RMV v. Ronald Marvin (2014)

Memorandum of Decision on Motion to Strike (No. 115)

FACTUAL/PROCEDURAL BACKGROUND

This matter involves alleged deceptive investment practices and fraudulent transfers of funds.   The plaintiffs include the individuals John Romano, Suzanne Barrows, and Carlo Vona, and the entities RMV Partners, L.P. (RMV Partners), RMV Holding Company, LLC (RMV Holding), and RMV Investments, LLC (RMV Investments).   Romano and Barrows are limited partners of RMV Partners, and Romano and Vona are members of RMV Holding.   Romano and Barrows are bringing this action individually and derivatively on behalf of RMV Partners and Romano and Vona are bringing this action individually and derivatively on behalf of the RMV Holding and RMV Investments.¹

On April 8, 2013, the plaintiffs filed a substituted complaint against the defendant, Ronald Marvin alleging the following facts.   The defendant formed RMV Holding, RMV Investments, and RMV Partners in 2003.   RMV Holding is the only member of RMV Investments, whose sole purpose is to provide services to RMV Holding.   RMV Holding is also the general partner of RMV Partners, with Romano and Barrows as limited partners.   RMV Partners has “the stated purpose of investing its assets in accordance with the investment objectives and restrictions set forth in” its limited partnership agreement and its private offering memorandum.   RMV Partners' limited partnership agreement states that its purpose “was to operate a hedge fund and to invest, reinvest and trade in securities and other financial instruments and rights and options relating thereto.”   In addition, in the RMV Partners' private offering memorandum, the RMV partners directed the partnership to “achieve capital appreciation primarily through a comprehensive research value-added approach to investing through equity, private equity and equity related trading and investments (including leverage and short selling).”

The defendant controlled and “exclusively managed all the funds contributed to all of the [plaintiff entities].”   In particular, the defendant managed the assets of RMV Partners as a broker-dealer via a securities brokerage account with Sloan Securities Corporation (Sloan), through which he was licensed under the Connecticut Uniform Securities Act (CUSA), General Statutes § 36b–2 et seq.   Through an employment agreement with RMV Investments, the defendant was to receive a salary of $15,000 per month from January 1, 2004, through December 31, 2005.

From January 5, 2005, through March 24, 2010, plaintiffs allege in Count Six that the defendant transferred approximately $1,406,000 of the plaintiffs' funds to himself without any approval or for “any legitimate business purpose.”   First, the defendant allegedly made periodic money transfers to himself via wire transfers from RMV Partners' account with Sloan to RMV Holding's bank account and then to RMV Investments' bank account, from which he would write himself a check.   The total from these unapproved transfers was approximately $703,000.   Second, “[the defendant] continued to draw approximately $15,000 per month from RMV Investments” in spite of the termination of his employment agreement on December 31, 2005.   These continued post-contract salary withdrawals also totaled approximately $703,000.   In the process of making these transfers, the plaintiffs allege that the defendant “misappropriat[ed] corporate assets ․ fail[ed] to disclose and actively conceal[ed] corporate financial information ․ dilut[ed] the [l]imited [p]artners' and [m]embers' equity without consent ․ [and] falsely misrepresent[ed] to the [l]imited [p]artners ․ and ․ [m]embers” regarding their rights, including “the right to receive annual reports which accurately stated the operation of the partnership.”   The defendant thus used his position to commingle personal and business funds and commit fraud.

On June 4, 2013, the defendant filed a motion to strike Count Six of the substituted complaint,² which alleges that the defendant violated the Connecticut Unfair Trade Practices Act (CUTPA), General Statutes § 42–110a et seq., on the ground that allegations of deceptive securities practices do not invoke a cause of action under CUTPA.   A memorandum of law in support accompanied the motion to strike.   On July 12, 2013, the plaintiffs file a memorandum of law in opposition.   The court heard oral argument at short calendar on September 30, 2013.

DISCUSSION

“The proper method to challenge the legal sufficiency of a complaint is to make a motion to strike prior to trial.”  Gulack v. Gulack, 30 Conn.App. 305, 309, 620 A.2d 181 (1993).  “Whenever any party wishes to contest ․ the legal sufficiency of the allegations of any complaint, counterclaim or cross claim, or of any one or more counts thereof, to state a claim upon which relief can be granted ․ that party may do so by filing a motion to strike the contested pleading or part thereof.”  Practice Book § 10–39(a).  “It is fundamental that in determining the sufficiency of a complaint challenged by a defendant's motion to strike, all well-pleaded facts and those facts necessarily implied from the allegations are taken as admitted.”  (Internal quotation marks omitted.)  Coe v. Board of Education, 301 Conn. 112, 116–17, 19 A.3d 640 (2011).  “[P]leadings are to be construed broadly and realistically, rather than narrowly and technically ․” (Internal quotation marks omitted.)  Downs v. Trias, 306 Conn. 81, 92, 49 A.3d 180 (2012).   This court takes “the facts to be those alleged in the complaint ․ and ․ construe[s] the complaint in the manner most favorable to sustaining its legal sufficiency.”  (Internal quotation marks omitted.)  Santorso v. Bristol Hospital, 308 Conn. 338, 349, 63 A.3d 940 (2013).

The defendant argues that Count Six of the substituted complaint is legally insufficient to state a claim under CUTPA because the Supreme Court has determined that CUSA, not CUTPA, applies to deceptive securities practices.   See Russell v. Dean Witter Reynolds, Inc., 200 Conn. 172, 180–81, 510 A.2d 972 (1986).   The defendant further argues that the plaintiff's allegations involve and “arise from” deceptive securities practices because the defendant's position within the plaintiff entities wholly concerned management and oversight of securities transactions, the plaintiff entities were organized solely for investment purposes, and the plaintiffs' limited partnership interests involved and allegedly diluted in value are within the statutory definition of a security.   In opposition, the plaintiffs counter that Russell is distinguishable because that case involved actual securities transactions, whereas this case involves misappropriation of funds after the partnership interests in the plaintiff entities were purchased.   Since the deceptive acts allegedly do not directly involve a security transaction, the plaintiffs argue that the defendant's actions “were deceptive acts occurring in trade or commerce and encompassed by CUTPA.”   The court agrees with the position of the plaintiffs.

CUTPA provides a private right of action under Conn. Gen.Stat. § 42–110g to “any person who suffers any ascertainable loss of money or property, real or personal, as a result of the use or employment of a method, act, or practice prohibited by section 42–110b.”   Section 42–110b(a) prohibits engaging in “unfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce.”   In contrast, CUSA provides a private right of action under Conn. Gen.Stat. § 36b–29 against any broker-dealer or investment advisor registered under CUSA who, “in connection with the offer, sale or purchase of any security, directly or indirectly engage[s] in any dishonest or unethical practice.”   Construing the actions of the defendant as alleged in the complaint most favorably to sustaining their legal sufficiency the court finds that they were not transactions committed in connection with the offer, sale, or purchase of partnership interests or any other security.   They are allegations of unauthorized and illegal conversion of cash owned by the entity plaintiffs.   The cash could have been the proceeds from the issuance of partnership interests, but the theft of cash proceeds from the sale or issuance of a security is not therefore itself a security transaction.

The CUTPA claim is directly based on Marvin's post-investment misappropriation and theft of company assets.   The factual allegations of unfair and deceptive practices occurred after the purchase and issuance of the individual plaintiffs' partnership interests.   Paragraph 38 of the complaint specifically alleges that “Marvin acted with the unlawful and improper purpose of diverting assets for his own use, engaging in the self dealing, conversion, usurping company assets, and placing his interests ahead of and in contravention to the best interests of the Plaintiffs.”   There is no allegation of any act unique to the securities industry or the regulatory scheme of CUSA. Embezzlement of employers' cash assets unfortunately occurs across the spectrum of trade and commerce which puts it squarely in the domain of CUTPA.   The allegations, if proved, would clearly be unethical, oppressive, and unscrupulous as alleged in ¶ 34 of the complaint.³

The primary case relied upon by the defendant, Russell v. Dean Witter Reynolds, Inc., 200 Conn. 172 (1986) is clearly distinguishable.   In Russell, the plaintiff brought a cause of action against his stockbroker for over-purchasing certain stock and subsequently misrepresenting to the plaintiff client the fact that he had purchased the extra shares of the stock for the client's account.   Clearly the unfair act (unauthorized purchase of shares) and the deceptive act (lying about purchasing the extra shares) in Russell were integral parts of, and directly concerned with, a purchase of securities for a client and were CUSA-related transactions.   Here, the unfair and/or deceptive acts alleged in support of plaintiffs' CUTPA claim are the egregious actions and misconduct associated with and arising out of wire transactions of plaintiffs' cash to the defendant for his own personal use.   Defendant's misappropriations and the wire transfers were not so related to the underlying purchase and issuance of partnership interests that they would remove this claim from the broad scope of CUTPA.   And the allegation that defendant continued to draw his $15,000 monthly salary without authority in spite of the termination of his employment agreement is even less related to any securities transaction.

CONCLUSION AND ORDER

For the foregoing reasons, the defendant's motion to strike Count Six of the substituted complaint is denied.

Alfred J. Jennings, Jr.

Judge Trial Referee

FOOTNOTES

FN1. For clarity, this memorandum will refer to the plaintiffs who are natural persons as the “individual plaintiffs,” the plaintiffs who are limited partnership or limited liability company entities as the “plaintiff entities,” and collectively as the “plaintiffs.”.  FN1. For clarity, this memorandum will refer to the plaintiffs who are natural persons as the “individual plaintiffs,” the plaintiffs who are limited partnership or limited liability company entities as the “plaintiff entities,” and collectively as the “plaintiffs.”

FN2. The substituted complaint contains eleven counts, but only Count Six is at issue in the present motion to strike..  FN2. The substituted complaint contains eleven counts, but only Count Six is at issue in the present motion to strike.

FN3. The well-established test whether an act is an “unfair trade practice” under CUTPA is the so-called “cigarette rule,” the second prong of which is that “2) it is immoral unethical, oppressive, or unscrupulous.”   See Harris v. Memorial Hospital and Health Center, 296 Conn. 315, 350 (2010)..  FN3. The well-established test whether an act is an “unfair trade practice” under CUTPA is the so-called “cigarette rule,” the second prong of which is that “2) it is immoral unethical, oppressive, or unscrupulous.”   See Harris v. Memorial Hospital and Health Center, 296 Conn. 315, 350 (2010).

Jennings, Alfred J., J.T.R.