Howe v. Shchekin et al

Filing 66

MEMORANDUM Opinion and Order Signed by the Honorable John Z. Lee on 3/3/17.Mailed notice(ca, ).

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
WILLIAM HOWE, an Individual, and
)
D & D AUTO RESORT, LLC, an Illinois )
limited liability company,
)
)
Plaintiffs,
)
)
v.
)
)
ALEXANDR SHCHEKIN a/k/a
)
ALEXANDRE SHCHEKIN, an
)
Individual,
)
)
Defendant.
)
)

15-cv-8675
Judge John Z. Lee

MEMORANDUM OPINION AND ORDER
Plaintiffs William Howe (“Howe”) and D&D Auto Resort, LLC (“D&D”)
(together, “Plaintiffs”) filed suit against Defendant Alexandr Shchekin (“Shchekin”),
alleging that Shchekin violated federal securities law and committed common law
fraud in connection with selling Howe membership units in ReadOz, LLC
(“ReadOz”). Shchekin now moves to dismiss Plaintiffs’ Amended Complaint under
Federal Rule of Procedure (“Rule”) 12(b)(6). For the reasons that follow, Shchekin’s
motion [51] is granted.
Background
Beginning in May 2008, Shchekin—an owner and manager of digital
publisher ReadOz—began soliciting Plaintiffs’ investment in the company.

Am.

Compl. ¶¶ 8, 16, ECF No. 47. His solicitation was successful. On three occasions,
Plaintiffs purchased “membership units” in ReadOz. First, on May 27, 2008, D&D

purchased 47,666 and 2/3 units for $71,500.00. Id. ¶ 17. Later, on September 15,
2009, Howe made an individual investment of an undisclosed amount and received
21,399.92 units. Id. ¶ 19. Finally, on April 8, 2011, Howe made another individual
investment of an undisclosed amount and received 8750 units in return. Id. ¶ 22.
In connection with these purchases, Plaintiffs allege that Shchekin made a
number of misrepresentations and omissions “[b]etween April 2008 and present.”
Id. ¶ 25.

First, in connection with all three sales, Shchekin failed to advise

Plaintiffs that the units were not registered with the Securities Exchange
Commission (SEC). Id. ¶ 25(a). He also “never presented or delivered” a prospectus
and “failed to ensure that [Plaintiffs] were accredited investors.” Id. ¶¶ 25(b), 45. 1
Additionally, in connection with the 2009 and 2011 sales, Shchekin “failed to advise
Howe that ReadOz could only accept investments over $50,000.” Id. ¶ 25(c). 2
Plaintiffs also identify a number of misrepresentations that Shchekin made
on various dates from on or about February 17, 2010, to August 1, 2011, in the
course of securing their investments. See id. ¶ 25. In general terms, the statements
sought to reassure Plaintiffs of ReadOz’s growth and solvency. See, e.g., id. ¶ 25(m)
(“In the same August, 17, 2010 correspondence, Shchekin claimed that ReadOz was

The significance of the latter action appears to be that in 2007, Shchekin filed a
“Notice of Sale of Securities” for ReadOz “pursuant to Regulation D of the Securities Act of
1933.” Id. ¶ 12. In the filing, “Shchekin state[d] that the issuer (ReadOz) has not and does
not intend to sell securities to non-accredited investors.” Id. ¶ 14.
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As with Shchekin’s failure to ensure Plaintiffs were accredited investors, the
significance of this action appears to be another representation in the Regulation D filing in
which “Shchekin state[d] that the minimum investment that will be accepted from any one
individual is $50,001.00.” Id. ¶ 15.
2

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experiencing 1,000% growth and in excess of 750,000 readers on the ReadOz site
monthly.”).

Plaintiffs further allege that, following their investments, Shchekin

continued to reassure them of ReadOz’s value.

Id. ¶¶ 26–27.

According to

Plaintiffs, their “suspicions of fraud were confirmed in 2015 when they discovered
Shchekin’s continued efforts to solicit additional investment.” Id. ¶ 28.
Plaintiffs filed their initial complaint before this Court on October 1, 2015.
On May 13, 2016, the Court granted Plaintiffs’ motion to file an amended
complaint, and Plaintiffs filed their amended complaint thereafter, naming
Shchekin and Andrew Menasce as Defendants. Andrew Menasce has since been
dismissed. Plaintiffs’ Amended Complaint contains two counts. Count I, brought
solely by Howe, is titled “Violation of § 10(b)(5) of the Securities Act of 1934” and is
based on Howe’s April 8, 2011 investment in ReadOz. Count II is titled “Common
Law Fraud” and is based on each of Plaintiffs’ investments in ReadOz.
Legal Standard
To survive a motion to dismiss pursuant to Rule 12(b)(6), a complaint must
“state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550
U.S. 544, 570 (2007).

“A claim has facial plausibility when the plaintiff pleads

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). Additionally, when considering motions to dismiss, the Court accepts “all
well-pleaded factual allegations as true and view[s] them in the light most favorable
to the plaintiff.” Lavalais v. Vill. of Melrose Park, 734 F.3d 629, 632 (7th Cir. 2013)

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(citing Luevano v. Wal–Mart Stores, Inc., 722 F.3d 1014, 1027 (7th Cir. 2013)). At
the same time, “allegations in the form of legal conclusions are insufficient to
survive a Rule 12(b)(6) motion.” McReynolds v. Merrill Lynch & Co., Inc., 694 F.3d
873, 885 (7th Cir. 2012) (citing Iqbal, 556 U.S. at 678). As such, “[t]hreadbare
recitals of the elements of the cause of action, supported by mere conclusory
statements, do not suffice.” Iqbal, 556 U.S. at 678.
In ruling on a motion to dismiss pursuant to Rule 12(b)(6), a district court
should not require a plaintiff to “anticipate or overcome affirmative defenses such
as those based on the statute of limitations.” O’Gorman v. City of Chi., 777 F.3d
885, 889 (7th Cir. 2015). But where a plaintiff “plead[s] himself out of court by
including factual allegations that establish that the plaintiff is not entitled to relief
as a matter of law,” the court can dismiss the complaint accordingly. Id.
Analysis
I.

Count I: Section 10(b) of the Securities and Exchange Act of 1934
A.

Statute of Repose

Shchekin initially moves to dismiss Count I to the extent it relies on
fraudulent misrepresentations or omissions occurring prior to October 1, 2010. He
argues that any such reliance is barred by the applicable statute of repose. Claims
under Section 10(b) of the Securities and Exchange Act of 1934 are subject to the
limitations and repose periods stated in 28 U.S.C. § 1658(b).
Reynolds, 559 U.S. 633, 638 (2010).

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Merck & Co. v.

Section 1658(b) requires that a cause of action be brought within two years
after discovery of facts constituting the violation (i.e., the statute of limitations), or
five years after the violation (i.e., the statute of repose). 28 U.S.C. § 1658(b). The
parties agree that the “violation” that triggers § 1658(b)’s limitations and repose
periods is the date of a misrepresentation or omission made in connection with a
sale that gives rise to a claim, rather than the date of the sale itself. Resp. at 3–4;
Reply at 2; see also McCann v. Hy-Vee, Inc., 663 F.3d 926, 932 (7th Cir. 2011)
(holding that “violation” for the purposes of § 1658(b)(2) is the date of the
“misrepresentation,” triggering the period “from the date of the fraud rather than
the date of the injury”). The parties disagree, however, on how the repose period
should apply to the facts of this case.
Here, Plaintiffs filed suit initially on October 1, 2015.

Thus, the repose

period would seem to bar Howe from relying on any misrepresentations or
omissions that occurred prior to October 1, 2010. Seeking to avoid this result, Howe
asks this Court to apply a “continuing fraudulent scheme theory.” Some district
courts outside of this circuit have applied such a theory to blunt the statute of
repose where a plaintiff alleges a series of misrepresentation or omissions, some
inside and some outside the repose period. In such circumstances, these courts
have held that the statute of repose “‘runs from the date of the last alleged
misrepresentation regarding related subject matter.’” In re Beacon Assocs. Litig.,
282 F.R.D. 315, 324 (S.D.N.Y. 2012) (quoting Plymouth Cty. Ret. Ass’n v. Schroeder,
576 F. Supp. 2d 360, 378 (E.D.N.Y. 2008)); see also Resp. at 3 (collecting cases).

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Support for the theory, however, is tenuous. One court applying the theory has
noted that “jurisdictions have arrived at varying and inconsistent results on this
issue,” Plymouth Cty. Ret. Ass’n, 576 F. Supp. 2d at 378, and the Court has found
scant reasoning that supports the theory.
A majority of courts across circuits, however, have rejected the continuing
fraudulent scheme theory. Carlucci v. Han, 886 F. Supp. 2d 497, 514 & n.9, 515
(E.D. Va. 2012) (collecting cases).

These courts have relied on two different

arguments, both based on statements by the Supreme Court that undercut the
theory. First, to permit the repose period to run only from the date of the last
misrepresentation in a series of misrepresentations would read into the statute a
form of equitable tolling that preserves earlier misrepresentations. Carlucci, 886 F.
Supp. 2d at 515.

The Supreme Court, however, has held that a bar virtually

equivalent to § 1658(b)(2) is not subject to equitable tolling. Lampf, Pleva, Lipkind,
Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 363 (1991), superseded on other
grounds as stated in Merck, 559 U.S. at 647–78. Additionally, the Supreme Court
has elsewhere characterized § 1658(b)(2) as “unqualified” and “giving defendants
total repose after five years.”

Merck, 559 U.S. at 650 (emphasis added).

The

Supreme Court offered this characterization in order to defuse concerns that
predicating the running of the statute of limitations in § 1658(b)(1) upon a
reasonable investor’s discovery of pertinent facts would permit “stale claims.” Id.
The Court agrees with the reasoning of Carlucci and similar cases and concludes
that reading the continuing fraudulent scheme theory into § 1658(b)(2) would

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unjustifiably qualify the repose period and permit stale claims. See Carlucci, 886 F.
Supp. 2d at 515.
Applying the statute of repose to Howe’s claim in Count I, § 1658(b)(2) bars
Howe from relying on any misrepresentations or omissions in support of his claim
that occurred before the filing of his initial complaint on October 1, 2015. Howe’s
complaint identifies various misrepresentations and omissions that predate October
1, 2010. See Am. Compl. ¶¶ 25(d)–(m). Thus, the complaint establishes everything
necessary for the repose period to apply as a matter of law. See O’Gorman, 777 F.3d
at 889. Howe’s claim in Count I is therefore dismissed with prejudice to the extent
it relies on misrepresentations or omissions that predate October 1, 2010.
b.

Federal Rule of Civil Procedure 9(b) and the Private Securities
Litigation Reform Act of 1995

Shchekin then moves to dismiss any remaining claims under Count I,
arguing that Plaintiffs’ remaining pleadings do not satisfy the heightened pleading
requirements applicable to such claims under Rule 9(b) and the Private Securities
Litigation Reform Act of 1995 (PSLRA).

Section 10(b) of the Securities and

Exchange Act of 1934 prohibits the “use or employ, in connection with the purchase
or sale of any security . . . , [of] any manipulative or deceptive device or contrivance
in contravention of such rules and regulations as the [SEC] may prescribe as
necessary or appropriate in the public interest or for the protection of investors.” 15
U.S.C. § 78j(b). The SEC in turn promulgated § 10b-5, which forbids “mak[ing] any
untrue statement of a material fact or . . . omit[ting] to state a material fact
necessary in order to make the statements made, in the light of the circumstances

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under which they were made, not misleading . . . in connection with the purchase or
sale of any security.” 17 C.F.R. § 240.10b-5. The basic elements of a § 10b-5 claim
are: “(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. Sci.-Atlanta, 552 U.S. 148,
157 (2008).
As a general matter, § 10b-5 claims sound in fraud and are therefore subject
to the heightened pleading requirements of Rule 9(b). Tellabs, Inc. v. Makor Issues
& Rights, Ltd., 551 U.S. 308, 319 (2007). Thus, the complaint must state with
particularity the circumstances of the purported fraud. Gandhi v. Sitara Capital
Mgmt., LLC, 721 F.3d 865, 869 (7th Cir. 2013). These circumstances include the
identity of the party who made the alleged misrepresentation, the time, place, and
content of the misrepresentation, and the method of communication of the
purported misrepresentation. Id. But the PSLRA goes beyond Rule 9(b), imposing
even more demanding requirements on § 10b-5 claims. Tellabs, 551 U.S. at 320–21.
In particular, the PSLRA instructs that “the complaint shall specify each statement
alleged to have been misleading . . . [and] the reason or reasons why the statement
is misleading.” 15 U.S.C. § 78u-4(b)(1).

Additionally, the complaint must “state

with particularity facts giving rise to a strong inference that the defendant acted
with the required state of mind.” Id. § 78u–4(b)(2)(A). If these requirements are

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not met, the Court must, on defendant’s motion, dismiss the complaint. Id. § 78u–
4(b)(3)(A).
Removing

the

repose-barred

misrepresentations

and

omissions

from

Plaintiffs’ complaint, there appear to be only four remaining bases for Howe’s § 10b5 claim: (1) “Shchekin never presented or delivered to Howe a prospectus for his
investment in ReadOz,” Am. Compl. ¶ 31; (2) “Shchekin knowingly sold securities to
an unaccredited investor, Howe,” id. ¶ 33; (3) “Shchekin sold unregistered securities
to Howe,” id. ¶ 34; and (4) “Shchekin failed to advise Howe that ReadOz could only
accept investments over $50,000,” id. ¶ 25(c). 3
These remaining allegations are deficient under the PSLRA in a number of
different ways. As an initial matter, Shchekin’s purported actions are just that:
actions. They are not false statements of fact or omissions of material facts that
render statements misleading. While Howe might have proceeded under a different
theory that would not require misrepresentations or omissions, see Affiliated Ute
Citizens of Utah v. United States, 406 U.S. 128, 152–53 (1972), he offers Shchekin’s
actions only as such, Am. Compl. ¶ 31, Resp. at 8, and thus fails to make out the
first element of his prima facie case.
Construed most charitably, however, Howe identifies three incidents that
could constitute omissions: Shchekin failed to tell Howe that investment units in

Howe incorporates and re-alleges much of the complaint in Count I, id. ¶ 29, and
alludes to other misrepresentations and omissions, id. ¶¶ 31, 35. But based on the Court’s
review of the complaint, these other misrepresentations or omissions are either barred by
the statute of repose, post-date Howe’s April 11, 2011 investment, or are not sufficiently
identified in the complaint so as to comply with the PSLRA.

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ReadOz were only available to accredited investors, failed to inform Howe that the
investment units were unregistered, and failed to advise Howe of the $50,000
investment threshold. Howe, however, does not allege with particularity why these
omissions are misleading; he has not identified any particular statements that
Shchekin made and coupled them with specific, contradictory information known to
Shchekin that rendered his statements misleading.

Constr. Workers Pension

Fund—Lake Cty. & Vicinity v. Navistar Int’l Corp., 114 F. Supp. 3d 633, 651 (N.D.
Ill. 2015); Garden City Employees’ Ret. Sys. v. Anixter Int’l, Inc., No. 09-CV-5641,
2012 WL 1068761, at *5 (N.D. Ill. Mar. 29, 2012); see also Babin v. Shchekin, No. 16
C 5722, 2017 WL 403568, at *8 (N.D. Ill. Jan. 30, 2017) (dismissing a pleading
containing purported omissions identical to those in this case on similar grounds).
Perhaps Howe’s hope was that the Court would draw a connection between
Shchekin’s alleged “omissions” and Shchekin’s purported statements in ReadOz’s
2008 Regulation D filing. Am. Compl. ¶¶ 14–15. But Howe does not plead this
connection himself, as the PSLRA requires him to do. Alizadeh v. Tellabs, Inc., No.
13 C 537, 2014 WL 2726676, at *5 (N.D. Ill. June 16, 2014) (discouraging “puzzle
pleading” in which plaintiffs abdicate their role of connecting representations to
contradictions).
What is more, Howe does not indicate whether Shchekin’s statements in the
2008 filing were still valid in 2011, given that ReadOz’s Notice of Sale of Securities
allegedly expired in 2008. Am. Compl. ¶ 11. This gap raises unanswered questions
as to how Shchekin’s omissions were fraudulent and the precise timing of

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Shchekin’s purported fraud, neither of which Howe provides.

See id. ¶ 25

(identifying a vague time frame of “[b]etween April 2008 and present”). And, even if
the statements were still valid in 2011, Howe fails to indicate how Shchekin’s
statements in the 2008 filing rendered his actions misleading.

Howe’s theory

appears to be that Shchekin’s statement that he had not and did not intend to sell
securities to unaccredited investors, and that the minimum investment would be
$50,000, prohibited him from deciding otherwise. But this is just the Court’s best
guess. Howe fails to explain his theory of fraud with particularity.
An additional failing in Howe’s pleading is his conclusory allegations of
scienter. Howe acknowledges in his response that he has an obligation to plead
facts giving rise to a strong inference of scienter. Resp. at 8. In determining if a
pleading raises this inference, the Court must accept all factual allegations in the
complaint as true, consider alternative, innocent explanations for Shchekin’s
conduct that are plausible, and determine if a reasonable person would find the
inference of scienter “cogent and at least as compelling” as any innocent inference.
Tellabs, 551 U.S. at 322–24.

Howe’s conclusory allegations of scienter—that

“Shchekin intentionally made the [stated] misrepresentations and omissions of
material facts in order to convince Howe to invest in ReadOz,” Am. Compl. ¶ 36—
are insufficient to satisfy the PSLRA. Greer v. Advanced Equities, Inc., 683 F. Supp.
2d 761, 775–76 (N.D. Ill. 2010) (citing Pugh v. Tribune Co., 521 F.3d 686, 700 (7th
Cir. 2008)).

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For these reasons, Shchekin’s motion to dismiss what remains of Howe’s
§ 10b-5 claim in Count I is granted. Given that Plaintiffs have only amended their
complaint once (on their own accord without a ruling from this Court), and mindful
of the demanding pleading standards of the PSLRA, Fannon v. Guidant Corp., 583
F.3d 995, 1002 (7th Cir. 2009), the dismissal is without prejudice.
II.

Count II: Common Law Fraud
Shchekin also moves to dismiss Plaintiffs’ common law fraud claim in Count

II. But the Court’s jurisdiction is anchored in Plaintiffs’ federal § 10b-5 claim, and
having dismissed that claim, the Court has discretion to decline the exercise of
supplemental jurisdiction over Plaintiffs’ remaining state law claim.

28 U.S.C.

§ 1367(c)(3). The general rule is that the Court should decline jurisdiction where a
case has not reached trial in order to avoid intruding upon questions that arise
purely under state law. Burritt v. Ditlefsen, 807 F.3d 239, 252 (7th Cir. 2015).
Seeing no reason deviate from this rule, id., the Court dismisses Plaintiff’s state law
claims without prejudice. Should Plaintiffs file an amended complaint, they are at
liberty to re-allege their common law fraud claim, at which time Shchekin can
renew his arguments for dismissal.
Conclusion
For the reasons stated herein, the Court grants Shchekin’s motion to dismiss
[51]. Plaintiffs’ claims are dismissed without prejudice except as noted. To the
extent Plaintiffs wish to amend their claims, they must do so by March 27, 2017. If

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Plaintiffs fail to do so, the Court will assume that they no longer wish to pursue this
litigation.

IT IS SO ORDERED.

ENTERED

3/3/17

__________________________________
John Z. Lee
United States District Judge

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