Seip v. Rogers Raw Materials Fund, L.P.

SUPREME COURT CASES

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State: Illinois

Court: 1st District Appellate

Docket No: 1-10-1440 NRel

Case Date: 03/10/2011

Preview:FOURTH DIVISION March 10, 2011 No. 1-10-1440 IN THE APPELLATE COURT OF ILLINOIS FIRST JUDICIAL DISTRICT TOM D. SEIP and ALEXA C. SEIP, Cotrustees of the Tom and Alexa Seip Living Trust, CLARENCE RIDLEY and ELEANOR RIDLEY, On Their Own Behalf and On Behalf of All Others So Situated, ) ) ) ) ) ) Plaintiffs-Appellants, ) ) v. ) ) ROGERS RAW MATERIALS FUND, L.P., an ) Illinois Limited Partnership; BEELAND ) MANAGEMENT COMPANY, L.L.C., an Illinois ) Limited Liability Company and General Partner of ) The Rogers Raw Materials Fund, and JAMES ) BEELAND ROGERS, JR., an Individual, ) ) Defendants-Appellees. ) Appeal from the Circuit Court of Cook County.

No. 07 CH 11719

Honorable Mary K. Rochford, Judge Presiding.

JUSTICE LAVIN delivered the judgment of the court, with opinion. Presiding Justice Gallagher and Justice Pucinski concurred in the judgment and opinion. OPINION I. BACKGROUND Here, we consider an appeal filed by disgruntled investors after their complaint against two investment funds and one individual was dismissed by the trial court. For the reasons discussed below, we affirm the judgment of the circuit court in all respects. A. Parties Involved The underlying facts in this dispute revolve around two index funds (Funds), the Rogers

1-10-1440 Raw Materials Fund (Private Fund) and the Rogers International Raw Materials Fund (Public Fund). Tom and Alexa Seip, cotrustees of the Tom and Alexa Seip Living Trust, and Clarence and Eleanor Ridley (collectively, plaintiffs) brought this class action suit against Beeland Management Company, L.L.C. (Beeland), James B. Rogers, and the Private Fund. Plaintiffs are former investors and limited partners in the Private Fund, and their rights as limited partners were controlled by a document titled "Second Amended and Restated Agreement of Limited Partnership" (Partnership Agreement). The Funds invested in commodities of futures and forward contracts that track the composition of the Rogers International Commodity Index, which was created by Rogers, and any unused assets were either held as cash or invested in government securities. A "Confidential Private Placement Memorandum" between the parties provided that investments would be held in segregated, regulated customer accounts and not be commingled with other assets. Beeland is a general partner of the Private Fund and also manages its operations. Beeland itself is managed by Tom Price, the chief executive officer, and Allen Goodman, the chief financial officer. Rogers is a 69% owner of Beeland, while Price and Goodman do not own any equity in Beeland. B. Rogers and Relationship With Refco Refco, now defunct, was a financial services company based in New York consisting of a number of entities. According to an affidavit given by Robert Mercorella, in spring 2005, Rogers asked Refco executives for assistance in finding candidates to serve as Beeland's chief operating officer. At that time, Mercorella was employed by Refco Alternative Investments in New York City. Mercorella was asked to assist in the candidate search, and during the process, he informed

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1-10-1440 Rogers that he wished to be considered as a candidate and was ultimately hired by Rogers. According to Mercorella, Rogers was contemplating relocating Beeland to New York and wanted Mercorella's assistance in making Refco the selling partner for the Funds. Eventually, Beeland agreed that Refco, LLC, a regulated subsidiary of Refco, Inc., would serve as the Funds' selling agent. Rogers and Refco also agreed that Refco would acquire Rogers' interest in Beeland. C. Diversion of Private Fund's Assets Refco, LLC's assumption as the Funds' administrator involved, among other things, the transfer of assets from the Funds' brokers at that time, Man Financial, Inc., and Harris, N.A., to Refco, LLC. Accounts were opened with Refco, LLC, and Refco Capital Markets (Refco CM), an offshore unregulated securities and foreign exchange broker, also a subsidiary of Refco, Inc. The account with Refco CM was part of a long-term plan to eventually transfer assets to Refco CM for strategic financial reasons. In September 2005, Price and Goodman initiated the transfer of the Funds' assets to Refco, LLC. Price executed two account transfer forms, one each for the Private and Public Funds, on September 22, 2005. The forms identified Man Financial, Inc., as the transferring firm and Refco, LLC, as the receiving firm, and stated: "Please be advised that I hereby direct you to transfer my account balances, margin and open commodity position to Refco, LLC." Goodman gave similar instructions to Harris in regards to the Funds' assets held there. An affidavit by Price indicated that he had "made clear to Refco that no collateral was to be transferred to Refco CM until *** after the Funds' existing investors were provided with advance notice that Refco CM would hold collateral" and "were given an opportunity to redeem

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1-10-1440 their interests in the funds if they did not want to accept the credit risk of having fund property held at Refco CM." Pursuant to Price's and Goodman's instructions, approximately $297.5 million of the Funds' assets were transferred in early October 2005, but Price later learned that the assets were transferred directly to Refco CM, without any express direction from either Price or Goodman. Upon learning this, Beeland immediately sought to have the assets transferred either to Refco, LLC, or back to the original brokerage accounts. D. Refco Bankruptcy and the Special Redemption Letter Shortly thereafter, Refco announced that nearly $500 million of debt had been concealed by its chief executive officer. As a result, on October 17, 2005, Refco, Inc., and a number of its affiliates and subsidiaries, including Refco CM, declared bankruptcy and subsequently filed for protection under chapter 11 of the Bankruptcy Code (11 U.S.C.

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