In Belmont v. MB Inv. Partners, Inc., 2012 U.S. Dist. LEXIS 1656 (E.D. Pa. Jan. 5, 2012), investors swindled in a Ponzi scheme sought to recover against an assortment of defendants  associated with the money manager that employed the scheme’s perpetrator.  The court, however, granted summary judgment and dismissed the claims. 

This case arose out of a Ponzi scheme allegedly involving North Hills Partnership, L.P. (the “Partnership”), a privately offered investment vehicle controlled by Mark Bloom, (“Bloom”).  Bloom, according to the PPM for the Partnership, was the sole principal of the general partner.  During the period when the scheme occurred, Bloom also served as    a high-ranking money manager at MB Investment Partners (“MB”). 

Bloom ran this scheme independent of his work at MB.  According to plaintiffs, Bloom from July 2001 until February 2009 diverted more than $20 million from the Partnership for his own use.  Bloom also invested Partnership funds with the Philadelphia Alternative Asset Fund (“PAAF”), an entity with which Bloom had a referral agreement.

Bloom did not disclose his conflicts and made the investments in violation of the disclosed strategy for diversification.  When Bloom informed his investors that the PAAF’s funds had been frozen due to fraud, several investors asked for their money back; however, Bloom had already diverted the funds for his own private use.  In order to repay his investors, Bloom solicited additional investments into the Partnership.  Bloom was arrested on February 25, 2009, and pled guilty to numerous charges, including securities fraud, mail fraud, wire fraud, money laundering, and obstruction of tax laws.  MB fired Bloom the day of this arrest.

The plaintiffs sued defendants in an effort to recover some of the funds misappropriated by Bloom.  The defendants included investors in, and employees or directors of, MB.  Plaintiff asserted that they should be responsible for Bloom’s actions with the Partnership and that the defendants failed to adequately supervise Bloom.  The court, however, ultimately rejected these theories.

The plaintiffs’ control person liability claim under Section 20(a) of the Exchange Act of 1934 failed because the plaintiffs failed to show that the defendants culpably participated in Bloom’s fraud.  The plaintiffs argued that the defendants were reckless by failing to implement sufficient internal controls that would have detected Bloom’s fraud.  The court stated that this allegation – even if correct – proved nothing more than simple inaction on the defendants’ part.  Because the plaintiffs failed to offer any evidence showing the defendants actually participated in Bloom’s fraud, the court rejected the plaintiffs’ control person liability claim.

The court also rejected the plaintiffs’ Section 10(b) and Rule 10b-5 claims against MB.  Plaintiffs  argued that Bloom’s fraud, when combined with his high-ranking position at MB, was sufficient to render  MB liable for fraud.  After articulating the elements of claims under Section 10(b) and Rule 10b-5, the court noted that the alleged fraud was committed by the Partnership rather than MB.  Plaintiffs attempt to extend liability to MB rested on “Bloom's role at MB and without regard to whether he was acting in MB's interests or causing harm to MB.” The court found this to be insufficient to justify the claim against MB.  As the court reasoned:  “Plaintiffs have cited no decision extending liability under the federal securities laws to a corporation that had no involvement with the plaintiff harmed.”

The plaintiffs’ claims of negligent supervision, breach of fiduciary duty, and violations of Pennsylvania’s Unfair Trade Practice and Consumer Protection Law all failed because the plaintiffs consistently failed to establish a connection between the defendants and Bloom’s fraud.

The primary materials for this case are available on the DU Corporate Governance website.