Sheldon Co. Profit Sharing Plan and Trust v. Smith, 1:92-CV-189.
| Decision Date | 02 July 1993 |
| Docket Number | No. 1:92-CV-189.,1:92-CV-189. |
| Citation | 828 F. Supp. 1262 |
| Parties | SHELDON COMPANY PROFIT SHARING PLAN AND TRUST, Sheldon Company Defined Benefit Plan and Trust (Terminated); and George Cares, Paul Cares, and Louis Cares, as individuals and as Trustees of both Trusts, Plaintiffs, v. Michael K. SMITH, as an individual and as a partner or former partner in Dolinka, Smith & Van Noord, a Michigan partnership; Marvin J. Dolinka, Harold J. Smith, Kenneth Van Noord, Gerald R. Vander Lugt, and Bruce Jelsema, the other partners or former partners in the partnership; Robert W. Baird & Co. Incorporated, a Wisconsin corporation; BMMG Capital Corp., a Michigan corporation; Gregory E.V. Dodgson, John Knight, W.E. Stevenson, James Van Til, Raymond A. Weigell III, D.H. Brush & Associates, an Illinois corporation, Ricky and Susan Kraai, Robert E. Schermer, Sr., Charles Gardiner, Ted Vogt, Daniel H. Brush, Donald Morsink, and Paul Kleinheksel, shareholders, directors, and/or officers of BMMG Capital Corp., and/or Trustees of the Buys-MacGregor, MacNaughton-Greenawalt & Co. Shareholders' Liquidating Trust under Agreement dated June 30, 1988, as amended, Timothy Moore as an individual employed by and registered agent of Robert W. Baird & Co., Inc., Oppenheimer & Co., Inc., a Delaware corporation, and Sheldon Altman, an individual employed by and a registered agent of Oppenheimer & Co., Inc., Defendants. |
| Court | U.S. District Court — Western District of Michigan |
828 F. Supp. 1262
SHELDON COMPANY PROFIT SHARING PLAN AND TRUST, Sheldon Company Defined Benefit Plan and Trust (Terminated); and George Cares, Paul Cares, and Louis Cares, as individuals and as Trustees of both Trusts, Plaintiffs,
v.
Michael K. SMITH, as an individual and as a partner or former partner in Dolinka, Smith & Van Noord, a Michigan partnership; Marvin J. Dolinka, Harold J. Smith, Kenneth Van Noord, Gerald R. Vander Lugt, and Bruce Jelsema, the other partners or former partners in the partnership; Robert W. Baird & Co. Incorporated, a Wisconsin corporation; BMMG Capital Corp., a Michigan corporation; Gregory E.V. Dodgson, John Knight, W.E. Stevenson, James Van Til, Raymond A. Weigell III, D.H. Brush & Associates, an Illinois corporation, Ricky and Susan Kraai, Robert E. Schermer, Sr., Charles Gardiner, Ted Vogt, Daniel H. Brush, Donald Morsink, and Paul Kleinheksel, shareholders, directors, and/or officers of BMMG Capital Corp., and/or Trustees of the Buys-MacGregor, MacNaughton-Greenawalt & Co. Shareholders' Liquidating Trust under Agreement dated June 30, 1988, as amended, Timothy Moore as an individual employed by and registered agent of Robert W. Baird & Co., Inc., Oppenheimer & Co., Inc., a Delaware corporation, and Sheldon Altman, an individual employed by and a registered agent of Oppenheimer & Co., Inc., Defendants.
No. 1:92-CV-189.
United States District Court, W.D. Michigan, S.D.
July 2, 1993.
Grant J. Gruel, Gruel, Mills, Nims & Pylman, Grand Rapids, MI, Kent, for Dolinka, Smith & Van Noord, Marvin J. Dolinka, Harold J. Smith, Kenneth Van Noord, Gerald R. Vander Lugt, Bruce A. Jelsema.
William C. Reens, Borre, Peterson, Fowler & Reens, PC, Grand Rapids, MI, Kent, Gary M. Saretsky, Hertz, Schram & Saretsky, PC, Bloomfield Hills, MI, Oakland, for Harold J. Smith.
Boyd A. Henderson, Gordon J. Quist, James R. Peterson, Miller, Johnson, Snell & Cummiskey, Grand Rapids, MI, Kent, for Robert W. Baird & Co., Inc.
D. Scott Stuart, Farr & Oosterhouse, Grand Rapids, MI, Kent, for BMMG Capital Corp., Gregory E.V. Dodgson, John Dodgson, Michael G. Dodgson, Tony K. Knight, W.E. Stevenson, James Van Til, Raymond A. Weigell, III, D.H. Brush & Associates, Ricky Kraai, Susan Kraai, Robert E. Schermer, Sr., Charles Gardiner, Ted Vogt, Daniel H. Brush, Donald Morsink, Paul Kleinheksel.
Thomas M. Weibel, Smith, Haughey, Rice & Roegge, PC, Grand Rapids, MI, Kent, for Timothy Moore.
Bradley J. Schram, Gary M. Saretsky, Dana Donohue, Hertz, Schram & Saretsky, PC, Bloomfield Hills, MI, Oakland, for Oppenheimer & Co., Inc., Sheldon Altman.
HILLMAN, Senior District Judge.
This is an amended opinion. On June 4, 1993, this court issued an opinion on all pending motions. Thereafter, plaintiffs filed a motion for clarification and reconsideration of the opinion as it relates to plaintiffs' churning claim. The court withdraws the opinion of June 4, 1993. Following is an amended opinion in which section B-2, The Churning Claim, has been rewritten.
Plaintiffs Sheldon Company Profit Sharing Plan and Trust, Sheldon Company Defined Benefit Plan and Trust, and three people as individuals and as trustees of the two trusts filed a 30-count complaint on March 11, 1992, against 12 named defendants and three "Doe" defendants. Defendants include Buys, MacGregor, MacNaughton, Greenawalt & Co. ("BMMG"), a Michigan corporation and a registered securities broker/dealer; Timothy Moore, BMMG's registered agent; Robert W. Baird & Co. Inc. ("Baird"), a securities broker/dealer incorporated in Wisconsin; Dolinka, Smith & VanNoord ("DSV"), a Michigan accounting firm partnership; Oppenheimer & Co., Inc. ("Oppenheimer"), a securities broker/dealer incorporated in Delaware; and Sheldon Altman, Oppenheimer's registered agent.
On November 24, 1992, plaintiffs filed an amended complaint, adding 16 individuals and one Illinois corporation as shareholders, directors, and/or officers of BMMG. Plaintiffs seek to recover approximately $185,000 embezzled by defendant Michael K. Smith from two separate trusts established by the Sheldon Company for the benefit of its employees, and punitive damages where appropriate.
Before the court are the following motions:
1. Defendant Oppenheimer & Co., Inc.'s, and defendant Altman's Motion for Summary Judgment pursuant to Fed. R.Civ.P. 56.
2. Defendant Baird's Motion to Dismiss for Failure to State a Claim under Fed. R.Civ.P. 12(b)(6) and 9(b). The motion was joined by defendants BMMG and Timothy Moore, BMMG's registered agent.
3. Plaintiffs' Motion for Partial Summary Judgment against Dolinka, Smith & VanNoord pursuant to Fed.R.Civ.P. 56.
BACKGROUND
Plaintiff Sheldon Company is a Michigan corporation engaged in a retail dry-cleaning business. The company is owned and operated by George Cares, Paul Cares and Louis Cares (collectively "the Careses"). The company established two respective plans for its employees — the Sheldon Company Profit Sharing Plan and Trust and the Sheldon Company Defined Benefit Plan and Trust (collectively, "the Plans").1 Funds contributed
Pursuant to section 7.1(a) of the Profit Sharing Plan, the trustees have the responsibility, "consistent with the `funding policy and method' determined by Sheldon Company, to invest, manage, and control the Plan assets subject, however, to the direction of an investment manager if the Trustees should appoint such manager as to all or a portion of the assets of the Plan." The Plans permit Sheldon Company, its directors, and/or trustees to designate an investment manager. On July 15, 1985, the two Plans entered into an Investment Management Agreement (the "Agreement") with DSV, a Michigan accounting firm partnership.
Defendant DSV is a four-partner CPA firm doing business in and around Grand Rapids, Michigan. The firm began with the partnership of Harold Smith and Ken VanNoord in 1975. In about 1982, Marvin Dolinka joined the firm which then took its present name.
Michael Smith, the son of Harold Smith, joined the firm as an associate in 1984. Since Michael Smith was a registered investment adviser by designation of the United States Securities and Exchange Commission ("SEC"), upon Smith's employment by DSV in 1984, DSV also was designated by the SEC as a successor investment adviser.2 Harold Smith retired in January 1987, and his partnership interest in the firm was purchased by Michael Smith.
In the summer of 1985, Smith/DSV opened two brokerage accounts for the Sheldon Plans. One of these was with Oppenheimer & Co. in Chicago, the other with BMMG in Grand Rapids. The agent who handled the account at BMMG was defendant Timothy Moore. Defendant Moore dealt exclusively with DSV regarding the management of the Plans' assets. Allegedly, Moore was provided with a copy of the Investment Management Agreement by DSV.
In 1988, BMMG's business was purchased by defendant Baird, and BMMG was later dissolved. Despite the name change, continuity continued in the local management, personnel, physical location, assets, and general business operations. Defendant Moore, who handled the account at BMMG, stayed on to handle the account at Baird.3
In 1986, Smith established a relationship with a closely held Michigan corporation called Call Free, Inc., a company that operated a telephonic referral service. According to Smith, he invested approximately $1,000,000 of DSV's investment advisory clients' funds in Call Free in 1986 and 1987.
It was Smith's practice to order checks from BMMG/Baird to pay himself or to pay one or more entities, real or fictitious, controlled by Smith by which means Smith unlawfully diverted the Plans' funds to his own use. For example, Smith wrote Moore, a registered agent at BMMG, on July 17, 1986, directing BMMG to "issue a check for $25,000 to Call Free, Inc., 6140 28th Street, S.E., Grand Rapids, Michigan 49506 in purchase of 1,000 Shares Common Stock from the account of Sheldon Company Retirement Plan A/C No. 12777017." In August 1987, Smith wrote to the firm ordering a check for $10,000 payable to Executive Capital Co. for a "2% Oil Well Interest." Allegedly, Smith embezzled most of the money from his clients' accounts at BMMG in this manner.
Plaintiffs alleged that starting in about 1985 and continuing possibly until 1991, Smith embezzled at least $185,000 and applied these funds for his own personal benefit.
Description of Payee
Date or Other Transaction Amount Source
7/18/86 Call Free, Inc. $ 25,000.00 BMMG
9/26/86 Call Free, Inc. $ 10,000.00 BMMG
10/20/86 Call Free, Inc. $ 10,000.00 BMMG
6/04/87 The New Call Free, Inc. $ 50,000.00 BMMG
6/17/87 The New Call Free, Inc. $ 30,000.00 BMMG
8/26/87 Executive Capital Co. $ 10,000.00 BMMG
4/28/87 Wire transfer* $ 6,276.13 BMMG
6/13/89 Executive Capital Co. $50,000.00 Baird
Smith hid the Call Free investment from the trustees after he took the money by mailing to them quarterly reports that falsely overstated and misrepresented the value of their account. DSV billed the Plans for investment advisory services based on these falsely inflated reports.
Call Free went bankrupt in the summer of 1987. Smith's embezzlement was discovered by the trustees in late May 1991 through Smith's involvement in the Model Pattern Company's Model Pattern Retirement Plans ("Model Pattern Plan"). In April 1991, the Model Pattern Company was making a claim against DSV for losses incurred in the Model Pattern Plan. The Model Pattern Plan...
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