Court Opinion

ID: 4639733
Source: CourtListenerOpinion
Date Created: 2020-12-04 20:00:41.821413+00
Date Added: 2024-06-11T07:58:59.947738
License: Public Domain

Case: 20-30186    Document: 00515660277        Page: 1    Date Filed: 12/03/2020

          United States Court of Appeals
               for the Fifth Circuit                               United States Court of Appeals
                                                                            Fifth Circuit

                                                                          FILED
                                                                   December 3, 2020
                                No. 20-30186                         Lyle W. Cayce
                                                                          Clerk

   Robert C. Ahders, Individual Domiciled in California,

                                                         Plaintiff—Appellant,

                                    versus

   SEI Private Trust Company, Pennsylvania Corporation;
   SEI Investments Company, Pennsylvania Corporation;
   Continental Casualty Company, Illinois Corporation;
   Certain Underwriters at Lloyd’s of London,
   Unincorporated Association domiciled in the United
   Kingdom; Indian Harbor Insurance Company, Delaware
   Corporation; Nutmeg Insurance Company, Connecticut
   Corporation; Allied World Assurance Company (U.S.),
   Incorporated, Delaware Corporation; Arch Insurance
   Group, Missouri Corporation,

                                                     Defendants—Appellees.

                 Appeal from the United States District Court
                     for the Middle District of Louisiana
                           USDC No. 3:16-CV-801
                           USDC No. 3:19-CV-353

   Before Owen, Chief Judge, and King and Engelhardt, Circuit Judges.
   OWEN, Chief Judge:
Case: 20-30186           Document: 00515660277           Page: 2      Date Filed: 12/03/2020

                                         No. 20-30186

           Plaintiffs brought this action against SEI Private Trust Company and
   SEI Investments Company (collectively, SEI), and SEI’s insurers, seeking to
   hold SEI liable under the control-person provision of Louisiana Securities
   Law. The district court granted summary judgment to SEI and its insurers,
   concluding that SEI was not a control person under the statute. We affirm.
                                               I
           This case arises out of R. Allen Stanford’s Ponzi scheme. 1 At its heart,
   Stanford’s Ponzi scheme involved selling fraudulent certificates of deposit
   (CDs) to investors though his company Stanford International Bank, Ltd.
   (SIBL). 2 The plaintiffs are investors who owned SIBL CDs as part of their
   individual retirement accounts (IRAs). The IRAs were held by Stanford
   Trust Company (STC). The investors assert that STC violated Louisiana
   Securities Law by selling, holding, and misrepresenting the value of the
   fraudulent SIBL CDs.
           In order to perform its operational functions, STC contracted with
   SEI.        SEI provides “asset management, investment processing, and
   investment operation solutions” for wealth-management companies. Under
   the contract, SEI was responsible for, among other functions, sending
   account statements to clients, reporting income and other details to the IRS,
   and providing a platform and operations for the IRAs. The contract specified
   that the “legal relationship” of SEI to STC was “intended to be that of an
   independent contractor.”
           Investors used SEI’s platform to view the value of various assets,
   including the SIBL CDs. The contract assigned STC the responsibility to

           1
            See Janvey v. Brown, 767 F.3d 430, 433-34 (5th Cir. 2014) (describing the Stanford
   Ponzi scheme).
           2
               See id.

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                                          No. 20-30186

   “obtain prices” for non-marketable securities, expressly including “CDs,”
   and to “provide [the prices] to SEI.” The contract further made STC
   “solely responsible for the accuracy and completeness of any data or other
   information provided” to SEI under the contract. SEI was responsible for
   “[s]tatement production and printing,” while STC was responsible for
   “[s]tatement review.” The statements sent to investors bore STC’s name
   and did not indicate that SEI was involved in the statement’s preparation.
          The investors allege that SEI is liable for STC’s violations under the
   control-person provision of Louisiana Securities Law 3 based on SEI’s
   contractual relationship with STC. In the district court, SEI moved for
   summary judgment, arguing that the investors had not established that SEI
   had control over the primary violations allegedly committed by STC. The
   district court held that the investors failed to establish that SEI had direct or
   indirect control over STC’s primary violations, and therefore granted
   summary judgment to SEI.               SEI’s insurers then moved for summary
   judgment, and the district court granted their motion. The investors appeal
   both grants of summary judgment.
                                                II
          “This court reviews a district court’s grant of summary judgment de
   novo, applying the same legal standards as the district court.” 4 Summary
   judgment is proper when “there is no genuine dispute as to any material fact
   and the movant is entitled to judgment as a matter of law.” 5 A genuine
   dispute of material fact exists “if the evidence is sufficient for a reasonable

          3
              La. Stat. Ann. § 51:714(B) (1985).
          4
              Condrey v. SunTrust Bank of Ga., 429 F.3d 556, 562 (5th Cir. 2005).
          5
              Fed. R. Civ. P. 56(a).

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                                         No. 20-30186

   jury to return a verdict for the nonmoving party.” 6 “In reviewing an appeal
   from summary judgment, we ‘view the facts in the light most favorable to the
   non-moving party and draw all reasonable inferences in its favor.’” 7
           The investors’ sole claim is that SEI is liable for STC’s primary
   violations of Louisiana Securities Law as a control person under Section
   51:714(B). Section 51:714(B) states:
           Every person who directly or indirectly controls a person liable
           under Subsection A of this Section . . . is liable jointly and
           severally with and to the same extent as the person liable under
           Subsection A of this Section unless the person whose liability
           arises under this Subsection sustains the burden of proof that
           he did not know and in the exercise of reasonable care could
           not have known of the existence of the facts by reason of which
           liability is alleged to exist. 8
           Thus, SEI is liable for the alleged primary violations of STC if SEI
   directly or indirectly controlled STC. Control is defined as “the possession,
   direct or indirect, of the power to direct or cause the direction of the
   management and policies of a person, whether through the ownership of
   voting securities, by contract, or otherwise.” 9
           Because Louisiana precedent interpreting Section 51:714(B) is
   “thin,” “we look to federal law for instruction.” 10 “Control person liability

           6
             Hamilton v. Segue Software Inc., 232 F.3d 473, 477 (5th Cir. 2000) (per curiam)
   (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)).
           7
            Griggs v. Brewer, 841 F.3d 308, 312 (5th Cir. 2016) (quoting Deville v. Marcantel,
   567 F.3d 156, 164 (5th Cir. 2009)).
           8
               La. Stat. Ann. § 51:714(B) (1985).
           9
               Id. § 51:702(4) (2008).
           10
             Heck v. Triche, 775 F.3d 265, 283 (5th Cir. 2014) (“In determining who is a
   ‘control person,’ the Fifth Circuit similarly construes the control person provisions in

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                                             No. 20-30186

   does not require participation in the fraudulent transaction.” 11 “But a
   plaintiff ‘must at least show that the defendant had an ability to control the
   specific transaction or activity upon which the primary violation is based.’” 12
   The investors allege that STC committed primary violations by selling and
   holding SIBL CDs in IRA accounts and by misrepresenting the value of the
   SIBL CDs. Therefore, to survive summary judgment, the investors must
   establish a genuine dispute of material fact that SEI directly or indirectly had
   the power to direct or cause the direction of the sale or valuation of SIBL CDs
   by STC. The investors have not met this burden.
             As the district court recognized, the contract between STC and SEI is
   strong evidence that SEI was unable to control STC’s primary violations.
   The contract made STC responsible for pricing the SIBL CDs and for
   providing accurate information to SEI. The contract does not assign any role
   to SEI in the sale or valuation of SIBL CDs. Further, as the district court
   noted, the investors’ “pleadings contain no evidence demonstrating that the
   relationship between the companies differed from that contemplated in the
   contract.” 13
             The investors do not refute this evidence and admit that they “do not
   contend that SEI priced the SIBL CDs.” Nor do the investors allege that SEI
   was involved in selling the SIBL CDs or in holding the SIBL CDs in IRAs.

   Section 15 of the Securities Act of 1933, 15 U.S.C. § 77o, and Section 20(a) of the Securities
   Exchange Act of 1934, 15 U.S.C. § 78t(a).”).
             11
                  Id. (citing G.A. Thompson & Co., Inc. v. Partridge, 636 F.2d 945, 958 (5th Cir.
   1981)).
             12
           Id. (quoting Meek v. Howard, Weil, Labouisse, Friedrichs, Inc., No. 95-60680, 1996
   WL 405436, at *3 (5th Cir. June 25, 1996) (per curiam)).
             13
            Ahders v. SEI Priv. Tr. Co., No. CV 16-00801-BAJ-EWD, 2020 WL 411694, at *3
   (M.D. La. Jan. 24, 2020).

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                                       No. 20-30186

   Instead, despite the contractual terms, the investors argue that SEI had direct
   or indirect control over STC’s primary violations due to various aspects of
   SEI’s role as a service provider for STC.
          First, the investors argue that SEI had the power to stop the primary
   violations from occurring because “SEI had the ability to deny its platform to
   the SIBL CD.” Because SEI could choose not to allow SIBL CDs on its
   platform, the investors assert that it is “reasonable to infer that . . . [SEI] also
   had the power to impose other, lesser, restrictions on the SIBL CD.”
   Viewing the facts in the light most favorable to the investors, SEI’s “platform
   was essential for STC’s customers to hold SIBL CDs in their IRAs,” and SEI
   could have prevented STC’s primary violations by denying its platform to
   the SIBL CD.
          Nevertheless, a reasonable jury could not conclude that SEI is liable
   as a control person merely because STC committed primary violations using
   SEI’s services. As SEI aptly notes, “[a]ny number of actors might have some
   ‘power to halt’ a fraudulent activity or provide important services to a
   primarily liable defendant,” for instance “if the power company had refused
   to provide power, [or] the landlord had refused to lease office space.” The
   control-person provision requires more than the power to stop a primary
   violation for an entity to be liable. The investors must establish that SEI
   directly or indirectly had “the power to direct . . . the management and
   policies” of STC. 14 Thus, SEI’s power to stop the primary violation is not
   sufficient, standing alone, to establish a genuine dispute of material fact that
   SEI had control over STC’s primary violations.
          Second, the investors argue that because SEI produced and sent
   statements containing the value of the SIBL CDs to clients, SEI had indirect

          14
               La. Stat. Ann. § 51:702(4).

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                                            No. 20-30186

   control over the valuation of the SIBL CDs. The investors contend that
   “[t]he facts here are analogous to cases finding sufficient indicia of control
   when an individual signs a misleading registration statement.”                 That
   argument is unpersuasive. Signing a registration statement is distinguishable
   from SEI’s role in producing and sending account statements for STC. By
   signing a registration statement, the signor is certifying the accuracy of the
   statement’s contents and becomes liable for any false statements of fact in
   the registration statement. 15
          In contrast, the investors do not allege that SEI signed anything
   relevant to the account statements. In fact, the statements bore STC’s name
   and gave no indication that SEI was involved in their creation. Nor did SEI
   certify the value of the SIBL CDs contained in the account statements.
   Rather, STC was responsible for providing SEI with the value of the SIBL
   CDs and for reviewing the statements. The investors acknowledge that the
   contract between SEI and STC “placed responsibility for valuing the SIBL
   CD[s] on STC.”
          Nevertheless, the investors allege that “SEI retained the ability to
   decline to send the statements or to require additional steps to be taken before
   accepting the values it reported out,” and therefore SEI had indirect control
   over the valuation of the statements. As discussed, however, SEI’s ability to
   prevent STC from sending misrepresentations by refusing to send account
   statements is not evidence that SEI directly or indirectly had the power to
   direct the management and policies of STC. It is not reasonable to infer that
   SEI had the power to control STC’s valuation of the SIBL CDs solely
   because SEI sent statements containing the valuation to STC’s clients,

          15
               See 15 U.S.C. § 77k(a)(1).

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                                            No. 20-30186

   particularly when the contract assigned STC the responsibility for valuing
   the CDs and providing accurate information to SEI.
           Alternatively, the investors argue that SEI is liable as a control person
   because “SEI controlled the day-to-day affairs of STC by virtue of its
   management and direction of the back-office functions of STC.” While some
   courts have required proof of control over day-to-day operations in addition
   to proof of control over the primary violations, 16 control over day-to-day
   operations is not facial evidence of control over a primary violation. 17 The
   investors appear to conflate these separate requirements. We need not
   decide whether the investors must establish that SEI had control over STC’s
   day-to-day operations because the investors fail to demonstrate a genuine
   dispute of material fact that SEI directly or indirectly controlled STC’s
   primary violations.
                                                  III
           With regard to SEI’s insurers, the investors argue that we should
   reverse the district court’s grant of summary judgment if we reverse the
   district court’s grant of summary judgment for SEI because the ruling for the

           16
              See Abbott v. Equity Grp., Inc., 2 F.3d 613, 619-20 (5th Cir. 1993) (discussing an
   Eighth Circuit opinion which “established a two-prong test for a prima facie case for
   controlling person liability: (1) ‘that the defendant [ ] actually participated in (i.e. exercised
   control over) the operations of the corporation in general’; and (2) ‘that the defendant
   possessed the power to control the specific transaction or activity upon which the primary
   violation is predicated, but [plaintiff] need not prove that this later power was exercised’”
   (alteration in original) (emphasis omitted) (quoting Metge v. Baehler, 762 F.2d 621, 631 (8th
   Cir. 1985))).
           17
            See Heck v. Triche, 775 F.3d 265, 283 & n.18 (5th Cir. 2014) (requiring a plaintiff
   to “show that the defendant had an ability to control the specific transaction or activity
   upon which the primary violation is based,” but noting that “[t]his Circuit has not yet
   decided whether a plaintiff must show that the alleged controlling person had ‘effective
   day-to-day control’ . . . over the controlled person” (quoting Abbott, 2 F.3d at 619-20)).

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   insurers “was based on [the district court’s] ruling with respect to SEI.”
   Because the district court properly granted summary judgment to SEI, we
   also affirm the district court’s grant of summary judgment on all claims
   against the insurers.
                                *        *         *
          For these reasons, the judgment of the district court is AFFIRMED.

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