Ahders v. SEI Private Trust Company et al

Filing 76

RULING AND ORDER granting 55 Motion for Summary Judgment. Plaintiffs' claims against SEI Investment Company and SEI Private Trust Company are DISMISSED WITH PREJUDICE. Plaintiffs' shall show cause, in writing and within 10 days, why th e Court should not grant summary judgment in favor of the Insurer Defendants and thereafter enter final judgment in accordance with Federal Rule of Civil Procedure 58. If Plaintiffs fail to timely respond, the Court will, on its own motion, enter summary judgment in the Insurer Defendants' favor. Signed by Judge Brian A. Jackson on 1/24/2020. (LLH)

UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF LOUISIANA

ROBERT AHDERS, ET AL. CIVIL ACTION

VERSUS
SEI PRIVATE TRUST CO., ET AL. Na: 16-00 801-BAJ-EWD
CAVNO.: 19-00353-BAJ-EWD

RULING AND ORDER
Before the Court is Defendants SEI Investments Company and SEI Private
Trust Company s (collectively "SEI") Motion for Summary Judgment (Doc. 55).
Plaintiffs filed a Response in Opposition (Doc. 56). For the reasons stated herein,

SEFs Motion (Doc. 55) is GRANTED.

I. BACKGROUND
Much of this case covers familiar territory. The claims brought here are

factually and structurally nearly identical to those that the Court dismissed in Lillie
v. Stanford Trust Co., et al. As was the case in Lillie, the issue presented concerns

SEPs liability under the control-person provision of the Louisiana Securities Law,
which holds anyone who directly or indirectly controls a direct violator of Louisiana
Securities Law under La. Stat. Ann. § 51:712(A) to be liable to the same extent as the
direct violator, unless the secondary violator sustains the burden of proof that they
did not know, and in the exercise of reasonable care could not have known, the

existence of the facts by reason of which liability is alleged to exist. LA. STAT. ANN.

51:714(B).
This dispute stems from the litigation surrounding R. Alien Stanford s Ponzi
scheme. See Janvey v. Brown, 767 F.3d 430, 433-34 (5th Cir. 2014) (describing the
scheme). Stanford sold fraudulent certificates of deposit (CDs) through his Antiguabased Stanford International Bank Ltd. (SIBL). Id. at 433. Stanford promised
investors that proceeds would be placed in low-risk, high return investments, but
instead utilized those proceeds to pay earlier investors their promised returns. Id.

Plaintiffs allege that the primary violator, R. Alien Stanford's Stanford Trust
Company ("STC"), was created for the "primary purpose of serving as the custodian
for investors' IRA accounts." (Doc. 1 at ^f 3). The asserted primary violations here are

the same as those in Lilile — that Stanford Trust Company sold fraudulent SIBL CDs
and created bogus CD values. Id. at 1[ 96.
Plaintiffs are former members of the class in Lillie who chose to opt out of the
Lillie v. Stanford Tr. Co., No. 3:13-CV-03127-N, 2016 WL 10591374 (N.D. Tex. May
2, 2016) action in the Northern District of Texas and subsequently brought suit here.
(Doc. 1 at ^[ 4-5). Plaintiffs are individuals for whom STC, the primary violator,
allegedly purchased or renewed SIBL CDs in Louisiana between January 1, 2007 and
February 13, 2009. Id. Plaintiffs pursued their claims separately in this action, which
was then transferred from the Northern District of Texas to this Court. See (Doc. 79
in Case No. 3:19-cv-353). Plaintiffs initially brought claims alleging SEI was liable

under Louisiana Securities Law § 712, § 714(A), and § 714(B), but ultimately

abandoned the first two. See (Doc. 49 in Case No. 3:19-cv-353). Only the § 714(B)
control claim, which aims to impose joint and several liability, remains.

Defendant SEI Private Trust Company is a limited purpose federal savings
association and wholly owned subsidiary ofSEI Investments Company. See (Doc. 18
in Case No. 3:19-cv-353). STC contracted with SEI, whom STC understood to be a
"large trust company that had a well-developed operations system," in order to

facilitate the operational functionality of STC, including handling back office
operations. (Doc. 56-8, at p. 4-5).

Now, SEI moves for summary judgment. SEI argues that Plaintiffs cannot
prove the control element of their § 714(B) claim, because the contract that governed
SEI s relationship with STC demonstrates that SEI could not control STC's primary
violations of the Louisiana Securities Law (Doc. 55-1 at p. 2). That contract
characterizes SEI as an "independent contractor" (55ml0 at p. 78). Notably, the
contract carves out the right to price non-marketable securities, like the SIBL CDs,

for STC, not SEL Id. at 93. Further, the contract makes STC "solely responsible for
the completeness of any data provided to SEI under the contract. Id. at 80.

II. LEGAL STANDARD
Pursuant to Rule 56, [t]he [C]ourt shall grant summary judgment if 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. Cw. P. 56(a). 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, 477 U.S. 242, 248 (1968). A fact is
material if it "might affect the outcome of the suit." Id. at 248.
In determining whether the movant is entitled to summary judgment, the
Court views the facts in the light most favorable to the non-movant and draws all
reasonable inferences in the non-movant's favor. Coleman v. Houston Independent

School Dist., 113 F.3d 528, 533 (5th Cir. 1997). The Court "resolve[s] factual
controversies in favor of the nonmoving party, but only where there is an actual
controversy, that is, when both parties have submitted evidence of contradictory

facts." Antoine v. First Student, Inc., 713 F.3d 824, 830 (5th Cir. 2013) (citation
omitted) (emphasis added).
Where the nonmovant bears the burden of proof at trial, the movant may
merely point to an absence of evidence, thus shifting to the nonmovant the burden of

demonstrating by competent summary judgment proof that there is an issue of
material fact warranting trial. In re La. Crawfish Producers, 852 F.3d 456, 462 (5th
Cir. 2017) (citation omitted).
Plaintiffs' remaining claim arises under § 714(B) of the Louisiana Securities
Law. Liability under § 714(B) hinges on whether SEI directly or indirectly controlled
STC s primary violations of the Louisiana Securities Law. That provision creates
liability for a person who "controls a person liable under § 714(A) of the Louisiana
Securities Law:

Every person who directly or indirectly controls a person liable under
Subsection A of this Section, every general partner, executive officer, or

director of such person liable under Subsection A of this Section, every
person occupying a similar status or performing similar functions, and

every dealer or salesman who participates in any material way in the

sale is liable jointly and severally with and to the same extent as the
person liable under Subsection A of this Section unless the person whose
liability arises under this Subsection sustains the burden of proof that
he did not know and in the exercise of reasonable care could not have

known of the existence of the facts by reason of which liability is alleged
to exist. There is contribution as in the case of contract among several
persons so liable.

LA. REV. STAT. § 51:714(B). The Louisiana Securities Law defines "control" as "the
possession, direct or indirect, of the power to direct or cause the direction of the
management and policies of a person, whether through the ownership of voting
securities, by contract, or otherwise. LA. REV. STAT. § 51:702(4). Because Louisiana
control-person precedent is thin, the Court look[s] to federal law for instruction."

Heck v. Triche, 775 F.3d 265, 283 (5th Cir. 2014).
Applied here, § 714(B) makes SEI liable for STC's violations of the Louisiana
Securities Law if SEI "directly or indirectly control[led]" STC. See Triche, 775 F.3d
at 283. Plaintiffs need not prove that SEI participated in the fraudulent transaction.
See Id. (citing G.A. Thompson & Co. v. Partridge, 636 F.2d 945, 958 (5th Cir. 1981)).
They must, however, show that [SEI] had an ability to control the specific transaction
or activity upon which the primary violation is based. Id. at 283 (citation omitted)
(emphasis added).

HI. DISCUSSION
Plaintiffs emphasize the intensely factual" nature of determining whether a
party is a control person, but ultimately fail to provide evidence that would include
such facts. (Doc. 56, at p. 2). To support their argument that SEI controlled STC under

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L.S.L. § 714(B), Plaintiffs allege that SEI fulfilled back-office functions for STC,
including order processing, accounting, reporting to clients, reporting to the IRS, and

reconciliation." (Doc. 56-3 at ^ 22, 24, 25). Plaintiffs further allege that the "only
way for an STC client to hold the SIBL CD in his IRA account was through the SEI
platform. Id. at H 28-30.

Much of the analysis of Plaintiffs claims is familiar from Lillie. In fact, the
only meaningful addition here is Plaintiffs more specific allegation of a close
relationship between STC and SEI premised upon STC outsourcing its back-office
work to SEL Two affidavits, by James D. Perry, a founder ofSTC, and Gary Layfield,
a trust officer at STC, are offered to corroborate this relationship. However, neither

affidavit provides a description of the dispute of material fact necessary for Plaintiffs
to survive summary judgment. The relationship between STC and SEI is detailed in
a contract, included in SEPs pleadings, which addresses SEI's inability to directly
control STCs primary violations. Upon review, Plaintiffs affidavits only serve to
confirm that STC was a small company that outsourced its operations tasks.

In his affidavit, Perry stated that he and Mr. Layfield, the only other trust
officer at STC, could not take on operational responsibilities as trust officers. (Doc.
56-8, at p. 3). Perry also stated that establishing operations would take "tremendous
resources and could require a sizable group and expertise. Id. at 3-4. As a small
company with two trust officers and few employees, Perry opted to outsource
operations to a "large trust company with a well-developed operations system" rather
than attempt to build an in-house operations group. Id. at 4. Perry stated that while

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SEI provided the operational functionality of STC, they did not have responsibility
for product creation. Id. at 5. Neither affidavit alludes to any control SEI had over
SIBL CD valuation.

As discussed supra, the contract between SEI and STC explicitly carved out
the asset-valuing conduct that constitutes the primary violations underlying
Plaintiffs' claims. Specifically, the sale and holding ofSIBL CDs in IRA accounts, as
well as the valuation of the SIBL CDs, was allocated to STC. (55-10 at p. 93).
Plaintiffs' pleadings contain no evidence demonstrating that the relationship between
the companies differed from that contemplated in the contract. The affidavits
submitted by Plaintiffs address SEI s handling of operations, but only with respect to
day-to-day business activities that do not implicate Louisiana Securities Laws.

Therefore, SEI has met its initial burden of pointing to the absence of evidence
supporting the control element of Plaintiffs' § 714(B) claim. See In re La. Crawfish
Producers, 852 F.3d at 462. The burden now shifts to Plaintiffs to <(demonstmt[e] by
competent summary judgment proof that there is an issue of material fact warranting

trial." Id. Plaintiffs fail to sustain this burden.

Plaintiffs correctly state that, as non-movants, they are entitled to all
reasonable inferences from the evidence. They proceed to argue that it is reasonable

to infer that because "SEI had the ability to deny its platform to the SIBL CD, it
therefore had the power to impose other, lesser restrictions on the SIBL CD." (Doc.

56, at p. 5). This ambitious inference is effectively countered by the factual showing
of evidence provided in the governing contract, combined with Plaintiffs' failure to

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submit any evidence that could be construed as indicating conduct violating the terms
of the contract or otherwise showing SET could control STC. Plaintiffs contention that
SEI should have known of the violations but failed to perform due diligence before
reporting the value of the SIBL CDs is beside the point. (Doc. 1, ^) 56). As stated
plainly in Lillie, due diligence is not relevant to the threshold question of control, and
only comes into play after a defendant is adjudged a control person under § 714(B).
Lillie v. Stanford Tr. Co., No. CV 13-150-BAJ-EWD, 2019 WL 2996915, at *6 (M.D.
La. July 9, 2019), reconsideration denied, No. CV 13-150-BAJ-EWD, 2019 WL
3849154 (M.D. La. Aug. 15, 2019).
Subsequent arguments in Plaintiffs Complaint similarly overlook the
definition and test for control. These arguments include that SEI was "inextricably
intertwined with STC based on STCs need to outsource their operations
requirements (Doc. 1, ^ 27); SEIs cradle-to-grave trust management (Doc. 1, ^ 29);

custodial responsibilities stemming from the role SEI played in sale and marketing
of the SIBL CDs (Doc. 1, T[ 35); and SEPs "respected brand name" lending recognition
and credibility to STC in support of their sales efforts (Doc. 1, 1[ 50). However, longterm business relationships alone do not constitute a violation of § 714(B). See LA.
REV. STAT. § 51:702(4); Triche, 775 F.3d at 283. Plaintiffs' arguments seeking to
demonstrate control amount to little more than conjecture, and SEI has satisfied its
burden. Summary judgment is appropriate.
Lastly, Plaintiffs have named several insurance companies as defendants (the

Insurer Defendants ) in this action and have brought claims against them under
Louisiana's Direct Action Statute, LA. REV. STAT. § 22:1269. (Doc. 1 at ^ 116-120).

The Direct Action Statute does not create an independent cause of action. Sec. &

Exch. Comm'n v. Stanford Int'l Bank, Ltd., 927 F.3d 830, 850 (5th Cir. 2019) Because
the Court is dismissing Plaintiffs' sole substantive cause of action against SEI, the
insured in this case, the claims under Louisiana's Direct Action Statute will
necessarily fail. See Marsh Eng'g Inc. v. Parker, 2004-0509 (La. App. 3d Cir. 9/29/04);
883 So. 2d 1119, 1127 (When the injured party s substantive cause of action against
the original tort feasor [sic] is extinguished, the procedural right of direct action
against the insurer, which is purely remedial and ancillary to the cause, must fall by
operation of law. ) However, because the Insurer Defendants did not join SET in their
motion for summary judgment, the Court cannot grant summary judgment in their
favor without affording Plaintiffs "notice and a reasonable time to respond." FED. R.

Civ. P. 56(f).

IV. CONCLUSION
Accordingly,

IT IS ORDERED that SEFs Motion for Summary Judgment (Doc. 55) is
GRANTED. Plaintiffs' claims against SEI Investment Company and SEI Private

Trust Company are DISMISSED WITH PREJUDICE.

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IT IS FURTHER ORDERED that Plaintiffs shall show cause, in writing and
within 10 days, why the Court should not grant summary judgment in favor of the
Insurer Defendants and thereafter enter final judgment in accordance with Federal
Rule of Civil Procedure 58. If Plaintiffs fail to timely respond, the Court will, on its
own motion, enter summary judgment in the Insurer Defendants' favor.

^

Baton Rouge, Louisiana, this AN I day of January, 2020.

JUDGE BRIAN^, JACKSON
UNITED STATES TTTSTRICT COURT
MIDDLE DISTRICT OF LOUISIANA

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