Bojan et al v. Infinium Capital Holdings, LLC et al

Filing 79

MEMORANDUM Opinion and Order signed by the Honorable Andrea R. Wood on 3/3/2016. Mailed notice(ef, )

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
KURT V. CORNIELSEN, GARRETT
FIFE, MIKE FOLEY, ALI GHAJARNIA,
MARCUS HESS, LUCAS HULING,
TIMOTHY KACMAR, THOMAS KANE,
SARAH KETVIRTIS, MINJONG KIM,
JOEL KOS, WILL KUHL, RAMESH
KUMAR, BRUCE LAWRENCE JR.,
MATT LECH, JASON LEUNG, JUN LIU,
DAVE LOHMANN, MOHAMMAD
MALEK, RICHARD MARYNOWKSI,
ADITYA MEHTA, DAVID MEINHART,
ERIC MOLAS, WES NORDINE, LUIS
RAMIREZ, IAN REID, MICHAEL
RICHARDS, BRET RIETOW, BRUCE
RISHER, NICK ROUPAS, ANDERSEN
SCHNEIDER, RYAN SHERMAN, ERIC
SZURGOT, ANDREA TERMINI, MITCH
TYSON, ALAN URBAN, TONI
VOLLMERS, GORDON WALLACE,
JACK WEBER, and TIMOTHY
WRZESINSKI, all individuals,
Plaintiffs,
v.
INFINIUM CAPITAL HOLDINGS, LLC, a
Delaware limited liability company, INFINIUM
CAPITAL MANAGEMENT, LLC, a Delaware
limited liability company and CHARLES F.
WHITMAN, GREGORY EICKBUSH, BRIAN
JOHNSON, and SCOTT ROSE, all individuals,
Defendants.

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No. 14-cv-00098
Judge Andrea R. Wood

MEMORANDUM OPINION AND ORDER

Plaintiffs are former employees of Defendants Infinium Capital Holdings, LLC
(“Infinium Holdings”) and Infinium Capital Management, LLC (“Infinium,” and along with
Infinium Holdings, “Infinium Defendants”). Plaintiffs had loaned money to the Infinium
Defendants and subsequently participated in what was known as the “Infinium Employee Capital
Pool program” or the “Employee Equity Incentive Plan” (“Employee Program”) in which
Plaintiffs’ loans were converted into equity in the company. Soon after Plaintiffs participated in
the plan, the Infinium Defendants failed. Plaintiffs subsequently filed the instant lawsuit against
the Infinium Defendants, as well as Infinium board members Charles Whitman, Gregory
Eickbush, Brian Johnson, and Scott Rose (collectively, “Individual Defendants,” and along with
Infinium Defendants, “Defendants”). Plaintiffs allege that Defendants violated securities laws,
breached their fiduciary duties, and engaged in common law fraud. The Individual Defendants
and the Infinium Defendants each filed a motion to dismiss the action.1 (Dkt. Nos. 14, 17.) For
the reasons stated below, the Court grants the motions to dismiss.
BACKGROUND
The following facts are drawn from Plaintiffs’ Second Amended Complaint (“SAC”) and
accepted as true for purposes of this motion. 2
Plaintiffs were all employees of Infinium, a diversified alternative asset and risk
management firm with offices in Chicago, Houston, New York, and London. (SAC ¶¶ 2, 7-47,
49, Dkt. No. 39.) The Individual Defendants were all Infinium officers or members of its Board
of Managers. (Id. ¶¶ 50-53.) Whitman also served as CEO of Infinium. (See id. ¶ 78.)
1

Plaintiffs filed a second amended complaint during the pendency of Defendants’ motions to dismiss the
amended complaint. (See Dkt. No. 34.) With the parties’ agreement, the Court deems the pending motions
to dismiss the amended complaint as directed toward the SAC. (Dkt. No. 36.)

2

For purposes of deciding a motion pursuant to Federal Rule of Civil Procedure 12(b)(6), the Court must
accept the plaintiff’s allegations as true and draws all permissible inferences in her favor. See, e.g., Active
Disposal, Inc. v. City of Darien, 635 F.3d 883, 886 (7th Cir. 2011).

2

According to Plaintiffs, the Employee Program was designed to meet two goals: first, to
replace capital that had been withdrawn from Infinium, and second, to have sufficient funds on
hand for Infinium to purchase the equity interests of several of its members. Beginning in late
2011, Whitman and Johnson began making private, undisclosed redemptions of Infinium equity.
(Id. ¶ 79.) Additionally, in approximately November 2011, Infinium, through the Individual
Defendants, began exploring the purchase of the equity interests of its member George Hanley,
who served on the Advisory Board of Infinium, and his affiliates. (Id. ¶ 62.) Hanley and his
affiliates owned a substantial equity stake in Infinium. (Id.) By November 2011, Infinium had
agreed to redeem the equity interest of its member Nathan Laurell, who also served on its
Advisory Board, for $8,604,779. (Id. ¶ 63.)
Prior to March 2, 2012, Plaintiffs made loans to Infinium collectively in the amount of
approximately $5,053,373.37. (Id. ¶ 61.) These loans ranged in amounts from $5,000 to
$550,000. (Id.) Beginning on or about January 1, 2012, Infinium and the Individual Defendants
began to offer Plaintiffs an opportunity to participate in the Employee Program, under which
Plaintiffs’ loans to Infinium would be converted into equity. (Id. ¶ 65.) According to Plaintiffs,
this would allow Infinium and the Individual Defendants to replace a portion of the equity that
Hanley, Laurell, and their affiliates were redeeming and to provide trading capital for the
business. (Id. ¶ 65.)
Infinium first solicited participation in the Employee Program in an e-mail dated
February 14, 2012. (Id. ¶ 66.) Infinium held three so-called “town-hall” meetings on February
16, 17, and 22, 2012, to discuss the details and merits of Plaintiffs participating in the Employee
Program. (Id. ¶ 67.) Each Plaintiff attended at least one of these three town-hall meetings, all of
which were organized by Infinium purportedly to “provide [Plaintiffs] a high level overview of

3

the goals and mechanics of the Employee [Program].” (Id.) During these town-hall meetings, and
at other times prior to March 2, 2012, Defendants represented that if Plaintiffs elected to convert
their loans to Infinium into equity or purchase equity in Infinium, that there would be a single
class of equity in Infinium and that all equity holders—current and future—would be treated
equally in all respects and at all times. (Id. ¶ 68.) During the town-hall meetings, Defendants also
touted the availability of an untapped, $20 million dollar credit facility from Fifth Third Bank
that would be available after the offering to fund Infinium’s business and to pay down the debt
due to Hanley, Laurell, and their affiliates. (Id. ¶ 71.)
Infinium prepared and disseminated on February 14, 2012 a “Private Placement
Memorandum” (“PPM”) to Plaintiffs. (Id. ¶ 72.) The PPM purportedly disclosed the risks
associated with acquiring equity in Infinium. (Id.) The PPM addressed Infinium’s acquisition of
the equity ownership of Hanley, Laurell, and their affiliates as follows:
Redemption Debt. In connection with the redemption debt of the equity of
interests of ICM held by George Hanley, Nathan Laurell, and their affiliates,
which redemption was effective as of January 1, 2012, the Company will issue
secured debt of approximately $53,000,000. The debt owed to George Hanley,
Nathan Laurell and their affiliates will be payable over a period of five (5)
years….
(Id. ¶ 73.)
In the course of its soliciting the conversion of their loans to equity through the Employee
Program, on March 2, 2012 Infinium wrote to Plaintiffs and explained that any monies converted
from debt to equity (or otherwise invested) in the Employee Program would be redeemable 50%
in the first year (2013) and 50% in the following year (2014). (Id. ¶ 74.) The March 2, 2012
correspondence also told Plaintiffs that they would be able, if they desired, to withdraw all of
their equity investments from the Employee Program in just two years. (Id.) Prior to March 2,
2012, Defendants also provided certain Plaintiffs with documents that represented that after

4

Hanley, Laurell, and their affiliates redeemed their equity, Infinium would have remaining equity
of $49,987,424. (Id. ¶ 76.)
Based upon the representations made in the PPM, the town hall meetings, and other
written communications, Plaintiffs each elected to convert their loans to equity and, in some
cases, to invest additional funds and to participate in the Employee Program. (Id. ¶ 77.)
On or about March 8, 2013, Infinium suspended Plaintiffs’ redemption rights, claiming
that Infinium was in default in its payment obligations to Hanley, Laurell, and their affiliates.
(Id. ¶ 80.) On or about September 1, 2013, Infinium’s acting Chief Executive Officer, Mark
Palchak, revealed during an “investor call” with Plaintiffs (“Investor Call”) that their investments
through the Employee Program prior to March 2, 2012 had become “worthless” and were valued
at “negative $18,000,000.” (Id. ¶ 81.) Palchak further represented that to avoid a takeover by
Hanley, Infinium had converted a portion of Hanley’s and Laurell’s debt to equity and agreed to
eliminate the Plaintiffs’ right to redeem their investments in the Employee Plan. (Id. ¶ 82.)
During the Investor Call, Palchak also revealed that although Plaintiffs’ equity was now
“worthless,” there was another class of equity in Infinium, which he referred to as the “Family
Office Equity.” Palchak claimed that this other class of equity was unaffected by the
aforementioned events, as it was superior to Plaintiffs’ equity interest and had been invested
under an agreement which protected it from certain losses. (Id. ¶ 83.)
Plaintiffs subsequently brought this lawsuit, asserting a number of claims based on the
loss of their investments in the Employee Plan, including causes of action for federal securities
fraud under Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule
10b-5 promulgated thereunder (Count I); common law breach of fiduciary duty (Count II); and
common law fraud (Count III). Defendants seek to have all of these claims dismissed in their

5

entirety pursuant to Rule 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure.
DISCUSSION
“A motion under Rule 12(b)(6) tests whether the complaint states a claim on which relief
may be granted.” Richards v. Mitcheff, 696 F.3d 635, 637 (7th Cir. 2012). In deciding such a
motion, the Court must accept all factual allegations in the complaint as true. Tellabs, Inc. v.
Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007). Under Federal Rule of Civil Procedure
8(a)(2), a complaint must include “a short and plain statement of the claim showing that the
pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2). The complaint must “plead[ ] factual content
that allows the court to draw the reasonable inference that the defendant is liable for the
misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). The “[f]actual allegations must
be enough to raise a right to relief above the speculative level.” Bell Atl. v. Twombly, 550 U.S.
544, 555 (2007).
Rule 9(b) requires a plaintiff alleging fraud to state the circumstances constituting the
fraud “with particularity.” Fed. R. Civ. P. 9(b). “This ordinarily requires describing the ‘who,
what, when, where, and how’ of the fraud.” AnchorBank, FSB v. Hofer, 649 F.3d 610, 615 (7th
Cir. 2011) (citing Pirelli Armstrong Tire Corp. Retiree Med. Benefits Trust v. Walgreen Co., 631
F.3d 436, 441-42 (7th Cir. 2011)). In other words, Rule 9(b) requires a plaintiff pleading fraud
“to state ‘the identity of the person making the misrepresentation, the time, place and content of
the misrepresentation, and the method by which the misrepresentation was communicated to the
plaintiff.’” Uni *Quality, Inc. v. Infotronx, Inc., 974 F.2d 918, 923 (7th Cir. 1992) (quoting
Bankers Trust Co. v. Old Republic Ins. Co., 959 F.2d 677, 683 (7th Cir. 1992)).

6

I.

Section 10(b) of the Exchange Act and Rule 10b-5
To state a claim under Rule 10b-5, a plaintiff must allege that: (1) the defendant made a

misstatement or omission (2) of material fact; (3) with scienter; (4) in connection with the
purchase or sale of securities; (5) on which the plaintiff justifiably relied; (6) and that
proximately caused the plaintiff’s economic loss. See Caremark, Inc. v. Coram Healthcare
Corp., 113 F.3d 645, 648 (7th Cir. 1997). To satisfy the final element, a plaintiff must allege
both transaction causation and loss causation—that is, the plaintiff must allege “that it would not
have invested in the instrument if the defendant had stated truthfully the material facts at the time
of sale” and “that it was the very facts about which the defendant lied which caused its
injuries.” Id.
Complaints alleging violations of Rule 10b-5 are subject to Rule 9(b)’s heightened
pleading standard. Sears v. Likens, 912 F.2d 889, 893 (7th Cir. 1990). Allegations of securities
fraud are also subject to the pleading requirements of the Private Securities Litigation Reform
Act (“PSLRA”), which requires that “[t]he complaint shall specify each statement alleged to
have been misleading, the reason or reasons why the statement is misleading, and, if an
allegation regarding the statement or omission is made on information and belief, the complaint
shall state with particularity all facts on which that belief is formed.” 15 U.S.C. § 78u–4(b)(1).
Furthermore, “the complaint shall . . . state with particularity facts giving rise to a strong
inference that the defendant acted with the required state of mind.” 15 U.S.C. § 78u–4(b)(2)(A).
In this case, Plaintiffs claim that Defendants made a number of actionable misstatements
and omissions. Among other things, Plaintiffs allege the following:


Defendants falsely represented that if Plaintiffs elected to convert their loans to Infinium
into equity through the Employee Program, there would be only one class of equity in
Infinium; whereas in reality there were two classes of equity, one of which was superior
to the class offered in the Employee Program (SAC ¶¶ 91-92, Dkt. No. 39);

7



Defendants did not disclose that Plaintiffs’ class of equity was immediately reduced to a
value below $0 (Id. ¶ 93);



Defendants’ representation that Plaintiffs would be able to redeem 50% of their
investments in the Employee Program in year one and the other 50% in year two was
false when it was made (Id. ¶ 94);



Defendants represented that Infinium would have access to a $20 million line of credit,
when in fact “it was almost certain that Infinium’s lender, Fifth Third Bank, would
eventually terminate” the line of credit (Id. ¶¶ 95-96);



Defendants falsely represented that after redeeming the equity interests of Hanley,
Laurell and their affiliates, over $49,987,424 of equity would remain (Id. ¶ 97); and



Defendants also made a number of other material omissions. (Id. ¶ 101.)
Defendants challenge Plaintiffs’ pleading of their Rule 10b-5 claim on a number of

grounds. Defendants argue that Plaintiffs failed to identify speakers with particularity, failed to
plead an actionable misstatement, insufficiently pleaded scienter, and insufficiently pleaded loss
causation. Because the Court finds that Plaintiffs have failed to allege sufficiently that the
Defendants made actionable misstatements under the heightened pleading standard of Rule 9(b),
the Court addresses the first two arguments only.3
A.

Two Classes of Equity Interest

Plaintiffs allege that Defendants made a material misrepresentation of fact by failing to
disclose that:
there were two classes of equity interests in Infinium: (a) one which would bear
risk of losses, or Plaintiffs’ equity in the Employee Capital Pool program, and (b)
another, of which Plaintiffs were not a part, the so-called “Family Office Equity,”
that would bear little (or no) risk of loss and, upon information and belief, was
beyond (1) the reach of certain creditors of Infinium and held subject to an
agreement with Infinium restricting the losses it could sustain and, that, (2)
limited the application of certain expenses of Infinium to the equity.
3

The Court’s determination that it is unnecessary to reach the remaining arguments should not be
understood as an endorsement of Plaintiffs’ positions.

8

(SAC ¶ 92, Dkt. No. 39.) Defendants argue that disclosures in the PPM bar a Rule 10b-5 claim
with respect to the two classes of equity interest. The PPM specifically notes that “[t]he Board
has the right to sell or issue additional Interests or other equity interests of the company to
Members or third parties on terms that may be senior to, junior to, or on parity with, the terms of
the Interests held by the then current Members.” (PPM at 8, Dkt. No. 16-1.)4
The Court agrees that Plaintiffs’ claims relating to the existence of two classes of equity
interests must be dismissed. The PPM clearly disclosed the possibility that Defendants would sell
additional equity interests to third parties that were senior to those held by Plaintiffs. This
disclosure bars any claim that there was a material misrepresentation. See e.g., In re VMS Sec.
Litig., 752 F. Supp. 1373, 1395 (N.D. Ill. 1990) (finding disclosures in prospectus to be adequate
and granting defendants’ motion to dismiss securities fraud claims); Nielsen v. Greenwood, 849
F. Supp. 1233, 1243 (N.D. Ill. 1994) (dismissing Rule 10b-5 claim where prospectus adequately
disclosed risks of investment and priority of distributions in case of event of default).
Plaintiffs make a number of arguments in an attempt to salvage their claims regarding the
two classes of equity. All of them lack merit. First, Plaintiffs argue that Defendants
misrepresented that there would be a single class of equity and that all equity holders would be
treated equally at the Town Hall Meetings in February 2012. (Pls.’ Resp. at 3, Dkt. No. 28 (citing
SAC ¶ 66, Dkt. No. 39)). However, Plaintiffs have failed to identify which Defendant made these

4

The PPM was referenced in the complaint but not attached to it. (See SAC ¶¶ 72-73, Dkt. No. 39.) The
Individual Defendants did attach a copy of the PPM to their Motion to Dismiss (see Dkt. No. 16-1),
however, and therefore the document may be properly considered. See Venture Assocs v. Zenith Data
Sys., 987 F.2d 429, 431 (7th Cir. 1993) (“[D]ocuments attached to a motion to dismiss are considered part
of the pleadings if they are referred to in the plaintiff’s complaint and are central to his claim.”) (citing
Fed. R. Civ. P. 10(c)). “In the event of a conflict between a complaint proper and an attachment thereto
that forms the basis of the plaintiffs’ claims, the attachment prevails, and dismissal is warranted if, as
here, the attachment negates the plaintiffs’ claims.” London v. RBS Citizens, N.A., 600 F.3d 742, 747 n.5
(7th Cir. 2010).

9

statements. Rule 9(b) requires that, in pleading a fraud-based claim, the complaint must allege
“the identity of the person who made the misrepresentation.” Vicom, Inc. v. Harbridge Merch.
Servs., Inc., 20 F.3d 771, 777 (7th Cir. 1994) (internal quotation marks omitted). Here, Plaintiffs
have alleged only that, “[d]uring these town-hall meetings and at other times prior to March 2,
2012, Defendants represented . . . that if Plaintiffs elected to convert their loans to Infinium into
equity, and/or purchase equity in Infinium, that there would be a single class of equity in
Infinium and, further, that all equity holders in Infinium— current and future—would be treated
equally in all respects and at all times.” (SAC ¶ 68, Dkt. No. 39 (emphasis added)). The Seventh
Circuit has held, however, that “[a] complaint that attributes misrepresentations to all defendants
lumped together for pleading purposes, generally is insufficient.” Sears, 912 F.2d at 892.
Accordingly, Plaintiffs have failed to meet their pleading burden under Rule 9(b).
Plaintiffs further argue that, although the PPM revealed that Defendants could possibly
seek additional equity investments that were senior to those of representation, Defendants did not
disclose that even prior to soliciting Plaintiffs’ investment in the Employee Program, Defendants
had been “actively seeking the infusion of new funds in Infinium—to be contributed in return for
equity—from third-party investors” who would receive “superior rights” due to Infinium’s lack
of trading equity. (SAC ¶¶ 70, 101, Dkt. No. 39.) However, these allegations are made “[u]pon
information and belief,” with no facts supporting them. Although Rule 9(b) does not preclude
allegations based on information and belief, a plaintiff relying on such allegations must include
the facts upon which the belief is based. See In re VMS Secs. Litig., 959 F.2d at 683-84. Because
Plaintiffs here have failed to plead any facts upon which their belief that Defendants had been
seeking third-party investors even prior to their solicitation of Plaintiffs’ involvement in the
Employee Program, this allegation cannot go forward. See Moak v. Roszak, No. 05-cv-01652,

10

2005 WL 2563014, at *4 (N.D. Ill. Oct. 6, 2005) (granting the defendants’ motion to dismiss
where plaintiff failed to state the grounds for allegations made upon information and belief);
Gilford Partners, L.P. v. Sensormatic Elec. Corp., No. 96-4072, 1997 WL 570771, at *16-17
(N.D. Ill. Sept. 10, 1997) (dismissing complaint alleging violations of Rule 10b-5 where the
plaintiff failed to “plead those facts within its knowledge or belief that demonstrate that its
charges are not baseless, and what type of additional information is in the defendants’ exclusive
control”).
B.

Devaluation of Plaintiffs’ Equity

Plaintiffs also allege that Defendants made material misstatements regarding the
valuation of their class of equity. According to the SAC:
Upon information and belief, because, among other things, 1) Infinium agreed to
pay Hanley, Laurell, and their affiliates an undisclosed premium (based upon a
multiple of earnings, not invested capital) for their equity interests in Infinium,
and 2) the private, undisclosed redemptions of equity that were being made by
Whitman, Johnson and perhaps others, Plaintiffs’ class of equity as of March 3,
2012, was immediately reduced to a value below $0, a fact which was not
disclosed to Plaintiffs prior to the conversion of their loans to Infinium to equity
in Infinium.
(SAC ¶ 93, Dkt. No. 39.) Again, Defendants argue in response that Plaintiffs cannot rely on these
alleged misstatements to state a claim because the PPM made adequate disclosures regarding
these matters. And, indeed, the PPM disclosed that “Company revenues may fluctuate
significantly in the future . . . based on various factors, including factors relating to the financial
markets that are outside the Company’s control.” (PPM at 15, Dkt. No. 16-1.) Defendants also
point to the disclosure in the PPM that “[i]n addition to the factors described above, certain
Members of the Company are entitled to withdraw certain amounts of capital, and receive certain
amount of distributions upon a Member’s request, which factors could also lead to the need to
raise additional funds.” (Id. at 18.)

11

But such general disclosures do not insulate Defendants from suit. In essence, Plaintiffs
contend that all of the money from the Equity Fund had been pledged to pay Hanley, Laurell,
and their affiliates with the knowledge that as a result of those obligations and other money
going to insiders, the value of shares in the Employee Plan would be reduced to zero.
Furthermore, although this allegation is based on “information and belief,” Plaintiffs have
pleaded sufficient facts to support it. For example, Plaintiffs allege that by November 11, 2011
Defendants had agreed, or were in the process of coming to an agreement, to redeem the equity
interests of Hanley and Laurell. (SAC ¶¶ 62-63, Dkt. No. 39.) Plaintiffs also allege that
beginning in late 2011, Whitman and Johnson had begun making undisclosed redemptions of
equity in Infinium. (Id. ¶ 79.) Less than two months later, Defendants introduced the Employee
Program to replace the equity that Infinium owed to Hanley and Laurell. (Id. ¶ 65.)
Drawing all inferences in Plaintiffs’ favor, as the Court must at this stage in the litigation,
these facts are sufficient to support Plaintiffs’ belief that all of the money from the Employee
Program had been already pledged to various Infinium insiders from the inception of the
Employee Program, and that Defendants knew this reduced the equity value of the shares to zero.
Further, this alleged omission was material, as there was “a substantial likelihood that the
disclosure of the omitted fact would have been viewed by the reasonable investor as having
significantly altered the ‘total mix’ of information made available.” TSC Indus., Inc. v.
Northway, Inc., 426 U.S. 438, 449 (1976).
However, Plaintiffs fail to allege facts establishing that any Defendant had a duty to
speak. There is generally no affirmative independent duty for a company to disclose all
information that could potentially affect share prices, even when that information is material,
unless such silence renders an affirmative statement misleading. Basic, Inc. v. Levinson, 485 U.S.

12

224, 239 (1988) (“Silence, absent a duty to disclose, is not misleading under Rule 10b–5.”);
Stransky v. Cummins Engine Co., Inc., 51 F.3d 1329, 1331 (7th Cir. 1995) (“Mere silence about
even material information is not fraudulent absent a duty to speak.”). In an attempt to establish
that Defendants had a duty to speak, Plaintiffs first argue that Defendants owed fiduciary duties
to Plaintiffs. (Pls’ Resp. at 10, Dkt. No. 28.) This is not the case. At the time of the alleged
omissions (which was before Plaintiffs converted their loans into equity as part of the Employee
Program), Plaintiffs were creditors of Defendants. “Under Delaware law, [a]s a general rule,
there is no fiduciary relationship between a debtor and a creditor.”5 In re Advance Nanotech,
Inc., No. 11-10776, 2014 WL 1320145, at *3 (Bankr. D. Del. Apr. 2, 2014) (internal quotation
marks omitted). Accordingly, Plaintiffs have not adequately pleaded that any Defendant owed a
duty to them prior to the close of the Employee Program offering. See, e.g., Holstein v.
Armstrong, 751 F. Supp. 746, 748 (N.D. Ill. 1990) (finding no duty to disclose in case where
plaintiffs claimed there was a fiduciary duty).
Plaintiffs next contend that there is a duty to disclose under the Supreme Court case
Chiarella v. United States, 445 U.S. 222 (1980). Chiarella, however, is inapposite: that case
related to the affirmative disclosure duty of a corporate insider, or of his “tippee,” when trading
publicly-held stock on nonpublic or inside information. Id. at 228-29. No such duty would
appear to apply on the facts alleged in this case.
Finally, even where there is no affirmative duty to disclose, an omission of material
information that renders any specific affirmative statements misleading can support a claim
under Rule 10b-5. See In re Guidant Corp. Sec. Litig., 536 F. Supp. 2d 913, 928 (S.D. Ind.

5

Defendants argue that Delaware law applies to the common law legal principles at issue in this case due
to the choice of law provision in Section 7 of the Subscription Agreement that Plaintiffs executed in
connection with their investment in the Equity Plan. (Ind. Defs’ Mot. Ex. C ¶ 4, Dkt. No. 16-3.) Plaintiffs
do not contest this point.

13

2008). A plaintiff wishing to state a claim under this theory of liability, however, must identify
with particularity the affirmative statement that an omission renders misleading. Id. Plaintiffs
have not done so with respect to their allegations that their investment was immediately devalued
to $0. Accordingly, Plaintiffs’ claims relating to this alleged omission cannot go forward as
pleaded.
C.

Right of Redemption

Plaintiffs also claim that Defendants violated Rule 10b-5 by misrepresenting that
Plaintiffs would be able to redeem 50% of their investments in the Employee Program in year
one and the other 50% in year two. (SAC ¶ 94, Dkt. No. 39.) In fact, according to Plaintiffs, in
March 2013, “Infinium suspended Plaintiff’s Redemption Rights—claiming that Infinium was in
default in its payment obligations under the Redemption Agreement to Hanley, Laurell, and their
affiliates.” (Id. ¶ 80.)
As an initial matter, Plaintiffs fail to plead this alleged misrepresentation with sufficient
particularity to satisfy Rule 9(b). The facts alleged in the SAC state as follows:
In the course of its solicitation of Plaintiffs’ conversion of their loans to equity, on
March 2, 2012, Infinium wrote to Plaintiffs and explained that any monies
converted from debt to equity or otherwise invested by Plaintiffs in the Employee
Capital Pool program would be redeemable 50% in the first year (2013) and 50%
in the following year (2014), with the ability, if they desired, to withdraw all of
their equity investments from the Employee Capital Pool program in just two
years.
(SAC ¶ 74 (emphasis added), Dkt. No. 39.) Plaintiffs fail to allege with any particularity the
actual speaker who made this alleged misrepresentation, which in itself is fatal to Plaintiffs’
claim. See Vicom, Inc., 20 F.3d at 777 (in pleading a fraud claim, the complaint must allege the
identity of the person who made the misrepresentation). Accordingly, this claim cannot go
forward.

14

In addition, disclosures in the PPM bar this claim as currently pleaded. The PPM
disclosed that Plaintiffs’ redemption rights “shall be subject to deferral or limitation . . . in the
event the Board determines, acting reasonably and in good faith, that any requested withdrawal
would cause the Company to fail to maintain a level of capital necessary to meet any . . .
requirement or rule.” (PPM at 9-10, Dkt. No. 16-1.) This disclosure bars any claim that
Defendants made an actionable misstatement by informing that Plaintiffs would be able to
redeem their equity in 2013 and 2014. See e.g., In re VMS Sec. Litig., 752 F. Supp. at 1395;
Nielsen, 849 F. Supp. at 1243.
Accordingly, the SAC as currently pleaded does not state a claim that Defendants
violated Rule 10b-5 by misrepresenting Plaintiffs’ right of redemption.6
D.

Line of Credit

Plaintiffs also allege that, contrary to representations at the town hall meetings that
Infinium had access to a $20 million credit facility, “it was almost certain that Infinium’s lender,
Fifth Third Bank, would eventually terminate the purportedly untapped, twenty-million dollar
line of credit to Infinium—which, upon information and belief, eventually it did.” (SAC ¶ 95
Dkt. No. 39.) But the complaint does not identify which of Defendants allegedly made the
purported misrepresentation. Instead, the allegation asserts only that,
[d]uring these town-hall meetings, Defendants also touted to Plaintiffs the
availability of an untapped, twenty-million dollar credit facility from Fifth Third
Bank, a financial institution and national banking association, that after the
offering was completed on March 2, 2012, would, for cash flow purposes, be
available to fund the business of Infinium and to pay down the debt due to
Hanley, Laurell, and their affiliates under the Redemption Agreement.
6

In their response, Plaintiffs argue that their theory of liability proceeds on the allegation that Defendants
were aware at the time Plaintiffs entered into the Employee Plan that Plaintiffs’ rights of redemption
would have to be suspended. (Pls’ Resp. at 4, Dkt. No. 28.) That specific allegation does not appear in the
SAC, however, and thus the Court disregards this argument. See Car Carriers, Inc. v. Ford Motor Co.,
745 F.2d 1101, 1107 (7th Cir. 1984) (a court’s determination of a motion to dismiss is “limited to the
pleadings.”).

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(Id. ¶ 71 (emphasis added).) Again, group-pleading the speaker of an omission is insufficient to
state a claim under Rule 9(b). See Sears, 912 F.2d at 892. Furthermore, these allegations do not
state sufficient facts to proceed. Plaintiffs allege that Fifth Third terminated its line of credit only
upon information and belief, without providing supporting facts. Thus, this cannot serve as an
actionable misstatement, as these allegations were made “[u]pon information and belief” with no
facts pled in support of this belief. See, e.g., Moak, 2005 WL 2563014, at *4; Gilford Partners,
L.P., 1997 WL 570771, at *16-1.
If Plaintiffs wish to re-plead this claim, they will also need to overcome the fact that the
PPM informed Plaintiffs that “[a]dditional financing may not be available when needed or on
terms favorable to Infinium. If Infinium is unable to obtain additional financing when needed . . .
this inability to access capital may adversely affect Infinium . . . .” (PPM at 18, Dkt. No. 16-1.)
Further, while Plaintiffs allege that the premium paid by Infinium to Hanley, Laurell, and their
associates, as well as to Whitman and Johnson “caused Infinium to be in breach of its loan
covenants” (SAC ¶ 96, Dkt. No. 39), the SAC itself concedes that the PPM disclosed the
redemption of equity by Hanley, Laurell, and their affiliates. (Id. ¶ 71.) The PPM further
disclosed that this redemption “will cause a significant change in the capital structure of
Infinium, and could constrain or even eliminate Infinium’s ability to obtain financing for its
business pursuits. The servicing of this debt will constrain Infinium’s available capital and could
have a material adverse effect on Infinium’s business.” (PPM at 18, Dkt. No. 16-1.)
E.

Alleged Omissions

Plaintiffs also claim that Defendants failed to disclose a number of allegedly material
facts. (SAC at ¶ 101-102, Dkt. No. 39.) As discussed above, however, there is no affirmative
independent duty for a company to disclose all information that could potentially affect its stock

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price, unless such silence renders a particular affirmative statement misleading. See Stransky, 51
F.3d at 1331. Plaintiffs here have failed to state with particularity how the alleged omissions
render any affirmative disclosure misleading; thus they fail to state a claim as to any of these
purported omissions. See In re Guidant Corp. Sec. Litig., 536 F. Supp. 2d at 928.
II.

Common Law Breach of Fiduciary Duty
Plaintiffs also have asserted a cause of action for common law breach of fiduciary duty.

As mentioned above, under Delaware law, a debtor does not generally owe a fiduciary duty to a
creditor. In re Advance Nanotech, Inc., 2014 WL 1320145, at *3. Thus, to the extent Plaintiffs’
breach of fiduciary duty claims relate to alleged misrepresentations made to them prior to their
participation in the Employee Program, Plaintiffs’ claims cannot go forward.
That said, read fairly, allegations related to actions and omissions made by Defendants
after Plaintiffs became minority shareholders may establish a breach of Defendants’ fiduciary
duty. (See SAC ¶¶ 108-09, Dkt. No. 39.) So, although some of the allegations that form the basis
for Plaintiffs’ breach of fiduciary duty claim are identical to those underlying their Rule 10b-5
claim, the common law cause of action is couched in terms of Defendants’ duty to Plaintiffs after
they had converted their loans into equity. In addition to stating claims that Defendants failed to
reveal crucial information to Plaintiffs after they had become equity holders, the complaint also
in essence alleges that Defendants suspended Plaintiffs’ redemption rights so that they could go
forward with the redemption of Hanley’s and Laurell’s equity positions at a premium and at a
time when the company was suffering from cash flow issues. (Id.)
Infinium is a limited liability company (“LLC”) formed under the Delaware Limited
Liability Company Act, . (See Ind. Defs’ Mot. Ex. C, Dkt. No. 16-3.) As such, Infinium’s
managers owed traditional fiduciary duties of loyalty and care to other members of the LLC,

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including Plaintiffs. See William Penn P’ship v. Saliba, 13 A.3d 749, 756 (Del. 2011)
(“[M]anagers of a Delaware limited liability company owe traditional fiduciary duties of loyalty
and care to the members of the LLC, unless the parties expressly modify or eliminate those
duties in the operating agreement.”).
Nonetheless, Plaintiffs cannot go forward with their breach of fiduciary duty claim as
pleaded in the SAC. The core of Plaintiffs’ fiduciary duty claim is that Defendants knowingly
concealed certain facts that, had Plaintiffs been aware of them, would have led Plaintiffs to
“exercise[] their redemption rights and redeem[] their equity interests in Infinium immediately
and convert[] [them] to cash, well before their redemption rights were suspended.” (SAC ¶ 108,
Dkt. No. 39.) A fiduciary duty claim premised on the allegation that a defendant knowingly
misled a plaintiff in breach of a fiduciary duty sounds in fraud and therefore is subject to the
heightened pleading standards of Rule 9(b). See Rogers v. Baxter Int’l, Inc., 417 F. Supp. 2d 974,
984 (N.D. Ill. 2006), aff’d, 521 F.3d 702 (7th Cir. 2008). As set out above, Plaintiffs have failed
to allege the persons who misled them with particularity. Thus, as currently pleaded, Plaintiffs’
fiduciary duty claims cannot proceed either.
III.

Common Law Fraud
Under Delaware law, the elements of common law fraud are: (1) a false representation,

usually one of fact, made by the defendant; (2) the defendant’s knowledge or belief that the
representation was false, or was made with reckless indifference to the truth; (3) an intent to
induce the plaintiff to act or to refrain from acting; (4) the plaintiff’s action or inaction taken in
justifiable reliance upon the representation; and (5) damage to the plaintiff as a result of such
reliance. Gaffin v. Teledyne, Inc., 611 A.2d 467, 472 (Del. 1992). Delaware recognizes three
categories of common law fraud: affirmative falsehoods, active concealment, and silence in the

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face of a duty to speak. Snowstorm Acquisition Corp. v. Tecumseh Prod. Co., 739 F. Supp. 2d
686, 708 (D. Del. 2010). Although a claim for common law fraud is not subject to the heightened
pleading standards of the PSLRA, it still must be pleaded with particularity consistent with Rule
9(b). Id.
Plaintiffs’ common law fraud claim is based on the alleged misrepresentations by
Defendants that there would be only one class of equity in Infinium and that there was an
untapped $20 million credit facility from Fifth Third Bank. (SAC ¶ 112, Dkt. No. 39.) These
allegations cannot are not sufficient to state a claim because they do not identify with specificity
who made the misstatements. See Sears, 912 F.2d at 892. Plaintiffs also base their common law
fraud claim on a number of purported omissions by Defendants. (SAC ¶ 117, Dkt. No. 39.)
However, Plaintiffs’ allegations fail to establish a duty to speak. All of the alleged omissions
took place “prior to the conversion of their loans to Infinium to equity in Infinium,” and thus
Infinium owed no fiduciary duty to Plaintiffs. See In re Advance Nanotech, Inc., 2014 WL
1320145, at *3. And although a duty to speak arises once the defendant has chosen to make other
statements that would be made misleading due to a defendant’s silence, see Metro Commc’n
Corp. BVI v. Advanced Mobilecomm Tech. Inc., 854 A.2d 121, 155 (Del. Ch. 2004), Plaintiff
fails to allege which of Defendants’ statements were made misleading by the alleged omissions.
Accordingly, Plaintiffs’ Delaware common law fraud claim also fails to state a claim under the
heightened pleading standard of Rule 9(b).

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CONCLUSION
For the foregoing reasons, the Court grants the Individual Defendants’ Motion to Dismiss
(Dkt. No. 14) and the Infinium Defendants’ Motion to Dismiss (Dkt. No. 17). The SAC is
dismissed without prejudice. Plaintiffs are granted leave to file a third amended complaint that
remedies the pleading deficiencies of the prior complaint.
ENTERED:

Dated: March 3, 2016

__________________________
Andrea R. Wood
United States District Judge

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