Knights of Columbus Council 3152 v. KFS BD, Inc.

• Decision Date: 10 December 2010
• Docket Number: No. S-09-225.,S-09-225.
• Citation: 280 Neb. 904,791 N.W.2d 317
• Parties: KNIGHTS OF COLUMBUS COUNCIL 3152 et al., appellants, v. KFS BD, INC., a Nebraska corporation, et al., appellees.
• Court: Nebraska Supreme Court

280 Neb. 904 791 N.W.2d 317 KNIGHTS OF COLUMBUS COUNCIL 3152 et al., appellants, v. KFS BD, INC., a Nebraska corporation, et al., appellees. No. S-09-225. Supreme Court of Nebraska. Dec. 10, 2010.

Syllabus by the Court

1. Motions to Dismiss: Pleadings: Appeal and Error. An appellate court reviews a district court's order granting a motion to dismiss de novo. It accepts all the factual allegations in the complaint as true and draws all reasonable inferences for the nonmoving party.

2. Motions to Dismiss: Pleadings. To prevail against a motion to dismiss for failure to state a claim, a plaintiff must allege sufficient facts, accepted as true, to state a claim for relief that is plausible on its face.

3. Motions to Dismiss: Pleadings. When a plaintiff does not or cannot allege specific facts showing a necessary element, the factual allegations, taken as true, are nonetheless plausible if they suggest the existence of the element and raise a reasonable expectation that discovery will reveal evidence of the element or claim.

4. Securities Regulation: Federal Acts: Courts: Jurisdiction. Federal courts have exclusive jurisdiction over private suits brought for violations under the Securities Exchange Act of 1934. And they also have exclusive jurisdiction over suits in equity or in law to enforce any liability or duty created by the act or the rules and regulations thereunder. But except for specified actions, the rights and remedies provided under the act are in addition to any and all other rights and remedies that may exist at law or in equity.

5. Actions: Securities Regulation: Federal Acts: Pleadings. Investors cannot plead around the lack of a private cause of action for violations of federal securities law by captioning their claim as a common-law claim.

6. Securities Regulation: Federal Acts: Damages. The broker-dealer recordkeeping requirements under the Securities Exchange Act of 1934 do not provide a private damage remedy for violations.

7. Negligence: Fraud: Proof. For both negligent and fraudulent misrepresentation, the plaintiff must be a recipient of the misrepresentation to show reliance.

8. Contracts: Fraud. A person has a duty to disclose information to another in a transaction when necessary to prevent his or her partial or ambiguous statement from being misleading. But a plaintiff must have received the representation before the plaintiff can show that a defendant had a duty to disclose additional facts.

9. Fraud. Mere silence cannot constitute a misrepresentation absent a duty to disclose information.

10. Fraud. When a party makes a partial or fragmentary statement that is materially misleading because of the party's failure to state additional or qualifying facts, the statement is fraudulent.

11. Fraud. Fraudulent misrepresentations may consist of half-truths calculated to deceive, and a representation literally true is fraudulent if used to create an impression substantially false.

12. Fraud. To reveal some information on a subject triggers the duty to reveal all known material facts.

13. Fraud: Intent. An ambiguous statement is fraudulent if made with the intent that it be understood in its false sense or with reckless disregard as to how it will be understood.

14. Fraud: Proof. To prove fraudulent concealment, a plaintiff must prove these elements: (1) The defendant had a duty to disclose a material fact; (2) the defendant, with knowledge of the material fact, concealed the fact; (3) the material fact was not within the plaintiff's reasonably diligent attention, observation, and judgment; (4) the defendant concealed the fact with the intention that the plaintiff act or refrain from acting in response to the concealment or suppression; (5) the plaintiff, reasonably relying on the fact or facts as the plaintiff believed them to be as the result of the concealment, acted or withheld action; and (6) the plaintiff was damaged by the plaintiff's action or inaction in response to the concealment.J.L. Spray and Randall V. Petersen, Lincoln, of Mattson, Ricketts, Davies, Stewart & Calkins, for appellants.

James M. Bausch, Omaha, and Andre R. Barry, Lincoln, of Cline, Williams, Wright, Johnson & Oldfather, L.L.P., for appellee KFS BD, Inc.

Joseph E. Jones and Timothy J. Thalken, of Fraser Stryker, P.C., L.L.O., Omaha, for appellee Mutual of Omaha Insurance Company.

Daniel E. Klaus, of Rembolt Ludtke, L.L.P., Lincoln, for appellees Reid D. Houser and Jeffrey N. Sime.

Gail S. Perry and Derek C. Zimmerman, of Baylor, Evnen, Curtiss, Grimit & Witt, L.L.P., Lincoln, for appellees Richard A. Witt and Kenneth R. Cook.

HEAVICAN, C.J., CONNOLLY, GERRARD, McCORMACK, and MILLER-LERMAN, JJ.

CONNOLLY, J.

The appellants are former customers of Rebecca Engle, a stockbroker formerly employed by Kirkpatrick Pettis, the predecessor of KFS BD, Inc. The appellants sued KFS BD, aNebraska corporation and Mutual of Omaha company; Mutual of Omaha Insurance Company; and officers of these two firms (collectively the defendants). The appellants alleged claims of vicarious liability, breach of contract, fraudulent misrepresentation, negligent misrepresentation, and fraudulent concealment. Their theories of recovery hinged on the following allegations: (1) Kirkpatrick Pettis misrepresented to them and to federal regulators why Kirkpatrick Pettis terminated Engle's employment; and (2) the defendants concealed that Engle was discharged because she violated state and federal securities laws.

The district court sustained the defendants' motions to dismiss all of the claims for failure to state a claim upon which relief could be granted. We affirm in part, and in part reverse.

I. BACKGROUND

1. Complaint's Allegations

(a) General Allegations

Because Kirkpatrick Pettis filed a securities industry form on December 22, 2000, we assume that all of the appellants' allegations are directed at actions taken by Kirkpatrick Pettis. To avoid confusion, we will refer to Kirkpatrick Pettis' conduct. And in analyzing the court's order sustaining the motion to dismiss, we must accept as true the factual statements and reasonable inferences from the appellants' complaint and attached exhibits.¹

We glean the following from the appellants' complaint. From January 1998 to November 29, 2000, Engle was employed by Kirkpatrick Pettis, a Mutual of Omaha company and KFS BD's predecessor. KFS BD is a wholly owned subsidiary of Mutual of Omaha.

Engle worked in Kirkpatrick Pettis' Nebraska City and Syracuse, Nebraska, offices with Brian Schuster. Kirkpatrick Pettis received numerous customer complaints against her. In the spring of 2000, Kirkpatrick Pettis experienced a "catastrophicfailure" of its compliance and supervisory obligations. It led to the eventual collapse of the business. Mutual of Omaha's chairman, chief executive officer, and board of directors took "heightened"control of Kirkpatrick Pettis and the supervision of Engle.

Because Engle was difficult to manage and they no longer wished to support the type of business she was doing, Kirkpatrick Pettis discharged her. Engle then affiliated with First Union Securities, and Schuster elected to follow her. Kirkpatrick Pettis decided to close the Nebraska City and Syracuse offices because of Engle's discharge and Schuster's decision to follow her. November 29, 2000, was Engle's last day of employment and the day that Kirkpatrick Pettis closed its offices in Nebraska City and Syracuse.

Engle-while still employed with Kirkpatrick Pettis and with its knowledge-falsely represented to customers that the offices were being closed because of a reduction in the sales force. On November 28, 2000, the day before Engle's discharge, Kirkpatrick Pettis sent a letter to its customers. It stated that it would be closing its Nebraska City and Syracuse offices on November 29. It informed its customers that they would soon be receiving information from Engle and Schuster announcing their affiliation with First Union Securities. The letter did not state a reason for its closing the offices or the reason for Engle's new affiliation. It included a number to call if the customers wished to maintain their business with Kirkpatrick Pettis.

On November 29, 2000, Engle and Schuster sent a letter to customers announcing their affiliation with First Union Securities. The letter stated that although Kirkpatrick Pettis had chosen to close the Nebraska City and Syracuse offices, Engle and Schuster would be keeping them open as their own business: Engle & Schuster Financial Advisory Group of First Union Securities. The letter had the new business name in the letterhead and stated that Kirkpatrick Pettis had been very helpful in making Engle and Schuster's transfer as smooth as possible.

On December 22, 2000, Kirkpatrick Pettis filed a "Form U-5" with the National Association of Securities Dealers (NASD),now known as the Financial Industry Regulatory Authority, Inc. (FINRA).² The Form U-5 is the "Uniform Termination Notice for Securities Industry Registration." The Form U-5 stated that Kirkpatrick Pettis had discharged Engle and stated the reason as a "reduction in sales force." When Kirkpatrick Pettis filed the Form U-5, the defendants knew that Engle had violated securities law and had pending customer complaints. They also knew that these violations were reportable events that Kirkpatrick Pettis should have disclosed on the form.

(b) Allegations Supporting Separate Claims

(i) Fraudulent Misrepresentation

The appellants alleged that in November 2000 and thereafter, Kirkpatrick Pettis knowingly made false statements in its filing with NASD and in letters it sent to the appellants. The false statements were that Engle had left its employment because of a reduction in its workforce and that Engle left its employment because Kirkpatrick Pettis was closing the Nebraska City office. The real reasons were that she was discharged because of customer complaints and her failure to adhere to company, industry, and state standards of conduct. The...