Title: Hays v. Ellrich

State: massachusetts

Issuer: Massachusetts Supreme Court

Document:

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SJC-11743 
 
MOLLY A. HAYS  vs.  DAVID J. ELLRICH & others.1 
 
 
 
Suffolk.     February 3, 2015. - June 10, 2015. 
 
Present:  Gants, C.J., Spina, Cordy, Botsford, Duffly, Lenk, 
& Hines, JJ. 
 
 
Uniform Securities Act.  Securities, Sale.  Fraud.  Fiduciary.  
Limitations, Statute of.  Evidence, Fraud.  Practice, 
Civil, Fraud, Statute of limitations. 
 
 
 
 
Civil action commenced in the Superior Court Department on 
September 11, 2006. 
 
 
The case was heard by Christine M. Roach, J. 
 
 
The Supreme Judicial Court on its own initiative 
transferred the case from the Appeals Court. 
 
 
 
David B. Mack (Stephanie R. Parker with him) for the 
defendants. 
 
Patrick J. Dolan for the plaintiff. 
 
 
 
GANTS, C.J.  In January, 2001, in reliance on the advice of 
her investment advisor, the plaintiff, Molly A. Hays, invested 
                                                 
 
1 Morgan Financial Advisors, Inc. (MFA), and U.S. Bank 
National Association (U.S. Bank).  U.S. Bank is not a party to 
this appeal. 
2 
 
approximately three-quarters of her retirement savings in a 
hedge fund that became insolvent in 2003, resulting in the loss 
of her entire investment.  In 2006, Hays filed suit in the 
Superior Court, alleging that her investment advisor, Morgan 
Financial Advisors, Inc. (MFA), and David J. Ellrich, the sole 
owner and officer of MFA, had, among other claims, violated the 
Massachusetts Uniform Securities Act (act), G. L. c. 110A, 
§ 410 (a) (2), committed fraud, and committed a breach of their 
fiduciary duty to her.  After a jury-waived trial, the judge 
ruled that Ellrich and MFA were liable under § 410 (a) (2), and 
entered judgment in Hays's favor for $381,354.80 plus 
interest.2,3  MFA and Ellrich appealed, and we transferred the 
case to this court on our own motion. 
 
On appeal, Ellrich and MFA claim that they were not 
"sellers" of securities within the meaning of § 410 (a) (2), and 
therefore cannot be liable under the act.  They also argue that 
                                                 
 
2 The trial on liability proceeded against MFA only, because 
David J. Ellrich had previously been defaulted for failing to 
appear at a hearing on his attorney's motion to withdraw as 
counsel of record, despite having been ordered by the court to 
appear at the hearing, and despite having been notified by his 
counsel of the date of the hearing. 
 
 
3 The trial judge also found in Molly A. Hays's favor on her 
common-law claims of fraud and breach of fiduciary duty, and 
entered judgment "consistent with, but not duplicative of," the 
statutory count under G. L. c. 110A, § 410.  The judge found in 
favor of the defendants on breach of contract claims and an 
estoppel claim. 
 
3 
 
the claims on which Hays prevailed are barred by the statute of 
limitations.  In addition, they contend that the judgment must 
be vacated because it is contrary to the great weight of the 
evidence.4  We affirm the judgment. 
 
Background.  We summarize the findings of fact made by the 
judge, supplemented where necessary by uncontested evidence in 
the record that the judge implicitly credited.  See Commonwealth 
v. Isaiah I., 448 Mass. 334, 337 (2007), S.C., 450 Mass. 818 
(2008).  We reserve certain facts that directly relate to the 
legal issues we address. 
 
In approximately 1991, when Ellrich was employed by another 
investment advisory firm, Hays and her husband retained Ellrich 
as an investment advisor to manage some of their funds.  Before 
her husband's death in 1993, Ellrich communicated almost 
exclusively with Hays's husband, and rarely with her.  Shortly 
after her husband's death, Hays met with Ellrich to discuss the 
management of the individual retirement account (IRA) she had 
inherited, which totaled approximately $310,000 at the time.  
Hays told Ellrich that she needed income but wanted to remain at 
home with her five year old daughter.5  Ellrich told Hays, who 
                                                 
 
4 Ellrich also claims that it was an abuse of discretion for 
the trial judge to deny his motion to set aside the default. 
 
 
5 Hays had worked for Pan American Airlines as a flight 
attendant until approximately 1991.  She has a bachelor's degree 
4 
 
was forty-one years old in 1993, that she could elect to make 
periodic withdrawals from the IRA without a tax penalty at the 
maximum rate permitted under § 72(t) of the Internal Revenue 
Code -- seven per cent per year at the time.6  As a consequence, 
Hays's investment portfolio needed to achieve an average annual 
rate of return of more than 11.75 per cent:  seven per cent to 
cover the withdrawal rate, plus inflation, which averaged 
approximately three per cent, plus Ellrich's management fee of 
1.75 per cent.  From 1993 to 1999, Hays directed Ellrich to 
employ a "moderate growth and income" investment strategy, which 
he implemented, maintaining an equities-to-fixed-income ratio of 
approximately seventy-five per cent to twenty-five per cent.  
Ellrich pursued a "market-timing" strategy for the equities 
portion of Hays's investment account, which, by 2000, was 
invested in funds at Rydex Series Trust (Rydex) and at Profunds 
Investments (Profunds).  He pursued a "buy and hold" strategy 
for the fixed income portion, which was invested in long-term 
investment vehicles maintained by Fidelity Investments 
(Fidelity).7  Hays had no investment experience and had relied 
                                                                                                                                                             
in English Literature from the University of South Florida and a 
master's degree in Library Sciences. 
 
 
6 The wisdom or accuracy of this advice is not at issue in 
the case. 
 
 
7 With a "market-timing" strategy (in contrast to a "buy and 
hold" strategy), an investor actively trades investments to time 
5 
 
upon Ellrich as her financial advisor since her husband's death; 
during that time period, she made no investment without 
Ellrich's advice. 
 
In 2000, after Ellrich had registered MFA as an investment 
advisor, Hays transferred her accounts to MFA, and executed 
first a portfolio management and services agreement and later a 
superseding investment advisory agreement with MFA.  MFA was 
designated as the registered investment advisor on all of Hays's 
accounts, which totaled approximately $470,000 at the end of 
2000. 
 
Also in 2000, Ellrich was approached by Richard Furber 
about becoming the investment advisor to Convergent Market Funds 
(Convergent), a new "hedge fund" Furber was creating.8  Ellrich 
agreed in September, 2000, to become the investment advisor to 
one or more Convergent funds, and MFA executed an investment 
advisor agreement with Convergent's general partner, Emerging 
Health Capital Partners LLC (EHCP).  Ellrich determined that, as 
                                                                                                                                                             
the rise and fall of the markets.  According to financial 
statements Ellrich prepared for Hays, Hays's accounts at Rydex 
Series Trust, Profunds Investments, and Fidelity Investments 
together made up more than ninety-nine per cent of Hays's net 
worth. 
 
 
8 A "hedge fund" is a "specialized investment group -- 
[usually] organized as a limited partnership or offshore 
investment company -- that offers the possibility of high 
returns through risky techniques such as selling short or buying 
derivatives."  Marram v. Kobrick Offshore Fund, Ltd., 442 Mass. 
43, 46 n.5 (2004), quoting Black's Law Dictionary 727 (7th ed. 
1999). 
6 
 
Convergent's investment advisor, he would no longer "have the 
time or resources" to perform market-timing services for 
individual accounts, and needed to terminate MFA's advisory 
business for all of his individual market-timing accounts.  In 
December, 2000, he spoke with each of his approximately 150 
individual clients, including Hays, to tell them that those 
services would be terminating as of December 31, 2000. 
 
During Ellrich's conversation with Hays, he explained to 
her that he was going to be the investment advisor to a new 
private fund, and encouraged Hays to transfer her funds to 
Convergent, telling her that he would personally be making the 
trades for Convergent and would employ the same strategies and 
techniques that Ellrich had always employed for her accounts.  
Ellrich did not explain to Hays what a hedge fund is or the 
distinctive risks of investing in a hedge fund.  He did not 
speak with her about whether, in light of those risks, such an 
investment would be suitable for someone relying on her 
investments to produce a fixed income.  He did not tell her that 
he had no experience trading for a private equity fund, or that 
Convergent had no track record.  And he never provided Hays with 
a "full and practical explanation of . . . how the historical 
role he had played as Hays'[s] investment advisor would change," 
never telling her that he would no longer be considering her 
individual needs in making trades for Convergent.  The judge 
7 
 
found that, "by a combination of his words, his manner, and his 
tone, Ellrich strongly implied to Hays . . . that Convergent 
would be a suitable investment for her."9 
 
Hays told him that she wanted to invest in Convergent, 
relying entirely on Ellrich's encouragement.  Nearly seventy-
five per cent of Ellrich's individual market-timing clients also 
decided to invest in Convergent, contributing all but $30,000 of 
the $16.5 million that Convergent initially raised. 
 
In December, 2000, EHCP sent a package of materials to 
Hays, including an offering memorandum for Convergent 
securities.  The first pages of the offering memorandum warned, 
"AN INVESTMENT IN THIS PARTNERSHIP INVOLVES A SIGNIFICANT RISK 
OF LOSS," and, "AN INVESTOR MUST BE IN A POSITION TO BEAR THE 
ECONOMIC RISK OF AN INVESTMENT IN THE PARTNERSHIP FOR A 
SIGNIFICANT PERIOD."  The offering memorandum identified EHCP as 
the general partner of Convergent and MFA as Convergent's 
investment manager, and disclosed the management fee MFA would 
be receiving from the general partner.  It specified 
Convergent's investment goal as an "annual rate of return of at 
                                                 
 
9 Ellrich testified that he merely identified Convergent 
Market Funds (Convergent) for his clients as an option for them 
to consider, and that he informed Hays that he could not advise 
her whether to invest in Convergent because it would create a 
conflict of interest where he was Convergent's investment 
advisor.  But the trial judge credited Hays's testimony 
regarding the conversation she had with Ellrich, finding that 
"Ellrich did more than neutrally recite 'options' Hays could 
consider." 
8 
 
least 30%," and explained that its investment strategy involved 
actively trading stock-indexed investments in an attempt to time 
the rise and fall of the stock market.  It stated that neither 
MFA nor EHCP "have operated a partnership with the same 
objectives and portfolio strategy as" Convergent, and that 
Convergent "was a newly-formed entity with no history of 
operating performance."  It also identified investment risks 
"associated with [Convergent's] proposed activities," including 
risks associated with short selling, the use of leverage, and 
the concentration of capital in single investments, industries, 
or sectors.  Under the heading "Eligible Investors," the 
offering memorandum explained that "[i]nvestors generally 
. . . , if natural persons, must (i) have a net worth of at 
least $1 million or (ii) income of at least $250,000 or (iii) 
entities with assets of at least $5 million."  Under the heading 
"Suitability," the offering memorandum declared: 
"Prospective investors should carefully evaluate whether an 
investment in [Convergent] is suitable for their particular 
circumstances and investment needs.  In doing so, they 
should consult with such legal, tax, and financial advisors 
as they consider appropriate, and should avail themselves 
of the opportunity to ask questions of the [g]eneral 
[p]artner." 
 
It also declared that "each investor should have sufficient 
funds, beyond those he or she intends to invest in [Convergent], 
to meet personal needs and contingencies." 
9 
 
 
The materials Hays received from EHCP also included an 
investor questionnaire, which Hays filled out following a 
telephone conversation with Ellrich during which she asked 
Ellrich how to answer certain questions.  By signing the 
investor questionnaire, Hays accepted certain terms and 
conditions, including that she "ha[d] carefully reviewed 
the . . . [o]ffering [m]emorandum," and was "able to bear the 
economic risks associated with this investment."10  Hays 
submitted the investor questionnaire to EHCP in December, 2000, 
and soon after, EHCP determined that she was an "eligible 
investor."11 
 
In January, 2001, Hays transferred all of her funds from 
her Rydex and Profunds accounts from MFA to Convergent, 
investing $381,354.80 in Convergent in total.  Following Hays's 
investment, Ellrich continued to send her written reports on her 
                                                 
 
10 These risks "include[d] the likelihood that [the] 
investment [would] not generate current income or distributions 
even if [Convergent were] successful, and the possibility that 
some or all of the amount invested [would] be lost if 
[Convergent were] not successful." 
 
 
11 In the investor questionnaire, Hays stated that her 
"[a]pproximate current portfolio value" was $500,000.  Hays did 
not complete the section of the investor questionnaire asking 
whether she had relied on a "purchaser representative." 
 
10 
 
net worth and portfolio holdings (now including her Convergent 
holding) as he had done previously.12 
 
From January, 2001, to June, 2001, Hays's investment in 
Convergent declined in value by approximately seventeen per 
cent.  Hays was aware of this decline at the time.  In the 
period from 2001 to 2002, Ellrich spoke with Hays one-half dozen 
times by telephone, reassuring her that the market was by nature 
volatile but would correct itself eventually.  In these 
conversations, Ellrich did not distinguish between Hays's 
Convergent investments and her Fidelity investments (which MFA 
continued to manage for Hays), and did not tell her that he 
could not advise her regarding her investment in Convergent.  
Both the stock market and the value of Hays' investment in 
Convergent continued to decline throughout 2002.  Although Hays 
was concerned, she "didn't do anything" because she trusted 
Ellrich. 
 
In April, 2003, after an overstatement by U.S. Bank of the 
balance in Convergent's accounts, Ellrich discovered that 
Convergent's net asset value was "approximately $0," with the 
result that Convergent became insolvent.  In September, 2003, 
                                                 
 
12 Following her investment with Convergent, Hays also 
periodically received a separate "Statement of Benefits" from 
Ellrich.  In 2002, Hays stopped receiving any written statements 
from Ellrich, who began reporting Hays's balances to her by 
telephone, with Ellrich claiming that personal difficulties 
prevented him from preparing written statements. 
 
11 
 
Ellrich telephoned Hays and told her that a banking error had 
caused a total loss of Convergent's value.  Ellrich also told 
Hays that an investigator from the securities division of the 
Secretary of the Commonwealth would be contacting her.  Ellrich 
told her that he was working to recover the lost money, and that 
it was only a matter of time before he could do so.  Although 
Hays believed him, she began "to prepare for [her] future based 
on no funds" by seeking employment in the real estate field, 
where she began working in 2005.13  
Hays filed this action 
against Ellrich and MFA in the Superior Court on September 11, 
2006. 
 
Discussion.  1.  "Seller" liability.  Under the 
Massachusetts Uniform Securities Act, G. L. c. 110A, 
§ 410 (a) (2), a sale of securities in Massachusetts may be 
rescinded if the person who "offers or sells a security" 
misleads the buyer by making an untrue statement of a material 
fact or by failing to state a material fact, unless the seller 
proves that he or she did not know of the untruth or omission 
and in the exercise of reasonable care could not have known.14  
                                                 
 
13 In late 2003 and early 2004, when Hays asked Ellrich 
about her situation, Ellrich offered to trade for her on the 
futures market, but Hays declined.  He also told her that her 
interests were being represented in a class action that Ellrich 
was bringing in Federal court against U.S. Bank, but Hays did 
not recover anything from that lawsuit. 
 
 
14 The full text of G. L. c. 110A, § 410 (a) (2) states: 
12 
 
See Marram v. Kobrick Offshore Fund, Ltd., 442 Mass. 43, 52 
(2004).  Ellrich15 argues that he cannot be liable under the act 
because he neither offered nor sold Convergent securities to 
Hays. 
 
Not all who solicit the purchase of securities are 
"sellers" under the act, nor are they all "sellers" under 
§ 12(a)(2) of the Securities Act of 1933 (Federal act), 48 Stat. 
74, codified at 15 U.S.C. § 77l (2012) -- which is the Federal 
counterpart to § 410 (a) (2) of the act.16  Neither Congress nor 
                                                                                                                                                             
 
"Any person who . . . offers or sells a security by means 
of any untrue statement of a material fact or any omission 
to state a material fact necessary in order to make the 
statements made, in the light of the circumstances under 
which they are made, not misleading, the buyer not knowing 
of the untruth or omission, and who does not sustain the 
burden of proof that he did not know, and in the exercise 
of reasonable care could not have known, of the untruth or 
omission, is liable to the person buying the security from 
him, who may sue either at law or in equity to recover the 
consideration paid for the security, together with interest 
at six per cent per year from the date of payment, costs, 
and reasonable attorneys' fees, less the amount of any 
income received on the security, upon the tender of the 
security, or for damages if he no longer owns the security.  
Damages are the amount that would be recoverable upon a 
tender less the value of the security when the buyer 
disposed of it and interest at six per cent per year from 
the date of disposition." 
 
 
15 For convenience, because Ellrich is the sole owner and 
operator of MFA, we refer to both appellants as "Ellrich" here 
and throughout the discussion section except where the context 
indicates otherwise. 
 
 
16 As we discuss further in part 2, infra, we consider 
Federal law here because the Legislature has directed us to 
13 
 
the Legislature intended to impose rescission "on a person who 
urges the purchase but whose motivation is solely to benefit the 
buyer" of the security.  Pinter v. Dahl, 486 U.S. 622, 647 
(1988).  See Stolzoff v. Waste Sys. Int'l, Inc., 58 Mass. App. 
Ct. 747, 766 n.21 (2003).  Under both of these statutes, a 
person "offers or sells a security" if he "successfully solicits 
the purchase motivated at least in part by a desire to serve his 
own financial interests or those of the securities owner."  Id., 
quoting Adams v. Hyannis Harborview, Inc., 838 F. Supp. 676, 686 
(D. Mass. 1993), aff'd in part sub nom. Adams v. Zimmerman, 73 
F.3d 1164 (1st Cir. 1996).  See Pinter, supra at 647. 
 
Ellrich does not deny that he solicited Hays's purchase of 
Convergent securities, but he nonetheless argues that he cannot 
be deemed a seller under the act because he had no "financial 
interest" in Hays's purchase.  In support of this argument, 
Ellrich notes that he did not receive a commission for Hays's 
purchase of Convergent securities; nor did he receive any other 
compensation directly tied to the sale of securities to Hays.  
He also notes that the rate he earned as Convergent's investment 
advisor -- 1.25 per cent per year of Convergent's net asset 
                                                                                                                                                             
"coordinate the interpretation and administration of [G. L. 
c. 110A] with the related federal regulation."  G. L. c. 110A, 
§ 415. 
14 
 
value -- was less than the 1.75 per cent he earned on Hays's 
retirement funds before she invested them in Convergent.17 
 
Ellrich's argument fails because the judge found that 
Ellrich solicited Hays to purchase Convergent securities 
"motivated at least in part by a desire to serve [his] own 
financial interests," and we conclude that her finding is not 
clearly erroneous.  Although "personal financial gain is 
clearest in cases where the defendant receives a commission or 
other direct remuneration from the sale," we agree with the 
"many courts [that] have taken a more expansive view of 
financial gain that includes increased compensation tied to 
share price or company performance."  In re OSG Sec. Litig., 971 
F. Supp. 2d 387, 404 & n.119 (S.D.N.Y. 2013).  Here, Ellrich 
earned an investment advisory fee from Convergent that was 
calculated based on the net asset value of Convergent funds.  
Although his fee percentage from Hays's retirement funds was 
lower at Convergent than it had been at MFA, the judge found 
that Ellrich viewed Convergent as an "opportunity" for him in 
part because he expected that, if Convergent proved viable, 
Furber would solicit additional investments that would 
ultimately increase Convergent's net asset value and, 
                                                 
 
17 Although Ellrich's investment management fee was three 
per cent per year of Convergent's net asset value, he was 
responsible for paying "sub-advisory fees" totaling 
approximately 1.75 per cent per year of Convergent's net asset 
value, leaving him only 1.25 per cent. 
15 
 
consequently, Ellrich's advisory fees.  In short, Ellrich was 
motivated at least in part by the potential for a long-term 
increase in his investment advisory fees if he could raise the 
funds necessary to launch Convergent as a hedge fund.18  Cf. In 
re Vivendi Universal, S.A. Sec. Litig., 381 F. Supp. 2d 158, 187 
(S.D.N.Y. 2003) (defendant was seller of company's securities 
where his bonuses were tied to company's increased earnings); In 
re OSG Sec. Litig., supra at 404-405 (pleadings adequately 
alleged that defendants were sellers of company's securities 
where plaintiffs alleged that "the survival of the [c]ompany was 
at stake," and that defendants' solicitation was motivated by 
desire to keep their positions and salaries).19  The judge, 
                                                 
 
18 Convergent's offering memorandum declared that the 
partnership was "seeking to raise Invested Capital in the 
minimum amount of $15,000,000," which it characterized as the 
"Minimum Offering." 
 
 
19 Ellrich's reliance on Cohen v. State St. Bank & Trust 
Co., 72 Mass. App. Ct. 627 (2008), is misplaced.  In that case, 
the plaintiff contended that his investment manager had made 
false statements and omitted material facts when the manager 
transferred the plaintiff's funds from one State Street 
investment account to two State Street subaccounts.  See id. at 
629, 635.  The Appeals Court affirmed the motion judge's ruling 
that State Street was not a "seller" under the act and the 
consequent grant of summary judgment for the defendants, because 
there was no evidence that the transfer of funds in any way 
affected the amount of investment management fees that State 
Street earned from the account.  See id. at 635 & n.12.  Here, 
by contrast, Ellrich's management fee was based on the net asset 
value of all of Convergent's accounts, not just the value of 
Hays's accounts, so he was motivated to urge her to transfer her 
funds to Convergent as part of his effort to reach the minimum 
offering amount and preserve the possibility that Convergent 
16 
 
therefore, did not err in finding that Ellrich's solicitation of 
Hays to purchase Convergent securities made him a seller under 
the act. 
2.  Statute of limitations.  Ellrich contends that Hays's 
claim under § 410 (a) (2) of the act, filed in September, 2006, 
was not timely in light of the four-year limitations period in 
§ 410 (e), which provides, "No person may sue under this section 
more than four years after the discovery by the person bringing 
the action of a violation of this chapter."  Ellrich contends 
that the limitations period began to run in December, 2000, when 
Hays received Convergent's offering memorandum and signed the 
agreement to become a limited partner (which included the 
representation that she had "received and read" the relevant 
agreements).  Relying on dictum in Marram, 442 Mass. at 54 n.20, 
quoting Kennedy v. Josephthal & Co., 814 F.2d 798, 802-803 (1st 
Cir. 1987), Ellrich contends that the limitations period in 
§ 410 (e) begins to run when the plaintiff is put on "inquiry 
notice" of the violation, and he contends that the information 
in the offering memorandum put Hays on "inquiry notice" in 
December of 2000 that the investment was unsuitable for her, 
because "inquiry notice" occurs when "a reasonable investor 
would have noticed something was 'amiss,' e.g., when [she] 
                                                                                                                                                             
would attract assets from sources other than his former 
investment clients and thereby substantially increase his 
investment management fees. 
17 
 
obtained a prospectus."  In Marram, however, the defendant who 
solicited the plaintiff to invest in his hedge fund did not owe 
the plaintiff a fiduciary duty; Ellrich, as Hays's investment 
advisor, did owe her such a duty.  And in determining when the 
statute of limitations clock begins to run, that makes all the 
difference. 
 
Under the "fraudulent concealment" doctrine, codified at 
G. L. c. 260, § 12, "[i]f a person liable to a personal action 
fraudulently conceals the cause of such action from the 
knowledge of the person entitled to bring it, the period prior 
to the discovery of his cause of action by the person so 
entitled shall be excluded in determining the time limited for 
the commencement of the action."  We have interpreted this 
statute to mean that "[w]here a fiduciary relationship exists, 
the failure adequately to disclose the facts that would give 
rise to knowledge of a cause of action constitutes fraudulent 
conduct and is equivalent to fraudulent concealment for purposes 
of applying § 12."  Demoulas v. Demoulas Super Mkts., Inc., 424 
Mass. 501, 519 (1997), S.C., 428 Mass. 543 (1998), and S.C., 432 
Mass. 43 (2000).  See Doe v. Harbor Sch., Inc., 446 Mass. 245, 
254-255 (2006); Patsos v. First Albany Corp., 433 Mass. 323, 
328-329 (2001); Puritan Med. Ctr., Inc. v. Cashman, 413 Mass. 
167, 175 (1992), and cases cited.  In these cases, the statute 
of limitations clock begins to run only when the plaintiff has 
18 
 
"'actual knowledge' . . . of the facts giving rise to his causes 
of action," i.e., the facts which the fiduciary had failed to 
disclose.  Patsos, supra at 329 n.11.  See Crocker v. Townsend 
Oil Co., 464 Mass. 1, 9 (2012) ("the statute of limitations 
begins to run when the plaintiff has actual knowledge of the 
wrong giving rise to his cause of action"); Doe, supra at 254-
255, quoting Akin v. Warner, 318 Mass. 669, 675 (1945) 
(limitations clock for tort claim alleging breach of fiduciary 
duty begins to run only when plaintiff has "'actual knowledge' 
that she has been injured by the fiduciary's conduct," which 
occurs "[o]nly when the beneficiary's harm at the fiduciary's 
hands has 'come home' to the beneficiary"); Demoulas, supra.  
Therefore, under the fraudulent concealment doctrine, "inquiry 
notice" of a violation by a seller of securities is not enough 
to start the limitations clock running when the seller owes a 
fiduciary duty to the purchaser. 
 
This does not mean that the limitations clock begins only 
when the plaintiff understands that she has a legal claim, that 
is, when she realizes that the defendant has violated a law that 
entitles her to sue to recover damages.  Doe, supra at 256-257.  
Rather, the clock begins when the plaintiff has "actual 
knowledge" of the wrong committed by the fiduciary, rather than 
"knowledge of the consequences of that [wrong] (i.e., a legal 
claim against the fiduciary)."  Id. 
19 
 
 
Ellrich contends that the actual knowledge standard should 
not govern when the limitations clock starts to run for claims 
under the act, and that we should instead apply the Federal 
standard governing when the limitations clock starts to run for 
claims under § 12(a)(2) of the Federal act.  As Ellrich 
correctly notes, G. L. c. 110A, § 415, provides, "This chapter 
shall be so construed as to effectuate its general purpose to 
make uniform the law of those states which enact it and to 
coordinate the interpretation and administration of this chapter 
with the related federal regulation."  See Marram, 442 Mass. at 
50 ("The Legislature has directed that we interpret the act in 
coordination with the [Federal act]").  We therefore examine the 
Federal standard and consider whether to apply it to the 
limitations period under the act. 
 
Where the defendant is not the fiduciary of the plaintiff, 
the long-standing Federal rule of fraudulent concealment mirrors 
the Massachusetts rule.  "Fraudulent concealment tolls the 
statute of limitations . . . even without affirmative acts on 
the part of the defendant unless the plaintiff, through 
reasonable diligence, discovered or should have discovered the 
fraud."  Kennedy, 814 F.2d at 802.  Compare with Passatempo v. 
McMenimen, 461 Mass. 279, 293-294 (2012), quoting Koe v. Mercer, 
450 Mass. 97, 101 (2007) ("Under [the] discovery rule, the 
statute of limitations starts when the plaintiff [1] discovers, 
20 
 
or [2] reasonably should have discovered, that [he or she] has 
been harmed or may have been harmed by the defendant's 
conduct").  In determining when the limitations clock under the 
Federal act begins, two questions are asked relating to when the 
plaintiff "should have discovered the fraud."  The first is an 
"objective" question asking whether there were "sufficient storm 
warnings to alert a reasonable person to the possibility that 
there were either misleading statements or significant omissions 
involved in the sale."  Kennedy, supra, quoting Cook v. Avien, 
Inc., 573 F.2d 685, 697 (1st Cir. 1978).  See Maggio v. Gerard 
Freezer & Ice Co., 824 F.2d 123, 128 (1st Cir. 1987).  "'[S]torm 
warnings' . . . trigger a plaintiff's duty to investigate in a 
reasonably diligent manner," so the second, "more subjective" 
question asks whether "a plaintiff actually exercised reasonable 
diligence."  Id., quoting Cook, supra.  The existence of a 
fiduciary relationship is relevant only with respect to this 
second inquiry, and only as one of "the circumstances of the 
particular case, including the existence of a fiduciary 
relationship, the nature of the fraud alleged, the opportunity 
to discover the fraud, and the subsequent actions of the 
defendants."  Maggio, supra. 
 
Federal courts have applied this two-part test to 
circumstances like those here, where unsophisticated investors 
received a prospectus that disclosed the risks of the 
21 
 
investment, and where the investors failed to make any inquiry 
into the risks of the investment because they relied on oral 
statements by the defendants that were contradicted or corrected 
by the prospectus.  Federal courts have repeatedly held that 
receipt of the prospectus constitutes a "storm warning" even 
where the plaintiff was unsophisticated.  See Dodds v. Cigna 
Sec., Inc., 12 F.3d 346, 350 (2d Cir. 1993), cert. denied, 511 
U.S. 1019 (1994); Kennedy, 814 F.2d at 802-803 ("We are faced 
here with the great glowering clouds of the offering 
memorandum," where, "[f]or each oral representation that [the 
defendant] made and upon which appellants claim they relied, 
there was a direct refutation by the plain language of the 
offering memorandum").  Although "subjective" factors are 
relevant in applying the second part of the test, Federal courts 
have rejected the argument that unsophisticated plaintiffs' 
reliance on defendants excused the plaintiffs from reasonable 
diligence after storm warnings were present, even where the 
defendants had committed a breach of fiduciary obligations 
towards them.  See Maggio, 824 F.2d. at 129 ("Even assuming that 
defendants owed plaintiff a fiduciary duty, . . . plaintiff's 
prolonged failure to investigate the possibility of fraudulent 
conduct in light of the abundant facts known to him . . . can 
hardly be characterized as due diligence"); Kravetz v. United 
States Trust Co., 941 F. Supp. 1295, 1303-1309 (D. Mass. 1996).  
22 
 
See also J. Geils Band Employee Benefit Plan v. Smith Barney 
Shearson, Inc., 76 F.3d 1245, 1259-1260 (1st Cir.), cert. 
denied, 519 U.S. 823 (1996), quoting Cook, 573 F.2d at 696 n.24 
("Even assuming that [defendants] owed [plaintiffs] a fiduciary 
duty, an investor 'must apply his common sense . . . in 
determining whether further investigation is needed' . . . [and] 
[w]hile we recognize, and are genuinely troubled by, the 
possibility that the [plaintiffs] were such unsophisticated 
investors that they were not in a position to heed the storm 
warnings, . . . plaintiffs cannot shroud themselves in ignorance 
or expect that their unsophistication will thoroughly excuse 
their lack of diligence or failure, here, to even inquire").  In 
short, under Federal law, where clients have invested in 
securities based on the false statements or omissions of an 
investment advisor who owes them a fiduciary duty, the clients 
are still required to act with reasonable diligence if the 
information in the prospectus suggests that their reliance on 
the investment advisor may be misplaced, and the limitations 
clock begins upon their failure to do so, even if they have no 
actual knowledge that they had been misinformed. 
 
We decline to adopt this Federal standard as our own under 
the act for two reasons.  First, the actual knowledge standard 
recognizes the trust that an investor is entitled to place in a 
fiduciary's advice regarding investment decisions.  See Doe, 446 
23 
 
Mass. at 255 ("[T]he actual knowledge standard recognizes the 
dependent status of the beneficiary vis-à-vis the fiduciary, and 
protects the beneficiary's legitimate expectation that the 
fiduciary will act with the utmost probity in all matters 
concerning the relationship").  It also recognizes that 
unsophisticated investors who are advised by their fiduciary 
that an investment is suitable for them are unlikely to read a 
prospectus with an eye towards testing the wisdom of that 
advice, especially where they might not understand the 
information that is relevant to such investment decisions and 
might not perceive the significance of "storm warnings."  The 
argument that financial information in a prospectus addressed to 
sophisticated investors will alert the investor to the 
possibility that his or her fiduciary is untrustworthy, and 
should impose on the investor a duty to make an independent 
inquiry into the fiduciary's trustworthiness, is contrary to the 
relationship of trust implicit in any fiduciary relationship.  
See id. at 256 n.13 ("a beneficiary is entitled to approach [a 
fiduciary's representations] without skepticism . . . and is not 
required to ascertain the absence of foul play"). 
 
Second, although G. L. c. 110A, § 415, directs that courts 
"coordinate the interpretation and administration of this 
chapter with the related [F]ederal regulation," it does not 
mandate that courts adopt the interpretation of comparable 
24 
 
Federal securities statutes, especially where doing so would 
conflict with our interpretation of other Massachusetts 
statutes, such as G. L. c. 260, § 12, which codifies our 
fraudulent concealment doctrine.  Moreover, the Legislature 
cannot have intended that the limitations period under the act 
would be the same as the limitations period under the Federal 
act where the Legislature provided Massachusetts plaintiffs a 
much more generous limitations period under the act (four years) 
than Congress provided under the Federal act (one year), and 
where the Legislature failed to impose the three-year statute of 
repose included in the Federal act.  Compare G. L. c. 110A, 
§ 410 (e), with 15 U.S.C. § 77m (2012).20 
 
Applying the actual knowledge standard to the facts of this 
case, we conclude that where an investment advisor owes a 
fiduciary duty of disclosure to his or her client and violates 
the act by misleading the client regarding the suitability of an 
investment, Massachusetts law deems it fraudulent concealment 
for the fiduciary to fail to reveal to the client that the 
investment was not suitable, and the limitations clock begins to 
run only when the client has actual knowledge of the 
                                                 
 
20 Title 15 U.S.C. § 77m (2012) provides, in relevant part, 
"No action shall be maintained to enforce any liability [under 
§ 12(a)(2)] unless brought within one year after the discovery 
of the untrue statement or the omission, or after such discovery 
should have been made by the exercise of reasonable diligence," 
and, "In no event shall any such action be brought . . . more 
than three years after the sale." 
25 
 
unsuitability of the investment.  Here, the facts giving rise to 
Hays's cause of action under § 410 (a) (2) of the act are that 
Convergent was an unsuitable investment for Hays, and that 
Ellrich, as her fiduciary, failed to disclose to her its 
unsuitability in soliciting her to purchase Convergent 
securities.  Therefore, in the context of this case, the 
limitations clock for Hays began when she had actual knowledge 
of the unsuitability of Convergent securities -- for instance, 
knowledge that investing in Convergent was substantially riskier 
than the investments that Ellrich had previously made for her.  
The judge found that, even though the value of Convergent 
securities declined after Hays purchased them, "a reasonable 
client in Hays'[s] position could not have ascertained, without 
expert advisor advice, how the Convergent risk compared to the 
risks she had been taking historically, particularly in a 
volatile market."  Further, the judge found that "a reasonable 
investor in Hays'[s] position . . . could not reasonably have 
noticed that something (other than market forces) was amiss 
prior to, at the earliest, September, 2003," when Ellrich 
informed Hays that Convergent was insolvent and that an 
investigator from the securities division of the Secretary of 
the Commonwealth would be contacting her.21  We conclude that 
these findings are not clearly erroneous. 
                                                 
 
21 The trial judge relied on Marram, 442 Mass. at 54 n.20, 
26 
 
 
Ellrich argues that Hays's action is time barred because 
Hays received Convergent's offering memorandum in December, 2000 
(approximately six years before her action was filed), and the 
information in that offering memorandum contradicted the 
misrepresentations and corrected the omissions that the judge 
found that Ellrich had made.22  It is true that a sophisticated 
investor who carefully read and considered the offering 
memorandum would have recognized that the investment was not 
suitable for a person in Hays's financial position.  But a 
sophisticated investor in Hays's financial position who 
carefully read and considered the offering memorandum would also 
likely not have invested in Convergent.  The fact that Hays did 
invest in Convergent supports the judge's finding that, despite 
having received the offering memorandum, she was not 
sophisticated enough to have actual knowledge of the 
unsuitability of the investment at the time she invested. 
 
Ellrich alternatively contends that Hays had actual 
knowledge by June, 2001, when she knew that her investment in 
                                                                                                                                                             
in applying an "inquiry notice" standard to the issue whether 
Hays's statutory claim was timely, finding that Hays was not on 
inquiry notice of the statutory violation by Ellrich at any time 
prior to 2003.  Although the trial judge did not apply an actual 
knowledge standard, as we do here, the judge implicitly found 
that Hays did not have actual knowledge before 2003 by finding 
that Hays was not on inquiry notice before 2003. 
  
 
22 Hays does not contend that the offering memorandum 
contained material misrepresentations or omissions. 
27 
 
Convergent had declined by approximately seventeen per cent in 
the first five months.  But actual knowledge of an investment 
loss is not sufficient by itself to constitute actual knowledge 
that the fiduciary falsely represented the investment's 
suitability, especially when the loss comes at a time when the 
over-all stock market is declining.  The knowledge required to 
commence the limitations clock is knowledge that she purchased 
Convergent securities based on a misrepresentation by Ellrich of 
their suitability for her, and, in essence, the judge found that 
this did not occur before September, 2003, when she learned that 
she had lost her entire investment in Convergent. 
 
Ellrich also contends that his fiduciary relationship with 
Hays regarding her equity investments ended when she liquidated 
her Rydex and Profunds accounts and transferred those funds to 
Convergent.  Once that occurred, he contends, his fiduciary duty 
extended only to her fixed income investments that she held with 
Fidelity.  He supports this contention by arguing that, having 
become the investment advisor for Convergent, he could no longer 
serve as Hays's investment advisor regarding her equity 
investments, because his fiduciary duty to the general partner 
of Convergent would potentially be in conflict with a fiduciary 
duty to any limited partner investor in Convergent.  There is no 
dispute that Ellrich served as her fiduciary for all her 
retirement funds when he advised her to invest in Convergent, 
28 
 
and when she signed the offering memorandum.  We need not 
address whether the actual knowledge standard applies to a claim 
against a person who once was a fiduciary but who subsequently 
terminated the fiduciary relationship, because the judge found 
(and the evidence supports her finding) that Ellrich did not 
explain to Hays his potential conflict of interest -- that is, 
he did not explain that "he would no longer be considering 
Hays'[s] individual needs with respect to those trades, and that 
he would no longer have any obligation to ensure that any of the 
securities purchased for the Convergent portfolio was an 
appropriate investment for Hays; and that [he] was no longer 
obliged to monitor for Hays the assets held by those funds."  
The judge further found, based on Ellrich's omissions and his 
conduct, that he "continued to provide advisory services to 
Hays, and accordingly Hays reasonably continued to trust [him] 
to do so."  In short, Ellrich's fiduciary relationship with Hays 
regarding the funds she invested in Convergent should have ended 
once she made that investment, but Ellrich never told her that 
it did, and she reasonably understood that he continued to serve 
as her investment advisor for these funds and continued to make 
market-timing investments on her behalf. 
 
Because we embrace the actual knowledge standard where an 
investment advisor owes his or her client a fiduciary duty in 
determining when the limitations clock commences for claims 
29 
 
under the act, and because we conclude that the judge was not 
clearly erroneous in finding that Hays did not have actual 
knowledge of a violation of the act before 2003, we affirm the 
judge's finding that Hays timely filed her action under the act. 
3.  Remaining claims on appeal.  We need not dwell long on 
Ellrich's remaining claims.  We reject his contention that the 
judgment against him should be vacated because it is contrary to 
the great weight of the evidence.  The evidence is more than 
sufficient to support the judge's finding that Ellrich's 
misrepresentations and omissions were material in that they 
strongly suggested that Convergent was a suitable investment for 
Hays to invest three-quarters of her retirement savings, where 
it was not.  Even if we were to accept Ellrich's argument that 
the offering memorandum contradicted or corrected all his false 
oral assertions and omissions, that would not negate the 
materiality of his oral statements.  "The test whether a 
statement or omission is material is objective:  'there must be 
a substantial likelihood that the disclosure of the omitted fact 
would have been viewed by the reasonable investor as having 
significantly altered the "total mix" of information made 
available.'"  Marram, 442 Mass. at 57-58, quoting Craftmatic 
Sec. Litig. v. Kraftsow, 890 F.2d 628, 641 (3d Cir. 1989).  The 
judge did not err in finding that, given the long-standing 
relationship of trust between Ellrich and Hays, Hays reasonably 
30 
 
viewed Ellrich's advice regarding the suitability of the 
Convergent investment as significantly altering the "total mix" 
of information available to her.  Cf. Marram, supra at 48, 55-59 
(claim under act alleging false oral statements regarding 
suitability of investment survived motion to dismiss even though 
subscription agreement included integration clause that stated 
that it superseded all prior understandings, written or oral). 
The evidence is also sufficient to support the judge's 
finding that Convergent was an unsuitable investment for Hays 
based on the expert testimony regarding the unsuitably high risk 
posed by investing in a hedge fund such as Convergent, and the 
offering memorandum's statements that eligible investors -- 
unlike Hays -- should have had a net worth of at least $1 
million, an income of at least $250,000, or entities with assets 
of at least $5 million, and should have had sufficient funds 
apart from those invested in Convergent to meet personal needs 
and contingencies.23 
                                                 
23 We need not consider Ellrich's claim that the judge 
abused her discretion in denying Ellrich's motion to set aside 
the default earlier entered against him, where the judge made 
findings of fact and law as if he were not a defaulted party, 
and these findings provide an adequate and independent ground 
for the judgment against him.  Nor need we consider whether the 
judge's allowance of the common-law claims would independently 
support the award of rescissionary damages where those damages 
were awarded under the act, and the judge did not award any 
damages beyond those available under the act.  
31 
 
 
Conclusion.  For the foregoing reasons, the judgment in 
favor of Hays against Ellrich and MFA is affirmed. 
 
 
 
 
 
 
 
So ordered.