Cowburn v. Leventis

• Decision Date: 29 August 2005
• Docket Number: No. 3990.,3990.
• Court: South Carolina Supreme Court
• Parties: James T. COWBURN, Appellant, v. Andrew P. LEVENTIS, Jr. and Fidelity National Bank, Respondents.

619 S.E.2d 437

James T. COWBURN, Appellant, v. Andrew P. LEVENTIS, Jr. and Fidelity National Bank, Respondents.

No. 3990.

Court of Appeals of South Carolina.

Heard February 9, 2005.

Decided May 16, 2005.

Rehearing Denied August 29, 2005.

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Joe Mooneyham, of Greenville, for Appellant.

Donald R. Moorhead, Mason A. Goldsmith and John L.B. Kehl, all of Greenville and James Timothy White and P. Jay Pontrelli, both of Atlanta, GA, for Respondents.

HEARN, C.J.:

James Cowburn brought several causes of action against Andrew Leventis and Fidelity National Bank related to his investment in a Ponzi scheme.¹ Both Leventis and Fidelity made motions for summary judgment, which the trial court granted. We affirm in part, reverse in part, and remand.

FACTS

James Cowburn contributed financially to a series of investments collectively known as the "Cash 4 Titles Program" (the Program). The Program, as it was described to Cowburn, engaged in the business of issuing short-term, high interest rate notes and bonds for the purpose of funding the automobile title lending industry. Cowburn first learned of the Program from a former co-worker, Clyde Matkin. Matkin then referred Cowburn to Andrew Leventis, an attorney who Matkin stated could get him into the Program. During Cowburn's meeting with Leventis, Leventis provided further details about the Program. Subsequently, Leventis arranged to accompany Cowburn on a trip to Atlanta to meet with Michael Gause, a principal in the Program. Cowburn alleges he decided to invest in the Program based on his conversations with Leventis and Gause.

Cowburn used money from his individual retirement account (IRA) to invest in the Program. According to Cowburn, Leventis informed him that Gause chose Fidelity National Bank as the conduit through which investors could contribute to the Program. Cowburn opened a self-directed individual retirement account (SDIRA) with Fidelity and transferred money from his other accounts into this SDIRA. Cowburn then completed the necessary paperwork to enable Fidelity to invest the money from his SDIRA into various notes and bonds connected with the Program. Specifically, Cowburn's investments consisted of: (1) a 270-day promissory note from Bellwether Holdings for $150,000, dated September 1, 1998; (2) a 270-day promissory note from Bellwether holdings for $100,227, dated October 1, 1998; (3) a seven-year bond from Southwestern Holdings for $318,000, issued on February 1, 1999; (4) a seven-year bond from Southwestern Holdings for $12,000, issued on April 1, 1999; (5) a seven-year bond from Southwestern Holdings for $14,000, issued on June 1, 1999; (6) a 270-day promissory note from Southern Title Holdings for $15,000, dated August 1, 1999; and (7) a 270-day promissory note from Southern Title Holdings for $43,000, dated September 1, 1999.

The Program initially performed as expected, and Cowburn received the interest payments he anticipated. However, in October of 1999, Cowburn received a call from Leventis informing him that his money was gone. Leventis informed Cowburn the Program was actually an illegal Ponzi scheme and that Gause had been arrested in connection with it.

Cowburn filed suit against both Leventis and Fidelity, alleging the following causes of action: (1) legal negligence against Leventis; (2) breach of fiduciary duty against Leventis and Fidelity; (3) violation of the South Carolina Uniform Securities Act against Leventis and Fidelity; (4) violation of the South Carolina Unfair Trade Practices Act against Leventis; (5) fraud against Leventis and Fidelity; (6) negligence against Fidelity; and (7) civil conspiracy against Leventis and Fidelity. Leventis and Fidelity filed motions for summary judgment. The trial court issued an order granting both Leventis's and Fidelity's motions. Cowburn appeals.

STANDARD OF REVIEW

In reviewing a motion for summary judgment, the appellate court applies the same standard of review as the trial court under Rule 56(c), SCRCP. Trousdell v. Cannon, 351 S.C. 636, 639, 572 S.E.2d 264, 265 (2002). Pursuant to Rule 56(c), SCRCP, summary judgment may be affirmed if no genuine issue of material fact exists and the moving party is entitled to judgment as a matter of law. Id. "On appeal from summary judgment, the reviewing court must consider the facts and inferences in the light most favorable to the nonmoving party." Cantrell v. Green, 302 S.C. 557, 559, 397 S.E.2d 777, 778 (Ct.App.1990).

LAW/ANALYSIS

I. Whether the trial court erred in granting summary judgment to Leventis?

a. Violation of the South Carolina Securities Act

Cowburn argues the trial court erred in finding there was no material issue of fact concerning his allegation that Leventis violated sections of the South Carolina Uniform Securities Act (the Act). We agree.

Initially, in order to determine whether the act was triggered, we must decide whether the investments made by Cowburn are securities. Section 35-1-20(15) of the South Carolina Code (Supp.2004) provides the definition of "security" as "any note, stock, treasury stock, bond, debenture, [or] evidence of indebtedness, . . . ." Cowburn's investments, as indicated on the statements he received from Fidelity, consisted of promissory notes and bonds. Therefore, Cowburn's investments in the Program were securities pursuant to the Act. See McGaha v. Mosley, 283 S.C. 268, 273, 322 S.E.2d 461, 464 (Ct.App.1984) ("An instrument may be included within any of the Act's definitions of a `security,' if on its face it answers to the name or description contained therein.").

Because the investments were securities, the next issue we must resolve is whether Leventis's sale of those securities gave rise to a cause of action under the Act. "The South Carolina Uniform Securities Act . . . created public enforcement provisions as well as private civil remedies which are compensatory in nature. The Act authorizes the state Securities Commissioner to enforce its provisions, while giving private plaintiffs a limited civil right of action for securities fraud." Atlanta Skin Cancer Clinic, P.C. v. Hallmark Gen. Partners, Inc., 320 S.C. 113, 116-17, 463 S.E.2d 600, 602 (1995). Section 35-1-1490 provides a private right of action for buyers of securities against "[a]ny person who . . . offers or sells a security in violation of . . . Section 35-1-410 or Section 35-1-810. . . ."² Cowburn argues the trial judge erred in granting summary judgment to Leventis because genuine issues of material fact existed as to whether Leventis violated the Act. Specifically, Cowburn asserts that (1) the securities were not registered pursuant to section 35-1-810, and (2) Leventis failed to register as a broker-dealer in violation of section 35-1-410. We agree.

Section 35-1-810 states: "It is unlawful for any person to offer or sell any security in this State unless (a) it is registered under this chapter, (b) the security or transaction is exempted under Section 35-1-310 or 35-1-320. . . ." Leventis argues he did not act in violation of section 35-1-810 because (1) he did not offer to sell the securities, and (2) the securities were exempt under sections 35-1-310 and -320.

An "offer to sell" securities is defined in section 35-1-20(13)(b) as "every attempt or offer to dispose of, or solicitation of an offer to buy, a security interest in a security for value." In this case, Leventis's role in the Program went beyond simply recommending an investment to a friend; rather Leventis played an integral role in the Program. Leventis introduced investors, such as Cowburn and Matkin, to the Program. In his deposition, Leventis stated he referred people to the Program and received a referral fee for doing so. Leventis confirmed he referred approximately twenty people to the Program. Leventis told potential investors about the Program and provided written information to them regarding the Program. Leventis persuaded potential investors to contribute to the program by telling them about other investors, including him and his mother, and their contributions. He also arranged trips for potential investors to meet with Gause and other principals of the Program. After individuals decided to invest in the Program, Leventis assisted them in making their investment by providing them with forms and information about how to set up a SDIRA. He even went further in some cases by filling out the forms for investors and assisting them with transactions. Additionally, Cowburn testified he viewed Leventis as selling the investments purchased under the Program. Thus, we find a genuine issue of material fact exists as to whether Leventis offered to sell securities.

Further, we find there is a genuine issue of material fact as to whether the securities were exempt under sections 35-1-310 and -320. Section 35-1-310(9) exempts short-term commercial paper from the registration requirements of section 35-1-810, stating:

Any commercial paper which arises out of a current transaction or the proceeds of which have been or are to be used for current transactions and which evidences an obligation to pay cash within nine months of the date of issuance . . . or any renewal of such paper which is likewise limited, or any guarantee of such paper or of any such renewal. . . .

In this case, Cowburn's initial investment consisted of short-term commercial paper exempted under section 35-1-310(9) because it was an investment in 270-day promissory notes,³ which were obligated to be paid within nine months.

However, Cowburn's subsequent investments were funded in part by the redemption proceeds on those short-term notes and included several seven-year bonds. Leventis asserts that these transactions were similarly exempted from the securities registration requirement of section 35-1-810 because they were "rollover" transactions. Section 35-1-320(11) provides that "[a]ny...