Dolin v. Contemporary Financial Solutions, Inc.

• Decision Date: 31 March 2009
• Docket Number: Civil Action No. 08-cv-00675-WYD-BNB.
• Citation: 622 F.Supp.2d 1077
• Parties: Robert A. DOLIN; and Lisa Dolin, Plaintiffs, v. CONTEMPORARY FINANCIAL SOLUTIONS, INC.; and Mutual Service Corporation, Defendants.
• Court: U.S. District Court — District of Colorado

Page 1077

622 F.Supp.2d 1077

Robert A. DOLIN; and Lisa Dolin, Plaintiffs, v. CONTEMPORARY FINANCIAL SOLUTIONS, INC.; and Mutual Service Corporation, Defendants.

Civil Action No. 08-cv-00675-WYD-BNB.

United States District Court, D. Colorado.

March 31, 2009.

COPYRIGHT MATERIAL OMITTED

Robert T. Lego, Lego Law Firm, Englewood, CO, for Plaintiffs.

Craig R. Bockman, Jones, Bell, Abbott, Fleming & Fitzgerald, L.L.P., Los Angeles, CA, Stephen Erik Csajaghy, William Dennis Nelson, Rothgerber Johnson & Lyons, LLP, Denver, CO, for Defendants.

ORDER

WILEY Y. DANIEL, Chief Judge.

THIS MATTER is before the Court on the Motion of Defendants Contemporary Financial Solutions, Inc. and Mutual Service Corporation to Dismiss Plaintiffs' Complaint Pursuant to Federal Rule of Civil Procedure 12(b)(6) [doc. #9, filed August 20, 2008]. Defendants move for the dismissal of Plaintiffs' First, Second, Third, Fourth, Fifth, Tenth, Twelfth, Thirteenth, and Fourteenth claims for relief. Plaintiffs Robert and Lisa Dolin filed a response on September 16, 2008 [doc. #16], and Defendants filed a reply on September 30, 2008 [doc. # 26]. Having considered these filings, I enter the following written Order.

FACTUAL ALLEGATIONS

This case involves an alleged Ponzi scheme by Robert Olan Bryant, an employee of Defendant Contemporary Financial Solutions, Inc. ("CFS"). On July 13, 2008, Plaintiffs filed a First Amended Complaint and Jury Demand ("Complaint") [doc. # 6], in which they allege the following facts. CFS is an alter ego of Co-Defendant Mutual Service Corporation ("MSC") inter alia with common business offices, assets, officers, directors, agents, and employees. Complaint at 6. Alternatively, CFS is MSC's agent, and accordingly MSC is liable for CFS's acts and omissions. Id. at 7. CFS employed Bryant, a licensed securities broker, from February 2003 to December 31, 2004 as its registered representative with an office in Colorado. Complaint at 2. Among the investment products that Bryant sold to his clients, including Plaintiffs Robert and Lisa Dolin, were promissory note contracts offered by National Consumer Mortgage, LLC ("NCM"), a California mortgage brokerage firm. Id. Beginning in October 2003, Bryant represented to Plaintiffs that NCM's Private Money Division made "private money" or "hard money" loans ("HMLs") in large amounts at higher-than-market interest rates and for terms shorter than traditional mortgages. Id. at 3.

Bryant represented to Plaintiffs that each of the HMLs was "secured by a first-position mortgage or deed of trust encumbering choice or high quality real estate, with all such transactions having a strong equity to loan ratio." Id. He further represented to them that NCM's "private money investment" program depended on cash advances or investments to fund specific HMLs in exchange for the good rate of return over a relatively short period of time, and with little risk of loss. Id. He represented to them that each of these investments was documented with a written Note Contract on NCM-generated forms. Id. Bryant further represented to Plaintiffs that they could receive referral fees. Id. at 4. He also told them about the success and trustworthiness of the program, which he said had been in operation since 1992, and he said that the Note Contracts were safe, secure, and legal. Id. Sam Favata, Bryant's close friend who was represented to be in charge of NCM's Private Money Division, and his wife Sandra Favata, who was represented to be in charge of NCM's traditional mortgage brokerage division, made similar representations. Id. at 2-5 & n. 2. Plaintiffs ultimately invested in NCM's "private money investment" program:

In 2003 Bryant solicited the Dolins to "invest" in the [p]rogram through him, as a registered representative of CFS in Colorado, expressly then disclosing to them his licensed status and relationship with CFS. In approximately March of 2004 they first invested in the [p]rogram in reliance on Bryant's representations about himself, such licensed status, the CFS connection, and [ ] Bryant['s] [r]epresentations concerning NCM and the [p]rogram. They renewed that investment in the [p]rogram, again relying on those same factors, in the Fall of 2004 and then in 2005 as well.

Id. at 6.

In early August of 2004, the Arkansas Securities Department ("ASD") notified CFS that it was investigating Bryant for violating securities laws by selling, and soliciting for the sale of, the Note Contracts. Id. Various federal and state statutes and/or regulations required each Note Contract to be registered with the appropriate state and/or federal securities agencies, and such registration never occurred. Id. at 5. The ASD further "asked Defendants to investigate Bryant's sale of NCM Note Contracts, furnish the ASD with the names and addresses of all persons who had purchased such Note Contracts, and give the ASD its assurance that Bryant, as Defendants' representative, would no longer sell them." Id. at 6. On August 19, 2004, MSC's Vice President and General Counsel responded to the ASD that they were investigating the report, and in October 2004 Defendants told the ASD that their thorough investigation had revealed that Bryant was not selling Note Contracts. Id. at 7.

The representations were false because Bryant had already sold approximately $2,450,000 in Note Contracts as of August 2004. Id. MSC's investigation had been limited to contacting Bryant and relying on his denial that he was selling or soliciting Note Contracts. Id. Neither CFS nor MSC performed any review of Bryant's financial accounts, contacted his customers, or conducted any investigation of the legality of the Note Contracts. Id. "Defendants thus knew or should have known no later than September of 2004 that Bryant was illegally selling Note Contracts." Id. at 8. Defendants' false representations "caused the ASD to refrain from actively pursuing its investigation of Bryant, who then continued to sell Note Contracts in 2004, 2005, and 2006." Id.

On "December 17, 2004, Defendants gave Bryant the option of `resigning, or being involuntarily terminated', and Bryant's employment relationship with Defendants ended on December 31, 2004." Id. Defendants then filed a Form U-5 with the National Association of Securities Dealers and various state security regulatory agencies, including those in Colorado and Arkansas, stating that Bryant's departure was voluntary. Id. The Form U-5 omitted any information regarding the Note Contracts and stated that Bryant was not the subject of investigation by any governmental body or any self-regulatory agency and was not under internal review for violating investment-related statutes, regulations, rules, or industry standards of conduct. Id. at 8-9. Defendants falsely notified the ASD in May 2005 that Bryant had voluntarily terminated his employment and that they believed he had not sold any NCM notes. Id. at 9. "When the ASD learned the true facts in November of 2006, it immediately issued a Cease and Desist Order against Bryant and NCM to stop selling Note Contracts." Id. Had Defendants taken the proper and timely course of action in their supervision and investigation of Bryant and reports to state and federal regulatory authorities, those authorities would have taken the necessary action to prohibit Bryant from selling Note Contracts. Id. Instead, during 2004, while he was a registered representative of Defendants, Bryant sold over $3,000,000 in NCM notes, and he sold more than $10,000,000 in additional Note Contracts in 2005 and 2006. Id.

Neither CFS nor MSC ever disclosed to Plaintiffs or any other actual or potential customers of Bryant that he was ever under investigation by securities regulators. Id. at 9. Plaintiffs, at the time of their Note Contract purchases and/or renewals in 2004 and 2005, had no knowledge that there was anything improper or irregular about Bryant's conduct or the Note Contracts, nor did they have any knowledge of any of the circumstances surrounding the ASD's investigation of Bryant. Id. at 10.

NCM filed for bankruptcy in April 2006, and afterward it was revealed that the "private money investment" program was in fact a Ponzi scheme. Id. at 10. No HMLs had actually been made, and the Note Contracts were not secured by real estate or any hard assets. Id. Instead, the scheme perpetrators, including Bryant and Sam and Sandra Favata, used the bulk of the invested funds for their own personal benefit while using some funds from new investors to pay amounts facially due to earlier investors "under illicitly crafted investment contract schedules." Id. at 10 n. 4. Bryant pleaded guilty to securities fraud and has been incarcerated for a term of years. Id. at 10. He has filed a Chapter 7 Bankruptcy action in the United States Bankruptcy Court for the District of Colorado and is the subject of an Adversary Action by Plaintiffs under 11 U.S.C. § 523(a) to prevent discharge of Bryant's debts to them. Id. at 10-11. Sam Favata has also been incarcerated for a term of years after pleading guilty to mail fraud in a federal district court in California. Id. at 11.

Plaintiffs have incurred the following harm:

[Plaintiffs] have lost funds they so "invested" in the Note Contracts and have incurred additional financial losses and debts, as well as non-economic damages (e.g., emotional distress, humiliation, loss of reputation, embarrassment, inconvenience and loss of quality of life), as a result of having been induced to participate in the Program/ Ponzi Scheme, and in consequence of their purchase and/or renewal of Note Contracts thereunder.

Id. at 10. They assert the following claims against Defendants: 1) negligent hiring; 2) negligent supervision; 3) negligent failure to monitor, investigate, and report; 4) negligence per se; 5) direct and vicarious liability for Bryant's sale of unregistered securities; 6) vicarious liability for Bryant's fraudulent misrepresentations; 7) vicarious liability...