Burdick v. Rosenthal Collins Grp., LLC
| Decision Date | 31 May 2016 |
| Docket Number | No. 73459-8-I,73459-8-I |
| Court | Washington Court of Appeals |
| Parties | DONALD BURDICK; SUSAN BYINGTON; LISA CARFAGNO; PETER and JANICE ELLIOT, and their marital community; BERNARD E. GOLDBERG; PAUL E. GOLSTEIN; TOM and LaVOE MULGREW, and their marital community; SUSAN ROSEN; MARTIN SILVERMAN; SHARON SILVERMAN; and BARRY and ROBIN STUCK, and their marital community, Appellants, v. ROSENTHAL COLLINS GROUP, LLC, an Illinois limited liability corporation, Respondent. |
UNPUBLISHED OPINION
DWYER, J. — This appeal arises from a trial court order granting summary judgment dismissal of securities and negligence claims brought against Rosenthal Collins Group, LLC (RCG) for its alleged role in a Ponzi scheme fraud perpetrated by Enrique Villalba.1 Because RCG was not involved in the sale of the securities herein at issue and owed no special duty to the investors in Villalba's scheme, we affirm.
This case begins with the collapse of a Ponzi scheme perpetrated by Villalba, through his company Money Market Alternatives, LLC (MMA), from late 1996 until September 2009.
Villalba held himself out to investors as an "investment manager" who managed his clients' assets in accordance with their individual investment objectives and by utilizing his trading strategy, which he referred to as the "Money Market Plus Method." In reality, Villalba stole the money that he was supposedly managing. After receiving investors' funds into his bank accounts, Villalba used the funds to, among other things, pay himself huge management fees, fund his lavish lifestyle and other business ventures, and make over $3 million in Ponzi-type payments to other investors. Villalba concealed his theft from his clients with lies and false account statements reflecting steady gains in their accounts.2 Based upon these fake statements and believing Villalba was earning impressive returns, investors sent more and more money to Villalba for him to manage on their behalf.
The 26 victims of the fraud, who include the appellants herein, lost more than $30 million.
Appellants (the investors) hired Villalba to manage their money and deposited funds with him at different times between 1996 and 2009.
The investors had different relationships with Villalba and different understandings of how he would manage their money. Bernard Goldberg, for example, met Villalba years before Villalba opened an account at RCG. Goldberg and Villalba formed a general partnership in 1996, through which Goldberg effectively hired Villalba to manage certain assets in return for a share of the trading profits. Given his close, longstanding relationship with Villalba, Goldberg was able to convince many of his friends to hire Villalba as their investment advisor, including (directly or indirectly) all of the other investors in this case.
After being introduced to Villalba, the other investors each entered into Investment Management Agreements (IMA) with Villalba. The IMAs detailed Villalba's role as "investment manager" of individually managed accounts and expressly provided the investor with the right to manage his or her own account and change the investment strategy to conform with his or her investment objectives. The IMAs also gave each investor the right to choose or change the brokerage firm handling the investor's individual account.
The IMAs made no mention of RCG3 and, by and large, the investors had no knowledge of the brokerage firms that Villalba was using. The investors typically wired money to Villalba by sending money directly to one of his bank accounts. Villalba then transferred money from MMA's bank accounts to futures accounts in MMA's name, including one at RCG, to trade futures. None of the investors sent any money to RCG. Indeed, the investors admitted that they hadno interaction whatsoever with RCG, that they never had a written agreement that mentioned RCG, and that RCG played no role in their decision to invest or in the sale of securities.
In June 1998, 18 months after the first of the investors invested with Villalba, RCG agreed to open a nondiscretionary commodity futures trading account for MMA. RCG is a Futures Commission Merchant (FCM) registered with the Commodities Futures Trading Commission (CFTC) and the National Futures Association (NFA) to conduct trading of futures contracts. As a "nondiscretionary" customer, MMA retained complete control over its futures account and had full responsibility and liability for all trading decisions.
RCG reviewed an offering circular that Villalba prepared to help him solicit $100 million from investors for the MMA account.4 According to the investment plan described in the circular, funds from Villalba's customers would be pooled to invest in treasury bills or money market funds "within a vehicle similar to a mutual fund." Villalba would also occasionally5 purchase S&P 500 futures contracts based on his purported expertise in predicting certain market trends. Those transactions would supposedly add 2 percent to 5 percent additional value for his customers. The investment would have "minimal" risk, it asserted, because the futures transactions would be made with "little or no leverage" and stop orders would be used to limit losses.
The circular claimed that the fund was not subject to state or federal regulation. RCG recognized, however, that because it would contain pooled investments, the fund would constitute a commodity pool.6 That made Villalba, or his company, a commodity pool operator. Neither were registered as commodity pool operators as required by the CFTC.
A form was provided to Villalba with the new account documents identifying two potential exceptions to the registration requirement. RCG's file shows that Villalba selected an exemption that was only applicable if he neither received any direct or indirect compensation for managing the anticipated $100 million pool, nor advertised for participants. The circular stated, however, that he expected to receive management fees from the proceeds and that MMA would be "offering these securities to the public."
RCG's compliance procedures mandate that a new account should not be opened if illegal activity is suspected. After RCG's review of the offering circular and the other information provided by Villalba, it opened the MMA account for trading.
Villalba never followed his purported investment plan. Instead of keeping the investors' money in treasury bills with occasional transactions in S&P 500 futures contracts, Villalba traded futures with RCG almost daily. Also, the trades were highly leveraged and risky. The promised "stop orders" to limit losses were not used. Single day losses of more than $100,000 were not uncommon and, in March 2008 alone, the MMA account lost more than $9 million.
Villalba's scheme began to unravel in 2009, after he suffered significant trading losses, making it difficult for him to pay investors as they requested their money back. Villalba closed his RCG account in June 2009. Around that time, Villalba opened a new futures account at a different firm. In early September 2009, Villalba started ignoring his clients' phone calls and e-mails, arousing their suspicions. By September 2010, after an investigation by the Securities and Exchange Commission and the Federal Bureau of Investigation, Villalba pleaded guilty to felony wire fraud and was ordered to pay over $30 million in restitution and sentenced to almost nine years in federal prison.
Shortly after Villalba was convicted, the CFTC investigated RCG's role in Villalba's fraud. In April 2012, RCG entered into a consent order with the CFTC related to its handling of the MMA account. The CFTC found that RCG ignored many "red flags" appearing in the account records and that it should have acted in light of "the lack of regard for trading losses, commissions, and fees in the MMA account." As part of the settlement offer underlying the order, RCG did not admit or deny these findings.7
The investors filed a motion for summary judgment, seeking a ruling that their transactions with Villalba were securities under multiple state securities acts, including the The Securities Act of Washington, chapter 21.20 RCW, and the Ohio Securities Act, chapter 1707 Ohio Rev. Code Ann. The trial court granted that motion, except as to the investments made by Goldberg.8
RCG filed two summary judgment motions. The first sought a ruling that claims for some transactions were barred under the Ohio and California statutes of repose. The investors conceded the claims under California's securities act, but contested the applicability of the Ohio provision. That motion was not decided because the trial court granted RCG's second motion for summary judgment in an order that: (1) ruled that the investors could bring claims under the Ohio securities act, (2) dismissed the investors' securities claims, holding that RCG could not be secondarily liable for Villalba's violations of the securities acts, and (3) dismissed the investors' claims for negligent supervision of the account and violation of the Washington Consumer Protection Act. The trial court did not rule on RCG's claim that the state securities acts were preempted by the Commodities Exchange Act.
Prior to the filing of the summary judgment motions, RCG moved the trial court for a protective order from the investors' discovery inquiries concerning RCG's suspicious activity monitoring and investigation practices, particularly regarding the MMA account, under the federal Bank Secrecy Act (BSA), 31U.S.C. § 5318(g). The court entered that order on March 9, 2015. The investors then moved the court to modify the protective order. On April 23, 2015, the trial court modified the protective order to exclude from its scope any information that was already publicly available or in the investors' possession. The investors also...
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