ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA
Before: STAPLETON, McKEE, Circuit Judges, and GIBSON *fn1,
(Opinion filed: August 28, l996)
We are called upon to determine the scope of the fiduciary duty owed by a broker-dealer of securities under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), 29 U.S.C. Section(s) 1104(a) in the rather narrow circumstances presented by this appeal. Various employee benefit funds sued Janney Montgomery Scott, Inc. ("Janney") alleging that Janney's failure to disclose information about one of Janney's employees was a breach of Janney's fiduciary duty under Section 404(a) of ERISA, and under federal and state common law. The district court assumed for purposes of summary judgment that Janney was a "functional" or "limited purpose" fiduciary pursuant to Section 3(21)(A)(ii) of ERISA, 29 U.S.C. Section(s) 1002(21)(A)(ii), but held that any liability that Janney had in such capacity extended only to its investment advice. Since Janney's alleged breach had nothing to do with investment advice, the district court granted summary judgment in favor of Janney and against the Funds on each count of the complaint. See Glaziers and Glassworkers Union Local 252 Annuity Fund, et al. v. Newbridge Securities, Inc., et al., 877 F.Supp. 948, 953-954 (E.D.Pa. 1995).
For the reasons that follow we will affirm the grant of summary judgment on the federal common law claim, but reverse the grant of summary judgment on the ERISA claim, and the state common law claim.
The plaintiffs are numerous funds maintained by Local 252 of the Glaziers and Glassworkers Union (the Annuity Fund, Pension Fund, Health and Welfare Fund, Vacation Fund, and Apprentice Fund), and two individual fiduciaries of those funds - Sean McGarvey and Martin Rosenberg (collectively, the "Funds"). Each of the funds are related Employee Benefit Plans managed by a board of trustees. Historically, the Funds limited the majority of their investments to federally-insured certificates of deposit issued by Philadelphia area banks that the Funds' trustees were familiar with.
The seeds of the instant suit were sown in 1982 when Richard Socket, the Funds' Administrator, met a Janney employee named Michael Lloyd. Socket introduced Lloyd to the Funds' trustees and recommended that the trustees consider and accept Lloyd's advice on new investments. Socket was particularly interested in CDs issued by non-Philadelphia area banks with which Lloyd was familiar and which offered rates of interest superior to those offered by Philadelphia area banks.
At some point between 1982 and June 1985, Lloyd became a Vice President at Janney. He also became increasingly involved with the Funds and their investments. During that period, the Funds, on Lloyd's advice, purchased a total of 73 CDs and other investments through Janney. The total value of these investments was in excess of $3,000,000.
The Funds contend that as time went on Lloyd routinely attended meetings of the Funds' trustees, offered advice concerning overall investment strategy, and came to be referred to as the Funds' "investment consultant." The Funds also allege that Lloyd would routinely call Socket and recommend a particular investment as being particularly well-suited to the Funds' specific investment strategy. According to Socket, it was rare that the Funds did not accept that advice.
At a meeting held on June 12, 1984 the trustees passed a motion appointing Lloyd "the financial consultant to all funds." See Brief of Appellee at 6. His relationship with the Funds can be gleaned in part from the minutes of the trustees' meeting of August 28, 1984, which read: "an investment decision may be made by the [Funds'] administrator with the approval of one trustee from each side [Employer and Union], to carry out recommendations of investment consultant, Michael Lloyd." This relationship continued for sometime to the apparent satisfaction of all concerned.
However, the plot began to thicken in early June of 1985 when Janney began investigating Lloyd because of suspected improprieties in Lloyd's personal investments. Lloyd had failed to make a payment to a partnership in which he was a limited partner, and Janney had come to suspect that he had tried to cover-up the late payment by tendering a cashier's check that had been fraudulently altered to create the appearance that it had been timely presented. Lloyd failed to explain what had actually occurred, but he did deny any wrongdoing. Despite Lloyd's denial, Janney conducted an internal investigation. Pending the completion of the investigation, and prior to a scheduled meeting with Lloyd's attorney, Janney informed Lloyd that he was suspended. Thereafter, on June 17, 1985, Janney informed Lloyd's attorney of its intent to discharge Lloyd. The following morning, June 18, 1985, Lloyd resigned from Janney.
Each of the parties to this dispute put their own "spin" on the circumstances leading to Lloyd's resignation. The Funds argue that Lloyd continued to obfuscate and prevaricate throughout Janney's investigation thereby causing Janney to discharge him. Janney, however, argues that Lloyd was forced to resign because he was unable to conform to the very high standard of conduct demanded of Janney employees.
In any event, when Lloyd left, Janney reported his departure to the National Association of Securities Dealers ("NASD") as required by the rules of that association. Janney completed the required "Uniform Termination Notice for Securities Industry Registration" form, and sent it to the NASD. Question No. 14 on that form asks:
Is there reason to believe that the individual while employed or associated with your firm, may have violated any provision of any securities law or regulation or any agreement with or rule of any governmental agency or self-regulatory body, or engaged in any conduct which may be inconsistent with just and equitable principles of trade? (Joint Appendix at 151a).
Janney answered "Yes," and included a detailed narrative explaining that answer. In relevant part, Janney's explanation included the following:
In November 1983, Mr. Lloyd purchased one unit of Austin Investors, L.P., a real estate limited partnership, at a cost of $39,500. The terms of the partnership agreement called for annual contributions to be remitted directly to Ascott Investment Corp. During the month of February 1985 our Financial Services Department became aware that the payment due February 1, 1985 had not been received by the Partnership. It is standard procedure to be notified by them in the event of apparent late payment by any of Janney's customers. Enclosed are a series of letters from Ascott to Mr. Lloyd with respect to the past due payments.
Upon learning of this, personnel of that department asked Mr. Lloyd for an explanation. He reported to them that timely payment had in fact been remitted by him. In an effort to resolve any question, Mr. Lloyd was asked to furnish some evidence of that payment. In late May, he presented to Firm personnel a copy of the face of a Cashier's Check in the amount of $9,980. . . .This showed a date of "2-21-85" and the payee as Ascott Investment Corp. In consideration of this, our Firm contacted Ascott, advised them of the check copy, and asked that they review their records. It was subsequently reported by them that they were unable to find any record of this check. Mr. Lloyd was asked to obtain a copy of the reverse side of that check which should have shown an endorsement and thus establish whether Ascott had in fact cashed the check. It was also suggested that he issue a stop payment on the February check. On June 6, 1985 Mr. Lloyd did purchase a Cashier's Check for $9,980 which was delivered to Austin to cover the payment due for February.
Our firm then made inquiries at Fidelity Bank, where the check had been drawn. . . After a search of their records, they notified us that they could find no evidence of a check dated February 21, 1985. However, based on their further review they identified that February check as one which was actually drawn May 21, 1985.
In light of these disclosures it appeared that the May 21, 1985 check and the February 21, 1985 check were one and the same. Moreover, there was an inference that the May 21 date may have been altered to represent a "2-21-85" date on the copy presented as proof of payment. (Joint Appendix at 152a-153a).
Janney did not inform the Funds of the circumstances surrounding Lloyd's departure. Instead, Janney assigned a new account executive, Mitchell B. Pinheiro, to Lloyd's accounts, including the Funds' accounts. On June 20, 1985, Pinheiro wrote a letter of introduction to Socket in which Pinheiro informed the Funds only that Lloyd had resigned as a Janney representative.
The NASD conducted its own investigation of Lloyd. That investigation resulted only in the NASD issuing a letter of caution to Lloyd in which it reminded him that he was obliged to ensure that his own personal securities transactions were paid in a timely fashion. *fn2
Meanwhile, Lloyd had established Lloyd Securities, Inc. ("LSI"), upon leaving Janney. Six days after Lloyd left Janney, the Funds decided to follow him and to transfer their accounts to Lloyd's new firm. Once Lloyd obtained the necessary regulatory approvals he asked the Funds to transfer their accounts from Janney to LSI. On June 24, 1985, the Funds' trustees voted to transfer the Funds' accounts from Janney to Lloyd and his new firm. However, the transfer was not made until sometime in September of 1985 when Janney transferred the Funds' accounts to Provident National Bank (as custodian) pending final transfer to Lloyd and LSI, in accordance with instructions from Socket. Janney does not suggest that it did not know that the accounts were to be transferred to LSI and Lloyd when it transferred the accounts to Provident pursuant to Socket's instructions. Janney never told the Funds of the circumstances surrounding Lloyd's departure from Janney.
After the Funds transferred their accounts to LSI, the Funds expanded the type and scope of investments which they permitted Lloyd to make on their behalf. The relationship with Lloyd continued until March, 1990, when the Funds learned that Lloyd and LSI were under investigation by the SEC and, concerned over the handling of their investments, finally terminated their relationship with Lloyd. However, by that time, Lloyd had stolen Fund assets in excess of $500,000 and had wasted additional assets in excess of $2,000,000 in what the Funds refer to as "bizarre and worthless investments." *fn3
Eventually, Lloyd pled guilty to numerous criminal offenses based upon his fraudulent conduct. In his guilty plea, he admitted stealing money from customers, including the Funds, and covering the thefts with forged and bogus documents. He was sentenced to a prison term and the SEC and other regulatory authorities shut down LSI and its related companies.
The Funds contend that Janney did not offer the information about the circumstances of Lloyd's departure out of fear of being sued by Lloyd. Janney denies this and explains that it did not inform the Funds of the circumstances of Lloyd's departure because it had only unproven suspicions that Lloyd never admitted. Janney thus argues that it "acted prudently in not volunteering to ...