Mark Bloom, an employee and officer of MB, operated a Ponzischeme through a hedge fund, North Hills, that he controlled and managedoutside the scope of his responsibilities at MB. (Kind of makes you wonder what other hedgiesdo with their spare time.) He wasarrested and indicted in 2009, by which time most of the money was gone. Investors in North Hills sued MB and various MB-relatedindividuals, alleging violations of the Securities and Exchange Act, negligentsupervision, violations of SEC Rule 10b-5, violations of the PennsylvaniaUnfair Trade Practice and Consumer Protection Law, and breach of fiduciaryduty. The district court granted summary judgment to the defendants (afterdismissing claims against one) on all claims. The court of appeals affirmed in part and vacated in part, remanding fora trial on the investors’ Rule 10b-5 and UTPCPL claims against MB (which ceasedoperations following the discovery of the North Hills fraud and Bloom’sarrest). Two of the investor-plaintiffswere MB clients/advisees, while two weren’t.
Bloom operated North Hills to fund his own extravagantlifestyle, and also engaged in additional misappropriation/self-dealingactivity. Bloom solicited the plaintiffswhile using his MB connections: for example, he met with Belmont to discuss MB’sinvestment advisory services, gave Belmont his MB business card, described MB’sinvestment philosophy, then discussed various funds, including North Hills,that he recommended as suitable investments. Other MB-related people were also allegedly involved in soliciting theinvestors, though there are factual disputes about what happened.
MB knew that Bloom was running North Hills while alsoworking as an adviser at MB. “Althoughthe business address for North Hills was one of Bloom's residences inManhattan, he made no attempt, while working at MB, to conceal his activitiesrelated to North Hills. Investments in North Hills were administered by Bloomand other MB personnel, using MB's offices, computers, filing facilities, andoffice equipment. MB support staff sometimes carried out tasks related to NorthHills.” As an investment adviser, MB waslegally required to supervise its personnel, but it didn’t have adequatecompliance procedures in place to prevent fraud and self-dealing. (MB disputed that, but the SEC issued adeficiency letter detailing compliance failures shortly after Bloom wasarrested.) Bloom was thus able to avoidrequired disclosures, and MB officers and directors “failed to make basicinquiries about Bloom's operation of North Hills, and did not collect anyinformation on North Hills or monitor sales of investments in North Hills toMB's own customers.”
Bloom pleaded guilty to the counts against him, includingcharges of diverting at least $20 million from North Hills to his own use,securities fraud, and wire fraud; criminal and civil proceedings against himare still pending.
On appeal, while the court of appeals affirmed summaryjudgment for the other defendants, it ruled that imputation of Bloom’s concededviolations of Rule 10b-5 might be imputed to MB, and thus summary judgment onthat issue was inappropriate. Similarimputation principles held out the possibility of UTPCPL liability, whichcreates liability for a person “[e]ngaging in any other fraudulent or deceptiveconduct which creates a likelihood of confusion or of misunderstanding.” Thestandard of liability under this catchall provision is in flux. Some casesrequire plaintiffs to meet the standards for common law fraud, while others don’tbut still require knowledge of falsity/misleadingness. The court here indicated that a defendantcouldn’t be derivatively liable under the UTPCPL for the fraudulent actions ofa third party without evidence that the defendant ever knowingly engaged inmisrepresentation. Thus, the claimsagainst an individual defendant failed because he wasn’t alleged to have anyknowledge of the North Hills fraud at the time he promoted it. However, Bloom’s admitted frauds wereviolations of the UTPCPL, and could potentially be imputed to MB, since thepurpose of imputation is “fair risk-allocation, including the affordance ofappropriate protection to those who transact business with corporations.”
There was a genuine issue of material fact onimputation. “There is some evidence thatMB benefitted from Bloom's operation of North Hills, to the extent that accessto North Hills was a selling point for MB, and MB was able to solicit NorthHills investors for advisory business. There is, however, also evidence thatthe cross-marketing benefit to MB was limited, given that the two entities hadonly four clients in common …. Also, MB never collected any fees or receivedany remuneration on account of any of the Investors' investments in NorthHills.” Whether there was so littlebenefit to MB that the investors should have known that Bloom’s statements weremade without MB’s authority was for the trier of fact to decide.
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