Fraioli v. Lemcke

CourtUnited States District Courts. 1st Circuit. United States District Courts. 1st Circuit. District of Rhode Island
Citation328 F.Supp.2d 250
Docket NumberC.A. No. 02-263L.
PartiesFrank FRAIOLI, Jr., D.O.; Louise Fraioli, Plaintiffs, v. Alfred M. LEMCKE, III; John Hancock Life Insurance Company; Signator Investors, Inc.; Boston Partners Insurance; The Mony Group, Inc.; Mony Securities Corp.; MML Investors Services, Inc, Defendants.
Decision Date04 August 2004

Todd D. White, Esq., Linda A. Mayer, Esq., Adler Pollock & Sheehan, Providence, RI, for Plaintiff.

Darlene K. Alt, Esq., Stephen M. Prignano, Esq., Edwards & Angell, William F. White, Esq., Dorothea R. Calvano, Esq., White & Galamaga, P.C., CharCretia C. DiBartolo, Esq., Cetrulo & Capone LLP, Ian C. Ridlon, Esq., Randall L. Souza, Esq., Nixon Peabody LLP, Providence, RI, for Defendant.


LAGUEUX, Senior District Judge.

This matter arises out of a private scheme devised and implemented by Defendant, Alfred M. Lemcke, III, ("Lemcke") whereby Lemcke defrauded Plaintiffs, Frank Fraioli, Jr., D.O. and Louise Frailoi, ("Plaintiffs") out of approximately $1,200,000.00. At various times between 1993 and 2001, Lemcke provided Plaintiffs with insurance and investment advice while he was affiliated with Defendants, John Hancock Life Insurance Company, ("John Hancock") Signator Investors, Inc., ("Signator") Boston Partners Insurance, ("Boston Partners")1 the Mony Group, Inc. and Mony Securities Corporation, ("the Mony Defendants") and MML Investors Services, Inc., ("MML") (hereinafter, referred to collectively as "the institutional Defendants"). In early 1996, Lemcke introduced Plaintiffs to the Individual Investors Portfolio Design Company, ("I2") a fabricated investment company of Lemcke's own creation which, unknown to Plaintiffs, Lemcke would use to divert Plaintiffs' money to his personal use.

Plaintiffs filed a seven count Verified Amended Complaint against Lemcke and the institutional Defendants. The factual basis for each count asserted against the institutional Defendants is essentially the same. Plaintiffs allege that the institutional Defendants' failure to investigate Lemcke's background and adequately supervise his work allowed Lemcke to defraud Plaintiffs and embezzle their funds. Count I presents a claim for negligent supervision, i.e., that the institutional Defendants each failed to properly investigate Lemcke's background and supervise his work. In Count II, Plaintiffs allege that each Defendant owed and breached a fiduciary duty while Lemcke was providing Plaintiffs with insurance and investment services in his capacity as an agent, representative, and/or associated person of each Defendant. Count III presents a claim for fraud and misrepresentation against each Defendant. Plaintiffs allege that by allowing Lemcke to act as an agent, registered representative, and/or associated person, the institutional Defendants directly or indirectly misrepresented Lemcke's qualifications to serve as Plaintiffs' insurance and investment advisor and allowed Lemcke to defraud Plaintiffs and embezzle their money. Count IV alleges respondeat superior liability: that the institutional Defendants were Lemcke's supervisors, masters, and/or employers at various times relevant to this litigation and failed to undertake proper supervisory measures to ensure that Lemcke was not defrauding Plaintiffs or misrepresenting the services he was providing. Count V presents a claim for violations of the Securities Exchange Act, 15 U.S.C.A. § 78T(a)(1934), ("Securities Act").2 Plaintiffs allege that each institutional Defendant directly or indirectly controlled Lemcke and induced him, through improper supervision, to illegally convert Plaintiffs' assets in violation of the Securities Act and the Rules and Regulations of the National Association of Securities Dealers ("NASD"). Count VI alleges that each institutional Defendant violated the Investment Advisors Act, 15 U.S.C.A. § 80b-6 (1940), by not properly investigating Lemcke's background and supervising his work and by allowing Lemcke to employ a scheme to defraud Plaintiffs using various instrumentalities of interstate commerce. Finally, Count VII presents a claim for violations of the Rhode Island Uniform Securities Act, R.I. Gen. Laws § 7-11-501 (1990).3 Plaintiffs seek remuneration of all funds embezzled due to Defendants' actions, including tax liabilities and penalties, interest, costs, attorneys' fees, and other fees assessed by this Court. Plaintiffs allege jurisdiction under 28 U.S.C. § 1331 and pursuant to diversity of citizenship.

This matter is before the Court on three separate motions for summary judgment on all counts presented by the Mony Defendants, MML, and Boston Partners. There is also a motion by Plaintiffs to file a Second Amended Verified Complaint, which adds counts alleging apparent authority against the institutional Defendants (Count VII), joint and several liability against the institutional Defendants (Count VIII), conversion against Lemcke (Count IX), and successor liability against Boston Partners (Count X).

For the reasons that follow, this Court is persuaded by the arguments presented by the Mony Defendants, MML, and Boston Partners and grants summary judgment to those entities on all of Plaintiffs' claims. Plaintiffs' Motion to File a Second Amended Verified Complaint is granted in part and denied in part. The motion to amend to add causes of action against the Mony Defendants, MML, and Boston Partners is denied because Plaintiffs fail to state any claim upon which relief could be granted as to those Defendants. This Court grants Plaintiffs' motion to amend to add their proposed Count VII for apparent authority against John Hancock and Signator and Count IX for conversion against Lemcke. Plaintiffs' motion to add their proposed Count VIII for joint and several liability against each institutional Defendant and Count X for successor liability against Boston Partners is denied.

I. Background and Procedural History

In considering a motion for summary judgment, the court must view the evidence in the light most favorable to the nonmoving party. See Springfield Terminal Ry. Co. v. Canadian Pac. Ltd., 133 F.3d 103, 106 (1st Cir.1997). Viewing the evidence in that manner, the facts in this case are as follows:

This case arises out of a long-standing friendship between Plaintiffs and Lemcke. Plaintiffs, Dr. and Mrs. Fraioli, are residents of Smithfield, Rhode Island. Defendant, Alfred M. Lemcke, III, was a resident of Hingham, Massachusetts at all times relevant to this litigation. Lemcke attended the Berklee College of Music where he met and befriended Louise Fraioli's brother, Michael Verville ("Verville").

Dr. and Mrs. Fraioli married on September 3, 1988. Shortly thereafter, Dr. Fraioli opened an osteopathic medical practice in Smithfield, Rhode Island. Dr. Fraioli met Lemcke in 1989 or 1990 at a wedding in Portland, Maine. At some point in 1993, Verville contacted his sister and explained that Lemcke had become an insurance agent and wanted to speak with Dr. Fraioli about his insurance needs.

After several meetings, the Fraiolis decided to purchase insurance products from Lemcke and to deal with him exclusively for all of their insurance needs. Dr. Fraioli and Lemcke's business relationship became more personal as Dr. Fraioli began to consider Lemcke a personal and financial confidant and later, one of his best friends. This close friendship made Dr. Fraioli feel comfortable going to Lemcke for investment and financial advice and services.

Lemcke was employed by the Mony Defendants when he first provided the Fraiolis with financial services in 1993. The Mony Defendants consist of a corporation, the Mony Group, Inc., and a securities broker-dealer, Mony Securities, who had places of business in Waltham, Massachusetts during all time periods relevant to this litigation. Before hiring Lemcke, the Mony Defendants verified the information that Lemcke provided on his application and conducted standard background checks. Between late 1992 and March of 1993, the Mony Defendants trained Lemcke and gave him study materials for the requisite life and health insurance exams. Lemcke did not have any experience in insurance sales or finance before he came to work for the Mony Defendants.

On March 8, 1993, after passing his life and health insurance exams, Lemcke entered into a Career Contract with the Mony Defendants. That contract designated Lemcke as an independent contractor and authorized him to solicit applications for insurance policies that could be issued by the Mony Defendants. On November 3, 1993, Lemcke entered into a Registered Representative Contract with the Mony Defendants, which designated him as an independent contractor and authorized him to sell Mony products including mutual funds, variable annuities, unit investment trusts, limited partnership interests, tax shelter programs, variable life insurance, and other approved products that were sold or distributed by the Mony Defendants.

During his tenure with the Mony Defendants, Lemcke attended routine meetings with his supervisors, Michael Meehan ("Meehan") and Peter MacAvin ("MacAvin"), to discuss his caseload and general level of production. Jeremiah Healey, Jr. ("Healey"), who was a general agent of the Mony Defendants, would then contact Meehan and inquire as to Lemcke's productivity and whether or not there were any problems with his general work performance. Lemcke also attended yearly compliance meetings that were required to maintain his license. The Mony Defendants' policies required Lemcke's supervisors to review his client files on a weekly or monthly basis, depending on the type of file. However, there does not appear to be any documentation of a review or audit of Lemcke's work performance for 1993, 1994, or 1995.

Throughout the early 1990s and while employed by the Mony Defendants, Lemcke sold...

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