Asplund v. Sife

• Decision Date: 11 December 2000
• Docket Number: No. A089432.,A089432.
• Citation: 86 Cal.App.4th 26,103 Cal.Rptr.2d 34
• Court: California Court of Appeals Court of Appeals
• Parties: Kenneth ASPLUND et al., Plaintiffs and Appellants, v. SELECTED INVESTMENTS IN FINANCIAL EQUITIES, INC., Defendant and Respondent.

103 Cal.Rptr.2d 34

86 Cal.App.4th 26

Kenneth ASPLUND et al., Plaintiffs and Appellants, v. SELECTED INVESTMENTS IN FINANCIAL EQUITIES, INC., Defendant and Respondent.

No. A089432.

Court of Appeal, First District, Division 2.

December 11, 2000.

Review Denied March 14, 2001.

Stephen McNichols, Jr., Donald A. Odell and Leslie A. Baxter, McNichols Randick O'Dea & Tooliatos, LLP, Pleasanton, for Appellant.

Jan Stiglitz, for Respondent.

KLINE, P.J.

The chief question in this case is whether a broker-dealer of securities has a common law duty to supervise sales by its registered representatives of investments in which the broker-dealer has no economic interest to persons who are not customers of the broker-dealer. We hold that where, as here, the registered representative is not an employee of the brokerdealer, has no actual or apparent authority to sell the investment at issue, and the broker had no notice of and did not in any way benefit from the transaction, the broker-dealer has no such duty.

FACTS AND PROCEEDINGS BELOW

In 1996 and 1997, appellants Kenneth and Sandra Asplund and Marguerite Summers purchased promissory notes issued by Medco, Inc. (Medco), a Florida based medical equipment company, from Joseph P. Tufo. Tufo was a registered representative of respondent Selected Investments in Financial Equities, Inc. (SIFE), a California corporation that is registered as an investment advisor with the Securities and Exchange Commission (SEC) and also as a broker-dealer with the National Association of Securities Dealers (NASD). SIFE's only purpose is to act as a management company for a mutual fund, the SIFE Trust Fund.

In October 1997 a federal court enjoined Medco from offering or selling promissory notes, which the SEC alleged to be "an elaborate Ponzi scheme" in violation of federal securities laws.¹ On June 24, 1997 the California Department of Corporations, acting under the authority of section 25532 of the Corporations Code, issued an order directing Medco, Tufo and others to desist and refrain from the further offer or sale in the State of California of investment contracts, promissory notes or any other securities of Medco on the ground such securities were unqualified for sale in this state. Five months later SIFE terminated its relationship with Tufo, who was subsequently charged by the SEC with violating federal securities laws, and by the Department of Corporations for violating the California Corporations Code.

Medco eventually failed and was placed in receivership. As a result of their investments in Medco, appellants lost approximately $154,000.

Appellants commenced this action in March 1998 by filing a complaint against Tufo, his wife, and his family trust, naming also numerous Doe defendants. In May 1998 appellants amended their complaint by naming SIFE a defendant. In August 1998 Tufo filed for bankruptcy. Thereafter appellants dismissed their complaint as against him without prejudice.

All but one of appellants' seven causes of action against SIFE are based on a theory of vicarious liability. Alleging that Tufo had actual or ostensible authority to act in its behalf, appellants sought to impose vicarious liability on SIFE for misrepresentation, breach of fiduciary duty, fraud, negligence and breach of an oral contract. The remaining cause of action against SIFE asserted direct liability for negligent failure to supervise Tufo in his representative capacity.

In March 1999, SIFE moved for summary judgment claiming (1) that SIFE could not be found vicariously liable because Tufo's sales of investments in Medco were not within the scope of his agency relationship with SIFE, and (2) that direct liability could not be imposed because SIFE had no duty to supervise Tufo with respect to his sale of investment products such as Medco in which it had no financial interest, as such sales were outside the scope of its agency relationship with Tufo.

The trial court granted the motion for summary judgment on September 20, 1999, and on that basis thereafter entered judgment for SIFE.

Kenneth and Sandra Asplund first learned that Tufo offered investments in Medco from a radio advertisement. What impressed them was that the ad described a fully secured investment that returned a steady 12 to 16 percent annual return. They phoned Tufo for an appointment and met with him about five times. Tufo informed the Asplunds that in addition to selling investments he was an insurance agent with the Farmers Insurance Group. As to investments, he offered two "options." The first was to invest in the SIFE Trust Fund, which Tufo described as a mutual fund; the second was to purchase promissory notes in Medco. Tufo stated that Medco leased medical equipment to hospitals and physicians and that it was "a very safe investment" because the loan was secured by the equipment. He also said that unlike a mutual fund that goes up and down in value, the Medco notes produced "a steady 12 to 16 percent," depending upon the amount of the investment and the maturity date. After considering these options, the Asplunds decided Medco was the better investment and initially purchased promissory notes in the amount of $50,000. Thereafter, in order to receive returns greater than 12 percent, which required a higher investment, the Asplunds used money from a bank certificate of deposit and a checking account to invest an additional $48,000. The Asplunds lost all but $18,000 of their entire $98,000 investment.

Kenneth Asplund also recommended an investment in Medco to appellant Robert Summers, his uncle, who purchased Medco notes in the amount of $56,000 in May 1997, a few months before he died.² Summers apparently also lost all or most of this investment.

Sandra Asplund believed there was a relationship between SIFE and Medco because Tufo promoted investments in both and because his business card contained SIFE's name "in big bold letters, and the words `Joseph Tufo, Registered Representative,' directly across from the SIFE logo." In a declaration, she stated that she reached this conclusion also because Tufo provided her and her husband with a chart showing the performance of the SIFE Trust Fund over 15 years, which stated in large print "Joseph P. Tufo Registered Representative," and he also provided them a copy of the SIFE 1995 annual report. The annual report commenced with the statement: "Going Strong: $600 million and growing" and listed the numerous financial institutions, other large corporations and United States treasury bills in which SIFE invested. The annual report also contained a section entitled "Additional SIFE Services" which stated that the SIFE Trust Fund provided "continuing individual services to the Investor," and stated that "[inquiries concerning any of SIFE's services may be directed to your representative or the home office...." Based on the business card, the chart and the annual report, Mrs. Asplund "understood that Mr. Tufo was a registered representative of SIFE, and that he was advising us regarding investments offered by SIFE [and] that the options offered included Medco as well as the SIFE Trust Fund."

Carl Regalado, who also purchased Medco investments from Tufo,³ testified at deposition that one of the reasons he was impressed with Tufo was his connection with SIFE. Regalado assumed Tufo was employed by SIFE which he knew to be "a very good company." He thought SIFE was the company he was dealing with, because "SIFE is an investment company, and that's what I—that's what this was all about." Because he thought SIFE was involved in the investment, Regalado "felt very comfortable."

Virginia Redler, an employee of Tufo and also an investor in both SIFE and Medco, testified at deposition that Tufo "got a lot of people into his other schemes by, you know, the legit thing of SIFE." Appellants never claimed, however, that Tufo ever explicitly represented that Medco was affiliated with SIFE, and Tufo testified that he never made any such representation.

Tufo was not an employee of SIFE but became a registered representative for the SIFE trust in 1985 or 1986. As a result of that relationship, Tufo was licensed by the NASD through SIFE.⁴ The relationship between SIFE and Tufo was defined by the "Sales Representative Agreement" they entered into in 1993. By this agreement, SIFE appointed Tufo "as its agent for the sale and distribution of Participating Agreements of the Trust Fund, ..." Paragraph 2.1 of the agreement stated "the parties' intention that Sales Representative [i.e., Tufo] shall be an independent contractor and not an employee of SIFE. Nothing in this Agreement shall create or be taken as evidence of an employer-employee relationship, an association, a partnership or a joint venture among the parties. Although Sales Representative is subject to the supervision and control of SIFE regarding the sales of Participating Agreements [i.e., shares or units in SIFE] in accordance with the terms and provisions of this Agreement and other rules and regulations regarding the sales of securities, Sales Representative shall determine the time, place and details of sales presentations to prospective investors. While Sales Representative is expected to devote substantial effort and time to the representation of SIFE, his/her status as an independent contractor requires that his/her hours of work, the percentage of time devoted to SIFE representation, and generally all details pertaining to Sales Representative's actual service be determined by Sales Representative."

Tufo's right to engage in other employment is also addressed in paragraph 8.1 of the agreement, which provided that, as an independent contractor, a sales representative "may engage in whatever other activities, including other employment" as he or she may desire. "Accordingly, Sales Representative may enter into other business activities or employments, such as tax return preparation, accounting, the sales of personal or real...