2013 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

2-22-2013

Barry Belmont v. MB Investment Partners, Inc.

Precedential or Non-Precedential: Precedential

Docket No. 12-1580

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PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

_____________

No. 12-1580

_____________

BARRY J. BELMONT; 

PHILADELPHIA FINANCIAL SERVICES, LLC; 

THOMAS J. KELLY, JR.;

FRANCES R. KELLY;

GARY O. PEREZ, 

 Appellants,

v.

MB INVESTMENT PARTNERS, INC.;

CENTRE MB HOLDINGS; 

CENTRE PARTNERS MANAGEMENT, LLC; 

ROBERT M. MACHINIST; MARK E. BLOOM;

RONALD L. ALTMAN; LESTER POLLACK; 

WILLIAM M. TOMAI; GUILLAUME BEBEAR; 

P. BENJAMIN GROSSCUP; THOMAS N. BARR;

CHRISTINE MUNN; ROBERT A. BERNHARD

_______________

On Appeal from the United States District Court

for the Eastern District of Pennsylvania

(D.C. No. 09-cv-4951)

District Judge: Hon. Berle M. Schiller

_______________
2

Argued

November 13, 2012

Before: SCIRICA, FISHER, and JORDAN, Circuit Judges.

(Filed : February 22, 2013)

_______________

Joseph R. Loverdi

Paul C. Madden [ARGUED]

Buchanan Ingersoll & Rooney

50 South 16th Street , Suite 3200

Philadelphia, PA 19102

 Counsel for Appellants

Peter J. Hoffman

Jeffrey P. Lewis

Eckert, Seamans, Cherin & Mellott

50 South 16th Street – 22nd Floor

Philadelphia, PA 19102
3

Edward D. Kutchin [ARGUED]

Kerry R. Northup

Berluti McLaughlin & Kutchin

44 School Street – 9th Floor

Boston, MA 02108

 Counsel for Appellees, MB Investment Partners Inc.,

 Robert M. Machinist,P. Benjamin Grosscup, Thomas N. 

 Barr, Christine Munn, Robert A. Bernhard

Joshua S. Amsel [ARGUED]

Weil, Gotshal & Magnes

767 Fifth Avenue – 27th Floor

New York, NY 10153

Teresa N. Cavenagh

Duane Morris 

30 S. 17th Street

Philadelphia, PA 19103

Alan T. Gallanty [ARGUED]

Kantor, Davidoff, Wolfe, Mandelker, Twomey & Gallanty

51 E. 42nd Street – 17th Floor

New York, NY 10017

Joseph J. Langkamer

Samuel W. Silver

Schander Harrison Segal & Lewis

1600 Market Street , Suite 3600

Philadelphia, PA 19103

 Counsel for Appellee Ronald L. Altman

_______________
4

OPINION OF THE COURT

_______________

JORDAN, Circuit Judge.

This case arises from a now-defunct Ponzi scheme. 

The defendants are MB Investment Partners, Inc. (“MB”), a 

registered investment adviser, and various persons affiliated 

with MB. The fraudulent scheme was perpetrated by Mark 

Bloom while he was an employee and officer of MB, through 

a hedge fund called North Hills, L.P. (“North Hills”) that

Bloom controlled and managed outside the scope of his 

responsibilities at MB. Bloom was arrested and indicted in

the Southern District of New York in 2009 on a variety of 

charges relating to the Ponzi scheme, by which time most of 

the money invested in North Hills was gone. Plaintiffs

Barry J. Belmont, Philadelphia Financial Services LLC

(“PFS”),

1 Thomas J. Kelly, Jr. and his wife Frances R. Kelly, 

and Gary O. Perez (collectively, the “Investors”) brought suit 

in the Unites States District Court for the Eastern District of 

Pennsylvania against MB, certain of its officers and directors, 

including Bloom, and one of its employees, Robert L. 

Altman, in an effort to recover money they had lost at the 

hands of Bloom.

The Investors offered various theories of liability 

under both federal and state law, alleging (1) controlling 

person liability under Section 20(a) of the Securities and 

 1 PFS is a Pennsylvania limited liability company that 

serves as the personal investment vehicle for its sole member, 

John F. Wallace.
5

Exchange Act (the “Exchange Act”), (2) negligent 

supervision, (3) violations of Securities and Exchange 

Commission (“SEC”) Rule 10b-5, (4) violations of the 

Pennsylvania Unfair Trade Practice and Consumer Protection 

Law (the “UTPCPL”), and (5) breach of fiduciary duty. The 

District Court dismissed all of the claims against Altman and, 

following discovery, granted summary judgment to all of the 

remaining defendants on all of the Investors’ claims. For the 

reasons that follow, we will affirm in part and vacate in part 

the District Court’s orders and will remand the case for a trial 

on the Investors’ claims against MB for violations of Rule 

10b-5 and the UTPCPL. 

I. BACKGROUND

A. Facts2

1. The Parties

Defendant MB is a registered investment adviser

previously known as Munn Bernhard & Associates, Inc. It is 

based in New York and registered to do business in 

Pennsylvania. As a registered investment adviser, MB 

managed client investments by trading securities on stock 

 2 In accordance with our standard of review, see infra 

note 17, we set forth the facts in the light most favorable to 

the Investors. See Funk v. CIGNA Grp. Ins., 648 F.3d 182, 

190 (3d. Cir. 2011) (“Summary judgment is proper if there is 

no genuine issue of material fact and if, viewing the facts in 

the light most favorable to the non-moving party, the moving 

party is entitled to judgment as a matter of law.” (internal 

quotation marks omitted)).
6

exchanges through custodial trading accounts held by third 

parties, such as Charles Schwab & Co., Inc. MB’s primary 

investment focus was on large-capitalization stocks. It ceased 

operations in June 2009, following the discovery of the North 

Hills fraud and Bloom’s arrest. 

Defendants Robert Machinist and Robert L. Altman 

(together with MB, the “MB Defendants”) were executives 

working at MB during the period that Mark Bloom also 

worked there. Machinist was the chairman of MB’s board of 

directors, and the chief operating officer and a co-managing 

partner of MB,3 and he owned 14 percent of the capital stock 

of its parent company, Centre MB Holdings, LLC (“CMB”). 

Machinist was listed as a “control person”4 in MB’s Form 

ADV, the reporting form used by investment advisers to 

register with both the SEC and state securities authorities. 

Altman was a senior managing director,5

 3 Although Machinist, Altman and Bloom held the 

titles of “partner,” MB was a New York corporation rather 

than a partnership at all times relevant to this dispute.

partner, and 

portfolio manager of MB. Bloom was also an executive at 

MB, serving as president, co-managing partner (with 

Machinist), and chief marketing officer, and he too owned 14 

4 The term “control” in Form ADV is defined as “the 

power, directly or indirectly, to direct the management or 

policies of a person, whether through ownership of securities, 

by contract, or otherwise.” (App. at 1130.) 

5 Altman held the title of “director” as a member of 

MB’s senior management team but was not a member of 

MB’s board of directors. 
7

percent of the capital stock of CMB. Bloom was also a 

member of MB’s board of directors.6

 

Defendant Centre Partners Management, LLC 

(“Centre Partners”) is a Delaware limited liability company 

that provides advisory and management services for various 

private equity investment funds, each of which is structured 

as a limited partnership composed primarily of investors 

otherwise unaffiliated with Centre Partners. Defendants 

Lester Pollack, William M. Tomai, and Guillaume Bébéar 

(together with Centre Partners and CMB, the “Centre 

Defendants”) are Centre Partners executives. Pollack, Tomai, 

and Bébéar were, at all times relevant to this dispute, nonmanagement members of MB’s board of directors, with no 

role in the business’s day-to-day operations, and they do not 

appear on MB’s organizational chart. However, Pollack and 

Tomai are listed as control persons on MB’s Form ADV. 

Defendant CMB is a Delaware limited liability 

company formed by Centre Partners, Machinist, and Bloom 

to acquire a controlling interest in MB. In July 2004, 

Machinist, Bloom, and Centre Partners (though an affiliated 

fund) invested $14 million in CMB for the acquisition of MB, 

with Centre Partners as the largest shareholder, followed by 

Machinist and Bloom. CMB owned 57 percent of the capital 

stock of MB, and controlled the operations of MB through a 

contractual operating agreement. CMB is denominated as a 

control person on MB’s Form ADV. After CMB acquired 

 6 Although Bloom was named as a defendant in the 

Complaint, the District Court entered a default judgment 

against him for failure to appear, plead, or otherwise defend, 

and he is not a party to this appeal. 
8

control of MB, it designated Bloom, Machinist, Pollack, 

Tomai, and Bébéar to serve as members of the MB board of 

directors. 

Defendants P. Benjamin Grosscup, Thomas N. Barr, 

Christine Munn, and Robert A. Bernhard (together with 

Machinist, Bloom, Pollack, Tomai, and Bébéar, the “MB 

Directors”) were all MB executives who also served as 

members of the MB board of directors. Grosscup, Barr, and 

Munn are listed as “control persons” in MB’s Form ADV.

7

 

Plaintiffs, the Investors, all had money in Bloom’s 

North Hills fund, investing a total of approximately $4.4 

million in North Hills from 2006 to 2008. Belmont and the 

Kellys were also MB clients and entered into advisory 

agreements with MB. PFS and Perez did not have any 

advisory agreement with MB.

2. Bloom and the North Hills Ponzi Scheme

Bloom worked as a certified public accountant in the 

tax department of an accounting firm from 1979 to 1992. 

From 1992 to 2001, he worked for a hedge fund management 

company where he was responsible for marketing and client 

 7 Bernhard is not listed as a control person because he 

ended his employment and resigned from the MB board of 

directors in connection with the July 2004 purchase of MB by 

CMB, although he continued to serve as an outside consultant 

to the company. Although CMB held majority voting control 

of MB, the minority shareholders were entitled to designate 

three directors under the terms of the company’s Operating 

Agreement. Those directors were Grosscup, Barr, and Munn.
9

services. Bloom left the hedge fund in 2001, and became 

president of a registered investment adviser and broker-dealer

affiliated with his former accounting firm. He resigned from 

that position and joined MB prior to the July 2004 

acquisition of MB by CMB. 

Bloom formed North Hills in 1997, as an enhanced 

stock index fund based on various stock indices. Bloom was 

the sole principal and managing member of North Hills 

Management, LLC, the general partner of North Hills, and he 

had sole authority over the selection of the fund’s 

investments. Although North Hills was founded as a stock 

index fund, Bloom later described North Hills to investors as 

a “fund of funds” that invested in hedge funds and other wellmanaged funds and that provided financing to the widelyknown retailer Costco. Between 2001 and 2007, Bloom 

raised approximately $30 million from 40 to 50 investors for 

the North Hills fund. He claimed that North Hills

consistently generated investment returns of 10-15 percent

per year without significant risk. 

In fact, however, North Hills was a Ponzi scheme that 

Bloom used to finance his lavish personal lifestyle, and, over 

time, he diverted at least $20 million from North Hills for his 

own personal use. Bloom used those funds to acquire 

multiple apartments and homes, furnishings, luxury cars and 

boats, and jewelry, and to fund parties and travel. 

Bloom also engaged in self-dealing beyond the money 

he converted from North Hills. For example, while acting as 

a third-party marketer for the Philadelphia Alternative Asset 

Fund (“PAAF’), he invested $17 million of North Hills’s

funds in PAAF, earning a lucrative commission for himself 
10

without disclosing that conflict of interest to North Hills 

investors. When PAAF, and another company in which 

North Hills had invested, the futures and commodities broker 

Refco, Inc., collapsed due to separate frauds, Bloom 

misappropriated proceeds of legal settlements and residual 

payments made to North Hills as an unsecured creditor. 

3. Marketing of North Hills to the Investors

In June 2006, Bloom met with plaintiff Belmont to 

introduce himself and to discuss the investment advisory 

services offered by MB. Bloom gave Belmont his MB 

business card and described the investment philosophy of 

MB. Bloom then discussed various investment funds, 

including North Hills, that he recommended as suitable for 

Belmont, supposedly based on Belmont’s objectives. 

In July 2006, John Wallace (the sole principal of 

plaintiff PFS) and Belmont met with Bloom and Altman. 

Altman repeated Bloom’s praise for North Hills, and he 

suggested that MB’s access to North Hills was a selling point 

for MB’s advisory services.8

 Bloom and Altman presented 

Belmont with a proposed asset allocation that they had 

prepared on MB’s letterhead.9

 8 Altman disputes that account of the meeting. He

testified that he never commented on North Hills as an 

investment and that he did not say that access to North Hills 

was a selling point for MB. 

 Both Belmont and PFS

9 The Investors contend that the proposed asset 

allocation “recommend[ed] that Belmont invest 20% of the 

funds he entrusted to MB in North Hills.” (Appellants’ 

Opening Br. at 7 (citing App. at 955).) However, the exhibit 
11

subsequently invested in North Hills. Belmont also became 

an investment advisory client of MB, with Altman serving as 

Belmont’s portfolio manager and Bloom serving as his 

relationship manager. In February 2008, allegedly on 

Altman’s advice, Belmont transferred $1 million from his 

MB-managed Charles Schwab account to North Hills, adding 

it to money he had already invested in that fund.10

Altman also served as portfolio manager for Thomas 

and Frances Kelly. He marketed North Hills to the Kellys as 

an investment option available through MB.11 

Perez had no formal relationship with MB. He had, 

however, previously met Bloom and, in the fall of 2008, he 

telephoned him at MB’s offices, seeking investment advice. 

Bloom recommended that Perez invest in North Hills. 

 

to which the Investors refer does not mention North Hills by 

name, and the asset allocation at issue is simply labeled 

“Credit Arbitrage.” (See id.) 

10 Altman disputes that account of the $1 million 

transfer. Altman testified that, when Belmont told him that 

he was nervous about the stock market in early 2008, Altman

advised him concerning various money market investment 

options. Altman also testified that the direction to transfer the 

funds from the MB-managed Schwab account to North Hills 

was relayed to him by Bloom. 

11 Altman contends that he did not market North Hills 

to the Kellys. He says that he was not their portfolio manager 

and that the Kellys ultimately signed some 13 separate 

advisory agreements for different MB products, none of 

which was North Hills.
12

4. The Defendants’ Roles with Respect to 

MB and North Hills

Bloom operated North Hills the entire time that he was 

an executive of MB, until his arrest in February 2009. 

Although the business address for North Hills was one of 

Bloom’s residences in Manhattan, he made no attempt, while 

working at MB, to conceal his activities related to North 

Hills. Investments in North Hills were administered by 

Bloom and other MB personnel, using MB’s offices,

computers, filing facilities, and office equipment. MB 

support staff sometimes carried out tasks related to North 

Hills. 

MB officers and directors were aware that Bloom was 

operating North Hills while he was also working as an 

investment adviser at MB. As a result of financial dealings 

with North Hills beginning in 2004, Machinist was familiar 

with Bloom’s control over North Hills. Machinist 

participated in a number of business ventures with North 

Hills, including North Hills’s investment in a company called 

DOBI Medical International Inc. (“DOBI”). Machinist also 

attended meetings in which Bloom marketed North Hills and 

described it as an MB fund. Machinist’s successor as MB’s 

CEO, Michael Jamison, was also aware of North Hills, and,

in December 2007, transferred funds to North Hills 

Management, the general partner of North Hills, as part of a 

personal loan to Bloom. Bloom’s position at North Hills was 

also disclosed in a 2005 prospectus of DOBI, in connection 

with North Hills’s investment in the stock of that company, 

and defendants Machinist, Grosscup, Barr, Bernhard, and 

Munn were investors in DOBI and had access to the 

prospectus. 
13

As an investment adviser, MB was required by the 

Investment Advisers Act of 1940 (the “Advisers Act”), and 

by Rules promulgated under the Advisers Act, and by the 

Pennsylvania Securities Act to supervise its personnel so as to 

prevent violations of the Advisers Act.12 However, during 

the period of the North Hills fraud, MB did not have in place

basic compliance procedures employed throughout the 

investment advising industry to identify and prevent fraud 

and self-dealing by MB employees and affiliates. 

Compliance weaknesses permitted Bloom to avoid required

disclosures to MB about North Hills as a personal investment 

vehicle. MB officers and directors failed to make basic 

inquiries about Bloom’s operation of North Hills, and did not 

collect any information on North Hills or monitor sales of 

investments in North Hills to MB’s own customers.13

 12 See 15 U.S.C. § 80b-3(e) (allowing the SEC to 

censure, or suspend or deny the registration of, an investment 

adviser, where such adviser “or any person associated with 

such investment adviser” violates the federal securities laws); 

Rule 204A-1, 17 C.F.R. § 275.204A-1 (requiring an 

investment adviser to establish a code of ethics to ensure that 

employees comply with the federal securities laws); Rule 

206(4)-7(a), 17 C.F.R. § 275.206(4)-7(a) (requiring an 

investment adviser to establish compliance policies and 

procedures to ensure compliance with the securities laws); 70 

Pa. Cons. Stat. Ann. § 1-102(j) (defining investment adviser 

for state law purposes); id. § 1-305(a)(v) (authorizing the 

suspension or revocation of the Pennsylvania registration of 

an investment adviser that fails to comply with the federal 

securities laws including the Advisers Act). 

 

13 MB disputes these characterizations of its oversight,

arguing that it did have in place written compliance policies 
14

The Centre Defendants were also aware of North Hills 

as a result of a due diligence investigation that the firm 

conducted on Bloom in relation to his personal investment in 

a fund managed by Centre Partners. The Centre Defendants 

believed that North Hills was Bloom’s “family investment 

vehicle” (App. at A515), and that it was “not an actual 

business” (App. at 528). The background report that the 

Centre Defendants obtained on Bloom stated that Bloom was 

the “sole proprietor of North Hills Management, LLC, which 

manages the investment partnership North Hills LP,” and that 

Bloom “work[ed] approximately eight hours per month for 

this fund of funds overseeing asset allocation and reporting 

performance.”14

 

and procedures. As part of MB’s compliance program, 

employees (including Bloom) were required to provide 

annual certifications listing all of the securities they owned, 

and were prohibited from managing accounts for third parties 

who were not MB clients. MB places the blame on Bloom 

and contends that, while Bloom provided those annual 

certifications, he “falsely and misleadingly omitted his 

ownership or operation of North Hills.” (MB Defendants’ Br. 

at 7-8). Bloom did omit any reference to North Hills or any 

other trading accounts in his annual certifications to MB. 

However, shortly after Bloom was arrested, the SEC 

investigated MB and issued a deficiency letter detailing 

compliance failures.

 (App. at 946.) Tomai and Bébéar were also 

14 The Centre Defendants contend that the facts set 

forth in the background check were “consistent with [their] 

understanding of North Hills as Mr. Bloom’s family, or 

personal investment vehicle.” (Centre Defendants’ Br. at 19 

(citing App. at 2621-23).)
15

aware of North Hills, and of Bloom’s control and operation of 

the fund, based on an investor questionnaire Bloom

completed prior making his personal investment in the Centre 

Partners fund. 

5. The Downfall of Bloom and MB

Ironically, losses suffered by North Hills because of 

the PAAF and Refco frauds ultimately led to the collapse of 

the North Hills fraud. In 2008, after Bloom was forced to 

disclose those losses, two large investors in North Hills 

requested a full redemption of their investments. By that

time, most of the money that had been invested in North Hills 

was gone, and Bloom could only return a portion of those 

investors’ funds. It is not clear from the record in this case

when federal authorities began to investigate Bloom, but he 

was arrested on February 25, 2009, and he was terminated by 

MB that same day. On July 30, 2009, the U.S. Attorney for 

the Southern District of New York filed an Information

against Bloom that documented in detail a wide-ranging 

scheme to defraud North Hills investors, beginning in 2001, 

as well as Bloom’s sale of illegal tax shelters while he was 

still practicing as an accountant. 

Bloom promptly pleaded guilty to all of the counts in 

the Information, including charges that he had diverted at 

least $20 million from the operating account of North Hills

for his own use, had misrepresented the value of North Hills 

investors’ capital accounts in their monthly statements, had 

solicited funds from new North Hills investors in 2007 and 

2008 to honor redemption requests from prior North Hills 

investors, had committed securities fraud in connection with 

the sale of interests in North Hills, and had committed mail 
16

and wire fraud and laundered money invested in North Hills. 

Bloom is still the subject of a number of criminal and civil 

proceedings brought by the United States and by North Hills 

investors.15 

After the North Hills fraud was exposed, MB, which 

had been losing money and was already in some financial 

distress, was forced to cease operations in June 2009. 

B. Procedural History

The Investors filed their original Complaint in this 

action on October 28, 2009. They filed an Amended 

Complaint on March 30, 2010, alleging (1) securities fraud in 

violation of Rule 10b-5 on the part of Bloom, Altman, and 

MB, (2) violation of the Pennsylvania UTPCPL by Bloom, 

Altman, and MB, (3) breach of fiduciary duty by Bloom, 

Altman, and MB, (4) controlling person liability under 

Section 20(a) of the Exchange Act against the MB Directors,

and (5) negligent supervision against the MB Directors. 

On April 13, 2010, Defendants filed motions to 

dismiss the Amended Complaint under Rules 12(b)(6) and 

9(b) of the Federal Rules of Civil Procedure, arguing that the 

 15 See U.S. Commodity Future Trading Comm’n v. 

Bloom, Civ. A. No. 09-1751 (S.D.N.Y); United States v. 

Bloom, Crim. A. No. 09-MAG-501 (S.D.N.Y); In re North 

Hills, L.P., No. 09-13035-AJG (Bankr. S.D.N.Y.); Alexander 

Dawson Found. v. Bloom, Index No. 603590/08 (N.Y. Sup. 

Ct.). Appellees are not parties to those proceedings, and the 

Investors state that those proceedings do not involve the 

issues raised in this appeal. 
17

Investors had failed to state a claim and had not pled the 

elements of fraud with the required particularity. On June 10, 

2010, the District Court dismissed all of the Investors’ claims 

against Altman. However, the Court denied all of the other

Defendants’ motions to dismiss. 

On October 31, 2011, following discovery and an 

unsuccessful attempt at settlement, the MB Defendants 

(excluding Altman), the Centre Defendants, and the MB 

Directors filed motions for summary judgment. On January 

5, 2012, the District Court granted summary judgment to all 

of the remaining Defendants, with the exception of Bloom, on 

all of the Investors’ claims. Because Bloom had previously 

failed to appear, plead, or otherwise defend, the Court gave 

the Investors leave to move for default judgment against him, 

which they did. On February 17, 2012, the Court entered a 

default judgment against Bloom and in favor of the Investors 

in the amount of approximately $5.7 million. 

The June 10, 2010 dismissal of Altman and the 

January 5, 2012 grant of summary judgment to the other 

Defendants became final upon the entry of the default 

judgment against Bloom. This timely appeal followed.16 

 16 Investors appeal both that portion of the June 10, 

2010 Order granting Altman’s motion to dismiss and the 

January 5, 2012 Order granting the motions for summary 

judgment by the MB Defendants, the Centre Defendants, and 

Grosscup, Barr, Munn, and Bernhard. 
18

II. DISCUSSION17

 17 The District Court had subject matter jurisdiction 

pursuant to 28 U.S.C. § 1331 and 15 U.S.C. §§ 77u, 78aa, and 

supplemental jurisdiction pursuant to 28 U.S.C. § 1367(a). 

The District Court alternatively had jurisdiction pursuant to 

28 U.S.C. § 1332(a)(1), because there was complete diversity 

of citizenship – the Investors are all citizens of the 

Commonwealth of Pennsylvania, and Defendants are all 

citizens of the State of New York – and the amount in 

controversy exceeds $75,000. We have jurisdiction under 28 

U.S.C. § 1291.

Our review of a district court’s order granting a motion 

to dismiss is plenary. Ill. Nat’l Ins. Co. v. Wyndham 

Worldwide Operations, 653 F.3d 225, 230 (3d Cir. 2011). 

“To survive a motion to dismiss, a complaint must contain 

sufficient factual matter, accepted as true, to state a claim to 

relief that is plausible on its face.” Id. (quoting Ashcroft v. 

Iqbal, 556 U.S. 662, 678 (2009) (internal quotation marks 

omitted)). “A claim has facial plausibility when the plaintiff 

pleads factual content that allows the court to draw the 

reasonable inference that the defendant is liable for the 

misconduct alleged.” Iqbal, 556 U.S. at 678.

We also exercise plenary review over the District 

Court’s grant of summary judgment. Howley v. Mellon Fin. 

Corp., 625 F.3d 788, 792 (3d Cir. 2010). “[S]ummary 

judgment is proper if the pleadings, depositions, answers to 

interrogatories, and admissions on file, together with the 

affidavits, if any, show that there is no genuine issue as to any 

material fact and that the moving person is entitled to a 

judgment as a matter of law.” Celotex Corp. v. Catrett, 477 

U.S. 317, 322 (1986) (quoting Fed. R. Civ. P. 56(c)) (internal 

quotation marks omitted). A factual dispute is genuine “if the 
19

The Investors press on appeal all of the theories of 

liability they argued before the District Court. First, they

contend that the MB Directors and the Centre Defendants are 

liable for the North Hills fraud as “controlling persons” under 

Section 20(a) of the Exchange Act, and that the MB Directors 

are also liable under common law principles of negligent 

supervision. Second, they argue that Altman is directly liable 

for securities fraud, under both Rule 10b-5 and the 

Pennsylvania UTPCPL, and that Altman’s and Bloom’s Rule 

10b-5 and UTPCPL violations should be imputed to MB. 

Third, they argue that Altman and MB are liable for breach of 

fiduciary duty. We address each of those theories of liability

in turn.

A. Claims Against The MB Directors And The 

Centre Defendants18

 

evidence is such that a reasonable jury could return a verdict 

for the nonmoving party.” Anderson v. Liberty Lobby, Inc., 

477 U.S. 242, 248 (1986).

18 We note at the outset that Bernhard was entitled to 

summary judgment on those claims because he resigned as 

both an employee and director, and became a consultant, at 

the closing of the acquisition of MB by Centre Partners 

(through CMB), Machinist, and Bloom in July 2004. 

Bernhard was therefore neither an officer nor a director of 

MB, and thus was not in any position of “control” or 

“supervision” over either Bloom or MB, during the relevant 

timeframe. See supra note 7. We therefore affirm the 

District Court’s grant of summary judgment to Bernhard on 

that basis.
20

1. Section 20(a) Controlling Person Claim

Against the MB Directors and the Centre 

Defendants

The District Court granted summary judgment to the 

MB Directors and the Centre Defendants on the Investors’ 

controlling person claim, finding no evidence of “culpable 

participation” by those defendants in the North Hills fraud, 

either in the form of active participation or intentional 

inaction. (App. at 13-14.) The Investors argue that the 

“reckless failure” of the MB Directors and the Centre 

Defendants to monitor Bloom’s activities made them 

“culpable participants” in Bloom’s fraud. (Appellants’ 

Opening Br. at 36.)

Section 20(a) of the Exchange Act provides that

[e]very person who, directly or indirectly, 

controls any person liable under any provision 

of this chapter or of any rule or regulation 

thereunder shall also be liable jointly and 

severally with and to the same extent as such 

controlled person to any person to whom such 

controlled person is liable ... , unless the 

controlling person acted in good faith and did 

not directly or indirectly induce the act or acts 

constituting the violation or cause of action.

15 U.S.C. § 78t(a).19

 19 Although § 20(a) governs the Investors’ “controlling 

person” claims, we have said that “§ 20(b), not § 20(a), 

defines the general standard of lawfulness to which a 

 Section 20(a) thus opens the possibility 

of making “controlling persons jointly and severally liable 
21

with the controlled person” for violations of the Exchange 

Act. In re Merck & Co., Inc. Sec. Litig., 432 F.3d 262, 275 

(3d Cir. 2005). “Under the plain language of the statute, 

plaintiffs must prove not only that one person controlled 

another person, but also that the ‘controlled person’ is liable 

under the [Exchange] Act.” In re Alpharma Sec. Litig., 372 

F.3d 137, 153 (3d Cir. 2004) (internal quotation marks

omitted), abrogated on other grounds by Tellabs, Inc. v. 

Makor Issues & Rights, Ltd., 551 U.S. 308 (2007). 

In addition to the statutory elements of controlling 

person liability, we have also held that, in order for secondary 

liability to attach under § 20(a), the defendant “must have 

been a ‘culpable participant’ in the ‘act or acts constituting 

the violation or cause of action.’”20

 

controlling person must conform.” SEC v. J.W. Barclay & 

Co., 442 F.3d 834, 844 n.14 (3d Cir. 2006) (citing SEC v. 

Coffey 493 F.2d 1304, 1318 (6th Cir. 1974)). Section 20(b) 

provides that “[i]t shall be unlawful for any person, directly or 

indirectly, to do any act or thing which it would be unlawful 

for such person to do under the provisions of this chapter or 

any rule or regulation thereunder through or by means of any 

other person.” 15 U.S.C. § 78t(b).

SEC v. J.W. Barclay & 

20 We derived that requirement from the legislative 

history of § 20(a), comparing an “insurer’s liability” standard 

proposed by the Senate, with the “fiduciary standard” 

proposed by the House and ultimately adopted in the text of §

20(a). We thus determined that Congress did not intend for 

controlling persons to be the “insurer against the fraudulent 

activities of another,” but rather that “what Congress did 

intend was to impose liability on those who were controlling 

persons and who were in some meaningful sense culpable 
22

Co., 442 F.3d 834, 841 n.8 (3d Cir. 2006) (citing Rochez 

Bros., Inc. v. Rhoades, 527 F.2d 880, 889-90 (3d Cir. 1975)); 

see also Sharp v. Coopers & Lybrand, 649 F.2d 175, 185 (3d 

Cir. 1981), overruled on other grounds by In re Data Access 

Sys. Sec. Litig., 843 F.2d 1537 (3d Cir. 1988) (en banc) (“One 

element of any case imposing liability under § 20(a) is 

‘culpable participation’ in the securities violation.”).

Examples of such culpable participation include an 

executive’s transfer of assets to himself so that the brokerage 

firm he controlled would be unable to pay a penalty to the 

SEC, see J.W. Barclay & Co., 442 F.3d at 841 n.8, and a 

broker-dealer’s “active participation” in a scheme to induce 

investors to purchase stock in an insolvent company in which 

the role of the broker-dealer and its sole shareholder “was not 

merely that of a facade for fraud but rather one of a culpable 

 

participants in the fraud perpetrated by the controlled 

persons.” Rochez Bros., Inc. v. Rhoades, 527 F.2d 880, 885

(3d Cir. 1975) (internal quotation marks omitted). 

Notwithstanding our articulation of that culpable participation 

requirement, a difference of opinion has emerged among 

district courts of this Circuit as to the pleading requirements 

for a § 20(a) claim. Compare In re Able Labs. Sec. Litig., No. 

05-2681, 2008 WL 1967509, at *29 (D.N.J. Mar. 24, 2008) 

(“[T]he Third Circuit does not require that culpable 

participation be pled in order to establish controlling person 

liability.”), with In re Nice Sys., Ltd. Sec. Litig., 135 F. Supp.

2d 551, 588 (D.N.J. 2001) (noting that culpable participation 

is an element of a § 20(a) claim when deciding a motion to 

dismiss). Because we hold that the Investors have failed to 

satisfy the culpable participation requirement for purposes of 

summary judgment, we need not, and do not, resolve the 

pleading issue at this time.
23

confederate,” Straub v. Vaisman & Co., Inc., 540 F.2d 591, 

596 (3d Cir. 1976).

The Investors point to no acts by the MB Directors in 

furtherance of the North Hills fraud, but rather seek to 

proceed on a theory of inaction. “To impose secondary 

liability on a controlling person for his inaction, the plaintiff 

must prove that the inaction ‘was deliberate and done 

intentionally to further the fraud.’” Sharp, 649 F.2d at 185 

(quoting Rochez Bros., 527 F.2d at 890). The Investors 

contend that culpable participation “may be premised on 

inaction[] ... if it is apparent that the inaction intentionally 

furthered the fraud or prevented its discovery.” (Appellants’

Opening Br. at 37 (quoting Rochez Bros., 527 F.2d at 890 

(emphasis added in quotation) (internal quotation marks 

omitted).) The Investors thus appear to suggest that any 

inaction that prevented the discovery of the fraud is sufficient 

for culpable participation. 

However, it is clear from Rochez Brothers that the 

requirement that the inaction be intentional applies both to 

furthering the fraud and to preventing its discovery, and that 

knowledge of the underlying fraud is required in either case.

“[I]naction alone cannot be a basis for liability,” Rochez 

Bros., 527 F.2d at 890, and a § 20(a) claim based on inaction 

fails if the controlling person “had no knowledge of [the 

controlled person’s] fraudulent acts and did not consciously 

intend to aid” the controlled person, id. (internal quotation 

marks omitted). Culpable participation requires knowledge 

because, “[i]n order to be a participant, the defendant must 

have some actual knowledge of the fraudulent activity taking 

place or knowledge must be imputed to him or her... .” 

Poptech, L.P. v. Stewardship Credit Arbitrage Fund, LLC, 
24

792 F. Supp. 2d 328, 341 (D. Conn. 2011) (internal quotation 

marks omitted); see also id. (noting also that “knowledge is a

first step in proving active participation” (internal quotation 

marks omitted)). The Investors have not alleged that the MB 

Directors or the Centre Defendants knew of the North Hills 

fraud, and in fact they concede a lack of knowledge in that 

“MB’s compliance officers failed to follow up on significant 

‘red flags’ that, if investigated, would have undoubtedly 

indentified Bloom’s fraud and prevented Investors’ losses.” 

(Appellant’s Opening Br. at 40.)

The Investors argue, however, that “because liability is 

secondary and not primary, a plaintiff need only [prove] a 

state of mind approximating recklessness ... and not the sort 

of knowing misconduct that would be required to state a 

primary violation claim under Section 10(b).” (Appellants’ 

Opening Br. at 37 (citation and internal quotation marks 

omitted).) They primarily rely on an unreported district court 

case, Lautenberg Foundation v. Madoff, No. 09-816, 2009 

WL 2928913, at *15 (D.N.J. Sept. 9, 2009), for the 

proposition that “reckless failure to detect the fraud through 

enforcement of a reasonably adequate system of internal 

controls establishes ... participation in the fraud for purposes 

of [a] Section 20(a) claim.” (Appellants’ Opening Br. at 

38.)21

 21 The Investors’ reliance on Lautenberg Foundation at 

this stage of the proceedings concerning their § 20(a) claims 

is somewhat misplaced, because the quoted language

describes the district court’s view of the pleading standard 

necessary to survive a motion to dismiss, and not the proof 

required to survive a motion for summary judgment. See 

Lautenberg Found., 2009 WL 2928913, at *15 (concluding 

 As they see it, the failure of the MB Directors and the 
25

Centre Defendants to monitor Bloom’s activity with respect 

to North Hills, and in particular their failure to install an 

effective compliance system at MB, satisfies that recklessness 

standard.

That approach is problematic. To begin with, the 

Investors’ contention that they need only prove recklessness 

because § 20(a) liability is “secondary and not primary” is 

contrary to the general principle that, when liability is 

secondary or derivative, a more culpable mens rea, not a 

lesser one, is required. See, e.g., MGM Studios, Inc. v. 

Grokster, Ltd., 545 U.S. 913, 930 (2005) (noting that 

secondary liability for copyright infringement requires 

intentional inducement of direct infringement); Inwood Labs., 

Inc. v. Ives Labs., Inc., 456 U.S. 844, 854 (1982) (holding that 

secondary liability for trademark infringement arises when a 

manufacturer or distributor intentionally induces another to 

infringe); Vita-Mix Corp. v. Basic Holding, Inc., 581 F.3d 

1317, 1328 (Fed. Cir. 2009) (noting that secondary liability 

for patent infringement requires a showing that the defendant 

“knowingly induced the infringing acts” with “a specific 

intent to encourage another’s infringement of the patent”);

Decker v. SEC, 631 F.2d 1380, 2387 n.12 (10th Cir. 1980)

(noting that many courts have concluded that secondary 

liability for securities law violations requires either intent to 

aid and abet or knowledge of the underlying violation). 

In addition, contrary to the Investors’ contention, there 

is no support for the proposition that reckless inaction without 

knowledge of the underlying fraud is sufficient to establish 

 

only that “the Complaint satisfactorily pleads all elements of 

a prima facie control person claim”).
26

culpable participation for purposes of a § 20(a) claim. The 

discussion in Lautenberg Foundation does not appear to go 

that far. See Lautenberg Found., 2009 WL 2928913, at *14 

(“[T]he Complaint adequately pleads that [Defendant] knew 

or should have known that [his company] was engaging in a 

massive, multi-billion dollar Ponzi scheme.”); id. at *15 

(“While mere inaction is not enough to rise to culpable 

participation, this Complaint pleads more than that.”). 

However, to the extent that that case can be read to suggest 

that knowledge of the underlying securities law violation is 

not required, we expressly reject it as incompatible with the 

“culpable participation” standard we articulated in Rochez 

Brothers.

Moreover, even if reckless inaction on the part of 

controlling persons, without knowledge of the underlying 

fraud, were sufficient to satisfy the culpable participation 

requirement, that standard is not met in this case. A failure to 

oversee the enforcement of compliance protocols does not 

necessarily constitute recklessness for purposes of a § 20(a) 

claim. Cf. In re Advanta Corp. Sec. Litig., 180 F.3d 525, 539-

40 (3d Cir. 1999) (noting that recklessness for purposes of 

Rule 10b-5 requires “an extreme departure from the standards 

of ordinary care” and that “claims essentially grounded on 

corporate mismanagement are not cognizable under federal 

law” (citation and internal quotation marks omitted)); 

Henricksen v. Henricksen, 640 F.2d 880, 885 (7th Cir. 1981) 

(acknowledging that the defendant “did not properly follow 

its own compliance rules” but holding that “the technical lack 

of compliance in these matters ... would not have constituted

a violation of Section 20(a)”). The fact that sloppy 

compliance practices at MB may have resulted in a lack of 

knowledge about Bloom’s activities at North Hills is thus 
27

insufficient to establish culpable participation for purposes of 

§ 20(a) liability.22 

As the District Court noted, “the only answer to the 

question of what the [MB Directors and the] Centre

Defendants did that intentionally furthered the fraud of 

Bloom is nothing.” (App. at 16.) Under the culpable 

participation standard that we articulated in Rochez Brothers, 

that answer is fatal to a § 20(a) claim, and the District Court 

properly granted summary judgment to the MB Directors and 

the Centre Defendants on that claim.

 22 The recklessness alleged in this case also bears little 

resemblance to that in Lautenberg Foundation. In that case, 

the defendant was the chief compliance officer and general 

counsel of the company that perpetrated a massive Ponzi 

scheme. 2009 WL 2928913, at *2. The Court therefore held 

that, “[a]ssuming the truth of the allegations, his reckless 

failure to detect fraud through enforcement of a reasonably 

adequate system of internal controls establishes his 

participation in the fraud for purposes of the Section 20(a) 

claim[]” because he was “charged with the responsibility and 

authority to run [the company] in accordance with the law. 

Id. at *15. In this case, none of the MB Directors or Centre 

Defendants worked for, let alone had any compliance 

responsibilities at, North Hills, the entity at which the actual 

fraud occurred, so that their alleged failure to instill a culture 

of compliance at MB cannot constitute recklessness as it 

related to North Hills. 
28

2. Negligent Supervision Claim Against the 

MB Directors 

The District Court granted summary judgment to the 

MB Directors on the Investors’ negligent supervision claim

because “[t]he cases applying this tort under Pennsylvania 

law repeatedly note that liability is imposed upon an 

employer” (Id. at 18), and “it does not follow that [Bloom’s] 

employment with MB turned individual board members of 

MB into Bloom’s employers as well” (id. at 19). The District 

Court also held that, “[t]o succeed on this claim, there must 

be evidence that the individuals charged with negligent 

supervision knew or should have know that Bloom would 

operate North Hills ... as a Ponzi scheme” (Id. at 19), and that, 

absent a showing of such knowledge, “there is no evidence 

that Bloom’s fraud was reasonably foreseeable.” (Id.).

The Investors assert in response that “[p]ersons vested 

with supervisory responsibilities like the individual MB and 

Centre [defendants], who are corporate officers and directors 

of MB, can be liable for negligent supervision” under 

Pennsylvania law. (Appellants’ Opening Br. at 27.) They 

further argue that the failure of the MB Directors to monitor 

Bloom’s activities, when those directors were aware that he 

was operating North Hills as a separate venture, rendered the 

fraud foreseeable as a matter of law. Neither of the Investors’ 

arguments is persuasive.

i. Negligent Supervision Claims 

Against Corporate Directors

To recover for negligent supervision under 

Pennsylvania law, a plaintiff must prove that his loss resulted 

from (1) a failure to exercise ordinary care to prevent an 
29

intentional harm by an employee acting outside the scope of 

his employment, (2) that is committed on the employer’s 

premises, (3) when the employer knows or has reason to 

know of the necessity and ability to control the employee.23

 23 Pennsylvania cases that recognize vicarious liability 

for negligent supervision draw on both the Restatement 

(Second) of Agency and the Restatement (Second) of Torts. 

See, e.g., Dempsey v. Walso Bureau, Inc., 246 A.2d 418, 419-

20 (Pa. 1968); Heller v. Patwil Homes, Inc., 713 A.2d 105, 

107 (Pa. Super. Ct. 1998). Section 213 of the Restatement 

(Second) of Agency provides, in relevant part:

 

A person conducting an activity through 

servants or other agents is subject to liability for 

harm resulting from his conduct if he is 

negligent or reckless: ... [b] in the employment 

of improper persons or instrumentalities in 

work involving risk of harm to others; or [c] in 

the supervision of the activity; or [d] in 

permitting, or failing to prevent, negligent or 

other tortious conduct, by persons, whether or 

not his servants or agents, upon premises or 

with instrumentalities under his control.

Id. Section 317 of the Restatement (Second) of Torts 

provides:

A master is under a duty to exercise reasonable 

care so to control his servant while acting 

outside the scope of his employment as to 

prevent him from intentionally harming others 

... if 

(a) the servant (i) is upon the premises in 

possession of the master or upon which the 
30

Dempsey v. Walso Bureau, Inc., 346 A.2d 418, 420 (Pa. 

1968); Heller v. Patwil Homes, Inc., 713 A.2d 105, 107-08

(Pa. Super. Ct. 1998). 

Negligent supervision requires the four elements of 

common law negligence, i.e., duty, breach, causation, and 

damages. Brezenski v. World Truck Transfer, Inc., 755 A.2d 

36, 42 (Pa. Super. Ct. 2000) (citing Restatement (Second) of 

Agency § 213 cmt. a). It is specifically predicated on two 

duties of an employer: the duty to reasonably monitor and 

control the activities of an employee, and the duty to abstain 

from hiring an employee and placing that employee in a 

situation where the employee will harm a third party.

24

 

servant is privileged to enter only as his servant, 

or (ii) is using a chattel of the master, and 

 See 

(b) the master (i) knows or has reason to know 

that he has the ability to control his servant, and 

(ii) knows or should know the necessity and 

opportunity for exercising such control.

Id. The MB Defendants argue that that provision “relates 

solely to bodily harm, not the purely economic harm at issue 

here.” (MB Defendants’ Br. at 20 (citing Semrad v. Edina 

Realty, Inc., 493 N.W.2d 528, 534 (Minn. 1992) (“Nothing in 

section 317 calls for its application in a case involving 

economic loss only.”)).) However, Pennsylvania does not 

appear to limit the tort of negligent supervision to cases of 

physical injury. See Heller, 713 A.2d at 109 (considering an 

“investment scam”).

24 We have also described negligent supervision under 

Pennsylvania law as existing “where the employer fails to 

exercise ordinary care to prevent an intentional harm to a 
31

Hutchinson v. Luddy, 742 A.2d 1052, 1059-60 (Pa. 1999)

(affirming the applicability of common law negligence and 

discussing the duty of an employer articulated in Section 317 

of the Restatement).

Negligent supervision differs from employer 

negligence under a theory of respondeat superior. 

A claim for negligent supervision provides a 

remedy for injuries to third parties who would 

otherwise be foreclosed from recovery under 

the principal-agent doctrine of respondeat 

superior because the wrongful acts of 

 

third party which (1) is committed on the employer’s 

premises by an employee acting outside the scope of his 

employment and (2) is reasonably foreseeable.” Petruska v. 

Gannon Univ., 462 F.3d 294, 309 n.14 (3d Cir. 2006) 

(internal quotation marks omitted). The harm caused by the 

employee must be reasonably foreseeable because “[l]iability 

under Section 213 [of the Restatement [Second] of Agency] 

exists only if all the requirements of an action of tort for 

negligence exist.” Gigli v. Palisades Collection, L.L.C., No. 

06-1428, 2008 WL 3853295, at *16 (M.D. Pa. Aug. 14, 2008) 

(internal quotation marks omitted) (citing Brezenski v. World 

Truck Transfer, Inc., 755 A.2d 36, 42 (Pa. Super. Ct. 2000)). 

The definitions of negligent supervision set forth in Dempsey, 

supra, and Petruska are the same, but the former emphasizes 

the foreseeability of the need to control the employee, while 

the latter stresses the foreseeability of the harm the employee 

causes. We discuss these foreseeability requirements infra

Part II.A.2.ii.
32

employees in these cases are likely to be outside 

the scope of employment or not in furtherance 

of the principal’s business.” 

In re Am. Investors Life Ins. Co. Annuity Mktg. & Sales 

Practices Litig., No. 05-3588, 2007 WL 2541216, at *29 

(E.D. Pa. Aug. 29, 2007) (citing Heller, 713 A.3d at 107).

The question of whether a corporate director, rather 

than a corporation as employer, may be held liable for 

negligent supervision can be resolved by asking whether a 

director owes a duty to third parties to supervise the

corporation’s culpable employee. See Harris v. KFC U.S. 

Props., Inc., No. 10-3198, 2012 WL 2327748, at *6 n.8 (E.D. 

Pa. June 18, 2012) (noting that “in cases alleging negligent 

hiring and supervising, the disputed issue is typically whether 

a duty to a third party exists”). It is true that corporate 

directors are often said to have, as part of their fiduciary duty 

of loyalty, a duty to act in good faith for the benefit of the 

corporation, see Stone ex rel. AmSouth Bancorp. v. Ritter, 911 

A.2d 362, 370 (Del. 2006) (describing “the requirement to act 

in good faith” as “a subsidiary element[,] i.e., a condition, of 

the fundamental duty of loyalty” (internal quotation marks 

omitted)), and that, in turn, has been held to incorporate a 

duty of oversight, see In re Caremark Intern., Inc., Derivative 

Litig., 698 A.2d 959, 971 (Del. Ch. 1996) (positing liability 

due to “a sustained or systematic failure of the board to 

exercise oversight – such as an utter failure to attempt to 

assure [that] a reasonable information and reporting system 

exists”). But that has never been understood as placing on 

directors the responsibility for day-to-day supervision of 

employees. On the contrary, those quotidian tasks are the 

work of employee-supervisors, not the board of directors. See 
33

id. (noting that “require[ing] directors to possess detailed 

information about all aspects of the operation of the 

enterprise[] ... would simpl[y] be inconsistent with the scale 

and scope of efficient organization size in this technological 

age”).

The fiduciary duties of the board are of a different 

character entirely. See Winer Family Trust v. Queen, 503 

F.3d 319, 338 (3d Cir. 2007) (“Under Pennsylvania law, 

corporate directors owe fiduciary duties ... ‘solely to the 

business corporation ... [that] may not be enforced directly by 

a shareholder or by any other person or group.’” (quoting 15 

Pa. Cons. Stat. Ann. § 1717)). Consequently, “in the absence 

of special circumstances it is the corporation, not its owner or 

officer, who is the principal or employer, and thus subject to 

vicarious liability for torts committed by its employees or 

agents.” Meyer v. Holley, 537 U.S. 280, 286 (2003). “[A] 

corporate employee typically acts on behalf of the 

corporation, not its owner or officer,” id., so that there is no 

agency relationship between an officer or director and an 

employee.

Virtually all of the cases in which liability for 

negligent supervision has been found under Pennsylvania law 

concern corporations and their employees.25

 25 The Investors rely heavily on Hutchinson v. Luddy, 

742 A.2d 1052 (Pa. 1999), for the proposition that “claims for 

negligent supervision may include ‘superiors’ of servants who 

commit wrongful acts.” (Appellants’ Opening Br. at 28 

(citing Hutchinson, 742 A.2d at 1059).) The Investors also 

argue that “the court in Hutchinson focused on who had 

‘supervisory responsibility or a real right to consider the 

 See, e.g., 
34

 

issues of [the employee’s] retention.’” (Id. (quoting 

Hutchinson, 742 A.2d at 1057.) Hutchinson concerned claims 

of child molestation against a priest in the Roman Catholic 

Diocese of Altoona-Johnstown. The Court found that the 

bishop (as well as the Diocese) could be held liable for 

negligent supervision because he “knew for certain that [the 

priest] had a propensity for pedophilic behavior and [was] 

aware of several specific instances of such conduct.” 

Hutchinson, 742 A.2d at 1059.

Hutchinson, however, is inapposite. The Investors 

quote the phrase “supervisory responsibility or a real right to 

consider the issue of [the employee’s] employment” (which 

the trial court in Hutchinson had used as part of a jury 

instruction) entirely out of context. That phrase was intended 

to distinguish the supervisory role of the Diocese and the 

bishop from that of the priest’s former parish and pastor, after 

the priest had left the parish and was employed directly by the 

Diocese. See id. at 1056-57. The statement does not suggest 

general liability for those in a “supervisory” capacity, and all 

the cases cited by the Hutchinson court as “analogous,” id. at 

1058, involve a defendant that was a corporate entity and 

harm that was caused by an employee or agent of that entity. 

See id. at 1058-59 (discussing Dempsey, 246 A.2d at 418 

(security agency defendant for assault by employee guard); 

Golden Spread Council, Inc. v. Akins, 926 S.W.2d 287 (Tex. 

1996) (local branch of Boy Scouts of America defendant for 

sexual molestation by scoutmaster); Macquay v. Eno, 662 

A.2d 272 (N.H. 1995) (school district defendant for 

employees’ abuse of students)). Also, “in Hutchinson, 

liability clearly was premised upon the master-servant 

relationship between the priest and his superiors as well as the 

special relationship between the parishioner, on the one hand, 
35

Dempsey, 248 A.3d at 420-23 (discussing various early cases 

of negligent supervision, in all of which the defendant was a 

corporate employer); Harris, 2012 WL 2327748, at *7 

(considering liability of fast food company for assault by 

employee on a customer who was slow in ordering); Corr.

Med. Care, 2008 WL 248977, at *15-16 (considering liability 

of employer for failure to supervise employees conducting 

private investigations); In re Am. Investors Life Ins. Co., 2007 

WL 2541216, at *29 (dismissing negligent supervision claims 

against insurer for fraudulent sales practices by employees 

because they were acting at the employer’s direction). We 

take that clear feature to be dispositive, so that when, as in 

this case, “Plaintiff alleges in the Complaint that [Defendant] 

is ... not an employer ... ‘negligent supervision’ is not a viable 

theory of liability.” Quandry Solutions, Inc. v. Verifone Inc., 

No. 07-97, 2007 WL 655606, at *5 (E.D. Pa. Mar. 1, 2007);

cf. id. (“In contrast to the employer-employee context, there is 

no general duty for a parent corporation to supervise its 

subsidiary; absent a piercing of the corporate veil, a parent 

corporation is not normally liable for wrongful acts or 

contractual obligations of a subsidiary ... .” (internal quotation 

marks omitted)). 

As the District Court noted, the Investors brought their 

negligent supervision claim only against the MB Directors, 

 

and the superiors of the church, on the other hand.” F.D.P. ex 

rel. S.M.P. v. Ferrara, 804 A.2d 1221, 1229 (Pa. Super. Ct. 

2002). Bloom did not stand in the same relationship to the 

MB Directors as a priest to his bishop, nor do the Investors 

stand in the same sort of relationship to the MB Directors as 

parishioners to the hierarchy of a Catholic Diocese.
36

and not against MB as Bloom’s employer,26 and “[i]t does not 

follow that [Bloom’s] employment with MB turned individual 

board members of MB into Bloom’s employers as well.”

(App. at 19.) As a result, the Investors’ claim against the 

directors under a theory of negligent supervision is not viable, 

notwithstanding their efforts to cast the directors in a 

“supervisory” role.27

 26 The Investors have included MB as one of the “MB 

Parties” against whom they assert liability for negligent 

supervision in their brief on appeal. (See Appellants’ 

Opening Br. at 5, 29, 35.) However, the Amended Complaint 

alleged liability “[f]or Negligent Supervision By Officers and 

Directors” only against the MB Directors. (See App. at 103.) 

The reasons for that pleading choice are not clear from the 

record, but MB was not the subject of the allegations in the 

Investors’ negligent supervision claim.

27 The Investors allege that Machinist occupied a 

different supervisory position from the other MB Directors in 

that, as MB’s chief operating officer, he was Bloom’s 

“immediate superior.” (Appellants’ Opening Br. at 29.) 

However, the extent of Machinist’s supervisory authority 

over Bloom is not clear from the record. Machinist and 

Bloom were co-managing partners of MB and held the same 

percentage ownership in the company, suggesting that they 

may have been effectively of equal rank in the organization. 

But even if Machinist had a supervisory role greater than that 

of the other MB Directors, the Investors’ negligent 

supervision claim against him still fails based on a lack of 

foreseeability, as discussed infra Part II.A.2.ii.
37

ii. Foreseeability Requirement for 

Negligent Supervision

Even assuming that corporate directors may be held 

liable as “supervisors,” to prevail in their claim for negligent 

supervision, the Investors would also have to satisfy two 

separate foreseeability requirements. First, “[u]nder 

Pennsylvania law, ... an employer may be liable for 

negligence if it knew or should have known of the necessity 

for exercising control of its employee.” Devon IT, Inc. v. 

IBM Corp., 805 F. Supp. 2d 110, 132 (E.D. Pa. 2011) (citing 

Brezenski v. World Truck Transfer, Inc., 755 A.2d 36, 39-40 

(Pa. Super. Ct. 2000) (citing Dempsey, 246 A.2d at 422)). 

Second, the harm that the improperly supervised employee 

caused to the third party must also have been reasonably

foreseeable. Petruska v. Gannon Univ., 462 F.3d 294, 309 

n.14 (3d Cir. 2006); Mullen v. Topper’s Salon & Health Spa, 

Inc., 99 F. Supp. 2d 553, 556 (E.D. Pa. 2000). The 

requirement that the employer foresee the need to supervise 

the employee comes from § 317 of the Restatement (Second) 

of Torts, see supra note 23, and the requirement that the harm

itself is foreseeable comes from § 213 of the Restatement 

(Second) of Agency, which requires that all of the elements of 

the tort of negligence exist in order for liability for negligent 

supervision to attach, see supra note 24.

An employer knows, or should know, of the need to 

control an employee if the employer knows that the employee 

has dangerous propensities that might cause harm to a third 

party. See Hutchinson, 742 A.2d at 1057-58 (citing Dempsey, 

246 A.2d at 423 (holding employer not liable where 

employee’s act of “horseplay” while on the job did not

suggest a propensity for violence)); see also Coath v. Jones, 
38

419 A.2d 1249, 1250 (Pa. Super. Ct. 1980) (holding employer 

liable where employer should have known of employee’s 

inclination to assault women)). A harm is foreseeable if it is 

part of a general type of injury that has a reasonable 

likelihood of occurring. See Serbin v. Bora Corp., Ltd., 96 

F.3d 66, 72 (3d Cir. 1996) (“The concept of foreseeability 

means the likelihood of the occurrence of the general type of 

risk rather than the likelihood of the occurrence of the precise 

chain of events leading to the injury.”). 

The Investors’ negligent supervision claim fails both 

foreseeability tests. First, there is no reason that the MB 

Directors should have foreseen the need to supervise Bloom 

with respect to his operation of North Hills. An employer is 

under “no duty ... to discover, at its peril, the fraudulent 

machinations in which [an employee] was involved outside 

the scope of his employment.” Cover v. Cushing Capital 

Corp., 497 A.2d 249, 253-54 (Pa. Super. Ct. 1985). While 

some (and perhaps all) of the MB Directors were aware that 

Bloom was running North Hills as a hedge fund outside of 

MB, nothing in Bloom’s conduct as an employee of MB

suggested that Bloom would use North Hills to defraud 

investors. Nor could the MB Directors have learned of the 

fraud without considerable investigation, given Bloom’s 

success at concealing the Ponzi-scheme nature of North Hills 

for almost ten years. For the same reasons, the Ponzi scheme 

and the harm that it would cause to North Hills investors were

not reasonably foreseeable by the MB Directors. 

As the District Court properly noted, the Investors 

“failed to submit any evidence that any [of the MB Directors] 

had reason to know at the time he was hired that Bloom was 

defrauding North Hills, L.P.’s investors” (App. at 20), and the 
39

Investors merely speculate about what the MB Directors 

might have learned had they asked Bloom more questions. 

Because a detailed inquiry into an employee’s personal 

history or outside activities is not generally required,28

see 

Dempsey, 246 A.2d at 423 (finding no evidence that employer 

was negligent in investigating employees’ past or that a more 

thorough investigation would have uncovered misconduct),

the negligent supervision claim fails on the basis of 

foreseeability, as well as on the defendants’ status as directors 

of MB rather than as Bloom’s employers, and the District 

Court properly granted summary judgment to the MB 

Directors on that claim.

B. Claims Under Rule 10b-5 And The UTPCPL

1. Rule 10b-5 Violations

The District Court dismissed the Rule 10b-5 claim

against Altman, noting that “the Amended Complaint makes 

no allegations that Altman was aware of Bloom’s 

squandering of North Hills’ assets.” (App. at 41.) The Court

explained that MB could not be liable under Section 10(b) of 

the Exchange Act and Rule 10b-5 because Bloom’s 

fraudulent statements, and Altman’s allegedly deceptive 

statements, related solely to investments in North Hills, “an 

entity unrelated to MB.” (App. at 21.) The Court noted that

“Plaintiffs do not charge that any individuals made false 

 28 We speak here strictly of the duties associated with 

the common law tort of negligent supervision under 

Pennsylvania law, and do not imply anything regarding duties 

that may exist by virtue of other common law principles, 

statutes, rules, or regulations.
40

statements about MB or its investments.” (Id.) Moreover, the 

Court said, “[w]ere this case about Bloom acting on behalf of 

MB, MB could not escape liability for Bloom’s conduct,” but

“this case presents a different set of circumstances” because 

Bloom’s fraud was perpetrated through an entity that had 

existed before he began working for MB and that had many 

investors who were not investors in MB. (Id.) 

The Investors challenge the District Court’s reasoning 

as to both Altman and MB, claiming that the Court 

“referenced no factual support for it premise that North Hills 

and MB were unrelated in the context of the Investors’ [10b5] claims.” (Appellants’ Opening Br. at 42.) The Investors 

also argue that the District Court erred when it dismissed their 

10b-5 claim against Altman because they had “allege[d] facts 

sufficient to give rise to a strong inference that defendants 

were reckless.” (Id. at 53.) Finally, the Investors say that 

statements by Bloom and Altman may be imputed to MB, 

“regardless of whether North Hills was affiliated with MB, 

because [their statements] were made in the course of their 

employment and with the apparent authority of MB.” (Id. at 

43.)

Rule 10b-5 makes it “unlawful ... [t]o engage in any 

act, practice, or course of business which operates or would 

operate as a fraud or deceit upon any person[] in connection 

with the ... sale of any security.” 17 C.FR. § 240.10b-5. The 

Rule implements Section 10(b) of the Exchange Act, which 

makes it unlawful to “use or employ, in connection with the 

purchase or sale of any security ... , any manipulative or 

deceptive device or contrivance in contravention of such rules 

and regulations as the [SEC] may prescribe.” 15 U.S.C. 

§ 78j(b).
41

To make out a securities fraud claim under Rule 10b-5, 

“a plaintiff must show that (1) the defendant made a 

materially false or misleading statement or omitted to state a 

material fact necessary to make a statement not misleading; 

(2) the defendant acted with scienter; and (3) the plaintiff’s 

reliance on the defendant’s misstatement caused him or her 

injury.” Marion v. TDI, Inc., 591 F.3d 137, 152 (3d Cir. 

2010) (internal quotation marks omitted). Scienter is “an 

intent to deceive, manipulate, or defraud.” Scattergood v. 

Perelman, 945 F.2d 618, 622 (3d Cir. 1991) (citing Ernst & 

Ernst v. Hochfelder, 425 U.S. 185, 194-214 (1976)). Rule 

10b-5 thus requires “more than negligent nonfeasance ... as a 

precondition to the imposition of civil liability.” Id., 425 U.S. 

at 215. The pleading requirements for a Rule 10b-5 violation 

are heightened by the Private Securities Litigation Reform 

Act (PSLRA), Pub. L. No. 104-67, 109 Stat. 737 (1995), 

which requires that a plaintiff “state with particularity facts 

giving rise to a strong inference that the defendant acted with 

the required state of mind.” 15 U.S.C. § 78u-4(b)(2).

i. The 10b-5 Claim Against Altman

The 10b-5 claim against Altman fails for the simple 

reason that the Investors have provided no evidence of 

scienter. To prove scienter, the Investors must show that 

Altman, with “a mental state embracing intent to deceive, 

manipulate, or defraud,” Tellabs, 551 U.S. at 319 (quoting 

Ernst & Ernst, 425 U.S. at 193-94), made some material 

misrepresentation or omitted some material fact and so left a 

materially misleading impression on them. The Investors 

have adduced no such proof. They do not contend that, when 

Altman and Bloom met with Belmont and Wallace of PFS, or 
42

that when Altman allegedly marketed North Hills as an MB 

investment option to the Kellys, Altman knew that North 

Hills was a fraud. The most they have said on this score is 

that Altman “touted” North Hills. 

The Investors likewise fail to “specify the role” of 

Altman in Bloom’s fraud or to “demonstrate[e] ... [his] 

involvement in misstatements or omissions,” see Winer 

Family Trust, 503 F.3d at 335-36, as required under the 

PSLRA. Rather, the Investors attempt to satisfy the scienter 

requirement, and the PSLRA’s heightened pleading standard,

by arguing that Altman’s praise of North Hills without 

sufficient investigation gives rise to a “strong inference that 

defendants were reckless.” (Appellants’ Opening Br. at 53.)

However, for purposes of a Rule 10b-5 claim, “[a] reckless 

statement is one involving not merely simple, or even 

inexcusable negligence, but an extreme departure from the 

standards of ordinary care, and which presents a danger of 

misleading buyers or sellers that is either known to the 

defendant or is so obvious that the actor must have been 

aware of it.” Inst. Invs. Grp. v. Avaya, Inc., 564 F.3d 242, 

267 n.42 (3d Cir. 2009) (quoting In re Advanta Corp. Sec. 

Litig., 180 F.3d 525, 535 (3d Cir. 1999)) (internal quotation 

marks omitted). Even if Altman did discuss North Hills as an 

investment option with Belmont, Wallace, or the Kellys, there 

is no evidence that the danger of misleading them was either 

known to Altman or so obvious that it should have been 

known, given Bloom’s apparently successful investment track 

record. Therefore, Altman’s statements about North Hills 

were neither knowingly false nor reckless, and the District 

Court properly dismissed the 10b-5 claim against him.
43

ii. The 10b-5 Claim Against MB

In contrast to Altman, Bloom’s violations of Rule 10b5 are beyond dispute,29 and the Investors argue that those 

violations may be imputed to MB as his employer. The 

Investors argue for imputation of Rule 10b-5 liability to MB

because “Bloom jointly marketed MB and North Hills, led 

Investors to believe [North Hills] was a[n] MB product[,] and 

[Bloom] was not the only MB employee involved in 

marketing North Hills,” the others being Machinist and 

Altman. (Appellant’s Opening Br. at 42.) 

Although the Investors’ underlying securities fraud 

claims are governed by federal law, the issue of imputation is 

determined by state law. See O’Melveny & Myers v. Fed.

Deposit Ins. Corp., 512 U.S. 79, 84-85 (1994) (declining to 

“adopt[] a special federal common-law rule divesting States 

of authority over the entire law of imputation” and holding 

that “[state] law, not federal law, governs the imputation of 

knowledge to corporate victims of alleged negligence”). 

Under Pennsylvania law, 

[T]he fraud of an officer of a corporation is 

imputed to the corporation when the officer’s 

fraudulent contact was (1) in the course of his 

employment, and (2) for the benefit of the 

corporation. This is true even if the officer’s 

conduct was unauthorized, effected for his own 

benefit but clothed with apparent authority of 

 29 Bloom pleaded guilty to all of the fraud-based 

counts in the Information filed against him. See supra Part 

I.A.5.
44

the corporation, or contrary to instructions. The 

underlying reason is that a corporation can 

speak and act only through its agents and so 

must be accountable for any acts committed by 

one of its agents within his actual or apparent 

scope of authority and while transacting 

corporate business. 

In re Pers. & Bus. Ins. Agency, 334 F.3d 239, 242-43 (3d Cir. 

2003) (internal quotation marks omitted).30 

“[T]he imputation doctrine recognizes that principals 

generally are responsible for the acts of agents committed 

within the scope of their authority.” Official Comm. of 

Unsecured Creditors of Allegheny Health Educ. & Research 

Found. v. PriceWaterhouseCoopers, LLP (AHERF), 989 A.2d 

313, 333 (Pa. 2010). “This rule of liability is not based on 

any presumed authority in the agent to do the acts, but on the 

ground of public policy ... that the principal who has placed 

 30 Although we did not base that imputation standard, 

which we first articulated in Rochez Brothers, 527 F.2d at 

884, specifically on Pennsylvania law, “the principles which 

[we] espoused are consistent with Pennsylvania agency law, 

succinctly stated by the Pennsylvania Supreme Court long 

ago.” Greenberg v. Grant Thornton L.L.P. (In re Greenberg), 

212 B.R. 76, 83-84 (Bankr. E.D. Pa. 1997) (citing Nat’l Bank 

of Shamokin v. Waynesboro Knitting Co., 172 A. 131, 134 

(Pa. 1934) (“The rule that knowledge or notice on the part of 

the agent is to be treated as notice to the principal is founded 

on the duty of the agent to communicate all material 

information to his principal and the presumption that he has 

done so.”)). 
45

the agent in the position of trust and confidence should suffer, 

rather than an innocent stranger.” Aiello v. Ed Saxe Real 

Estate, Inc., 499 A.2d 282, 285 (Pa. 1985). The imputation 

doctrine also advances public policy goals in that, “because it 

is the principal who has selected and delegated responsibility 

to [its] agents[,] ... the doctrine creates incentives for the 

principal to do so carefully and responsibly.” AHERF, 989 

A.2d at 333 (citing Aiello, 499 A.2d at 285-86); accord 

Restatement (Third) of Agency § 5.03 cmt. b (2006) 

(“Imputation creates incentives for a principal to choose 

agents carefully and to use care in delegating functions to 

them.”).

Public policy concerns also implicate the “adverse 

interest” exception to the imputation doctrine. Under the 

“adverse interest” exception, “where an agent acts in his own 

interest, and to the corporation’s detriment, imputation 

generally will not apply.” AHERF, 989 A.2d at 333 (citing

Todd v. Skelly, 120 A.2d 906, 909 (Pa. 1956)). The District 

Court applied the adverse interest exception only in the 

context of the UTPCPL, discussed infra Part II.C.2, and held 

that it barred imputation of Bloom’s violations of that statute 

to MB. However, as the MB Defendants point out, arguments 

as to the potential application of the adverse interest 

exception “apply with equal force” to the Investors’ 10b-5 

claim (MB Defendants’ Br. at 14), and so we turn to that 

exception at this point.

“The primary controversy surrounding the appropriate 

application of the adverse-interest exception ... concerns the 

degree of self-interest required, or, conversely, the quantum 

of benefit to the corporation necessary to avoid the 

exception’s application (where self-interest is evident).” 
46

AHERF, 989 A.2d at 334. At one end of the spectrum are 

cases holding that any benefit to the corporation will bar the 

application of the exception and trigger imputation. Cf. Todd, 

120 A.2d at 909 (“Where an agent acts in his own interest 

which is antagonistic to that of his principal, ... the principal 

who has received no benefit therefrom will not be liable for 

the agent’s tortious act.”). At the other end of the spectrum 

are cases that hesitate to impute liability, even in the face of 

some benefit to the corporation. Cf. Adelphia Commc’ns 

Corp. v. Bank of America (In re Adelphia Commc’ns Corp.), 

365 B.R. 24, 56 (Bankr. S.D.N.Y. 2007) (finding that the 

adverse interest exception might be applicable when there 

was only “a peppercorn of benefit to a corporation from the 

wrongful conduct”). Courts that favor “strong imputation 

rules, including a low threshold for benefit, support[] a potent 

form of in pari delicto defense,” AHERF, 989 A.2d at 334,

based on a concern “that weakening the defense and 

associated rules of imputation would represent an 

inappropriate reallocation of risks, as well as eviscerate 

socially useful defenses which otherwise would be available 

to those who transact with corporations,” id. (citing Am. Int’l 

Grp., Inc. Consol. Derivative Litig. v. Greenberg, 976 A.2d 

872, 889 (Del. Ch. 2009)). By contrast, courts that see 

“difficulty with applying too liberal a litmus for benefit,” 

AHERF, 989 A.2d at 334, are concerned about potential 

“collusion between the agent and the defendant,” id., because 

imputation, and the resulting availability of the in pari delicto

defense, “would provide total dispensation to defendants 

knowingly and substantially assisting insider misconduct,” id. 

at 335 (quoting In re Adelphia Commc’ns Corp., 365 B.R. at 

56). 
47

Whatever conclusions the District Court may have 

reached about the policy concerns affecting the adverse 

interest exception,31

 31 It does not appear that this case implicates the 

concerns about the availability of the in pari delicto defense 

that one might argue to support the District Court’s liberal 

application of the adverse interest exception. No defendant 

has tried to raise that defense – and with good reason, as there 

does not appear to be any basis at all for invoking it here.

it erred in applying it. Under the 

exception, “the question generally should be whether there is 

a sufficient lack of benefit (or apparent adversity) [to the 

corporation] such that it is fair to charge the third party with 

notice that the agent is not acting with the principal’s 

authority.” AHERF, 989 A.2d at 338. The Court presumed 

that knowledge of Bloom’s fraud is not imputable to MB 

because “[[w]]here one in transacting the business of his 

principal is committing fraud for his own benefit, he is not 

acting within the scope of his authority as his principal’s 

agent ... .” (App. at 26 (quoting Lilly v. Hamilton Bank of 

N.Y., 178 F. 53, 56 (3d Cir. 1909) (internal quotation marks 

omitted).) However, imputation to an employer is proper 

based on “acts committed by one of its agents within his 

actual or apparent scope of authority,” In re Pers. & Bus. Ins. 

Agency, 334 F.3d at 243, and a swindler may still act with 

apparent authority, even if he is acting for his own benefit. 

Also, the District Court found sufficient “adversity of 

interest” in the fact that the discovery of the North Hills fraud 

ultimately destroyed MB as well. But that adverse impact 

occurred only after the exposure of the North Hills Ponzi 

scheme. While the scheme was on-going, at the time the 

Investors put their money in North Hills, what they knew did 

not necessarily give them notice that Bloom was acting 
48

outside the scope of his employment. Indeed, what they 

knew and what they should have concluded are contested 

issues of fact.

Ultimately, under Pennsylvania law,“[i]n light of the 

competing concerns, the appropriate approach to benefit and 

self-interest is best related back to the underlying purpose of 

imputation, which is fair risk-allocation, including the 

affordance of appropriate protection to those who transact 

business with corporations.” AHERF, 989 A.2d at 335. We 

therefore conclude that imputation may be appropriate in this 

case, if the Investors can prove that the manner in which 

Bloom marketed North Hills to them while he was working 

for MB, and the apparent benefit to MB, made it appear that 

he marketed North Hills within the scope of his authority as a 

senior executive of MB.

There is a genuine issue of material fact as to whether 

Bloom’s fraudulent statements were made as part of his 

employment with, and for the benefit of MB, so that those 

statements might be imputed to MB. On the one hand, the 

record indicates that Bloom made it clear that he, not MB or 

any of its other employees, personally managed North Hills, 

and North Hills’ marketing and subscription materials, tax 

reporting documents, and capital account statements did not 

include any references to MB. On the other hand, there is 

evidence that Bloom marketed North Hills to existing and 

potential clients of MB in meetings that were ostensibly held

to discuss MB’s investment advisory services, and that he at 

times represented North Hills to be an MB fund. There is 

also evidence that Bloom openly used other MB employees to 

conduct North Hills business, used his MB business card in 

meetings in which he marketed North Hills, and presented an 
49

asset allocation recommending an investment in North Hills 

on MB letterhead, all of which may have created the 

impression for at least some of the Investors that Bloom 

operated North Hills under the apparent authority of MB. 

Also, Bloom’s operation of North Hills appears to have been 

of at least some benefit to MB. There is evidence that MB 

used access to North Hills as a selling point in the marketing 

of MB’s investment advisory services, and MB used North 

Hills as a source of potential clients, soliciting North Hills’

largest investors for business. If those points of evidence are 

accepted, there is a basis for imputation.

Imputation of Bloom’s violations of Rule 10b-5 to MB 

would also be consistent with the public policy goals served 

by the imputation doctrine. The record suggests that MB 

placed Bloom “in [a] position of trust and confidence,” Aiello, 

499 A.2d at 285, that it permitted him to mix the operation of 

North Hills with his legitimate duties at MB, and that it

should therefore share responsibility for the resulting losses. 

Likewise, MB “selected and delegated responsibility to” 

Bloom, AHERF, 909 A.2d at 333, but arguably did not do so 

“carefully and responsibly,” id., given that MB officers and 

directors knew that Bloom was operating North Hills but 

accepted compliance reports by Bloom that failed to 

adequately disclose details of the North Hills’s operation. 

Recognizing that “imputation rules justly operate to 

protect third parties on account of their reliance on an agent’s 

actual or apparent authority,” id. at 336, we cannot say that 

imputation of Bloom’s violations of Rule 10b-5 to MB is 

inappropriate as a matter of law. The District Court thus

erred when it granted summary judgment to MB on the

Investors’10b-5 claim.
50

2. Unfair Trade Practice and Consumer 

Protection Law Claims 

The District Court concluded that Altman could not be 

held liable under the UTPCPL because “the Amended 

Complaint does not sufficiently allege deceptive conduct on 

the part of Altman,” and “[w]ithout any factual allegation that 

Altman was somehow involved with Bloom’s fraud, ... [the 

Investors] cannot simply call Altman’s actions deceptive and 

equate it with Bloom’s stealing.” (App. at 49.)

The District Court also granted summary judgment to 

MB on the UTPCPL claim. The Court recognized that 

statements by Bloom could potentially be imputed to MB, but

it looked to the adverse interest exception to the doctrine of 

imputation to conclude that MB was not liable. The Investors 

argue that the District Court improperly applied the adverse 

interest exception because “[a]pplication of that exception is 

not determined from the perspective of the employer, as the 

District Court did, but rather on how the defrauded party 

perceives the speaker’s authority.” (Appellants’ Opening Br.

at 25.) 

Pennsylvania’s UTPCPL, 73 Pa. Cons. Stat. Ann.

§ 201-1 et seq., “is designed to protect the public from fraud 

and deceptive business practices.” Gardner v. State Farm 

Fire & Cas. Co., 544 F.3d 553, 564 (3d Cir. 2008). The 

statute provides that 

[a]ny person who purchases or leases goods or 

services primarily for personal, family or 

household purposes and thereby suffers any 
51

ascertainable loss of money or property, real or 

personal, as a result of the use or employment 

by any person of a method, act or practice 

declared unlawful by section 3 of this act, may 

bring a private action to recover actual damages 

or one hundred dollars ($100), whichever is 

greater.

73 Pa. Cons. Stat. Ann. § 201-9.2(a). “The UTPCPL 

regulates an array of practices which might be analogized to 

passing off, misappropriation, trademark infringement, 

disparagement, false advertising, fraud, breach of contract, 

and breach of warranty.” Ash v. Cont’l Ins. Co., 932 A.2d 

877, 881 (Pa. 2007) (internal quotation marks omitted). The 

statute lists twenty specific prohibited practices, see 73 Pa. 

Cons. Stat. Ann. § 201-2(4)(i)-(xx), and also contains a 

“catch-all” provision, see id. § 201-2(4)(xxi), which the 

Investors cite as the basis for their UTPCPL claim. The 

catch-all provision provides a private right of action against a 

person “[e]ngaging in any other fraudulent or deceptive 

conduct which creates a likelihood of confusion or of 

misunderstanding.” Id.

In the wake of an amendment to the UTPCPL in 1996 

that expanded the catch-all provision to cover “deceptive” as 

well as fraudulent conduct, “Pennsylvania law regarding the 

standard of liability under the UTPCPL catchall is ‘in flux.’” 

Fazio v. Guardian Life Ins. Co., No. 1240 WDA, 2012 WL 

6177271, at *8 (Pa. Super. Ct. Dec. 12, 2012); see also id. at 

*7-8 (comparing cases before and after the 1996 amendment 

of the UTPCPL).32

 32 Division in our district courts parallels that in 

 Consequently, we are called upon to 
52

predict what interpretation of the “deceptive conduct” 

standard the Pennsylvania Supreme Court would adopt. The 

Pennsylvania Superior Court’s recent decision in Fazio was 

based on “decisions from the Commonwealth Court, the 

federal courts interpreting Pennsylvania law, as well as the 

statutory language of the post-amendment catchall provision.” 

2012 WL 6177271 at *9. The district court decisions on 

which Fazio relied suggest that deceptive conduct does not 

require proof of the elements of common law fraud, but that 

knowledge of the falsity of one’s statements or the misleading 

quality of one’s conduct is still required.

33

 

Pennsylvania’s own courts. See Molley v. Five Town 

Chrysler, Inc., No. 07-5415, 2009 WL 440292, at *3 (E.D. 

Pa. Feb. 18, 2009) (“Clearly there is uncertainty within the 

Circuit as to what type of conduct the ‘catch all’ provision of 

the UTPCPL protects.”). Some district courts have held that 

“it is no longer necessary for a plaintiff to allege all of the 

elements of common law fraud in order to recover under the 

[UTP]CPL,” Flores v. Shapiro & Kreisman, 246 F. Supp. 2d 

427, 432 (E.D. Pa. 2002), and that a “plaintiff may allege 

deception, as opposed to common law fraud,” Davis v. Mony 

Life Ins. Co., No. 08-0938, 2008 WL 4170250, at *6 (W.D. 

Pa. Sept. 2, 2008). Other courts have continued to require 

plaintiffs proceeding under the catch-all provision of the 

UTPCPL to prove the elements of common law fraud, even 

when alleging mere deception. See Rock v. Voshell, 397 F. 

Supp. 2d 616, 622 (E.D. Pa. 2005) (noting that “all of the 

fraud elements are still required”). 

 See Wilson v. 

33 It appears that a UTPCPL claim based on deceptive 

conduct differs from a claim based on fraudulent conduct in 

that a plaintiff “does not need to prove all of the elements of 

common-law fraud or meet the particularity requirement of 
53

Parisi, 549 F. Supp. 2d 637, 666 (M.D. Pa. 2008) (“A

deceptive act [under the UTPCPL] is the act of intentionally 

giving a false impression or a tort arising from a false 

representation made knowingly or recklessly with the intent 

that another person should detrimentally rely on it.” (internal 

quotation marks omitted)). Therefore, a defendant cannot be 

held “derivatively liable” under the UTPCPL for the 

fraudulent actions of a third party when “plaintiff fails to 

allege or present any evidence that [the defendant] ever 

knowingly engaged in misrepresentation.” Canty v. 

Equicredit Corp. of Am., No. 01-5804, 2003 WL 21243268, 

at *3 (E.D. Pa. May 8, 2003).

i. The UTPCPL Claim Against 

Altman

The deceptive conduct that the Investors allege against 

Altman was limited to three things: (1) his preparing (with 

Bloom) a proposed asset allocation plan for Belmont that 

recommended placing 20 percent of Belmont’s MB-advised 

investments in North Hills, (2) his describing to Belmont and 

Wallace that MB had access to North Hills as an investment 

vehicle, and (3) his advising Belmont to transfer $1 million 

from his Schwab account into North Hills in February 2008. 

In dismissing the UTPCPL claim against Altman, the District 

 

Federal Rule of Civil Procedure 9(b).” Schnell v. Bank of 

New York Mellon, 828 F. Supp. 2d 798, 807 (E.D. Pa. 2011). 

In Fazio, the Superior Court held that that a jury instruction 

that “deceptive conduct” for purposes of the UTPCPL is 

“‘misleading’ conduct accurately set[s] forth the standard of 

liability under the amended catchall provision.” 2012 WL 

6177271 at *9.
54

Court followed the more plaintiff-friendly standard of courts 

“that have allowed UTPCPL claims to move forward without 

demonstrating all of the elements of common law fraud” 

(App. at 48), but held that the three complained-of acts were 

not sufficient to establish deceptive conduct.

As a threshold issue, neither Perez nor the Kellys have

stated a UTPCPL claim against Altman because they have not 

alleged any conduct on his part, deceptive or otherwise, that 

caused them to invest in North Hills. Cf. Weinberg v. Sun 

Co., 777 A.2d 442, 446 (Pa. 2001) (noting that a UTPCPL 

plaintiff must demonstrate that he justifiably relied on the 

defendant’s deceptive practice and that he suffered harm as a 

result of that reliance). 

As to the claim of Belmont and PFS, there is no 

evidence that, in any of the conduct noted above, Altman 

acted either to defraud or deceive them. That claim fails even 

under the “deceptive conduct” standard that the District Court 

applied, because none of Altman’s conduct comprised either 

“the act of intentionally giving a false impression” or “a false 

representation made knowingly or recklessly,” Wilson, 549 F. 

Supp. 2d at 666, given that he is not alleged to have had any

knowledge of the North Hills fraud at the time. 

Consequently, the District Court correctly dismissed the 

UTPCPL claims against Altman for a lack of factual 

allegations sufficient to satisfy the requirements of the catchall provision of the UTPCPL.

ii. The UTPCPL Claim Against MB

The District Court held that the adverse interest

exception barred the imputation to MB of Bloom’s admitted 
55

frauds, which all acknowledge were violations of the 

UTPCPL.

34 Our earlier discussion of the proper application 

of the adverse interest exception, supra, is equally applicable 

to the Investors’ UTPCPL claim against MB. As noted 

above,“[i]n light of the competing concerns, the appropriate 

approach to benefit and self-interest is best related back to the 

underlying purpose of imputation, which is fair riskallocation, including the affordance of appropriate protection 

to those who transact business with corporations.” AHERF,

989 A.2d at 335. 

As a result, there remains a genuine issue of material 

fact as to whether Bloom’s violations of the UTPCPL may be 

imputed to MB. There is some evidence that MB benefitted 

from Bloom’s operation of North Hills, to the extent that 

access to North Hills was a selling point for MB, and MB was 

able to solicit North Hills investors for advisory business. 

There is, however, also evidence that the cross-marketing

benefit to MB was limited, given that the two entities had 

only four clients in common, two of whom were Belmont and 

the Kellys. Also, MB never collected any fees or received 

any remuneration on account of any of the Investors’ 

investments in North Hills. 

Whether there was a sufficient lack of benefit to MB 

such that the Investors should have known that statements by 

 34 Bloom’s violations of the UTPCPL are presumably 

uncontested because he pled guilty to all of the fraud-based 

counts in the Information against him, which included various 

counts that involved deceptive practices with respect to the 

marketing of North Hills. See supra Part II.A.5.
56

Bloom in violation of the UTPCPL were made without MB’s 

authority is a question for the trier of fact.

C. Claims For Breach Of Fiduciary Duty 

The Investors contend before us, as they did before the 

District Court, that Altman breached a fiduciary duty to them 

“by failing to investigate North Hills before recommending it 

as a suitable investment” (Appellants’ Opening Br. at 60), and 

that MB also breached a fiduciary duty because “MB should 

have recognized Bloom’s fraud,” (id. at 50). The District 

Court rejected those contentions. It concluded that “[s]imply 

because Altman was an investment advisor at the same 

location where Bloom worked ... does not create a fiduciary 

relationship” (App. at 52), and therefore Altman could not be 

held liable for a breach of fiduciary duty owed to the 

Investors. The Court granted summary judgment to MB on 

the fiduciary duty claim because MB owed no such duty to 

those Investors who invested directly in North Hills, i.e., PFS 

and Perez, and because those Investors to whom MB did owe 

fiduciary duties, i.e., Belmont and the Kellys, had adduced no 

evidence that MB’s alleged failure to act in their best interests 

was the cause of their North Hills losses. 

The Pennsylvania Supreme Court has said that a 

plaintiff alleging a fiduciary breach must first demonstrate 

that a fiduciary or confidential relationship existed, see Basile 

v. H & R Block, Inc., 761 A.2d 1115, 1119-22 (Pa. 2000), 

which requires that “one person has reposed a special 

confidence in another to the extent that the parties do not deal 

with each other on equal terms.” In re Estate of Clark, 359 

A.2d 777, 781 (Pa. 1976) (internal quotation marks 
57

omitted).35 “Although no precise formula has been devised to 

ascertain the existence of a confidential relationship, it has 

been said that such a relationship ... exists whenever one 

occupies toward another such a position of advisor or 

counselor as reasonably to inspire confidence that he will act 

in good faith for the other’s interest.” Silver v. Silver, 219 

A.2d 659, 662 (Pa. 1966). 

 35 We note that the fiduciary duty claims present a 

question of the proper choice of law. The claims are

purportedly brought under state law, even though, as is more 

fully discussed herein, they are arguably an attempt to bring 

claims under federal law despite there being no private right 

of action available under federal of law. Assuming that the 

claims can be brought under state law, the question remains 

as to whether the law of Pennsylvania or of New York 

applies. The Investors are all citizens of the Commonwealth 

of Pennsylvania, and Altman and MB are citizens of the State 

of New York. See supra note 17. The parties have briefed 

only Pennsylvania law, and they explained at oral argument 

before us that they viewed the law of the state whose citizens 

claim the protection of the fiduciary relationship as 

controlling. The record is unclear as to whether the alleged 

fiduciary breaches by Altman and MB occurred in 

Pennsylvania or New York. However, following the 

approach of the Pennsylvania Supreme Court, “[s]ince the 

parties did not see fit to question the application of 

Pennsylvania law, we infer that th[at] state was in fact the 

situs of most of the allegedly wrongful conduct and 

accordingly decide the issues of fiduciary responsibility on 

the basis of [that state’s] law.” Vulcanized Rubber & Plastics 

Co. v. Scheckler, 162 A.2d 400, 403 n.2 (Pa. 1960). 
58

The Investors claim a breach of fiduciary duty by MB 

under state law, but, at least insofar as Pennsylvania law is 

concerned, the evolution of duties governing investment 

advisers as fiduciaries appears to have been shaped 

exclusively by the Advisers Act and federal common law. 

The Advisers Act makes it unlawful for an investment adviser 

(1) to employ any device, scheme, or artifice to 

defraud any client or prospective client; (2) to 

engage in any transaction, practice, or course of 

business which operates as a fraud or deceit 

upon any client or prospective client; (3) acting 

as principal for his own account, knowingly to 

sell any security to or purchase any security 

from a client, or acting as broker for a person 

other than such client, knowingly to effect any 

sale or purchase of any security for the account 

of such client, without disclosing to such client 

in writing before the completion of such 

transaction the capacity in which he is acting 

and obtaining the consent of the client to such 

transaction. ... ; (4) to engage in any act, 

practice, or course of business which is 

fraudulent, deceptive, or manipulative.

15 U.S.C. § 80b-6.36

 36 Broker-dealers are exempted from this provision of 

the Advisers Act, provided that they are not otherwise acting 

as investment advisers. 15 U.S.C. § 80b-6(3). At numerous 

places in their brief, the Investors attempt to equate MB, an 

investment adviser, with a “broker-dealer” or a “securities 

firm.” (See Appellant’s Opening Br. at 29 n.20 (noting that 

 
59

In SEC v. Capital Gains Research Bureau, Inc., 375 

U.S. 180 (1963), the Supreme Court interpreted the antifraud 

provision of the Advisers Act as expressing Congress’s 

recognition that an investment adviser is a fiduciary with a 

duty of “utmost good faith, and full and fair disclosure of all 

material facts, as well as an affirmative obligation to avoid

misleading his clients.” Id. at 194 (citations and internal 

quotation marks omitted); see also id. 191 (citing 

Congressional recognition of “the delicate fiduciary nature of 

an investment advisory relationship” (internal quotation 

marks omitted)); id. at 201(holding that an investment adviser 

who purchases a security for his own account and then 

 

the “[r]ules of the SEC and self-regulatory organizations 

provide a standard of care for the securities industry,” and 

collecting cases); id. at 38 (citing Jairett v. First Montauk 

Sec. Corp., 153 F. Supp. 2d 562, 572-73 (E.D. Pa. 2001) 

(“[A] broker-dealer may be held liable for failing to strictly 

supervise the acts of a registered agent ... .”)); id at 60 (citing 

Hanley v. SEC, 415 F.2d 589, 595-96 (2d Cir. 1969) 

(“Brokers and salesmen are under a duty to investigate, and 

... cannot deliberately ignore that which [they have] a duty to 

know and recklessly state facts about matters of which [they] 

are ignorant.”)).) However, “investment adviser” is not

synonymous with “broker-dealer,” and the Pennsylvania 

Securities Act explicitly distinguishes broker-dealers from 

investment advisers. See 70 Pa. Cons. Stat. Ann. § 1-

102(j)(iii) (excluding broker-dealers from the definition of 

“investment adviser”). Because “MB was never a registered 

broker-dealer, and [the Investors] have not even alleged 

otherwise” (Centre Defendant’s Br. at 32 n.11), we decline 

the Investors’ invitation to treat it as one. 
60

recommends the same security to his client without disclosing 

that ownership violates the antifraud provision of the Act and 

breaches his fiduciary duty). The decision in Capital Gains 

Research has been interpreted as establishing a federal 

fiduciary standard for investment advisers. See Santa Fe 

Indus., Inc. v. Green, 430 U.S. 462, 472 n.11 (1977) 

(interpreting the Capital Gains Research Court’s “references 

to fraud in the ‘equitable’ sense” as “recognition that 

Congress intended the Investment Advisers Act to establish 

federal fiduciary standards for investment advisers”); 

Transam. Morg. Advisors (TAMA) v. Lewis, 444 U.S. 11, 17 

(1979) (finding that “the [Advisers] Act’s legislative history 

leaves no doubt that Congress intended to impose enforceable 

fiduciary obligations”). 

Because of the federal fiduciary standard, some courts 

dealing with private causes of action alleging fiduciary breach 

by investment advisers have relied on federal, rather than 

state, common law. See Laird v. Integrated Res., Inc., 897 

F.2d 816, 837 (5th Cir. 1990) (“The Supreme Court has 

recognized the investment advisers’ fiduciary status. Courts 

may refer to [its] cases instead of state analogies in deciding 

whether this status prohibits particular conduct.”); see also 

id. (“[C]oncerning entanglement with state law, because our 

holding encompasses a developed federal standard, it does 

not require reference to state corporate and securities law or 

the state law of fiduciary relationships.”); State ex rel. Udall 

v. Colonial Penn Ins. Co., 812 P.2d 777, 785 (N.M. 1991) 

(citing Capital Gains Research, and applying the standard set 

forth therein, in ruling on a state law claim for breach of 

fiduciary duty against an investment adviser); cf. Douglass v. 

Beakley, ___ F. Supp.2d ___, 2012 WL 5250566, *11 & n.16 

(N.D.Tex., Oct. 24, 2012) (citing Texas law for breach of 
61

fiduciary duty claims, but noting that the Supreme Court in 

Transamerica recognized “that Section 206 of the IAA 

“establishes federal fiduciary standards to govern the conduct 

of investment advisers” (citing Transamerica, 444 U.S. at 

17)); but cf. In the Matter of O’Brien Partners, Inc., S.E.C. 

Release No. 7594, 88 S.E.C. Docket 615, 1998 WL 744085, 

*9 n.20 (Oct. 27, 1998) (noting that respondent “owed a 

fiduciary duty to its clients, both as a financial advisor and as 

an investment adviser[,]” and adding by footnote that “[i]n 

addition to its duties under the Advisers Act, relevant state 

law also imposed a fiduciary duty on [respondent],” with 

citations to Wisconsin and California law). Among other 

benefits, following the federal fiduciary standard has as the

particular virtue that, “because state law is not considered, 

uniformity is promoted.” Laird, 897 F.2d at 837.

Of course, if one looks to federal law for the statement 

of the duty and the standard to which investment advisers are 

to be held, one might reasonably wonder why the cause of 

action is presented as springing from state law, and the 

answer is straightforward: no federal cause of action is 

permitted. With the exception of a private remedy relating to 

certain investment advisory contracts,37

 37 There exists only “a limited private remedy under 

the [Advisers Act] to void an investment advisers contract” 

made in violation of the Act. Transam. Morg. Advisors 

(TAMA) v. Lewis, 444 U.S. 11, 24 (1979); see also 15 U.S.C. 

§ 80b-15 (providing that any contract whose terms would 

violate the Advisers Act shall be void both as to parties to the 

contract and as to third parties who acquire rights under the 

contract).

“the [Advisers] Act 

confers no other private causes of action, legal or equitable.” 
62

Transam. Morg. Advisors, 444 U.S. at 24. That reality ought 

to call into serious question whether a limitation in federal 

law can be circumvented simply by hanging the label “state 

law” on an otherwise forbidden federal claim.38 Questionable 

or not, however, that is the labeling game that has been 

played in this corner of the securities field, and the confusion 

it engenders may explain why there has been little 

development in either state or federal law on the applicable 

standards. Half a century later, courts still look primarily to 

Capital Gains Research for a description of an investment 

adviser’s fiduciary duties. See SEC v. DiBella, 587 F.3d 553, 

567 (2d Cir. 2009) (citing Capital Gains Research for the 

proposition that an investment adviser is a fiduciary).

We need not resolve whether the Investors’ fiduciary 

duty claims can properly be brought as a matter of state law 

because, even if Pennsylvania and federal law permit a 

private right of action for a breach of an investment adviser’s 

fiduciary duties, and assuming that the proper standard of 

care is the federal standard,39

 38 And, in fact, the viability of a state law claim for a 

fiduciary breach by an investment adviser has been 

questioned. See Steadman v. SEC, 603 F.2d 1126, 1142 (5th 

Cir. 1979) (“We do not think this overall purpose [of the 

Advisers Act] is a warrant to read ... the [antifraud] sections 

... as the vehicle to reach all breaches of fiduciary trust.”).

the Investors have not 

39 Given the paucity of Pennsylvania law on the 

fiduciary duties owed by investment advisers, and given that 

Pennsylvania statutory law expressly follows the Advisers 

Act, we believe that, if Pennsylvania were to sanction such a 

claim, it would follow the federal standard. Provisions of the 

Pennsylvania Securities Act (“PSA”), 70 Pa. Cons. Stat. Ann. 
63

 

§§ 1-101 et seq., applicable to investment advisers prohibit 

fraudulent, deceptive, or manipulative practices. See 70 Pa. 

Cons. Stat. Ann. § 1-404 (describing “prohibited advisory 

activities”). The PSA does not impose any affirmative duty 

to investigate investments, but merely says that an investment 

adviser may not “make any untrue statement of material fact 

or omit to state a material fact necessary in order to make the 

statements made ... not misleading” as part of the “solicitation 

of advisory clients.” Id. § 1-404(b). Pennsylvania 

regulations governing registered investment advisers require 

that they “exercise diligent supervision over the securities 

activities ... of [their] agents, investment adviser 

representatives, and employees” and require investment 

advisers to adopt internal compliance procedures similar to 

those mandated by the Advisers’ Act. See 10 Pa. Code 

§ 305.011(a). However, the PSA also provides that the 

requirements it imposes on investment advisers do not 

establish a standard of care that can be the basis of civil 

liability. See 70 Pa. Cons. Stat. Ann. § 1-506 (“Except as 

explicitly provided in this act, no civil liability in favor of any 

private party shall arise against any person by implication 

from or as a result of the violation of any provision of this act 

or any rule hereunder.”); see also Cover v. Cushing Capital 

Corp., 497 A.2d 249, 253 (Pa. Super. Ct. 1985) (“Regulations 

adopted pursuant to the [Pennsylvania] Securities Act were 

intended to make broker-dealers responsible to the state, 

rather than to any specific person or group. They were not 

intended to provide an absolute standard of care to be applied 

in a civil action against a broker where an agent, 

unbeknownst to the broker, engaged in a private scheme to 

defraud his friends and customers.”). Although “brokerdealer” is generally not synonymous with “investment 
64

succeeded in stating such a claim, let alone adducing proof 

sufficient to withstand summary judgment for the reasons set 

forth below. The federal fiduciary standard requires that an 

investment adviser act in the “best interest” of its advisory 

client. See, e.g., SEC v. Tambone, 550 F.3d 106, 146 (1st Cir. 

2008) (“[15 U.S.C. § 80b-6] imposes a fiduciary duty on 

investment advisers to act at all times in the best interest of 

the fund and its investors.”). Under the “best interest” test, an 

adviser may benefit from a transaction recommended to a 

client if, and only if, that benefit and all related details of the 

transaction are fully disclosed. See Capital Gains Research, 

375 U.S. at 191-92. (stating that the Advisers Act was meant 

to “eliminate, or at least to expose, all conflicts of interest 

which might incline an investment adviser – consciously or 

unconsciously – to render advise which was not 

disinterested”). In addition to the clear statutory prohibition 

on fraud, the federal fiduciary standard thus focuses on the 

avoidance or disclosure of conflicts of interest between the 

investment adviser and the advisory client. See 17 C.F.R. 

§ 275.204A-1 (describing the required investment adviser 

code of ethics, and its focus on conflicts of interest); cf. 

Capital Gains Research, 375 U.S. at 191-92 (discussing the 

obligations of investment advisers).40

 

adviser,” the regulations cited apply both to “[e]very brokerdealer and investment adviser registered under the [PSA] ... .” 

10 Pa. Code. § 305.011(a). Ultimately, however, even if 

Pennsylvania were to apply its own fiduciary duty standards, 

the Investors’ claims would fail. See infra n.44.

 

40 It has been suggested that the fiduciary duty of 

investment advisers under the federal standard goes beyond 

the avoidance of fraud and conflicts of interest. At least one 

court has held that an investment adviser has “a duty to his 
65

Because Altman and MB had different relationships 

with various Investors – some advisory and some not – we 

 

clients and readers to undertake some reasonable 

investigation of the figures he [is] printing before he print[s] 

them.” SEC v. Blavin, 557 F. Supp. 1304, 1314 (E.D. Mich. 

1983), aff’d, 760 F.2d 706 (6th Cir. 1985). The SEC has also 

proposed regulations that would expressly prohibit 

investment advisers from making “unsuitable 

recommendations to clients.” See Suitability of Investment 

Advice Provided by Investment Advisers; Custodial Account 

Statements for Certain Advisory Clients, Advisers Act 

Release No. 1406, 59 Fed. Reg. 13,454, 13464 (Mar. 16, 

1994) (describing a proposed “suitability rule” to be 

promulgated at 17 C.F.R. 275.206(4)-5). In addition, the SEC 

proposed a number of regulations aimed at hedge funds that 

would have, inter alia, imposed a duty “to have a reasonable 

basis for client recommendations”). See Registration Under 

the Advisers Act of Certain Hedge Fund Advisers, Advisers 

Act Release No 2333, 69 Fed. Reg. 72,054, 72054 (Dec. 2, 

2004). Notably, that Release was later vacated by the United 

States Court of Appeals for the District of Columbia Circuit. 

Goldstein v. SEC, 451 F.3d 873, 882-83 (D.C. Cir. 2006). 

Moreover, we find nothing in Capital Gains Research or the 

Supreme Court cases that came after it that extended the 

Court’s interpretation of the Advisers Act to encompass a 

fiduciary duty of “reasonable investigation.” We also find 

nothing in the record to suggest that North Hills, had it been 

the successful hedge fund that Altman and MB believed it to 

be, was “unsuitable” for any of the Investors. 
66

discuss the Investors’ direct fiduciary duty claims against 

each of them separately.41 

1. Fiduciary Duty Claim Against Altman

The Investors appeal the District Court’s dismissal of 

their breach of fiduciary duty claim against Altman only with 

respect to Belmont and PFS, and do not appeal the dismissal 

as it may pertain to Perez and the Kellys.42 The Court 

rejected the claim concerning Belmont and PFS because it 

concluded that neither of those plaintiffs had established that 

Altman was in a fiduciary relationship with them, and that 

there was no evidence of conduct on the part of Altman that 

would constitute a breach, even if such a relationship had 

existed. 

 41 Because Bloom breached the federal fiduciary 

standard when he deceived the Investors as to the true nature 

of North Hills, in violation of 15 U.S.C. § 80b-6, our

discussion of the imputation doctrine, supra, may arguably be 

applicable to the Investors’ claim that MB breached its 

fiduciary breach to them. Unlike their 10b-5 and UTPCPL 

claims, however, the Investors’ fiduciary duty claim against 

MB is not one that they argue involves principles of 

imputation. Consequently we do not address that question.

42 The District Court concluded that the Investors had 

made “no allegation of any relationship between Altman and 

Plaintiff Perez or the Kellys, let alone a fiduciary one” (App. 

at 51), a conclusion that the Investors do not challenge in this 

appeal. 
67

The Investors argue that Altman had a fiduciary 

relationship with Belmont because Belmont was an advisory 

client of MB’s, and that Altman was a fiduciary to PFS 

because he took on an advisory role when he met with 

Wallace, the sole principal of PFS, to discuss North Hills. 

The Investors say that Altman breached his fiduciary duty 

because he “tout[ed] North Hills and its claimed performance 

to Belmont and [PFS]” and “recommend[ed]/directed[ed] 

Belmont’s transfer of $1 million to North Hills from 

[Belmont’s] MB-managed Schwab account.” (Appellants’ 

Opening Br. at 58.) Those arguments fall short. First, PFS 

was not an MB advisory client, and Altman therefore owed 

him no duty as an investment adviser. Altman met with 

Wallace only once, in June 2006, and PFS did not invest in 

North Hills until September 2008, suggesting that, to the 

extent PFS relied at all on statements allegedly made by 

Altman, that reliance was extremely limited. It is impossible 

to infer from the minimal contact that Wallace and Altman 

had that an investment advisory relationship was formed with 

PFS, and the District Court thus properly dismissed the PFS 

fiduciary duty claim against Altman. 

Unlike PFS, Belmont did have an investment advisory 

agreement with MB, and Altman served as Belmont’s 

portfolio manager. Also unlike PFS, Belmont invested in 

North Hills shortly after the June 2006 meeting with Altman 

and Bloom, at which they allegedly recommended such an 

investment. For the sake of argument, then, we will accept 

the assertion that Altman had a fiduciary relationship with 

Belmont. Even accepting that premise, however, there is no 

evidence of fraud on the part of Altman and no allegation that 

he benefitted from his recommendation that Belmont invest in 

North Hills in a manner that would constitute an undisclosed 
68

conflict of interest. The mere fact that Altman made what 

turned out to be an ill-advised recommendation to Belmont is 

not sufficient to establish a breach of fiduciary duty under the 

federal fiduciary standard. The District Court thus did not err 

in dismissing Belmont’s fiduciary duty claim against Altman.

2. Fiduciary Duty Claim Against MB by 

PFS and Perez

The District Court granted summary judgment on the 

fiduciary duty claim of PFS and Perez against MB because 

there was no evidence of a fiduciary relationship. However, 

Wallace and Perez argue that they “believed that North Hills 

was an investment vehicle provided by MB and, as such, 

[that] MB was their investment adviser with respect to their 

North Hills investments.” (Appellants’ Opening Br. at 47). 

Although there may at one time have been some 

confusion on the part of Perez and PFS as to the relationship 

between North Hills and MB, there is no evidence that there 

was an advisory relationship between MB and either Perez or 

PFS pursuant to which they could claim the protection of the 

federal fiduciary standard. Perez and PFS invested no money 

with MB and signed no investment advisory agreement with 

MB. Both Perez and PFS’s principal, Wallace, knew that 

they were investing in North Hills, rather than MB, and that 

Bloom was the sole portfolio manager of North Hills. Perez 

had met Bloom in connection with a matter unrelated to MB, 

telephoned Bloom directly for investment advice, and 

invested in North Hills based on Bloom’s personal 

recommendation. For his part, Wallace testified that he gave 

the funds that he invested in North Hills directly to Bloom 

and that he never discussed with Bloom the possibility of 
69

investing that money in MB or any of its managed funds. 

Wallace further admitted that in his only conversation with 

Machinist, they discussed only funds offered by MB and not 

North Hills or anything about Bloom’s separate fund. 

In the absence of any investment by Perez or PFS 

through MB, or any other reason why Perez and PFS should 

have thought that MB was their investment adviser with 

respect to their North Hills investments, the District Court 

properly held that there was no fiduciary relationship that 

would support a claim by Perez and PFS for a breach of 

fiduciary duty by MB, and the Court therefore correctly 

granted summary judgment to MB on that claim.

3. Fiduciary Duty Claim Against MB by 

Belmont and the Kellys

The District Court acknowledged, and MB does not 

contest, that MB owed a fiduciary duty to Belmont and the 

Kellys based on their investment advisory agreements with 

MB. The Investors argue that the District Court ignored 

evidence that MB had breached its fiduciary duty to Belmont 

and the Kellys by failing to uncover and disclose the North 

Hills fraud. 

Applying the federal fiduciary standard to this case, 

Belmont and the Kellys have failed to prove that MB 

breached its fiduciary duty as their investment adviser. They 

have not alleged any conflict of interest, in the context of 

MB’s limited involvement in their North Hills investments. 

And, to the extent they refer to Bloom’s fraud, it is merely to 

repeat the allegation made in the context of their other claims 

that “there was more than enough evidence – in MB’s 
70

possession – from which MB should have recognized 

Bloom’s fraud.” (Appellants’ Opening Br. at 50.) But, while 

MB’s failure to uncover the North Hills fraud may have been 

a “real factor” in the losses sustained by Belmont and the 

Kellys, it is not sufficient to establish that MB failed to act 

solely in their interest.43 The District Court thus did not err in 

granting summary judgment to MB on the claim for breach of 

fiduciary duty to Belmont and the Kellys.44

 43 The fact that MB continued to manage investments 

for the Kellys until it ceased operations in June 2009 also 

suggests that they, at least, did not think that MB had acted in 

bad faith or under a conflict of interest in connection with 

their North Hills investments.

44 Even if Pennsylvania did not follow the federal 

fiduciary standard for investment advisers, see supra note 39, 

we do not think that it would affect the disposition of the 

Investors’ direct fiduciary claims. The Pennsylvania 

Supreme Court has said that a plaintiff alleging a fiduciary 

breach must first demonstrate that a fiduciary or confidential 

relationship existed, see Basile v. H & R Block, Inc., 761 A.2d 

1115, 1119-22 (Pa. 2000), which requires that “one person 

has reposed a special confidence in another to the extent that 

the parties do not deal with each other on equal terms.” In re 

Estate of Clark, 359 A.2d 777, 781 (Pa. 1976) (internal 

quotation marks omitted); see also eToll, Inc. v. Elias/Savion 

Advertising, Inc., 811 A.2d 10, 23 (Pa. Super. Ct. 2002) 

(“[T]he critical question is whether the relationship goes 

beyond mere reliance on superior skill, and into a relationship 

characterized by overmastering influence on one side or 

weakness, dependence or trust, justifiably reposed on the 

other side.” (internal quotation marks omitted)).
71

III. CONCLUSION

For the foregoing reasons, we will affirm in part and 

vacate in part the District Court’s dismissal order and 

 

None of the Investors has demonstrated a relationships 

characterized by such justifiable reliance or “overmastering 

influence.” PFS and Perez were not clients of either Altman

or MB, and therefore could not justifiably rely on any advice 

they received regarding North Hills. Altman met with 

Wallace of PFS only once, in June 2006, and PFS did not 

invest in North Hills until September 2008, suggesting that 

any reliance on either Altman or MB was extremely limited. 

Perez can point to nothing more than single phone 

conversation with Bloom while he was in his office at MB. 

Because they had advisory agreements with MB, Belmont 

and the Kellys have better grounds on which to claim a 

fiduciary relationship. However, Pennsylvania law is clear 

that a fiduciary relationship does not exist merely because one 

party receives, or even relies on advice from another, but 

rather requires that “the parties do not deal with each other on 

equal terms.” Estate of Clarke, 359 A.2d at 781. Nothing in 

Belmont’s or the Kellys’ relationships with Altman and MB 

suggests that they dealt on unequal terms. On the contrary, 

both Belmont and the Kellys were at all times free to reject 

any recommendation that Altman or MB may have made 

concerning a possible investment in North Hills. Again, the 

mere fact that one takes another’s advice does not, in itself, 

demonstrate the “overmastering influence” that the law 

requires. 
72

summary judgment. We will affirm to the extent that the 

Court dismissed all of the Investors’ claims against Altman, 

granted summary judgment to all of the other defendants, 

other than MB, on all of the Investors’ claims, and granted 

summary judgment to MB on the claim for breach of 

fiduciary duty. We will vacate the grant of summary 

judgment to MB on the claims for violations of Rule 10b-5 

and the UTPCPL, and we will remand this case for a trial 

with respect to those claims against MB.