predecessor
entities as of July 31, 2003).)

- 14 -

The Amended and Restated Operating Agreement does not describe
the company’s history, nor would one expect a document of this kind
to do so.

But in the absence of some other document or statement

disclosing the predecessor entities’ existence, the “Holder Loans”
disclosure in § 3.7 is misleading. (Amended and Restated Operating
Agreement, dated Oct. 31, 2003, § 3.7.) Section 3.7 indicates that
the Cummings Family Loving Trust and Agile Partners LP (Cummings’
hedge fund) had loaned money “to the Company.”

Cummings’

(Id.)

loans to UWT’s predecessor entities account for some or all of the
outstanding balance of those loans ($1,712,429 “as of July 1,
2003").

(Id.)

But that fact was not disclosed to Elipas and other

investors.
Elipas made a second investment in UWT on December 8, 2004 in
the amount of $600,000.

(Elipas Aff. ¶ 28.)

Prior to that

investment he received more materials from Howard and Jedynak
indicating that the company was profitable and predicting continued
success: (1) a UWT “Corporate Profile: Executive Summary,” dated
October 2004; (2) a “Confidential Presentation,” dated November
2004; and (3) a “Condensed Profit and Loss Statement” purporting to
show

actual

figures

for

January

through

September

2004,

and

projected figures for the balance of the year. (Elipas Aff. ¶¶ 3035.)

Like

the

Business

Plan,

the

Corporate

Profile

and

the

Confidential Presentation tout Howard’s success with Northstar, and
draw an even more direct connection between that company and UWT.
(See Corporate Profile, dated October 2004, attached as Ex. 11 to

- 15 -

Elipas

Aff.

(Howard
telecom

international

“is

replicating

service

her

business,

prior

NorthStar,

successful
which,

as

President/CEO, Ms. Howard sold in 2001 for a significant ROI.”);
Confidential Presentation, dated November 2004, attached as Ex. 12
to Elipas Aff. (“Ms. Howard was President and CEO of Northstar, a
$3 million startup, which in four years was sold for $340 million
in 2001.”).)

Neither the Corporate Profile, nor the Confidential

Presentation, disclosed Howard’s more recent experience with UWT’s
predecessor entities.

The Condensed Profit and Loss Statement

shows net operating income of approximately $797,000 for the first
nine months of 2004. The Elipas Plaintiffs calculate a net loss of
$235,931.24 for the same period based on financial records obtained
in

discovery.

(See

Corrections

to

Collins

Aff.

¶

1-2.)

A

significant portion of the loss that plaintiffs calculate is
depreciation and interest.

The existence of those expenses does

not necessarily make the disclosed figures for “operating income”
misleading.
Condensed

That said, even if we exclude those expenses the

Profit

and

Loss

Statement

significantly

overstated

operating income. (Id. at Ex. 10 (showing $193,115.52 of “ordinary
income” for the period January to September 2010, compared with the
$797,000 of “operating income” disclosed in the Condensed Profit
and Loss Statement).9

9/

Plaintiffs argue that UWT’s actual losses were much higher, citing
purportedly fictitious income entries in 2005. (Corrections to Collins Aff. ¶
2.)
While those entries may be questionable, plaintiffs have not cited any
evidence indicating that the Condensed Profit and Loss Statement — which purports
to show actual figures for 2004 — includes fictitious income.

- 16 -

Jedynak told Elipas that he had not received any distributions
from UWT, despite its success, because the company was reinvesting
in its network. (Elipas Aff. ¶ 29.) That representation is echoed
in the Corporate Profile.

(Corporate Profile, dated Oct. 2004, at

7 (stating that the company was placing revenues in a reserve
account “to be reinvested to expand UWT’s global VoIP network,”
among other uses).)

And it also appears in a letter that Howard

sent to Elipas, dated November 23, 2004, enclosing a distribution
check of $3,806.00.
2004,

attached

(Letter from Howard to Elipas, dated Nov. 23,

as

Ex.

10

to

Elipas

Aff.

“substantially” increased infrastructure).)

(touting

UWT’s

In 2007 Howard listed

more than $18 million of personal property on UWT’s bankruptcy
schedules, including equipment and licenses; UWT’s creditors have
been able to locate only $9,000 worth of used equipment.
Pls.’ Stmt. ¶ 8.)

(Elipas

Given the amount of time that elapsed between

Elipas’ second investment and UWT’s bankruptcy, it is possible that
Jedynak’s and Howard’s statements were true in 2004.

But viewing

the scheme as a whole, that possibility seems unlikely.
Also prior to Elipas’ second investment Jedynak and Howard
told

Elipas

that

Caterpillar.”

UWT

had

signed

a

“lucrative

(Elipas Pls.’ Stmt. ¶ 15.)

contract

with

Howard later claimed

that Caterpillar owed UWT approximately $10 million for VoIP
services.

(Trans.

of

Howard’s

Testimony

at

341(a)

attached as Ex. 16 to Elipas Pls.’ Stmt., at 55-56.)

Hearing,

Caterpillar

has no record of any dealings with UWT whatsoever. (Anderson Aff.,

- 17 -

attached as Ex. 12 to Elipas Pls.’ Stmt., ¶¶ 2-4 (sworn statement
of Caterpillar’s Payables Section Manager).) A document purporting
to assign a VoIP contract between Caterpillar and another entity to
UWT is evidently a forgery.

(Banwart Aff., attached as Ex. 11 to

Elipas Pls.’ Stmt., ¶¶ 2-6 (sworn statement of a Caterpillar
executive stating that he did not sign, nor did he authorize anyone
else to sign, the assignment that purports to bear his signature).)
The

existence

of

a

contract

with

important to a reasonable investor.
by

the

contract,

a

relationship

a

major

customer

would

be

Besides the revenue generated
with

a

large,

established

corporation like Caterpillar would be seen as a sign that UWT was
itself successful and dependable.
(b)

John, Thomas, and Dennis Pavlopoulos

John Pavlopoulos purchased UWT interests on January 31, 2004
for $250,000, with a check payable to UWT.

(T. Pavlopoulos Aff.

(05/04/2010), attached as Ex. 2 to Elipas Pls.’ Stmt.,

¶ 6.)10

Before doing so the Pavlopouloses received from Jedynak the same
External Business Forecast that Jedynak had given Elipas.

(Id.)

As we previously discussed, that document materially misstated
UWT’s actual losses.

Thomas Pavlopoulos purchased UWT interests

from KOR Venture, LLC for $100,000 in August 2004. (T. Pavlopoulos
Aff. (02/28/2009), attached as Ex. 16 to King Pls.’ Mot. for

10/

Thomas Pavlopoulos, the affiant, is John Pavlopoulos’ son.
(T.
Pavlopoulos Aff. ¶ 6.) He states in his affidavit that he, his father, and his
brother Dennis each received materials from Howard and Jedynak concerning UWT.
(See, e.g., id. at ¶¶ 6-10, 14-16.)

- 18 -

Partial Summ. J. Against Howard, ¶ 4.)11

By that time, Kellogg &

Andelson had completed its review of UWT’s financials, which showed
a $2.9 million loss for the period ending December 31, 2003.
one

disclosed

that

information

to

Pavlopoulos Aff. (05/04/2010) ¶ 15.)

the

Pavlopouloses.

No
(T.

Instead, Jedynak and Howard

continued to tell them that UWT was profitable, even though
expenses continued to exceed revenues during the first seven months
of 2004.

(T. Pavlopoulos Aff. (05/04/2010) ¶ 17; Corrections to

Aff. of Michael R. Collins, ¶ 1 (UWT’s financial records show a
loss of $334,760.89 for the period January 1, 2004 through July 31,
2004, taking into account depreciation and interest expenses).).
In April 2005 John Pavlopoulos wired $125,000 to KKJ Holdings,
LLC, which included his own $75,000 investment and his son Dennis’s
$50,000 investment. (J. Pavlopoulos Aff. (02/28/2009), attached as
Ex. 15 to the King Plaintiffs’ Rule 56.1 Stmt. (DKT # 382), ¶ 4; D.
Pavlopoulos Aff. (02/28/2009), attached as Ex. 17 to the King
Plaintiffs’ Rule 56.1 Stmt. (DKT # 382), ¶ 4.)

Thomas separately

purchased additional UWT interests for $75,000 that same month,
also

by

payment

to

KKJ

Holdings.

(02/28/2009), attached as Ex. 16, ¶ 4.)

(T.

Pavlopoulos

Aff.

Jedynak misrepresented

that those payments would be forwarded to UWT.

(T. Pavlopoulos

Aff. (05/04/2010) ¶¶ 26-27)); see Elipas II, 2010 WL 1611024, *2
11/
“The private right of action under Section 10(b) and Rule 10b-5 reaches
beyond statements and omissions made in a registration statement or prospectus
or in connection with an initial distribution of securities and creates liability
for false or misleading statements or omissions of material fact that affect
trading on the secondary market.”
In re Burlington Coat Factory Securities
Litigation, 114 F.3d 1410, 1417 (3d Cir. 1997) (footnote omitted).

- 19 -

(“A reasonable investor would consider it important that his or her
investment would be used for the personal expenses and investments
of

the

company’s

operations.”).

agents,

and

not

to

fund

the

company’s

Jedynak and Howard also touted UWT’s nonexistent

relationship with Caterpillar.

(T. Pavlopoulos Aff. (05/04/2010)

¶ 21 (stating that Jedynak and Howard told the Pavlopouloses and
other investors that Caterpillar was a “huge customer of UWT,” had
given UWT “$5,000,000 in equipment to use,” and was “bringing
$4,000,000 per month in revenue to UWT”).)
(c)

Ivo Cozzini

Cozzini purchased UWT securities in January and April 2005 for
$200,000 total.
Holdings

at

(Elipas Pls.’ Stmt. ¶¶ 36-38.)

Jedynak’s

and

Howard’s

direction,

He paid KKJ
both

of

whom

misrepresented that KKJ Holdings would transmit the money to UWT.
(Id. at ¶ 38; see also Cozzini Aff. (10/04/2009) at 1-2 (stating
that in connection with each investment he received a letter from
Howard reassuring him that KKJ Holdings would transmit the money to
UWT).) Prior to his April 2005 investment, Howard and Jedynak also
told Cozzini about the “lucrative” (but nonexistent) Caterpillar
deal.

(Elipas Pls.’ Stmt. ¶ 3.)

Cozzini also received the

Corporate Profile, the Confidential Presentation, the Amended and
Restated Operating Agreement, and the Condensed Profit and Loss
Statement. (Cozzini Aff. “#2" ¶¶ 6-7.) Those documents, too, were
materially misleading.

See supra.

(d) JS Squared, LLC and Cuzins Four, LLC

- 20 -

JS Squared purchased UWT interests on January 5, 2005 ($25,000
payment to UWT) and February 5, 2005 ($25,000 payment to KKJ
Holdings); Cuzins Four purchased UWT interests on February 5, 2005
($25,000 payment to UWT).12

(Elipas Pls.’ Stmt. ¶ 27.)

JS Squared

and Cuzins Four received from Jedynak the Corporate Profile, the
Confidential Presentation, the Amended and Restated Operating
Agreement, and the Condensed Profit and Loss Statement.

(Miceli

Aff. ¶ 7); see supra.
(e) Katherine and Wayne Endre
Katherine and Wayne Endre separately purchased UWT securities
in February 2005, for $100,000 and $200,000 respectively. (Aff. of
K. Endre, attached as Tab 5 to Elipas Pls.’ Stmt., ¶ 2; Aff. of W.
Endre, attached as Tab 6 to Elipas Pls.’ Stmt., ¶ 3.)

Jedynak told

the Endres that Caterpillar was a large UWT customer.

(FBI

Questionnaire, attached as Ex. 1 to Aff. of K. Endre, ¶ 12 (Jedynak
told the Endres that Howard “had brought in Caterpillar and other
big names in industry”); FBI Questionnaire, attached as Ex. 1 to
Aff. of W. Endre, ¶ 21 (“Caterpillar was a huge selling point.
said

Caterpillar

customer.”).)

was

on

board

and

currently

their

He

largest

The Endres also received the Corporate Profile, the

Confidential Presentation, and the Amended and Restated Operating
Agreement.

(K. Endre Aff. ¶ 4; W. Endre ¶

4); see supra.

(f) Lewis Carrozza

12/

JS Squared and Cuzins Four have a common manager, Jerry Miceli.
(Miceli Aff. ¶ 2.)

- 21 -

Lewis Carrozza purchased UWT securities in January 2005 for
$100,000 with a check payable to KKJ Holdings at Jedynak’s and
Howard’s direction.
Pls.’ Aff., ¶ 2.)

(Carrozza Aff., attached as Tab 7 to Elipas

Howard falsely represented that the proceeds of

Carrozza’s investment would be transferred “[u]pon receipt” to UWT.
(Id.; see also Letter from G. Howard to L. Carrozza, dated Jan. 7,
2005, attached as Ex. 2 to Aff. of L. Carrozza.) Carrozza also
received

the

Corporate

Operating Agreement.

Profile

and

the

Amended

and

Restated

(Carrozza Aff. ¶ 4.)

(g) Martha Ault
Martha Ault purchased UWT securities for $200,000 in January
2005.
Ault

(Elipas Pls.’ Stmt. ¶ 25.)
did

not

investment.

receive

any

Unlike her co-investors, Martha

documents

in

conjunction

with

her

Indeed, she states in her FBI questionnaire that she

had “no idea” what UWT was.
representation

that

she

She invested based only on Jedynak’s

“would

make

a

lot

of

money.”

(FBI

Questionnaire, attached as Ex. 1 to Aff. of M. Ault, ¶ 4.)

Vague

optimism about a company’s prospects is not actionable. Eisenstadt
v. Centel Corp., 113 F.3d 738, 746 (7th Cir. 1997) (“Mere sales
puffery is not actionable under Rule 10b-5.”). And plaintiffs have
not articulated any other basis to require defendants to disclose
non-public information about the company.

See Gallagher v. Abbott

Laboratories, 269 F.3d 806, 808-09 (7th Cir. 2001) (“[F]irms are
entitled to keep silent (about good news as well as bad news)

- 22 -

unless positive law creates a duty to disclose.”).

We conclude

that Ault has not proven a material false statement or omission.
b.

Scienter

Plaintiffs must prove that Howard made the misrepresentations
with the “intent to deceive, demonstrated by knowledge of the
statement[s]’ falsity or reckless disregard of a substantial risk
that

the

statement[s]

[were]

false.”

Higginbotham

Intern., Inc., 495 F.3d 753, 757 (7th Cir.2007).

v.

Baxter

Scienter may be

proven by circumstantial evidence, and we may also consider the
“‘inference (permissible in a civil case) of guilt’ from her
refusal to participate in this litigation on Fifth Amendment
grounds.”

Elipas II, 2010 WL 1611024, *2 (quoting SEC v. Lyttle,

538 F.3d 601, 604 (7th Cir. 2008). The evidence supports the
conclusion that Howard: (1) approved of, and participated in, the
scheme to divert payments intended for UWT; (2) knew that UWT was
losing money even as she and Jedynak told investors that the
company was very profitable; (3) knew that the company was not
investing in infrastructure to expand is VoIP business; and (4)
deliberately fabricated UWT’s contract with Caterpillar.
d.
To

Connection to the Sale of Securities
establish

a

“connection”

between

the

omissions

and

misrepresentations and the sale of securities “[i]t is enough that
the scheme to defraud and the sale of securities coincide.” SEC v.
Zandford, 535 U.S. 813, 822 (2002).

Howard’s and Jedynak’s

misrepresentations and omissions were an integral part of their

- 23 -

efforts to solicit investments.

The “scheme” was designed to sell

securities.
e.

Reliance and Transaction Causation

The record supports plaintiffs’ contention that they relied on
Howard’s misrepresentations and omissions before investing in UWT.
(Elipas Pls.’ Stmt. ¶¶ 44-45.)

Cummings contends that Elipas did

not rely on any of the offering materials, citing a portion of
Elipas’ deposition where he states that he relied on Jedynak’s
recommendation.

(See Elipas Dep., attached as Ex. 6-E to Cummings

Decl., at 17.)

But there is no dispute that Elipas received the

documents in question, and he states in his affidavit that he
relied on them in deciding to invest.

(Elipas Aff. ¶ 7.)

We do

not think that the purported discrepancy between his affidavit and
his deposition testimony creates a genuine dispute of material
fact.

It is a reasonable inference that each plaintiff relied at

least in part on Jedynak’s and/or Howard’s “recommendation.”

That

does not mean that they did not also rely on the misleading
materials underlying their sales pitch.
To show transaction causation the plaintiff must provide
“proof that a knowledgeable investor would not have made the
investment in question, had she known all the facts.” Ray v.
Citigroup Global Markets, Inc., 482 F.3d 991, 995 (7th Cir.2007).
The plaintiffs plausibly state that they would not have invested in
UWT but for Howard’s misrepresentations and omissions.
Pls.’ Stmt. ¶¶ 44-45.)

(Elipas

Neither Howard nor Cummings has cited any

- 24 -

evidence that would give us a reason to disbelieve plaintiffs’
testimony.
f.

Economic Loss and Loss Causation

When

UWT

entered

interests were worthless.
for

a

few

small

investments.
loss.

Id.

Id.

bankruptcy

in

June

2007,

plaintiffs’

Elipas II, 2010 WL 1611024, *3.

distributions,

plaintiffs

lost

their

Except
entire

We conclude that plaintiffs have shown economic

We previously held that Howard’s and Jedynak’s scheme

to divert funds intended for UWT was a substantial factor in UWT’s
demise.

Id.; see also Miller v. Asensio & Co., Inc., 364 F.3d 223,

231-32 (4th Cir.2004) (a plaintiff proves Rule 10b-5 liability by
showing that the defendant’s fraud was a substantial cause of
plaintiff’s losses, even if it was not the sole cause); Caremark,
Inc. v. Coram Healthcare Corp., 113 F.3d 645, 649 (7th Cir.1997) (a
plaintiff may adequately plead loss causation without alleging
“that all of its loss can be attributed to the false statement of
the defendant”).

And if UWT had been as profitable as Howard and

Jedynak had represented it to be, it is reasonable to infer that
plaintiffs would have received some return on their investments.
See LHLC Corp. v. Cluett, Peabody & Co., Inc., 842 F.2d 928, 931
(7th Cir.1988) (“‘Loss causation’ means that the investor would not
have suffered a loss if the facts were what he believed them to
be.”).

It is ordinarily the plaintiff’s burden to isolate the

effects of fraud from other factors that may have contributed to
the loss.

Id.

Here, Howard’s decision not to participate in the

- 25 -

litigation in any meaningful way complicates an already difficult
task.

Id.

Under these circumstances, we will again “shift the

burden to Howard to show that other factors besides her fraud
contributed to UWT’s demise.”

Elipas II, 2010 WL 1611024, *4.

Because “there is no evidence in the record that would support a
finding that some other factor besides Howard’s fraud contributed
to plaintiffs’ losses,” we conclude that Howard’s fraud was the
sole cause of those losses.
damages

is

the

amount

of

Id.

The appropriate measure of

plaintiffs’

investment

less

any

distributions they may have received.
In sum, we conclude that Elipas, the Pavlopouloses, and
Cozzini are entitled to summary judgment on their Rule 10b-5 claims
against Howard.
Endre,

Wayne

JS Squared, LLC, Cuzins Four, LLC, Katherine

Endre,

and

Lewis

Carrozza

have

proven

a

10b-5

violation, although they are not entitled to a judgment against
Howard while the bankruptcy stay remains in place.

We conclude

that Martha Ault, who also has not obtained relief from the
bankruptcy stay, did not rely on a material misstatement or
omission.
2.

Illinois Securities Law

Plaintiffs allege that the defendants have violated Illinois
Securities Law § 12(G), making it illegal “[t]o obtain money or
property through the sale of securities by means of any untrue
statement of a material fact or any omission to state a material
fact necessary in order to make the statements made, in light of

- 26 -

the circumstances under which they were made, not misleading.” 815
ILCS 5/12(G).

The elements of a § 12(G) claim mirror the elements

of a Rule 10b-5 claim, except that the plaintiff is not required to
prove scienter (see Foster v. Alex, 572 N.E.2d 1242, 1245 (Ill.
App. 1991)) and loss causation (see Lucas v. Downtown Greenville
Investors L.P., 671 N.E.2d 389, 398-400 (Ill. App. 1996)).

It

follows from our conclusion that Howard violated Rule 10b-5 that
she also violated § 12(G).
A plaintiff who proves a violation of the Illinois Securities
Law is entitled to rescind the securities sale and recover the
purchase price from,
the issuer, controlling person, underwriter, dealer or
other person by or on behalf of whom said sale was made
. . . and in case the issuer, controlling person,
underwriter or dealer is a corporation or unincorporated
association or organization, each of its officers and
directors (or persons performing similar functions) who
shall have participated in making the sale.
815 ILCS 5/13(A).

Howard was a “controlling person,” a “person by

or on behalf of whom said sale was made,” and an officer of the
issuer who “participated in making the sale.” Plaintiffs were also
required to notify Howard of their intention to rescind within 6
months after learning that the sale was voidable.

Id. at § 13(B).

Illinois courts have held that “the time for notice begins to run
not from the time of knowledge of the underlying facts, but rather
from the time of knowledge that those facts give rise to a right of
rescission.”

Reshal Associates, Inc. v. Long Grove Trading Co.,

754 F.Supp. 1226, 1236 (N.D.Ill. 1990) (collecting cases).

The

- 27 -

Pavlopouloses learned for the first time in early 2007 that UWT was
in

serious

financial

trouble,

despite

Howard’s

and

Jedynak’s

assurances that the company was very profitable.

They contacted

their

a

attorney

investigation.

in

March

2007,

who

conducted

preliminary

Their attorney states that he then concluded that

his clients had been defrauded, and sent a notice to Howard
rescinding the Pavlopouloses’ purchases on April 12, 2007.

The

Pavlopouloses referred Elipas and Cozzini to their attorney in May
2007, who sent rescission notices on their behalf to Howard on May
22, 2007. The notices were sent within six months after plaintiffs
learned that they had a right to rescind their purchases.

The

Pavlopouloses, Elipas, and Cozzini are entitled to rescission
against Howard.
C.

The Elipas and King Plaintiffs’ Renewed Motions for Summary
Judgment Against Scott Cummings
In their previous motions against Cummings plaintiffs asked us

to decide fact-intensive questions in a virtual vacuum. See Elipas
I, 2010 WL 1286795, *6.

As we have just discussed, we now have a

better sense for the context in which the defendants’ made their
misstatements

and

denying

he

that

investors.

omissions.
knew

what

Cummings
Jedynak

and

generally
Howard

responds
were

by

telling

For the reasons explained below, we do not think this

is sufficient to defeat summary judgment with respect to at least
some of the challenged investments.
1.

Violations of Rule 12(G)

- 28 -

We have already held that the Elipas Plaintiffs (except Martha
Ault) have established § 12(G) violations.

In Elipas I held that

the sales to Andrew Bennett, Brian King, Joseph Lanzito, Janice
Migon, and P&P Holdings violated § 12(G) based on the KKJ Holdings
fraud.

In light of our ruling with respect to UWT’s predecessor

entities, those plaintiffs have also established § 12(G) violations
based on the defendants’ failure to disclose information about
those entities.

(See A. Bennett Decl. (01/18/11) ¶¶ 3-6; B. King

Decl. (01/19/11) ¶¶ 3-6; J. Lanzito Decl. (01/18/11) ¶¶ 3-6; J.
Migon Decl. (01/23/11) ¶¶ 3-6; P. Shannon Jr. Decl. (01/20/11) ¶¶
4-7).)

For the same reason, the remaining King Plaintiffs, whose

motions we denied because they were not predicated on the KKJ
Holdings fraud, have also established § 12(G) violations.

(See L.

Liebovich (01/19/11) ¶¶ 3-6; J. Ohk Decl. (01/26/11) ¶¶ 3-6; T.
Perez Decl. (01/26/11) ¶¶ 3-6; P. Shannon Sr. Decl. (01/__/11) ¶¶
4-7;

A.

Skinner

and

D.

Skinner

Decl.

(01/27/11)

¶¶

3-6;

R.

Riegelhaupt Decl. (01/__/11) ¶¶ 3-6; D. Spinney Decl. (02/04/11) ¶¶
6, 8, 13-16.).)
2.

Control Person Liability

Section 13(A) of the Illinois Securities Law provides that
“controlling person[s]” are liable to purchasers for sales that
violate the Law.

815 ILCS 5/13(A).

“In case of unincorporated

issuers” — UWT is a limited liability company — “‘controlling
person’ means any person offering or selling a security, or group
of persons acting in concert in the offer or sale of a security,

- 29 -

who directly or indirectly controls the activities of the issuer.”
815 ILCS 5/2.4.

As one half of UWT’s executive committee, which

had “sole and complete charge and management of all the business
and affairs of the Company, in all respects and all matters,”
(Amend. and Restated Operating Agreement of UWT, attached as Ex. 7
to Elipas Aff., at §§ 6.1.1 and 6.1.4), we conclude that Cummings
“control[led] the activities of the issuer.”
2010 WL 1286795, *5.

See also Elipas I,

There is no evidence that Cummings himself

offered or sold UWT securities to the plaintiffs.

Therefore, his

liability as a “controlling person” turns on whether he was part of
the “group of persons acting in concert” to sell UWT securities.
“While overt action by a member of a controlling group would not
always be required, there must be some showing of assent, approval
or concurrence, albeit tacit approval, in the action of the group
in selling securities, before an individual will be held liable for
the actions of the controlling group.” Froehlich v. Matz, 417
N.E.2d 183, 190 (Ill. App. 1981).
The plaintiffs in Froelich sought to hold defendants Conrad
Matz and George Froelich liable as controlling persons for the sale
of unregistered securities.

Id. at 187-88.13

Matz gave one of the

issuer’s promoters the idea for the issuer’s business, in exchange
for which the promoter issued stock in the new company to Matz.
Id. at 185.

But he did so without Matz’s knowledge.

Id.

By the

13/
A third individual, Carolyn Buchanan, was also sued as an alleged
controlling person.
The facts surrounding the verdict in her favor are not
relevant to this lawsuit.

- 30 -

time that Matz learned that he owned shares in the company — over
a year later — the company had sold unregistered securities to the
plaintiffs.

Id. at 190.

The court reasoned that to hold Matz

liable under these circumstances would, in effect, eliminate the
“in concert” requirement from the statute.

Id. (“A person is not

liable merely because one can add his shareholdings onto the
holdings of a controlling group and they still remain a controlling
group.”).

The plaintiff must show that the defendant had “[s]ome

connection with the sale, or decision to sell, securities.”

Id.

Matz had nothing to do with the challenged sales. By contrast, the
court found that Froehlich — a stockholder and director of the
company — was a controlling person.

Id. at 193-94.

Froelich

agreed with the decision to seek new investors, and he and the
company’s other principals agreed that the proceeds would be used
to repurchase some of Froelich’s stock.

Id. at 194.

“[B]y

Froehlich’s concurrence in the decision to sell stock to others,
Froehlich acted in concert with [the company’s other principals] in
the sale of securities” to the plaintiffs.

Id.

As we indicated in Elipas I, the undisputed evidence supports
the conclusion that Cummings was “connected” with the sale, or the
decision to sell, new equity in the company.
1286795, *5.

Elipas I, 2010 WL

In 2003 and 2004 UWT’s Executive Committee — Howard

and Cummings — decided to seek new investors.

(Cummings Decl. ¶¶

7-9, 17.); see Froehlich, 417 N.E.2d at 194 (concluding that the
evidence supported the trial court’s conclusion that the defendant

- 31 -

“agreed . . . that new investors should be brought into the
corporation if possible.”).

That decision was driven, in part, by

their desire to pay down debt that UWT owed to Cummings (some
portion of which consisted of loans to UWT’s predecessor entities).
See Froehlich, 417 N.E.2d at 194 (the sale to new investors “was
done with the purpose, in part, of repurchasing Froehlich’s shares,
and

thereby

permitting

investment.”).

him

to

recoup

part

of

his

imperiled

It is not a defense that Cummings did not sell UWT

securities, or that he did not know specifically to whom Howard and
Jedynak were selling them.

See id., 417 N.E.2d at 194 (“That

[Froelich] had no specific knowledge of the individuals solicited,
or that he did not solicit them, does not remove or negate his
active participation and encouragement in the decision to seek
other investment.”).

Nor do we believe that plaintiffs must show

that Cummings knew specifically what Howard and Jedynak were
telling investors (although he would have known that the Business
Plan and the Amended and Restated Operating Agreement did not
mention UWT’s predecessor entities, see Cummings Decl. ¶ 8.).

The

federal Securities Act, on which the Illinois Securities Law was
modeled (see Foster, 572 N.E.2d at 1244-45), provides that a
controlling person is not liable if he or she “had no knowledge of
or reasonable ground to believe in the existence of the facts by
reason of which the liability of the controlled person is alleged
to exist.”

15 U.S.C. § 77o.

There is no comparable language in

the Illinois Securities Law, and Cummings has not cited (nor are we

- 32 -

aware of any) authorities that would support reading such a defense
into the statute.

Cummings controlled UWT, and approved and

encouraged sales of UWT securities to new investors. Therefore, he
is liable as a controlling person for the fraudulent sales of new
UWT securities to the plaintiffs. The following plaintiffs, all of
whom have complied with § 13(A)’s notice requirement, are entitled
to rescind the purchases that they made directly from UWT and
recover the purchase price from Cummings (less distributions):
Brian King, Rosa and Tony Perez, Larry J. Liebovich Living Trust,
Ronald Riegelhaupt, John Ohk, Adam and Dana Skinner, James Elipas,
Wayne Endre, Katherine Endre, Cuzins Four, LLC, Joseph Lanzito, JS
Squared, LLC, and John Pavlopoulos. See Zapata Hermanos Sucesores,
S.A. v. Hearthside Baking Company, Inc., 313 F.3d 385, 391 (7th
Cir. 2002) (“Rule 56(d) [now Rule 56(g)] of the civil rules is
explicit in allowing the judge to grant summary judgment on less
than the plaintiff’s whole claim.”).

Thomas Pavlopoulos relied on

Howard’s and Jedynak’s false statements and material omissions when
he purchased UWT units from KOR Venture.

Cummings, as a member of

UWT’s Executive Committee, approved this sale. (Cummings’ Resp. to
Elipas Pls.’ Stmt. ¶ 21.)

Where, as here, the controlling person

retains and exercises the authority to approve after-market sales,
we think liability is appropriate.

See Olczyk v. Cerion Tech.,

Inc., 721 N.E.2d 732, 744-45 (Ill. App. 1999) (holding that the
issuer, its officers and directors, and other defendants could be

- 33 -

held liable for after-market sales traceable to a materially false
prospectus).
The remaining purchases involve payments to KKJ Holdings for
Howard’s and Jedynak’s own securities.

In Elipas I we drew a

distinction between these sales and direct sales of UWT securities.
Elipas I, 2010 WL 1286795, *5.

First, sales by existing interest

holders required Executive Committee approval under the terms of
UWT’s Amended and Restated Operating Agreement.

Cummings denies

that the Committee approved the sales, and the plaintiffs have not
cited any contrary evidence. In their supplemental materials three
plaintiffs point out that they executed a subscription agreement
with UWT, not KKJ Holdings, Jedynak, or Howard.

(See Miceli Aff.

¶ 6; Carrozza Aff. ¶ 3; Cozzini Aff. “#3" ¶ 3.)

This was part of

Howard’s and Jedynak’s scheme — they told investors that they were
investing directly in UWT, when in reality Howard and Jedynak were
selling for their own account. It does not establish that Cummings
approved of these sales.

Second, we concluded that Cummings did

not benefit when Howard and Jedynak sold their own securities.
Plaintiffs also dispute this conclusion, citing a letter agreement
that Cummings entered into with UWT in October 2005.

Pursuant to

the agreement, UWT “loaned” Cummings $400,000 interest free in
exchange for his agreement to sell stock in the company “to one or
more interested outside investors that have been aggregated by Jim
Jedynak in the past several months and of whom you [Howard] and I
[Cummings] are aware and approve.”

(Letter Agreement, dated

- 34 -

October 28, 2005, attached as Ex. 20 to Cummings Decl.)
parties

later

revised

substantially the same.

the

agreement,

but

the

terms

The

remained

It is undisputed that Cummings did not

sell any stock in connection with these agreements and that he kept
the $400,000.

Plaintiffs further contend that, although UWT is

ostensibly a party to the letter agreement, Cummings actually
received the $400,000 from Jedynak or KKJ Holdings and that the
payment included “some portion” of the money that plaintiff David
Spinney paid to KKJ Holdings in August 2005 for UWT securities.
(See King Pls.’ Supp. Stmt. ¶¶ 1, 3, 5-13.)

The record is muddled

on this point, but it appears that Jedynak withdrew $400,000 from
KKJ Holdings’ bank account, transmitted the funds to UWT, which in
turn wired the funds to Cummings’ bank account.
Even if we assume that the money Cummings received included
some of Spinney’s co-mingled funds, that does not necessarily show
that Cummings approved the sale to Spinney (or any other aftermarket sales to the plaintiffs).

A reasonable jury, considering

all the evidence, could conclude otherwise.14

Plaintiffs ask us to

infer that the option agreement was a sham transaction designed to
funnel the proceeds of Jedynak’s and Howard’s fraud to Cummings.
(King Pls.’ Supp. Mem. at 7.)

But as the moving parties, they are

not entitled to that inference.

See Pitasi, 184 F.3d at 714.

14/
The fact that Cummings reviewed the Business Plan and the Amended and
Restated Operating Agreement, and that Jedynak and Howard used those documents
to sell their own UWT interests, is one piece of evidence that a jury may
consider to determine whether Cummings "tacitly" approved the sales. (Cf. King
Pls.’ Mem. at 9.) But we are not persuaded that it entitles the plaintiffs to
summary judgment.

- 35 -

CONCLUSION
The Elipas Plaintiffs’ motion for summary judgment against
Betty Gail Howard (407) is granted.

In light of the plaintiffs’

supplemental materials, our order denying their joint of motion for
partial summary judgment against Cummings (393) is vacated.

Their

joint motion for partial summary judgment (361) is granted in part
and denied in part as to liability.

The motion is granted as to

the following plaintiffs with respect to securities that they
purchased

from

UWT

directly:

Rosa

and

Tony

Perez,

Larry

J.

Liebovich Living Trust, Ronald Riegelhaupt, John Ohk, Adam and Dana
Skinner, James Elipas, Wayne Endre, Katherine Endre, Cuzins Four,
LLC, Joseph Lanzito, JS Squared, LLC, and John Pavlopoulos.

The

motion is also granted as to Thomas Pavlopoulos with respect to the
securities he purchased from KOR Venture, LLC.
denied as to the remaining securities purchases.

The motion is
A status hearing

is set for May 18, 2011 at 10:30 a.m.

DATE:

May 5, 2011

ENTER:

___________________________________________
John F. Grady, United States District Judge