Minneapolis Employees Retirement Fund v. Allison-Williams Co.
| Decision Date | 30 June 1994 |
| Docket Number | No. C6-93-844,ALLISON-WILLIAMS,C6-93-844 |
| Citation | 519 N.W.2d 176 |
| Parties | MINNEAPOLIS EMPLOYEES RETIREMENT FUND, et al., Respondents, v.COMPANY, et al., Petitioners, Appellants. |
| Court | Minnesota Supreme Court |
Syllabus by the Court
1. To establish an unsuitability claim under Minn.Stat. § 80A.01 (1992), a plaintiff must prove three elements: (1) that a broker-dealer recommended or purchased securities which are unsuitable in light of the investor's objectives, (2) that a broker-dealer recommended or purchased securities with an intent to defraud or with reckless disregard of the investor's interest, and (3) that the broker exercised control over the investor's account.
2. Within the meaning of Minn.R. § 2875.0910, subp. 2 (1993), a "low-priced" security is one that is low in market value.
3. Absent a special agreement to the contrary, a broker owes her customer only the duty to exercise due care in executing all instructions expressly given to her.
Terrance J. Fleming and Randy G. Gullickson, Lindquist & Vennum, Minneapolis, for appellants.
James B. Lynch, J. Thomas Vitt and David Ranheim, Dorsey & Whitney, Minneapolis, for respondents.
Considered and decided by the court en banc.
At issue is whether the district court properly granted summary judgment to appellants Allison-Williams and Robert Tengdin on claims by respondent Minneapolis Employees Retirement Fund ("MERF") that appellants violated the Minnesota Securities Act and were negligent in connection with the sale of securities to MERF. 1 The court of appeals held that material issues of fact precluded entry of summary judgment on both claims, 508 N.W.2d 805. We reverse the court of appeals and reinstate summary judgment in favor of Allison-Williams and Robert Tengdin. 2
MERF is a pension fund for retired employees of Minneapolis and for present employees hired before 1978. It is a public corporation formed pursuant to Minn.Stat. §§ 422A.01-.26 (1990). As of June 1990 MERF had an investment portfolio in excess of $800 million.
Overall responsibility for MERF's investment policies and activities is held by a Retirement Board, comprised of the Minneapolis Mayor, one city council member, and five legally qualified voters. Minn.Stat. § 422A.02. The members of the Retirement Board are the "trustees" and "custodians" of MERF funds and "have exclusive control and management of these funds." Minn.Stat. § 422A.05, subd. 1. The Retirement Board is directed by statute to appoint an Executive Director. The Executive Director is responsible for carrying out the policies of the board and otherwise administering the fund. Minn.Stat. § 422A.03. By statute, the members of the Retirement Board, MERF's Executive Director, and the Board's staff are charged with the duty to "act in good faith" and to:
exercise that degree of judgment and care, under the circumstances then prevailing, which persons of prudence, discretion, and intelligence exercise in the management of their own affairs, not for speculation, but for investment, considering the probable safety of their capital as well as the probable income to be derived therefrom.
Minn.Stat. § 422A.05, subd. 2a.
From 1979 until May 1990, John Chenoweth was the Executive Director of MERF. Chenoweth had primary responsibility for MERF's in-house bond portfolio and had authority to engage in securities transactions for MERF. Chenoweth was also authorized to communicate MERF's investment objectives to other brokers. Chenoweth was fatally shot on August 10, 1991.
Allison-Williams is a licensed securities broker-dealer engaged in the purchase and sale of securities in the secondary market for private placement. Generally, these securities are in the nature of corporate debt obligations or bonds. Allison-Williams deals in these securities only with institutional investors like MERF. Annually, Allison-Williams engages in transactions with around 100 institutional investors, including many pension funds. The transactions between Allison-Williams and its institutional clients usually involve the purchase or sale of a block of securities worth hundreds of thousands, or even millions, of dollars. Robert Tengdin is the Chairman of the Board of Directors and an employee of Allison-Williams.
From about 1981 until 1990, MERF purchased tens of millions of dollars worth of high-yield, high-risk bonds from Allison-Williams. Chenoweth represented MERF in these transactions, and Tengdin represented Allison-Williams.
Tengdin first met with Chenoweth in the early 1980s. They had extensive discussions in which Chenoweth described MERF's investment objectives. Chenoweth was critical of the low returns previously generated by MERF's portfolio and expressed interest in obtaining greater returns by buying privately placed securities. Tengdin advised Chenoweth about purchasing bonds, and Chenoweth sometimes but not always followed his advice. Chenoweth stated that he "had to say no 20 times for every one time I said yes" in response to Tengdin's recommendations.
Allison-Williams did not exercise discretion over MERF's investments. Allison-Williams had no authority to enter into transactions on MERF's behalf without MERF's advance, express authorization. Chenoweth expressly approved in advance the purchase of every security sold MERF by Allison-Williams.
MERF never disclosed to Allison-Williams the other investments it purchased from or through the numerous other broker-dealers with whom MERF dealt, or MERF's direct investments. MERF never requested that Allison-Williams review, analyze, or make recommendations with respect to its overall investment strategy or portfolio. Allison-Williams never provided MERF with any such review, analysis, or recommendation.
In June 1991, MERF sued Allison-Williams to recover losses incurred as a result of transactions with Allison-Williams. 3 In its complaint, MERF specifically alleged that Allison-Williams breached a fiduciary duty to MERF, was negligent, and violated the Securities Act by selling unsuitable investments and failing to disclose material facts to MERF.
Allison-Williams moved for summary judgment on MERF's claims and requested attorney fees under Rule 11. On March 4, 1992, MERF moved to amend its complaint to add an excessive mark-up claim, as well as claims for common law fraud and violation of the Consumer Fraud Act.
On June 23, 1992, the district court granted Allison-Williams' motion for summary judgment on all three claims in the complaint, denied MERF's motion to amend, and granted Allison-Williams' motion for attorney fees under Rule 11. MERF subsequently brought a motion for reconsideration. After considering new evidence, including expert affidavits submitted with the motion, the district court declined to vacate its original order, found the new evidence to be untimely, and entered its June 23, 1992 order as final.
In an opinion filed November 23, 1993, the court of appeals affirmed in part and reversed in part. The court of appeals affirmed summary judgment on MERF's breach of fiduciary duty claim, but reversed the trial court's grant of summary judgment on MERF's unsuitability claim. The court of appeals also reversed the district court's denial of MERF's motion to amend its complaint to add an excessive mark-up claim, and reversed the award of Rule 11 sanctions against MERF. Allison-Williams sought further review of those portions of the court of appeals opinion reversing summary judgment on MERF's negligence and unsuitability claims. MERF sought further review of the portion of the opinion affirming summary judgment with respect to MERF's breach of fiduciary duty claim. This court granted Allison-Williams petition for review and denied MERF's.
We consider first whether the district court properly granted summary judgment for Allison-Williams with respect to MERF's claim that Allison-Williams violated the Minnesota Securities Act, Minn.Stat. §§ 80A.01 to 80A.31 (1990), by recommending the sale of unsuitable securities.
The Minnesota Securities Act is patterned after federal law. The Act is to be construed so as "to coordinate the interpretation of sections 80A.01 to 80A.31 with the related federal regulation." Minn.Stat. § 80A.31. Federal case law is of considerable value in deciding issues arising under the Act. Foley v. Allard, 427 N.W.2d 647, 650 (Minn.1988).
Minn.Stat. § 80A.01 is Minnesota's counterpart to federal Rule 10b-5, 17 C.F.R. § 240.10b-5 (), and to section 17(a) of the Federal Securities Act of 1933, 15 U.S.C. § 77q(a) (1988). 4 Federal courts have recognized that a broker-dealer may be liable under Rule 10b-5 where the dealer recommends the purchase of securities unsuitable for the buyer's investment needs. See, e.g., O'Connor v. R.F. Lafferty & Co., Inc., 965 F.2d 893 (10th Cir.1992); Clark v. John Lamula Investors, Inc., 583 F.2d 594 (2d Cir.1978). In O'Connor, the Tenth Circuit held that to establish an unsuitability claim based on fraud, a plaintiff must prove three elements: (1) that a "broker recommended (or in the case of a discretionary account purchased) securities which are unsuitable in light of the investor's objectives," (2) that "the broker recommended or purchased securities with an intent to defraud or with reckless disregard for the investor's interests," and (3) that "the broker exercised control over the investor's account." 965 F.2d at 898.
For unsuitability claims brought under Minn.Stat. § 80A.01, administrative rules promulgated by the Minnesota Commissioner of Commerce further define the contours of broker liability. In particular, Minn.R. § 2875.0910, subp. 2 (1991) provides:
Recommendations to customers: In recommending to a customer the purchase, sale, or exchange of any security, a broker-dealer shall have reasonable grounds for believing that the recommendation is suitable for such customer...
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