Opinion
Case No: 00-4485-CIV-UNGARO-BENAGES
August 23, 2002
ORDER DENYING MOTION FOR SUMMARY JUDGMENT
THIS CAUSE is before the Court upon Defendants' Motion for Summary Judgment, filed July 23, 2002.
THE COURT has considered the motion, the pertinent portions of the record, and is otherwise fully advised in the premises.
Plaintiffs are a class of investors in Cyprus Funds, Inc. (the "Fund"), which appeared to the public to be a mutual fund but actually was a Ponzi scheme operated mainly by and for the benefit of Eric Bartoli. See Securities and Exchange Commission v. Latin America Services Co., et al., Case No. 99-2360-CIV-UNGARO-BENAGES. Defendants herein provided Cypress Funds with banking and investment services. Plaintiffs allege that Defendants aided and abetted Cypress Funds in breaching its fiduciary duties to its investors. See Amended Complaint, Count X.
For the reasons explained below, the Court has concluded that, based on the evidence in the summary judgment record, reasonable minds could differ with respect to whether Defendants' employee, Zoraida Diaz, had actual knowledge of the fraud. Accordingly, Defendants' motion for summary judgment is denied.
The employee in question, Zoraida Diaz, testified that she is employed by both Defendant First Union National Bank and Defendant First Union Securities, Inc. See, Plaintiffs' Statement at 3.
LEGAL STANDARD
Summary judgment is authorized only when the moving party meets its burden of demonstrating that "the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56. See Adickes v. S.H. Kress Co., 398 U.S. 144, 157 (1970). The Adickes Court explained that when assessing whether the movant has met this burden, the court should view the evidence and all factual inferences therefrom in the light most favorable to the party opposing the motion. See Adickes, 398 U.S. at 157; Poole v. Country Club of Columbus, Inc., 129 F.3d 551, 553 (11th Cir. 1997) (citing Adickes).The party opposing the motion may not simply rest upon mere allegations or denials of the pleadings; after the moving party has met its burden of coming forward with proof of the absence of any genuine issue of material fact, the non-moving party must make a sufficient showing to establish the existence of an essential element to that party's case, and on which that party will bear the burden of proof at trial. See Celotex Corp. v. Catrell, 477 U.S. 317 (1986); Barfield v. Brierton, 883 F.2d 923, 933 (11th Cir. 1989).
If the record presents factual issues, the Court must not decide them; it must deny the motion and proceed to trial. See Environmental Defense Fund v. Marsh, 651 F.2d 983, 991 (5th Cir. 1981). Summary judgment may be inappropriate even where the parties agree on the basic facts, but disagree about the inferences that should be drawn from these facts. See Lighting Fixture Elec. Supply Co. v. Continental Ins. Co., 420 F.2d 1211, 1213 (5th Cir. 1969). If reasonable minds might differ on the inferences arising from undisputed facts then the Court should deny summary judgment. See Impossible Electronics Techniques, Inc. v. Wackenhut Protective Sys., Inc., 669 F.2d 1026, 1031 (5th Cir. 1982). See also Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986) ("[T]he dispute about a material fact is `genuine,' . . . if the evidence is such that a reasonable jury could return a verdict for the non-moving party.").
Moreover, the party opposing a motion for summary judgment need not respond to it with evidence unless and until the movant has properly supported the motion with sufficient evidence. See Adickes, 398 U.S. at 160. The moving party must demonstrate that the facts underlying all the relevant legal questions raised by the pleadings or otherwise are not in dispute, or else summary judgment will be denied notwithstanding that the non-moving party has introduced no evidence whatsoever. See Brunswick Corp. v. Vineberg, 370 F.2d 605, 611-12 (5th Cir. 1967). The Court must resolve all ambiguities and draw all justifiable inferences in favor of the nonmoving party. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986).
LEGAL ANALYSIS
The sole remaining count in Plaintiffs' Amended Complaint alleges Defendants aided and abetted the breach of a fiduciary duty owed by Cyprus Funds to Plaintiffs. As the Court explained in its Order of December 5, 2001, this claim consists of the following elements: (1) a fiduciary duty on the part of Cyprus Funds, its affiliates, and/or principals, (2) a breach of this fiduciary duty, (3) knowledge of the breach by the Defendants and (4) the Defendants' substantial assistance or encouragement of the wrongdoing. See Order of December 5, 2001 ("Order") at 7 (citing AmeriFirst Bank v. Bomar, 757 F. Supp. 1365, 1389 (S.D. Fla. 1991)).
The parties dispute whether Defendants had "actual knowledge" of the fraud. See Motion at 8; Response at 6. The Court explained in its earlier Order that "Plaintiff's [would] have to prove Defendants had actual knowledge of the fraud. Absent knowledge, `[t]he mere fact that all participants in the alleged scheme used accounts at [First Union] to perpetuate it, without more, does not rise to the level of substantial assistance to state a claim for aiding and abetting liability.'" Order at 8 (citing Renner v. Chase Manhattan Bank, 2000 WL 781081 at * 12 (S.D.N.Y.)).
The Second Restatement of Torts § 876 provides: "For harm resulting to a third person from the tortious conduct of another, one is subject to liability if he . . . knows that the other's conduct constitutes a breach of duty and gives substantial assistance or encouragement to the other so to conduct himself." Restatement (Second) of Torts § 876 (1977); see also Federal Deposit Ins. Corp. v. First Interstate Bank of Des Moines, N.A., 885 F.2d 423, 431 (8th Cir. 1989). More particularly, the Eleventh Circuit has determined that "a person may be held as an aider and abettor . . . if the accused party has a general awareness that his role was a part of an overall activity that is improper, and if the accused aider-abettor knowingly and substantially assisted the violation." Woods v. Barnett Bank of Fort Lauderdale, 765 F.2d 1004, 1009 (11th Cir. 1985) (quoting Woodward v. Metro Bank of Dallas, 522 F.2d 84, 94-95 (5th Cir. 1975)). See also Federal Deposit Ins. Corp., 885 F.2d at 431 (same); Monsen v. Consolidated Dressed Beef Co., 579 F.2d 793 (3rd Cir.), cert. denied, 439 U.S. 930, (1978) (involvement "may be demonstrated by proof that the aider-abettor had general awareness that his role was part of an overall activity that is improper.") (citations omitted).
The Court notes that both Woods and Woodward addressed aiding and abetting liability under section 10(b) of the Securities and Exchange Act of 1934. 765 F.2d 1004; 522 F.2d 84. Moreover, the Court is aware that the U.S. Supreme Court disallowed aiding and abetting claims based on statutory securities violations because the statute did not provide for the attachment of such liability. See Central Bank of Denver v. First Interstate Bank, 511 U.S. 164 (1994). However, the Supreme Court's rejection of liability under the statute does not effect precedent articulating the elements of the cause of action. Moreover, courts addressing aiding and abetting liability under section 10(b) apply the same analysis as those addressing common law aiding and abetting liability as asserted by Plaintiffs. See Restatement (Second) of Torts § 876. See, e.g., AmeriFirst Bank v. Bomar, 757 F. Supp. 1365, 1389 (S.D. Fla. 1991); Aetna Casualty and Surety Co. v. Leahey Construction Co., Inc., 219 F.3d 519, 534 (8th Cir. 2000). Thus, the Court adopts the reasoning of these cases solely to the extent they permit exposition of the cause of action sub judice. and are relied on by the parties for the same.
Decisions of the United States Court of Appeals for the Fifth Circuit entered before October 1, 1981, are binding precedent in the Eleventh Circuit. See Bonner v. City of Prichard, 661 F.2d 1206 (11th Cir. 1981).
In discussing the "general awareness" requirement, courts have "noted that the surrounding circumstances and expectations of the parties were critical, because knowledge of the existence of a violation must usually be inferred." Woods, 765 F.2d at 1109 (quoting Woodward, 522 F.2d at 95-96). Accord Monsen, 579 F.2d 793. Moreover, courts have "observed that knowledge could be shown by circumstantial evidence, or by reckless conduct, but cautioned that "the proof must demonstrate actual awareness of the party's role in the fraudulent scheme." Id. (quoting Woodward, 522 F.2d at 96). Accord Federal Deposit Ins. Corp., 885 F.2d at 431; Monsen, 579 F.2d 793. Importantly, however, for liability to attach merely for reckless conduct, a defendant must have been under a duty to disclose. Woods, 765 F.2d at 1010. Further, a "defendant who is not under a duty to disclose can be found liable as an aider and abettor only if he acts with a high degree of scienter, that is, with a "conscious intent" to aid the fraud." Id.
"In a case involving silence/inaction with affirmative assistance, the degree of knowledge required should depend on how ordinary the assisting activity is in the business involved." Woodward, 522 F.2d at 97; see also Woods, 765 F.2d at 1010 (same). "If the evidence shows no more than a transaction constituting the daily grist of the mill, we would be loathe to find liability without clear proof of intent to violate the laws. Conversely, if the method or transaction is atypical or lacks business justification, it may be possible to infer knowledge necessary for aiding and abetting liability." Woodward, 522 F.2d at 97; see also Woods, 765 F.2d at 1010 (same). Accord Monsen, 579 F.2d at 793; Federal Deposit Ins. Corp., 885 F.2d at 430.
In the instant case, Plaintiffs' contend Defendants had certain duties to disclose based on banking regulations and internal policies. See Response at 12. However, these regulations and policies did not require disclosure to Plaintiffs. Thus, Plaintiffs can prevail only if they can prove, i.e., "`conscious intent" to aid the fraud." Woods, 765 F.2d at 1010. See also Monsen, 579 F.2d at 799 (requiring "the evidence establish conscious involvement in impropriety"); accord Federal Deposit Ins. Corp., 885 F.2d at 431.
Plaintiffs aver Defendants' employee, Zoraida Diaz, had this requisite knowledge. In order to prove this contention, they rely primarily on their expert's enumeration of "atypical" activity which would have been known to Diaz in her capacity as the "relationship manager," and which they suggest in the aggregate permits the inference of knowledge. See Expert Report of Edward P. Mahoney at 2-3 ("Mahoney Rep."). This includes:
Diaz' was a "relationship manager" in Defendant's private banking department responsible for the Funds' accounts. See Diaz Dep. at 18. Thus, she explained: "In this kind of setting you have a group of clients that are assigned to you directly so you are their contact for basically everything from asking for their balance, opening an account, requesting a loan. You are basically one person, like one branch. You represent the entire unit for that client. You have people backing you in case you are on vacation and you have assistants but you basically are the bank to them." Id. at 18-19.
Plaintiffs rely upon the opinions of their expert, Edward P. Mahoney, as presented in his deposition, expert report, and declaration. Mr. Mahoney's testimony was challenged by Defendants in their Motion in Limine, filed July 23, 2002. Pursuant to the Court's Order of August 21, 2002, Mr. Mahoney's declaration was struck as untimely and thus not considered by this Court. See Order of August 21, 2002.
1. The Cyprus accounts were among the largest that the two First Union officers were handling (Diaz De. at 83; Romanach Dep. at 64-65).
2. There was a pattern of wiring out monies that had been deposited into Cyprus' accounts at First Union ( see PAASCO schedules).
3. Numerous wire transfers were made which sent monies to entities that were obviously not related to the activities of a mutual fund, including transfers to Eric Bartoli, his family members, and entities he controlled. ( see PAASCO schedules).
4. There were wire transfers between Cyprus' accounts at First Union and an account at an Ecuadorian Bank ( see PAASCO schedules).
5. Restrictions preventing further debits were placed on Cyprus' accounts at First Union after checks were presented with insufficient funds to cover them. (Diaz Dep. at 119-21). Furthermore, many overdrafts on the Cyprus accounts were approved by First Union. (Diaz Dep. at 100, 127-28).
6. The management of Cyprus provided evasive or obscure answers to questions regarding the nature of Cyprus' business. (Romanach Dep. at 50-53; Diaz Dep. at 63-64, 69).
7. The management at Cyprus allegedly did not disclose the solicitation purchases of an investments in Cyprus at their joint presentations in Ecuador. (Romanach Dep. at 79-80; Diaz Dep. at 89).
8. The management requested (and First Union provided) letters relating to Cyprus that were addressed "To Whom It May Concern" ( see HST00866 (8/18/95 Diaz Letter); FUNB000876 (7/26/96 Diaz Letter); FUNB000719-20 (10/28/96 Romanach Letter); FUNB000721 (2/23/98 Romanach Letter); FUNB000887 (3/16/98 Diaz Letter).
9. The amount of trading increased dramatically several years after the account was opened. ( See PAASCO ex. C).
10. Cyprus Manager Bartoli provided First Union with income tax returns indicating that in 1992 he had gross income of $111,662, adjusted gross income of $54,835, and only 9 stock transactions for a net loss of approximately $13,940; and in 1993 he had gross income of $63,011, adjusted gross income of $8,242, and only 10 stock transactions for a net loss of $13,199. ( See FUNB000390-395, 398-403). At the same time, Bartoli had indicated to First Union that he had $20 million in stock in his investor profile. ( See FUNB000344).
11. First Union's mortgage underwriter found four reasons why a residential loan to Bartoli should not be approved, including that closing funds were coming from a business account and there was no letter from a CPA stating that this would not impact the business. ( See FUNB000285). First Union approved the loan anyway, stating (falsely) that Bartoli himself had $2.5 million in deposits. ( See FUNB000286).
12. Subordinates of the First Union officers had tried to contact the advisor of the Equine Trust, a company known to be controlled by Bartoli, but were given "the run-around" and never able to contact him. ( See FUNB0001118-21).
Plaintiffs initially alleged that John Romanach, another employee of Defendants, had knowledge of the fraud. However, they have since limited their case to the activities of employee Diaz. See Response at 1.
Mahoney Rep at 2-3. Plaintiffs' expert concludes this activity was suspicious or atypical based on industry standards, banking laws and regulations, and Defendants' own policies and procedures. See Mahoney Rep. at 1. Additionally, Plaintiffs rely on Diaz' statement to Douglas Shisler, one of the Funds' directors, that: "I did some transferring I shouldn't have done and I'm not going to do it anymore." Response at 9 (quoting Shisler Dep. at 47.).
Defendants attempt to minimize the significance of this statement explaining "that Shisler also testified, with respect to Diaz' alleged `confession' that he had no idea what Diaz was even talking about." Reply at 9-10 (citing Shisler Dep. at 54) (emphasis in original). However, to the extent that this statement remains unexplained, as Defendants admit, its ambiguity results in a disputed fact.
Viewing this evidence in a light most favorable to Plaintiffs, the non-movants sub judice, the Court finds it creates a disputed fact as to whether Defendants' employee, Diaz, acted with "`conscious intent' to aid the fraud." Woods, 765 F.2d at 1010. After conducting a comprehensive review of Woodward and its progeny, the Eighth Circuit concluded that "[t]o charge [Defendants] with knowledge that [the Fund's] conduct was unlawful . . . [Plaintiffs must] prove that [Defendants] had a general awareness of [their] overall role in [the Fund's] scheme and that such knowledge could come through circumstantial evidence, including finds available to its employees." Federal Deposit Ins. Corp., 885 F.2d at 431 (emphasis added). Indeed, as Woodward and its progeny have explained:
If it is assumed that an illegal scheme existed and that the bank's loan or other activity provided assistance to that scheme, some remaining distinguishing factor must be found in order to prevent such automatic liability. The bank's knowledge of the illegal scheme at the time it loaned the money or agreed to loan the money provides that additional factor. Knowledge of wrongful purpose thus becomes a crucial element in aiding and abetting or conspiracy cases.Woodward, 522 F.2d at 96 (quoting Ruder, Multiple Defendants in Securities Law: Aiding and Abetting. Conspiracies, in Pan Delicto, Indemnification and Contribution, 120 U. Pa. L. rev. 597, 630-31 (1972) (emphasis added); Federal Deposit Ins. Corp. v. First Interstate Bank of Des Moines, N.A., 885 F.2d 423, 431 (8th Cir. 1989) (same). Thus, there remains a disputed fact as to whether Diaz had "knowledge of the [Fund's] wrongful purpose" based on the series of "atypical" banking transactions detailed above, her unexplained failure to report the suspicious activity, and her statement acknowledging a degree of malfeasance. Id. Accordingly, it is hereby
ORDERED AND ADJUDGED that the Motion for Summary Judgment is DENIED.