Mark Bloom, an employee and officer of MB, operated a Ponzi scheme through a hedge fund, North Hills, that he controlled and managed outside the scope of his responsibilities at MB. (Kind of makes you wonder what other hedgies do with their spare time.) He was arrested and indicted in 2009, by which time most of the money was gone. Investors in North Hills sued MB and various MB-related individuals, alleging violations of the Securities and Exchange Act, negligent supervision, violations of SEC Rule 10b-5, violations of the Pennsylvania Unfair Trade Practice and Consumer Protection Law, and breach of fiduciary duty. The district court granted summary judgment to the defendants (after dismissing claims against one) on all claims. The court of appeals affirmed in part and vacated in part, remanding for a trial on the investors’ Rule 10b-5 and UTPCPL claims against MB (which ceased operations following the discovery of the North Hills fraud and Bloom’s arrest). Two of the investor-plaintiffs were MB clients/advisees, while two weren’t.
Bloom operated North Hills to fund his own extravagant lifestyle, and also engaged in additional misappropriation/self-dealing activity. Bloom solicited the plaintiffs while using his MB connections: for example, he met with Belmont to discuss MB’s investment advisory services, gave Belmont his MB business card, described MB’s investment philosophy, then discussed various funds, including North Hills, that he recommended as suitable investments. Other MB-related people were also allegedly involved in soliciting the investors, though there are factual disputes about what happened.
MB knew that Bloom was running North Hills while also working as an adviser at MB. “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.” As an investment adviser, MB was legally required to supervise its personnel, but it didn’t have adequate compliance procedures in place to prevent fraud and self-dealing. (MB disputed that, but the SEC issued a deficiency letter detailing compliance failures shortly after Bloom was arrested.) Bloom was thus able to avoid required disclosures, and 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.”
Bloom pleaded guilty to the counts against him, including charges of diverting at least $20 million from North Hills to his own use, securities fraud, and wire fraud; criminal and civil proceedings against him are still pending.
On appeal, while the court of appeals affirmed summary judgment for the other defendants, it ruled that imputation of Bloom’s conceded violations of Rule 10b-5 might be imputed to MB, and thus summary judgment on that issue was inappropriate. Similar imputation principles held out the possibility of UTPCPL liability, which creates liability for a person “[e]ngaging in any other fraudulent or deceptive conduct which creates a likelihood of confusion or of misunderstanding.” The standard of liability under this catchall provision is in flux. Some cases require plaintiffs to meet the standards for common law fraud, while others don’t but still require knowledge of falsity/misleadingness. The court here indicated that a defendant couldn’t be derivatively liable under the UTPCPL for the fraudulent actions of a third party without evidence that the defendant ever knowingly engaged in misrepresentation. Thus, the claims against an individual defendant failed because he wasn’t alleged to have any knowledge of the North Hills fraud at the time he promoted it. However, Bloom’s admitted frauds were violations of the UTPCPL, and could potentially be imputed to MB, since the purpose of imputation is “fair risk-allocation, including the affordance of appropriate protection to those who transact business with corporations.”
There was a genuine issue of material fact on imputation. “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 …. Also, MB never collected any fees or received any remuneration on account of any of the Investors' investments in North Hills.” Whether there was so little benefit to MB that the investors should have known that Bloom’s statements were made without MB’s authority was for the trier of fact to decide.