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Stanley v. Schmidt

United States District Court, D. Massachusetts

March 28, 2019

JEAN L. STANLEY and MICHAEL J. QUIGLEY, Personal Representative of the Estate of LORETTA CLUNE, Plaintiffs,
v.
STANLEY T. SCHMIDT and ALEXANDER R. BLACK, Defendants.

          MEMORANDUM AND ORDER

          DOUGLAS P. WOODLOCK UNITED STATES DISTRICT JUDGE.

         This is an action for securities fraud and negligence brought by Jean Stanley and Loretta Clune, against an investment advisory company they used - Interinvest Corporation, Inc. (“Interinvest”) - and three of its senior executives - Dr. Hans P. Black (“Dr. Black”), Stanley T. Schmidt, and Alexander R. Black (“Alexander Black”).[1] Alexander Black now seeks summary judgment on the claims alleging a violation of the 1934 Securities and Exchange Act (“the '34 Act”) and common law negligence.

         I. BACKGROUND

         A. Factual Background

         1. The Parties

         Dr. Black is a resident and citizen of Canada. In 1980, Dr. Black founded Interinvest, an investment company in Boston, Massachusetts. Interinvest was organized under the laws of the Commonwealth of Massachusetts and was administratively dissolved on June 30, 2017. At various times, Dr. Black has served as Interinvest's Chairman, President, Chief Compliance Officer (“CCO”), and Chief Investment Officer. In 2014, he was Interinvest's sole shareholder, President, and Chief Investment Officer. Additionally, Dr. Black was Plaintiffs' investment adviser at Interinvest.

         Alexander Black is Dr. Black's son and began working for Interinvest in 2009. In March 2013, Alexander Black became the CCO of Interinvest, taking over for Stanley Schmidt. He also served as President for a period of time between 2013 and 2014. Alexander Black left Interinvest in August 2014 and has not spoken to his father since then.

         Plaintiff Jean Stanley opened accounts with Interinvest in 2000 after she heard “good reports” about Dr. Black through relatives who had also invested with the company. In the 1980s and 1990s, Ms. Stanley had worked as a commodities trader and as an execution broker for a hedge fund, though she did not professionally trade securities. When Ms. Stanley first invested with Interinvest, she stated specifically that she “had no tolerance for high risk” and wanted a stable, relatively safe, investment strategy. Through 2010, Ms. Stanley stated that she was satisfied with how her portfolio was being managed, and that she met with Dr. Black annually to discuss her account generally, though she ultimately gave Dr. Black and Interinvest discretion to make investment decisions for her accounts. These conversations slowly decreased and ultimately stopped after 2010.

         Plaintiff Loretta Clune[2] opened accounts with Interinvest in 2006.[3] Like Ms. Stanley, Ms. Clune had heard of Interinvest through relatives and decided to invest with the company on the recommendation of her nephew. Ms. Clune did not understand investments and her brother, John Quigley, an accountant, received copies of her monthly account statements. Though Ms. Clune's accounts lost value in 2008, the decline in performance did not cause her concern because it was in line with the state of the market at the time; ultimately, Ms. Clune invested more money with Interinvest in 2010.

         2. Interinvest's Disclosures and Form ADVs

         Between 2011 and 2014, Alexander Black began participating in the preparation of Interinvest's Form ADV, the form used by investment advisors to register simultaneously with the Securities and Exchange Commission (“SEC”) and state-level securities authorities. During this time, Dr. Black did not initiate changes to Interinvest's Form ADV, and all changes to Interinvest's Form ADV disclosures were initiated by Alexander Black and Mr. Schmidt. Dr. Black also consistently “denied ever getting compensation from” any of the companies for which he served on the board. Alexander Black testified that he asked Dr. Black if he ever received compensation from those companies and Dr. Black claimed that he did not, though when pressed, Dr. Black ultimately conceded that he received stock options. Alexander Black also testified that he took the initiative to look up filings for the companies on which Dr. Black served on the board to determine whether and to what extent Dr. Black had received compensation. In this manner, he discovered that Dr. Black received $12, 000 from one of the companies. This information was subsequently disclosed on Interinvest's Form ADV in 2013.

         In addition, Alexander Black also testified that he and Mr. Schmidt pushed Dr. Black to disclose relevant regulatory matters. In 2011, Dr. Black disclosed to Alexander Black and Mr. Schmidt the existence of an Autorite des Marche Financiers (“AMF”) action against a Canadian company controlled by Dr. Black that had previously operated as an investment advisory firm. This action was subsequently disclosed on Interinvest's Form ADV. Alexander Black had actual knowledge of one regulatory matter concerning Dr. Black during the time that they were employed by Interinvest, though Dr. Black was involved in two others.

         At some point between 2011 and 2014, Dr. Black also told Alexander Black and others that he had previously been involved in several civil lawsuits that were resolved through out-of-court settlements. Dr. Black stated that these actions were unrelated to the business of Interinvest and were instead related to currency trading losses he suffered in 2005.[4]

         Alexander Black testified that he consulted with Interinvest's counsel at Edwards, Angell, Palmer & Dodge in Boston to verify Dr. Black's position that settled civil actions did not need to be reported on Interinvest's Form ADV and to determine whether any legal actions needed to be disclosed, and was told that disclosure was unnecessary. However, Interinvest's counsel did not provide a formal opinion letter.

         Alexander Black testified that, while he was at Interinvest, he was not aware of any additional director compensation, regulatory actions against Dr. Black, or lawsuits concerning Dr. Black other than those that were disclosed in Interinvest's Form ADV.

         3. Plaintiffs' Investments

         In 2012, the risk profile of Plaintiffs' investment accounts with Interinvest began to change. By March 31, 2013, stocks selling for less than $1.00 per share, known as penny stocks, made up 50% of Ms. Clune's stock portfolio and 43% of Ms. Stanley's portfolio. Plaintiffs' expert has testified that “the primary cause of the damages was the transition of historically ‘Balanced' accounts owned by the Plaintiffs, to high-risk accounts concentrated in a handful of Nano-cap stocks beginning in 2012.” These penny stocks included shares in Amorfix, Tyhee Gold Corp., Wi2Wi, and Williams Creek Gold (collectively, “the portfolio securities”), among others. All four companies were Canadian corporations and were publicly traded on either the Toronto Stock Exchange or the TSX Venture Exchange. Dr. Black was affiliated with all four portfolio companies and served on their Boards of Directors. He also received a cash fee from Tyhee Gold Corp. and stock options in the other three corporations as compensation for his work as a director.

         In December 2013, Dr. Black authorized and initiated Ms. Clune's purchases of unsecured notes in Wi2Wi, a Canadian corporation for which he was a board member. In January 2014, he did the same for Ms. Stanley. That same month, both Ms. Stanley and Ms. Clune contacted Interinvest to inquire about the purchase of Wi2Wi shares. Internal emails from Interinvest suggest the trades were explained to both Plaintiffs, though the content of those conversations is not part of the record.

         The Wi2Wi notes did not appear in either Plaintiff's account until April 2014. Ms. Stanley and Ms. Clune again contacted Interinvest in July 2014 and both testified that they spoke to Alexander Black at length about their portfolios. Alexander Black does not recall speaking to Ms. Clune.

         4. Policy Changes and Regulatory Actions

         In early 2014, Alexander Black sent out a memo instructing Dr. Black that Interinvest should not be making private placement transactions without clients' express written consent. In March 2014, Alexander Black also attempted to cancel Dr. Black's corporate credit cards. He also sent another memo to employees and directors of Interinvest instructing Dr. Black to cease trading in securities of entities for which he sat on the board of directors. However, Interinvest continued to send “Dear Friends” emails to its clients, promoting the portfolio securities at issue in this case.

         Around the same time, the Securities and Exchange Commission (“SEC”) began an audit or examination of Interinvest. During the audit, Dr. Black provided misleading information to the SEC. In a note dated March 14, 2014, Dr. Black led the SEC to believe that he had only been involved in one litigation matter. In April 2015, Ms. Clune received a letter from State Street Bank, the Custodian of her account, that the New Hampshire Bureau of Securities Regulation had started an enforcement action against Interinvest, Dr. Black, and Alexander Black on the basis of, inter alia, allegations of securities fraud.

         B. Procedural Background

         Plaintiffs filed the complaint in this case on December 30, 2016. Of the four named Defendants in the case, only Mr. Schmidt[5] and Alexander Black remain. The case against Interinvest Corp. and Dr. Black concluded on October 3, 2017 pursuant to a default judgment issued against both.

         Alexander Black has filed a motion for summary judgment on Plaintiffs' claims under the '34 Act and for negligence.

         During a motion hearing on June 13, 2018, I allowed the parties an opportunity to file additional materials specifically regarding the question of scienter.

         II. STANDARD OF REVIEW

         Summary judgment is appropriate where “the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). A fact is material if it “might affect the outcome of the suit under the governing law, ” and a dispute is “genuine” if “the 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).

         Generally, “a party seeking summary judgment bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of [the record] which it believes demonstrate the absence of a genuine issue of material fact.” Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). Once it has made such a showing, the burden shifts to the nonmovant to “present definite, competent evidence to rebut the motion” and show a “trialworthy issue persists, ” especially on issues where the nonmovant bears the ultimate burden of proof. Vineberg v. Bissonnette, 548 F.3d 50, 56 (1st Cir. 2008) (internal citations and quotations omitted).

         When assessing the merits of a motion for summary judgment, “it is not for the court . . . to weigh the evidence but to determine whether there is a genuine issue for trial.” Estrada v. Rhode Island, 594 F.3d 56, 62 (1st Cir. 2010). “Ruling on [a] party's motion, the court views all facts and draws all reasonable inferences in the light most favorable to the nonmoving party.” Id. The standard requires that the nonmovant do more than “rest upon improbable inferences, conclusory allegations, or rank speculation;” instead, she must provide “submissions of evidentiary quality” to meet her burden. Vineberg, 548 F.3d at 56; see also Iverson v. City of Boston, 452 F.3d 94, 98 (1st Cir. 2006).

         III. ANALYSIS

         A. Count I: Securities Fraud

         Count I of Plaintiffs' complaint asserts a claim under section 10(b) of the '34 Act and its implementing regulations for securities fraud. See 15 U.S.C. § 78j(b), 17 C.F.R. § 240.10(b)(5). Plaintiffs allege that Alexander Black, by virtue of his position as CCO, had a duty to investigate and disclose information regarding Dr. Black's involvement in litigation and regulatory actions and the fact that Dr. Black received substantial compensation from various portfolio companies. His failure to do so, they allege, constitutes a violation of section 10(b) of the '34 Act.

         The '34 Act makes it “unlawful for any person . . . [t]o use or employ, in connection with the purchase and sale of any security . . . any manipulative device or contrivance, ” and gives the Securities and Exchange Commission (“SEC”) the power to promulgate rules to enforce this provision. 15 U.S.C. § 78j(b). Pursuant to this provision, the SEC has promulgated Rule 10b-5, which makes it unlawful for any ...


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