Hart v. First Oak Wealth Mgmt.

Decision Date29 July 2022
Docket Number21 CVS 15763
Citation2022 NCBC 41
PartiesSTEVEN C. HART, Plaintiff, v. FIRST OAK WEALTH MANAGEMENT, LLC; DWM ADVISORS, LLC; AIRIS ALEXANDER ABOLINS; and JOSEPH P. DAVIS, III, Defendants.
CourtSuperior Court of North Carolina

Mauney PLLC, by Gary V. Mauney for Plaintiff Steven C. Hart.

Bell Davis &Pitt, P.A., by Joshua B. Durham and Kevin J. Roak for Defendant Airis Alexander Abolins.

Vann Attorneys, PLLC by James R. Vann and Ian S. Richardson for Defendant First Oak Wealth Management, LLC.

Defendants DWM Advisors, LLC and Joseph P. Davis, III have not appeared.

ORDER AND OPINION ON MOTIONS TO DISMISS
Julianna Theall Earp Special Superior Court Judge

1. The dispute in the above-captioned matter involves an alleged securities fraud scheme. It is before the Court on Defendant Airis Alexander Abolins' Motion to Dismiss (the "Abolins Motion"), (ECF No. 9), and Defendant First Oak Wealth Management, LLC's Motion to Dismiss (the "First Oak Motion"; together with the Abolins Motion, the "Motions"), (ECF No. 14), pursuant to Rule 12(b)(6) of the North Carolina Rules of Civil Procedure (the "Rule(s)").

2. Having considered the Motions, the related briefing, the arguments of counsel at a hearing on the Motions and other relevant matters of record, the Court GRANTS in part and DENIES in part the Motions as provided below.

I. FACTUAL AND PROCEDURAL BACKGROUND

3. The Court does not make findings of fact when ruling on a motion to dismiss under Rule 12(b)(6). Rather, the Court tests the claims by stating the relevant factual allegations in the Complaint construed in the plaintiff's favor without being bound to any of its alleged legal conclusions. See, e.g., Concrete Serv. Corp. v. Invs. Grp., Inc., 79 N.C.App. 678, 681 (1986).

4. Plaintiff Steven C. Hart ("Plaintiff"), a citizen and resident of Mecklenburg County, North Carolina, is a hydrogeologist. He employed Defendants to help him invest personal funds. (Compl. ¶ 3, ECF No. 3.)

5. Defendant First Oak Wealth Management, LLC ("First Oak") is a closely-held North Carolina limited liability company that maintains its principal place of business in Wake County, North Carolina. (Compl. ¶ 4.)

6. Defendant DWM Advisors, LLC ("DWM") is also a closely-held North Carolina limited liability company that maintained its principal place of business in Durham County, North Carolina. (Compl. ¶ 5.)

7. Defendant Joseph P. Davis, III ("Davis") is a citizen and resident of Orange County, North Carolina. Davis was the Managing Member and Chairman of DWM. (Compl. ¶ 6.)

8. Defendant Airis Alexander Abolins ("Abolins"), a citizen and resident of Wake County, North Carolina, is a Managing Member of First Oak. (Compl. ¶ 7.) Prior to the formation of First Oak, Abolins also held himself out to Plaintiff as Director, Chief Investment Officer, and Senior Vice President for Research and Analytics. (Compl. ¶ 7.) At all relevant times, Abolins was a "registered investment adviser" with state and federal regulatory authorities. (Compl. ¶ 18.)

9. During 2009, Plaintiff began looking for an investment adviser to help him develop a savings and retirement plan. (Compl. ¶ 65.) That June, Plaintiff met Davis, who purported to be an experienced registered investment adviser. Davis presented Plaintiff with brochures and information about DWM, himself, and "other professionals at DWM Advisors (i.e., Abolins)[.]" (Compl. ¶ 66.)

10. Plaintiff and Davis "discussed various investment options and approaches." (Compl. ¶ 66.) Based on these discussions and on "verbal and written information about Davis' qualifications, credentials, and Davis' apparent suitability to provide investment advisory and financial management services[,]" Plaintiff "reached a level of comfort and trust" with Davis. (Compl. ¶ 67.) On 25 June 2009, Plaintiff agreed to execute Davis' proposed Investment Advisory Agreement (the "DWM Agreement"). (Compl. ¶¶ 68-69.)

11. The DWM Agreement confirmed that DWM was registered as an investment adviser and stated that DWM was a fiduciary with respect to Plaintiff's account. The DWM Agreement also provided for DWM to have "full power to direct, manage, and change the investment and reinvestment of the assets in the account . . . without prior consultation with or notice to [Plaintiff][.]" (Compl. ¶¶ 69(A)-(C).)

12. DWM set investment targets for Plaintiff based on Plaintiff's primary investment goals, which were "moderate risk" and "capital preservation." (Compl. ¶¶ 84-85.) As a result of these goals, the investments made on behalf of Plaintiff "were supposed to primarily consist of traditional forms of publicly-traded stocks and short and intermediate term bonds." (Compl. ¶ 86.)

13. From time to time after Plaintiff engaged DWM in 2009, DWM provided Plaintiff with a Form ADV, a disclosure brochure that the Securities and Exchange Commission ("SEC") requires investment adviser firms to provide to clients. DWM also sent Plaintiff its own supplemental brochure to provide additional information about its qualifications and business practices. (Compl. ¶ 71.)

14. The fee for Defendants' services was calculated as a percentage of the Plaintiff's "assets under management." (Compl. ¶ 19.)

DWM's Representations to Plaintiff

15. On 27 April 2011, DWM, "through Abolins and Davis," sent Plaintiff a supplemental brochure that contained the following representations:

a. Mr. Davis is not engaged in any other business activities.
b. Mr. Davis has no other income or compensation to disclose.
c. As the primary owner of DWM, Joseph Davis supervises all duties and activities of the firm, and is responsible for all advice to clients.

(Compl. ¶ 72.)

16. In addition, on 27 April 2011, DWM Advisors issued its Form ADV, "drafted by Abolins and Davis[,]" containing the following representations:

a. DWM has no disciplinary events to report; b. DWM has adopted a Code of Ethics which requires DWM associated persons to act with honesty, good faith and fair dealing in working with clients. In addition, the Code prohibits associated persons from trading or otherwise acting on insider information;
c. Under the Code's Professional Standards, DWM expects its associated persons to put the interests of its clients first, ahead of personal interests. In this regard, DWM associated persons are not to take inappropriate advantage of their positions in relation to DWM clients;
d. DWM's Code sets forth policies and procedures to monitor and review the personal trading activities of associated persons. DWM has adopted procedures designed to reduce or eliminate conflicts of interest this could possibly cause;
e. DWM's policies are designed to discourage and prohibit personal trading that would disadvantage clients; and f. Joseph P. Davis, DWM's Managing Director, and Abolins, DWM's SVP for Research and Analytics review client accounts.

(Compl. ¶¶ 73, 75(A)-(F).)

17. DWM's Form ADV stated that Abolins' "primary focus" was "at the client level, ensuring all aspects of DWM's clients' financial lives have been thoroughly reviewed, and making sure 'no stone is left unturned[.]'" (Compl. ¶ 75(H).)

18. Finally, the Form ADV reported that DWM Advisors did not have any "Proprietary Interest in Client Transactions" or "Sales Interest in Client Transactions." (Compl. ¶¶ 75(I)-(J).)

The CarFab Investment

19. On 1 July 2009, DWM Advisors began investing Plaintiff's funds into a private company called Carolina Fabrication, Inc. ("CarFab"). (Compl. ¶ 139.) Over a period of several months, DWM invested $125,000.00 of Plaintiff's funds in exchange for three promissory notes. (Compl. ¶ 140.)

20. Plaintiff alleges that during the time DWM was investing his money in CarFab, Davis and Abolins, the principals at DWM, knew that the company was "in financial distress." (Compl. ¶ 140.) They nevertheless steered the money to CarFab because Davis was one of its owners. Neither Davis nor Abolins disclosed this conflict to Plaintiff. (Compl. ¶ 142.)

21. By September 2012, Davis knew that CarFab would not be able to meet its obligations with respect to Plaintiff's notes. Despite this knowledge, DWM continued to charge Plaintiff fees for the investment. (Compl. ¶¶ 143-44.)

22. Davis told Plaintiff by letter that he was working on getting CarFab to propose a solution with respect to the notes, but this representation was false. (Compl. ¶ 144.)

The SSE Group Investment

23. In December 2012, Davis told Plaintiff that CarFab's financial problems would be resolved through a settlement agreement between CarFab and its noteholders. The settlement agreement provided for shares of CarFab to be transferred to SSE Group ("SSE"), an entity formed by the noteholders. (Compl. ¶¶ 145-46.)

24. Plaintiff alleges that Davis and Donald Collins ("Collins"), a long-time friend and business partner, were behind the SSE/CarFab restructuring scheme and that the scheme was merely a means to placate DWM's clients by leading them to think that CarFab might still be viable "down the road." (Compl. ¶ 151.)

25. Davis informed Plaintiff that, with the restructuring, CarFab was still a "potentially viable business." (Compl ¶ 150.) DWM, "meaning Davis and Abolins," did not reveal that, in fact, the investment was a total loss. (Compl. ¶ 151.)

26. The restructuring plan transformed Plaintiff's notes in CarFab into unguaranteed equity in SSE. (Compl. ¶ 152.)

27. Unbeknownst to Plaintiff, Davis was the sole owner of SSE's single Class B Unit. The Class B Unit entitled Davis to the same return as the Class A Units issued to investors. (Compl. ¶ 148.)

28. On 28 April 2014, Davis told Plaintiff, without further explanation, that Plaintiff was subject to a "legally binding 'capital call' obligation" for CarFab in the amount of $5,257.46. Plaintiff paid the...

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