The opinion of the court was delivered by: Schiller, J.
Defendant Mark Bloom controlled an investment vehicle through which he operated a Ponzi scheme that allowed him to live in the lap of luxury.After his deception was revealed, he pled guilty to charges of fraud and money laundering. Now, some of the people who invested money with Bloom are seeking to recover the money of which he defrauded them. Plaintiffs brought this action alleging violations of the federal securities law and various state law claims against Bloom, his employer, a portfolio manager who worked with Bloom, a number of officers and directors of Bloom's employer, and two entities involved with Bloom's employer. Presently before the Court are three motions to dismiss. For the reasons below, the Court will grant Defendant Ronald Altman's motion to dismiss. The remaining two motions to dismiss are denied.
MB Investment Partners, Inc. ("MB") is a registered investment advisor which entered into Investment Advisory Agreements with Plaintiffs. (Am. Compl. ¶ 8.) Centre MB Holdings, LLC ("CMB") is a private equity firm that owned 57% of MB's capital stock and controlled its operations through a contractual operating agreement. (Id. ¶ 9.) Center Partners Management, LLC ("CPM") owned the majority of CMB's capital stock and shared common directors with MB who served to insure that CPM and CMB were able to influence and control the operations and policies of MB. (Id. ¶ 10.)Robert Machinist was Chairman, Chief Operating Officer, and co-managing partner of MB, a member of its Board of Directors, and an owner of 14% of CMB's capital stock. (Id. ¶ 11.) Bloom was President, a co-managing partner, Chief Marketing Officer, and a director of MB. (Id. ¶ 12.) He was also the principal and sole member of North Hills Management, LLC and the general partner of North Hills, L.P. ("North Hills"). (Id.) Ronald Altman was a partner at MB, where he also served as senior managing director and portfolio manager. (Id. ¶ 13.) Lester Pollack was Chairman of CPM and a member of MB's Board of Directors. (Id. ¶ 14.) William Tomai, another member of MB's board, was Chief Administrative Officer and Chief Financial Officer of CPM. (Id. ¶ 15.) Guillaume Bébéar was a senior director of CPM and a member of MB's Board. (Id. ¶ 16.) P. Benjamin Grosscup, Thomas Barr, and Christine Munn were all partners, managing directors, and board members of MB. (Id. ¶¶ 17-19.) Robert Bernhard was a partner and a member of the MB Board of Directors. (Id. ¶ 20.) According to Plaintiffs, MB touted in press releases that Machinist and Bloom led its management team. (Id. ¶ 11.) In SEC filings, Pollack and Tomai were listed as being control persons of MB. (Id. ¶¶ 14, 15.)
B. Mark Bloom and North Hills
In 1997, Bloom formed North Hills as an enhanced stock index fund based on the S&P 500, S&P 400, and Russell indices. (Am. Compl. ¶ 32.) In exercising almost complete control of North Hills, Bloom disregarded any boundaries between him and North Hills. (Id. ¶¶ 33-34.) Bloom embezzled North Hills' assets for his own personal use and even invested $17 million of its assets in the Philadelphia Alternative Asset Fund because he was a third-party marketer for the fund and received a lucrative commission from the fund. (Id. ¶ 35.) The investment in the Philadelphia Alternative Asset Fund, coupled with Bloom's lavish spending, left North Hills without any material assets when Plaintiffs invested in North Hills, despite the fact that the monthly account statements provided to North Hills investors had not shown a loss in over seven years. (Id. ¶ 36.) Bloom also lost millions of North Hills' funds in another fraud. (Id. ¶ 37.)
C. Plaintiffs' Investments in North Hills
In June of 2006, Bloom met with Plaintiff Barry Belmont at the Westin Hotel in Philadelphia to discuss investments. Bloom handed Belmont his MB business card and extolled the conservative investment philosophy of MB; Belmont agreed that MB's conservative approach meshed with his investment preferences. (Am. Compl. ¶ 21.) At this meeting, Bloom discussed a variety of suitable investment vehicles for Belmont, including North Hills. (Id. ¶ 22.) According to Bloom, North Hills regularly returned 10-15% annually without significant risk by investing in hedge funds and other well-managed funds. (Id. ¶¶ 23-24.) A few weeks after this meeting, Belmont and John Wallace, the sole member of Plaintiff Philadelphia Financial Services, LLC ("PFS"), met with Bloom and Altman; Altman touted the virtues of MB's unique access to investment vehicles such as North Hills. (Id. ¶¶ 6, 26.) He also reiterated that North Hills was a conservative investment option without significant risk. (Id. ¶ 26.) Bloom and Altman prepared a proposed asset allocation dated July 12, 2006 that recommended Belmont put 20% of his investment in North Hills. (Id. ¶ 25.) Belmont invested $3.5 million in North Hills between July of 2006 and February of 2008. (Id. ¶ 63(a).)
Belmont tried to redeem his investment in North Hills but was told by Bloom that the North Hills partnership agreement allowed redemptions only at the end of the year and only with ninety days notice. (Id. ¶ 72.) Bloom assured Belmont that his investment was safe and based upon Bloom's representations, Belmont withdrew his redemption request. (Id. ¶¶ 73-74.) Belmont subsequently renewed his request but has not been repaid on his North Hills investment. (Id. ¶ 75.)
In December of 2006, Plaintiff Thomas Kelly and Wallace met with Machinist and Bloom to discuss setting up an investment advisory relationship for Kelly with MB. (Id. ¶ 27.) Kelly and his wife, Plaintiff Frances Kelly, entered into an investment advisory agreement with MB, with which the Kellys invested $4.6 million. (Id. ¶ 28.) Altman was responsible for the oversight and management of the Kellys' investment portfolio. (Id.) During a meeting the Kellys had with MB, Bloom recommended that they invest in North Hills, which Bloom said was a fund that made diversified, conservative investments and enjoyed consistent positive returns. (Id. ¶ 29.) The Kellys invested $375,000 in North Hills. (Id. ¶ 63(c.).)
Thomas Kelly withdrew $25,000 from North Hills in December of 2008 and sought to regain more of his investment after Bloom was arrested. (Id. ¶ 76.) Bloom promised a response to Kelly's request but none has been forthcoming. (Id.)
Throughout 2008, Bloom solicited Wallace to invest PFS' funds in North Hills. (Id. ¶ 30.) Bloom described North Hills as a fund of funds that consistently generated positive returns with little risk. (Id.) PFS invested $450,000 with North Hills. (Id. ¶ 63(b).) PFS is, among other things, a vehicle through which Wallace channels his personal investments and from which Wallace draws funds for his personal needs. (Id. ¶ 6.) Wallace anticipated that any gains he realized through his investment would be available to him personally. (Id. ¶ 66.)
In the fall of 2008, Plaintiff Gary Perez called Bloom for investment advice; Bloom recommended North Hills due to its consistently positive returns and conservative management. (Id. ¶ 31.) Perez invested $100,000 in North Hills. (Id. ¶ 63(d).)
In January of 2008, two large investors wanted to redeem their investments but because North Hills did not have enough assets to honor the request, it made only small distributions to these investors in March of 2008. (Id. ¶ 40.) One of these large investors threatened legal action and, thereafter, Bloom's lawyer admitted to other investors that Bloom dipped into North Hills' funds to buy a luxury apartment in Manhattan and splurge on a spending spree that included beach houses, luxury cars and boats, and a 6,200 square foot triplex with a gym.*fn1 (Id. ¶¶ 41-43.) Bloom also used millions of dollars stolen from North Hills' investors to benefit people in MB, including buying a 14% interest in CMB, the majority shareholder of MB's corporate parent, and investing money in an enterprise in which Machinist and other MB executives were invested. (Id. ¶ 45.) Plaintiffs' money was also used to repay prior North Hills investors whose money had been lost because of Bloom's fraud. (Id. ¶ 46.)
On July 30, 2009, Bloom pled guilty to fraud and money laundering. (Id. ¶ 47.)
E. Plaintiffs' Allegations
According to the Amended Complaint, the officers and directors of MB turned a blind eye to Bloom's illegal actions although they knew that he controlled North Hills and allowed him to sell interests in North Hills through MB. (Id. ¶¶ 52-53.) Plaintiffs allege that Defendants "failed to employ reasonable systems and controls that would have ensured that MB and its personnel placed the interests of customers first, that there was a reasonable basis for its and their investment advice, that investments conformed to customer objectives, that clients were treated fairly and that full and fair disclosures were made to customers regarding conflicts of interest." (Id. ¶ 54.) MB's officers and directors never asked Bloom about his profligate spending and failed to monitor his activities despite the numerous red flags and intertwined operations of MB and North Hills. (Id. ¶¶ 55-58.) Altman, in his position of portfolio manager, was charged with overseeing and managing Plaintiff's investments yet failed to conduct any meaningful due diligence of the North Hills investment. (Id. ¶ 61.)
Plaintiffs claimed that they were duped and had no idea about Bloom's nefarious dealings. (Id. ¶ 63, 71.) Indeed, "[f]or every month for which plaintiffs remained investors in North Hills until 2009, their account statements showed a positive result. Based on these statements, plaintiffs believed their investments to be stable and secure." (Id. ¶ 70.)
Count One is a securities fraud claim against Bloom, Altman and MB under 15 U.S.C. § 78(j) and its related regulations. Count Two is a Pennsylvania Unfair Trade Practices and Consumer Protection Law ("UTPCPL") claim against Bloom, Altman, and MB. Count Three is entitled "Controlling Person Liability" and is brought against CMB, CPM, Machinist, Pollack, Tomai, Bébéar, Grosscup, Munn, Barr, and Bernhard. This count alleges that as controlling persons as defined by the securities laws, these Defendants owed a duty to supervise MB, Bloom, and Altman but failed to uncover any fraud, rendering them liable under Section 20(a) of the Exchange Act. Count Four is a "Negligent Supervision By Officers and Directors" claim against Machinist, Pollack, Tomai, Grosscup, Munn, Barr, Bernhard, and Bébéar. Count Five (mislabeled Count Four) is a breach of fiduciary duty claim against Bloom, Altman, and MB.
Plaintiffs' original Complaint was filed on October 28, 2009. Defendants filed motions to dimiss on February 1, 2010. In Plaintiffs' response to these motions they requested that, if the Court was inclined to grant the motions, they be permitted to file an Amended Complaint. Rather than rule on the motions to dismiss, the Court allowed Plaintiffs to file an Amended Complaint. ...