Opinion
DOCKET NO. A-2902-11T1
11-15-2012
LEONARD L. FREDERICK, THE ESTATE OF COLETTE A. FREDERICK, FRANCES A. FREDERICK, MATTHEW F. STREIB and LAUREN A. STREIB, Plaintiffs-Appellants, v. MAXWELL BALDWIN SMITH, HOLLY SMITH, CANTONE RESEARCH, INC., PNC INVESTMENTS, J.J.B. HILLIARD, W.L. LYONS, INC., ATLANTIC GROUP SECURITIES, INC. and RICKEL & ASSOCIATES, INC., Defendants, and MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., Defendant-Respondent.
D'Alessandro & Jacovino, attorneys for appellants (Edward G. D'Alessandro, Jr., on the brief). Bressler, Amery & Ross, attorneys for respondent (David J. Libowsky, on the brief).
NOT FOR PUBLICATION WITHOUT THE
APPROVAL OF THE APPELLATE DIVISION
Before Judges Fisher and St. John.
On appeal from the Superior Court of New Jersey, Law Division, Morris County, Docket No. L-1108-09.
D'Alessandro & Jacovino, attorneys for appellants (Edward G. D'Alessandro, Jr., on the brief).
Bressler, Amery & Ross, attorneys for respondent (David J. Libowsky, on the brief). PER CURIAM
Plaintiffs alleged in these consolidated actions that they lost approximately $8,000,000 as a result of their investment in defendant Maxwell Baldwin Smith's unlawful Ponzi scheme. In earlier proceedings, we affirmed Judge W. Hunt Dumont's dismissal of the claims against defendant Merrill Lynch, Pierce, Fenner & Smith because "plaintiffs had no relationship with Merrill Lynch, and because Smith had no relationship with Merrill Lynch other than as owner of the account into which the funds were placed." Frederick v. Smith, 416 N.J. Super. 594, 596-97 (App. Div. 2010), certif. denied, 205 N.J. 317 (2011). We rejected the notion that Merrill Lynch had a duty to "periodically or regularly police the personal account maintained by Smith for indicia of fraud," observing that Merrill Lynch only "deposited [plaintiffs'] checks in Smith's account as directed and derived no financial benefit from the fact that checks may have been written directly to Merrill Lynch instead of Smith." Id. at 601.
Approximately seven months after the Supreme Court denied certification, plaintiffs moved to vacate the dismissal order, based on Rule 4:50-1(b) (newly-discovered evidence) and Rule 4:50-1(c) (fraud). Plaintiffs argued in the trial court that they were entitled to relief pursuant to Rule 4:50-1(b) because, in 2011, Merrill Lynch consented to the imposition of sanctions against it regarding Smith's movement of the misappropriated funds in question through his Merrill Lynch account, and that they were entitled to relief pursuant to Rule 4:50-1(c) because Merrill Lynch and its counsel had misrepresented Merrill Lynch's obligation, pursuant to federal law, to adopt an anti-money-laundering policy. Following Judge Dumont's retirement, the motion was heard and denied by Judge David B. Rand for reasons set forth in his cogent and thoughtful oral decision of January 6, 2012.
Plaintiffs appeal, arguing their entitlement to relief from the October 23, 2009 order of dismissal because:
I. THE COURT ERRED IN FAILING TO GRANT PLAINTIFF[S] RELIEF UNDER NEW JERSEY RULE OF COURT 4:50-1(b) BASED ON NEWLY DISCOVERED EVIDENCE WHICH WOULD ALTER THE JUDGMENT OR ORDER AND WHICH BY DUE DILIGENCE COULD NOT HAVE BEEN DISCOVERED IN TIME TO MOVE FOR A NEW TRIAL UNDER RULE 4:49.We find insufficient merit in these arguments to warrant discussion in a written opinion. R. 2:11-3(e)(1)(E). We add only the following brief comments.
II. THE CONSOLIDATED PLAINTIFFS ARE ENTITLED TO RELIEF FROM THE JUDGMENT DUE TO THE MISREPRESENTATION OR OTHER MISCONDUCT ON THE PART OF MERRILL LYNCH AND ITS COUNSEL PURSUANT TO RULE 4:50-1(c).
III. MERRILL LYNCH BOTH OWED A DUTY TO THE CONSOLIDATED PLAINTIFFS UNDER FEDERAL ANTI-MONEY LAUNDERING STAUTES AND THE PATRIOT ACT AND ASSUMED A DUTY BY ADOPTING SPECIFIC
REGULATIONS WHICH PROHIBITED MERRILL LYNCH FROM ACCEPTING THE CONSOLIDATED PLAINTIFFS' FUNDS IN THE INSTANT MATTER.
IV. THE PLAINTIFFS ARE ENTITLED TO RELIEF UNDER RULE 4:50-1(f).
First, although Merrill Lynch's 2011 settlement with the Financial Industry Regulatory Authority (FINRA) occurred after entry of the October 23, 2009 dismissal order and, thus, may in a general sense be viewed as something new or newly-discovered, Merrill Lynch correctly argues that the settlement of that regulatory matter has no bearing on the dismissal of plaintiffs' claims against Merrill Lynch. That is, relief from a final judgment or order is authorized only for newly-discovered evidence that "would probably alter the judgment." R. 4:50-1(b); see DEG, LLC v. Twp. of Fairfield, 198 N.J. 242, 264 (2009) (holding that a movant pursuant to this subsection must demonstrate the new evidence "would probably have changed the result"). The settlement agreement does not demonstrate or otherwise suggest that Merrill Lynch owed a duty of care to non-customers such as plaintiffs. In fact, in executing the settlement agreement, Merrill Lynch asserted that it neither admitted nor denied its liability in that regulatory matter but only consented to the imposition of sanctions based on the facts outlined in the agreement. For that reason alone, the settlement agreement was not admissible or germane to establishing whether Merrill Lynch owed a duty to plaintiffs or others similarly situated. See Lipsky v. Commonwealth United Corp. , 551 F.2d 887, 893-94 (2d Cir. 1976) (holding that "a consent judgment between a federal agency and a private corporation which is not the result of an actual adjudication of any of the issues . . . can not be used as evidence in subsequent litigation between that corporation and another party"); see also N.J.R.E. 408; Shankman v. State, 184 N.J. 187, 207 (2005); Leslie Blau Co. v. Alfieri, 157 N.J. Super. 173, 200 (App. Div.), certif. denied, 77 N.J. 510 (1978). As a result, Judge Rand correctly viewed the settlement agreement as inessential in determining whether Merrill Lynch owed a duty of care to these plaintiffs.
The settlement agreement was executed by Merrill Lynch on June 8, 2011, and by FINRA on July 26, 2011.
To be precise, the settlement agreement states that Merrill Lynch "accept[ed] and consent[ed], without admitting or denying the findings, and solely for the purposes of this proceeding and any other proceeding brought by or on behalf of FINRA, or to which FINRA is a party prior to a hearing and without an adjudication of any issue of law or fact, to the entry of the following findings by FINRA."
In asserting their right to relief based on Rule 4:50-1(c), plaintiffs claim that Merrill Lynch and its representatives made false and misleading comments about the existence or scope of Merrill Lynch's duty to monitor Smith's account. We agree there was no misrepresentation and that plaintiffs' claim is based on statements of Merrill Lynch's counsel that were taken out of context. Viewed in light of the following additional comments made by Merrill Lynch's counsel during oral argument on the motion to dismiss, it is clear that Merrill Lynch candidly acknowledged that the circumstances may have had regulatory consequences; that is, in answering a question posed by the trial judge, counsel recognized that what occurred
maybe . . . raises regulatory issues, maybe a regulator would have issues with that, the fact that checks -- $8 million worth of checks are being deposited into the account of another person. I mean, brokerage firms -- this is outside the purview of the motion, but they do have policies dealing with the acceptance of third party checks. So the fact that there's a third party check in and of itself, is not, necessarily, you know, cause for concern, but would a -- you know, would a regulatory -- perhaps a regulator --At that point, counsel was interrupted by the trial judge and never completed his thoughts on that subject. We are satisfied that Merrill Lynch did not deny that its actions may have had regulatory consequences and, accordingly, find no basis for plaintiffs' claim of a right to relief pursuant to Rule 4:50-1(c).
To summarize, we conclude: that the FINRA-Merrill Lynch settlement that came about approximately two years after the dismissal of this action has no bearing on whether Merrill Lynch owed a duty to noncustomers such as plaintiffs; that neither Merrill Lynch nor its counsel misrepresented the existence or application of regulatory policies in this context; and that whether Merrill Lynch had established and implemented an anti-money-laundering program pursuant to federal law could not form a basis for relief from the dismissal order because any such legal obligations existed as early as 2002 and were ascertainable by plaintiffs prior to the dismissal of their action against Merrill Lynch.
According to the FINRA-Merrill Lynch settlement agreement, treasury regulations requiring suspicious transaction-reporting for broker-dealers were adopted in 2002. To the extent those regulations had any colorable bearing on the establishment of a civil cause of action on behalf of noncustomers was something plaintiffs should have asserted when the trial judge considered Merrill Lynch's motion to dismiss. Plaintiffs unreasonably delayed when they made this argument for the first time two years after dismissal. See R. 4:50-2.
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Affirmed.
I hereby certify that the foregoing is a true copy of the original on file in my office
CLERK OF THE APPELLATE DIVISION