William A. Curry v. TD Ameritrade, Inc. ( 2016 )

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[DO NOT PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
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No. 16-12041
Non-Argument Calendar
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D.C. Docket No. 1:14-cv-01361-LMM
WILLIAM A. CURRY,
ROBERT L. CLAXTON,
JOHN R. SULLIVAN,
JANICE M. WALKER,
THE WALKER FAMILY TRUST,
WILLIAM J. KISSEL,
CESAREO M. FLORES,
PATRICIA M. FLORES,
Plaintiffs-Appellants,
versus
TD AMERITRADE, INC.,
f.k.a. TD Waterhouse Investor Services, Inc.,
TD AMERITRADE CLEARING, INC.,
TD AMERITRADE HOLDING CORPORATION,
successor in interest to TD Waterhouse Group, Inc.,
f.k.a. Ameritrade Holding Corporation,
Defendants-Appellees,
CHARLES SCHWAB & CO., INC.
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Defendant.
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Appeal from the United States District Court
for the Northern District of Georgia
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(October 21, 2016)
Before JORDAN, JULIE CARNES and BLACK, Circuit Judges.
PER CURIAM:
Plaintiffs-Appellants William A. Curry, Robert L. Claxton, John R. Sullivan,
Janice M. Walker, the Walker Family Trust, William J. Kissel, Cesareo M. Flores,
and Patricia M. Flores appeal the district court’s dismissal of their securities law
claims in a putative class action against TD Ameritrade, Inc., TD Ameritrade
Clearing, Inc., and TD Ameritrade Holding Corporation (together, TDA).
Appellants appeal the district court’s dismissal of the following claims: (1) control
person liability under federal and Georgia law; and (2) secondary liability based on
material aid or participation under Georgia law. After review, 1 we affirm the
judgment of the district court.
1
“We review de novo the district court's grant of a motion to dismiss for failure to state a
claim, accepting the allegations in the complaint as true and construing them in the light most
favorable to the nonmoving party.” Kizzire v. Baptist Health Sys., Inc., 441 F.3d 1306, 1308
(11th Cir. 2006).
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I. BACKGROUND
According to their Amended Complaint, Appellants invested in various
private securities that ultimately proved to be a part of a sizable Ponzi scheme
perpetrated by Angelo A. Alleca. Alleca, a registered investment advisor, began
selling partnership interests in his first fund, Summit Investments Fund, L.P., in
2004. Alleca soon incurred large losses and investors in the Summit Fund began to
redeem their investments, which he paid by selling new interests in Asset Class
Diversification Fund, LP. He continued this pattern in a nearly identical manner
by fraudulently marketing equity interests in two new investment vehicles, Detroit
Memorial Partners LLC and Private Credit Opportunities Fund, LLC. Alleca
marketed each of the nonpublic securities directly to each of the purchasers though
private placement memordanda, meetings, and phone calls. TDA is not alleged to
have participated in the actual sales. Rather, once the decisions to invest had been
made, Appellants invested in the fraudulent funds using TDA as a custodian to
complete the transaction and then to hold the securities on behalf of the purchasers.
TDA was not the only firm used for this purpose; initially, the Private Credit
Opportunities Fund was listed on Charles Schwab’s trading platform and was
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transacted there until Schwab and Alleca ended their relationship and Alleca
moved the asset to TDA’s platform. 2
Appellants’ allegations are essentially identical with respect to each of the
securities purchased. In each case, Appellants assert that TDA materially aided
and participated in Alleca’s fraudulent sales because TDA “jointly executed the
transaction [with Alleca] . . . using [TDA’s] platform” and “custodied the . . .
securities on [plaintiff’s] behalf, valued those securities for [plaintiff] and
[plaintiff’s] investment advisors for both performance reporting and billing
purposes, and independently reported the market value for [the] securities on
[TDA’s] statements sent directly to [plaintiff].” TDA allegedly listed the securities
as approved for sale on the trading platforms following TDA’s review of
documents demanded from Alleca by TDA’s licensed broker-dealers, creating “a
market for these otherwise unmarketable securities.” In addition, TDA reported
valuations given by Alleca for the value of the securities directly to Appellants on
their periodic statements. TDA is not alleged to have undertaken any duty to
perform independent valuations.
Appellants allege Alleca acknowledged he could not have perpetuated the
Ponzi scheme without the assistance of TDA and that Appellants invested in the
2
Charles Schwab & Co., Inc. was a defendant in this case but Appellants did not appeal
the dismissal of their claims against Schwab and did not include allegations against Schwab in
their amended complaint.
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securities because of TDA’s involvement. They also contend because TDA is a
large enterprise and member of the “Big Four” broker-dealer custodians, they felt
they could safely avoid Ponzi schemes by investing through TDA. Further, they
charge TDA with “holding out Summit Wealth and Alleca as vali[d] [registered
investment advisors (RIAs)]” and “allowing Alleca to represent to the investing
public the existence of his . . . relationship with [TDA], implying the securities
marketed were legitimate.” They support this contention by alleging Alleca was
included in TDA promotional materials in his capacity as a registered investment
advisor in order to solicit the business of other RIAs.
As a result of these factual allegations, Appellants allege that TDA
controlled Alleca and materially aided and participated in Alleca’s fraudulent
sales.3 Appellants filed their initial complaint in May, 2014. The district court
dismissed it with leave to amend the claims regarding material aid or participation
under Georgia law. Thereafter, it dismissed their amended complaint as well
because “the allegations . . . do not allow the Court to draw a reasonable inference
3
The Ponzi scheme eventually collapsed, culminating in Alleca pleading guilty to
criminal charges of securities fraud. We take judicial notice of Alleca’s indictment and
settlement. See United States v. Alleca, No. 1:15-cr-000458 (N.D. Ga. May 26, 2016) (guilty
plea and minute sheet of court’s acceptance of same); United States v. Rey, 811 F.2d 1453, 1457
n.5 (11th Cir. 1987) (“A court may take judicial notice of its own records and the records of
inferior courts.”); Fed. R. Evid. 201 advisory committee’s note to subdivision (f) (“In accord
with the usual view, judicial notice may be taken at any stage of the proceedings, whether in the
trial court or on appeal.”).
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that TDA participated in the alleged sales in any material way, or that TDA
materially aided Alleca’s alleged conduct.”
II. DISCUSSION
“To survive a motion to dismiss, a complaint must contain sufficient factual
matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’”
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Co. v. Twombly, 550
U.S. 544, 570 (2007). “While a complaint attacked by a Rule 12(b)(6) motion to
dismiss does not need detailed factual allegations,” Twombly, 550 U.S. at 555, a
plaintiff must provide the factual grounds of his entitlement to relief, which
requires more than “labels and conclusions,” Iqbal, 556 U.S. at 678. A “formulaic
recitation of the elements of a cause of action will not do.” Id. (quoting Twombly,
550 U.S. at 555).
The factual allegations in the complaint “must be enough to raise a right to
relief above the speculative level.” Twombly, 550 U.S. at 555. “A claim has facial
plausibility when the plaintiff pleads factual content that allows the court to draw
the reasonable inference that the defendant is liable for the misconduct alleged.”
Iqbal, 556 U.S. at 678 (citing Twombly, 550 at 556). Thus, to state a claim in this
case, Appellants must do more than simply restate the elements of their cause of
action.
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A. Control Theory
“To state a claim under § 20(a) [of the Securities Exchange Act], [a plaintiff]
must allege three elements: (1) that [the alleged violator] committed a primary
violation of the securities laws; (2) that the individual defendants had the power to
control the general business affairs of [the violator]; and (3) that the individual
defendants had the requisite power to directly or indirectly control or influence the
specific corporate policy which resulted in primary liability.” Mizzaro v. Home
Depot, Inc., 544 F.3d 1230, 1237 (11th Cir. 2008) (quotation omitted). Appellants
allege Alleca committed and pled guilty to numerous violations of the securities
laws, satisfying the first prong. Nevertheless, the complaint is deficient with
respect to the second and third elements of the control test. Taking the facts as
stated by the plaintiffs and making all reasonable inferences in their favor, TDA
did not control Alleca. There are no factual allegations tending to show TDA
controlled the general business affairs of Alleca or Summit Wealth, much less had
the power to direct the specific policies resulting in the fraud. 4 Nothing Appellants
allege even remotely approaches the level of control necessary to state a claim.
See, e.g., Brown v. Enstar Grp., Inc., 84 F.3d 393, 397 (11th Cir. 1996) (chairman
of board of directors of violating company was not liable on control theory where
4
The best Appellants can offer is the allegation that TDA asked Alleca to complete their
Non-Standard Asset Custody Agreement and deliver copies of the offering memorandum,
subscription agreement, and most recent financial statements pertaining to one of Alleca’s funds.
This falls far short of control.
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he did not direct the specific policy resulting in fraudulent prospectus, even though
he participated in the related restructuring). Accordingly, we affirm the dismissal
of Appellants’ federal and state control person liability claims. 5
B. Material Aid or Participation
Section 10-5-14 of the Georgia Securities Act of 1973 provides that “every
dealer . . . who participates in any material way in the sale” is liable jointly and
severally with the person primarily liable for the securities violation. O.C.G.A.
§ 10-5-14(c) (2000). In 2008, Georgia replaced its existing blue sky laws with the
2002 version of the Uniform Securities Act. See 2008 Ga. Laws 528. Section 10-
5-58 of the Georgia Uniform Securities Act contains a secondary liability provision
similar to the old statute, stating that “[a] person that is a broker-dealer . . . that
materially aids the conduct giving rise to the liability” is liable jointly and severally
with the primary violator. O.C.G.A. § 10-5-58(g)(4). Both statutes provide an
inverse negligence affirmative defense. We consider them together, as the district
court and the parties have done.
Appellants contend that TDA materially aided and participated in the sales
simply by virtue of their having acted in accordance with their duties as custodian.
5
Although there is no reported Georgia case setting forth a test for control under either
the Georgia Securities Act of 1973 (GSA) or the Georgia Uniform Securities Act (GUSA), we
affirm the dismissal of plaintiffs’ state control liability claims as well because the GSA and
GUSA control liability provisions are nearly identical to the federal statute. Compare 15 U.S.C.
§ 78t(a) with O.C.G.A. § 10-5-14(c) (2000) and O.C.G.A. § 10-5-58(g)(1). Appellants concede
this is the correct approach.
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Because there is no reported Georgia case applying either version of the statute,
Appellants rely primarily on state court cases from Oregon and Kansas applying
those jurisdictions’ analogous Uniform Act provisions, and construe the statutory
language to impose an affirmative duty on TDA to investigate for fraud each of the
transactions it completes as a custodian.
We conclude TDA did not materially aid or participate in the sale. First, the
cases cited by Appellants are not binding, and are distinguishable because they
hold that materiality turns on the exercise of professional judgment. See Prince v.
Brydon, 764 P.2d 1370, 1371 (Or. 1988) (holding that “knowledge, judgment, and
assertions” reflected in private placement memorandum drafted by lawyer rendered
lawyer’s aid material, not merely ministerial); Klein v. Oppenheimer & Co., 130
P.3d 569, 588 (Kan. 2006) (holding that clearing broker’s services were material
because they required the “exercise of professional expertise and judgment,”
including calculation of margin requirements and initiation of margin calls).
Second, the official comments to the Uniform Act provision on which § 10-5-58 is
based bolster our conclusion. Comment 11 states that “the performance by a
clearing broker of the clearing broker’s contractual functions—even though
necessary to the processing of the transaction—without more would not constitute
material aid or result in liability under this subsection.” Unif. Sec. Act § 509
cmt. 11 (2002). TDA’s alleged custodial activities are even less substantial than
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those of a clearing broker. See Klein, 130 P.3d at 572 (describing role of clearing
broker).
Appellants have alleged no facts tending to show that TDA contributed to
the fraudulent transactions in any way other than by fulfilling its contractual duties
to act as custodian. TDA executed the transactions on behalf of the parties, but did
not procure the investments for Appellants or recommend them; they reported
values of the securities to the investors but expressly disclaimed any investigation;
and they held the securities on behalf of the Appellants, but undertook no duty to
scrutinize the financial health of the investment funds.
Additionally, Appellants’ reading of the provisions would make materiality
superfluous. To state a secondary liability claim, a plaintiff could merely allege
that the securities violator used a custodian; there would be no need to allege facts
tending to show any greater degree of involvement. All custodians would be
subject to onerous discovery at all times simply by virtue of being in business. If
the Georgia legislature had contemplated such a result, it could simply have
imposed blanket liability, leaving only the affirmative defense. See, e.g., 815 Ill.
Comp. Stat. Ann. 5/13 (“[E]ach underwriter, dealer, internet portal, or salesperson
who shall have participated or aided in any way in making the [unlawful] sale . . .
shall be jointly and severally liable to the purchaser.”) (emphasis added).
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Finally, Appellant’s suggestion that TDA’s marketing efforts featuring
Alleca constitute material aid or participation falls short as well. Appellants allege
those efforts aimed to increase TDA’s registered investment advisor clientele, but
do not contend these activities caused any of the plaintiffs to invest with Alleca.
The district court was correct to ignore these facts as irrelevant to the question of
material aid to or participation in Alleca’s fraudulent sales.
III. CONCLUSION
For the reasons given above, we affirm the district court’s dismissal of
Appellants’ claims.
AFFIRMED.
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