Knauer v. Jonathon Roberts Financial Group, Inc., IP 01-1168-C-K/T (S.D. Ind. 9/30/2002)
| Decision Date | 30 September 2002 |
| Docket Number | IP 01-1168-C-K/T. |
| Parties | JAMES A. KNAUER, as the Court Appointed Receiver for HEARTLAND FINANCIAL SERVICES, INC., and JMS INVESTMENT GROUP, LLC, Plaintiff, v. JONATHON ROBERTS FINANCIAL GROUP, INC., ALLIANCE CAPITAL MANAGEMENT CORP., AND OVER SECURITIES INC., FSC SECURITIES CORPORATION, and FFP SECURITIES, INC., Defendants. |
| Court | U.S. District Court — Southern District of Indiana |
Hundred of unsuspecting investors placed their trust (and millions of dollars of their savings) in Heartland Financial Services, Inc. and some related companies. Unfortunately, their trust was betrayed by the unscrupulous principals of the Heartland entities. This case is part of the debris left behind as a result of the perfidious acts of a handful of scoundrels. Unfortunately for the investors, the legal theories upon which this case is based provide them no relief against the Defendants named in this suit. As will be explained below, the connection between the wrongdoers and these Defendants is slim, too tenuous as a matter of law to require them to repay what the Heartland thieves took.
Defendants have filed motions to dismiss. Plaintiff opposes the motions. Having reviewed the parties' briefs and heard oral argument, the court decides as follows.
Following are the Complaint's allegations, which the court accepts as true for purposes of the motions to dismiss. Plaintiff, James A. Knauer, is the court-appointed receiver (the "Receiver") for Heartland Financial Services, Inc. ("Heartland"), an Indiana corporation, and JMS Investment Group, LLC ("JMS"), an Indiana limited liability company. Defendants, Jonathon Roberts Financial Group, Inc. ("Jonathon Roberts"), Alliance Capital Management Corporation ("Alliance"), Andover Securities, Inc. ("Andover"), FSC Securities Corporation ("FSC"), and FFP Securities, Inc. ("FFP"), at all times relevant were broker dealers registered under Section 15 of the Securities and Exchange Act ("SEA") and with the National Association of Securities Dealers.2
Kenneth R. Payne was a licensed securities registered representative with Defendants for the following time periods: Andover — December 12, 1991 to January 1, 1996; FSC — January 1, 1996 to February 14, 1997; FFP — February 26, 1997 to October 1, 1998; Jonathon Roberts — March 15, 1999 to August 10, 2000; and Alliance — March 15, 1999 to unknown date. Daniel G. Danker was a licensed securities registered representative with Defendants for the following time periods: Andover — October 28, 1991 to January 1, 1996; FSC — January 1, 1996 to February 14, 1997; FFP — February 26, 1997 to October 1, 1998; Jonathon Roberts — March 12, 1999 to March 27, 2000; Alliance — March 15, 1999 to unknown date. During these time periods, Payne and Danker were employees and agents of Andover, FSC, FFP, Jonathon Roberts, and Alliance (collectively the "Broker Dealers"). Each Broker Dealer was able to control Payne and Danker during the time period in which they maintained their securities licenses with such Broker Dealer. (Compl. ¶ 35.)
Heartland was founded by Payne and holds itself out as a brokerage, insurance and estate planning firm. Payne owns and was the president of Heartland. Heartland was not registered with the United States Securities and Exchange Commission ("SEC"). JMS was founded in 1997 by Johann M. Smith. Smith was the manager of and attorney for JMS and made the investment decisions for JMS. Danker was the vice president and office manager of Heartland. He maintained Heartland's books and records. Constance Brooks-Kiefer was an administrative assistant at Heartland. She was responsible at both Heartland and JMS for preparing and issuing checks, depositing investor funds, preparing and issuing account statements, and maintaining the books and records.
Beginning in 1994 and continuing through August 2001, Payne, Danker, Smith, Brooks-Kiefer, Heartland, JMS and others engaged in a fraudulent Ponzi scheme in which "induced investors to pay them millions of dollars through the fraudulent sale of securities (the Ponzi Scheme)." (Compl. ¶ 24; SEC Compl. ¶ 1.) Investors were told that their investments would be used to purchase securities and were promised a high rate of return. Payne and Danker sold the securities without registration under the SEA and in violation of the SEA and the Indiana Securities Act. Investors were sent fraudulent confirmations and monthly statements on Heartland letterhead and/or that of Heartland's alter ego entities which indicated the investments were earning high rates of return.
Most investor funds in Heartland and JMS were deposited into an account in the name of Lincoln Fidelity Escrow (the "Lincoln account") and commingled with other investor funds. Smith and Brooks-Kiefer are the signatories on the Lincoln account. Some investor funds were deposited directly into Payne's bank account; some investor funds were transferred from the Lincoln account to Heartland's corporate account. Payne and Danker are signatories on Heartland's account. Though a limited amount of investor funds in Heartland, JMS and other related entities were used to purchase securities, most investments were never made and were used in the Ponzi scheme and/or to pay the personal and business expenses of Heartland, JMS, Payne, Danker, Smith, and Brooks-Kiefer. Payne, Danker, Smith and Brooks-Kiefer wrongfully converted Heartland funds to their own use and personal benefit or to that of others. Also, assets of Heartland and JMS were fraudulently transferred to a number of persons and other entities controlled by Payne, Danker, Smith, Brooks-Kiefer and others. Danker has been convicted of wire fraud and money laundering. Payne has been convicted of mail fraud and money laundering.
The investors were induced by the fraud and deceit of Payne and Danker. The investors believed that Payne and Danker were acting with the knowledge, consent and approval of the Broker Dealers and that the investments offered by Payne and Danker were approved and authorized by the Broker Dealers. No Broker Dealer notified the investors "to whom Payne and Danker fraudulently sold securities that Payne and/or Danker were not authorized to offer and sell such securities." (Compl. ¶ 46.)
It is alleged that "Payne, Danker and the Broker/Dealers owed a fiduciary duty to each of the investors and to Heartland and JMS to act honestly and openly and in good faith in the conduct of their affairs and in handling investor funds." (Id. ¶ 49.) They breached this fiduciary duty "when, among other things, Payne and/or Danker commingled funds invested, . . . converted funds in bank accounts and other invested funds to their own use and benefit, fraudulently misrepresented the value of securities and how investor funds would be invested or used and when the Broker Dealers failed to exercise adequate and reasonable oversight over the conduct of Payne and Danker." (Id. ¶ 50.)
The Broker Dealers, as licensed securities broker dealers, had a duty to supervise, monitor and control the securities sales activities of Payne and Danker, including the duty to ascertain what securities they were selling, the handling of the proceeds of such sales, and whether Payne and Danker were engaging in other business activity. (Id. ¶ 60.) This duty was owed to those persons to whom Payne and Danker sold securities and to Heartland and JMS; and the Broker Dealers breached this duty, causing the losses to the investors and the losses and liabilities of Heartland and JMS. (Id. ¶¶ 61-63.)3
The Complaint incorporates by reference the 95 rhetorical paragraphs of the complaint filed against Payne, Danker and others in the case of United States Securities and Exchange Commission v. Payne, Cause No. IP00-1265-C-T/G (the "SEC Complaint"). (Compl. ¶ 26.) The Complaint also incorporates by reference rhetorical paragraphs 41 through 206 of the complaint filed by the Receiver against Payne, Danker and others in Knauer v. Payne, Cause No. IP00-1629-C-T/G (the "RICO Complaint"). (Compl. ¶ 27.)
The SEC Complaint alleges that Heartland and JMS engaged in acts which violated federal securities laws and made false and misleading statements and knew or were reckless in not knowing about the Ponzi scheme including the false and misleading statements of Heartland, JMS, Payne, Danker, and Brooks-Kiefer. (See, e.g., SEC Compl. ¶¶ 4-5, 72-74, 76-77, 79-81, 82-86, 89-93.) The SEC Complaint further alleges, inter alia, that all investor funds were deposited in the Lincoln account (id. ¶¶ 21, 57), JMS never purchased the promised stocks or purchased only a limited number of shares to show investors and the remaining funds were deposited into the Lincoln account and commingled with funds from the other investment schemes, (id. ¶ 35). In addition, it is alleged that Heartland investor money was not deposited into the Heartland bank account (id. ¶ 55) and most of that money was commingled with other investor funds in the Lincoln account, which account was used to operate the Ponzi scheme and allocated to Payne, Danker, Smith, Brooks-Kiefer, Heartland, JMS, and for travel, entertainment and clothing allowances for employees, (id. ¶¶ 51, 62, 63). The SEC Complaint also alleges that investor money was deposited directly into Payne's banking account; only a small percentage of all money deposited into the Lincoln and Payne accounts and transferred to the Heartland account was used to purchase legitimate securities; and much of the money deposited into the Heartland account was used to pay Payne and his personal expenses, paid to Smith or converted to cash. (Id. ¶¶ 59-65.) The SEC Complaint alleges that "JMS and Heartland knew, or were reckless in not knowing, of the activities described in Paragraphs 89 [] through 91 above." ...
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