Court Opinion

ID: 4091761
Source: CourtListenerOpinion
Date Created: 2016-10-21 19:01:55.831506+00
Date Added: 2024-06-11T07:45:27.324208
License: Public Domain

Case: 16-12041    Date Filed: 10/21/2016   Page: 1 of 11

                                                         [DO NOT PUBLISH]

               IN THE UNITED STATES COURT OF APPEALS

                        FOR THE ELEVENTH CIRCUIT
                          ________________________

                                No. 16-12041
                            Non-Argument Calendar
                          ________________________

                     D.C. Docket No. 1:14-cv-01361-LMM

WILLIAM A. CURRY,
ROBERT L. CLAXTON,
JOHN R. SULLIVAN,
JANICE M. WALKER,
THE WALKER FAMILY TRUST,
WILLIAM J. KISSEL,
CESAREO M. FLORES,
PATRICIA M. FLORES,

                                                            Plaintiffs-Appellants,

                                     versus

TD AMERITRADE, INC.,
f.k.a. TD Waterhouse Investor Services, Inc.,
TD AMERITRADE CLEARING, INC.,
TD AMERITRADE HOLDING CORPORATION,
successor in interest to TD Waterhouse Group, Inc.,
f.k.a. Ameritrade Holding Corporation,

                                                            Defendants-Appellees,

CHARLES SCHWAB & CO., INC.
                Case: 16-12041        Date Filed: 10/21/2016        Page: 2 of 11

                                                                        Defendant.

                                ________________________

                       Appeal from the United States District Court
                          for the Northern District of Georgia
                             ________________________

                                      (October 21, 2016)

Before JORDAN, JULIE CARNES and BLACK, Circuit Judges.

PER CURIAM:

       Plaintiffs-Appellants William A. Curry, Robert L. Claxton, John R. Sullivan,

Janice M. Walker, the Walker Family Trust, William J. Kissel, Cesareo M. Flores,

and Patricia M. Flores appeal the district court’s dismissal of their securities law

claims in a putative class action against TD Ameritrade, Inc., TD Ameritrade

Clearing, Inc., and TD Ameritrade Holding Corporation (together, TDA).

Appellants appeal the district court’s dismissal of the following claims: (1) control

person liability under federal and Georgia law; and (2) secondary liability based on

material aid or participation under Georgia law. After review, 1 we affirm the

judgment of the district court.

       1
         “We review de novo the district court's grant of a motion to dismiss for failure to state a
claim, accepting the allegations in the complaint as true and construing them in the light most
favorable to the nonmoving party.” Kizzire v. Baptist Health Sys., Inc., 441 F.3d 1306, 1308
(11th Cir. 2006).
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                                I. BACKGROUND

      According to their Amended Complaint, Appellants invested in various

private securities that ultimately proved to be a part of a sizable Ponzi scheme

perpetrated by Angelo A. Alleca. Alleca, a registered investment advisor, began

selling partnership interests in his first fund, Summit Investments Fund, L.P., in

2004. Alleca soon incurred large losses and investors in the Summit Fund began to

redeem their investments, which he paid by selling new interests in Asset Class

Diversification Fund, LP. He continued this pattern in a nearly identical manner

by fraudulently marketing equity interests in two new investment vehicles, Detroit

Memorial Partners LLC and Private Credit Opportunities Fund, LLC. Alleca

marketed each of the nonpublic securities directly to each of the purchasers though

private placement memordanda, meetings, and phone calls. TDA is not alleged to

have participated in the actual sales. Rather, once the decisions to invest had been

made, Appellants invested in the fraudulent funds using TDA as a custodian to

complete the transaction and then to hold the securities on behalf of the purchasers.

TDA was not the only firm used for this purpose; initially, the Private Credit

Opportunities Fund was listed on Charles Schwab’s trading platform and was

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transacted there until Schwab and Alleca ended their relationship and Alleca

moved the asset to TDA’s platform. 2

       Appellants’ allegations are essentially identical with respect to each of the

securities purchased. In each case, Appellants assert that TDA materially aided

and participated in Alleca’s fraudulent sales because TDA “jointly executed the

transaction [with Alleca] . . . using [TDA’s] platform” and “custodied the . . .

securities on [plaintiff’s] behalf, valued those securities for [plaintiff] and

[plaintiff’s] investment advisors for both performance reporting and billing

purposes, and independently reported the market value for [the] securities on

[TDA’s] statements sent directly to [plaintiff].” TDA allegedly listed the securities

as approved for sale on the trading platforms following TDA’s review of

documents demanded from Alleca by TDA’s licensed broker-dealers, creating “a

market for these otherwise unmarketable securities.” In addition, TDA reported

valuations given by Alleca for the value of the securities directly to Appellants on

their periodic statements. TDA is not alleged to have undertaken any duty to

perform independent valuations.

       Appellants allege Alleca acknowledged he could not have perpetuated the

Ponzi scheme without the assistance of TDA and that Appellants invested in the

       2
         Charles Schwab & Co., Inc. was a defendant in this case but Appellants did not appeal
the dismissal of their claims against Schwab and did not include allegations against Schwab in
their amended complaint.
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securities because of TDA’s involvement. They also contend because TDA is a

large enterprise and member of the “Big Four” broker-dealer custodians, they felt

they could safely avoid Ponzi schemes by investing through TDA. Further, they

charge TDA with “holding out Summit Wealth and Alleca as vali[d] [registered

investment advisors (RIAs)]” and “allowing Alleca to represent to the investing

public the existence of his . . . relationship with [TDA], implying the securities

marketed were legitimate.” They support this contention by alleging Alleca was

included in TDA promotional materials in his capacity as a registered investment

advisor in order to solicit the business of other RIAs.

       As a result of these factual allegations, Appellants allege that TDA

controlled Alleca and materially aided and participated in Alleca’s fraudulent

sales.3 Appellants filed their initial complaint in May, 2014. The district court

dismissed it with leave to amend the claims regarding material aid or participation

under Georgia law. Thereafter, it dismissed their amended complaint as well

because “the allegations . . . do not allow the Court to draw a reasonable inference

       3
          The Ponzi scheme eventually collapsed, culminating in Alleca pleading guilty to
criminal charges of securities fraud. We take judicial notice of Alleca’s indictment and
settlement. See United States v. Alleca, No. 1:15-cr-000458 (N.D. Ga. May 26, 2016) (guilty
plea and minute sheet of court’s acceptance of same); United States v. Rey, 811 F.2d 1453, 1457
n.5 (11th Cir. 1987) (“A court may take judicial notice of its own records and the records of
inferior courts.”); Fed. R. Evid. 201 advisory committee’s note to subdivision (f) (“In accord
with the usual view, judicial notice may be taken at any stage of the proceedings, whether in the
trial court or on appeal.”).
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that TDA participated in the alleged sales in any material way, or that TDA

materially aided Alleca’s alleged conduct.”

                                   II. DISCUSSION

      “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.’”

Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Co. v. Twombly, 550
U.S. 544, 570 (2007). “While a complaint attacked by a Rule 12(b)(6) motion to

dismiss does not need detailed factual allegations,” Twombly, 550 U.S. at 555, a

plaintiff must provide the factual grounds of his entitlement to relief, which

requires more than “labels and conclusions,” Iqbal, 556 U.S. at 678. A “formulaic

recitation of the elements of a cause of action will not do.” Id. (quoting Twombly,
550 U.S. at 555).

       The factual allegations in the complaint “must be enough to raise a right to

relief above the speculative level.” Twombly, 550 U.S. at 555. “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 (citing Twombly, 550 at 556). Thus, to state a claim in this

case, Appellants must do more than simply restate the elements of their cause of

action.

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A. Control Theory

       “To state a claim under § 20(a) [of the Securities Exchange Act], [a plaintiff]

must allege three elements: (1) that [the alleged violator] committed a primary

violation of the securities laws; (2) that the individual defendants had the power to

control the general business affairs of [the violator]; and (3) that the individual

defendants had the requisite power to directly or indirectly control or influence the

specific corporate policy which resulted in primary liability.” Mizzaro v. Home

Depot, Inc., 544 F.3d 1230, 1237 (11th Cir. 2008) (quotation omitted). Appellants

allege Alleca committed and pled guilty to numerous violations of the securities

laws, satisfying the first prong. Nevertheless, the complaint is deficient with

respect to the second and third elements of the control test. Taking the facts as

stated by the plaintiffs and making all reasonable inferences in their favor, TDA

did not control Alleca. There are no factual allegations tending to show TDA

controlled the general business affairs of Alleca or Summit Wealth, much less had

the power to direct the specific policies resulting in the fraud. 4 Nothing Appellants

allege even remotely approaches the level of control necessary to state a claim.

See, e.g., Brown v. Enstar Grp., Inc., 84 F.3d 393, 397 (11th Cir. 1996) (chairman

of board of directors of violating company was not liable on control theory where

       4
          The best Appellants can offer is the allegation that TDA asked Alleca to complete their
Non-Standard Asset Custody Agreement and deliver copies of the offering memorandum,
subscription agreement, and most recent financial statements pertaining to one of Alleca’s funds.
This falls far short of control.
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he did not direct the specific policy resulting in fraudulent prospectus, even though

he participated in the related restructuring). Accordingly, we affirm the dismissal

of Appellants’ federal and state control person liability claims. 5

B. Material Aid or Participation

       Section 10-5-14 of the Georgia Securities Act of 1973 provides that “every

dealer . . . who participates in any material way in the sale” is liable jointly and

severally with the person primarily liable for the securities violation. O.C.G.A.

§ 10-5-14(c) (2000). In 2008, Georgia replaced its existing blue sky laws with the

2002 version of the Uniform Securities Act. See 2008 Ga. Laws 528. Section 10-

5-58 of the Georgia Uniform Securities Act contains a secondary liability provision

similar to the old statute, stating that “[a] person that is a broker-dealer . . . that

materially aids the conduct giving rise to the liability” is liable jointly and severally

with the primary violator. O.C.G.A. § 10-5-58(g)(4). Both statutes provide an

inverse negligence affirmative defense. We consider them together, as the district

court and the parties have done.

       Appellants contend that TDA materially aided and participated in the sales

simply by virtue of their having acted in accordance with their duties as custodian.

       5
          Although there is no reported Georgia case setting forth a test for control under either
the Georgia Securities Act of 1973 (GSA) or the Georgia Uniform Securities Act (GUSA), we
affirm the dismissal of plaintiffs’ state control liability claims as well because the GSA and
GUSA control liability provisions are nearly identical to the federal statute. Compare 15 U.S.C.
§ 78t(a) with O.C.G.A. § 10-5-14(c) (2000) and O.C.G.A. § 10-5-58(g)(1). Appellants concede
this is the correct approach.
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Because there is no reported Georgia case applying either version of the statute,

Appellants rely primarily on state court cases from Oregon and Kansas applying

those jurisdictions’ analogous Uniform Act provisions, and construe the statutory

language to impose an affirmative duty on TDA to investigate for fraud each of the

transactions it completes as a custodian.

      We conclude TDA did not materially aid or participate in the sale. First, the

cases cited by Appellants are not binding, and are distinguishable because they

hold that materiality turns on the exercise of professional judgment. See Prince v.

Brydon, 764 P.2d 1370, 1371 (Or. 1988) (holding that “knowledge, judgment, and

assertions” reflected in private placement memorandum drafted by lawyer rendered

lawyer’s aid material, not merely ministerial); Klein v. Oppenheimer & Co., 130
P.3d 569, 588 (Kan. 2006) (holding that clearing broker’s services were material

because they required the “exercise of professional expertise and judgment,”

including calculation of margin requirements and initiation of margin calls).

Second, the official comments to the Uniform Act provision on which § 10-5-58 is

based bolster our conclusion. Comment 11 states that “the performance by a

clearing broker of the clearing broker’s contractual functions—even though

necessary to the processing of the transaction—without more would not constitute

material aid or result in liability under this subsection.” Unif. Sec. Act § 509

cmt. 11 (2002). TDA’s alleged custodial activities are even less substantial than

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those of a clearing broker. See Klein, 130 P.3d at 572 (describing role of clearing

broker).

      Appellants have alleged no facts tending to show that TDA contributed to

the fraudulent transactions in any way other than by fulfilling its contractual duties

to act as custodian. TDA executed the transactions on behalf of the parties, but did

not procure the investments for Appellants or recommend them; they reported

values of the securities to the investors but expressly disclaimed any investigation;

and they held the securities on behalf of the Appellants, but undertook no duty to

scrutinize the financial health of the investment funds.

      Additionally, Appellants’ reading of the provisions would make materiality

superfluous. To state a secondary liability claim, a plaintiff could merely allege

that the securities violator used a custodian; there would be no need to allege facts

tending to show any greater degree of involvement. All custodians would be

subject to onerous discovery at all times simply by virtue of being in business. If

the Georgia legislature had contemplated such a result, it could simply have

imposed blanket liability, leaving only the affirmative defense. See, e.g., 815 Ill.

Comp. Stat. Ann. 5/13 (“[E]ach underwriter, dealer, internet portal, or salesperson

who shall have participated or aided in any way in making the [unlawful] sale . . .

shall be jointly and severally liable to the purchaser.”) (emphasis added).

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      Finally, Appellant’s suggestion that TDA’s marketing efforts featuring

Alleca constitute material aid or participation falls short as well. Appellants allege

those efforts aimed to increase TDA’s registered investment advisor clientele, but

do not contend these activities caused any of the plaintiffs to invest with Alleca.

The district court was correct to ignore these facts as irrelevant to the question of

material aid to or participation in Alleca’s fraudulent sales.

                                 III. CONCLUSION

      For the reasons given above, we affirm the district court’s dismissal of

Appellants’ claims.

      AFFIRMED.

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