aR

contact with Illinois.” See Oliveira v. Amoco Oil Co., 726 N.E.2d
51, 61 (Ill. App. Ct. 2000), appeal allowed by 734 N.E.2d 895 (Ill.
2000).

The defendants ask me to read Oliveira to preclude any non-
resident from suing under the Act, regardless of where the trade or
commerce occurred. I have cited Oliveira for the proposition that
the Act “does not apply to consumers outside Illinois or business
conducted outside Illinois,” The Alcar Group, Inc. v. Corporate
Performance Sys., Ltd., 109 F. Supp. 2d 948, 952 (N.D. Ill. 2000),
but that case involved “alleged trademark violations that occurred
entirely abroad,” id. at 949. See also General Elec. Capital Auto
Fin. Servs., Inc. v. Phil Smith Chrysler Plymouth Jeep Eagle, No.
00 C 762, 2001 WL 1223537, at *2 (N.D. Ill. Oct. 11, 2001) (Grady,
J.) (holding that plaintiff lacked standing where it did “not
allege that the purported fraudulent trade practices affecting
consumers were conducted in Illinois or that such practices
affected Illinois consumers”). Here, however, Wafra purchased the
Owner’s Certificate in Illinois, in reliance on misrepresentations
made by the defendants in Illinois, and alleges that it was injured
by the cover-up of a fraudulent “diversion, misappropriation and
kiting scheme” that occurred entirely in Illinois. Although Wafra
is not an Illinois citizen, it is a consumer of Illinois products
and services, and thus has standing to sue under the Act. See Man

Roland Inc. v. Quantum Color Corp., 57 F. Supp. 2d 568, 575 (N.D.


time required.” Id. The defendants argue that Wafra’s injuries were
caused by the alleged breach of the indenture agreement, and that
the fraudulent statements and omissions that induced the sale
related only to Prime’s financial condition. I rejected this narrow
reading of the complaint, holding that the fraud alleged was more
than just failure to disclose Prime’s failing finances, but
included the failure to disclose the alleged diversion,
misappropriation, and kiting scheme that compromised the “lock-box”
account, and this is what caused Wafra’s alleged injuries. Wafra,
2002 WL 460826, at *4. This is sufficient to allege “loss
causation” at this stage.

Smithburg, Walter, Friedman and Bischoff also argue that Wafra
has not pleaded fraud with the particularity required by Rule 9(b):
“the who, what, when, where, and how: the first paragraph of any
newspaper story.” Dileo v. Ernst & Young, 901 F.2d 624, 627 (7th
Cir. 1990). Bischoff merely repeats the argument that he made with
respect to the motion to dismiss the allegations in Count I, which
I have already held were sufficient to satisfy Rule 9(b). Compl. I
84, 87-94; Wafra, 2002 WL 460826, at *15. Friedman (“who”) is
alleged to have participated in a meeting with Wafra at Prime’s
offices in Rosemont, Illinois (“where”), on December 11, 1998
(“when”), in which Friedman said that Prime never defaulted
payments to its investors (“what”), but failed to disclose that,

but for the diversion, misappropriation, and kiting of funds, Prime


1068 (N.D. Ill. 1991, and Wafra alleges that it purchased the
Owner’s Certificate (an “intangible”) and contracted for the
servicing of the financial contract (“services”), Compl. 94% 39, 41,
so it contracted for the sale of “merchandise” under § 1(b) of the
Acts and is therefore a “consumer.” § l(e). Whether I consider
Wafra, as a “consumer,” to be excused from the “more stringent
standing requirements” for two non-consumer businesses, see ASI
Acquisition, LLC v. Rayman, No. 01 C 165, 2002 WL 335311, at *2
(N.D. Ill. Feb. 28, 2002), or whether I consider its allegations
that it is a “consumer” sufficient to satisfy the consumer nexus
test, see Commonwealth Ins. Co. v. Stone Container Corp., No. 99 C
8471, 2001 WL 477151, at *4-5 (N.D. Ill. May 3, 2001), this case is
distinguishable from Athey. Cf. DRL Enters., Inc. v. ePartners,
Inc., 173 F. Supp. 2d 818, 820 (N.D. Ill. 2001) (reading Athey
broadly to require consumer nexus allegation even when parties are
not two non-consumers, but not describing the circumstances in
which Athey applied). Wafra has standing to sue under the Act.
III.

Wafra acknowledges that it was not a first-hand consumer of
the services of KPMG and B&S, but it argues that the Act applies to
their services. Legal services, including the “actual practice of
law” as well as billing practices, are exempt from the Act, Cripe
v. Leiter, 703 N.E.2d 100, 105 (Ill. 1998), so B&S cannot be liable

for consumer fraud for its opinion letter. Accountants, however,


Ill. 1999); Garner v. Healy, 184 F.R.D. 598, 604 (N.D. IJ11. 1999).

KPMG and the individual defendants also argue that Wafra has
failed to allege that the conduct that led to its injuries
“involves: trade practices directed to the market generally or
otherwise implicates consumer protection concerns.” Athey Prods.
Corp. v. Harris Bank Roselle, 89 F.3d 430, 437 (7th Cir. 1996). The
Seventh Circuit held that Illinois courts and the courts in this
district “have uniformly held that claims under the Act must meet
the consumer nexus test,” but it did not distinguish between
consumer and non-consumer plaintiffs. Id. In Athey, the plaintiff
was not a “consumer” as defined by the Act, see id. at 432, and all
of the cases that it cited involved non-consumer plaintiffs. See
Lake County Grading Co. v. Advance Mech. Contractors, Inc., 654
N.E.2a 1109, 1115-16 (Ill. App. Ct. 1995); Scarsdale Builders, Inc.
v. Ryland Group, Inc., 911 F. Supp. 337, 340 (N.D. Ill. 1996); Web
Communications Group, Inc. v. Gateway 2000, Inc., 889 F. Supp. 316,
322 (N.D. Ill. 1995).

Athey was decided on summary judgment, which involves a
stricter standard than I apply on a motion to dismiss, where a
plaintiff is not required to plead evidence or match facts to every
element of its claim. Bennett v. Schmidt, 153 F.3d 516, 518 (7th
Cir. 1998). Moreover, Athey did not involve a consumer plaintiff,
which Wafra claims to be. The Act applies to securities

transactions, see Lyne v. Arthur Andersen & Co., 772 F. Supp. 1064,


plaintiff rely on the deception”).

KPMG argues that Wafra’s claim based on KPMG’s 1997 audit is
barred by the statute of limitations. Actions against accountants
in Illinois, whether “based upon tort, contract or otherwise,” must
be “commenced within 2 years from the time the person bringing an
action knew or should reasonably have known of such act or
omission.” 735 ILCS 5/13-214.2(a). KPMG argues that Wafra should
have discovered the alleged fraudulent omissions as early as May
1999, more than two years before it filed the complaint, on June 8,
2001. I rejected a similar argument with regard to the one-year
statute of limitations for federal securities fraud, finding that
there were questions of fact that barred a determination, as a
matter of law, that Wafra should have known about its injuries
before June 9, 2000. Wafra, 2002 WL 460826, at *6. The same
questions of fact prevent dismissal under the two-year statute of
limitations here.

Iv.

The individual defendants argue here, as they did in their
previous motions, that Wafra cannot establish “loss causation”;
i.e., “that the investor would not have suffered a loss if the
facts were what he believed them to be.” Martin II, 643 N.E.2d at
747. Loss causation is distinct from mere “transaction causation,”
which means that “the investor would not have engaged in the

transaction had the other party made truthful statements at the


€° Minute Order Form (06/97)

United States District Court, Northern District of Ilinois

Name of Assigned Judge ; Sitting Judge if Other
or Magistrate Judge Elaine E. Bucklo than Assigned Judge
CASE NUMBER 01 C 4314 DATE 5/24/2002
CASE Wafra Leasing vs. Prime Capital, et al.
TITLE
[In the following box (a) indicate the party filing the motion, ¢.g., plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the nature

MOTION: of the motion being presented.]

DOCKET ENTRY:

qd) oO Filed motion of [ use listing in “Motion” box above.]

(2) oO Brief in support of motion due

(3) oO Answer brief to motion due. . Reply to answer brief due.

(4) oC Ruling/Hearing on set for at :

(5) i | Status hearing set for 6/21/02 at 10:15 A.M..

(6) oO Pretrial conference[held/continued to] [set for/re-set for] on set for at

(7) QO Trial[set for/re-set for] on at

(8) Q [Bench/Jury trial] [Hearing] held/continued to at

(9) im This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to]

OrRCP4(m) O General Rule2!1 OFRCP41(a)(1) O FRCP41(a)(2).

(10) i [Other docket entry] | Ehmann and Landeck’s motion to dismiss is denied. Smithburg, Walter, and Friedman’s
motion to dismiss is granted as to Smithburg and Walter, but denied as to Friedman. B&S and Bischoff’s motion to
dismiss is granted as to B&S, but denied as to Bischoff. KPMG’s motion to dismiss is granted in part with respect to
the May 4 valuation letter, but otherwise denied. Enter Memorandum Opinion and Order. At the status hearing the court
will set discovery and trial schedules in this case. Prior to the status hearing, the parties shall confer and provide the court
with a written proposed discovery schedule. Any motion for summary judgment must be filed within 14 days after the date
set in the scheduling order for close of discovery. Any extension of discovery will not extend that date.

(1) [For further detail see order attached to the original minute order.]

No notices required, advised in open court, Document
. 7 Number
No notices required, number of notices =
V_ | Notices maited by judge’s staff. MAY 2.8 2002
Notified counsel by telephone, date docketed
Docketing to mail notices.
Mail AO 450 form. ven “oth coakehhMMear
Copy to judge/magistrate judge. :
sian
a7) dae muiled notice
courtroom een thy TOK
MPY deputy’s Lot Me)
initials q +
Date/time received in...) 23 is
Date repivd i pyc



insufficient to plead the “how” of the fraud under Rule 9(b).
Vv.

Ehmann and Landeck’s motion to dismiss is DENIED. Smithburg,
Walter, and Friedman's motion is GRranTED as to Smithburg and Walter,
but DENIED as to Friedman. B&S and Bischoff’s motion is GranTED as to
B&S, but DENIED as to Bischoff. KPMG’s motion is GRANTED IN PART with

respect to the May 4 valuation letter, but otherwise DENIED.

Elaine E. Bucklo
United States District Judge

Dated: May 24 , 2002

11


would have been unable to pay its investors (“how”). Compl. 7 79.
This is sufficient.

Wafra alleges that Smithburg and Walter were “control persons”
for the purposes of federal securities law, Compl. 1 17-18, and
that they were involved in the day-to-day management and overall
direction of Prime in the preparation of the financial statements,
which allegedly contained false and misleading statements and
omissions. Compl. 7 100. Smithburg signed the 1997 and 1998 annual
10-K report, and Walter signed the 1998 10-K. This satisfies the
“who,” “what,” and “when” components of Rule 9(b), but is
insufficient to show how Smithburg’s and Walter’s signature on and
implicit approval of the 10-K reports was false. There is no
allegation that they knew, or even should have known, about the
kiting scheme that the 10-K reports failed to disclose. See DeLeon
v. Beneficial Constr. Co., 998 F. Supp. 859, 866 (N.D. Ill. 1998
(“[A]lthough [the defendant] may have made the referral, absent any
allegation that he knew [that the referred company] was a
fraudulent entity, we fail to see how the referral could constitute
a misrepresentation, lie or omission of material fact as ICFA
requires.”). Cf. Petri v. Gatlin, 997 F. Supp. 956, 974-75 (N.D.
Ill. 1997) (holding that Rule 9(b) was satisfied where plaintiffs
“alleged that the individual defendants ‘were aware of and
approved’ the misstatements in the brochures”). That Smithburg and

Walter were merely involved in the day-to-day operation of Prime is

10


may be liable even where plaintiffs do not directly purchase their
services, but receive them from the accountant’s client in the
course of a securities offering. See Lyne, 772 F. Supp. at 1068.
Nothing in the Act requires that the plaintiff have purchased goods
or services directly from the defendant. Id.

Nonetheless, Wafra must be able to satisfy the elements of a
claim under the Act. Id. KPMG argues that Wafra could not prove any
set of facts that would show that KPMG intended for Wafra to rely
on its May 4, 1999 valuation letter. As I noted in my previous
opinion in this case, the valuation letter was addressed oniy to
Prime Leasing, Prime Financial, and Merrill Lynch, and stated that:
“[t]his report is intended solely for the use of the addressees and
should not be used by those who have not agreed to the procedures
and taken responsibility for the sufficiency of the procedures for
their purposes.” KPMG Ex. A at 1, 6.1 I held that “no reasonable
reading of the letter shows that Wafra was intended to rely on it,”
Wafra, 2002 WL 460826, at *17, so Wafra cannot state a claim under
the Act. See Martin v. Heinold Commodities, Inc., 643 N.E.2da 734,
754 (Ill. 1994) (“Martin II”) (holding that, although plaintiff
need not show that it actually relied on the defendant’s

statements, it must show “intent on the defendant’s part that

1 Although the valuation letter was not attached to the
complaint, I may consider it without converting this motion to one
for summary judgment because the letter was mentioned in the
complaint and is central to Wafra’s claim. Help At Home, Inc. v.
Medical Capital, L.L.C., 260 F.3d 748, 752 (7th Cir. 2001).

7


w

any deception, fraud, false pretense, false promise,
misrepresentation or the concealment, suppression or omission of
any material fact” in the conduct of trade or commerce with the
intent that others rely on the fraud, though no person need
actually have relied on the fraud. § 2. “Person” is defined to
include corporations (foreign and domestic). § 1(c). “Consumer”
means “any person who purchases or contracts for the purchase of
merchandise not for resale in the ordinary course of his business.”
§ 1(e). “Merchandise” includes both intangibles and services. §
1(b).

The purpose of the Act is to “protect Illinois consumers,
borrowers, and businessmen against fraud, unfair methods of
competition, and other unfair and deceptive business practices.”
Scott v. Association for Childbirth at Home, Int’l, 430 N.E.2d
1012, 1017 (11. 1981). The Illinois Supreme Court has never
expressly considered whether non-Illinois citizens have standing to
sue for violations of the Act, although it implicitly approved of
their standing where there was a significant connection to Illinois
and many of the acts making up the claim occurred in Iilinois. See
Martin v. Heinold Commodities, Inc., 510 N.E.2d 840, 847 (Ill.
1987) (certifying multi-state class under the Act). An Illinois
appellate court recently declined to certify a nationwide class
that included consumers who lived outside of Illinois and purchased

the defendant’s product in another state because there was “no


Landeck move to dismiss, and Smithburg, Walter and Friedman adopt
and supplement their motion. KPMG also moves to dismiss, raising
several of the same arguments as the individual defendants.
Bischoff and B&S address their objections to Count X in a
supplemental memorandum in support of their earlier motion to
dismiss. I grant the motions in part and deny them in part.

I.

The facts of this case were set out in detail in my previous
opinion, see Wafra, 2002 WL 460826, at *1-2, and I repeat them here
only where necessary to decide issues presented by the motions to
dismiss. For the purposes of these motions, I take the allegations
of the complaint as true, draw all reasonable inferences in favor
of Wafra, and dismiss only where it is clear that Wafra could prove
no set of facts consistent with its complaint that would entitle it
to relief under the Act. First Ins. Funding Corp. v. Federal Ins.
Co., 284 F.3d 799, 804 (7th Cir. 2002).

II.

The individual defendants and KPMG argue that Wafra lacks
standing under the Act because it is not an Illinois resident and
because it has failed adequately to plead a “nexus” between its
claims and consumer protection concerns. The Act provides a cause
of action for “[a]ny person who suffers actual damages as a result
of a violation of this Act committed by any other person.” 815 ILCS

505/10a(a). The Act is violated when a defendant uses or employs


IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION DOCKETE?

WAFRA LEASING CORPORATION 1999-A-1, MAY 2 8 2002

Plaintiff,
v.

PRIME CAPITAL CORPORATION, PRIME
LEASING CORPORATION, PRIME FINANCE
CORPORATION 1999-A-1, PRIME FINANCE
CORPORATION 1999-A-2, KPMG LLP,
BISCHOFF & SWABOWSKI, LTD., MARK
BISCHOFF, JAMES FRIEDMAN, VERN
LANDECK, THOMAS EHMANN, WILLIAM
SMITHBURG and JOHN WALTER,

No. O01 C 4314

Defendants.

MEMORANDUM OPINION AND ORDER

Wafra Leasing Corporation (“Wafra”) invested in a
securitization of financial contracts by Prime Capital Corporation
and Prime Leasing Corporation (collectively “Prime”), and its
investment went bad. Wafra sued Prime and several of its officers
and directors, as well as KPMG L.L.P., Prime’s auditor, and
Bischoff & Swabowski (“B&S”), its attorneys. I have already decided
the defendants’ motions to dismiss on the federal securities claims
and some of the state law claims. See Wafra Leasing Corp. 1999-A-1
v. Prime Capital Corp., No 01 C 4314, 2002 WL 460826, *1 (N.D. Ill.
Mar. 26, 2002). While those motions were pending, Wafra filed an
amended complaint, adding Count X, a claim under the Illinois
Consumer Fraud and Deceptive Business Practices Act, 815 ILCS 505/1

et seq. (“the Act”), against all of the defendants. Ehmann and

Cp