Alvarez et al v. United States of America

Filing 100

ORDER granting 88 motion to dismiss; plaintiffs' amended complaint 87 is dismissed for lack of subject matter jurisdiction; the Clerk shall close the file. Signed by Judge Timothy J. Corrigan on 9/12/2016.(SRW)

UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF FLORIDA
JACKSONVILLE DIVISION

RENE ALVAREZ, et al.,
Plaintiffs,
vs.

Case No. 3:13-cv-174-J-32MCR

UNITED STATES OF AMERICA,
Defendant.

ORDER
Plaintiffs are the victims of a Ponzi scheme whose mastermind, Kenneth Wayne
McLeod, committed suicide on June 22, 2010. For the most part, the plaintiffs are current
or former federal law enforcement officers and their spouses from all over the country who
met McLeod at one of many government-sponsored retirement seminars where he pitched
his fraudulent bond fund. Many have lost their life savings. Now, plaintiffs seek to hold the
United States liable for their losses under the Federal Tort Claims Act.
Although there were numerous red flags that government employees could have
heeded to stop McLeod before he cheated these investors, suits against the United States,
as a sovereign, are subject to strict limitations. These limitations may bar a suit, even one
which would be successful if brought against a private entity. After much study, the Court
finds that plaintiffs’ claims fail to overcome the government’s sovereign immunity from suit.
Thus, while the rampant fraud here calls out for a remedy, one cannot be secured from the
United States.

Plaintiffs’ Amended Complaint (Doc. 87)1 and Background Facts

I.

Federal government agencies began regularly providing retirement education and
training for their employees in 1986. Approximately two years later, various federal law
enforcement agencies began contracting with Kenneth Wayne McLeod, who held himself
out to be an expert on the federal retirement system, and his Jacksonville, Florida company,
Federal Employee Benefits Group, Inc. (“FEBG”), to provide these services to federal
employees at seminars, meetings and training events all over the country.
FEBG claimed to be a “financial services and benefits consulting firm focused on
[f]ederal retirement options” and “dedicated to the complex issues surrounding special group
employees, including [l]aw [e]nforcement [o]fficers . . . .” Doc. 87 (Amended Complaint) at
¶ 144. FEBG charged the government up to $15,000 per event and many employees who
attended FEBG seminars received educational information about federal retirement benefits
from McLeod. However, in addition to group presentations at seminars and training
sessions, McLeod offered private follow-up sessions with individual employees to give advice
regarding how best to achieve the employees’ personal retirement goals. These meetings
were routinely held in federal agency offices. During these individual meetings, and
frequently at group sessions as well, McLeod would pitch a financial product he created– the

1

Plaintiffs’ amended complaint is a shotgun pleading, where each count improperly
incorporates every preceding paragraph. See, e.g., Magluta v. Samples, 256 F.3d 1282,
1284 (11th Cir. 2001). However, the Court is able to address the merits of the motion to
dismiss without requiring plaintiffs to replead.
2

FEBG Bond Fund.2

While McLeod promoted the FEBG Bond Fund as a long term

investment with a guaranteed return of 8-10% offered to a select group of investors and
sometimes backed by a “promissory note,” in actuality, the FEBG Bond Fund was a Ponzi
scheme. Unaware of the true nature of this “investment,” federal law enforcement officers
and other federal employees invested or transferred from their TSP accounts to the FEBG
Bond Fund tens and hundreds of thousands of dollars, some even more than a million. They
also introduced their parents, friends and other colleagues to McLeod and he convinced
them to invest as well. McLeod kept his investors in the dark over the course of many years
by providing fake account statements, emails and memoranda showing the purported gains
of their investments.3
To gain access to a steady stream of new federal employee investors to perpetuate
the scheme, McLeod cultivated and capitalized on personal relationships with senior agency
officials, many of whom were themselves FEBG Bond Fund investors. These senior officials
enjoyed lavish parties, all expense paid Super Bowl trips, tax preparation services,

2

The FEBG Bond Fund was sometimes called the “FEBG Special Fund,” “Special Fund”
or “FEBG Fund.” Doc. 87 at ¶ 148.
3

FEBG was not a one man shop. As part of its subsequent investigation, the Office of
Inspector General of the United States Department of Justice (“OIG”) interviewed “several”
individuals who had been FEBG employees. See Doc. 92 (Response to Motion to Dismiss),
Ex. 5 at 3. One former FEBG employee is a plaintiff in this lawsuit, having himself invested
$100,000 in the FEBG Bond Fund after observing several of McLeod’s seminars. See Doc.
87 (Amended Complaint) at ¶ 98. FEBG employees other than McLeod sometimes led the
retirement seminars but no plaintiff alleges that any FEBG employee other than McLeod
solicited them to invest in the FEBG Bond Fund. See id. at ¶¶ 8-101; Doc. 78, Ex. 8 at
CM/ECF p. 14 (plaintiff declaration referencing seminar led by other FEBG representatives).
3

subsidized mortgages and other benefits. Within the agencies where McLeod maintained
these relationships, including the Drug Enforcement Administration (“DEA”), Immigration and
Customs Enforcement (“ICE”), and others, FEBG became the nearly exclusive provider of
retirement education and advice for those agencies’ employees.4
According to a later investigation, FEBG began to experience cash flow problems in
2008 and McLeod, who already had a long history of personal financial difficulties, had
trouble making interest payments to some of the FEBG Bond Fund investors. FEBG laid off
many of its employees but financial problems continued. Then, in the spring of 2010, the
Securities and Exchange Commission received a complaint from an FEBG investor who tried
unsuccessfully to redeem his investment. The SEC interviewed McLeod, who admitted on
June 17, 2010 that the FEBG Bond Fund was a Ponzi scheme. Five days later, just before
McLeod was due to appear for a deposition with SEC lawyers, he committed suicide. Only
then did investors discover that their money was never invested in any fund and that McLeod
was a fraud. The SEC froze McLeod’s assets, a receiver was appointed, the OIG opened
its investigation and individual investors from all over the country conferred and assembled
themselves, hiring counsel to sue the government in an attempt to recoup their losses and
recover for emotional damages.5

4

According to the amended complaint, DEA, ICE, United States Customs and Border
Protection (“CBP”), the Federal Aviation Administration (“FAA”), the United States Fish and
Wildlife Service (“FWS”), the Federal Bureau of Investigation (“FBI”), and the United States
Postal Service (“USPS”) all hired FEBG to provide seminars or training sessions. Doc. 87
at ¶¶ 8-101.
5

Some investors made a modest recovery from the receiver of McLeod’s estate; some
pursued claims in a FINRA arbitration proceeding against brokerage firms associated with
4

In this suit, 141 individuals– including employees of DEA, CBP, ICE, FBI, FAA, FWS,
USPS, Bureau of Alcohol, Tobacco, Firearms and Explosives (“ATF”), and Naval Criminal
Investigative Service (“NCIS”), their spouses, other family members and friends, two friends
of McLeod’s, and one FEBG employee, who all invested in the FEBG Bond Fund, as well
as three people who hired McLeod to manage their money– have sued the United States
under the FTCA, 28 U.S.C. § 2671 et seq.
Plaintiffs claim McLeod, acting as an employee of the government under a contract,
was negligent per se when he violated the Florida Securities and Investor Protection Act
(“FSIPA”), by selling unregistered Florida securities to plaintiffs (Count I); that government

McLeod. As of May 2014, over $13 million in settlements had been paid through the FINRA
proceeding (including to some of the plaintiffs here). See Doc. 92-5 (OIG report) at 25; Doc.
87 (Amended Complaint) at ¶ 225.
In December 2014, the OIG issued a Report on its investigation of the DEA’s
relationship with McLeod. See Doc. 92-5, redacted version (Counsel for plaintiffs reports
that an unredacted version (which was not filed and which the Court has not seen) does not
enlighten any of the issues before the Court.). The thorough report describes McLeod’s
background, the nature of McLeod’s business, and his relationship with the DEA, and opines
on the failures of DEA employees to take actions that might have prevented the fraud (the
Report noted that one DEA Training Director had banned McLeod from further access to a
DEA facility in 2006, finding McLeod to be incompetent and unstable, but the Director’s
efforts to warn others within DEA were not communicated or were not heeded). The OIG
Report found that while some DEA officials were aware of adverse facts about McLeod, that
information was not so widely known that officials could be faulted for allowing his continued
access to DEA employees. The OIG further found that two DEA employees used “extremely
poor judgment” and violated ethics regulations by accepting gifts from McLeod. Doc. 92-5
at 89. The Report concludes with recommendations for improvement to DEA policies and
practices with regard to selection, vetting and monitoring of financial education instructors;
implementation of best practices to ensure compliance with prohibitions on advertising and
commercial activities in government facilities; and measures to avoid showing favoritism.
DEA’s response to the OIG Report stated that the DEA was considering whether to take
disciplinary action against certain employees based on the OIG Report. The DEA also
concurred with the OIG’s recommendations for future improvement. See Doc. 92-5 at
Appendix A.
5

employees who invited McLeod to attend the government sponsored seminars, who
arranged private follow-up meetings between McLeod and individual plaintiffs, and/or in
whose presence McLeod sold securities in violation of Florida law are liable for aiding and
abetting McLeod’s negligence in violating the FSIPA (Count II)6; that McLeod and the
government employees who assisted him acted negligently by breaching a duty to their
federal agency employees when they failed to adhere to various policies, regulations and
standards of care governing solicitation, commercial activities and endorsements; by failing
to supervise McLeod; by failing to warn government employees that McLeod was not
endorsed by the government and that his securities were unregistered; by failing to vet or
investigate McLeod’s background or qualifications; and by favoring McLeod’s services in
violation of ethics laws, regulations and policies (Count III); that McLeod and the retirement
counselors at the federal agencies who invited McLeod to speak to or meet with government
employees breached fiduciary duties owed to the plaintiffs by permitting prohibited
commercial solicitations during government-sponsored events, promoting McLeod’s products
during those events, failing to adhere to ethics laws and regulations that would have
eliminated McLeod’s ability to defraud employees, and failing to vet McLeod or FEBG before

6

In its motion to dismiss, the government assumed (as did the Court) that plaintiffs were
alleging a violation of the Florida Securities and Investor Protection Act in Counts I and II.
However, unless the purchaser has sold the security (which is not alleged here), the only
available remedy under that statute is rescission, which is not available from the government
under the FTCA. See Fla. Stat. §§ 517.07, 517.211(1); 28 U.S.C. § 1346(b). In their
response to the motion to dismiss, plaintiffs clarified that they are suing for negligence based
on violations of the Florida statute, and not for the statutory violations themselves. The
government’s reply addresses why, in its view, the negligence claims are likewise
unsustainable.
6

engaging him to provide retirement financial education to employees (Count IV); that the
agencies that employed McLeod under personal service contracts negligently supervised
him (Count V); and that the conduct of the government resulted in the negligent infliction of
emotional distress (Count VI). Plaintiffs allege their investment losses total approximately
$20 million but they seek lost amounts their Thrift Savings Plan accounts or pensions would
have earned and emotional damages, bringing the damages claimed to approximately $120
million.
Following two earlier rounds of motion practice (Docs. 11, 14, 15, 21, 25, 26, 74, 75,
77, 78, 82), two hearings (Docs. 31, 84), a period of discovery, an unsuccessful effort to
settle the case (Doc. 54), and the filing of an amended complaint (Doc. 87), the United
States now moves to dismiss plaintiffs’ amended complaint for lack of subject matter
jurisdiction (Doc. 88), plaintiffs have responded (Doc. 92), and the government filed a reply
(Doc. 96). On August 12, 2016 the Court held argument on the motion to dismiss. The
record of all three hearings is incorporated by reference.
For purposes of this motion, the Court is viewing the claims from plaintiffs’ “best case”
scenario; thus, it is putting aside those investors who were not employed by the government,
those who did not invest in the FEBG Bond Fund but hired McLeod to manage their
investment portfolio, those who did not meet McLeod at a government-sponsored seminar
or who did not attend a seminar at a GSA-controlled venue. For venue purposes, the Court
is also presuming a plaintiff who resides in Florida and attended a seminar in Florida. At
least two of the 141 plaintiffs present allegations of a paradigm case: both Rachel Cannon
and Jacqueline Fruge are Florida residents, employed by federal agencies (Cannon by ICE
7

and Fruge by the FBI), both attended government-sponsored seminars led by McLeod in
GSA-controlled buildings in Florida where senior agency employees were present, both
completed financial questionnaires provided by their supervisors, both heard McLeod pitch
his “special” bond fund at the seminar, both invested in the FEBG Bond Fund (Cannon,
$309,000; Fruge, $30,000), and both claim losses as a result.7 See Doc. 87 at ¶¶ 22, 44,
240, 262. Because these paradigm plaintiffs cannot demonstrate that subject matter
jurisdiction is proper here, the Court need not address the government’s numerous
challenges to the claims of the other plaintiffs.8
II.

Standard of Review
Barring an applicable waiver, sovereign immunity protects the United States from any

claim. Zelaya v. United States, 781 F.3d 1315, 1321 (11th Cir.) (citations omitted), cert.
denied, 136 S.Ct. 168 (2015). One such waiver, the FTCA, “makes the United States liable

7

As was typical of many of the federal law enforcement investors, Cannon and Fruge
unfortunately introduced their families to McLeod. McLeod convinced Cannon’s parents to
invest $277,500 in the FEBG Bond Fund and Fruge’s father to invest $1,000,000. See Doc.
87 at ¶¶ 21, 45.
8

When the Court granted an earlier motion to dismiss, giving plaintiffs leave to file an
amended complaint, it instructed the government that any renewed motion to dismiss should
not raise certain issues thoroughly covered by the filings already on hand, including the
interference with contract rights exception, failure to exhaust administrative remedies, venue,
or whether the case should be stayed pending a determination of Federal Employees’
Compensation Act coverage. The government additionally points to an inherent conflict in
that some of the plaintiffs may also be some of the alleged tortfeasors (see, e.g., Doc. 92-5
(OIG report) at 57-58 (naming certain plaintiffs as recipients of Super Bowl tickets from
McLeod)). The parties’ briefs and this Order address only subject matter jurisdiction on the
grounds discussed herein; these other issues are not addressed. See, e.g., Chhetri v.
United States, 823 F.3d 577, 583, n.5 (11th Cir. 2016) (affirming dismissal based on
discretionary function exception and declining to reach other issues, including venue).
8

for money damages ‘caused by the negligent or wrongful act or omission of any employee
of the Government.’” Logue v. United States, 412 U.S. 521, 525-26 (1973) (citation omitted).9
However, there are many exceptions to this waiver of immunity, “which must be strictly
construed in favor of the United States.” JBP Acquisitions, LP v. United States, 224 F.3d
1260, 1263 (11th Cir. 2000) (quotation and citation omitted). “If the alleged conduct falls
within one of these statutory exceptions, the court lacks subject matter jurisdiction over the
action” under the FTCA. Id. at 1263-64 (citations omitted). In other words, “when an
exception applies to neutralize what would otherwise be a waiver of immunity, a court will
lack subject matter jurisdiction over the action.” Zelaya, 781 F.3d at 1322 (citation omitted).
The government argues that the FTCA’s misrepresentation and discretionary function
exceptions bar plaintiffs’ claims. See 28 U.S.C. §§ 2680(a) and (h). Both parties rely on
material outside the four corners of the amended complaint;10 thus, this motion raises a
factual (as opposed to a facial) challenge to the Court’s subject matter jurisdiction under Rule

9

Section 1346(b)(1) of Title 28 provides that, subject to the provisions enumerated in
chapter 171, claims may be brought
against the United States, for money damages, accruing on or after January
1, 1945, for injury or loss of property, or personal injury or death caused by the
negligent or wrongful act or omission of any employee of the Government
while acting within the scope of his office or employment, under circumstances
where the United States, if a private person, would be liable to the claimant in
accordance with the law of the place where the act or omission occurred.
10

Following an earlier round of motion practice, the Court denied the United States’ motion
to dismiss without prejudice to renewal and permitted plaintiffs to undertake a significant
period of discovery designed to flesh out the evidentiary bases supporting subject matter
jurisdiction over their claims. Plaintiffs have now filed deposition transcripts and various
documents in support of their response to the government’s motion to dismiss. Neither party
has argued that more discovery is needed to reach decisions on the issues before the Court.
9

12(b)(1). Generally, when presented with such a motion, “no presumptive truthfulness
attaches to plaintiff’s allegations, and the existence of disputed material facts will not
preclude the trial court from evaluating for itself the merits of jurisdictional claims.” Lawrence
v. Dunbar, 919 F.2d 1525, 1529 (11th Cir. 1990) (quotation and citation omitted).
However, where the jurisdictional basis for the claim is intertwined with the merits, the
Court must view the jurisdictional facts as it would at summary judgment, construing all
inferences in favor of plaintiffs as the non-moving party. Douglas v. United States, 814 F.3d
1268, 1275-76 (11th Cir. 2016); see also Odyssey Marine Exploration, Inc. v. Unidentified
Shipwrecked Vessel, 657 F.3d 1159, 1169-70 (11th Cir. 2011) (citation omitted) (explaining
that facts should be viewed in light most favorable to plaintiff on a 12(b)(1) motion when the
jurisdictional basis for the claim is intertwined with the merits). Here the jurisdictional basis
is intertwined with the merits of plaintiffs’ claims; thus, the Court will construe all inferences
in plaintiffs’ favor. See, e.g., Freeman v. U.S. Marshal Service, 310 F. App’x 355, 358 (11th
Cir. 2009) (vacating order of summary judgment for lack of subject matter jurisdiction in
advance of discovery where evidence viewed in light most favorable to plaintiff might show
that Court Security Officer was a government employee for FTCA purposes, which would
establish subject matter jurisdiction and necessary element of tort claim).
Yet while the Court will construe all factual inferences in plaintiffs’ favor, “[i]n the face
of a factual challenge to subject matter jurisdiction, the burden is on the plaintiff to prove that
jurisdiction exists.” OSI, Inc. v. United States, 285 F.3d 947, 951 (11th Cir. 2002) (citations
omitted). Thus, plaintiffs must prove that the exceptions invoked by the government do not
apply. See id. (explaining that plaintiff bore the burden of proving that the discretionary
10

function exception did not apply). Stated otherwise, it is plaintiffs’ burden to allege facts
falling outside the exceptions. See, e.g., Douglas, 814 F.3d at 1276 (“At the pleading stage,
[plaintiff] must allege a plausible claim that falls outside the discretionary function
exception.”).
III.

Discussion
A typical FTCA case might involve an auto accident caused by a negligent

government driver, a medical malpractice suit involving a VA or Navy hospital, or perhaps
a premises liability suit involving injuries sustained at a federal facility. It is far less common
to have an FTCA case where the main injury is investment loss. Plaintiffs themselves
recognize that investor suits against the government have not fared well. See Doc. 92
(Plaintiffs’ Response) at 1 (citing Zelaya, 781 F.3d 1315; Baer v. United States, 722 F.3d 168
(3d Cir. 2013); Molchatsky v. United States, 713 F.3d 159 (2d Cir. 2013); Dichter-Mad Fam.
Partners, LLP v. United States, 709 F.3d 749 (9th Cir. 2013); Suter v. United States, 441
F.3d 306 (4th Cir. 2006), as examples of failed efforts by Ponzi scheme victims to sue the
government under the FTCA). This case is also unusual in that typical FTCA plaintiffs are
not themselves government employees.11 Nonetheless, plaintiffs claim that the government
is liable for the negligent conduct of McLeod and other government employees who allegedly
allowed McLeod’s fraudulent scheme to flourish.

11

Suits by federal employees are often handled under the Civil Service Reform Act, 5
U.S.C. § 1101 et seq., which is the “exclusive remedial regime for federal employment and
personnel complaints.” Mahoney v. Donovan, 721 F.3d 633, 635 (D.C. Cir. 2013) (quotation
and citation omitted). The government has not argued that the CSRA covers plaintiffs’
claims.
11

The government argues that it cannot be liable for McLeod’s conduct because he was
not an employee within the meaning of the FTCA and that even if he was, his fraudulent
activities would be outside the scope of any federal employment, thereby barring government
liability as to Count I in its entirety and barring government liability as to Counts III, IV, V and
VI to the extent those counts allege liability premised on McLeod’s actions as an employee.
The government also argues that the misrepresentation exception and the discretionary
function exception bar all of plaintiffs’ claims. The government further contends it cannot be
liable for Counts I and II arising under the FSIPA and that, to the extent plaintiffs are
attempting to state a claim of negligence per se arising out of a FSIPA violation, those claims
are barred by Florida’s statute of repose, Fla. Stat. § 95.11(4)(e).
A.

McLeod’s Status as an Employee or Contractor

Having previously maintained that McLeod was a non-employee contractor whose
actions only subjected the United States to liability via the enabling negligent conduct of
other government employees, plaintiffs now allege McLeod himself acted as an employee
of the United States and that the United States is directly liable for his conduct as well as that
of other government employees.12 For purposes of the FTCA, those deemed employees of
the United States include “officers or employees of any federal agency” and “persons acting
on behalf of a federal agency in an official capacity, temporarily or permanently in the service

12

In their Amended Complaint, plaintiffs allege, in addition or in the alternative, that
McLeod’s company, FEBG, is also an employee of the government. See Doc. 87 at ¶ 143.
The FTCA definition of an employee contemplates that it is a natural person. See 28 U.S.C.
§ 2671 (referencing “officers” “employees” “members” “persons”). However, the Court need
not determine whether FEBG’s conduct alone could subject the government to liability
because plaintiffs have not alleged any FEBG conduct separate from McLeod’s.
12

of the United States, whether with or without compensation.” 28 U.S.C. § 2671. A “[f]ederal
agency,” however, “does not include any contractor with the United States.” Id. Thus, the
United States is generally not liable for the tortious conduct of its contractors’ employees.
Logue, 412 U.S. at 528-32 (discussing Congressional decision to exempt the United States
from liability for injury caused by employees of a contractor and holding that for purposes of
the FTCA, county sheriff’s employees who allegedly failed to prevent death of federal
detainee at county jail were employees of a contractor, not employees of the United States).
However, where the parties’ contract grants the United States the authority to “control the
physical conduct of the contractor in the performance of the contract,” id. at 527, a contractor
may be deemed to be “acting on behalf of a federal agency,” and the United States will be
liable for the contractor’s employees’ tortious conduct as though they were employed by the
United States. Means v. United States, 176 F.3d 1376, 1379 (11th Cir. 1999). Thus, in
certain situations, “even private individuals who are not on the Government’s payroll may be
considered employees for purposes of establishing the Government’s liability” under the
FTCA. Patterson & Wilder Constr. Co., Inc. v. United States, 226 F.3d 1269, 1274 (11th Cir.
2000).
While this exception is a narrow one, construing all inferences in plaintiffs’ favor for
purposes of the motion, the Court addresses the government’s arguments assuming, as
plaintiffs have alleged, that McLeod acted as an employee of the government.13

13

From the beginning, plaintiffs and their counsel have recognized the difficulty of suing
the government under the FTCA in these circumstances. Faced with motions to dismiss by
the government invoking numerous exceptions to the FTCA and other jurisdictional
barricades, plaintiffs have at times altered their primary theories of liability to try to state a
13

B.

Misrepresentation Exception

The government contends that all of plaintiffs’ claims are barred by the FTCA’s
misrepresentation exception captured within 28 U.S.C. § 2680(h): the United States’ waiver
of sovereign immunity “shall not apply” to “[a]ny claim arising out of assault, battery, false
imprisonment, false arrest, malicious prosecution, abuse of process, libel, slander,
misrepresentation, deceit, or interference with contract rights . . . .” (emphasis supplied).
The misrepresentation exception covers direct miscommunications by government
employees, JBP Acquisitions, 224 F.3d at 1266, implied misrepresentations, Baroni v. United
States, 662 F.2d 287, 288 (5th Cir. 1981), and failures to communicate, JBP Acquisitions,
224 F.3d at 1266, and applies to both negligent and intentional misrepresentations. Block
v. Neal, 460 U.S. 289, 296 (1983). Particularly relevant here, the misrepresentation
exception applies when the claim “is based on the communication or miscommunication of

viable FTCA claim. Also, the Court granted plaintiffs an opportunity to conduct extensive
jurisdictional discovery to try to support their claims. The current and final iteration of their
case is premised on the contention that McLeod was an “employee” of the United States
when he committed his wrongs. All causes of action in the amended complaint assume that
McLeod was an employee. While this is different from plaintiffs’ earlier contention that
McLeod was not an employee (see, e.g., Doc. 26 (sur-reply to earlier motion to dismiss) at
10 (arguing that because McLeod was not an employee, the intentional torts exception did
not bar plaintiffs’ claims), the Court assumes for purposes of testing plaintiffs’ claims that
McLeod was an employee of the United States.
Though the government’s brief argued why McLeod should not be deemed to have
been an employee, at oral argument the government conceded that the Court could decide
the motion to dismiss by assuming that McLeod was an employee. However, if the case
were to go forward, plaintiffs would have to prove McLeod was an employee by showing that
the government controlled McLeod’s “physical performance,” determined from the parties’
entire relationship, and depending in large part on the terms of any contract between them.
See, e.g., Logue, 412 U.S. at 529-32; Means, 176 F.3d at 1379; Patterson & Wilder, 226
F.3d at 1274; Bravo v. United States, 532 F.3d 1154, 1160 (11th Cir. 2008); Tisdale v. United
States, 62 F.3d 1367, 1371 (11th Cir. 1995).
14

information upon which others might be expected to rely in economic matters.” Zelaya, 781
F.3d at 1334.

Moreover, the misrepresentation exception bars not only claims for

misrepresentations, but claims “arising out of” misrepresentations. Id. at 1333. Whether a
claim “arises out of” a misrepresentation “is interpreted broadly to include all injuries that are
dependent upon” the misrepresentation. Id.14
For example, in JBP Acquisitions, the plaintiff real estate loan purchaser sued the
United States for, inter alia, conversion, trespass, negligence, and interference with property
rights when the government sold it a loan secured by a housing project and then sold the
property to another buyer who bulldozed the project before plaintiff could intervene in the
proceeding. 224 F.3d at 1262. The district court dismissed the claims for lack of subject
matter jurisdiction and the Eleventh Circuit affirmed, rejecting JBP’s argument that the suit
was over the government’s failure to perform operational tasks in connection with the loan
transfer. Id. at 1263. Instead, the Court held the misrepresentation exception applied
because “the basis of the Government’s negligence, in fact what makes it negligence in the
first place, is the Government’s misrepresentation to [the bulldozing buyer] regarding [the
government’s] current ownership of the loan.” Id. at 1265 (emphasis omitted). “It is that
misrepresentation which is the ‘crucial element of the chain of causation’ upon which JBP’s
claims are founded.” Id. (citations omitted).

14

In evaluating whether the exception applies, “[i]t is the substance of the claim and not
the language used in stating it which controls whether the claim is barred by an FTCA
exception.” JBP Acquisitions, 224 F.3d at 1264 (quotation and citation omitted). Thus, a
party’s own characterization of its claim is not determinative. Id. at 1265.
15

Thus, if the government’s misstatements are essential to the negligence claim, the
misrepresentation exception will apply. Block, 460 U.S. at 296. Otherwise, the exception
does not apply. Id. In other words, the exception “does not bar negligence actions which
focus not on the [g]overnment’s failure to use due care in communicating information, but
rather on the [g]overnment’s breach of a different duty.” Id. at 297. Therefore, “if a plaintiff
can show that the [g]overnment has breached a duty distinct from the duty not to make a
misrepresentation and if that breach has caused the plaintiff’s injury, the fact that the
[g]overnment may have also made a misrepresentation will be insufficient to trigger the
misrepresentation exception to a waiver of sovereign immunity.” Zelaya, 781 F.3d at 1336.
In Zelaya, plaintiff investors who lost money in a Ponzi scheme operated by the
Stanford Group sued the SEC claiming it violated its statutory duty to notify the Securities
Investor Protection Corporation (SIPC) which might have acted on the SEC’s information that
the Stanford Group was in financial trouble. Id. at 1334. In arguing that the government’s
negligence was more than a failure to communicate (which would bar the claim as a
misrepresentation), the investors argued that the SEC’s duty to notify the SIPC was an
“operational task devoid of any communicative aspect.” Id. at 1337. The Eleventh Circuit
rejected that argument, finding it made “no sense at all” because it was the content of the
communication which would have triggered action by the SIPC and not the mere fact of
compliance with an operational task of notification. Id. Thus, the investors’ effort to engage
in a “semantical sleight-of-hand” “to end-run the misrepresentation exception” was
unsuccessful. Id.

16

By contrast, in Block, a homeowner sued the government when a federal lending
agency failed to inspect and supervise construction of her home, resulting in defects. 460
U.S. at 290-91. The Supreme Court held that while misrepresentations may have been
made along the way, the government had undertaken an independent duty to inspect and
supervise the construction and it was these failures that formed the basis of the
homeowner’s claim. Id. at 297. In so ruling, the Supreme Court contrasted the facts of
Block with those of United States v. Neustadt, where the plaintiff homeowner alleged a faulty
government inspection and appraisal failed to reveal structural defects. Id. at 296 (citing
Neustadt, 366 U.S. 696 (1961)). In holding that the misrepresentation exception barred
Neustadt’s claim, the Supreme Court rejected the Fourth Circuit’s characterization of the
claim as one for “the careless making of an excessive appraisal” in violation of the
government’s statutory duty under the National Housing Act and instead found that
Neustadt’s claim was that she was misled by statements in the appraisal, in other words, the
communication of misinformation upon which she relied. Neustadt, 366 U.S. at 704, 706-07.
As the Court in Block explained, whereas the essence of Neustadt’s claim was a negligent
misrepresentation (barred by the FTCA exception), in Block, the homeowner alleged an
injury proximately caused by the government’s failure to perform a duty that was distinct from
its duty to use due care in communicating to the homeowner. Block, 460 U.S. at 297. Thus,
the suit did not arise out of misrepresentations and was not barred by the FTCA exception.
Id. at 298-99. See also JM Mechanical Corp. v. United States, 716 F.2d 190, 195 (3d Cir.
1983) (reversing order granting motion to dismiss under the misrepresentation exception and
remanding where plaintiff’s allegations of negligence were separate from misrepresentation
17

because, although government failed to communicate regarding lack of a valid bond (which
was not actionable), plaintiff’s injuries were caused by the government’s breach of duty to
secure a valid bond).
Plaintiffs argue that, as in Block, McLeod and other government employees committed
negligent acts independent of any misrepresentations.
In Counts I and II, plaintiffs claim that McLeod and government employees engaged
in negligence per se when McLeod sold unregistered securities and government employees
aided and abetted his doing so by inviting McLeod to government sponsored seminars,
arranging meetings between him and employees, and/or allowing him to sell securities, in
violation of FSIPA (Fla. Stat. § 517.07). Doc. 87 (Amended Complaint) at ¶¶ 175-192. Yet
had the FEBG Bond Fund been legitimate, the fact of its being unregistered would have had
no effect on plaintiffs. And conversely, if McLeod had registered the fraudulent securities
(lying about them to do so since they didn’t exist), plaintiffs would still have suffered the
same harm. Plaintiffs’ injuries flow from the securities and McLeod’s representations which
underlay them being fraudulent, not because they were unregistered. Moreover, the basis
for plaintiffs’ FSIPA claim is that McLeod told some investors that the investment in the
FEBG Bond Fund was a loan backed by a promissory note which, if true, would be required
to be registered. But of course his statements were false. Thus, McLeod’s violation of
FSIPA was based on a misrepresentation and the failure to register the security was not
itself an independent act that caused plaintiffs harm. See Zelaya, 781 F.3d at 1337
(rejecting plaintiffs’ claim that the content of the communication the SEC was required-- and
failed-- to provide was immaterial). Notwithstanding plaintiffs’ characterization of this claim,
18

the underlying element causing their injuries was McLeod’s misrepresentations about the
FEBG Bond Fund; thus this is a claim which “arises out of” McLeod’s misrepresentations and
is therefore barred. See id. at 1333-34 (explaining that “‘arising out of’ is interpreted broadly
to include all injuries that are dependent upon [a misrepresentation]” regardless of how
plaintiff has framed the claim). Since McLeod’s conduct is not actionable, neither is that of
government employees alleged to have aided or abetted him as alleged in Count II. Even
so, to the extent plaintiffs were harmed by any government employee who engaged in
conduct that aided or abetted McLeod in his violation of FSIPA, it was due to an implied
misrepresentation or failure to communicate on their part or alternatively, would be deemed
to “arise out of” McLeod’s misrepresentations. Id.
As to Count III, plaintiffs allege government employees engaged in common law
negligence when they failed to adhere to various OPM policies and GSA regulations
prohibiting commercial solicitations or the provision of specific investment advice, failed to
supervise or control McLeod, failed to warn employees that McLeod was not endorsed by
the government and that he was selling unregistered securities, failed to vet or investigate
McLeod, and negligently favored his services in violation of ethics rules. Doc. 87 at ¶¶ 193202. In Count IV this same conduct is alleged to result in a breach of fiduciary duty to
plaintiffs. Id. at ¶¶ 203-211. In Count V, plaintiffs allege the government negligently
supervised McLeod and FEBG. Id. at ¶¶ 212-219. In Count VI, plaintiffs allege that all of the
foregoing conduct was done in a manner that caused plaintiffs to suffer the negligent
infliction of emotional distress. Id. at ¶¶ 220-224. Plaintiffs argue these claims are not
barred by the misrepresentation exception because “[t]he government’s failure to observe
19

and enforce the anti-solicitation regulations and OPM [Office of Personnel Management]
policy directives at agency-sponsored retirement training events” is actionable independent
of any government misrepresentation. Doc. 92 (Response) at 46. Plaintiffs also assert that
their state law Good Samaritan claim survives because the agencies undertook “a duty to
properly conduct and supervise agency retirement and financial education and training,” a
duty that is “unrelated” to an “agency’s duty to make accurate communications,” which
independent duty was violated by “negligently permitting commercial solicitation and vending
when prohibited, negligently permitting commercial solicitation when prohibited, and
negligently allowing specific investment advice when prohibited.” Doc. 92 (Response) at 4849. Plaintiffs claim these are failures to perform “operational” duties which are distinct from
the duty not to miscommunicate but which nonetheless are linked to plaintiffs’ injuries. Id.
at 49.
The government argues that it is not the agency employees’ failure to follow GSA
regulations or some other policy that harmed plaintiffs.

Rather, to the extent that

government employees harmed plaintiffs (as opposed to it just being McLeod who harmed
plaintiffs by his misrepresentations), it was because they vouched for McLeod in a manner
which encouraged employees to invest their money with him. According to the government,
providing McLeod with airs of respectability and trustworthiness is conduct that falls squarely
within the misrepresentation exception. See Boda v. United States, 698 F.2d 1174 (11th Cir.
1983) (holding claim barred by misrepresentation exception where plaintiff lost heirloom
diamond ring to man in witness protection program whose credentials were provided by the
government). In Boda, the Eleventh Circuit “accept[ed] the reasoning of the [S]eventh
20

[C]ircuit . . . in Redmond v. United States” in finding that Neustadt barred the negligence
claims because they arose out of government misrepresentations. Boda, 698 F.2d at 1176;
see also Redmond v. United States, 518 F.2d 811 (7th Cir. 1975) (holding claim barred by
misrepresentation exception where the government vouched for a fraudster and plaintiff
invested and lost his money).
Plaintiffs claim Boda and Redmond are unpersuasive because they predate the
Supreme Court’s Block decision which countenanced a Good Samaritan theory of liability
as to government employees. While this statement of Block’s import is true, neither Boda
nor Redmond depart from that principle. Moreover, Block did not abrogate Neustadt, which
both Boda and Redmond recognized as binding. In both Boda and Redmond, the plaintiffs
were relying on misrepresentations of government employees or their failures to
communicate, notwithstanding, like here, that there was an underlying fraudster who was
associated with (or, as plaintiffs allege, employed by), the government. See Boda, 698 F.2d
at 1175 (plaintiff’s suit alleged government employees failed to warn her about criminal
history of participant in witness protection program); Redmond, 518 F.2d at 813 (plaintiff’s
suit alleged he relied on an “aura of respectability,” “credibility and trustworthiness” conferred
on defrauding securities dealer by government employees). Moreover, in Zelaya, where the
plaintiffs were ostensibly proceeding on a Good Samaritan theory,15 the Eleventh Circuit

15

The Eleventh Circuit faulted plaintiffs in Zelaya for not alleging any state law analogue
to their alleged violation of the SEC’s duty to investors, expounding on whether a Good
Samaritan theory would be available in the states where the conduct occurred, but ultimately
determining the case could be decided without reaching that issue. Zelaya, 781 F.3d at
1324-26.
21

recently reaffirmed that miscommunications or failures to communicate or failures to warn
by government employees are barred by the misrepresentation exception. Zelaya, 781 F.3d
at 1335, 1338 (holding that “the misrepresentation exception applies to the breach of the
duty to use due care in obtaining and communicating information upon which [the plaintiff]
may reasonably be expected to rely in the conduct of his economic affairs”) (citing Neustadt,
366 U.S. at 706).
Thus, just because plaintiffs have alleged negligence per se based on a statutory duty
under Florida law, negligence under a Good Samaritan theory, and violations of OPM
policies and GSA regulations, they still must identify injuries proximately caused by any of
that independent negligence;16 here plaintiffs merely state that the breach of those duties
“are sufficiently linked to Plaintiffs’ injuries.” See Doc. 92 (Response) at 49. This is not
enough. Plaintiffs must show that some act of independent negligence was the cause of
their injury. Zelaya, 781 F.3d at 1336. In Zelaya, the Eleventh Circuit explained that an
independent claim of negligence is actionable only where the plaintiff’s economic injuries
arise out of something other than misrepresentations. Id. at 1337 (distinguishing Block and
other cases). Plaintiffs must demonstrate injuries suffered from a duty that is distinct from
the misrepresentations. Id. at 1336. United States v. Shearer, 473 U.S. 52, 55 (1985)

16

Plaintiffs’ citation to United States v. Friedenthal, No. 97CRMISC1PAGE13(THK),1997
WL 786371 (S.D.N.Y. Dec. 19, 1997) (a criminal prosecution for violation of a GSA antisoliciting regulation) as support for the proposition that a GSA violation is an independent
tort, is not helpful. The question of whether it is independent is not posed in a vacuum; rather
the question for the FTCA misrepresentation exception is whether any injuries the tort
caused are independent of those borne out of a misrepresentation, a matter not addressed
in Friedenthal.
22

(“Section 2680(h) does not merely bar claims for [the listed torts]; in sweeping language it
excludes any claim arising out of [those torts].”) (emphasis in original).
Plaintiffs attempt to escape the broad reach of the misrepresentation exception by
arguing that the government’s breach of separate duties is an essential part of the chain of
causation that led to their injuries. Plaintiffs focus on language in Block which explains that
where claims of misrepresentation and negligence share factual and legal issues, the
negligence claims can go forward notwithstanding the FTCA’s misrepresentation exception.
See Block, 460 U.S. at 298. But where the damages are caused by reliance on the
misrepresentation, it cannot be said that a distinct duty has caused a breach. Id. To survive
the misrepresentation exception, plaintiffs must allege that the “cause of the injury was the
breach of a duty that was distinct from the duty not to miscommunicate.” Zelaya, 781 F.3d
at 1336.
The crucial component of plaintiffs’ claims-- the essence of what caused them harm-is that McLeod, assumed to be a government employee, lied about the bona fides of the
FEBG Bond Fund, and other government employees, either expressly or impliedly,
convinced plaintiffs to trust McLeod and invest with him. Without those misrepresentations,
plaintiffs would have suffered no injuries, despite any other negligence by McLeod or other
government employees. Stated otherwise, none of the alleged acts of “independent”
negligence by McLeod or other government employees would have resulted in injuries to the
plaintiffs had the plaintiffs not relied on misrepresentations by McLeod or other government
employees. Plaintiffs’ injuries are dependent on these misrepresentations and therefore are
deemed to “arise out of” them. Id. at 1333 (explaining that “injuries that are dependent” on
23

a misrepresentation are deemed to “arise out of” the misrepresentation).
“[T]he essence of an action for misrepresentation, whether negligent or intentional,
is the communication of misinformation on which the recipient relies.” Block, 460 U.S. at 296
(explaining that the claim in Neustadt failed because Neustadt could not identify an injury
that he would have suffered independent of his reliance on erroneous appraisal). See also
Zelaya, 781 F.3d at 1337 (holding that plaintiffs’ claims were barred by the misrepresentation
exception because their “injuries here arose precisely from the SEC’s failure to notify SPIC”);
JBP Acquisitions, 224 F.3d at 1265 (“Without the false representation by the Government
that it was the owner of the Property, the consent agreement in the condemnation
proceedings never would have been consummated, the Property would not have been
demolished, and JBP would have suffered no injury.”). So it is here.
IV.

Conclusion
In fulfilling Congress’ mandate that federal agencies educate their employees about

their retirement benefits, the federal law enforcement agencies involved here made what,
in retrospect, was a disastrous choice in selecting Kenneth Wayne McLeod to take part in
that mission. But it was not attendance at the seminars or meeting with McLeod that harmed
the employees; rather, it was the additional step of investing in McLeod’s bogus FEBG Bond
Fund that caused them injury. That decision was made in reliance on McLeod’s and other
government employees’ misrepresentations or omissions. Thus, plaintiffs’ injuries “arise out
of” misrepresentations made by government employees. The FTCA’s misrepresentation

24

exception bars all of plaintiffs’ claims against the government.17
In so ruling, the Court is not without empathy for the many law enforcement officers,
their families and friends who were duped by McLeod and who lost so much. While it may
seem anomalous that the government may be liable for negligence but not when it makes
(even intentional) misrepresentations, such is the way that Congress chose to write the
FTCA. This Court must follow the law. With McLeod dead, it is not certain where these
plaintiffs go to find their remedy. But, unfortunately, it is not from the United States.
Accordingly, it is hereby
ORDERED:
The United States’ motion to dismiss (Doc. 88) is GRANTED. Plaintiffs’ amended
complaint (Doc. 87) is dismissed for lack of subject matter jurisdiction. The Clerk shall close
the file.

17

The government alternatively argued that plaintiffs’ claims are barred by the
discretionary function exception, which bars any claim “based upon the exercise or
performance or the failure to exercise or perform a discretionary function or duty on the part
of a federal agency or an employee of the government, whether or not the discretion involved
be abused.” 28 U.S.C. § 2680(a). Because the Court finds plaintiffs’ claims to be barred by
the misrepresentation exception, it need not address this alternative ground. Likewise, while
the government also raises several challenges to plaintiffs’ FSIPA claims (Counts I and II)
(including that they are barred by Florida’s statute of repose and that no remedy is available),
because the Court finds those claims barred by the misrepresentation exception, it need not
address those alternative arguments. See Chhetri, 823 F.3d at 583, n.5. Finally, the
government has not specifically argued that any of plaintiffs’ claims fail for lack of a state law
analogue. While the Court inquired about that at argument (based on the Eleventh Circuit’s
emphasis on that point in Zelaya , 781 F.3d at 1323-26), the government was satisfied that
the Court could rule on the issues before it without delving into that further. The Court
therefore assumes for purposes of this ruling that plaintiffs’ claims are supported by state law
analogues.
25

DONE AND ORDERED at Jacksonville, Florida this 12th day of September, 2016.

s.
Copies:
counsel of record

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