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Daily Court Reporter - News Ponzi scheme victims cannot sue brokers who sent funds to perpetrator

 

Ponzi scheme victims cannot sue brokers who sent funds to perpetrator

Dan Trevas, Supreme Court of Ohio

Ohio law does not allow victims of an alleged Dayton Ponzi scheme to seek financial recovery from brokers that unknowingly purchased fraudulent investments from the scam perpetrator at the direction of the victims, the Ohio Supreme Court ruled recently.

Ohio residents Cynthia Boyd and Thomas Flanders filed a federal lawsuit to hold two-out-of-state investment firms jointly and severally liable for their financial losses in a Ponzi scheme that sent Dayton area investor William Apostelos to prison. As part of their federal lawsuit, the Sixth Circuit U.S. Court of Appeals asked the Ohio Supreme Court to clarify whether the Ohio Securities Act allows certain security owners to sue their brokers for purchasing illegal securities even if the firms were unaware of the Ponzi scheme and were not participants in it.

Writing for the unanimous Supreme Court, Justice Judith L. French wrote that Ohio law imposes liability on people and businesses that have played a role selling illegal securities. Whether Kingdom Trust Company or PENSCO Trust Company colluded with Apostelos or his companies in the sale of illegal securities is something the victims would have to prove in federal court for their case to move forward, the justices concluded.

Investors Seek Fleeced Funds

Boyd and Flanders are part of a class-action lawsuit seeking repayment of the investment funds lost to Apostelos and his companies — Midwest Green Resources and WMA Enterprises. Apostelos allegedly urged the investors to open self-directed individual retirement accounts (IRAs) to invest in securities offered by Midwest Green and WMA. Boyd opened an account with Kingdom Trust and Flanders with PENSCO.

Once the IRA accounts were opened, Apostelos asked the investors to ask the trust companies to invest in Apostelos-directed securities or give him the ability to invest the money in their IRA trusts for them.

When the Ponzi scheme unraveled, Boyd and Flanders sought to hold the trust companies liable under the Ohio Securities Act. Their complaint does not allege that Kingdom Trust or PENSCO had any role in the scheme aside from purchasing the unlawful securities at their direction, nor do they allege the companies knew Apostelos was perpetrating a fraud.

Federal Court Raises Questions

The companies asked the federal district court to dismiss the cases against them, which the court agreed to do. The district court found, absent any claim that the trust companies were providing anything but routine banking activities, they can’t be held liable for the transactions.

The victims appealed the decision to the U.S. Sixth Circuit, which noted that the Ohio Supreme Court has never addressed the issue and certified to the Supreme Court the question whether the law applies to the custodian of a self-directed IRA. Self-directed IRAs are less costly and more risky to investors because the trust companies do not independently evaluate the securities their customers ask them to purchase.

R.C. 1707.43 states that “[t]he person making such sale or contract for sale, and every person that has participated in or aided the seller in any way in making such sale or contract for sale, are jointly and severally liable to the purchaser ... for the full amount paid by the purchaser and for all taxable court costs.”

The opinion stated that liability is imposed on three types of participants: the person making the sale; everyone who participated in the sale; and everyone who has “aided the seller in any way in making such sale or contract for sale.” The law does not apply to those whose only involvement is purchasing the illegal securities.

‘Purchase,’ ‘Sale’ Differ in Ohio Law

The Court explained the legislature treats “purchase” and “sale” as two separate actions under the securities act. The companies argued their only role was to purchase investments. Boyd and Flanders argued the law broadly covers those who aided “the seller in any way,” which includes the purchases by the trust companies even if they were not involved in the sale or did not induce the sale.

The opinion stated that in other court cases, investing companies have been held liable for being actively involved in the sale by setting up investor meetings or acting as the financial adviser for the investment. But in cases where the financial institution did not aid or participate in the sale, the courts ruled the companies complied with the securities act.

The Court concluded that the law on its face does not allow lawsuits against the companies without alleging they worked in concert with the perpetrator. However, the Court did not rule on whether these or other IRA custodians could be held liable for their actions.

“Nothing in our holding today would insulate from liability a self-directed IRA custodian who colludes with the seller in an unlawful sale of securities or actively participates or aids in the sale of illegal securities,” Justice French wrote.

She noted the Court will leave it to the Sixth Circuit to decide whether there are reasons why the federal court ought to let the case go further against the trust companies.

2017-1336. Boyd v. Kingdom Trust Co., Slip Opinion No. 2018-Ohio-3156.

The opinion can be found online at: http://www.courtnewsohio.gov/cases/2018/SCO/0809/171336.asp#.W2xUmrgnaUk

Please note: Opinion summaries are prepared by the Office of Public Information for the general public and news media. Opinion summaries are not prepared for every opinion, but only for noteworthy cases. Opinion summaries are not to be considered as official headnotes or syllabi of court opinions. The full text of this and other court opinions are available online.

Date Published: August 24, 2018

 

Supreme Court of Ohio

 

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