756 F. Supp. 2d 1053
N.D. Iowa2010Background
- Plaintiffs McGraws, Pestka, and Montross invested through broker Lovegren, allegedly in fictitious 'special' investments; ownership of funds was routed through SCI/Wells Fargo or A.G. Edwards/Wachovia accounts.
- Lovegren disappeared in 2006; Bond Management and the currency investment were fictitious; FBI involvement followed and Lovegren's body was found in 2007.
- Defendants SCI/Wells Fargo and A.G. Edwards/Wachovia are alleged to have negligently supervised Lovegren or otherwise breached fiduciary duties by failing to monitor outside activities and private securities transactions.
- Plaintiffs allege documents and communications originated from defendants’ offices; defendants argue there is no evidence of notice or authority to Lovegren for these investments.
- The court held that discovery-rule principles apply to Iowa five-year limitations, findings on accrual depend on knowledge of claim, and genuine issues exist about when plaintiffs knew or should have known to sue.
- Procedural posture: remaining claims include negligent supervision (Count IV), negligent misrepresentation (Count V, vicarious liability), negligence as to suitability of investments (Count VI, vicarious liability), and breach of fiduciary duty (Count VII, direct and/or vicarious).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Timeliness of claims | McGraws timely under discovery rule; claims accrue when they know facts and cause. | Claims accrued by 1999; five-year limit bars suit filed in 2008. | Timeliness denied; genuine issues exist regarding accrual and discovery. |
| Direct vs. vicarious liability framework | Claims may be direct (defendants' own duty) or vicarious (Lovegren's conduct within apparent authority). | Theories are either intertwined or limited by authority; focus on which claims fit which theory. | Court separates direct and vicarious analyses; some claims remain viable under either theory depending on duty and authority found. |
| Necessity of expert testimony on duty and breach | Expert testimony (Lyle) establishes industry-standard duties and breaches; FINRA standards support duty to supervise. | Plaintiffs failed to offer timely, adequate expert opinions on duty and breach. | Expert testimony required but not fatal to all claims; genuine issues preclude summary judgment on duty/breach for negligent supervision. |
| Duty to non-customers | Brokerage firms owe duties to non-customers when red flags appear; monitoring outside activities can reach non-customers. | Generally no duty to non-customers absent explicit authority or notice; Riniker distinguishable. | No absolute rule; red flags and circumstances may create a duty to non-customers; issues of fact remain. |
| Apparent authority and Lovegren’s conduct | Lovegren acted with apparent authority; plaintiffs reasonably believed investments were through defendants. | Lovegren acted outside authority; funds and documents show personal dealings with Lovegren, not the firms. | Genuine issues about Lovegren’s apparent authority preclude summary judgment on vicarious liability. |
Key Cases Cited
- Hartnagel v. Norman, 953 F.2d 395 (8th Cir. 1992) (summary judgment when no material facts; standard for burden on moving party)
- Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (Supreme Court 1986) (genuine dispute requires evidence; material facts must be in issue)
- Kiesau v. Bantz, 686 N.W.2d 164 (Iowa 2004) (distinguishes direct liability from vicarious liability; negligent supervision is direct liability)
- Bear Stearns and Co. v. Buehler, 23 F.App’x 773 (9th Cir. 2001) (non-customer duty; red flags may create duty to monitor)
- Bates v. Shearson Lehman Bros., Inc., 42 F.3d 79 (1st Cir. 1994) (apparent authority and reasonable belief; context in vicarious liability)