United States District Court, D. Massachusetts
JEAN L. STANLEY and MICHAEL J. QUIGLEY, Personal Representative of the Estate of LORETTA CLUNE, Plaintiffs,
STANLEY T. SCHMIDT and ALEXANDER R. BLACK, Defendants.
MEMORANDUM AND ORDER
DOUGLAS P. WOODLOCK UNITED STATES DISTRICT JUDGE.
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”). 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
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.
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.
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.
Loretta Clune opened accounts with Interinvest in
2006. 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.
Interinvest's Disclosures and Form ADVs
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.
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.
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
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
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
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.
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.
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.
Policy Changes and Regulatory Actions
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.
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.
filed the complaint in this case on December 30, 2016. Of the
four named Defendants in the case, only Mr.
Schmidt 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.
Black has filed a motion for summary judgment on
Plaintiffs' claims under the '34 Act and for
a motion hearing on June 13, 2018, I allowed the parties an
opportunity to file additional materials specifically
regarding the question of scienter.
STANDARD OF REVIEW
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).
“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).
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
Count I: Securities Fraud
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 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 ...