On July
10, 2020, Stephen Morris, Dannie Maddox, Jerry Maddox, Steven
Sketo, Sheryl Sketo, and Robert Fry sued Kestra Investment
Services, LLC ("Kestra"); James Blake Daughtry; The
Daughtry Group, LLC ("Daughtry Group"); ETC; Equity
Trust; Graysail Advisors, LLC ("Graysail"); Jared
Eakes; Small World Capital, LLC ("SWC"); David
Smalls; Trust Financial Corporation d/b/a SunTrust Bank
("SunTrust Bank"); and various fictitiously named
defendants in the Houston Circuit Court.
On
September 1, 2021, "Stephen Morris, individually and FBO
Stephen Morris IRA; Dannie Maddox, individually and FBO
Dannie Maddox IRA; Jerry Maddox, individually and FBO Jerry
Maddox IRA; Steve Sketo, individually and FBO Steve Sketo
IRA; Sheryl Sketo, individually and FBO Sheryl Sketo IRA
Robert Fry, individually and FBO Robert Fry IRA; Donna
Taylor, individually and FBO Donna Taylor
IRA; and Gary Morgan, individually and FBO Gary Morgan
IRA" (collectively referred to as "the
plaintiffs") filed a first amended complaint against
Graysail, Kestra, Daughtry, Daughtry Group, ETC, Equity
Trust, Eakes, Smalls, SWC, SunTrust Bank, and fictitiously
named defendants. In pertinent part, the first amended
complaint included negligence, civil-conspiracy, and
breach-of-fiduciary duty claims against Equity Trust and ETC.
On
September 18, 2020, Equity Trust and ETC filed motions to
compel arbitration and to stay the proceedings or, in the
alternative, to dismiss the claims against them.
On
September 30, 2020, the plaintiffs filed their second amended
complaint. The second amended complaint alleged:
"As set in particularity below, Dannie Maddox, Jerry
Maddox, Sheryl Sketo, Steve Sketo, Stephen Morris, Robert
Fry, and their respective IRAs (collectively, 'Kestra
Plaintiffs') 1 plead intentional tort claims
against Daughtry, Eakes, Smalls, Daughtry Group, Graysail
SWC, and/or fictitious defendants A through F (hereafter
'the Conspirators' or 'Co-Conspirators') for
stealing nearly $1.5 million dollars of Kestra
Plaintiffs' retirement savings. 2 Kestra
Plaintiffs also plead breach of fiduciary claims against
Daughtry's broker-dealer -- Kestra -- as well as Daughtry
Group, Daughtry himself, and/or fictitious defendants G
through P. Kestra Plaintiffs also sue Kestra, Daughtry's
principal, as being vicariously liable for the intentional
torts committed by Daughtry.
"Furthermore, Kestra Plaintiffs plead claims against
Kestra, Daughtry Group, Daughtry, Eakes, Graysail, Smalls
SWC, Equity Trust, and fictitious defendants Q-T, for
violating Alabama and Florida's blue-sky law.
"Alternatively, Kestra Plaintiffs plead negligence
claims against Kestra, ETC, Equity Trust, Daughtry, Daughtry
Group, and/or fictitious defendants U-W.
"Donna Taylor, individually and on behalf of her IRA,
pleads the claims listed above against each defendant except
Kestra. 3
"Gary Morgan, who was not a client of Kestra or Daughtry
but had roughly $233,000.00 stolen from him by Eakes and
other co-conspirators, pleads, individually and on behalf of
his IRA, intentional tort claims against Eakes, Smalls,
Graysail, SWC, Equity Trust, ETC and fictitious defendants
A-F. Furthermore, Morgan pleads claims against Eakes,
Graysail, Smalls, SWC, Equity Trust, and fictitious
defendants Q-T, for violating Arkansas' blue-sky law.
Alternatively, Gary Morgan, individually and on behalf of his
IRA, pleads negligence claims against Equity Trust and
fictitious defendants U-W.
"Finally, all Plaintiffs plead negligence and negligent
supervision, hiring and training against SunTrust Bank.
Plaintiffs Jerry Maddox, Dannie Maddox, and Sheryl Sketo, on
behalf of their IRA's, also plead a UCC claim against
SunTrust Bank.
"1Kestra Plaintiffs invested their retirement
savings with Daughtry while he was a registered
representative and agent of Kestra.
"2Kestra Plaintiffs also plead intentional
tort claims against Equity Trust and ETC.
"3Donna Taylor asserted claims against Kestra
in a previously filed FINRA arbitration."
The
second amended complaint alleged that Blake Daughtry was a
registered representative of Kestra and a broker-dealer who
was registered with the Financial Industry Regulatory
Association ("FINRA") until Daughtry "was
barred by FINRA in March 2020 because of the fraud or
breaches of fiduciary duties committed against Plaintiffs and
others." It further alleged that Daughtry operated his
financial-advising business through Daughtry Group, which had
its principal place of business in Dothan.
Morris,
Dannie Maddox ("Dannie"), Jerry Maddox
("Jerry"), Steven Sketo ("Steven"),
Sheryl Sketo ("Sheryl"), Fry, and Taylor ("the
Daughtry plaintiffs") were clients of Daughtry who had
individual retirement accounts ("IRAs") with
Kestra. The second amended complaint alleged that, in early
2019, while still an agent of Kestra, and without their
knowledge, Daughtry devised a scheme to sell the accounts of
the Daughtry plaintiffs to Eakes. That complaint alleged that
Eakes was "a previously registered financial advisor
with Merrill Lynch"; that, in 2018,
Eakes formed Graysail; that Graysail was a "sham company
owned and controlled by Eakes"; that Graysail was
previously registered with FINRA as a "Registered
Independent Advisory"; and that Graysail's
registration with the Securities and Exchange Commission
("SEC") was terminated in September 2019.
The
second amended complaint alleged that, between March 2019 and
June 2019, Daughtry told the Daughtry plaintiffs that he was
merging with another agency but that he would continue to
manage their accounts. That complaint alleged that Daughtry
asked the Daughtry plaintiffs to sign a signature page to
facilitate the process and that each of the Daughtry
plaintiffs signed a signature page. That complaint further
alleged:
"… Unbeknownst to [the Daughtry plaintiffs],
Daughtry or Eakes attached the signature pages to a document
reflecting that Graysail was now 'advisor' for [the
Daughtry plaintiffs] and had discretionary authority to
'invest' their funds.
"… Using the original signatures from the
signature pages, Daughtry's Co-Conspirators copied and
pasted the signatures onto account documents to open
fraudulent custodian and brokerage accounts at Equity Trust
and ETC.
"… Daughtry and his Co-Conspirators suppressed
their scheme from [the Daughtry plaintiffs]. Daughtry, in
fact, never mentioned the name Eakes to [the Daughtry
plaintiffs]
one single time; or that someone other than himself would be
managing their accounts; or that he was selling away their
accounts.
"… After certain [Daughtry plaintiffs] received
letters in the mail from Equity Trust in November 2019 that
Graysail had lost its registration and that Graysail and
Eakes were no longer the 'advisors' on their
accounts, they contacted Daughtry in confusion because they
were not aware that 'Eakes' was managing their
retirement portfolios. Based on the Conspirators'
misrepresentations and suppressions, they believed their
accounts were with Kestra and that Daughtry was managing
their accounts. Rather than come clean, Daughtry lied."
The
second amended complaint further alleged:
"… Eakes and his Co-Conspirators transposed
Plaintiffs' signatures over one hundred times onto ETC
and Equity Trust account documents and opened brokerage and
custodian accounts in Plaintiffs' names.7
"... ETC and Equity Trust knew these account documents
were fraudulent as each signature was identical to the others
(because all had been copied and pasted from the signature
pages). Indeed, ETC and Equity Trust never should have
allowed the Conspirators to open the fraudulent accounts in
the first place.
"… The Conspirators fraudulently transferred
Plaintiffs' accounts using two primary methods. First
the Conspirators copied and pasted certain Kestra
plaintiffs' signatures on ACATs,8 which
'authorized' Kestra to transfer the accounts to
Equity Trust or another broker-dealer. Kestra and Equity
Trust negligently and wantonly accepted the fraudulent ACATs
without proper review or investigation, which allowed certain
Kestra Plaintiffs' accounts to transfer to Equity Trust.
"… Acceptance of suspect accounts without
authentic review for fraud is Equity Trust's business
model. Afterwards, once the incipient fraud becomes too hot
to handle in terms of legal liability, Equity Trust freezes
accounts as necessary. This is after the damage is done to
the victims. By these means Equity Trust profits from known
systemic fraud for as long as it can get away with. The vast
majority of Equity Trust Clients are not owners of
'self-directed' retirement accounts in fact; rather,
they are unsophisticated investors whose life savings are
being raided and risked by known fraudsters and high-rollers.
These fraudsters and high-rollers are the ones
'directing' the accounts in the name of
unsophisticated investors and Equity Trust has been fully
aware of this for many years and has made boatloads of dirty
money on the backs of unsophisticated investors.
"… Second, Daughtry instructed [the Daughtry
plaintiffs'] retirement account providers to wire funds
or issue checks made payable to Equity Trust FBO
'Client'; Interactive Brokers FBO 'Client',
an online trading platform; or National
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