UNITED STATES DISTRICT COURT 

EASTERN DISTRICT OF MICHIGAN 

SOUTHERN DIVISION 

THE MJK FAMILY LLC,

AIR BANKS, LLC, WINDSONG LLC, 

MARK II AVIATION, LLC, 

CONVENIENSO, LLC, S4AIR LLC,

NATIONAL CITY BANK 

as Trustee for THE DAVID L. HAYES IRA,

ROBERT SKANDALARIS, and

DON DEFOSSET,

Plaintiffs,

Civil No. 09-12613

Hon. John Feikens 

v.

CORPORATE EAGLE MANAGEMENT 

SERVICES, INC., and

RICHARD M. NINI,

Defendants. 

________________________________/

OPINION AND ORDER DENYING 

DEFENDANTS’ MOTION TO DISMISS

In their Complaint, Plaintiffs allege that Defendants Corporate Eagle Management Services,

Inc. (“CEMS”) and Richard M. Nini, as president and CEO of CEMS and as an individual (“Nini”),

violated § 10(b) of the Securities Exchange Act and Securities and Exchange Commission (“SEC”)

Rule 10b-5 by making fraudulent misrepresentations and omissions regarding Defendants’ conflicts

of interest relevant to their sale of securities in Corporate Eagle Jet to Plaintiffs. The issue before

the Court is whether Plaintiffs adequately alleged that Defendants made false or misleading

statements that they had a duty to disclose. 

Case 2:09-cv-12613-JF-DAS Document 29 Filed 11/30/2009 Page 1 of 19
1

The following facts are taken from the Complaint, and are not findings of fact by the

Court. The Court, as it must, assumes these facts to be true for the purpose of deciding

Defendants’ Motion, and construes them in the light most favorable to Plaintiff. Inge v. Rock

Fin. Corp., 281 F.3d 613, 619 (6th Cir. 2002). 

I. BACKGROUND

A. The Facts Set Forth in the Complaint1

1. CEMS Creates and Capitalizes Corporate Eagle Jet

CEMS was originally founded by Nini in 1985. Compl. ¶ 14. Nini exerts substantial control

over CEMS as its President, Chief Executive Officer, majority shareholder, and member of its board

of directors. Compl. ¶ 15. CEMS manages and maintains privately-owned aircraft. Among its

services, CEMS sells and leases fractional interests in aircraft, in return for which it receives a

commission. Compl. ¶ 17. The “fractional interests” program allows purchasing (or leasing)

“members” to time-share the aircraft with other members. 

In 2006, Nini planned to expand CEMS by opening a second base of operations in Florida,

which would include a private terminal with adjacent hangars, administrative facilities, and one to

five aircraft. Compl. ¶¶ 20-21. To effectuate this plan, Nini, through CEMS, sought $5,000,000 in

capital investments to form a new entity, Corporate Eagle Jet, LLC (“CEJ”). Compl. ¶¶ 23-24. 

Once capitalized, CEJ was to immediately purchase a thirty-percent equity position in CEMS

(for $1.2 million), and receive three seats on CEMS’s board of directors. Compl. ¶¶ 22-23. CEJ

would then purchase a previously-owned aircraft and sell/lease fractional interests in it. After all

shares for the aircraft were sold/leased, CEJ would repeat the process with an additional aircraft.

Compl. ¶ 29. CEMS, under Nini’s control, would manage CEJ, and execute all transactions

necessary to implement the business plan. Compl. ¶ 30. In exchange, CEMS would receive two

percent of the value of any sale or lease of a fractional interest in aircraft, and a two percent fee if

Case 2:09-cv-12613-JF-DAS Document 29 Filed 11/30/2009 Page 2 of 19
2

In considering a Motion to Dismiss, this Court may consider documents that Plaintiffs

referred to in the Complaint and are central to their claims. Nixon v. Wilmington Trust Co., 543

F.3d 354, 357 (6th Cir. 2008).

any trade-in aircraft was resold. Compl. ¶ 32. 

To solicit investors for CEJ, Nini and CEMS prepared an “Investment Presentation”,

including an Executive Summary and various Offering Materials.2

 Compl. ¶¶ 27-28. The Offering

Materials emphasized that CEJ’s operations would focus on the Florida market. Compl. ¶¶ 28, 41.

 The Offering Materials also included several statements addressing conflicts of interest:

1) Section 5.4 of the Operating Agreement, entitled “Transactions with Affiliates,”

generally permitted CEMS to enter into transactions with its affiliates if the

transactions were disclosed to the CEJ’s members and contained “commercially

reasonable terms and market rates.” 

2) Section 5.5 of the Operating Agreement, entitled “Other Activities Permitted,”

allowed CEJ’s “Members, Manager, and their respective affiliates” to have “interests

in other present or future ventures, including ventures that are competitive with

[CEJ].” According to the language of this section, the Manager had no obligation

to advise the Members regarding potential business opportunities or to account for

any profits derived from such ventures. 

3) Exhibit C to the Subscription Agreement, entitled “Risk Factors,” disclosed two

known conflicts of interest:

Conflicts of Interest

The LLC is subject to various potential conflicts of interest arising

out of the relationships between the Manager, the LLC, and their

affiliates. These conflicts include, but are not limited to, those arising

from:

The Manager or its affiliates entering into contracts and rendering a

Case 2:09-cv-12613-JF-DAS Document 29 Filed 11/30/2009 Page 3 of 19
number of services to the LLC for which it will be paid a fee or from

which it may profit; or

The Manager and the LLC are being represented in this transaction

by the same legal counsel. Consequently, the Subscriber should

retain its own independent counsel.

The top of Exhibit C also cautioned, in bold capital letters: 

Additional risks and uncertainties not presently known to us or that we

currently deem immaterial may also impair our business operations. 

(emphasis added).

The Offering Materials did not specifically disclose that Defendants would sell/lease

fractional interests in aircraft owned by other companies, for which they would receive

commissions. Compl. ¶ 33. Specifically, Plaintiffs contend that CEMS and Nini maintained

undisclosed affiliations with a third-party, Art Van Elslander, that were “competitive to and directly

conflict with CEJ’s business to CEJ’s detriment.” Compl. ¶ 41. Mr. Van Elslander allegedly owned

CEMS’s existing aircraft and paid CEMS a commission for selling and leasing fractional interests

in those aircraft. Compl. ¶ 42. 

Relying on the Offering Materials, each Plaintiff purchased a membership interest in CEJ

for $500,000. Compl. ¶ 43. Plaintiffs assert that they would not have invested in CEJ “had it been

known that Nini would be competing against CEJ.” Id.

2. The Investors Discover the Undisclosed Conflicts of Interest

Three CEJ investors received seats on the board of directors for CEMS. They first attended

board meetings in April, 2007, and again in July, 2007. At the latter meeting, Plaintiffs learned that

Nini was locating prospective purchasers for an aircraft that CEJ did not own. In response to

inquiries from the CEJ investors, Nini revealed that he managed aircraft owned by Mr. Van

Elslander and received commission for the sale/lease of interests in Mr. Van Elslander’s aircraft.

Compl. ¶¶ 45-47. Plaintiffs contend that Defendants’ relationship with Mr. Van Elslander “directly

Case 2:09-cv-12613-JF-DAS Document 29 Filed 11/30/2009 Page 4 of 19
conflicted with CEJ’s interests, and materially impaired [Nini’s] ability, as CEMS’s President and

majority shareholder, to manage CEJ in Plaintiffs’ best interest.” Compl. ¶ 49. 

In October, 2007, CEMS caused CEJ to acquire a new aircraft, a Raytheon Hawker 800XP

(“800XP”). Compl. ¶ 52. The remainder of Plaintiffs’ investment was used as a down payment; the

balance was financed by a Florida-regional bank and personally guaranteed by Nini. Id. As part

of the financing arrangement, Nini agreed to market the aircraft in Florida, which would allow the

bank to finance the members’ purchase/lease interests. Id. Nevertheless, Plaintiffs contend that Nini

marketed the plane exclusively in Michigan (the same market where he worked for Mr. Van

Elslander). Against Plaintiffs’ advice, Nini sold a single one-quarter share of the 800XP, in

exchange for which he accepted a trade-in of an older Hawker 700 aircraft. Compl. ¶ 53. That left

CEJ holding two aircraft, one with no investors (the 700), and one that was three-quarters empty (the

800XP). Compl. ¶ 54.

By early 2009, CEJ had no capital and insufficient revenues to make the loan payments on

the 800XP. Compl. ¶¶ 57-58. The bank called the loan, and because CEJ was insolvent, Nini’s

guarantee obligated him personally to pay the debt. Compl. ¶¶ 58-59. The Plaintiffs feared that Nini

would put his own interests ahead of CEJ’s interests by selling the 800XP (at a substantial loss) and

using the money to satisfy his guarantee. Accordingly, Plaintiffs instructed Nini not to sell the

800XP, and established a meeting to discuss available options. Compl. ¶¶ 59-60. Despite Nini’s

assurances that he would not sell the plane, he sold it to Mr. Van Elslander. Compl. ¶ 61. Plaintiffs

allege that Nini acknowledged lying about the sale, explaining “he did not want Plaintiffs to take

any action to stop the sale.” Id.

B. Procedural History

Plaintiffs filed their eleven-count Complaint on July 2, 2009. Dkt. 1. In lieu of an answer,

Case 2:09-cv-12613-JF-DAS Document 29 Filed 11/30/2009 Page 5 of 19
3

Defendants actually filed two Motions to Dismiss. The first moved to dismiss and

compel arbitration for Counts I, II and III pursuant to an arbitration clause in the Operating

Agreement signed by all parties. Dkt. 7. The second, the Motion at issue, moved to dismiss

Counts IV through XI for failure to state a claim. Dkt. 8. On October 8, 2009, by agreement of

the parties, this Court compelled arbitration for Counts I, II and II, but stayed the arbitration

pending resolution by this Court of the remaining Counts. Dkt. 14. 

Defendants filed a Motion to Dismiss on September 8, 2009. Dkt. 8.3

 Plaintiffs filed their Response

on September 29, 2009. Dkt. 10. Defendants filed their Reply on October 8, 2009. Having

compelled arbitration for Counts I-III, the Court must now consider whether Plaintiffs have

adequately stated a claim upon which relief may be granted for the remaining Counts (IV - XI).

II. DISCUSSION

A. Legal Standard

A court considering a motion to dismiss under Rule 12(b)(6) “must accept all well-pleaded

factual allegations of the complaint as true and construe the complaint in the light most favorable

to the plaintiff.” Inge v. Rock Fin. Corp., 281 F.3d 613, 619 (6th Cir. 2002) (citing Turker v. Ohio

Dep’t of Rehab. & Corr., 157 F.3d 453, 456 (6th Cir. 1998)). The court need not, however, “accept

as true . . . unwarranted factual interferences.” Morgan v. Church’s Fried Chicken, 829 F.2d 10, 12

(6th Cir. 1987).

A claim survives this Motion where its “[f]actual allegations [are] enough to raise a right to

relief above the speculative level . . . .” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct.

1955, 167 L.Ed.2d 929 (2007). Thus, this Court will not grant a motion to dismiss for failure to state

a claim unless it is “clear that no relief could be granted under any set of facts that could be proved

consistent with the allegations.” Trzebuckowski v. City of Cleveland, 319 F.3d 853, 855 (6th Cir.

2003) (quoting Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 81 L.Ed.2d 59 (1984)).

B. Plaintiffs’ Claim of Disclosure Violations

Case 2:09-cv-12613-JF-DAS Document 29 Filed 11/30/2009 Page 6 of 19
1. Regulations and Statutes Cited by Plaintiffs

Counts IV and V relate to the issue of whether Defendants (respectively, CEMS, and Nini

as a Controlling Person) violated the anti-fraud provisions of federal securities law by failing to

disclose information in their investment materials concerning certain existing conflicts of interest.

The remaining counts, which mirror the allegations of Counts IV and V, are brought under the

Michigan Uniform Securities Act (Counts VI and VII), the Florida Securities and Investor

Protection Act (Counts VIII and IX), and Illinois Securities Law (Counts X and XI). Defendants

do not argue that Nini was not a Controlling Person under the various federal and state securities

laws. Accordingly, if Plaintiffs have adequately stated any claim against CEMS, the corresponding

controlling-person claim against Nini will survive. 

In addition, a securities claim under each State’s legislation is nearly identical to the

corresponding federal securities fraud claim. See Ward v. Atlantic Security Bank, 770 So.2d 1144,

1147 (Fla. Dist. Ct. App. 2001) (Florida); Branch -Hess Vending Services Employees’ Pension Trust

v. Guebert, 751 F. Supp. 1333, 1342 (C.D. Ill. 1990) (Illinois); Department of Commerce v. DeBeers

Diamond Dev’t Inv., Ltd., 280 N.W.2d 547, 550 (Mich. App. 1979) (Michigan). Thus, as

Defendants appear to concede, if Plaintiffs have adequately alleged (a) a claim under the Federal

statutes, and (b) the applicability of the state statute to the parties, the state claims will survive the

instant Motion to Dismiss. I will therefore begin my analysis with the Federal securities fraud claim

against CEMS.

Case 2:09-cv-12613-JF-DAS Document 29 Filed 11/30/2009 Page 7 of 19
2. Securities Fraud Under Section 10(b) and Rule 10b-5 against CEMS 

Federal Securities Laws are Broad and Flexibly Construed

In Count IV, Plaintiffs allege that Defendants violated: (1) § 10(b) of the Securities Exchange

Act of 1934, which prohibits any person from using or employing any “manipulative or deceptive

device or contrivance” in connection with the purchase or sale of any security, 15 U.S.C. § 78j(b),

and (2) Rule 10b-5, which makes it unlawful for any person, in connection with the purchase or sale

of any security, directly or indirectly: 

(a) to employ any device, scheme, or artifice to defraud,

(b) to make any untrue statement of a material fact or to omit to state a material fact

necessary in order to make the statements made, in the light of the circumstances under

which they were made, not misleading, or

(c) to engage in any act, practice or course of business which operates or would operate as

a fraud or deceit upon any person in connection with the purchase or sale of any security.

As the United States Supreme Court explained, “[t]hese proscriptions, by statute and rule, are broad

and, by repeated use of the word ‘any,’ are obviously meant to be inclusive.” Affiliated Ute Citizens

of the State of Utah v. United States, 406 U.S. 128, 151, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972).

They “embrace a ‘fundamental purpose . . . to substitute a philosophy of full disclosure for the

philosophy of caveat emptor and thus to achieve a high standard of business ethics in the securities

industry.’” Id. (quoting SEC v. Capital Gains Research Bureau, 375 U.S. 180, 186, 84 S.Ct. 275,

11 L.Ed.2d 237 (1963)). The Supreme Court advised that the anti-fraud provisions of securities

legislation are to be construed “not technically and restrictively, but flexibly to effectuate [their]

remedial purposes.” Id. quoting Capital Gains, 375 U.S. at 195.

“Generally, federal securities law prohibits fraudulent, material misstatements or omissions

in connection with the sale or purchase of a security.” City of Monroe Employees Retirement System

v. Bridgestone Corp., 399 F.3d 651, 668 (6th Cir. 2005) (internal quotations and citation omitted).

Case 2:09-cv-12613-JF-DAS Document 29 Filed 11/30/2009 Page 8 of 19
4

Defendants do not argue that Plaintiffs have inadequately pled scienter, reliance, injury,

or proximate cause. And as discussed more fully below, although Defendants do not challenge

the materiality of the alleged omissions, in this context the materiality inquiry “coalesces” with

the duty inquiry. Accordingly, I must analyze whether Defendants had a duty to disclose

additional information arising from their voluntary, but arguably selective, disclosure. 

5

Each Plaintiff certified his/its Accredited Investor status when signing the Subscription

Agreement.

Specifically, in order to state a claim under § 10(b) or Rule 10b-5, a plaintiff must allege: (1) a

misrepresentation or omission; (2) of a material fact that the defendant had a duty to disclose; (3)

made with scienter; (4) justifiably relied on by plaintiffs; and (5) proximately causing them injury.

Id. (citing Helwig v. Vencor, Inc., 251 F.3d 540, 554 (6th Cir. 2001) (en banc)). The Sixth Circuit

has explained that a statement is “actionable” when it satisfies the first two of these requirements,

“i.e., it is a misrepresentation or omission of a material fact that the defendant had a duty to

disclose.” Id. 

In the instant Motion, Defendants have argued only that there was no duty to disclose the

allegedly omitted information.4

 Thus, the only issue for the Court is whether the Plaintiffs have

sufficiently alleged an actionable misrepresentation or omission. 

Plaintiff’s Claim

Plaintiffs contend that Defendants’ duty to disclose the omitted information arose from two

places: (1) the Securities Statutes and Regulations; and (2) Defendants’ decision to speak about

conflicts of interest, which Plaintiffs argue creates a duty to speak fully and completely. 

As to the first, Plaintiffs acknowledge that Defendants relied upon the private-placement

exemption in Regulation D, Rule 506, 17 C.F.R. § 230.506. Rule 506 exempts from registration,

offerings having no more than 35 purchasers, if each purchaser meets established sophistication

criteria or is an “Accredited Investor.”5

 Rule 502(b)(1) states that information need not be furnished

Case 2:09-cv-12613-JF-DAS Document 29 Filed 11/30/2009 Page 9 of 19
to Accredited Investors. 17 C.F.R. § 502(b)(1). Accordingly, despite Plaintiffs’ contention that

Defendants’ “express reliance on Regulation D . . . created a representation that Defendants would

disclose all information necessary to avoid being misleading” (Response at 12), I find that

Defendants had no statutory duty to disclose their conflicts. 

This, however, is not the end of the inquiry. Plaintiffs also claim that, “CEMS, having

generally addressed the possibility of unspecified conflicts and competitive interests in the offering

materials[,] assumed a duty to speak completely and accurately on these issues . . . .” Compl. ¶ 82.

By not fully disclosing CEMS’s and Nini’s conflicts of interest, Plaintiffs assert that “the [O]ffering

[M]aterials created the false impression that neither Nini nor CEMS were aware of any material

conflicts and competitive interests or that no such conflicts or competitive interests existed.” Compl.

¶ 83.

Defendants Are Not Exempt From Providing 

Truthful and Complete Disclosures When They Speak

Defendants’ entire Motion argues that they are exempt from making any disclosures to

Plaintiffs regarding the investments at issue. Defendants reason that, among other things, Plaintiffs

are Accredited Investors who are presumed to be sophisticated investors. Therefore, Defendants

conclude, the Rules impose no duty on CEMS to provide “any information whatsoever” to Plaintiffs.

Motion at 3-8.

Plaintiffs’ status as Accredited Investors, however, does not foreclose Defendants’ duty to

speak truthfully and completely when it chooses to make disclosures. Wright v. National Warranty

Co., L.P., 953 F.2d 256 (6th Cir. 1992) (reversing district court’s grant of summary judgment to

defendant on § 10(b) and Rule 10b-5 violations, despite plaintiff’s status as an Accredited Investor);

Helwig v. Vencor, Inc., 251 F.3d at 560 (differentiating between a non-actionable case involving

silence absent a duty to disclose, and an actionable case “about selective disclosure of information

Case 2:09-cv-12613-JF-DAS Document 29 Filed 11/30/2009 Page 10 of 19
known exclusively to defendants and essential to complete a picture they had only partially

revealed”). 

In this case, neither Defendants’ private-placement exemption, nor Plaintiffs’ AccreditedInvestor status controls. Therefore, I must now determine whether the statements Defendants

elected to make are rendered false or misleading in light of the information they withheld.

Defendants’ Statements Regarding Conflicts of Interest 

Created a Duty Not to Mislead

“[A] corporation is not required to disclose a fact merely because a reasonable investor

would very much like to know the fact. Rather, an omission is actionable under the securities laws

only when the corporation is subject to a duty to disclose the omitted facts.” In re Time Warner Inc.

Securities Litigation, 9 F.3d 259, 267 (2d Cir. 1993) (citing Basic Inc. v. Levinson, 485 U.S. 224,

239 n. 17, 108 S.Ct. 978, 987 n. 17, 99 L.Ed.2d 194 (1988)). A duty to affirmatively disclose “may

arise when there is insider trading, a statute requiring disclosure, or, as relevant to this case, an

inaccurate, incomplete or misleading prior disclosure.” City of Monroe, 399 F.3d at 669 (internal

quotations and citations omitted) (emphasis added). Accordingly, even when it has no independent

duty to speak, if a company makes a “voluntary disclosure,” it must speak “fully and truthfully.”

Helwig, 251 F.3d at 564. See also Zweig v. Hearst Corp., 594 F.2d 1261 (9th Cir. 1979) (holding

a newspaper columnist had no statutory duty to disclose his interests in a stock, but he “assumed”

the duty to disclose his conflicts of interest when he chose to write a glowing article encouraging

purchases of the securities). 

In Helwig, the Sixth Circuit differentiated between mere silence and selective disclosure.

In that case, the district court granted summary judgment for the defendants on the plaintiffs’

securitiesfraud claims, finding the defendants had no duty to disclose the complained-of omissions.

The Sixth Circuit, en banc, reversed, explaining that, contrary to the district court’s framing of the

Case 2:09-cv-12613-JF-DAS Document 29 Filed 11/30/2009 Page 11 of 19
issue, the question “is not whether [Defendants] had a duty to divulge [the omitted information].

Rather, the question is whether the company had a duty to complete the information already given

concerning [the company’s voluntary disclosures].” Helwig, 251 F.3d at 561 (emphasis added). The

court answered affirmatively, holding that an actor must “provide complete and non-misleading

information with respect to the subjects on which he undertakes to speak.” Id. In other words, “a

company may choose silence or speech elaborated by the factual basis as then known – but it may

not choose half-truths.” Id. 

 In the earlier case of Rubin v. Schottenstein, the Sixth Circuit explained that the duty to speak

“fully and truthfully” arises from Rule 10b-5, itself: 

The question thus is not whether a [defendant’s] silence can give rise to liability, but

whether liability may flow from his decision to speak . . . concerning material details

. . . without revealing certain additional known facts necessary to make his

statements not misleading. This question is answered by the text of Rule 10b-5(b)

itself: it is unlawful for any person to ‘omit to state a material fact necessary in order

to make the statements made, in the light of the circumstances under which they were

made, not misleading . . . .

143 F.3d 263, 268 (6th Cir. 1998) (en banc) (quoting 17 C.F.R. § 240.10b-5(b)). Therefore,

whether Defendants “assumed” a duty to disclose known conflicts of interest depends on whether

the conflicts withheld comprise a “material fact” necessary to make its other statements “not

misleading.” 

For purposes of securities fraud cases, “materiality depends on the significance the

reasonable investor would place on the withheld or misrepresented information.” Basic, 485 U.S.

at 240. That is, undisclosed information is material if its disclosure would “significantly alter the

‘total mix’ of information made available.” Id. at 231-32 (citations omitted). For a Complaint to

be dismissed based on the immateriality of an omission, the undisclosed informationmust have been

“so obviously unimportant to a reasonable investor that reasonable minds could not differ on the

Case 2:09-cv-12613-JF-DAS Document 29 Filed 11/30/2009 Page 12 of 19
question of [their] unimportance.” City of Monroe, 399 F.3d 678-80 (quoting Helwig, 251 F.3d at

563) (emphasis in original). Accordingly, although there is a distinction between the concepts of

a duty to disclose and materiality, these factors largely “coalesce” where the duty arises from an

omitted fact that renders a prior statement false or misleading. See In re Time Warner, 9 F.3d at

267-68 (explaining, if a reasonable investor would find omitted information to alter the “total mix”

of information disclosed, “it is difficult to imagine a circumstance where the prior statement would

not be rendered misleading in the absence of the disclosure.”). 

When determining whether an omission renders prior statements misleading, context matters.

Indeed, “[s]ome statements, although literally accurate, can become, through their context and

manner of presentation, devices which mislead investors.” McMahan & Co. v. Wherehouse Entm’t,

Inc., 900 F.2d 576, 579 (2d Cir. 1990). For that reason, a material misrepresentation – and the

resultant duty to “complete” a disclosure – is measured “not by literal truth, but by the ability of the

material to accurately inform rather than mislead prospective buyers.” Id. Thus, a court must not

“pluck” disclosures out of their context and analyze their truth in a vacuum, but must look at the

statements in light of the circumstances and events that create the context in which they were made.

See City of Monroe, 399 F.3d at 672. 

Plaintiffs argue that, although Defendants’ disclosures regarding potential conflicts of

interests may be literally true, they are materially misleading because they “failed to state that

CEMS and Nini actually had vested, pecuniary interests in the financial success of ventures that

were directly competing against CEJ.” Response at 10. Accordingly, Plaintiffs submit that

Defendants’ omissions were material, and the incomplete disclosures gave the “false impression”

that the specific conflicts identified in the Offering Materials “are the only conflicts that may arise

or that Defendants were not aware of any other types of conflicts.” Id. at 10-11. Plaintiffs’ position

Case 2:09-cv-12613-JF-DAS Document 29 Filed 11/30/2009 Page 13 of 19
6

Defendants also claim that there is no liability because “CEMS’[s] disclosure of actual

and possible conflicts of interest and competition did not make any other statement misleading.” 

Reply at 4 (emphasis added). Defendants have misread the appropriate inquiry. The question is

not whether Defendants’ disclosure renders other statements misleading, but whether

Defendants’ omissions render their disclosures misleading.

7

A reasonable juror could find that the Offering Materials did not “overtly state” that

there are competing business ventures. Section 5.5 of the Operating Agreement stated that

Defendants may have interests in other competitive ventures; and Section 5.4 permitted affiliated

transactions if disclosed and commercially reasonable. But, when itemizing their conflicts of

interest on the Risk Factors disclosure (Subscription Agreement, Exhibit C), no competitive

interests were disclosed. 

– that known but undisclosed conflicts are material – finds support in case law. See, e.g., SEC v.

Washington County Utility District, 676 F.2d 218, 223, 225 (6th Cir. 1982) (undisclosed conflict of

interest is material); Vernazza v. SEC, 327 F.3d 851, 859 (9th Cir. 2003) (“It is undisputable that

potential conflicts of interest are ‘material’ facts . . . .”) (citation omitted); Zweig v. Hearst Corp.,

594 F.2d 1261 (9th Cir. 1979) (undisclosed conflicts of interest are material). 

On the other hand, Defendants contend that their disclosures (i.e. that CEMS “may” have

“present or future” competitive ventures and “potential conflicts”) are “clear,” “unambiguous,”

“accurate,” and “literally truthful.” Reply at 4-5; Motion at 6. Defendants also conclusively argue

that their “disclosures . . . were not deliberate misstatements or misleading omissions, and therefore

there was no duty to provide additional information.”6

 Reply at 3. Finally, Defendants reason that,

because they “overtly stated [that] there are conflicts and competing business ventures,”7 any further

specificity “would not have changed the meaning or the import of the affirmative disclosures.” Id.

at 4. 

At this stage of the proceedings, I need not decide whether any particular statement is

rendered misleading by a particular omission. I must only determine whether Plaintiffs have

sufficiently alleged circumstances under which they could conceivably prove their claim of

fraudulent misrepresentation under any set of facts. With this standard in mind, I now consider other

Case 2:09-cv-12613-JF-DAS Document 29 Filed 11/30/2009 Page 14 of 19
courts’ analysis of omission liability.

In Benzon v. Morgan Stanley Distributors, Inc., 420 F.3d 598 (6th Cir. 2005), the Sixth

Circuit analyzed an investor’s claim that a disclosure was misleading under §10(b) and Rule 10b-5.

An investment prospective disclosed that sales personnel “may” receive different compensation for

selling different classes of shares. Plaintiffs claimed that an existing compensation scheme

established conclusively that brokers “did” earn more for selling a certain share class, thus creating

a conflict of interest which should have been disclosed. The plaintiffs suggested the “may”

disclosure was misleading because the existing compensation scheme was no longer speculative.

The Sixth Circuit held that the “semantic quibble” was not misleading, and served to put investors

on notice such that they could inquire of their financial advisors if they were concerned about broker

incentives. Id. at 611-12.

But the Sixth Circuit found a selective disclosure to be actionable in City of Monroe, when

the court reviewed a dismissal of a claim for securities fraud against Bridgestone. The plaintiff

investors argued that, by presenting information to investors regarding accounting principles and

loss contingencies, but omitting known contingencies arising from various claims and lawsuits for

defective tires, Bridgestone had implied that no such contingency existed. The Sixth Circuit agreed,

holding that a reasonable juror could find that Bridgestone’s selective disclosures were belied by

the existence of the lawsuits and other data suggesting that Bridgestone’s tires were defective.

Accordingly, the court reversed the dismissal and remanded for further proceedings. City of

Monroe, 399 F.3d at 669-81. 

The Second Circuit arrived at the same conclusion in Kronfeld v. Trans World Airlines, Inc.,

832 F.2d 726 (2d Cir.1987). In that case, the defendant, TWA’s parent corporation, issued a

prospectus for a new issue of TWA stock that discussed “in some detail” the relationship between

Case 2:09-cv-12613-JF-DAS Document 29 Filed 11/30/2009 Page 15 of 19
TWA and the parent. Id. at 735. The parent, however, failed to disclose that it was contemplating

termination of its relationship with TWA. Id. The court held that a trier of fact could find that the

parent’s disclosure of one business plan and financing strategy (or strategies) was misleading

without disclosure of an alternate considered strategy with substantially more negative implications

for investors. Id. at 736-37. 

And in the recent case of Heller v. Goldin Restructuring Fund, L.P., 590 F. Supp. 2d 603

(S.D.N.Y. 2008), a plaintiff investor alleged that the defendant violated section 10(b) and Rule 10b-5

by disclosing that the defendants investment fund sought to raise $200 million in capital, but failing

to reveal that the fund was severely undercapitalized, having raised only $40 million despite lengthy

fund-raising efforts. In denying Defendants’ 12(b)(6) motion, the court held that, in light of

Defendants’ funding goal disclosures, a reasonable investor may have considered the omitted

information “significant in making investment decisions.” Id. at 615-17.

Finally, in Provenz v. Miller, 102 F.3d 1478, 1488-89 (9th Cir. 1996), the Ninth Circuit

reversed the district court’s grant of summary judgment to the defendant. The plaintiff alleged that

the defendant company failed to reveal that it was having “serious technical problems” with the

manufacture of one of its product lines. The district court found the failure to disclose the

information was not misleading because the defendants had already disclosed that the program was

having problems with its supplier, including sourcing and cost problems. On appeal, the Ninth

Circuit found that the generalized disclosures may have been false or misleading: 

There is a difference between knowing that any product-in-development may run

into a few snags, and knowing that a particular product has already developed

problems so significant as to require months of delay. 

Id. (citation omitted). Because there was evidence that the defendants were “experiencing more

than simply supply problems,” a jury could reasonably find that the disclosures about the supply

Case 2:09-cv-12613-JF-DAS Document 29 Filed 11/30/2009 Page 16 of 19
8

 These conflicts disclosed: (1) that CEMS would be paid for the management services it

rendered to CEJ, and (2) that CEMS and CEJ were represented by the same legal counsel in the

formation and capitalization of CEJ. The investors obviously knew of the first by virtue of

CEMS’s position as Manager of CEJ, and the second is not an uncommon occurrence in the

formation of new entities. 

problems were “false or misleading.” Id. 

I find this case to be more similar to the City of Monroe/Kronfield/Heller/Provenz cases than

to Benzon. This case is not a simple “semantic quibble” about a single statement that conflicts of

interest “may” or “do” exist. In this case, Defendants disclosed two specific conflicts of interest8

while failing to disclose the more significant conflict: CEMS would, at times, act in direct

competition with and have interests directly opposed to CEJ’s interests. Moreover, at the top of the

Risk Factors, Defendants cautioned that “additional risks and uncertainties not presently known to

us or that we currently deem immaterial may also impair our business operations.” (emphasis

added). A reasonable investor could find this statement misleading, in that it could imply that all

known, material risks (including conflicts of interest) have been disclosed. Finally, although the

Offering Materials seemingly permit Defendants to have competitive interests, Section 5.4 required

transactions involving affiliates to be commercially reasonable and disclosed to the investors. Thus,

a reasonable investor may have believed that all known affiliations had been disclosed. 

As the Ninth Circuit reasoned in Provenz, there is a difference between knowing that a

conflict of interest may arise, and knowing of an existing business relationship that results in direct

competition. And although Defendants rely on the “literal truth” of their disclosures, the duty to

disclose arises if omitted information renders prior statements “materially misleading” – it need not

“completely negate” them. In re Time Warner, 9 F.3d at 268 . Plaintiffs have sufficiently alleged

facts sufficient to bring their claim for misrepresentation by omission above the speculative level.

Accordingly, Defendants’ Motion to Dismiss as to Count IV is DENIED.

Case 2:09-cv-12613-JF-DAS Document 29 Filed 11/30/2009 Page 17 of 19
2. Securities Fraud Under Section 10(b) and Rule 10b-5 against Nini

Section 20(a) of the Exchange Act imposes on Controlling Persons joint and several liability

for securities violations. 15 U.S.C. § 78t(a). As explained above, Defendants do not dispute that

Nini is a Controlling Person under this section. Therefore, having denied the Motion to Dismiss as

to Count IV, I also DENY it with respect to Count V. 

3. The State Law Claims

Plaintiffs assert identical claims under the Michigan Uniform Securities Act (“MUSA”),

Mich. Comp. Laws §§ 451.810(a)(2), 451.10(b). Defendants concede that MUSA applies, and

recognize that the federal analysis applies to claims under the Michigan statute. Accordingly,

following the same analysis, Defendants’ Motion to Dismiss is DENIED as to Counts VI and VII.

For the Florida and Illinois claims, in addition to the “no duty to speak” argument (which

I have rejected), Defendants contend that neither States’ statutes apply because the sale and

distribution of the securities at issue did not occur in those states. Motion at 9, 11. Plaintiffs

correctly note that the Florida statutes apply to any sale of securities “to persons of [Florida] from

offices outside of this state, by mail or otherwise.” Skurnick v. Ainsworth, 591 So.2d 904, 906 (Fla.

1991) (finding Florida securities laws to apply to a sale of securities where a Florida resident sent

a check from Florida to a broker in New York). Similarly, the Illinois Securities Law of 1953

applies where any “step toward the completion of the sale” occurs in Illinois – including, for

example, where any offering materials are sent to Illinois, or the purchaser submits payment for

securities from Illinois. See Benjamin v. Cablevision Programming Investments, 499 N.E.2d 1309,

1315 (Ill. 1986) (liberally construing Illinois securities laws, and noting that “it is quite possible that

the securities laws of two or more States may apply to a single transaction.”). The Complaint lists

two Plaintiffs, Air Banks, LLC and Don Defosset, as Florida residents, and one Plaintiff,

Case 2:09-cv-12613-JF-DAS Document 29 Filed 11/30/2009 Page 18 of 19
19

Convenienso, LLC, as an Illinois resident. Compl. ¶¶ 2, 5, 9. The Complaint also alleges that each

Plaintiff transmitted funds via a wire transfer to a CEMS bank account. Compl. ¶ 43. Construing

the facts in the light most favorable to Plaintiffs, it is reasonable to infer that each Plaintiffs

“purchased” the securities from his home state, and caused payment to be wired from within that

state. As such, the Complaint sufficiently alleges that Defendants sold securities in Florida and

Illinois, at least as to the Plaintiffs residing in those states, and Defendants’ Motion to Dismiss is

DENIED with respect to Counts VIII through XI.

III. CONCLUSION

For the foregoing reasons, the Defendants’ Motion to Dismiss is DENIED in its entirety.

IT IS SO ORDERED. 

Date: November 30, 2009 s/ John Feikens 

United States District Judge

Proof of Service

I hereby certify that the foregoing order was served on

the attorneys/parties of record on November 30, 2009,

by U.S. first class mail or electronic means.

s/Carol Cohron 

Case Manager

Case 2:09-cv-12613-JF-DAS Document 29 Filed 11/30/2009 Page 19 of 19