Court: Court of Appeals of South Carolina; May 16, 2005; South Carolina; State Appellate Court
James Cowburn sued Andrew Leventis and Fidelity National Bank, claiming multiple causes of action related to his investment in a Ponzi scheme known as the "Cash 4 Titles Program." Cowburn was introduced to the Program by Clyde Matkin and met with Leventis, an attorney who facilitated his investment. Cowburn invested using funds from his self-directed individual retirement account (SDIRA) at Fidelity, acquiring various promissory notes and bonds from Bellwether Holdings and Southwestern Holdings, among others. Although Cowburn initially received expected interest payments, he was later informed by Leventis that the investment was part of a Ponzi scheme, leading to the loss of his funds.
Cowburn's lawsuit against Leventis and Fidelity included claims of legal negligence, breach of fiduciary duty, violations of the South Carolina Uniform Securities Act and Unfair Trade Practices Act, fraud, negligence, and civil conspiracy. Both defendants moved for summary judgment, which the trial court granted, prompting Cowburn to appeal the decision. The Court of Appeals affirmed in part, reversed in part, and remanded the case for further proceedings.
In reviewing a motion for summary judgment, appellate courts apply the same standard as trial courts under Rule 56(c), SCRCP, affirming summary judgment if no genuine issue of material fact exists and the moving party is entitled to judgment as a matter of law. The reviewing court must consider facts and inferences favorably to the nonmoving party. Cowburn contends the trial court erred by granting summary judgment to Leventis regarding alleged violations of the South Carolina Uniform Securities Act. The determination of whether Cowburn's investments qualify as securities is essential; they include promissory notes and bonds, thus classified as securities under the Act. The Act allows private civil remedies for securities fraud, enabling buyers to sue under specific violations. Cowburn argues that genuine issues of material fact exist concerning Leventis's compliance with the Act, specifically regarding the lack of registration of the securities and Leventis's failure to register as a broker-dealer. Leventis claims he did not violate the Act, asserting he did not offer to sell the securities and that the securities were exempt. However, his involvement in the Program extended beyond mere recommendations, as he actively introduced investors, including Cowburn, to the Program and received referral fees for these actions, indicating he played a significant role in the sale of the securities.
Leventis influenced potential investors to join the Program by highlighting contributions from him and his mother and organizing meetings with Gause and other Program leaders. He aided investors in completing their investments by providing necessary forms and information on establishing a Self-Directed Individual Retirement Account (SDIRA), sometimes even filling out forms for them. Cowburn viewed Leventis as a seller of the investments associated with the Program. There is a significant question of fact regarding whether Leventis offered to sell securities and whether those securities were exempt under sections 35-1-310 and -320.
Section 35-1-310(9) exempts short-term commercial paper from registration requirements if it is a current transaction, evidenced by an obligation to pay cash within nine months. Cowburn's initial investment in 270-day promissory notes qualifies for this exemption. However, his later investments, partly funded by redemptions from the short-term notes, included seven-year bonds. Leventis claims these were also exempt as "rollover" transactions under section 35-1-320(11), which applies to offers made to existing security holders if certain conditions are met.
Cowburn did not consistently invest with the same issuer; his initial investments were with Bellwether Holdings, while subsequent transactions involved Southwestern Holdings. Tax returns from Leventis and Priority Advisors indicated income from "referral fees" during 1998 and 1999. Given the material issues regarding the exemption of securities, the trial judge incorrectly granted summary judgment in favor of Leventis concerning Cowburn's claims of violation of section 35-1-810. The court underscored that exemptions from the Act must be interpreted narrowly to safeguard investors. Additionally, there is a factual dispute regarding Cowburn’s claim that Leventis failed to register as a broker-dealer per section 35-1-410, which prohibits unregistered transactions in the state.
A "broker-dealer" is defined as a person engaged in securities transactions for others or themselves, while an "agent" represents a broker-dealer or issuer in such transactions. Evidence shows that Leventis was pivotal in marketing and referring investors to a specific Program and assisted them with self-directed IRA (SDIRA) setups. In 1998, Leventis's tax return showed over $120,000 in referral fees, and in 1999, his company, Priority Advisors, reported $297,367 in referral income. Leventis also held an ownership interest in Southwestern Holdings without purchasing it and acted as its marketing manager during Cowburn's investment. This suggests Leventis may have engaged in securities transactions, potentially classifying him as a broker-dealer or agent under South Carolina law.
Leventis does not dispute his lack of registration as a broker-dealer or agent but claims exemption from registration due to the nature of the securities involved, which he argues are exempt under specific South Carolina codes. The evidence indicates a genuine dispute regarding the exemption status of the securities and Leventis's registration requirements. Additionally, Leventis cites an Attorney General Order that purportedly exempts him from registration as an agent, allowing company officers to sell securities without registration, provided they meet certain conditions regarding their duties and compensation.
Leventis did not provide the required thirty days' notice or a sworn statement indicating he would perform duties unrelated to securities transactions, raising genuine issues of fact regarding his exemption from registration as a broker-dealer under Order Number 97003. The court reversed the trial court's summary judgment on Cowburn's private cause of action under section 35-1-410. Regarding Cowburn's claim of fraud, the court found he failed to specify any misrepresentation by Leventis or provide evidence for the essential elements of fraud, including the materiality and intent behind the statements. Cowburn's claim that Leventis misrepresented the status of bonds was unsupported, and discrepancies in investment amounts were deemed immaterial. Consequently, the trial court's summary judgment favoring Leventis on the fraud claim was upheld. In Cowburn's breach of fiduciary duty claim, the court determined no fiduciary relationship existed as defined by equitable principles, since there was no evidence that Leventis had a duty to act in Cowburn's best interests. Thus, summary judgment for Leventis was also affirmed on this issue.
Evidence must demonstrate that the entrusted party genuinely accepted the confidence placed in them. A broker or dealer of securities acts as an agent for the buyer, generally holding fiduciary duties, which include accounting for the buyer's funds, avoiding actions adverse to the buyer's interests, refraining from fraud, and communicating advantageous information. However, no cases have been cited that impose a duty on brokers to investigate unknown investment risks. Contrarily, a loan broker has a duty to conduct reasonable investigations to ensure loans meet specific criteria. A bank may have a fiduciary duty to disclose material facts if it advises clients. Parties in a fiduciary relationship are obligated to disclose all material information, and silence can be construed as fraud.
A broker must keep their principal fully informed of all significant facts affecting the transaction. However, in a case involving a bond broker, an allegation of breach of fiduciary duty was dismissed due to customer agreements acknowledging their responsibility for investment decisions. The trial court correctly granted summary judgment on the breach of fiduciary duty claim.
Regarding negligence, Cowburn argued that Leventis acted negligently by failing to investigate the Program before recommending it, but the court disagreed. Common law does not generally impose a duty to act unless an individual voluntarily undertakes a duty, which Leventis did not do in this case. Leventis's role was limited to referring investors, and no duty to investigate was established. Thus, the trial court appropriately granted summary judgment on the negligence claim.
Finally, Cowburn claimed Fidelity created an agency relationship with Leventis by granting him apparent authority, but this argument was also rejected.
To establish an agency relationship, the key test is whether the principal can control the agent's conduct. Agency may arise from actual or apparent authority. Apparent agency requires proof of three elements: (1) the principal represented the agent, (2) there was reliance on this representation, and (3) the relying party suffered a detriment. Actions by an alleged agent alone cannot create agency. In this case, Cowburn's claim of Leventis's apparent authority was based on Fidelity providing forms and business cards, but these did not demonstrate that Fidelity controlled Leventis or that Cowburn relied on them to his detriment. Cowburn's assertions regarding Leventis's actions are irrelevant since they pertain to the agent, not the principal. The court found no material fact supporting Cowburn's claim of agency.
Regarding Cowburn's argument about the trial court's failure to consider his expert affidavit, the court determined that this issue was not preserved for appeal. For an appellate review, issues must be raised and ruled upon by the trial judge, and Cowburn did not make a Rule 59(e) motion to preserve this claim after the court’s general ruling. Furthermore, Leventis and Fidelity objected to the affidavit, and the trial court did not address it in its summary judgment order, leaving the question of the affidavit's consideration unpreserved for appeal.
Cowburn contends that a genuine issue of material fact exists regarding Fidelity's potential fiduciary duty to him and whether it breached that duty. However, it is noted that a fiduciary relationship arises when one party places special trust in another, who is then obligated to act in good faith and with consideration for the other party's interests. Generally, a bank-depositor relationship is characterized as creditor-debtor, not fiduciary, unless the bank provides advisory services. In this case, there is no evidence that Fidelity advised Cowburn on his investments; rather, the custodial agreement explicitly states that Fidelity does not take on investment discretion or responsibility for investment decisions, emphasizing that Cowburn was solely responsible for his investment choices. Cowburn acknowledged his understanding of these provisions, confirming that he recognized Fidelity's role as merely that of a custodian without any obligation to provide investment advice.
Cowburn asserted sole responsibility for his investment decisions and acknowledged that Fidelity did not provide financial advice or make affirmative representations about his investments. He claimed a statement from Fidelity employee Loree Adams constituted a recommendation, stating she mentioned that the Program had never missed a payment and seemed good to her. However, the court found this statement did not equate to Fidelity providing investment advice, as it only addressed the timeliness of payments without evaluating the investment's quality. Additionally, the phrase "it seems good to me" did not create a fiduciary duty, as mere respect or trust does not establish such a relationship, particularly when there was no evidence that Adams was aware of any special trust placed in her. Cowburn also argued that section 408 of the Internal Revenue Code classified IRAs as trusts, thereby imposing fiduciary duties on Fidelity; however, the court disagreed, clarifying that section 408 defines an individual retirement account as a trust or custodial account meeting specific criteria, with custodial accounts treated as trusts only under certain conditions. The court emphasized that an IRA must always be maintained as a domestic trust to satisfy these requirements.
A custodial account, treated as a trust for specific provisions of the Internal Revenue Code, designates the custodian as the trustee. An IRA or custodial account is not inherently a trust but is treated as such for this chapter. Section 408 does not impose fiduciary duties on custodians, leading to the conclusion that Fidelity does not have fiduciary obligations to Cowburn, which invalidates his breach of fiduciary duty claim and supports the trial court's summary judgment.
Cowburn claims a genuine material fact exists for his negligence claim against Fidelity, alleging that Fidelity violated its policies and the custodial agreement. To establish negligence, Cowburn must show a legal duty from Fidelity, a breach of that duty, and damages caused by the breach. A legal duty exists only if established by statute, contract, or special circumstance. Cowburn argues that Fidelity breached its custodial agreement by not mandating asset purchases through its brokerage; however, the agreement allows for such purchases but does not require them. Cowburn also fails to demonstrate how this alleged breach caused his injury.
Additionally, Cowburn asserts that Fidelity did not maintain adequate records or determine the fair market value of his investments as required by its internal policies and the Internal Revenue Code. He claims that compliance would have revealed a Ponzi scheme. Fidelity's policies mandate annual reporting of fair market value to the IRS and the account holder, especially for non-publicly traded securities, as per Section 408(i), which outlines reporting requirements for individual retirement accounts.
Fidelity is required to file reports as prescribed by the Secretary and provide them to individuals by January 31 of the following calendar year. Cowburn fails to specify which records Fidelity allegedly did not maintain, undermining his claim of breach. The appeal record includes semi-annual statements from Fidelity detailing Cowburn's investment values, contributions, and distributions, which comply with internal policies and section 408(i) of the Internal Revenue Code (IRC). The custodial agreement mandates precise record-keeping and states that unless Cowburn reports discrepancies within 60 days of receiving statements, Fidelity is absolved of liability. Cowburn did not inform Fidelity of any issues with the statements. He also claims Fidelity breached its duty under section 408 by permitting him to invest in non-qualified investments; however, section 408 does not define "qualified" investments, only prohibiting specific types such as life insurance contracts. Fidelity's obligation is to ensure compliance with IRC prohibitions, which Cowburn has not demonstrated. Additionally, Cowburn's argument regarding Fidelity's duty under the Anunzio-Wylie Anti-Money Laundering Act lacks supporting authority and is considered abandoned on appeal. Lastly, Cowburn claims Fidelity employees had a duty to advise him on investment quality, but the custodial agreement limits Fidelity's advisory role, and no evidence suggests any employees assumed such a duty or breached it. Overall, there are no genuine material fact disputes regarding these claims.
The trial court granted summary judgment in favor of Fidelity, finding no genuine issue of material fact regarding allegations of negligence. Cowburn claimed that Fidelity and Leventis engaged in civil conspiracy by facilitating the opening of SDIRAs, which he argued was crucial to a Ponzi scheme that caused him injury. However, the court noted that South Carolina law requires three elements to establish civil conspiracy: a combination of two or more persons, intent to injure the plaintiff, and resulting special damage. The court found no evidence of an agreement or joint intent between Fidelity and Leventis to harm Cowburn, thus dismissing the conspiracy claim.
The court affirmed the summary judgment for Fidelity on all of Cowburn's causes of action. However, it reversed the summary judgment concerning Cowburn's claims against Leventis related to violations of specific South Carolina securities laws, as a genuine issue of material fact remained. The court also noted that Cowburn's argument regarding the expert's affidavit was not preserved for review. Other causes of action were affirmed in favor of Fidelity. The ruling was affirmed in part and reversed in part, with the case remanded for further proceedings.
