Santore et al v Swaminathan

Filing 35

MEMORANDUM Opinion and Order Signed by the Honorable Young B. Kim on 3/1/2018. (ma,)

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
VICTOR SANTORE, et al.,
Plaintiffs,
v.
NARAYANAN SWAMINATHAN,
Defendant.

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No. 17 CV 5742

Magistrate Judge Young B. Kim
March 1, 2018

MEMORANDUM OPINION and ORDER
Plaintiffs Victor Santore, Alexis Humphreys, Mariela Humphreys, Mirza
Abbas Raza, Vinay Kadam Sadashiv, Banmeet Saluja, Harish Singh, and Manjit
Singh bring this action against Defendant Narayanan Swaminathan alleging that
he violated Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”),
15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5.

Before the court is

Swaminathan’s motion to dismiss the complaint under Federal Rules of Civil
Procedure 12(b)(6) and 12(b)(3), or in the alternative, to transfer the matter to the
District of Maryland. For the following reasons, the motion is denied:
Background
For purposes of the current motion, the court accepts as true the following
well-pled facts taken from the complaint, drawing all reasonable inferences in
Plaintiffs’ favor. See Berger v. Nat’l Coll. Athletic Assoc., 843 F.3d 285, 289-90 (7th
Cir. 2016).

Plaintiffs purchased an internet course on options trading from

Swaminathan that began on April 3, 2016, and ended on April 29, 2016. (See R. 1,

Compl. ¶ 11.) During the course Swaminathan promoted to Plaintiffs and others
the idea of joining an investment club with him. (Id. ¶ 12.) A number of individuals
and entities, including Plaintiffs, (collectively, the “Partners”) expressed interest.
(Id.) After collecting $525 from each Partner for “legal expenses” in May 2016,
Swaminathan emailed the Partners informing them that he would not be advising
the club, explaining that he would have to be a registered investment advisor to do
so and that registering as an advisor was “not practical” at the time. (Id. ¶¶ 13-17.)
Shortly thereafter Swaminathan emailed the Partners again directing their
attention to an SEC website explaining the difference between an investment club,
which operates based on members’ active participation in investment decisions and
is not considered a security, and an investment contract, which is considered a
security because investing members expect to make a profit from the efforts of
others. (See id. ¶ 19.)
On May 24, 2016, Swaminathan formed AlphaTigers Capital, LLC
(“AlphaTigers”), as an investment club organized under Delaware law. (Id. ¶ 20.)
The group consisted of 16 Partners, including the Plaintiffs, with Swaminathan as
the sole operating manager. (Id.) A few days later, Swaminathan set up a bank
account at Bank of America (“Bank Account’) and an Interactive Brokers account
(“IB Account”), but informed the Partners that they would not have equal access to
the IB Account. (See id. ¶¶ 21-23.) On June 1, 2016, the Partners signed a Limited
Liability Company Agreement for AlphaTigers (“Operating Agreement”). (Id. ¶ 24;
R. 28-1, Ex. 1.) Swaminathan signed the Operating Agreement on behalf of his

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company, OptionTiger Trading, LLC, and on behalf of AlphaTigers as “Operating
Manager.” (Id. at 21-22.) Section 2.5 of the Operating Agreement states in relevant
part that the purpose of AlphaTigers is “to engage in investments as an investment
club, trade securities . . . , to generate profits, provide for a collaborative learning
and education environment to become better traders . . . and collaborative
discussion for the benefit of all Members[.]” (R. 28-1, Ex. 1.) Exhibit A of the
Operating Agreement demonstrates that Plaintiffs themselves contributed a total of
$625,000 in capital to AlphaTigers. (R. 1, Compl. ¶ 26; R. 28-1, Ex. 1, Ex. A.) The
capital contributions of all Partners totaled $1,175,000, but Swaminathan made no
capital contributions himself or on behalf of OptionTiger Trading, LLC.

(Id.)

According to the terms of the Operating Agreement, the Partners retained 60
percent of the equity of AlphaTigers and Swaminathan retained 40 percent of the
equity. (R. 1, Compl. ¶ 27.) Net capital proceeds would first be applied to the
payment of the investment club’s debts and liabilities, and then the balance would
be distributed to the Partners and Swaminathan in proportion to their equity
interests.

(Id. ¶ 28.)

According to a “stop loss” provision in the Operating

Agreement, if capital were to be reduced by 30 percent, AlphaTigers would dissolve
with the agreement of a majority of Partners, all trading activities would cease, and
only Partners who contributed capital would receive the remaining money back on a
pro-rata basis. (See id. ¶¶ 30-31.) The Operating Agreement further provided that
actions regarding “all matters of the Company” would need the approval of a
majority of equity holders. (See R. 28-1, Ex. 1, § 5.17.)

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On the day the Operating Agreement was signed, Swaminathan emailed the
Partners stating that his trading would be conservative initially and that he would
only use “a small fraction” of the capital. (R. 1, Compl. ¶ 32.) After transferring a
total of $1,000,000 from the Bank Account to the IB Account, Swaminathan began
trading through the IB Account on June 3, 2016. (Id. ¶¶ 33-35.) On June 13, 2016,
Swaminathan deposited $7,500 into the Bank Account and also transferred
$125,000 from the Bank Account to the IB Account. (Id. ¶¶ 36-37.) The next day,
AlphaTigers transferred $70,000 from the IB Account to the Bank Account as
trading profits to be distributed in accordance with Section 4.2 of the Operating
Agreement. (Id. ¶ 38.) Swaminathan received $28,000 from this distribution, equal
to 40 percent of the profits. (Id.)
The following day, on June 15, 2016, Swaminathan emailed the Partners to
report a $90,000 net trading loss and promised to recover the amount “very
quickly.” (Id. ¶ 40.) A couple days later he transferred $50,000 from the Bank
Account to the IB Account and emailed the Partners informing them that he had
been unavailable because of a head injury and that losses had exceeded the stop loss
amount. (Id. ¶¶ 41-42.) On June 19, 2016, Swaminathan emailed the Partners
again and indicated that only about $180,000 remained in the IB Account. (See id.
¶ 43.) He stated that he wanted to discuss restoration of capital and offered to
contribute up to $150,000 to AlphaTigers, but that he would need several weeks to
make the contribution because the funds were illiquid and coming from India. (Id.)

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The Partners held an emergency meeting on June 20, 2016, and agreed to
freeze all trading and issue a hold on the IB Account. (Id. ¶ 44.) In the days that
followed Swaminathan expressed embarrassment and his desire to “make this
right,” acknowledging that the size of the contracts he traded “played a big role in
the losses.” (Id. ¶¶ 45-48, 50.) He also promised to make efforts to repay the lost
capital, although he said he could not return the $28,000 distribution he received
earlier. (Id. ¶ 49.) In July and August 2016, the Partners removed Swaminathan
as a signatory and account holder of the IB Account and transferred $180,000 from
the IB Account to the Bank Account. (Id. ¶¶ 51-54.) Meanwhile, Swaminathan
emailed the Partners, referring to his “massive fault” and offering to raise money
from his assets to pay them back. (Id. ¶ 55.) But in September 2016 Swaminathan
stopped communicating with the Partners citing the expectation of litigation. (Id.
¶ 56.) Plaintiffs brought this suit in August 2017.
Analysis
Swaminathan moves to dismiss Plaintiffs’ Exchange Act claim on multiple
grounds.

First, he seeks dismissal pursuant to Rule 12(b)(6), arguing that the

parties’ investment activities did not involve a security, that Plaintiffs failed to
allege any material misrepresentations or omissions of fact, and that Plaintiffs have
not pled the requisite scienter. Second, he seeks dismissal under Rule 9(b), which
requires a party alleging fraud or mistake to state with particularity the
circumstances constituting fraud or mistake. Third, he argues that the Operating
Agreement requires that the dispute be submitted to arbitration.

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Finally,

Swaminathan contends pursuant to Rule 12(b)(3) that venue is improper in the
Northern District of Illinois (“NDIL”), or alternatively, that the case should be
transferred to the District of Maryland. At the court’s invitation the parties filed
supplemental briefing to address the Exchange Act’s venue provision and the
potential application of 28 U.S.C. § 1404(a), which governs change of venue. (See
R. 29; R. 31, Pls.’ Suppl. Resp.; R. 33, Def.’s Suppl. Mem.)
A.

Rule 12(b)(6)
A Rule 12(b)(6) motion to dismiss tests the sufficiency of the complaint, see

General Elec. Corp. v. Lease Resolution Corp., 128 F.3d 1074, 1080 (7th Cir. 1997),
rather than the merits of the case. Plaintiffs’ sole count alleges that Swaminathan
violated Section 10(b) of the Exchange Act and Rule 10b-5. (See R. 1, Compl. ¶¶ 5760.) In a typical Section 10(b) private action, a plaintiff must prove the following:
(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. Pugh v. Tribune Co., 521 F.3d 686, 693 (7th Cir. 2008).
Swaminathan begins by arguing that AlphaTigers was an investment club
and did not involve an “investment contract” constituting a security as alleged in
the complaint. (R. 1, Compl. ¶ 58.) In the Exchange Act context, an investment
contract is defined as “(1) an investment of money, (2) in a common enterprise,
(3) with the expectation of profits produced solely by the efforts of others.” Stenger
v. R.H. Love Galleries, Inc., 741 F.2d 144, 146 (7th Cir. 1984) (citing SEC v. Howey

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Co., 328 U.S. 293, 299 (1946)). Swaminathan focuses on the third prong, contending
that the formation of AlphaTigers was not a security because Plaintiffs expected to
profit from their own decision-making, not from Swaminathan’s efforts. (R. 19-1,
Def.’s Mem. at 5-6.) He points to the Operating Agreement, which dictates that all
investment actions must be voted on by each member. (See id. at 5.) According to
Swaminathan, Plaintiffs were part of a “collaborative learning situation,” “working
collectively to make trades and invest.” (Id. at 6.)
However, Swaminathan does not address the complaint’s allegations that the
investment activity at issue here occurred with no votes, input, or apparent
direction from Plaintiffs whatsoever. And even though the Operating Agreement
provided in theory for a collective effort, the Supreme Court has warned against
relying on form over substance in determining whether a particular financial
relationship constitutes an investment contract.

See Int’l Bhd. of Teamsters v.

Daniel, 439 U.S. 551, 558 (1979) (noting that the definition of an investment
contract should be applied in light of “the economic realities of the transaction”
rather than “the names that may have been employed by the parties”). The Seventh
Circuit has also eschewed a strict interpretation of the requirement that profits had
to come “solely” from the efforts of others, instead endorsing “a more realistic test”
examining “whether the efforts made by those other than the investor are the
undeniably significant ones, those essential managerial efforts which affect the
failure or success of the enterprise.” Kim v. Cochenour, 687 F.2d 210, 213 n.7 (7th
Cir. 1982) (internal quotations and citations omitted). And while the expectations

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of control are generally analyzed at the time the interest is sold, courts may look at
how a group actually operated and the “totality of the circumstances surrounding
the offering” to determine how control was actually allocated at the outset. See SEC
v. Merchant Capital, LLC, 483 F.3d 747, 756-57 (11th Cir. 2007) (citations omitted).
Reading the well-pled facts in the complaint as true and drawing all reasonable
inferences

in

Plaintiffs’

favor,

Swaminathan’s

efforts

certainly

affected

AlphaTigers’s success (or lack thereof) and are of central significance here.
According to the complaint, despite the Operating Agreement’s terms and even after
sending an email in which he claimed he would not be advising the group,
Swaminathan made trades unilaterally from the outset. (See R. 1, Compl. ¶¶ 22,
35-43.) He transferred funds and executed trading decisions without any input
from the Partners. The Supreme Court has emphasized that “Congress did not
intend to adopt a narrow restrictive concept of security in defining that term.”
Tcherepnin v. Knight, 389 U.S. 332, 338 (1967). The court therefore finds that the
complaint sufficiently alleges the existence of an investment contract constituting a
security.
Swaminathan next argues that Plaintiffs failed to allege that he made any
material misrepresentations or omissions of fact. (R. 19-1, Def.’s Mem. at 6-7.) The
court disagrees. According to the complaint, Swaminathan represented that he and
the Partners would make decisions collectively, AlphaTigers would function as an
investment club, he would not be “advising,” he would trade conservatively to start,
and that he would use only a small fraction of the capital. (See R. 1, Compl. ¶¶ 12,

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16-17, 19, 32.) Plaintiffs allege that none of those statements were true because he
made decisions without consulting or involving them and traded away nearly all of
the Partners’ capital contributions in less than three weeks. (See id. ¶¶ 35-43.) As
Swaminathan himself points out, the purpose of AlphaTigers and the reason
Plaintiffs joined was to collectively participate in trades and provide an educational
environment for the Partners. (See R. 19-1, Def.’s Mem. at 6.) But the complaint
adequately alleges that none of these goals was realized in the manner
Swaminathan represented and that the formation of AlphaTigers was nothing more
than bait to raise funds from unsuspecting investors.
As for scienter, the complaint in a securities-fraud action must “state with
particularity facts giving rise to a strong inference that the defendant acted with
the required state of mind.” Higginbotham v. Baxter Int’l, Inc., 495 F.3d 753, 756
(7th Cir. 2007) (internal quotation and citation omitted). That “state of mind” is an
intent to deceive demonstrated by knowledge of a statement’s falsity or reckless
disregard of a substantial risk that the statement is false. Id. A complaint will
survive a motion to dismiss “only if a reasonable person would deem the inference of
scienter cogent and at least as compelling as any opposing inference one could draw
from the facts alleged.” Id. (internal quotations omitted) (citing Tellabs, Inc. v.
Makor Issues & Rights, Ltd., 551 U.S. 308, 323 (2007)). The inference “need not be
irrefutable . . . or even the most plausible of competing inferences[,]” but the
inference of scienter must be strong in light of other explanations. Tellabs, 551 U.S.
at 324 (internal quotations and citations omitted).

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In light of the alleged facts and inferences to be drawn therefrom in favor of
Plaintiffs, Swaminathan at least recklessly disregarded the truth that he intended
to follow through on his representations.

To properly allege fraud rather than

simple breach of contract, the complaint must contain allegations demonstrating
that Swaminathan never intended to perform his obligations under the Operating
Agreement or to act on his email representations.

See United States ex rel.

O'Donnell v. Countrywide Home Loans, Inc., 822 F.3d 650, 658 (2d Cir. 2016)
(“[W]here allegedly fraudulent misrepresentations are promises made in a contract,
a party claiming fraud must prove fraudulent intent at the time of contract
execution; evidence of a subsequent, willful breach cannot sustain the claim.”).
Accepting the well-pled facts as true, Swaminathan was well aware of relevant
restrictions imposed by federal securities laws on investment advisors. (See R. 1,
Compl. ¶¶ 16-18.) It also appears he was cognizant of the difference between an
investment club and an investment contract, and having taught a class on options
trading before recruiting Plaintiffs to form AlphaTigers, the opposing inference that
he accidentally ran afoul of the very restrictions and definitions he acknowledged in
writing is not especially compelling. (See id. ¶¶ 11-12, 16-19.) Even the timeline of
events strengthens the inference of scienter in that barely one month elapsed
between when Swaminathan allegedly began making email statements about his
role and how AlphaTigers would be run and his alleged actions directly
contradicting those statements. (See id. ¶¶ 16-35.) The complaint also alleges that
Swaminathan received $28,000 in trading profits despite having contributed no

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capital.1 (Id. ¶¶ 26, 38-39); see Tellabs, 551 U.S. at 325 (personal financial gain may
weigh heavily in favor of a scienter inference). These alleged facts, when viewed
and accepted together, are sufficient to give rise to a strong inference that
Swaminathan acted with the requisite state of mind.
Lastly, Swaminathan argues that the complaint is deficient because it fails to
allege a connection between the alleged misrepresentations and the transactions at
issue and fails to allege the elements of reliance, economic loss, and loss causation.
(R. 19-1, Def.’s Mem. at 5, 7.) The court disagrees. Plaintiffs sufficiently allege that
they decided to invest capital and become a part of AlphaTigers in reliance on
Swaminathan’s representations that AlphaTigers would function as an investment
club and provide an educational, interactive experience. (See R. 1, Compl. ¶¶ 12,
16, 19, 25-26.)

The complaint also adequately alleges that Plaintiffs suffered

economic loss in the form of their capital contributions as a result of their reliance.
(See id. ¶¶ 40-56.) The Supreme Court has explained that the Exchange Act should
be “construed ‘not technically and restrictively, but flexibly to effectuate its
remedial purposes.’” See SEC v. Zandford, 535 U.S. 813, 819, 822 (2002) (citation
omitted) (holding it was “enough that the scheme to defraud and the sale of
The complaint also alleges “[u]pon information and belief” that Swaminathan
wrote himself a check for an additional $5,000 at the time of the $28,000
distribution for reasons unknown. However, invoking “information and belief” as a
basis for an allegation is insufficient in a fraud case unless “(1) the facts
constituting the fraud are not accessible to the plaintiff and (2) the plaintiff
provides ‘the grounds for his suspicions.’” See United States ex rel. Grenadyor v.
Ukrainian Vill. Pharmacy, Inc., 772 F.3d 1102, 1108 (7th Cir. 2014) (internal
quotation and citations omitted). Because Plaintiffs have provided no additional
context regarding the alleged $5,000 check, the court does not factor that allegation
into its analysis.
1

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securities coincide[d]” where investors “were duped into believing respondent would
‘conservatively invest’ their assets”). The Court also recognized that “the SEC has
consistently adopted a broad reading of the phrase ‘in connection with the purchase
or sale of any security.’” Id. at 819. Taking all well-pled facts in the complaint as
true, the court finds that this is not merely a case of common-law fraud or breach of
contract that happens to involve a security. See id. at 823 (explaining that a valid
Section 10(b) claim existed where defendant sold a security while never intending to
honor the terms of the sale in the first place); see also id. at 820 (finding Section
10(b) claim valid where “respondent’s fraud coincided with the sales themselves”).
Accordingly, the court denies Swaminathan’s motion to dismiss pursuant to Rule
12(b)(6).
B.

Rule 9(b)
Rule 9(b), which governs Plaintiffs’ Section 10(b) claim, requires that a

complaint “state with particularity the circumstances constituting fraud or
mistake.” See Greer v. Advanced Equities, Inc., 683 F. Supp. 2d 761, 768 (N.D. Ill.
2010) (internal citation and quotation omitted); see also Sears v. Likens, 912 F.2d
889, 893 (7th Cir. 1990) (applying Rule 9(b) to claims brought under the Exchange
Act). To meet this requirement, the complaint must specify “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.” See Sears, 912 F.3d at 893. “By requiring the
plaintiff to allege the who, what, where, and when of the alleged fraud, the rule

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requires the plaintiff to conduct a precomplaint investigation in sufficient depth to
assure that the charge of fraud is responsible and supported, rather than
defamatory and extortionate.” Ackerman v. Northwestern Mut. Life Ins. Co., 172
F.3d 467 (7th Cir. 1999) (citation omitted).
Swaminathan argues that the complaint fails to allege the who, what, where,
and when of the alleged fraud and only makes “conclusory assertions that
[Plaintiffs] provided funds and subsequently lost them.” (R. 19-1, Def.’s Mem. at 9.)
But this grossly mischaracterizes the complaint. Plaintiffs allege with particularity
that Swaminathan made statements on specific dates in April, May, and June 2016,
via written emails to specific parties. (See, e.g., R. 1, Compl. ¶¶ 12, 16-22, 32, 40);
see, e.g., Hefferman v. Bass, 467 F.3d 596, 601 (7th Cir. 2006) (finding allegations of
an oral statement made at the plaintiff’s residence sometime “in late August or
early September 2003” sufficient to meet specificity requirements under Rule 9(b)).
The complaint even quotes language from the alleged emails and makes sufficiently
clear that Swaminathan’s statements regarding the supposed purpose and nature of
AlphaTigers furthered the alleged fraudulent scheme by inducing Plaintiffs to
invest money in the endeavor. (See R. 1, Compl. ¶¶ 16-17, 19); Sears, 912 F.3d at
893. To the extent Swaminathan argues that Plaintiffs failed to allege his intent or
knowledge with specificity, even under Rule 9(b) a plaintiff may plead a person’s
scienter generally. See Hefferman, 467 F.3d at 601 (finding allegation in complaint
that defendant’s participation in the fraud “was knowing and intentional” sufficient

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under Rule 9(b)).

For these reasons, the court finds that Plaintiffs’ complaint

satisfies Rule 9(b).
C.

Arbitration
Swaminathan next argues that the Operating Agreement subjects this

dispute to arbitration.

(R. 19-1, Def.’s Mem. at 9-11.)

Section 10.11 of the

Operating Agreement states that any disputes between the parties must first be
referred to “a court certified mediator of the Court in Montgomery County,
Maryland,” and then to “a neutral arbitrator residing in Montgomery County,
Maryland” if the dispute is not resolved in mediation.

(R. 28-1, Ex. 1.)

The

Operating Agreement also provides that “[a]rbitration shall be the exclusive legal
remedy of the parties.” (Id.) Plaintiffs contend that Swaminathan cannot hold
them to the Operating Agreement’s arbitration provision because he was not a
party to the contract in his individual capacity. (R. 28, Pls.’ Resp. at 14-15.) They
also argue in their supplemental brief that the Operating Agreement was a product
of fraud and should not be enforced. (R. 31, Pls.’ Suppl. Resp. at 4-5.)
As an initial matter, whether a binding arbitration agreement exists is
usually determined under principles of state contract law.

Janiga v. Questar

Capital Corp., 615 F.3d 735, 742 (7th Cir. 2010) (citation omitted).

However,

neither party directly addresses what law applies here. In his supplemental brief
Swaminathan notes for the first time that the Operating Agreement stipulates
Delaware law applies.

(See R. 33, Def.’s Suppl. Mem. at 7, 9; R. 28-1, Ex. 1,

§ 10.30.) But he only refers to the choice-of-law provision to argue that transferring

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venue is in the public interest and does not address how Delaware law governs the
enforceability of the Operating Agreement’s provisions. Both sides cite primarily to
federal law and occasionally to Illinois state decisions in their briefs, but neither
side appears to rely on Delaware jurisprudence regarding contract enforceability by
a nonparty. In federal question cases such as this one, the Seventh Circuit has
advocated applying federal common law principles to choice of law questions. See
Berger v. AXA Network LLC, 459 F.3d 804, 810 (7th Cir. 2006).

However, the

Seventh Circuit has also advised that courts not dwell on conflict of laws questions
unless the parties make an issue of which state’s law applies, which does not appear
to be the case here. See Wood v. Mid-Valley Inc., 942 F.2d 425, 427 (7th Cir. 1991)
(“courts are not required to and ordinarily do not create issues where the parties
agree”). In fact, Swaminathan does not directly address Plaintiffs’ contract-based
argument, let alone cite any cases from Delaware or otherwise in rebuttal, despite
having the opportunity to file a reply. (See R. 23.) At any rate, Delaware, Illinois,
and federal law all treat the question of signatories and contract formation
similarly. See In re Griffin Trading Co., 245 B.R. 291, 305 (Bankr. N.D. Ill. 2000)
(declining to decide whether state or federal principles control because the
applicable state and federal analyses were the same).
Turning to the issue at hand, Plaintiffs contend that there is no agreement
to arbitrate between Plaintiffs and Swaminathan because he is not a party to the
Operating Agreement in his individual capacity. (See R. 28, Pls.’ Resp. at 15.) The
court agrees.

Swaminathan signed the Operating Agreement on behalf of

15

OptionTiger Trading, LLC, which was a party to the contract as “a Maryland
Limited Liability Company[.]” (See R. 28-1, Ex. 1 at 3, 21.) He also signed on
behalf of AlphaTigers, which was a party to the contract as “a Delaware Limited
Liability Company.” (Id.) Swaminathan is not listed as a party to the Operating
Agreement in his individual capacity.

(See id.)

The general rule is that an

arbitration agreement only binds the parties to that agreement. See Dr. Robert L.
Meinders, D.C., Ltd. v. UnitedHealthcare, Inc., 800 F.3d 853, 857 (7th Cir. 2015)
(citations omitted); see also NAMA Holdings, LLC v. Related World Market Center,
LLC, 922 A.2d 417, 434 (Del. Ch. 2007) (“As a general rule, only parties to a
contract and intended third-party beneficiaries may enforce an agreement’s
provisions.” (citation omitted)); Ervin v. Nokia, Inc., 812 N.E.2d 534, 539 (Ill. App.
Ct. 2004) (“Under either federal or Illinois law, the right to compel arbitration
stems from an underlying contract and generally may not be invoked by a
nonsignatory to the contract.” (internal quotation and citation omitted)).

The

Seventh Circuit and courts in this district have rejected claims involving contracts
brought against individual parties who did not sign the contract at issue in their
individual capacities. See, e.g., Omosegbon v. Wells, 335 F.3d 668, 673 (7th Cir.
2003) (upholding dismissal of due process claim against individual employees noting
that “[t]he individuals, after all, were not even parties to the contract in their
individual capacity”); Rissman v. Rissman, 229 F.3d 586, 588 (7th Cir. 2000)
(finding that a contract clause could not be enforced against one of the defendants
who signed the contract exclusively in his capacity as trustee of a trust when he was

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sued exclusively in his individual capacity); Wojcik v. InterArch, Inc., No. 13 CV
1332, 2013 WL 5904996, at *10 (N.D. Ill. Nov. 4, 2013) (dismissing breach of
contract claims asserted by plaintiffs in their individual capacities since they were
not parties to the contract as individuals); Essex Real Estate Grp., Ltd. v. River
Works, L.L.C., No. 01 CV 5285, 2002 WL 1822913, at *2-3 (N.D. Ill. Aug. 7, 2002)
(dismissing plaintiff as a party to breach of contract claim because he signed the
contract at issue in his official capacity as president of a real estate group); Roberts
v. Bd. of Educ., 25 F. Supp. 2d 866, 868 (N.D. Ill. 1998) (dismissing breach of
contract claim where contract clearly stated it was “by and between” parties which
did not include defendants in their individual capacities).

Although there are

exceptions to this rule, including circumstances such as assumption of the contract,
agency, estoppel, and veil-piercing, see Meinders, 800 F.3d at 857; see also NAMA
Holdings, 922 A.2d at 430-31 & n.26, Swaminathan has not asserted that an
exception exists here despite bearing the burden to do so, see Meinders, 800 F.3d at
857 (citing Reese v. Forsythe Mergers Grp., Inc., 682 N.E.2d 208, 213 (Ill. App. Ct.
1997)); see also Chapter 7 Tr. Constantino Flores v. Strauss Water, Ltd., No. 11141VCS, 2016 WL 5243950, at *1 (Del. Ch. Sept. 22, 2016) (describing the showing
required of a non-party claiming that another is bound to an arbitration clause by
estoppel); Kronenberg v. Katz, 872 A.2d 568, 605 n.74 (Del. Ch. 2004) (“Of course, a
nonparty to a contract ordinarily has no rights under that contract. The exception
is when the nonparty can demonstrate that it was a third-party beneficiary of the

17

contract.”). Accordingly, the court finds that Plaintiffs’ claim need not be dismissed
on the basis of the Operating Agreement’s arbitration clause.2
D.

Venue
Swaminathan makes a similar contractual argument regarding venue,

relying primarily on Section 10.28 of the Operating Agreement providing that a
lawsuit to enforce the agreement “shall be brought in Montgomery County,
Maryland.” (R. 28-1, Ex. 1.) However, because that provision is not enforceable by
Swaminathan in his individual capacity for the same reasons explained above
regarding the arbitration clause, the court focuses on Swaminathan’s argument
that venue is improper because the events giving rise to the claim did not occur in
Illinois.

(See R. 19-1, Def.’s Mem. at 12-13.)

Plaintiffs have the burden of

establishing that venue is proper. Wendt v. Handler, Thayer & Duggan, LLC, 613
F. Supp. 2d 1021, 1027 (N.D. Ill. 2009) (citation omitted). In ruling on a motion to
dismiss for improper venue, the court is entitled to consider facts outside of the
complaint, takes all the allegations in the complaint as true, and draws all
reasonable inferences in favor of Plaintiffs. Id.
The venue provision of the Exchange Act, which governs here, see Atlantic
Marine Constr. Co. v. U. S. Dist. Court, 134 S. Ct. 568, 577 n.2 (2013) (“Section 1391
governs ‘venue generally,’ that is, in cases where a more specific venue provision
does not apply.”); Haskett v. Reliv’ Int’l, Inc., No. 94 CV 1461, 1994 WL 171431, at
Having found that Swaminathan is not entitled to enforce the arbitration clause
against Plaintiffs in his individual capacity, the court need not reach Plaintiffs’
other argument that the arbitration clause should not be enforced because the
Operating Agreement was a product of fraud. (See R. 31, Pls.’ Suppl. Resp. at 4-5.)
2

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*2 (N.D. Ill. May 3, 1994) (special venue provision of the Exchange Act supersedes
28 U.S.C. § 1391(b)), provides that a civil action may be brought in any district
where: (1) any act or transaction constituting the violation occurred; (2) the
defendant is “found”; (3) the defendant is an “inhabitant”; or (4) the defendant
transacts any business. See 15 U.S.C. § 78aa; Shapiro v. Santa Fe Gaming Corp.,
No. 97 CV 6117, 1998 WL 102677, at *1 (N.D. Ill. Feb. 27, 1998). Any one of these
alternatives support proper venue, see Tomkins v. Forte Capital Partners, No. 05 CV
5251, 2006 WL 907776, at *3 (N.D. Ill. April 5, 2006) (citation omitted), and the
standard for establishing venue under this provision is not a rigorous one, see
Haskett, 1994 WL 171431, at *2 (citation omitted).
The complaint alleges that Swaminathan sold his online course to Plaintiff
Victor Santore, a resident of the NDIL, and solicited him to join AlphaTigers. (See
R. 1, Compl. ¶¶ 3, 11-12.) Swaminathan also collected funds from and corresponded
with Santore, acts which form the basis of Plaintiffs’ claim. (See, e.g., id. ¶¶ 5, 15,
16-22, 32, 38-55.) Courts have held that telephone calls, emails, and similar longdistance contacts directed to a forum can be sufficient acts or transactions to
establish venue under the Exchange Act. See, e.g., Poling v. Farrah, 131 F. Supp.
2d 191, 193-94 (D.D.C. 2001) (collecting cases); see also United States v. Russell,
No. 1:10-cr-00968, 2014 WL 2558761, at *10 (E.D.N.Y. June 5, 2014) (finding venue
proper in the chosen forum where the defendants’ “schemes relied heavily on the
use of the internet for targeting victims as well as executing the schemes, which
were far-reaching and targeted victims throughout the country”); Cortis, Inc. v.

19

CortiSlim Int’l, Inc., No. 3:12-CV-00562-P, 2012 WL 12885719, at *3 (N.D. Tex. Oct.
16, 2012) (finding that an “act or transaction constituting the violation” occurred in
the forum because calls were directed into the forum, documents were emailed to a
forum resident, and payments originated from the forum “that culminated in a deal
allegedly tainted with federal securities violations”). The court therefore concludes
that venue is proper here in the NDIL under the Exchange Act.
However, even though venue is proper in this district, the court may still
transfer venue “for the convenience of the parties and witnesses [and] in the
interest of justice.” See 28 U.S.C. § 1404(a); see also Roberts & Schaefer Co. v. Merit
Contracting, Inc., 99 F.3d 248, 254 (7th Cir. 1996).

District courts have broad

discretion in interpreting and weighing these factors, which act more as guidelines
than as rigid rules and should be applied on a case-by-case basis. See Coffey v. Van
Dorn Iron Works, 796 F.2d 217, 219-20 (7th Cir. 1986). Swaminathan ultimately
bears the burden of persuasion when it comes to transferring venue. See Heller
Fin., Inc. v. Midwhey Powder Co., Inc., 883 F.2d 1286, 1293 (7th Cir. 1989).
Because Plaintiffs do not appear to dispute that this suit could have been
brought in the District of Maryland, see 28 U.S.C. § 1404(a) (stating that transfer
can only be made to a district in which the action “might have been brought”), the
court begins its analysis by considering convenience. When weighing convenience,
the court looks to factors such as: (1) Plaintiffs’ initial choice of forum; (2) the site of
material events; (3) the relative ease of access to sources of proof; (4) the
convenience to the witnesses to be called to testify in the case; and (5) the

20

convenience to the parties themselves. See Plotkin v. IP Axess, Inc., 168 F. Supp. 2d
899, 902 (N.D. Ill. 2001). Plaintiffs’ choice of forum is given substantial weight,
especially where a plaintiff is a resident of the judicial district in which the suit is
brought, as is the case here. See Gulf Oil Corp. v. Gilbert, 330 U.S. 501, 508 (1947).
However, where the plaintiff’s choice of forum has a weak connection with the
operative facts underlying the claim, the deference given that selection is reduced.
See Tomkins, 2006 WL 907776, at *5 (citations omitted). While Santore resides in
the NDIL, the other Plaintiffs live in states on the East Coast and in California.3
(See R. 1, Compl. ¶ 3.) Furthermore, Swaminathan persuasively points out that the
site of material events favors transfer because the correspondence at issue
originated in Maryland, the financial accounts were opened there, and the disputed
trades were also executed there. (See R. 19-1, Def.’s Mem. at 12-13; R. 33, Def.’s
Suppl. Mem. at 9-10.) For these reasons, deference to Plaintiffs’ choice of forum
must be reduced.
As for ease of access to evidence and witnesses’ convenience, aside from
making general statements about Maryland being the site of material events,
Swaminathan makes no real effort to explain how the location of business records,
non-party witnesses, or any additional sources of proof favors transfer. Meanwhile,
Plaintiffs persuasively contend that records of Swaminathan’s trading activity and
the emails containing allegedly fraudulent statements can be obtained in digital
Swaminathan incorrectly asserts that some parties to this action reside in
Canada and Israel. (R. 33, Def.’s Suppl. Mem. at 9.) While two of the Partners
identified in the Operating Agreement do have addresses there, those individuals
are not plaintiffs in this case. (Compare R. 28-1, Ex. A, with R. 1, Compl. ¶ 3.)

3

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format, which reduces the importance of the “ease of access to sources” factor. (See
R. 31, Pls.’ Suppl. Mem. at 9.) Because it is Swaminathan’s burden to persuade the
court why it should transfer venue, and because he does little to further his
argument when it comes to access to sources and witnesses’ convenience, this factor
weighs against transfer.
Regarding the convenience of the parties, this factor also weighs slightly
against transfer.

Even though five of the eight Plaintiffs live much closer to

Maryland than Illinois and Swaminathan lives in or near Maryland, (see R. 1,
Compl. ¶¶ 3, 6; R. 31-1, Ex. 2), the NDIL is a relatively central location, (see R. 31,
Pls.’ Suppl. Mem. at 10). Plaintiffs also urge the court to consider that their counsel
is located in the NDIL. (See R. 31, Pls.’ Suppl. Mem. at 6.) Courts in this district
have not traditionally given significant weight to the location of counsel. See, e.g.,
Humphries v. Coppercrest Leveraged Mort. Fund, No. 10 CV 7756, 2012 WL 527528,
at *3-5 (N.D. Ill. Feb. 15, 2012) (collecting cases); see also Wright, Miller, & Cooper,
15 Fed. Prac. & Proc. Juris. 3d § 3850 (explaining that “the great majority of the
cases” have concluded that convenience and location of counsel “is not to be
considered at all, that it is ‘irrelevant’ or ‘improper’ to consider, or that it is to be
given very little weight by the district court” in considering whether to transfer a
case). However, courts have considered “the financial burdens on the litigants and
their interest in using their established counsel, which courts are more likely to
regard as significant[.]” Wright et al., supra, § 3850. Here, Plaintiffs state that
they were unable to find representation in Maryland and ultimately retained the

22

Northwestern Pritzker School of Law Bluhm Legal Clinic, which they assert has a
limited amount of resources. (See R. 31, Pls.’ Suppl. Resp. at 6, 10.) Plaintiffs
further argue that “requiring the Clinic attorneys to travel to Maryland would be an
unnecessary financial burden[,]” although they do not specify who would bear the
costs of such travel. (Id. at 10.) At any rate, it is reasonable to conclude that the
location of Plaintiffs’ counsel in this case bears the cost of litigation, adding slight
weight in favor of Plaintiffs’ choice of forum.
Lastly, the court must also consider which venue best serves “the interest of
justice.” Coffey, 796 F.2d at 220. In weighing this factor, the court takes into
account considerations such as: “(1) the speed at which a case will proceed to trial,
(2) the court’s familiarity with the applicable law, (3) the relation of the community
to the occurrence at issue, and (4) the desirability of resolving controversies in their
locale.”

Plotkin, 168 F. Supp. 2d at 904 (citation omitted).

Even where the

convenience of the parties and witnesses may call for a different result, the “interest
of justice” component can be determinative. See Coffey, 796 F.2d at 220.
The court finds that the speed that the case might go to trial slightly favors
transfer. For the 12-month period ending September 30, 2017, the median time
from filing to disposition for civil cases was the same in the NDIL and in the
District of Maryland. See Admin. Office of the U.S. Courts, FEDERAL COURT
MANAGEMENT

STATISTICS

(2017),

available

at

http://www.uscourts.gov/sites/default/files/data_tables/fcms_na_distprofile0930.201
7.pdf (8.5 months in both forums). But the median time from filing to trial for civil

23

cases was 36.8 months in the NDIL and 30.3 in the District of Maryland. Id. The
second factor, the court’s familiarity with applicable law, is neutral because
Plaintiffs’ claim is brought under the Exchange Act and both forums are equally
capable of applying securities regulations. See Tomkins, 2006 WL 907776, at *7.
The third and fourth factors are neutral because Illinois has an interest in
protecting its citizens from fraud, while Maryland has an interest in ensuring that
those who conduct business in the state receive a fair trial.

See Einhaus v.

Textmunication Holdings, Inc., No. 17 CV 4478, 2018 WL 398258, at *4 (N.D. Ill.
Jan. 12, 2018) (finding factors neutral under similar circumstances); Tomkins, 2006
WL 907776, at *7 (same).
In light of all these factors, the question of whether transfer is appropriate is
a close one. The court is cognizant of the fact that given the alleged fraud’s online
medium

and

the

nature

of

its

distribution,

considerations here is far from straightforward.

applying

traditional

venue

However, the court denies

Swaminathan’s request to transfer the case to the District of Maryland for two main
reasons. First, even though the significance of Plaintiffs’ choice of forum is lessened
to some extent because the site of material events occurred in or originated from
Maryland, Plaintiffs’ choice of venue is still entitled to some deference. While only
one of the Plaintiffs lives in the NDIL, the other non-Illinois resident Plaintiffs
chose to bring their suit in this forum. Second, Swaminathan ultimately bore the
burden of showing that the “transferee forum is clearly more convenient” than the
transferor forum.

See Heller, 883 F.2d at 1293 (quotation marks and citation

24

omitted).

And although he did highlight certain relevant factors in favor of

transfer, he failed to fully engage other factors under Section 1404(a), choosing
instead to rely primarily on the forum-selection clause in the Operating Agreement
which the court finds unenforceable as to Swaminathan in his individual capacity.
Accordingly, the court finds that Swaminathan did not meet his burden of
persuasion.
Conclusion
For the foregoing reasons, Swaminathan’s motion to dismiss, or in the
alternative, to transfer, is denied.
ENTER:

____________________________________
Young B. Kim
United States Magistrate Judge

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