Stanley v. Black

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

JEAN L. STANLEY and )

MICHAEL J. QUIGLEY, Personal )

Representative of the Estate )

of LORETTA CLUNE, )

)

Plaintiffs, )

)

v. ) CIVIL ACTION NO.

) 16-cv-12647-DPW

STANLEY T. SCHMIDT and )

ALEXANDER R. BLACK, )

)

Defendants. )

MEMORANDUM AND ORDER

March 28, 2019

This is 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”).1 Alexander Black now seeks summary

judgment on the claims alleging a violation of the 1934

1 The cases against Defendants Dr. Hans P. Black and Interinvest

were terminated on October 3, 2017, following the entry of a

default judgment and a permanent injunction. Though the case

against Defendant Stanley T. Schmidt is still pending, it has

been stayed since May 8, 2017, when Mr. Schmidt filed a

suggestion of bankruptcy with this court. The motion for

summary judgment before me was filed after the entry of default

judgment against Dr. Black and Interinvest, and after Mr.

Schmidt filed for bankruptcy relief, and concerns only the

claims against Alexander Black.

Securities and Exchange Act (“the ’34 Act”) and common law

negligence.

I. BACKGROUND

A. Factual Background

1. The Parties

Dr. 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.

Alexander 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.

Plaintiff 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.

Plaintiff Loretta Clune2 opened accounts with Interinvest in

2006.3 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

2 Ms. Clune passed away on September 28, 2018. On November 15,

2018, Michael Quigley was appointed as the personal

representative of her estate by the Probate Division of the

Circuit Court for Palm Beach County, Florida, where Ms. Clune

lived. On January 16, 2019, I allowed Mr. Quigley in his

representative capacity to be substituted for Ms. Clune as a

Plaintiff in this case. To avoid confusion, this memorandum

will continue to refer to Ms. Clune, rather than to Mr. Quigley,

as the co-plaintiff of Ms. Stanley.

3 There is some dispute about this date. Plaintiffs claim that

Ms. Clune received invoices from Interinvest at least as early

as October 2005. In any event, the date is immaterial for

purposes of resolving the motion before me.

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.

2. Interinvest’s Disclosures and Form ADVs

Between 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.

In 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.

At some 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 2005.4

4 Dr. Black consulted Interinvest’s counsel, Matthew Dallett, in

January 2010 about two lawsuits that had been filed against him

relating to a hedge fund in Bermuda. Dr. Black stated that in

reading the Form ADV instructions, he did not believe that the

lawsuits were subject to disclosure. Attorney Dallett wrote

back to Dr. Black the same day and stated, “I agree that, as

Alexander 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 opinion letter.

Alexander 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 Form ADV.

3. Plaintiffs’ Investments

In 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

long as these are private plaintiffs (not a regulatory

authority) and assuming (i) they have not alleged any breach of

the Bermuda Securities Regulations QL111.Y.[,] other investment-

related statute or regulation and (ii) they are seeking only

money damages, not injunctive relief, there is no reasonable

basis for a “yes” answer under Item 11.H(2).” These emails did

not constitute a formal opinion letter and were not sent to

Alexander Black.

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.

In 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.

The 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.

4. Policy Changes and Regulatory Actions

In 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.

Around 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.

B. Procedural Background

Plaintiffs filed the complaint in this case on December 30,

2016. Of the four named Defendants in the case, only Mr.

Schmidt5 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.

Alexander Black has filed a motion for summary judgment on

Plaintiffs’ claims under the ’34 Act and for negligence.

During a motion hearing on June 13, 2018, I allowed the

parties an opportunity to file additional materials specifically

regarding the question of scienter.

5 Though Mr. Schmidt is still formally a defendant in this case,

proceedings against him have been stayed in this court since

May, 2017, when Mr. Schmidt filed a petition for Chapter 13

bankruptcy in the District of Vermont. See in re Stanley T.

Schmidt, Bankruptcy Petition No. 17-bk-10173. The bankruptcy

filing triggered an automatic stay of this proceeding as to Mr.

Schmidt, pursuant to 11 U.S.C. § 362(1). The Plaintiffs in this

case filed a notice of a claim against the bankruptcy estate and

initially objected to a proposed plan of reorganization, which

did not account for their claims. See id. Dkt. No. 29 (D. Vt.

June 9, 2017). Plaintiffs’ claims against the estate were for

the amount in damages claimed in the present litigation and were

premised on the argument that Mr. Schmidt was liable to them for

negligence. See id. Both Mr. Schmidt and the Bankruptcy

Trustee have objected to the Plaintiffs’ claims against the

estate. Id. at Dkt. No. 34 (D. Vt. Aug. 1, 2017), Dkt. No. 35

(D. Vt. Aug. 1, 2017), Dkt. No. 55 (D. Vt. Feb. 20, 2018). A

hearing on their claim has been continued until this motion has

been resolved. Id. at Dkt. No. 72 (D. Vt. Aug. 18, 2018) At

this juncture, it seems likely that the negligence claims

against Mr. Schmidt will be resolved by the bankruptcy court

and, by extension, the District Court for the District of

Vermont, in the process of resolving the bankruptcy matter. See

generally, Stern v. Marshall, 564 U.S. 462 (2011).

II. STANDARD OF REVIEW

Summary 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).

Generally, “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).

When 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 Cir. 2006).

III. ANALYSIS

A. Count I: Securities Fraud

Count I 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.

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 person “by the use

of any means or instrumentality of interstate commerce . . .” to

do any of the following:

(a) To employ any device, scheme, or artifice to defraud;

(b) To make any untrue statement of a material fact or

to omit to state a material fact necessary in order to

make the statements made, in the light of the

circumstances under which they were made, not

misleading; or,

(c) To engage in any act, practice, or course of

business.

17 C.F.R. § 240.10b-5.

Though not made explicit in the text of the statute, courts

have consistently read section 10(b) of the ’34 Act and

Rule 10b-5 together to imply “a private damages action, which

resembles, but is not identical to, common-law tort actions for

deceit and misrepresentation.” Dura Pharmaceuticals, Inc. v.

Broudo, 544 U.S. 336, 341 (2005). To succeed on a section 10(b)

claim, a plaintiff must show that: (1) there was “a material

misrepresentation (or omission); (2) the defendant had

“scienter, i.e., a wrongful state of mind;” (3) the alleged

wrongful conduct occurred in “connection with the purchase or

sale of a security;” (4) there was “reliance;” (5) the plaintiff

suffered economic loss; and, (6) “loss causation, i.e., a causal

connection between the material misrepresentation and the loss.”

Id. (internal citations and quotations omitted).

Alexander Black does not contest that there was a material

misrepresentation that Plaintiffs relied upon; nor does he

contest that the Plaintiffs suffered economic loss. Instead,

his motion for summary judgment rests on his contention that the

remaining three elements are not met – that the transaction was

not made in connection with the purchase or sale of security;

that he lacked the requisite scienter; and that there is no loss

causation. He also argues that Plaintiffs’ claims are time

barred.

I address each argument in turn beginning with the

threshold argument regarding the statute of limitations.

1. The Statute of Limitations

As a preliminary matter, Alexander Black argues that

Plaintiffs’ claims under section 10(b) are time barred because

they were brought more than two years after Plaintiffs received

the 2014 Form ADV. A claim for relief under section 10(b) must

be brought “no later than the earlier of (1) 2 years after the

discovery of the facts constituting the violation; or, (2) 5

years after such violation.” 28 U.S.C. § 1658.

Under the statute, a cause of action accrues either “when

the plaintiff did in fact discover” the violation or when “a

reasonably diligent plaintiff would have discovered the facts

constituting the violation – whichever comes first.” Merck &

Co. v. Reynolds, 559 U.S. 633, 637 (2010). In determining

whether a “reasonably diligent plaintiff” would have discovered

the alleged fraud, the Supreme Court has indicated that “terms

such as ‘inquiry notice’ and “storm warnings’ may be useful to

the extent that they identify a time when the facts would have

prompted a reasonably diligent plaintiff to begin

investigating.” Id. at 653. Those concepts do not, however,

necessarily mark the moment at which the cause of action begins

to accrue.

The limitations period begins to run only when “the

plaintiff thereafter discovers or a reasonably diligent

plaintiff would have discovered ‘the facts constituting the

violation,’ including scienter.” Id.; see also Firstbank Puerto

Rico, Inc. v. La Vida Merger Sub., 638 F.3d 37, 39 (1st Cir.

2011). The First Circuit has acknowledged that “the doctrine of

fraudulent concealment operates to toll the statute of

limitations where the party injured by the fraud remains in

ignorant of it” despite the plaintiff’s own diligence. Maggio

v. Gerard Freezer & Ice Co., 824 F.2d 123, 127-28 (1st Cir.

1987). Thus, while so-called “storm warnings” may trigger the

plaintiff’s obligation to investigate, they may not trigger the

statute of limitations if evidence of the fraud was

intentionally kept from the plaintiffs. Id.

Here, Alexander Black argues that the Plaintiffs’ cause of

action began to accrue at the latest in April 2014, when

Interinvest disclosed that Dr. Black received cash compensation,

stock options, and expense reimbursement from companies on whose

boards he served, as well as that he had been the subject of a

regulatory action by Canadian securities regulators in 2007.

Indeed, some of the same information had been disclosed earlier

on the 2013 ADV. Because Plaintiffs did not file suit until

December 30, 2016 — some 32 months after he says the cause of

action accrued under the discovery rule — Alexander Black argues

the Plaintiffs’ securities fraud claim is time-barred.

The facts regarding earlier disclosure are insufficient to

trigger the limitations period. Though the 2013 Form ADV (and,

by extension, the 2014 Form ADV) listed Dr. Black’s 2007 fine in

Quebec by the AMF, neither said anything more with regard to Dr.

Black’s disciplinary history. Moreover, neither listed any of

the private suits brought against Dr. Black, or gave Plaintiffs

any indication that those suits even existed. The fact that

Plaintiffs’ accounts contained penny stocks as early as 2011

also does not trigger the statute of limitations. In January

2014, both Ms. Stanley and Ms. Clune specifically contacted Dr.

Black and sought reassurances about their investments, which

they received. Plaintiffs argue that up to April 2015, they

also continued to receive “Dear Friends” letters from

Interinvest, extolling the virtues of investing in the very

securities at issue in this litigation, including Amorfix Life

Sciences, LakeShore Gold, Tyhee Gold, and Williams Creek Gold.

Accordingly, Plaintiffs have identified sufficient facts in

the record to raise the inference that a “reasonably diligent

investor” would not have discovered the violation here earlier

than December, 2014, two years before this suit was filed, even

if she would have been put on inquiry notice to some degree by

the April 2014 Form ADV. Consequently, the claims are not time-

barred.

2. In Connection with the Purchase and Sale of Securities

To prevail on a claim brought under section 10(b),

Plaintiffs must demonstrate that the alleged misrepresentation

or omission was made in connection with the purchase or sale of

a security and falls within the territorial scope of the ’34

Act. See generally, Dura Pharmaceuticals, Inc., 544 U.S. 336;

Morrison v. National Australian Bank, Ltd., 561 U.S. 247 (2010).

I address each prong in turn.

a. In Connection with the Purchase and Sale

For a plaintiff to have a cause of action under the ’34

Act, the alleged fraud must have been “in connection with the

purchase or sale of a security.” Dura Pharmaceuticals, 544 U.S.

at 341. Traditionally, this requirement was used to limit the

plaintiffs’ class to only “actual purchasers and sellers,”

thereby preventing investors who had never held an ownership

stake in the securities at issue from filing suit. Blue Chip

Stamps v. Manor Drug Stores, 421 U.S. 723, 731 (1975) (affirming

the rule established in Birnbaum v. Newport Steel Corp., 193

F.2d 461 (2d Cir. 1952)).

Beyond this limitation, however, the Supreme Court has

consistently read the “in connection with” requirement “flexibly

to effectuate [the statute’s] remedial purposes.” S.E.C. v.

Zandford, 535 U.S. 813, 819 (2002). Though the requirement

“must not be construed so broadly as to convert every common-law

fraud that happens to involve securities into a violation of

§ 10(b),” the requirement that the transaction be “in connection

with” the purchase or sale of securities is not a restrictive

one. Id. at 820. To this end, it is enough “that the fraud

alleged ‘coincide’ with a securities transaction – whether by

the plaintiff or by someone else.” Merrill Lynch, Pierce,

Fenner & Smith v. Dabit, 547 U.S. 71, 85 (2006).

Here, the alleged fraudulent misrepresentation related to

Dr. Black’s failure to disclose information on his Form ADV

about his connection to portfolio companies and his prior

involvement in litigation. Alexander Black does not contest

that the Form ADV was misleading or that Dr. Black’s

misstatements were material, in the sense that they necessarily

influenced the Plaintiffs’ willingness to invest with

Interinvest and to enter into (or authorize) specific

transactions. See Basic, Inc. v. Levinson, 485 U.S. 224, 231

(1988). I find the deception, therefore, to have been “in

connection with” the purchase and sale of securities. See

Zandford, 535 U.S. at 822.

The Plaintiffs contend that by virtue of his position as

CCO and as a Portfolio Manager at Interinvest, Alexander Black

was necessarily complicit in these misstatements; his conduct,

they argue, falls within the scope of the “in connection with”

requirement. While Alexander Black’s asserted lack of knowledge

as to the deception may go to scienter, it does not change the

fact that the alleged deception was made in connection with the

purchase or sale of securities. Alexander Black proffered no

evidence to suggest that the deception did not, in fact, relate

to a securities transaction. Consequently, I find that the “in

connection with” requirement has been met here.

b. In a Domestic Transaction

It is not enough for the material misrepresentation at

issue to have been “in connection with” a securities

transaction. The transaction itself must also fall within the

territorial scope of the ’34 Act. To do so, it must be a

transaction “that the statute seeks to regulate,” meaning the

“parties or prospective parties” are the ones “the statute seeks

to protect.” Morrison v. National Australia Bank Ltd., 561 U.S.

247, 267 (2010).

Under Supreme Court precedent, section 10(b) only applies

to “transactions in securities listed on domestic exchanges, and

domestic transactions in other securities.” Id. “With regard

to securities not registered on domestic exchanges, the

exclusive focus [is] on domestic purchases and sales” –

transactions effectuated by American investors on American soil.

Id. at 268.

Alexander Black argues that Plaintiffs’ claims fall outside

the scope of the ’34 Act because the securities at issue -

Amorfix, Tyhee, Wi2Wi, and Williams Creek Gold – are all related

to Canadian companies and sold exclusively on Canadian

exchanges. However, Alexander Black’s argument reads Morrison

too narrowly. Though the securities themselves are traded on

foreign exchanges, the transactions at issue are domestic. Both

Ms. Stanley and Ms. Clune lived in Massachusetts during the

relevant time period, and Interinvest was headquartered in

Boston. Alexander Black has provided no evidence that the

securities transactions at issue were not effectuated through

Interinvest’s Boston office. Indeed, Ms. Stanley and Ms. Clune

are exactly the kinds of people the ’34 Act was designed to

protect – domestic investors entering transactions through a

domestic broker-dealer that is regulated by the SEC. See Ernst

& Ernst v. Hochfelder, 425 U.S. 185, 195 (1976); see also

Zandford, 535 U.S. at 822.

I find and conclude the transactions at issue here fall

within the ambit of the ’34 Act.

3. Scienter6

The core of Alexander Black’s motion for summary judgment

rests on his contention that he cannot be held liable under

section 10(b) because he lacked the requisite scienter. The

Supreme Court has consistently held that Ҥ 10(b) was addressed

to practices that involve some element of scienter and cannot be

read to impose liability for negligent conduct alone.” Ernst &

Ernst, 425 U.S. at 201. In this context, “‘scienter’ refers to

a mental state embracing intent to deceive, manipulate, or

defraud,” and requires more than negligent nonfeasance. Id. at

193 n. 12. Scienter also requires a showing that the defendant

is someone who is primarily liable for the deceptive act, a

status which can, as the Supreme Court clarified yesterday,

include those who knowingly disseminate false or misleading

information. See Lorenzo v. S.E.C., —S. Ct.—, 2019 WL 1369839

at *4 (March 27, 2019).

6 The Plaintiffs did not raise any affirmative arguments

concerning scienter in their original opposition to the motion

for summary judgment. They did, however, address the issue in

their response to the summary judgment motion. Following my

instructions, the Plaintiffs also filed a supplemental brief

focused on the question of scienter.

To prove scienter, a plaintiff must show that the defendant

“consciously intended to defraud, or that [he] acted with a high

degree of recklessness.” Ezra Charitable Trust v. Tyco Intern.,

Ltd., 446 F.3d 1, 6 (1st Cir. 2006); see also S.E.C. v. Ficken,

546 F.3d 45, 47 (1st Cir. 2008). Specifically, “[t]he plaintiff

must prove that defendants knew (i) that the statement was false

or misleading, and (ii) that it was made in reference to a

matter of material interest to investors.” Geffon v. Micrion

Corp., 249 F.3d 29, 35 (1st Cir. 2001).7

In the absence of affirmative knowledge or intent,

“reckless statements of misleading facts may be actionable under

10b-5.” Id. In this context, recklessness requires “‘a highly

unreasonable omission, involving not merely simple, or even

inexcusable[ ] negligence, but an extreme departure from

the standards of ordinary care, and which presents a danger of

misleading buyers or sellers that is either known to the

defendant or is so obvious the actor must have been aware of

it.’” Ficken, 546 F.3d at 47-48 (quoting S.E.C. v. Fife, 311

F.3d 1, 9-10 (1st Cir. 2002)).

Alexander Black argues that there is no evidence in the

record from which a reasonable jury could conclude that he acted

7 In this context, the defendant’s silence may also be fraudulent

if the defendant was under an affirmative duty to disclose

information and failed to do so. Chiarella v. United States,

445 U.S. 222, 232 (1980).

with the requisite scienter. The Plaintiffs’ case against

Alexander Black rests on their contention that, as the CCO of

Interinvest, he was ultimately responsible for the deceptive

Form ADV filed by Dr. Black and for the securities held in Ms.

Stanley’s and Ms. Clune’s accounts. Indeed, the Plaintiffs

argue — and Alexander Black does not contest the fact — that he

was aware of unregistered and unauthorized transactions and that

he encouraged Dr. Black to disclose any further involvement with

the portfolio companies or in litigation.

While the evidence of Alexander Black’s efforts within

Interinvest to limit Dr. Black’s misconduct is not, in and of

itself, dispositive of the question of liability, it does speak

to his intent to deceive or defraud. Despite having ample

opportunity to do so, the Plaintiffs here have provided no

evidence that Alexander Black affirmatively intended to mislead

them, or that he acted in a way that constituted an “extreme

departure from the standards of ordinary care.” Ficken, 546

F.3d at 47-48.

Alexander Black attested that he asked Dr. Black if he ever

received compensation from these companies and Dr. Black claimed

that he did not. When Alexander Black pressed Dr. Black on the

compensation issue, Dr. Black finally conceded that he received

stock options, after which Alexander Black independently looked

at the filings for the relevant companies and disclosed

information that he found on Interinvest’s Form ADV. Alexander

Black also affirmatively asked Dr. Black to share any legal

actions that may need to be disclosed, and Dr. Black divulged

that he had some legal issues in the past but that they were

unrelated to the business of Interinvest. The only action

disclosed to him by Dr. Black was the 2007 fine by the AMF,

which was consistently disclosed in the Form ADVs. While

Alexander Black’s failure to investigate further may require

further analysis from a negligence perspective, it was not such

an extreme departure from the ordinary standard of care as to

raise an inference of scienter here.

Although Plaintiffs list specific amounts of compensation

allegedly paid to Dr. Black from these companies in 2014 in the

complaint, they fail to produce any evidence to indicate that

Alexander Black had any knowledge of these amounts. Nor have

they provided any evidence that Alexander Black acted recklessly

by failing to investigate further. Based on the evidence of

record, then, I find that there is no genuine issue of material

fact with respect to Alexander Black’s mental state. He did not

possess the requisite scienter and therefore, cannot be held

liable under section 10(b) of the ’34 Act.

4. Loss Causation8

For the sake of completeness, I will briefly address the

question of loss causation, since Alexander Black raised the

issue in his original motion for summary judgment. To prove

loss causation in a securities fraud suit, plaintiffs “bear the

burden of showing that [their] losses were attributable to the

revelation of the fraud and not the myriad other factors that

affect a company’s stock price.” Bricklayers & Trowel Trades

Int’l Pension Fund v. Credit Suisse Sec. (USA) LLC, 752 F.3d 82,

95 (1st Cit. 2014) (quoting in re Williams Sec. Litig., 558 F.3d

1130, 1137 (10th Cir. 2009)).

Here, Plaintiffs allege, and Alexander Black does not

contest, that “Dr. Black and Interinvest’s actions have caused,

and continue to cause, Plaintiffs substantial losses, damages

and harm in an amount to be determined.” Nor does Alexander

Black contest the fact that the misrepresentations were

material, and proximately caused Plaintiffs’ losses.

Plaintiffs’ expert witness opines that “[t]he primary cause of

the damages was the transition of historically ‘Balanced’

8 As with scienter, the Plaintiffs here did not raise any

affirmative arguments concerning loss causation in their

original opposition to the motion for summary judgment. They

did, however, address the issue in their response to the summary

judgment motion. Moreover, Alexander Black does not contest the

fact that Plaintiffs suffered economic loss. His only argument

is that the loss was not proximately caused by his actions.

accounts owned by the Plaintiffs, to high-risk accounts

concentrated in a handful of Nano-cap stocks beginning in 2012.”

On this record, plaintiffs have demonstrated that their loss was

caused by the investment decisions implemented by Dr. Black, in

contravention of Plaintiffs’ express instructions and statements

concerning their investment goals.

Alexander Black’s argument concerning loss causation rests

on his contention that he, personally, did not make any material

misrepresentations or take any investment decisions that

contributed to the Plaintiffs’ injury. This argument reads the

loss causation requirement, and Plaintiffs’ allegations, too

narrowly. Plaintiffs’ claims against Alexander Black rest on

their contention that he should have known, by virtue of his

position as CCO, about the investment decisions and the material

misstatements. While his lack of actual knowledge or

involvement goes to scienter, it does not demonstrate that there

was no causal connection between the alleged misrepresentation

and Plaintiffs’ injury.

At the very least, the record indicates that there is a

triable issue of fact as to the causal link between Alexander

Black’s alleged failure to investigate and disclose information

and Plaintiffs’ loss. However, because I have already

determined as a matter of law that Alexander Black lacks the

requisite scienter, I will grant summary judgment to him on the

Plaintiffs’ section 10(b) claim.

B. Count IV: Negligence

In addition to their claim under the ’34 Act, the

Plaintiffs assert a claim for state-law negligence against

Alexander Black. The negligence claim rests on the same factual

circumstances as the claim under the ’34 Act – Plaintiffs allege

that, as CCO, Alexander Black had an obligation to supervise

Interinvest employees, including Dr. Black, ensure that all

proper disclosures were made to Interinvest clients with respect

to material conflicts of interest, compensation arrangement, and

legal and regulatory events, and ensure that securities traded

in client accounts were suitable for those clients and in

conformity with their stated investment objectives. By failing

to do so, Alexander Black breached a duty of care owed to the

Plaintiffs, resulting in substantial financial loss.

Under Massachusetts law, a plaintiff asserting a claim for

negligence has to prove the existence of: “(1) a legal duty owed

to the plaintiff by the defendant; (2) a breach of that duty by

the defendant; (3) causation; and (4) actual loss by the

plaintiff.” Everest Nat’l Ins. Co. v. Boston Water & Sewer

Comm’n, 2012 WL 90450, at *3 (D. Mass. Jan. 10, 2012). “[T]he

question of negligence is usually a factual question for the

jury.” Id.; see also Nelson v. Mass. Port Authority, 771 N.E.2d

209, 211 (Mass. App. Ct. 2002) (citing Altman v. Aronson, 121

N.E.2d 505, 506 (Mass. 1919)). Furthermore, a claim for

negligence must be brought “within three years next after the

cause of action accrues.” M.G.L. c. 260 § 2A.

Here, Alexander Black contends that any negligence claims

based on the suitability of investments and failure to supervise

Dr. Black are time-barred. Furthermore, Alexander Black

maintains that Plaintiffs cannot demonstrate that he owed a duty

to them and that they cannot demonstrate any causal connection

between the alleged negligence and their alleged damages.

I will address each argument in turn beginning with the

threshold statute of limitations issue.

1. Statute of Limitations

Under Massachusetts law, a tort claim must be brought

within three years of the date when the cause of action accrues.

M.G.L. c. 260 § 2A. Though ordinarily a cause of action for

tort begins to accrue when the injury occurs, the Massachusetts

Supreme Judicial Court has “recognized the unfairness of a rule

that holds that the statute of limitations has run even before a

plaintiff knew or reasonably should have known she may have been

harmed by the conduct of another.” Bowen v. Eli Lilly & Co.,

Inc., 557 N.E.2d 739, 741-42 (Mass. 1990). Consequently, the

SJC has adopted a “discovery rule,” which states that “certain

causes of action based on inherently unknowable wrongs do not

accrue until the plaintiff learns, or reasonably should have

learned that he has been harmed by the defendant’s conduct.”

White v. Peabody Construction Co., Inc., 434 N.E.2d 1015, 1020

(Mass. 1982).

The Massachusetts “discovery rule” largely parallels the

rule used to determine when a cause of action under the ’34 Act

begins to accrue. Indeed, as with claims under the ’34 Act,

Massachusetts law recognizes that the doctrine of fraudulent

concealment operates to toll the statute of limitations.

Stetson v. French, 72 N.E.2d 410, 412 (Mass. 1947). In the

context of fraud, a failure to reveal information may be

sufficient if “there is a duty to reveal” or disclose that

information. Id. However, “once possessed of actual or

constructive knowledge, a plaintiff . . . cannot simply wait for

an unfavorable return before asserting his rights.” Genovesi v.

Nelson, 5 N.E.3d 571, 576 (Mass. App. Ct. 2014). Ultimately,

the question of when a plaintiff should have known and when a

plaintiff should have asserted her rights, are questions of fact

“often unsuited for summary judgment” unless “the facts

regarding discovery of harm are undisputed.” Mass. Housing

Opportunities Corp. v. Whitman & Bingham Associates, P.C., 983

N.E.2d 734, 737 (Mass. App. Ct. 2013).

Those facts are not undisputed here, and the parties’

arguments with respect to the statute of limitations under

Massachusetts law rest on the same factual premises as their

argument with respect to the statute of limitations under

section 10b-5.

I decline based on the record before me to grant summary

judgment on this basis, for essentially the same reasons I have

concluded that the statute of limitations under the ’34 Act is

not a bar to Plaintiffs’ claims.

As with the ’34 Act claim, there are sufficient facts in

the record from which a reasonable jury could find that a

reasonable Plaintiff should have known that they had a

negligence cause of action no earlier than December 2014. I

will not, therefore, grant summary judgment on the basis that

Plaintiffs’ negligence claims are time-barred.

2. Duty and Breach

The core of Alexander Black’s motion for summary judgment

with respect to his negligence claim rests on his contention

that he did not owe Plaintiffs any legal duty. He was not, he

argues, the Plaintiffs’ investment advisor or portfolio manager,

and he did not personally make investment decisions for

Plaintiffs.

a. Duty

Under Massachusetts law, “a simple broker-customer

relationship is not fiduciary in nature, even if the broker has

encouraged the trust of an unsophisticated customer;” however, a

“full relation of principal and broker” is a fiduciary one.

Patsos v. First Albany Corp., 741 N.E.2d 841, 848 (Mass. 2001).

“In determining the scope of the broker’s fiduciary obligations,

courts typically look to the degree of discretion a customer

entrusts to his broker:” the more discretionary an account, and

the more involvement a broker or his associate have with the

account, the more likely it is for a broker to be considered a

fiduciary. Id. at 849-50. Ultimately, the question of whether

there is a fiduciary relationship is a question of fact. Id. at

851.

Here, Alexander Black argues that, as CCO of Interinvest,

he was not responsible for the client accounts and therefore, is

not a fiduciary under this rule in Massachusetts. He did not

place trades on behalf of any of the clients. Plaintiffs do not

contest this, though they do argue that, on at least one

occasion, they individually spoke to Alexander Black about their

investments. However, these conversations are insufficient to

establish a fiduciary duty between Alexander Black and the

Plaintiffs under Massachusetts law, especially since he was not

their broker and did not place trades on their behalf. See

Saunwin Int’l Equities Fund, LLC v. Donville Kent Asset

Management, 2018 WL 3543533 at *10 (D. Mass. July 20, 2018).

The absence of a fiduciary duty owed to Plaintiffs as an

investment advisor does not, however, relieve Alexander Black of

liability. As the SJC has held, negligence is broader than

breach of fiduciary duty: it is a “want of diligence

commensurate with the requirements of the duty at the moment

imposed by the law.” Nelson, 771 N.E.2d at 211 (citing Altman,

121 N.E.2d at 506). The duty owed, in this context, is the

“degree of care, vigilance, and forethought which . . . a person

of ordinary caution and prudence ought to exercise under the

particular circumstances.” Id. Ordinarily, there is no general

“duty of reasonable care to protect a plaintiff from the actions

of third parties absent the existence of a special

relationship.” Saunwin Int’l Equities Fund, LLC, 2018 WL

3543533 at *18. However, Massachusetts courts have, in some

circumstances, imposed this kind of duty to prevent a

misrepresentation “where a professional . . . knows a third

party is relying on her statements.” Fine v. Sovereign Bank,

634 F. Supp. 2d 126, 136 (D. Mass. 2008). A similar duty is

imposed on individuals who are considered responsible for making

certain statements or disclosures by law and could reasonably

have discovered that the statements were misleading or false.

See e.g., Marram v. Kobrick Offshore Fund, 809 N.E.2d 1017,

1031-32 (Mass. 2004); Cooperman v. Individual, Inc., 171 F.3d

43, 50 (1st Cir. 1999).

Consequently, even though Alexander Black is not a

fiduciary, he may still be held liable for negligence if a

reasonable trier of fact could find that, by virtue of his

position as CCO of Interinvest, he had a special relationship to

the Plaintiffs such that he knew Plaintiffs were relying on his

statements to them, and he failed to take reasonable steps to

ensure those statements were accurate. I find that Plaintiffs

have made such a showing here.

As CCO, and subsequently as President, Alexander Black was

responsible under both federal law and under Interinvest’s

policies, for adopting and implementing policies and procedures

to prevent violations of securities laws and to oversee their

implementation.9 A reasonable fact-finder could decide that, by

virtue of that position, Alexander Black had had an affirmative

duty to monitor the investment practices and to investigate and

report potential violations of federal securities laws. At the

very least, a reasonable fact-finder could determine that,

because Alexander Black was, by law, responsible for

implementing policies and procedures to prevent fraud and was

9 Indeed, federal regulations promulgated under the 1940

Investment Advisers Act require investment advisers, such as

Interinvest, to “[a]dopt and implement written policies and

procedures reasonably designed to prevent violation, by [the

company] and [its supervised persons, including employees] of

the Act,” and to designate an individual supervised by the

company as “responsible for administering the policies and

procedures” adopted under the regulation. 17 C.F.R.

§ 275.206(4)-7; see also 17 C.F.R. § 275.204A-1. Federal

regulations promulgated under the 1940 Investment Company Act

carry the same requirements. See 17 C.F.R. § 270.38a-1.

responsible, at least in part, for producing the Form ADVs and

other disclosure statements on behalf of Interinvest, he

reasonably knew that the Plaintiffs relied on his statements and

owed them a duty to take reasonable care to avoid

misrepresentation. See Fine, 634 F. Supp. 2d at 136.

Consequently, I find that there is a genuine issue of

material fact as to whether Alexander Black owed Plaintiffs a

duty of care under state negligence law.

b. Breach of Duty

There is also a genuine issue of material fact as to

whether Alexander Black acted reasonably to avoid

misrepresentation or to supervise Dr. Black. Alexander Black

has argued that he exercised due care by asking Dr. Black if he

received compensation from various portfolio companies, pressing

him on the issue, and independently investigating his father’s

affiliation with those companies. He also ensured that the

information he discovered was reported on Interinvest’s Form

ADV. Moreover, Alexander Black affirmatively asked Dr. Black to

disclose any legal actions, and reported his 2007 fine by the

AMF on the Form ADV.

Alexander Black did not, however, conduct any further

investigations into disciplinary actions involving Dr. Black,

and Plaintiffs have provided evidence that Dr. Black was fined

twice more by the AMF, once in March 2008 and once in July 2012.

Nor did Alexander Black make any inquiries into Plaintiffs’

accounts, though, as Plaintiffs argue, he was in a position to

do so by virtue of his role as CCO. Taken together, these facts

read in the light most favorable to the Plaintiff, can be read

to show that Alexander Black did not act with the “degree of

care, vigilance, and forethought” expected of “a person of

ordinary caution and prudence” in his position as the CCO and,

ultimately, the President of an investment company. See Nelson,

771 N.E.2d at 211.

A reasonable fact-finder could conclude that Alexander

Black should have conducted a more searching inquiry into Dr.

Black’s past, and should have examined Plaintiffs’ accounts more

carefully. Consequently, there is a genuine issue of material

fact as to the question of duty and breach that must go to a

jury.

3. Loss Causation

As with their claim under the ’34 Act, Plaintiffs, to

succeed on their negligence claim, must be able to show that

“there [is] some reasonable connection between the act or

omission of the defendant and the damage which the plaintiff has

suffered.” See generally Prosser and Keeton, Torts § 41, at 263

(5th ed 1984); see also, e.g., Delaney v. Reynolds, 825 N.E.2d

554, 556-57 (Mass. App. Ct. 2005).

The basis for finding causation on the negligence claim is

virtually identical to the basis for finding causation with

respect to the claim under the ’34 Act – Dr. Black and

Interinvest made material misrepresentations to Plaintiffs about

Dr. Black’s background and relationship with certain

corporations, and the investment strategy employed to manage

Plaintiffs’ accounts was contrary to their explicit

instructions. Their loss, therefore, was proximately caused by

the investment decisions implemented by Dr. Black, in

contravention of Plaintiffs’ express instructions and statements

concerning their investment goals. Alexander Black does not

contest this.

Instead, his argument concerning loss causation – like his

argument with respect to the ’34 Act claim – rests on his

contention that he, personally, did not make any material

misrepresentations or take any investment decisions on those

accounts. However, while Alexander Black’s involvement within

Interinvest goes to the existence (or lack thereof) of a duty

owed to the Plaintiffs, it does not directly speak to loss

causation. Indeed, Plaintiffs’ claims against Alexander Black

rest on the contention that he had a duty, as CCO, to

investigate and prevent Dr. Black from acting to the Plaintiffs’

detriment. The breach of this duty, then, caused the

Plaintiffs’ loss. If there was a duty, this evidence is

sufficient to raise a genuine issue of material fact as to

causation.

Consequently, as with the ’34 Act claim, I find that there

is a genuine issue of material fact with respect to loss

causation.

IV. CONCLUSION

For the reasons set forth above, I GRANT Alexander Black’s

motion [Dkt. No. 153] for summary judgment with respect to the

Plaintiffs’ claim under section 10(b) of the ’34 Act, but DENY

the motion for summary judgment with respect to the state-law

negligence claim.

In light of the disposition of this motion, the parties

shall consult and provide a status report on or before Friday,

April 19, 2019, addressing any further action — including trial

(with proposed trial dates) — that must be undertaken to bring

this case with respect to Alexander Black to final judgment. A

status conference thereon will be held on Thursday, April 25,

2019 at 2:00 p.m. in Courtroom 1.

Further, counsel for Plaintiffs shall file a separate

status report on or before Friday, April 19, 2019, addressing

whether the case against Mr. Schmidt in this court should be

closed, given the pending claims brought by Plaintiffs against

Mr. Schmidt in the Bankruptcy Court of the District of Vermont,

which appears to be able to provide the damages for resolution

on the merits Plaintiffs initially sought in this court. See

supra note 5.

/s/ Douglas P. Woodlock_________

DOUGLAS P. WOODLOCK

UNITED STATES DISTRICT JUDGE