Opinion
CIVIL ACTION NO. 02-8065
December 8, 2003
MEMORANDUM
The facts recited below are either uncontested, or if contested, viewed in the light most favorable to the non-moving party in this case.
Plaintiff Maria Amendolia ("Ms. Amendolia") is a divorced woman in her sixties with a high school education. In 1992, Ms. Amendolia received settlement funds totaling approximately $229,000 in connection with two accidents that caused her significant disability and prevented her from further employment.
Seeking to invest her settlement funds so that she would receive income for the balance of her life, Ms. Amendolia turned to defendant Joseph Sharp ("Mr. Sharp"), who was Ms. Amendolia's insurance agent, for guidance. Ms. Amendolia had known Mr. Sharp since the early 1980s. Upon learning of Ms. Amendolia's intention to invest her settlement funds, Mr. Sharp introduced Ms. Amendolia to his investment adviser friend, defendant Ted Rothman ("Mr. Rothman") of Rothman Securities, Inc. ("RSI").
Mr. Sharp, Mr. Rothman and RSI are collectively referred to as "defendants".
Following a meeting with both Mr. Sharp and Mr. Rothman in June 1992, Ms. Amendolia acquired various financial instruments, including annuities and mutual funds, through Mr. Sharp, Mr. Rothman and RSI.
The initial investments, which totaled approximately $219,000, included annuities and mutual funds. Part of the dispute between the parties is whether or not the annuities and mutual funds acquired by the defendants were consistent with Ms. Amendolia's investment objectives. Complicating the issue are numerous transactions including both scheduled and unscheduled withdrawals from her annuities, and a withdrawal of $50,000 to purchase a CD. These transactions, while relevant, need not be discussed in any level of detail for the purposes of this discussion.
In 1996, Ms. Amendolia considered having another financial planner, named Louis Procacci ("Mr. Procacci"), manage her investments. When Mr. Rothman learned about Ms. Amendolia's intentions, he telephoned Mr. Sharp and asked him to call Ms. Amendolia to discuss the matter. Mr. Sharp informed Ms. Amendolia that she would incur approximately $5,000 in surrender charges if she transferred her investment funds to Mr. Procacci. Ms. Amendolia did not want to incur these charges and decided not to move her funds.
At some point in her relationship with defendants, Ms. Amendolia noticed a decline in the value of her investments. After consultation with her cousin Frances Solano ("Mr. Solano"), who is a stock broker, and Robert Powell ("Mr. Powell"), who is a stock broker and a financial planner, Ms. Amendolia began the process of transferring her investment accounts away from defendants' control. Ms. Amendolia now blames the defendants for the decline in the value of her investments.
In the instant case against Mr. Sharp, Mr. Rothman and RSI, Ms. Amendolia alleges violations of the Section 10 of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j. In addition to the federal securities law claim, Ms. Amendolia's amended complaint alleges common law claims of fraud, breach of fiduciary duty, negligence, and violations of the Pennsylvania Unfair Trade Practices and Consumer Protection Law ("CPL"), 73 P.S. § 201-1 to 201-9.3.
Presently before the court are Mr. Sharp's motion for summary judgment and Mr. Rothman's and RSI's motion for summary judgment. For the reasons that follow, the court finds that summary judgment is appropriate in favor of defendants and against Ms. Amendolia on the federal securities law claim, common law fraud claim, and CPL fraud claim. Ms. Amendolia has failed to establish that there is a genuine issue of material fact as to whether or not she acted in reliance on the alleged misrepresentations and false statements made by Mr. Sharp and Mr. Rothman.
However, as there are genuine issues of material fact with respect to plaintiff's negligence and breach of fiduciary duty claims, summary judgment is not proper on these claims. Thus, defendants' motions for summary judgment will be granted in part and denied in part.
II. DISCUSSION
A. The Standard for Summary Judgment.
___ A court may grant summary judgment only when "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 party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). A fact is "material" only if its existence or non-existence would affect the outcome of the suit under governing law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986). An issue of fact is "genuine" only when there is sufficient evidence from which a reasonable jury could find in favor of the non-moving party regarding the existence of that fact. Id. In determining whether there exist genuine issues of material fact, all inferences must be drawn, and all doubts must be resolved, in favor of the non-moving party. Coregis Ins. Co. v. Baratta Fenerty, Ltd., 264 F.3d 302, 305-06 (3d Cir. 2001) (citingAnderson, 477 U.S. at 248).
Although the moving party bears the burden of demonstrating the absence of a genuine issue of material fact, in a case such as this, where the non-moving party is the plaintiff, and therefore, bears the burden of proof at trial, that party must present affirmative evidence sufficient to establish the existence of each element of his case. Id. at 306 (citingCelotex Corp. v. Catrett. 477 U.S. 317, 323 (1986)). Accordingly, a plaintiff cannot rely on unsupported assertions, speculation, or conclusory allegations to avoid the entry of summary judgment, see Celotex, 477 U.S. at 324, but rather, she "must go beyond the pleadings and provide some evidence that would show that there exists a genuine issue for trial." Jones v. United Parcel Service., 214 F.3d 402, 407 (3d Cir. 2000).
B. Ms. Amendolia Cannot Establish Reliance on Statements Made by Mr. Sharp or Mr. Rothman.
To prevail on her federal securities law claim, common law fraud claim, and CPL fraud claim, Ms. Amendolia must demonstrate that she reasonably relied on false or misleading statements made by Mr. Sharp and Mr. Rothman. AES Corp. v. Dow Chem. Co., 325 F.3d 174, 178 (3d Cir. 2003) (A plaintiff must show that (1) the defendant made a misstatement or an omission of a material fact (2) with scienter (3) in connection with the purchase or the sale of a security (4) upon which the plaintiff reasonably relied and (5) that the plaintiff's reliance was the proximate cause of his or her injury.); Blumenstock v. Gibson, 811 A.2d 1029, 1034 ( Pa. Super. 2002) (plaintiff must show "justifiable reliance" to establish common law fraud and CPL fraud claims). However, by her own admission, Ms. Amendolia did not rely on any alleged false statements made by Mr. Rothman and Mr. Sharp.
To the extent that Ms. Amendolia also raises an unsuitability claim under Section 10 of the Securities and Exchange Act of 1934, such a claim rises and falls with her federal securities fraud claim because the elements for establishing an unsuitablility claim parallel the elements of a securities fraud claim. Banca Cremi, S.A. v. Alex. Brown Sons, 132 F.3d 1017, 1032 (4th Cir. 1997) ("A claim for § 10(b) suitability fraud `is a subset of the ordinary § 10(b) fraud claim.'") (quoting Brown v. E.F. Hutton Group, Inc., 991 F.2d 1020, 1031 (2d Cir. 1993)).
According to the amended complaint, Mr. Sharp's and Mr. Rothman's allegedly false statements were made to reassure Ms. Amendolia that she had "plenty" of investment income. Am. Complaint at 6. Specifically, Ms. Amendolia alleges that Mr. Rothman made the following misrepresentations: (1) that the money would "outlive" Ms. Amendolia; (2) that Ms. Amendolia could spend up to $35,000 and "not run out of money"; (3) that Ms. Amendolia "could afford to buy a Cadillac"; (4) that her "investments were secure"; and (5) that the "market will come up" when her funds went below $130,000. Amendolia Dep. Tr. at 363-66.
The allegedly false statements made by Mr. Sharp, according to Ms. Amendolia, are the following: (1) that her investments were "conservative" and (2) that she was in "good hands" with Mr. Rothman. Amendolia, Dep. Tr. at 392-93. Ms. Amendolia alleges that, based on these statements made by Mr. Rothman and Mr. Sharp, she did not move her account to another financial advisor. Mem. Opp. Summ. Judg. at 9. In her view, this failure to act on her part caused her to realize significant losses in her investments.
Ms. Amendolia alleges that Mr. Sharp made his statements in a letter dated December 10, 1993 and during a conversation in late 2001 or early 2002. The court notes, however, that neither of the statements alleged to have been made by Mr. Sharp are contained in the letter of December 10, 1993.
To support her claim of reliance, Ms. Amendolia points to the following excerpt from her deposition:
Q: Well, I'm asking, did you act differently or not act because Mr. Rothman told you that your finances are secure and you should not worry?
A: I felt relieved, but I didn't do anything.
Q: Well, were you about to do something before Mr. Rothman said that your finances are secure and you should not worry which you didn't do because he made that statement?
A: No.
Amendolia, Dep. Tr. at 388. Rather than supporting her assertion of reliance, however, this excerpt from her deposition transcript supports Mr. Rothman's argument that Ms. Amendolia did not, in fact, act or fail to act in reliance on statements made by Mr. Rothman. Indeed, when Ms. Amendolia was pressed again just moments later, the following exchange occurred:
Q: Did you do anything in reliance on the statement by Mr. Rothman that the market would come back?
A: No.
Id. at 391-92. Ms. Amendolia's testimony in this regard is consistent with her self-described distrust of Mr. Rothman. According to Ms. Amendolia, she had misgivings about Mr. Rothman as early as 1994 because she felt as though Mr. Rothman did not care "if [she] lost, if [she] gained." Id. at 384-386.
In connection with Mr. Sharp's statements, the following exchange occurred during Ms. Amendolia's deposition:
Q: What is the complete basis for your belief that Mr. Sharp knew or should have been aware that his statements were false when he made them to you?
A: Because he kept saying don't worry. Don't worry. And when people tell me not to worry, that's big no, that's a red flag.
Q: So did you believe Mr. Sharp when he said don't worry?
A: No, not really.
Q: Let's be clear about it. You did not believe Mr. Sharp when he told you don't worry; is that true?
A: True.
Q: Now, why do you think that Mr. Sharp knew that his statements when he made them to you were false or that he made them without regard for whether they were true?
A: I don't know.
* * *
Q: Did you take any action or not take any action based on any of the statements by Mr. Sharp which you contend were false?
A: No.
Amendolia, Dep. Tr. at 400.
In view of the above, the court concludes that there is no genuine issue of material fact and that Ms. Amendolia has provided insufficient evidence so that a reasonable jury could conclude that she reasonably relied on the allegedly false statements made by Mr. Rothman and Mr. Sharp. Thus, Ms. Amendolia cannot prove an essential element of her federal securities law claim, her common law fraud claim, and her CPL fraud claim. For these reasons, summary judgment is proper as to these counts I, II and V of the amended complaint.
Although defendants discussed a "churning" claim under Section 10 of the Securities and Exchange Act of 1934 in their motions for summary judgment, plaintiff has indicated, during the hearing on the motions for summary judgment, that a churning claim is not being pursued in this action. Summ. Judg. Hearing Tr. at 18. Any other claim related to "excessive commissions" allegedly charged by defendants also is unsupported by the evidence based on plaintiff's expert's testimony that the commissions charged by Mr. Rothman and RSI were "very close to the industry average." Carr, Dep. Tr. at 243. In addition, plaintiff's expert has testified that there were not an excessive number of transactions while Ms. Amendolia's account was being handled by Mr. Rothman and RSI.Id. at 240.
B. Genuine Issues of Material Fact Exist As To Whether Defendants Breached a Fiduciary Duty and Whether Defendants Acted Negligently.
According to defendants, the statute of limitations bars plaintiff's claims. By statute, the statute of limitations in Pennsylvania for tortious acts such as breach of fiduciary duty and negligence is two years. 42 Pa. Cons. Stat. Ann. § 5524(7). A claim under Pennsylvania law accrues at "`the occurrence of the final significant event necessary to make the claim suable.'" Barnes v. American Tobacco Co., 161 F.3d 127, 136 (3d Cir. 1998) (quoting Mack Trucks, Inc. v. Bendix-Westinghouse Automotive Air Brake Co., 372 F.2d 18, 20 (3d Cir. 1966)). Pennsylvania follows the discovery rule under which the statute of limitations is tolled until "`plaintiff knows, or in the exercise of reasonable diligence should have known, (1) that he has been injured, and (2) that his injury has been caused by another's conduct.'" Barnes, 161 F.3d at 136 (quoting Bradley v. Ragheb, 633 A.2d 192, 194 (Pa.Super. 1993)).
Defendants argue that Ms. Amendolia was put on notice of her alleged injuries as early as 1994, based on her testimony that she distrusted Mr. Rothman. This argument is tenuous at best unless one believes, and the court does not, that feelings of mistrust are a "storm warning" for breach of fiduciary duty and/or negligence. Further, Ms. Amendolia has argued that she was not put on notice of her alleged injury until she sought the advice of Mr. Powell in June or July of 2002. "Only where the facts are undisputed and lead unerringly to the conclusion that the length of time it took the plaintiff to discover the injury or its cause was unreasonable may the question be decided as a matter of law."Burnside v. Abbott Labs., 505 A.2d 973, 988 ( Pa. Super. 1985).
1. Breach of fiduciary duty.
Defendants argue that summary judgment is appropriate on Ms. Amendolia's breach of fiduciary duty claim because there was no "confidential relationship" between the defendants and plaintiff. According to the record, Mr. Sharp was Ms. Amendolia's insurance agent and Mr. Rothman was her securities broker and financial planner. However, at the request of Ms. Amendolia, Mr. Sharp accompanied Ms. Amendolia in her meetings with Mr. Rothman. Thus, Mr. Sharp played some role in Ms. Amendolia's financial planning and securities purchases.
A "fiduciary relationship [does not arise] merely because one party relies on and pays for the specialized skill or expertise of the other party." Etoll, Inc. v. Elias/Savion Advertising, Inc., 811 A.2d 10, 23 (Pa.Super. 2002). Plaintiff, instead, must demonstrate that there was a "confidential relationship" between her and the defendants. Id. A confidential relationship exists when there is "a disparity in position that the inferior party places complete trust in the superior party's advice and seeks no other counsel, so as to give rise to a potential abuse of power." Id. at 23 (citing Basile v. HR Block, Inc. 777 A.2d 95, 102 ( Pa. Super. 1998)). Whether or not a confidential relationship exists in a given case is usually a question of fact to be determined by no inflexible rule but by a weighing of the particular factors present in that case. Stauffer v. Stauffer, 351 A.2d 236, 241-42 (Pa. 1976). However, "[i]n some cases, as between trustee and cestui que trust, guardian and ward, attorney and client, and principal and agent, the existence of a confidential relationship is a matter of law." Basile, 777 A.2d at 102.
As for Mr. Rothman, the law in Pennsylvania is unambiguous that a securities broker is an agent of the client and that an agent-principal relationship exists between the two. Biqqans v. Bache Halsey Stuart Sheilds, Inc., 638 F.2d 605, 610 (3d Cir. 1980); Merrill Lynch, Pierce, Fenner Smith v. Perelle, 514 A.2d 552, 560 ( Pa. Super. 1986). Thus, as a matter of law, Mr. Rothman had a confidential relationship with Ms. Amendolia and owed her fiduciary duties.
The duties of a stock broker, when managing a non-discretionary account, include: (1) the duty to recommend a stock only after studying it sufficiently to become informed as to its nature, price and financial prognosis; (2) the duty to carry out the customer's orders promptly in a manner best suited to serve the customer's interests; (3) the duty to inform the customer of risks involved purchasing or selling a particular security; (4) the duty to refrain from self-dealing or refusing to disclose any personal interest the broker may have in any particular recommended security; (5) the duty not to misrepresent any fact material to the transaction; (6) the duty to transact business only after receiving prior authorization from the customer; and (7) the duty to communicate. Perelle, 514 A.2d at 561.
Ms. Amendolia has proffered evidence, such as Mr. Rothman and RSI's failure to provide her with account statements on a regular basis (including a twenty month gap between March 1995 and November 1996 according to Mr. Rothman, Rothman, Dep. Tr. at 109-110, to establish a genuine issue of material fact as to whether or not any of these duties were breached by Mr. Rothman.
Whether or not Mr. Sharp and Ms. Amendolia entered into a confidential relationship is not as perspicuous. Courts in this state have held that an agent-principal or confidential relationship does not exist as a matter of law between an insurance agent and his client. See, e.g., Weisblatt v. Minnesota Mutual Life Ins. Co., 4 F. Supp. 3d 371, 380 (E.D. Pa. 1998); In re H. Wolfe Iron Metal Co., 64 B.R. 754, 757 (W.D. Pa. 1986). Nonetheless, a confidential relationship may be found to have existed based on the facts and circumstances surrounding the relationship between the parties.Stauffer, 351 A.2d at 241-42.
Here, there is a genuine issue of material fact as to whether or not a confidential relationship developed between Ms. Amendolia and Mr. Sharp. The relevant factors in this case include Ms. Amendolia's age and limited education, her physical disability, her lack of sophistication in financial matters (acknowledged by Mr. Sharp), her trust in Mr. Sharp and her insistence that Mr. Sharp be present in all meetings between plaintiff and Mr. Rothman, the length and nature of Ms. Amendolia's relationship with Mr. Sharp, and Mr. Sharp's superior knowledge of financial matters. See Benevento v. Life USA Holding, Inc., 61 F. Supp.2d 407, 421-22 (E.D. Pa. 1999) (finding a confidential relationship between a customer and an insurance agent based on factors such as plaintiff's trust, reliance, and the agent's expertise for general financial advice).
Sharp, Dep. Tr. at 90.
Id. at 50.
For these reasons, summary judgment is not proper based on the contention that a fiduciary relationship did not arise between Ms. Amendolia and the defendants.
When questioned about his role in talking to Ms. Amendolia's about her transfer of her account to Mr. Procacci, Mr. Sharp testified as follows:
Q: Did Mr. Rothman tell you why he was sending [documents related to Ms. Amendolia's transfer] to you?
A: He suggested because I had a prior relationship with Maria and I knew her longer and better, that I might be better equipped at trying to conserve the business, especially since a good portion of it was my annuity.
Q: Hadn't you already earned a commission on that annuity?
A: Yes.
Q: Would you have lost any money if Ms. Amendolia had surrendered that annuity —
A: No.
Q: — as part of her plan?
A: No. Maria would have. I wouldn't have.
Q: Whose financial interests would be preserved by keeping Ms. Amendolia's account with Mr. Rothman?
A: Maria Amendolia's.
Q: How about Mr. Rothman's?
A: At that time, no. He was in the same position I was, as far as I understood.
Q: Wasn't he making ongoing transactions?
A: There weren't any transactions pending at the time that I knew of.
Q: Are you telling me that from the time she made her first investment with Mr. Rothman in 1992 until 1996, there were no transactions on her account with Mr. Rothman?
A: I don't know.
Sharp, Dep. Tr. at 65-66.
Mr. Rothman's reported entreaty to Mr. Sharp to call Ms. Amendolia's to "conserve the business" raises at least one genuine issue of material fact as to whether or not defendants breached a fiduciary duty, assuming one existed, by not acting "in good faith and solely for the benefit of plaintiff." McDermott v. Party City Corp., 11 F. Supp.2d 612, 626 (E.D.Pa. 1998).
2. Negligence.
"An insurance broker is under a duty to exercise the care that a reasonably prudent businessman in the brokerage field would exercise under similar circumstances and if the broker fails to exercise such care and if such care is the direct cause of loss to his customer, then he is liable for such loss unless the customer is also guilty of failure to exercise care of a reasonably prudent businessman for the protection of his own property and business which contributes to the happening of such loss." Industrial Valley Bank Trust Co. v. Dilks Agency, 751 F.2d 637, 640 (3d Cir. 1985) (citing Consolidated Sun Rav, Inc. v. Lea, 401 F.2d 650, 656 (3d Cir. 1968)); see also Swantek v. Prudential Property Casualty Insurance Co., 48 Pa. D. C. 3d 42 (1988); Peterson v. State Farm Insurance Co., 133 P.L.J. 437 (1985). The duty of care owed to an insurance purchaser by an insurance agent on a claim of simple negligence is to obtain the coverage that a reasonably prudent professional insurance agent would have obtained under the circumstances. Berlin v. Maryland. Casualty Co., 60 Pa. D. C. 4th 457, 461 (Pa. D. C. 2002) (citing Weisblatt v. Minnesota Mutual Life Insurance Co., 4 F. Supp.2d 371, 379 n. 7 (E.D. Pa. 1998)). Likewise, a securities dealer, as an agent, owes similar duties of care to his or her clients. McCarthy v. Recordex Serv., 80 F.3d 842, 857-58 (3d Cir. 1996); Perelle, 514 A.2d at 561.
Based on the record before the court, it is clear that there are genuine issues of material fact as to what Ms. Amendolia's investment strategy was at the time she engaged Mr. Sharp and Mr. Rothman. Although the parties do not dispute that Ms. Amendolia wished to have income for the rest of her life from her settlement funds, the means by which she hoped to accomplish this end — whether through conservative or more aggressive investments — is disputed by the parties. Defendants assert that Ms. Amendolia wished to invest aggressively and point to a letter written by Mr. Sharp to Ms. Amendolia indicating that this was Ms. Amendolia's intention. Rothman Mem. Summ. Judg. at 12. Defendants also point to Ms. Amendolia's investment strategy as expressed on her account applications with other financial firms such as Morgan Stanley Dean Witter, in which she indicated that her investment objectives were "speculation" and "capital appreciation." Id. Ms. Amendolia has indicated, however, that she wanted conservative investments. Id. at 6.
There are also genuine issues of material fact as to whether or not Mr. Rothman and Mr. Sharp placed Ms. Amendolia in investments consistent with her investment goals. According to Ms. Amendolia's expert, Jan Carr, Ms. Amendolia's asset allocation was inconsistent with a conservative investment strategy because they were "overweighted in equities." Carr, Dep. Tr. at 236-37. Mr. Rothman's expert, Wayne Geisser, disputes plaintiff's expert's characterization. Geisser Rep. at 9. The extent to which Ms. Amendolia suffered damages, if any, also is at issue as demonstrated by plaintiff's expert's "money-in, money-out" method and defendants expert's "well managed portfolio" analysis. Summ. Judg. Hearing Tr. at 15. For at least these reasons, summary judgment is not appropriate on Ms. Amendolia's negligence claim against defendants.
III. CONCLUSION
In view of the forgoing, summary judgment is appropriate against plaintiff and in favor of defendants on the federal securities law claim, common law fraud claim, and CPL fraud claim. However, genuine issues of material fact exist so as to preclude summary judgment on plaintiff's breach of fiduciary duty and negligence claims.
Accordingly, the claims remaining against the defendants are plaintiff's breach of fiduciary duty and negligence claims.
An appropriate order follows.
ORDER
AND NOW, this day of December 2003, it is hereby ORDERED that defendants' motions for summary judgment (doc. nos. 27, 46) shall be DENIED IN PART and GRANTED IN PART pursuant to the accompanying memorandum.
It is FURTHER ORDERED that JUDGMENT is ENTERED in favor of defendants and against plaintiff on counts I, II and V.
AND IT IS SO ORDERED.