Pomeroy et al v. GreatBanc Trust Company et al
Filing
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MEMORANDUM Opinion and Order. For the reasons stated in this opinion (and indeed for other reasons as well, as stated in the paragraph preceding this Conclusion), GreatBanc's Rule 12(b)(6) motion for its dismissal as a defendant is granted. This action is set for a status hearing at 9:15 a.m. December 22, 2014 to discuss further proceedings by plaintiffs against the remaining defendants, CMA and the Dusheks. Signed by the Honorable Milton I. Shadur on 12/16/2014. Mailed notice(tlp, )
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
PATRICIA POMEROY, ENOCH
ANDERSON,
Plaintiffs,
v.
GREATBANC TRUST COMPANY, an
Illinois Corporation, et al.,
Defendants.
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Case No. 14 C 6162
MEMORANDUM OPINION AND ORDER
This opinion need not engage in any revisit to the unsuccessful state court efforts by
plaintiffs Patricia Pomeroy and Enoch Anderson to recoup the losses they sustained as victims of
the fraudulent cherry-picking scheme devised and implemented by Charles Dushek Sr. and Jr.
and their investment advisory firm Capital Management Associates ("CMA"). 1 Now plaintiffs
(both individually and on behalf of a proposed class of such victims) have turned to the federal
courts, seeking to invoke the United States securities laws as their jurisdictional predicate.
GreatBanc Trust Company ("GreatBanc"), targeted by plaintiffs as a codefendant with
CMA and the Dusheks (very likely because its pockets are deeper than theirs), has filed a
Fed. R. Civ. P. ("Rule") 12(b)(6) motion for its dismissal from the action. 2 As Complaint
¶¶ 138-41 have set out, the Securities and Exchange Commission earlier filed a civil action (Case
1
Charles Sr. is CMA's President and owner and a registered investment advisor, while
Charles Jr. is a CMA employee.
2
For a reason explained a bit later, this opinion eschews the normal Rule 12(b)(6)
locution of referring to the cherry-picking scheme as merely "alleged."
No. 13 C 3669) in this District Court, also alleging Securities Exchange Act § 10(b) and Rule
10b-5 violations by CMA and the Dusheks via the same cherry-picking scheme (notably the SEC
did not name GreatBanc as a defendant in that action). When the three culpable defendants
agreed to the entry of a judgment in that case, this Court's colleague Honorable Gary Feinerman
entered a consent judgment against the Dusheks and CMA under Securities Exchange Act §
21(d)(3), with the resulting disgorgement order extending to at least as much as $2,058,514 in illgotten profits gained and losses avoided. As this opinion's earlier "deep pocket" reference
suggests, that overhanging liability has obviously served as an additional impetus for plaintiffs'
attempt to extend securities law liability to GreatBanc in this lawsuit.
In brief, the cherry-picking scheme at issue in both the SEC's lawsuit and this action
involved an abuse of the powers granted to Charles Sr. as plaintiffs' investment advisor pursuant
to Investment Advisory Agreements ("Advisory Agreements") that plaintiffs entered into with
CMA. In part CMA required in the Advisory Agreements that plaintiffs enter into a Custodial
Agreement with GreatBanc, and plaintiffs would not have opened accounts with GreatBanc in
the absence of that requirement.
In essence the Dusheks-CMA cherry-picking activities were really easy pickings.
Dusheks, who were themselves investors for their own accounts, would make block purchases of
securities -- but instead of allocating those purchases among the third-party investors and
themselves at the times that the purchases were made, they would wait several days, then
allocate profitable trades to their own personal accounts and unprofitable trades to the accounts
of CMA clients such as plaintiffs. According to Complaint ¶¶ 84-85, during the 2008-12 period
Dusheks made something in excess of $2 million in profits through the scheme, while CMA
clients such as plaintiffs suffered corresponding aggregate losses.
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As for GreatBanc, it is not asserted by plaintiffs to have either directed or decided how to
allocate the trades. Instead Complaint ¶ 100 charges that GreatBanc's asserted role in the scheme
comprised these activities:
a.
Provided securities execution services relative to all securities transactions
in the GreatBanc accounts;
b.
Consummated all portfolio transactions in the Plaintiff's GreatBanc
accounts through payment and delivery of securities purchased and sold;
c.
Processed all securities settlements for the GreatBanc accounts on a
transactional fee basis;
d.
Represented that the allocation of securities would be performed on a fair
and equitable basis;
e.
Made block purchases of securities in the GreatBanc Master Account and
GreatBanc Omnibus Account.
Those activities must be evaluated in terms of plaintiffs' acknowledged sole ticket of entry to this
federal court, as stated in the "Procedural Posture" prelude to plaintiffs' Response to GreatBanc's
current motion:
As a result, Plaintiffs have filed the present Complaint before this Court based
solely on Rule 10b-5.
At the outset that Rule 10b-5 limitation cabins plaintiffs' claim against GreatBanc, for
they make no allegations that it made any misrepresentations or omissions that caused plaintiffs
to invest in the Dusheks-CMA cherry-picking scheme. But black letter securities law for almost
four decades has imposed a purchaser-seller requirement for any implied private right of action
under Section 10(b): Blue Chip Stamps v. Manor Drugstores, 421 U.S. 723, 749 (1975)
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expressly held that misrepresentations or omissions that cause an investor to refrain from buying
or selling is not actionable under Section 10(b), 3 and that principle remains good law today.
Here plaintiffs do not (and cannot) contend that GreatBanc did anything to cause them to
choose CMA as their investment advisor, to choose GreatBanc as custodian or to decide to invest
in any specific security. Instead Plaintiffs' Response to GreatBanc's motion contends at page 14
that "GreatBanc made material omissions every single month of the scheme in the account
statements it prepared for Plaintiffs." But Stoneridge Inv. Partners, LLC v. Scientific-Atlanta,
Inc., 552 U.S. 148, 159 (2008) (citations omitted) teaches:
Reliance by the plaintiff upon the defendant's deceptive acts is an essential
element of the § 10(b) private cause of action. It ensures that, for liability to arise,
the "requisite causal connection between a defendant's misrepresentation and a
plaintiff's injury" exists as a predicate for liability.
And plaintiffs' attempt in their Response to bring themselves within a rebuttable presumption of
reliance by simply continuing their relationship is unavailing -- on that score our Court of
Appeals' affirmance of the dismissal of Section 10(b) claims in O'Brien v. Continental Ill. Nat'l
Bank & Trust Co., 593 F.2d 54 (7th Cir. 1979) scotched a like contention that asserted
omissions, rather than active misrepresentations, had induced pension funds to maintain their
advisory relationship with their investment advisor. 4 Simply put, plaintiffs' position on this issue
exemplifies their overall attempt to blur the dispositive distinctions between the sharply different
3
It might of course have been plausible for courts to find that an investor's decision to
hold onto an already-owned security because of another party's misrepresentation could also be
characterized as an investment decision. But it is far too late in the day to invoke Section 10(b)
or Rule 10b-5 as the predicate for such a claim.
4
As might have been expected, O'Brien, id. at 58 adhered to the then-recent Blue Chip
Stamps decision in its holding. And like Blue Chip Stamps, O'Brien too still remains good law
despite its age.
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roles played by the cherry-picking defendants and by GreatBanc, all in an effort to tar the latter
with the same brush.
That simply won't do. On that score the controlling authority is provided by such cases
as Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296, 2302 and n.6 (2011),
where the Supreme Court reconfirmed the principle that only the maker of a false statement can
be sued in a private action under Section 10(b) -- in so doing, the Court followed its earlier
holding in Central Bank of Denver N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164,
180 (1994) that Rule 10b-5's private right of action does not include suits against aiders and
abettors. And in like fashion, our Court of Appeals has held in Fulton County Employees Ret.
Sys. v. MGIC Inv. Corp., 675 F.3d 1047, 1051-52 (7th Cir. 2012) that Section 10(b) does not
impose liability for a failure to correct another's misrepresentations.
There are more nails that the memoranda by GreatBanc's counsel have driven into the
coffin of plaintiffs' asserted Rule 10b-5 claim against it -- for example, GreatBanc's
R. Mem. 11-13 points to plaintiffs' failure to satisfy the 15 U.S.C. § 78u-4(b)(2)(A) statutory
requirement that a plaintiff in such an action must allege a strong inference of scienter for each
alleged act or omission on the part of a targeted defendant. But it is unnecessary to extend this
opinion to treat with all of GreatBanc's contentions, compelling though they may be, for what
has been said to this point amply supports the GreatBanc motion for its dismissal from the
action.
Conclusion
For the reasons stated in this opinion (and indeed for other reasons as well, as stated in
the paragraph preceding this Conclusion), GreatBanc's Rule 12(b)(6) motion for its dismissal as
a defendant is granted. This action is set for a status hearing at 9:15 a.m. December 22, 2014 to
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discuss further proceedings by plaintiffs against the remaining defendants, CMA and the
Dusheks.
Date: December 16, 2014
__________________________________________
Milton I. Shadur
Senior United States District Judge
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