Donald Burdick v. Rosenthal Collins Group, Llc ( 2016 )

v.; u; u
IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
DONALD BURDICK; SUSAN
BYINGTON; LISA CARFAGNO; PETER DIVISION ONE
and JANICE ELLIOT, and their marital
community; BERNARD E. GOLDBERG; No. 73459-8-
PAUL E. GOLSTEIN; TOM and LaVOE
MULGREW, and their marital
community; SUSAN ROSEN; MARTIN
SILVERMAN; SHARON SILVERMAN; UNPUBLISHED OPINION
and BARRY and ROBIN STUCK, and
their marital community,
Appellants,
v.
ROSENTHAL COLLINS GROUP, LLC,
an Illinois limited liability corporation,
Respondent. FILED: May 31, 2016
Dwyer, J. —This appeal arises from a trial court order granting summary
judgment dismissal of securities and negligence claims brought against
Rosenthal Collins Group, LLC (RCG) for its alleged role in a Ponzi scheme fraud
perpetrated by Enrique Villalba.1 Because RCG was not involved in the sale of
the securities herein at issue and owed no special duty to the investors in
Villalba's scheme, we affirm.
1Relief is also sought from a protective order obtained by RCG prohibiting discovery of
certain information related to the account involved in the fraud. We conclude thatthis order was
proper.
No. 73459-8-1/2
A. Villalba's Ponzi Scheme
This case begins with the collapse of a Ponzi scheme perpetrated by
Villalba, through his company Money Market Alternatives, LLC (MMA), from late
1996 until September 2009.
Villalba held himself out to investors as an "investment manager" who
managed his clients' assets in accordance with their individual investment
objectives and by utilizing his trading strategy, which he referred to as the
"Money Market Plus Method." In reality, Villalba stole the money that he was
supposedly managing. After receiving investors' funds into his bank accounts,
Villalba used the funds to, among other things, pay himself huge management
fees, fund his lavish lifestyle and other business ventures, and make over $3
million in Ponzi-type payments to other investors. Villalba concealed his theft
from his clients with lies and false account statements reflecting steady gains in
their accounts.2 Based upon these fake statements and believing Villalba was
earning impressive returns, investors sent more and more money to Villalba for
him to manage on their behalf.
The 26 victims of the fraud, who include the appellants herein, lost more
than $30 million.
B. Appellants Invest With Villalba
Appellants (the investors) hired Villalba to manage their money and
deposited funds with him at different times between 1996 and 2009.
2There is no dispute that RCG played no role in creating (and had no knowledge of)
these fake account statements.
No. 73459-8-1/3
The investors had different relationships with Villalba and different
understandings of how he would manage their money. Bernard Goldberg, for
example, met Villalba years before Villalba opened an account at RCG.
Goldberg and Villalba formed a general partnership in 1996, through which
Goldberg effectively hired Villalba to manage certain assets in return for a share
of the trading profits. Given his close, longstanding relationship with Villalba,
Goldberg was able to convince many of his friends to hire Villalba as their
investment advisor, including (directly or indirectly) all of the other investors in
this case.
After being introduced to Villalba, the other investors each entered into
Investment Management Agreements (IMA) with Villalba. The IMAs detailed
Villalba's role as "investment manager" of individually managed accounts and
expressly provided the investor with the right to manage his or her own account
and change the investment strategy to conform with his or her investment
objectives. The IMAs also gave each investor the right to choose or change the
brokerage firm handling the investor's individual account.
The IMAs made no mention of RCG3 and, by and large, the investors had
no knowledge of the brokerage firms that Villalba was using. The investors
typically wired money to Villalba by sending money directly to one of his bank
accounts. Villalba then transferred money from MMA's bank accounts to futures
accounts in MMA's name, including one at RCG, to trade futures. None of the
investors sent any money to RCG. Indeed, the investors admitted that they had
3 RCG also had no knowledge of the IMAs.
No. 73459-8-1/4
no interaction whatsoever with RCG, that they never had a written agreement
that mentioned RCG, and that RCG played no role in their decision to invest or in
the sale of securities.
C. Villalba's Futures Trading
In June 1998, 18 months after the first of the investors invested with
Villalba, RCG agreed to open a nondiscretionary commodityfutures trading
account for MMA. RCG is a Futures Commission Merchant (FCM) registered
with the Commodities Futures Trading Commission (CFTC) and the National
Futures Association (NFA) to conduct trading of futures contracts. As a
"nondiscretionary" customer, MMA retained complete control over its futures
account and had full responsibility and liability for all trading decisions.
RCG reviewed an offering circular that Villalba prepared to help him solicit
$100 million from investors for the MMA account.4 According to the investment
plan described in the circular, funds from Villalba's customers would be pooled to
invest in treasury bills or money market funds "within a vehicle similar to a mutual
fund." Villalba would also occasionally5 purchase S&P 500 futures contracts
based on his purported expertise in predicting certain market trends. Those
transactions would supposedly add 2 percent to 5 percent additional value for his
customers. The investment would have "minimal" risk, it asserted, because the
futures transactions would be made with "little or no leverage" and stop orders
would be used to limit losses.
4 None of the investors ever saw, received, or signed any subscription agreement or
offering circular relating to their investment.
5The timing was variously described as "a few days per month," "on average a week per
month," and "approximately [1]0% of the year."
No. 73459-8-1/5
The circular claimed that the fund was not subject to state or federal
regulation. RCG recognized, however, that because it would contain pooled
investments, the fund would constitute a commodity pool.6 That made Villalba,
or his company, a commodity pool operator. Neither were registered as
commodity pool operators as required by the CFTC.
A form was provided to Villalba with the new account documents
identifying two potential exceptions to the registration requirement. RCG's file
shows that Villalba selected an exemption that was only applicable if he neither
received any direct or indirect compensation for managing the anticipated $100
million pool, nor advertised for participants. The circular stated, however, that he
expected to receive management fees from the proceeds and that MMA would
be "offering these securities to the public."
RCG's compliance procedures mandate that a new account should not be
opened if illegal activity is suspected. After RCG's review of the offering circular
and the other information provided by Villalba, it opened the MMA account for
trading.
Villalba never followed his purported investment plan. Instead of keeping
the investors' money in treasury bills with occasional transactions in S&P 500
futures contracts, Villalba traded futures with RCG almost daily. Also, the trades
were highly leveraged and risky. The promised "stop orders" to limit losses were
not used. Single day losses of more than $100,000 were not uncommon and, in
March 2008 alone, the MMA account lost more than $9 million.
6A"commodity pool" or "pool" is "any investment trust, syndicate or similar form of
enterprise operated for the purpose of trading commodity interests." 17 C.F.R. § 4.10(d)(1).
Essentially, it is the futures industry-equivalent ofa mutual fund.
No. 73459-8-1/6
Villalba's scheme began to unravel in 2009, after he suffered significant
trading losses, making it difficult for him to pay investors as they requested their
money back. Villalba closed his RCG account in June 2009. Around that time,
Villalba opened a new futures account at a different firm. In early September
2009, Villalba started ignoring his clients' phone calls and e-mails, arousing their
suspicions. By September 2010, after an investigation by the Securities and
Exchange Commission and the Federal Bureau of Investigation, Villalba pleaded
guilty to felony wire fraud and was ordered to pay over $30 million in restitution
and sentenced to almost nine years in federal prison.
D. The CFTC investigates RCG
Shortly afterVillalba was convicted, the CFTC investigated RCG's role in
Villalba's fraud. In April 2012, RCG entered into a consent order with the CFTC
related to its handling ofthe MMA account. The CFTC found that RCG ignored
many "red flags" appearing in the account records and that it should have acted
in light of "the lack of regard for trading losses, commissions, and fees in the
MMA account." As part of the settlement offer underlying the order, RCG did not
admit or deny these findings.7
7Asthe trial court below recognized, such consentjudgments are not admissible
evidence ofthe allegations stated therein. See In re Platinum and Palladium Commodities
Litigation 828 F. Supp. 2d 588 (S.D.N.Y. 2011) (striking references to a CFTC order from civil
complaint); Carpenters Health &Welfare Fund v. The Coca-Cola Co.. 2008 WL 9358563, *3
(N.D. Ga. Apr. 23, 2008) (a consent judgment "falls squarely into the class of evidence deemed
inadmissible pursuant to Rule 408"). This is so because of the "high public policy value of
encouraging entities ... to settle their disputes with ... governmental agencies," and the "chilling
effect" that "would likely" result from admitting the consent judgment as evidence ofwrongdoing
by private litigants. Coca-Cola. 2008 WL 9358563, at*3; see also In re Blech Sec. Litiq.. 2003
WL 1610775 (S.D.N.Y. Mar. 26, 2003); N.J. Turnpike Auth. v. PPG Indus.. Inc.. 16 F. Supp. 2d
460, 474 (D.N.J. 1998).
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No. 73459-8-1/7
E. Procedural history
The investors filed a motion for summary judgment, seeking a ruling that
their transactions with Villalba were securities under multiple state securities
acts, including the The Securities Act of Washington, chapter 21.20 RCW, and
the Ohio Securities Act, chapter 1707 Ohio Rev. Code Ann. The trial court
granted that motion, except as to the investments made by Goldberg.8
RCG filed two summary judgment motions. The first sought a ruling that
claims for some transactions were barred under the Ohio and California statutes
of repose. The investors conceded the claims under California's securities act,
but contested the applicability of the Ohio provision. That motion was not
decided because the trial court granted RCG's second motion for summary
judgment in an order that: (1) ruled that the investors could bring claims under
the Ohio securities act, (2) dismissed the investors' securities claims, holding that
RCG could not be secondarily liable for Villalba's violations of the securities acts,
and (3) dismissed the investors' claims for negligent supervision of the account
and violation of the Washington Consumer Protection Act. The trial court did not
rule on RCG's claim that the state securities acts were preempted by the
Commodities Exchange Act.
Prior to the filing of the summary judgment motions, RCG moved the trial
court for a protective order from the investors' discovery inquiries concerning
RCG's suspicious activity monitoring and investigation practices, particularly
regarding the MMA account, under the federal Bank Secrecy Act (BSA), 31
8 The court ruled that his investments were not securities.
No. 73459-8-1/8
U.S.C. § 5318(g). The court entered that order on March 9, 2015. The investors
then moved the court to modify the protective order. On April 23, 2015, the trial
court modified the protective order to exclude from its scope any information that
was already publicly available or in the investors' possession. The investors also
appeal from that modified order.
II
The investors contend that the trial court erred by granting summary
judgment dismissal of their state securities claims. This is so, they assert,
because RCG is secondarily liable to the investors under the Washington
securities act for its role in Villalba's fraud. We disagree.
Our review is de novo. Lokan &Assocs.. Inc. v. Am. Beef Processing,
LLC, 177 Wash. App. 490, 495, 311 P.3d 1285 (2013). When reviewing an order
granting summary judgment, we engage in the same inquiry as the trial court,
viewing the facts and all reasonable inferences therefrom in the light most
favorable to the nonmoving party. Brown v. Brown, 157 Wash. App. 803, 812, 239
P.3d 602 (2010). "Summary judgment is appropriate if the pleadings, affidavits,
depositions, answers to interrogatories, and admissions on file show that there is
no genuine issue of material fact and that the moving party is entitled to judgment
as a matter of law." Keithlv v. Sanders, 170 Wash. App. 683, 686, 285 P.3d 225
(2012) (citing CR 56(c)).
The investors claim that RCG is liable under RCW 21.20.430, subsections
(1)and(3).
No. 73459-8-1/9
RCW 21.20.430(1), which pertains to seller liability, provides, in pertinent
part:
Any person, who offers or sells a security in violation of any
provisions of RCW 21.20.010, 21.20.140(1) or (2), or 21.20.180
through 21.20.230,[9] is liable to the person buying the security from
him or her.
"'[Liability may be imposed [under this provision] on a person in addition
to the immediate seller if the person's participation was a substantial contributive
factor in the violation.'" Haberman v. Wash. Pub. Power Supply Svs., 109 Wash. 2d
107, 130, 744 P.2d 1032, 750 P.2d 254 (1987) (emphasis added) (quoting
Uniform Securities Act, § 605 cmt., 7B U.L.A. 81 (Supp. 1987)).
RCW 21.20.430(3), which pertains to participant liability, provides, in
pertinent part:
[Ejvery broker-dealer. . . who materially aids in the transaction is
also liable jointly and severally with and to the same extent as the
seller or buyer, unless such person sustains the burden of proof
that he or she did not know, and in the exercise of reasonable care
could not have known, of the existence of the facts by reason of
which the liability is alleged to exisU101
(Emphasis added.)
Thus, to establish their claims under this provision, the investors were
required to show (1) that they purchased "securities," (2) that Villalba violated the
securities laws when he sold those securities to the investors, and (3) that RCG's
9Application ofthis subsection is triggered by Villalba's violation ofRCW 21.20.010
(securities sales involving fraud or deceit) and RCW 21.20.140 (sales of unregistered securities).
10 Liability under subsection (1) generally stems from being a seller/buyer, whereas
liability under subsection (3) generally stems from a party's formal relationship to a seller/buyer.
However, as our Supreme Court recognized in Haberman, 109 Wash. 2d at 133, by expanding seller
liability to cover parties who were not actually sellers/buyers, but who substantially contributed to
the sales transaction, it created significant overlap between the parties liable under each ofthe
subsections.
No. 73459-8-1/10
involvement with the scheme was sufficient for secondary liability under either
the "substantia^] contribution]" standard or the "material[] aid" standard.
Although the parties focus on the third component of the investors' claims,
we begin by briefly addressing the first two components, which help identify the
securities transaction to which RCG must have substantially contributed or given
material aid. As to the first component, "a security [is defined] as (1) an
investment of money (2) in a common enterprise and (3) the efforts of the
promoter or a third party must have been fundamentally significant ones that
affected the investment's success or failure." Ito v. Int'l Corp. v. Prescott, Inc., 83
Wash. App. 282, 291, 921 P.2d 566 (1996) (citing Cellular Enq'a Ltd. v. O'Neill, 118
Wash. 2d 16, 26-31, 820 P.2d 941 (1991)). The trial court granted the investors'
motion for summary judgment, ruling that the investors (except Goldberg)
purchased securities when they provided money to Villalba's MMA program. No
appeal was taken from that decision. Regarding the violation question, it is
uncontested that Villalba violated the Washington securities act by selling
unregistered securities and defrauding the investors.
As to the contribution standard, in Hines v. Data Line Systems, Inc., 114
Wash. 2d 127, 149, 787 P.2d 8 (1990), the controlling case on this subject, our
Supreme Court held that service providers, such as RCG, are not a "substantial
contributive factor" in a securities offering (i.e., not a "seller"), absent some level
of "active participation" in the sales transaction itself. Thus, even though the law
firm in Hines had advised the issuer of the security, the court held that itwas not
10
No. 73459-8-1/11
a "seller" because it had no "personal contact with any of the investors [and was
not] in any way involved in the solicitation process." Hines, 114 Wash. 2d at 149.
We have consistently interpreted Hines to mean that a service provider is
not a "seller" under the law unless it "take[s].. . part in the actual sales process
by acting as the 'catalyst' between the [seller] and the [purchaser]." Brin v.
Stuzman, 89 Wash. App. 809, 830, 951 P.2d 291 (1998). Indeed, '"but for'
causation alone does not satisfy proximate causation" of the securities sales
transaction. Brin, 89 Wash. App. at 830 (citing Haberman, 109 Wash. 2d at 131);
accord Viewpoint-North Stafford LLC v. CB Richard Ellis, Inc., 175 Wash. App. 189,
197, 303 P.3d 1096 (2013) (referring purchasers to an investment company was
not a "substantial contributive factor" in the sale); Shinn v. Thrust IV, Inc., 56 Wn.
App. 827, 851, 786 P.2d 285 (1990) (same).
No Washington appellate court has opined in any significant way on the
"materially aids" standard. However, othercourts interpreting identical provisions
have required the material aid to be given in the course of the sales transaction.11
See, e.g., Benton v. Merrill Lvnch & Co., 524 F.3d 866, 871 (8th Cir. 2008) ("It is
not enough for the investors to allege [financial institution] was [investment
manager's broker-dealer; they must also allege [financial institution] materially
aided in the sale of the promissory notes." (emphasis added)); Katz v. Sunset
11 There does not appear to be similar consistency with regard to the quality of actions
that might constitute "material[] aid[]." Compare In re Nat'l Century Fin. Enters., Inc., 846 F.
Supp. 2d 828, 890 (S.D. Ohio 2012) ("Establishing that the actof assistance was material can be
satisfied by showing, among other things, the act influenced or induced the decision to purchase."
(citing analogous statutes in several states)) with Nicholas v. Saul Stone &Co. LLC, 1998 WL
34111036, *19 (D.N.J. June 30, 1998), affd, 224 F.3d 179 (3d Cir. 2000) ("To establish liability on
the part of a broker-dealer for 'materially aid[ing]' in the sale ofa security, the plaintiff must
demonstrate that the broker-dealer's involvement in the sale is 'considerable, significant or
substantial."' (alteration in original) (quoting Schor v. Hope. 1992 WL 22189, at *6 (E.D. Pa. Feb.
4, 1992))).
-11 -
No. 73459-8-1/12
Fin. Servs., Inc., 650 F. Supp. 2d 962, 969 (D. Neb. 2009) ("The . . . [c]omplaint
is devoid of allegations that [broker-dealer] took any action that could be
construed as aiding [investment manager's sale of promissory notes to
Plaintiffs." (emphasis added)); Nicholas v. Saul Stone & Co. LLC, 1998 WL
34111036, *19 (D.N.J. June 30, 1998), affd, 224 F.3d 179 (3d Cir. 2000)
(analogous provision "requires that the offender must. .. 'materially aid' in the
sale of th[e] securities" (emphasis added)).
Thus, under either subsection, the substantial contribution must be made,
or the material aid given, in the course of the sales transaction. This insight
forecloses both of the investors' claims. RCG did not participate at all in
Villalba's sale of interest in MMA to the investors. The investors admit that RCG
did not factor into their decision to invest with Villalba. RCG did not issue,
promote, or solicit the sale of alleged securities and, in fact, had absolutely no
contact whatsoever with the investors. The securities sales were completed well
before Villalba would send any money to an account at RCG to trade futures.
Thus, RCG's role in the sale of the relevant securities was insufficient as a matter
of law.
Because RCG had no involvement whatsoever with Villalba's sale of
securities, the trial court's order granting summary judgment dismissal of the
investors' Washington securities act claims was proper.
Ill
The investors also brought claims pursuant to the Ohio securities act.
RCG contends that these duplicative claims are barred by Washington's well-
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No. 73459-8-1/13
established conflict of laws principles. This is so, it asserts, because claims may
be brought pursuant to only one state's laws and, in this case, Washington law
applies.
In general,
[w]hen parties dispute choice of law, there must be an actual
conflict between the laws or interests of Washington and the laws
or interests of another state before Washington courts will engage
in a conflict of laws analysis. Bumside v. Simpson Paper Co., 123
Wash. 2d 93, 100-01, 864 P.2d 937 (1994). When the result of the
issues is different under the law of the two states, there is a "real"
conflict. Pacific Gamble Robinson Co. v. Lapp, 95 Wash. 2d 341, 344-
45, 622 P.2d 850 (1980). The situation where laws or interests of
concerned states do not conflict is known as a "false" conflict.
Burnside, 123 Wash. 2d at 101. If a false conflict exists, the
presumptive local law is applied. Rice v. Dow Chem. Co., 124
Wash. 2d 205, 210, 875 P.2d 1213 (1994).
Seizer v. Sessions, 132 Wash. 2d 642, 648-49, 940 P.2d 261 (1997) (emphasis
added); accord Woodward v. Taylor, 184 Wash. 2d 911, 918, 366 P.3d 432 (2016)
("If there is no actual conflict, the local law ofthe forum applies and the court
does not reach the most significant relationship test."); Rice, 124 Wash. 2d at 210
("To engage in a choice of law determination, there must first be an actual
conflict between the laws or interests of Washington and the laws or interests of
another state. Burnsidef, 123 Wash. 2d at 100-01]. Where there is no conflict
between the laws or interests of two states, the presumptive local law is applied.
Burnside, at 101.").
The investors acknowledge that there is no actual conflict between the
Washington and Ohio securities laws.12 Yet, they assert that the result of the
12 Indeed, the statutes share the same interest of protecting investors.
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No. 73459-8-1/14
lack of conflict is that both laws apply. This, however, is not an option in the
standard framework.13
In effect, the investors are arguing for the adoption of the so-called "Blue
Sky exception." See Danielle Beth Rosenthal, Navigating the Stormy Skies: Blue
Sky Statutes & Conflict of Laws, 2:1 Stan. J. Complex Lit. 96 (2014). Under the
Blue Sky exception, state securities laws, also known as Blue Sky laws, are
treated as "additive rather than exclusive." Mass. Mut. Life Ins. Co. v.
Countrywide Fin. Corp., 2012 WL 1322884, *2 (CD. Cal. April 16, 2012). In
other words, just as a litigant can bring claims under both state law and federal
law, under the Blue Sky exception, so can a litigant can bring claims under
multiple state's securities laws. Simms Inv. Co. v. E.F. Hutton &Co., 699 F.
Supp. 543, 545 (M.D.N.C. 1988) ("[T]he securities laws oftwo or more states
may be applicable to a single transaction without presenting a conflict of laws
question."); Lintz v. Carey Manor Ltd., 613 F. Supp. 543, 551 (W.D. Va. 1985)
("Just as the same act can violate both federal and state law simultaneously, or a
state statute as well as state common law, so too can it violate several Blue Sky
laws simultaneously."). The Blue Sky exception appears to be the strong
majority rule. See Countrywide, 2012 WL 1322884, at *2 (referring to the
"growing weight of authority" applying the exception). However, no Washington
appellate court has directly addressed whether claims may be brought under
multiple states' securities laws.
13 RCG's contentions are similarly muddled. It asserts both that there is an actual conflict
between the securities law ofWashington and Ohio and that the outcome is the same under both
statutes (namely, that RCG is not secondarily liable for Villalba's fraud). Because an actual
conflict oflaws requires that "the result ofan issue is different under the laws of the interested
states," Woodward, 184 Wash. 2d at 918, these positions are internally inconsistent.
14
No. 73459-8-1/15
The Washington case closest to the point is FutureSelect Portfolio Mgmt,
Inc. v. Tremont Grp. Holdings, Inc., 180 Wash. 2d 954, 331 P.3d 29 (2014). In that
case, a Washington purchaser asserted claims under the Washington securities
act against a New York seller. FutureSelect, 180 Wash. 2d at 959. The New York
seller moved to dismiss, arguing that New York securities laws, which do not
recognize a private cause of action, controlled the plaintiff's claim. FutureSelect,
180 Wash. 2d at 959. Given the actual conflict, the court engaged in a full-scale
conflict of law analysis, weighing the contacts with each state and each state's
interest in the dispute. FutureSelect, 180 Wash. 2d at 967. The court ultimately
concluded that "Washington has a more compelling interest in protecting its
investors from fraud and misrepresentation than [the seller's state] does in
regulating sellers of securities that may have perpetrated [a] fraud or
misrepresentation in another state." FutureSelect, 180 Wash. 2d at 970.
RCG contends that, by engaging in a full conflict of law analysis, the
FutureSelect court implicitly rejected the Blue Sky exception. Adopting the
investors' position, it asserts, would render unnecessary the conflict analysis
engaged in by the FutureSelect court. The investors contend, by contrast, that
FutureSelect is inapposite. A conflict analysis was required therein, they assert,
only because the New York securities law was offered to defeat the Washington
law claim, rather than to supplement it.
In truth, the FutureSelect opinion permits of both parties' readings. Thus,
there is no determinative Washington law on this issue.
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No. 73459-8-1/16
As we demonstrate below, the result in this case would be the same
regardless of whether we decide this issue. Because it is unnecessary to the
case's resolution, our pronouncement—were we to make one—would be mere
dicta. For this reason, we decline to further address the question of the
applicability of the Blue Sky exception in Washington.
IV
The investors further contend that RCG is also liable under the Ohio
securities act. This is so, they assert, because it "participated or aided" Villalba
in making the sale. We disagree.
The Ohio securities act extends secondary liability for securities violations
to those who "participated in" the illegal sale or "aided the seller in any way."
[E]very sale or contract for sale made in violation of [the securities
law] is voidable at the election of the purchaser. The person making
such sale or contract for sale, and every person [who] has
participated in oraided the sellerin any way in making such sale or
contract for sale, arejointly and severallyliable to the purchaser, . .
. unless the court determines that the violation did not materially
affect the protection contemplated by the violated provision.
Ohio Rev. Code Ann. § 1707.43(A) (emphasis added).
The crux of secondary liability under section 1707.43 of the Ohio
securities act is participation or aid by the defendant in "making [the] sale." Ohio
Rev. Code Ann. § 1707.43(A). Although section 1707.43 extends liability to non-
sellers, the act "do[es] not impose liability on anyone who aided the seller 'in any
way.' Rather, [it] impose[s] liability on anyone who aided the seller in any way in
making an unlawful sale orcontract for sale." In re Nat'l Century Fin. Enters.,
Inc. Inv. Litig., 2006 WL 2849784, *10 (S.D. Ohio Oct. 3, 2006).
16
No. 73459-8-1/17
The recent Ohio appellate court decision in Wells Fargo v. Smith, 2013
WL 938069 (Ohio Ct. App. Mar. 11, 2013), makes clear the importance of the
sales transaction. Therein, the court analyzed and synthesized all of the Ohio
cases applying Section 1707.43(A). Wells Fargo, 2013 WL 938069, at *5-6. The
court found that Ohio courts consider "several factors in deciding whether a
person or entity shall be responsible for the sale of illegal securities under [Ohio
Rev. Code Ann.] 1707.43(A)," all of which are directly connected to "making such
sale", including: (i) "relaying information, such as the proposed terms of the sale,
from the sellers to the investors," (ii) "arranging or attending meetings between
the investors and the sellers," (iii) "collecting money for investments," (iv)
"distributing promissory notes and other documents to the investors from the
sellers," (v) "distributing . . . payments to the investors," and (vi) "actively
marketing the security or preparing documents to attract investors." Wells Fargo,
2013 WL 938069, at *5.
As was explained above, in the context of the discussion of liability under
the Washington securities act, the investors did not proffer any evidence that
RCG "participated or aided" Villalba in "making [the] sale" of securities to them.
Thus, even if the Ohio securities act were applicable to this case, summary
judgment dismissal was properly granted on the investors' section 1707.43(A)
claims.
Because each of the investors' securities claims fails, as explained above,
determination of the conflict of law issue is unnecessary to the resolution of this
17
No. 73459-8-1/18
case and any explanation offered in response to that issue would constitute only
dicta.
V
The investors also contend that RCG is liable to them in tort for its role in
Villalba's fraud. This is so, they assert, because RCG's negligent supervision of
the MMA account facilitated Villalba's fraud. We disagree.
A negligence action may proceed only ifthe plaintiffs can establish that (1)
a duty of care was owed to them by the defendant; (2) there was a breach of that
duty; (3) that breach was the cause of their harm; and (4) they suffered injury as
a result. Keller v. City of Spokane. 146 Wash. 2d 237, 242, 44 P.3d 845 (2002).
The only element at issue herein is the existence of a duty of care.
Our Supreme Court has repeatedly made clear that "there is no duty to
prevent a third party from intentionally harming another unless a 'special
relationship exists between the defendant and either the third party or the
foreseeable victim.'" Niece v. Elmview Grp. Home, 131 Wash. 2d 39, 43, 929 P.2d
420 (1997) (internal quotation marks omitted) (quoting Hutchins v. 1001 Fourth
Ave. Assocs., 116 Wash. 2d 217, 227, 802 P.2d 1360 (1991)): accord Folsom v.
Burger King, 135 Wash. 2d 658, 674-75, 958 P.2d 301 (1998) (absent a special
relationship "no legal duty to come to the aid of a stranger exists"); Restatement
(Second) Torts § 315.
Consistent with this principle, Washington follows the rule that financial
institutions do not owe a duty of care to protect non-customers from fraud. See,
e.g., Zabkav. Bankof Am. Corp., 131 Wash. App. 167, 173, 127 P.3d 722 (2005)
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No. 73459-8-1/19
(bank owed no duty to defrauded investors absent a direct relationship). Zabka
illustrates the strength of this rule. Therein, investors sued Bank of America (BA)
in tort for its alleged role in a fraud perpetrated by one of the bank's customers
using an account at the bank. We held that the investors' negligence claims
were properly dismissed for failure to state a claim because the bank owed no
duty to the investors, with whom it had no relationship. This was our holding
despite evidence to support a finding that the bank had failed to meet certain
procedural and monitoring requirements with respect to the account. As we
stated:
There is evidence that BA failed to follow standard
procedures and monitor transactions according to its own internal
standards. BA's failures may have facilitated the theft of the
Zabkas' money, but BA did not have a duty to prevent their loss.
The trial court correctly dismissed the negligence claims on a CR
12(b)(6) motion.
Zabka, 131 Wash. App. at 173.
Our approach is in accordance with that taken across the country. Indeed,
every court to address the precise issue presented herein has held that FCMs
owe no duty to protect non-customers from a customer's fraud. See, e.g.,
Soitzer Mgmt., Inc. v. Interactive Brokers, LLC, 2013 WL 6827945, *4 (N.D. Ohio
Dec. 20, 2013) (FCM did not owe any duty of care to non-customer plaintiffs who
lost money in a Ponzi scheme); In re Agape Litig., 681 F. Supp. 2d 352, 357-58,
360 (E.D.N.Y. 2010) (same); Nicholas, 1998 WL 34111036, at *22 (same);
Kolbeckv. LIT Am., Inc., 923 F. Supp. 557, 571-72 (S.D.N.Y. 1996), affd 152
F.3d 918 (2d Cir. 1998) (samp); see also Frederick v. Smith, 7 A.3d 780, 783-84
(N.J. Super. 2010) ("[A] brokerage firm is under no obligation to be a fraud
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No. 73459-8-1/20
watchdog for non-customers."); Bottom v. Bailey, 767 S.E.2d 883, 896-87 (N.C.
App. 2014) (a broker has no legal duty to "supervise" or "monitor" the
investments of its customers to protects is customer's clients from fraud); accord
Unity House, Inc. v. N. Pac. Inv., Inc., 918 F. Supp. 1384, 1392-93 (D. Haw.
1996) (treating as well-established under Washington law that a brokerage firm
has no duty to its own customers—much less non-customers—to prevent
unsuitable trading in a nondiscretionary account).
Herein, the evidence established that the investors were not customers of
RCG and never did business with RCG. The investors admitted that they had no
contact with anyone at RCG before the scheme collapsed and never sent any
money or documentation to RCG. In short, the investors had no relationship with
RCG, let alone a "special relationship" pursuant to which RCG might have owed
them a duty.
Despite their lack of direct connection to RCG, the investors contend that
RCG owed a duty—to them—to police the activity and trading in the MMA
account. The investors' argument in this regard relies on Garrison v. Sagepoint
Fin.. Inc., 185 Wash. App. 461, 345 P.3d 792, review denied, 183Wn.2d 1009
(2015). Therein, we held that AIG Financial Advisors Inc., a securities broker-
dealer, could be responsible for negligently supervising the transactions of an
employee who was also acting as an independent investment advisor. Garrison,
185 Wash. App. at 484-85; accord McGrawv. Wachovia Sec, LLC, 756 F. Supp.
2d 1053, 1075 (N.D. Iowa 2010) (case upon which Garrison significantly relied).
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No. 73459-8-1/21
This case does not involve the particular factual scenario addressed in
Garrison. The investors were Villalba's customers, for sure, but Villalba was not
RCG's employee and registered agent. Rather, Villalba was RCG's customer or,
more precisely, he was the manager of RCG's customer. Thus, the investors'
reliance on Garrison is misplaced.
Because RCG owed the investors no special duty to supervise Villalba,
the trial court's order granting summary judgment dismissal of the investors'
negligence claim was proper.
VI
The investors also challenge the trial court's protective order, asserting
that it improperly prevented them from obtaining relevant information from RCG
in the discovery process. Because the information was privileged pursuant to the
BSA, we disagree.
The investors served RCG discovery requests for information regarding
the opening of the MMA account, what RCG did to monitor the account, and any
actions it took with respect to the account. While these requests were pending,
RCG filed a motion seeking a protective order prohibiting the investors from
"conducting discovery relating to RCG's internal investigations and monitoring of
suspicious activity," including: (1) RCG's inquiries and monitoring of Villalba and
the MMA account specifically; (2) RCG's practices and methods of investigation
and monitoring generally; or (3) The identities of RCG employees charged with
suspicious activity monitoring and investigations.
The motion contended that this discovery was prohibited under the BSA.
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No. 73459-8-1/22
The BSA requires that banks and other financial institutions report certain types
of suspicious activity to the federal government in a suspicious activity report
(SAR). 31 U.S.C. § 5318(g)(1). The act affords a privilege to the federal
government, allowing it to keep these reports confidential, and prohibits
disclosure by others of the actual SARs, or other information indicating that an
SAR was filed.
The requested order was granted but, pursuant to the investors' motion for
reconsideration, the trial court modified the order so that it would not apply to
"materials which are already publically available from prior litigation on the MMA
account against RCG." The investors contend that the modified order was also
erroneous.
We review de novo issues interpreting the privilege provided by the BSA.
Norton v. U.S. Bank, 179 Wash. App. 450, 324 P.3d 693, review denied, 180
Wash. 2d 1023 (2014).
The trial court's protective order mirrored the order that we affirmed in
Norton, a case substantially similar to this one, except that it involved a bank,
rather than an FCM.14 Therein, this court held that a financial institution "may not
be ordered to describe or disclose its internal investigations, either generally or
those specifically related" to a Ponzi scheme. Norton, 179 Wash. App. at 461-62.
As FCMs are expressly included in the BSA's definition of covered "financial
institutions," 31 U.S.C. §§ 5312(c)(1)(A), 5318(g), the BSA's protections apply
14 The protective order affirmed in Norton applied to information related to the bank's
monitoring practices and internal investigations "generally or those specifically related" to the
activity in question. 179 Wash. App. at 462. By comparison, the order at issue herein protected _
information related to RCG's "practices and methods of investigation and monitoring generally"
and "inquiries and monitoring of Villalba and the MMA account specifically."
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No. 73459-8-1/23
equally to RCG as to the bank in Norton.15
The trial court's order, which was compelled by our decision in Norton,
was proper.
Affirmed.
We concur:
15 We are unmoved by the investors' contention that the outcome should be different in
this case than in Norton based on differences in the regulations applicable to FCMs versus
banks. Even were we to accept the investors' assertion that FCMs in general are exempted by
regulation from some SAR reporting requirements as a member of the NFA, RCG was
nevertheless required to make these reports. See NFA Interpretive Notice 9045, "NFA
Compliance Rule 2-9; FCM and IB Anti-Money Laundering Program."
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