Barry Belmont v. MB Investment Partners, Inc.
2013 U.S. App. LEXIS 3732
| 3rd Cir. | 2013Background
- MB Investment Partners, Inc. (“MB”) operated as a registered investment adviser; Mark Bloom ran a North Hills hedge fund fraud while MB employee/officer
- North Hills raised about $30 million from 40–50 investors; Bloom diverted at least $20 million for personal use
- MB officers/directors were aware Bloom controlled North Hills; MB was ultimately unable to prevent the fraud and ceased operations in June 2009
- Investors Belmont, Philadelphia Financial Services (PFS), Thomas and Frances Kelly, and Perez invested in North Hills; Belmont and Kellys were MB advisory clients; Altman was MB’s portfolio manager involved with Belmont
- District Court dismissed most claims (including Altman) and entered a default against Bloom; Investors appeal seeking liability for MB and others on multiple theories (Rule 10b-5, UTPCPL, Section 20(a), negligent supervision, fiduciary duty)
- This appeal culminates in a remand for trial on remaining Rule 10b-5 and UTPCPL claims against MB; other claims are affirmed or vacated as explained in the opinion
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Section 20(a) controlling person liability against MB Directors and Centre Defendants | Investors contend directors were culpable due to reckless inaction | MB Directors/Centre Defendants argue inaction cannot satisfy culpable participation without knowledge | Summary judgment on §20(a) is affirmed due to lack of culpable participation |
| Negligent supervision by MB Directors | Directors failed to monitor Bloom and foresee the North Hills fraud | Directors not MB’s employees; foreseeability insufficient to impose duty | District Court correctly granted summary judgment; no viable negligent supervision claim |
| Rule 10b-5 liability and imputation to MB | Bloom’s misrepresentations can be imputed to MB; MB benefited from North Hills | Imputation requires agency within scope and appropriate benefit; adverse interest exception applies | Imputation question creates genuine fact issues; reversed for 10b-5 to MB and remand for trial |
| UTPCPL claims and imputation to MB | Bloom’s UTPCPL violations were imputable to MB; MB benefited from North Hills | Adverse interest/benefit analysis precludes imputation as a matter of law | Genuine issue of material fact on imputation; remand for UTPCPL consideration |
| Breach of fiduciary duty by Altman/MB | Altman/MB owed fiduciary duties to Belmont, Kellys; MB to Belmont/ Kellys; alleged failure to uncover fraud | No fiduciary relationship with Perez/PFS; Capital Gains/Advisers Act standards apply; no undisclosed conflict shown against Belmont/Ke llys | Fiduciary claims against Altman/MB resolved with mixed results; Belmont/Ke llys claims not proven; remand on 10b-5/UTPCPL |
Key Cases Cited
- In re Merck & Co., Inc. Sec. Litig., 432 F.3d 262 (3d Cir. 2005) (standard for controlling persons and culpable participation)
- In re Alpharma Sec. Litig., 372 F.3d 137 (3d Cir. 2004) (culpable participation; §20(a) scope)
- SEC v. J.W. Barclay & Co., 442 F.3d 834 (3d Cir. 2006) (culpable participation/knowingly aiding the fraud)
- Rochez Bros., Inc. v. Rhoades, 527 F.2d 880 (3d Cir. 1975) (necessity of knowledge for inaction-based §20(a) liability)
- Dempsey v. Walso Bureau, Inc., 246 A.2d 418 (Pa. 1968) (negligent supervision—foreseeability and control by employer)
- Heller v. Patwil Homes, Inc., 713 A.2d 105 (Pa. Super. Ct. 1998) (negligent supervision principles under Pennsylvania law)
- Capital Gains Research Bureau, Inc., 375 U.S. 180 (1963) (fiduciary duties of investment advisers; best interests/fair disclosure)
- Transamerica Morg. Advisors v. Lewis, 444 U.S. 11 (1979) (federal fiduciary duties of investment advisers; private right of action limits)
- Aiello v. Ed Saxe Real Estate, Inc., 499 A.2d 282 (Pa. 1985) (imputation/public policy in agency)
- Basle v. H&R Block, Inc., 761 A.2d 1115 (Pa. 2000) (fiduciary/confidential relationship required)