708 F.3d 470 (3rd Cir. 2013), 12-1580, Belmont v. MB Inv. Partners, Inc.

Docket Nº:12-1580.
Citation:708 F.3d 470
Opinion Judge:JORDAN, Circuit Judge.
Party Name:Barry J. BELMONT; Philadelphia Financial Services, LLC; Thomas J. Kelly, Jr.; Frances R. Kelly; Gary O. Perez, Appellants, v. MB INVESTMENT PARTNERS, INC.; Centre MB Holdings; Centre Partners Management, LLC; Robert M. Machinist; Mark E. Bloom; Ronald L. Altman; Lester Pollack; William M. Tomai; Guillaume Bebear; P. Benjamin Grosscup; Thomas N. Bar
Attorney:Joseph R. Loverdi, Paul C. Madden, [Argued], Buchanan Ingersoll & Rooney, Philadelphia, PA, for Appellants. Peter J. Hoffman, Jeffrey P. Lewis, Eckert, Seamans, Cherin & Mellott, Philadelphia, PA, Edward D. Kutchin, [Argued], Kerry R. Northup, Berluti McLaughlin & Kutchin, Boston, MA, for Appelle...
Judge Panel:Before: SCIRICA, FISHER, and JORDAN, Circuit Judges.
Case Date:February 22, 2013
Court:United States Courts of Appeals, Court of Appeals for the Third Circuit
 
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708 F.3d 470 (3rd Cir. 2013)

Barry J. BELMONT; Philadelphia Financial Services, LLC; Thomas J. Kelly, Jr.; Frances R. Kelly; Gary O. Perez, Appellants,

v.

MB INVESTMENT PARTNERS, INC.; Centre MB Holdings; Centre Partners Management, LLC; Robert M. Machinist; Mark E. Bloom; Ronald L. Altman; Lester Pollack; William M. Tomai; Guillaume Bebear; P. Benjamin Grosscup; Thomas N. Barr; Christine Munn; Robert A. Bernhard.

No. 12-1580.

United States Court of Appeals, Third Circuit.

February 22, 2013

Argued Nov. 13, 2012.

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Joseph R. Loverdi, Paul C. Madden, [Argued], Buchanan Ingersoll & Rooney, Philadelphia, PA, for Appellants.

Peter J. Hoffman, Jeffrey P. Lewis, Eckert, Seamans, Cherin & Mellott, Philadelphia, PA, Edward D. Kutchin, [Argued], Kerry R. Northup, Berluti McLaughlin & Kutchin, Boston, MA, for Appellees, MB Investment Partners Inc., Robert M. Machinist, P. Benjamin Grosscup, Thomas N. Barr, Christine Munn, Robert A. Bernhard.

Joshua S. Amsel, [Argued], Weil, Gotshal & Magnes, New York, NY, Teresa N. Cavenagh, Duane Morris, Philadelphia, PA, Alan T. Gallanty, [Argued], Kantor, Davidoff, Wolfe, Mandelker, Twomey & Gallanty, New York, NY, Joseph J. Langkamer, Samuel W. Silver, Schander Harrison Segal & Lewis, Philadelphia, PA, for Appellee Ronald L. Altman.

Before: SCIRICA, FISHER, and JORDAN, Circuit Judges.

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OPINION

JORDAN, Circuit Judge.

This case arises from a now-defunct Ponzi scheme. The defendants are MB Investment Partners, Inc. (" MB" ), a registered investment adviser, and various persons affiliated with MB. The fraudulent scheme was perpetrated by Mark Bloom while he was an employee and officer of MB, through a hedge fund called North Hills, L.P. (" North Hills" ) that Bloom controlled and managed outside the scope of his responsibilities at MB. Bloom was arrested and indicted in the Southern District of New York in 2009 on a variety of charges relating to the Ponzi scheme, by which time most of the money invested in North Hills was gone. Plaintiffs Barry J. Belmont, Philadelphia Financial Services LLC (" PFS" ), 1 Thomas J. Kelly, Jr. and his wife Frances R. Kelly, and Gary O. Perez (collectively, the " Investors" ) brought suit in the Unites States District Court for the Eastern District of Pennsylvania against MB, certain of its officers and directors, including Bloom, and one of its employees, Robert L. Altman, in an effort to recover money they had lost at the hands of Bloom.

The Investors offered various theories of liability under both federal and state law, alleging (1) controlling person liability under Section 20(a) of the Securities and Exchange Act (the " Exchange Act" ), (2) negligent supervision, (3) violations of Securities and Exchange Commission (" SEC" ) Rule 10b-5, (4) violations of the Pennsylvania Unfair Trade Practice and Consumer Protection Law (the " UTPCPL" ), and (5) breach of fiduciary duty. The District Court dismissed all of the claims against Altman and, following discovery, granted summary judgment to all of the remaining defendants on all of the Investors' claims. For the reasons that follow, we will affirm in part and vacate in part the District Court's orders and will remand the case for a trial on the Investors' claims against MB for violations of Rule 10b-5 and the UTPCPL.

I. BACKGROUND

A. Facts 2

1. The Parties

Defendant MB is a registered investment adviser previously known as Munn Bernhard & Associates, Inc. It is based in New York and registered to do business in Pennsylvania. As a registered investment adviser, MB managed client investments by trading securities on stock exchanges through custodial trading accounts held by third parties, such as Charles Schwab & Co., Inc. MB's primary investment focus was on large-capitalization stocks. It ceased operations in June 2009, following the discovery of the North Hills fraud and Bloom's arrest.

Defendants Robert Machinist and Robert L. Altman (together with MB, the " MB Defendants" ) were executives working at MB during the period that Mark Bloom also worked there. Machinist was the chairman of MB's board of directors, and the chief operating officer and a co-managing

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partner of MB,3 and he owned 14 percent of the capital stock of its parent company, Centre MB Holdings, LLC (" CMB" ). Machinist was listed as a " control person" 4 in MB's Form ADV, the reporting form used by investment advisers to register with both the SEC and state securities authorities. Altman was a senior managing director,5 partner, and portfolio manager of MB. Bloom was also an executive at MB, serving as president, co-managing partner (with Machinist), and chief marketing officer, and he too owned 14 percent of the capital stock of CMB. Bloom was also a member of MB's board of directors.6

Defendant Centre Partners Management, LLC (" Centre Partners" ) is a Delaware limited liability company that provides advisory and management services for various private equity investment funds, each of which is structured as a limited partnership composed primarily of investors otherwise unaffiliated with Centre Partners. Defendants Lester Pollack, William M. Tomai, and Guillaume Bébéar (together with Centre Partners and CMB, the " Centre Defendants" ) are Centre Partners executives. Pollack, Tomai, and Bébéar were, at all times relevant to this dispute, non-management members of MB's board of directors, with no role in the business's day-to-day operations, and they do not appear on MB's organizational chart. However, Pollack and Tomai are listed as control persons on MB's Form ADV.

Defendant CMB is a Delaware limited liability company formed by Centre Partners, Machinist, and Bloom to acquire a controlling interest in MB. In July 2004, Machinist, Bloom, and Centre Partners (though an affiliated fund) invested $14 million in CMB for the acquisition of MB, with Centre Partners as the largest shareholder, followed by Machinist and Bloom. CMB owned 57 percent of the capital stock of MB, and controlled the operations of MB through a contractual operating agreement. CMB is denominated as a control person on MB's Form ADV. After CMB acquired control of MB, it designated Bloom, Machinist, Pollack, Tomai, and Bébéar to serve as members of the MB board of directors.

Defendants P. Benjamin Grosscup, Thomas N. Barr, Christine Munn, and Robert A. Bernhard (together with Machinist, Bloom, Pollack, Tomai, and Bébéar, the " MB Directors" ) were all MB executives who also served as members of the MB board of directors. Grosscup, Barr, and Munn are listed as " control persons" in MB's Form ADV.7

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Plaintiffs, the Investors, all had money in Bloom's North Hills fund, investing a total of approximately $4.4 million in North Hills from 2006 to 2008. Belmont and the Kellys were also MB clients and entered into advisory agreements with MB. PFS and Perez did not have any advisory agreement with MB.

2. Bloom and the North Hills Ponzi Scheme

Bloom worked as a certified public accountant in the tax department of an accounting firm from 1979 to 1992. From 1992 to 2001, he worked for a hedge fund management company where he was responsible for marketing and client services. Bloom left the hedge fund in 2001, and became president of a registered investment adviser and broker-dealer affiliated with his former accounting firm. He resigned from that position and joined MB prior to the July 2004 acquisition of MB by CMB.

Bloom formed North Hills in 1997, as an enhanced stock index fund based on various stock indices. Bloom was the sole principal and managing member of North Hills Management, LLC, the general partner of North Hills, and he had sole authority over the selection of the fund's investments. Although North Hills was founded as a stock index fund, Bloom later described North Hills to investors as a " fund of funds" that invested in hedge funds and other well-managed funds and that provided financing to the widely-known retailer Costco. Between 2001 and 2007, Bloom raised approximately $30 million from 40 to 50 investors for the North Hills fund. He claimed that North Hills consistently generated investment returns of 10-15 percent per year without significant risk.

In fact, however, North Hills was a Ponzi scheme that Bloom used to finance his lavish personal lifestyle, and, over time, he diverted at least $20 million from North Hills for his own personal use. Bloom used those funds to acquire multiple apartments and homes, furnishings, luxury cars and boats, and jewelry, and to fund parties and travel.

Bloom also engaged in self-dealing beyond the money he converted from North Hills. For example, while acting as a third-party marketer for the Philadelphia Alternative Asset Fund (" PAAF" ), he invested $17 million of North Hills's funds in PAAF, earning a lucrative commission for himself without disclosing that conflict of interest to North Hills investors. When PAAF, and another company in which North Hills had invested, the futures and commodities broker Refco, Inc., collapsed due to separate frauds, Bloom misappropriated proceeds of legal settlements and residual payments made to North Hills as an unsecured creditor.

3. Marketing of North Hills to the Investors

In June 2006, Bloom met with plaintiff Belmont to introduce himself and to discuss the investment advisory services offered by MB. Bloom gave Belmont his MB business card and described the investment philosophy of MB. Bloom then discussed various investment funds, including North...

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