Fine v. Sovereign Bank, Civil Action No. 06CV11450-NG.

• Decision Date: 08 August 2008
• Docket Number: Civil Action No. 06CV11450-NG.
• Citation: 634 F.Supp.2d 126
• Parties: David J. FINE, as he is Receiver of Bradford C. Bleidt and Allocation Plus Asset Management Co., et al., Plaintiffs, v. SOVEREIGN BANK, Defendant.
• Court: U.S. District Court — District of Massachusetts

634 F.Supp.2d 126

David J. FINE, as he is Receiver of Bradford C. Bleidt and Allocation Plus Asset Management Co., et al., Plaintiffs, v. SOVEREIGN BANK, Defendant.

Civil Action No. 06CV11450-NG.

United States District Court, D. Massachusetts.

August 8, 2008.

COPYRIGHT MATERIAL OMITTED

David J. Fine, Law Offices of David J. Fine, Boston, MA, pro se.

Melanie L. Oxhorn, New York, NY, for Plaintiffs.

Patrick T. Voke, Daniel J. Blake, LeClairRyan, P.C., Paul G. Boylan, LeClair-Ryan, A Professional Corporation, Michele T. Perillo, U.S. Securities & Exchange Commission, Boston, MA, for Defendant.

ORDER ON PLAINTIFFS' MOTION FOR SUMMARY JUDGMENT

GERTNER, District Judge.

Over some twenty years, Bradford Bleidt ("Bleidt") swindled his business and his clients out of tens of millions of dollars. This litigation arises from the aftermath of the fraud. With few other targets for recovery, the receiver for Bleidt's wholly-owned company and his former clients have joined forces to seek to place some of the blame for the fraud on defendant Sovereign Bank ("defendant" or "Sovereign"). The plaintiffs have moved for summary judgment. For the reasons explained below, the Motion for Summary Judgment (document # 133) is DENIED in part and RESERVED in part.

The receiver, David J. Fine ("the receiver"), represents Bleidt's former company, Allocation Plus Asset Management, Inc. ("APAM"). He is joined in this suit by Nancy and Langdon Lombard, Donna Brandt Lawrence, and Bessie Panos, each of whom lost money when they gave Bleidt funds to be invested. These individuals, referred to herein as "the individual plaintiffs" or "the investor-clients," seek to represent a class of all similarly situated persons.

The receiver and the named plaintiffs each assert three separate theories of liability.¹ First, they argue that Sovereign aided and abetted Bleidt's breaches of the fiduciary duties he owed to APAM (as its agent) and to the investor-clients (as their investment advisor). To prove the claim, the plaintiffs must show that Sovereign knew of the breaches and that it actively participated in or substantially assisted them. See Arcidi v. Nat'l Assoc. of Government Employees, Inc., 447 Mass. 616, 623-24, 856 N.E.2d 167 (2006).

Second, the plaintiffs argue that the bank negligently permitted Bleidt to evade detection by the SEC and negligently processed transactions beyond his authority. As discussed below, the contours of the plaintiffs' negligence claims are less clear, but it seems certain that they also require the plaintiffs to prove that the bank knew of Bleidt's fraud. See Schlichte v. Granite Sav. Bank, 40 Mass.App.Ct. 179, 181, 662 N.E.2d 238 (1996) (discussing bank's duties in negligence to depositors, and requiring actual knowledge of the breach); Lerner v. Fleet Bank, N.A., 459 F.3d 273, 287-90 (2d Cir.2006) (discussing bank's duties in negligence to third-party non-customers under New York law, and requiring notice of the breach).

Third, the plaintiffs claim that Sovereign committed conversion by taking financial instruments with notice of Bleidt's breaches of fiduciary duty. To make out the claim, the plaintiffs must show that Sovereign intentionally exercised control over property to which it had no right. Sovereign, however, may be able to assert defenses such as Bleidt's apparent authority to sign the checks and its status as a holder in due course. To rebut those defenses, the plaintiffs are required to prove that Sovereign had notice of Bleidt's breach of fiduciary duty. See Mass. Gen. Laws ch. 106, § 3-307.

This case involves two distinct sets of plaintiffs: the receiver and the individual investor-clients. They are not identically situated. For example, Bleidt may have owed different fiduciary duties when acting as APAM's agent than he did when acting as the investor-clients' investment advisor. And since APAM was a depositor at Sovereign Bank, the defendant may have owed it a different duty of care than the one it owed to the investor clients— none of whom were customers at Sovereign. Though the parties have not distinguished sharply between the two, the Court finds it useful to do so. After reciting the background of the case, the Court will briefly address the claims by the investor-clients before turning to those of the receiver, who represents APAM.

I. BACKGROUND

A. Facts

The Court takes all the facts in the light most favorable to Sovereign, the non-moving party. Fed.R.Civ.P. 56(c); Mariasch v. Gillette Co., 521 F.3d 68, 71 (1st Cir. 2008).

1. Bleidt's Fraud Generally and the Ensuing Litigation

In January 1991,² Bleidt became a registered representative of Commonwealth Equity Services, LLP ("Commonwealth"), a brokerdealer.³ See Bleidt Dep. at 30, Ex. 1 to Voke Aff. (document # 158). He operated an investment advisory firm, Allocation Plus Asset Management Company, Inc. ("APAM"), of which he was the sole shareholder and sole director. Def. Resp. Pl. Stmt. Material Facts ("Def. Stmt. Facts") at 5 (document # 157); Pl. Stmt. Material Facts ("Pl. Stmt. Facts") ¶ 6 (document # 136). Bleidt acted as an intermediary between APAM's investor-clients and Commonwealth. He established accounts at Commonwealth for most of his clients. See Bleidt Dep. at 41, Ex. 1 to Voke Aff. (document # 158). Bleidt claimed to offer his clients investments like a "special mutual fund that particularly fit[ ] the economic climate," id. at 37, and purportedly directed their investments at Commonwealth accordingly. Indeed, he represented to his clients that when they wrote APAM a check, they could consider it invested with Commonwealth. Id. at 40-41. His clients believed APAM was a real investment firm. It was not.

In reality, Bleidt's business was a Ponzi scheme. Bleidt Confession Tape 1, Ex. 7 to Voke Aff. (document # 158) (so describing it). He convinced APAM's investor-clients to give him money under the false pretenses that he would invest it on their behalf, then misappropriated it.⁴ As explained below, some checks Bleidt received were drawn by an investor-client, payable to APAM; some were drawn by a third party, payable to an investor-client and endorsed to APAM.⁵ Bleidt maintained enough liquidity in APAM's accounts to make payments on request so the investor-clients would not suspect that their money had been taken. He also sent the investor-clients falsified earnings statements. In some instances, explained in more detail below, he set up monthly payments to investor-clients, representing payments on "annuities." To help conceal his crimes from APAM's other employees, Bleidt arranged for the monthly statements for the account from which he was embezzling funds to be sent to his home address rather than a business address. Bleidt used the money toward the payroll for his other companies and for personal expenses. He also used it to purchase a radio station.

Inevitably, an investor-client requested a withdrawal that exceeded the liquidity Bleidt had available. On or about November 11, 2004, Bleidt mailed audio tapes to his wife, colleagues, and the SEC confessing his crimes. He then attempted, unsuccessfully, to commit suicide.

On November 12, 2004, the SEC initiated an emergency action in this Court to prevent Bleidt and APAM from dissipating further any assets belonging to the investor-clients. See Complaint, SEC v. Bleidt, No. 04cv12415-NG (D.Mass. filed Nov. 12, 2004). Bleidt, APAM, and the SEC eventually reached an agreed-upon judgment, in which Bleidt and APAM agreed to "pay, jointly and severally . . ., disgorgement of $31,734,192.75, representing profits gained as a result of the [Ponzi scheme] . . ., together with prejudgment interest thereon in the amount of $9,497,553.30, for a total of $41,231,746.05." Final Judgment as to Defendant APAM, SEC v. Bleidt, No. 04cv12415-NG (D.Mass. filed May 3, 2007). In addition, Bleidt was criminally charged with 115 counts of mail fraud and one count of money laundering. He pleaded guilty on all counts and was sentenced to 135 months' imprisonment. Judgment in a Criminal Case, United States v. Bleidt, 05cr10144-WGY (D.Mass. Dec. 7, 2005). He was also ordered to pay the same $31,734,192.75 in restitution as part of the criminal judgment. Id. at 5.

As part of the effort to preserve and maximize assets to be repaid to the investor-clients, the Court appointed David A. Vicinanzo as receiver for APAM. Due to a potential conflict of interest,⁶ the Court also appointed David J. Fine ("the receiver") as an ancillary receiver "in matters related to claims or potential claims against banks." Order for Appointment of Ancillary Receiver ("Order for Appointment") at 1, SEC v. Bleidt, No. 04cv12415-NG (D.Mass. Mar. 22, 2006). The receiver's mandate is to "institute, prosecute, defend, compromise, adjust, intervene in, or become party to" actions on behalf of Bleidt and APAM against banks. Id. at 1-2. He was further directed to "assist the victims of Bleidt's fraud to institute, prosecute, compromise or settle such claims as they may have against banks in their individual capacities, provided that the victims specifically authorize the Ancillary Receiver to do so." Id. at 2. As part of that effort, the receiver, along with the named plaintiffs, brought the instant suit against Sovereign. This case concerns the period from June 2000 to November 2004, when Bleidt's fraud was discovered. The Court therefore turns to the specific details of the fraud during that time.

2. Bleidt's Operations at Sovereign

From 1995 to 2000, Bleidt's scheme was run through account number '876 at a Fleet Bank branch located at 125 Causeway Street, Boston, Massachusetts. Def. Stmt. Facts at 26 (document # 157). As opened, the account was a business checking account. Fleet required submission of a signature card, certification of the taxpayer identification number, and the social security number of the authorized signatory. Id.; Bleidt Dep. at 94-95, Ex. 1 to Voke Aff. (document # 158). In June of 2000,...