LELAND v. EFMC INTERNATIONAL INC (2022)

MEMORANDUM AND ORDER PURSUANT TO RULE 23.0

After losing nearly $200,000 in a foreign commodities trading investment, the plaintiff, Nancy A. Leland, sued the defendants alleging that they acted fraudulently and negligently as her investment advisers and broker-dealers. Specifically, the complaint alleged breach of contract, breach of the implied duty of good faith and fair dealing, negligence, fraud, violations of the Massachusetts Uniform Securities Act, and unfair and deceptive business practices. Following a jury-waived trial, a Superior Court judge issued a comprehensive written decision in favor of the defendants on all claims.³ Discerning no error in the judge's conclusion that the defendants did not act as investment advisers or broker-dealers, and did not knowingly mislead the plaintiff for their own benefit, we affirm.

Background. We summarize the judge's factual findings, supplemented by uncontested evidence implicitly credited by the judge. See Hays v. Ellrich, 471 Mass. 592, 593, cert. denied, 577 U.S. 985 (2015). In November of 2008, Richard A. Reichter (Reichter) traveled to Switzerland with two business associates to investigate a commodities trading program (program) operated by Dividium Capital, LTD (Dividium).⁴ Reichter toured Dividium's trading floor and offices, met with a Dividium asset manager, reviewed Dividium's business records, and studied the program's recent performance. Satisfied with the research, Reichter and his business associates invested $75,000 of their own funds in the program.

Upon returning to Massachusetts, Reichter shared information about the program with his longtime friend, Edmund Leland, and Leland's wife Nancy, the plaintiff, who managed the family's financial affairs. Reichter and Edmund Leland had been friends for decades and were occasionally business partners. They socialized together and often discussed their investments and business affairs. On this occasion, Reichter told the Lelands that he had just visited Dividium in Switzerland and invested in its “closed” commodities trading program. He explained that in closed trading the seller contracts to sell a commodity to a buyer before acquiring the commodity to be sold. This form of trading was intended to reduce risk because the transaction's yield would be known before the sale of the commodity.

Reichter explained that participation in the program required a deposit of at least €50,000 into an HSBC “sub-account,” which Dividium would use as collateral for a line of credit. The line of credit would then be used to trade commodities, with the profits equally divided between Dividium and the investor. Reichter encouraged the Lelands to participate in the program and explained that there was minimal risk because the HSBC sub-account could only be accessed by the investor.

The Lelands were interested in the investment opportunity but enrolling in the program was complicated. Investors were required to travel to Dividium in Switzerland to complete the application process, and the Lelands did not speak German, the language in which Dividium conducted business. Reichter offered the services of his company, EFMC International, Inc. (EFMC), to help the Lelands apply. Although EFMC primarily assisted corporate clients in raising capital for initial public offerings and special projects, Reichter had personal experience with the application process and had business associates in Switzerland who could help with the Lelands’ application.

The plaintiff agreed and executed an “Engagement Agreement” with Reichter, in his capacity as president of EFMC.⁵ In exchange for a fee of $7,500, EFMC agreed to “assist [the plaintiff] in undertaking a Swiss [Dividium] Funds Management Strategy” and to serve as her “exclusive representative.” The agreement stated that “[EFMC was] not a broker” and made “no guarantee as to the final outcome of its efforts.” It further specified that the fee would compensate EFMC for “[a]pplication processing[,] [d]ocumentation[,] [and] [c]oordination.” The agreement did not authorize EFMC to provide investment advice and no one at EFMC was licensed or registered as a securities broker, agent, or investment adviser.

The plaintiff paid the $7,500 fee and EFMC prepared and submitted the plaintiff's application. Dividium approved the application and sent the plaintiff a “Joint Venture Agreement,” which she executed.⁶ The joint venture agreement was between the plaintiff and Dividium. The defendants were not signatories. A few days later, EFMC provided the plaintiff with a memorandum summarizing its due diligence investigation of Dividium and the success of their own investment in the program. Bradley Reichter sent the plaintiff documentation regarding the positive investment returns of an anonymous investor in the program. Pursuant to the joint venture agreement, in January of 2009, the plaintiff wired $100,000 into an HSBC sub-account.

Initially, the program operated as expected. The plaintiff invested another $100,000 in March of 2009, without assistance from the defendants, using an online portal to the HSBC account.

In the spring of 2019, several investors lodged complaints regarding Dividium which caused Swiss authorities to initiate an investigation. Dividium reassured investors and promised to return their investments, but no refunds were forthcoming. Reichter and his associates took steps to try to recover their own investments in the program and assisted the plaintiff in a similar effort.

Dividium eventually declared bankruptcy and its assets were liquidated. The plaintiff and Reichter ultimately lost the funds in their HSBC sub-accounts. Swiss authorities recovered a portion of the money, which was distributed to investors in pro rata shares.⁷

Discussion. 1. Standard of review. We accept the judge's factual findings unless they are clearly erroneous. Makrigiannis v. Nintendo of Am., Inc., 442 Mass. 675, 677 (2004). “A finding is ‘clearly erroneous’ only when, ‘although there is evidence to support it, the reviewing court on the entire evidence is left with a definite and firm conviction that a mistake has been committed.’ ” Demoulas v. Demoulas Super Mkts., Inc., 424 Mass. 501, 509 (1997), quoting Building Inspector of Lancaster v. Sanderson, 372 Mass. 157, 160 (1977). “Where there are two permissible views of the evidence, the factfinder's choice between them cannot be clearly erroneous” (quotation omitted). Pehoviak v. Deutsche Bank Nat'l Trust Co., 85 Mass. App. Ct. 56, 65 (2014). In applying this standard, we give “due regard ․ to the opportunity of the trial court to judge the credibility of the witnesses.” Mass. R. Civ. P. 52 (a), as amended, 423 Mass. 1402 (1996). “We are not bound, however, by the judge's conclusions of law, and we must ensure that the judge's ultimate findings and conclusions are consistent with relevant legal standards.” Demoulas, supra at 510.

2. Claims under the Massachusetts Uniform Securities Act, G. L. c. 110A (the Act). Under the Act, investment advisers and broker-dealers of securities must register with the Secretary of the Commonwealth of Massachusetts to do business in that capacity. See G. L. c. 110A, § 201 (a), (c). The complaint alleged that the defendants violated the Act by (1) failing to register as investment advisers, (2) failing to register as broker-dealers, and (3) making deceptive and misleading statements in connection with the sale of a security.

First, we address the allegation that the defendants violated the Act by failing to register as investment advisers or broker-dealers. We note as a preliminary matter that the Act does not create a cause of action for merely failing to register as an investment adviser. While § 410 (a) (1) of the Act imposes civil liability for the offer or sale of securities by unregistered brokers-dealers and agents, see G. L. c. 110A, § 201 (a), the Act does not similarly impose civil liability for selling securities without registering as an investment adviser. See G. L. c. 110A, §§ 201 (c), 410 (a) (1). Therefore, even if the judge had found that the defendants acted as investment advisers, there was no civil cause of action under the Act for merely failing to register as an investment adviser.

In any event, we discern no error in the judge's conclusion that the defendants were not acting as investment advisers under the Act. The Act defines “investment adviser” as:

“any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as a part of a regular business, issues or promulgates analyses or reports concerning securities.”

G. L. c. 110A, § 401 (m). Here the evidence established that the defendants’ regular business activity was counselling corporate clients regarding raising capital, not advising individual clients about the purchase and sale of securities. The defendants did not hold themselves out to the public as investment advisers. Nor did they “as part of a regular business, issue[ ] or promulgate[ ] analyses or reports concerning securities” (emphasis added). G. L. c. 110A, § 401 (m). While the plaintiff paid a fee to EFMC, the engagement agreement stated, and the evidence showed, that the $7,500 fee was for processing and coordinating the plaintiff's application to the program, not for investment advice.

To be sure, the defendants’ roles in the transaction were more than merely administrative. Reichert brought the opportunity to the plaintiff's attention, recommended investing in the program, and shared information acquired during EFMC's due diligence. However, the promotion of an isolated investment opportunity which fell outside of EFMC's regular business, did not require the judge to conclude that the defendants were acting as investment advisers under the Act. The judge's finding that the defendants were not in the regular business of advising others as to the value of securities, or the wisdom of investing in them, was not clearly erroneous.

The plaintiff's claim that the defendants were required to register as broker-dealers of securities is also unavailing. Under the Act, a “ ‘broker-dealer’ means any person engaged in the business of effecting transactions in securities for the account of others or for his own account.” G. L. c. 110A, § 401 (c). While a contract to advise and consult regarding the sale of a security can “effect[ ] transactions in securities” within the meaning of the Act, id.; see Indus Partners, LLC v. Intelligroup, Inc., 77 Mass. App. Ct. 793, 801 (2010), we look to the specific terms of the contract to determine whether it required the defendants to act as broker-dealers. See NTV Mgt., Inc. v. Lightship Global Ventures, LLC, 484 Mass. 235, 241-242 (2020) (“Two inquiries are necessary to determine whether a contract on its face triggers an obligation to register as a broker-dealer: ․ [1] whether the instrument that is the subject of the transaction is a ‘security,’ and, if so, [2] whether the conduct required by the contract amounts to ‘effecting transactions’ ”). We “examine the language of the contract by itself, independent of extrinsic evidence concerning the drafting history or the intention of the parties.” Indus Partners, 77 Mass. App. Ct. at 795, quoting Bank v. Thermo Elemental, Inc., 451 Mass. 638, 648 (2008).

Here, the language of the engagement agreement was unambiguous. EFMC was being compensated by the plaintiff for “[a]pplication processing[,] [d]ocumentation[,] [and] [c]oordination.” The engagement agreement explicitly stated that EFMC was not acting as a broker. Thus, even assuming that the joint venture agreement between the plaintiff and Dividium qualified as a security, a question we need not reach, it is clear that the engagement agreement did not require the defendants to act as broker-dealers. Simply put, the plaintiff's conclusory assertion on appeal that the defendants “were functioning as a broker dealer ․ in offering to get [the plaintiff] accepted into [the program]” was not supported by the evidence.

Finally, we find no merit in the plaintiff's argument that the defendants made deceptive and misleading statements in connection with the plaintiff's investment in the program. The Act prohibits any person who sells a security from making material misrepresentations and omissions in connection with that sale. G. L. c. 110A, § 410 (a) (2). But “[n]ot all who solicit the purchase of securities are ‘sellers’ under the act.” Hays, 471 Mass. at 599. For example, one is not liable under the act if his motivation for soliciting the purchase of the security is “solely to benefit the buyer of the security” (quotation omitted). Id.

The judge found that, even assuming that the joint venture agreement between the plaintiff and Dividium could be considered a security,⁸ the plaintiff failed to prove that the defendants “solicit[ed] the purchase [of a security] motivated at least in part by a desire to serve [their] own financial interests or those of the securities owner.” Hays, 471 Mass. at 599 (quotation omitted). Such assessments of motive are for the factfinder, and the judge was in the best position to assess the credibility of the witnesses and determine their intentions. See Millennium Equity Holdings, LLC v. Mahlowitz, 456 Mass. 627, 636-637 (2010). The judge's conclusion that the plaintiff failed to establish that the joint venture agreement between the plaintiff and Dividium served the defendants’ financial interests was not clearly erroneous.

3. Negligence. The complaint generally alleged that the defendants had a fiduciary duty to the plaintiff and that they breached that duty by, among other things, “negligently reassur[ing] [the plaintiff] that there were no risks to the investment,” and “negligently fail[ing] to follow basic investment advisor protocols to guide the advice given to [the] [p]laintiff.” The judge analyzed the claim as one alleging professional negligence, concluding that the plaintiff failed to establish that the defendants were acting as the plaintiff's financial advisers. Further, the judge concluded that, to the extent that the plaintiff relied on the defendants’ financial advice, the reliance was unreasonable.

On appeal, the plaintiff does not address the judge's reasoning on the negligence claim. Rather, in cursory fashion, the plaintiff suggests that the defendants should have been found liable for negligently misrepresenting that there was no risk of loss in the investment. We need not address this abbreviated and conclusory argument, as it does not rise to the level of acceptable appellate argument.⁹ See Cameron v. Carelli, 39 Mass. App. Ct. 81, 86 (1995).

The argument is unavailing in any event. To establish a claim of negligent misrepresentation, the plaintiff was obligated to prove that the defendants (1) supplied false information to the plaintiff, (2) without exercising reasonable care, (3) that the plaintiff justifiably relied on the false information, and (4) lost money as a result. Cumis Ins. Soc'y, Inc. v. BJ's Wholesale Club, Inc., 455 Mass. 458, 471 (2009). We see no error in the judge's conclusion that the plaintiff failed to prove that her reliance on the alleged negligent misrepresentations was reasonable. Where the evidence showed that EFMC's agreement with the plaintiff was to assist her in processing the investment application, rather than providing investment advice, the plaintiff's reliance on such investment advice would not have been reasonable.

4. Fraud. The plaintiff argues that the defendants fraudulently misrepresented that the investment had no risk because the plaintiff was the only person who could access her HSBC account. To succeed on a claim of fraudulent misrepresentation the plaintiff was required to prove that the defendants knowingly made false statements of material fact for the purpose of inducing the plaintiff to act in reliance, and the plaintiff did reasonably rely on the false statement to her detriment. See H1 Lincoln, Inc. v. South Washington St., LLC, 489 Mass. 1, 18 (2022).

There is no dispute that persons other than the plaintiff withdrew funds from the plaintiff's HSBC account. Therefore, any statements by the defendants that withdrawals from that account could only be made by the investor turned out to be false. The judge found, however, that “no evidence presented showed that the defendants knew the information conveyed to [the plaintiff] was untrue.” Reichter testified that he believed, based on what was represented to him by Dividium, that the HSBC sub-account could only be accessed by the investor. The judge, who had the benefit of seeing and hearing Reichter's testimony, was in the best position to evaluate his credibility. See Mass. R. Civ. P. 52 (a). Moreover, Reichter's testimony was supported by Dividium's joint venture agreement with the plaintiff, which stated, “these cash funds will stay at all times the legal property of the Investor, will only be used for trading purposes and cannot be withdrawn by anybody unless instructed in writing by the Investor.” While there may have been material misrepresentations made by Dividium or its representatives, we see no clear error in the judge's finding that the defendants did not knowingly make false statements to the plaintiff.

5. Claims under G. L. c. 93A. In an action alleging a violation of G. L. c. 93A, “[w]hether a particular set of facts, in their factual setting, is unfair or deceptive is a question of fact.” Casavant v. Norwegian Cruise Line Ltd., 460 Mass. 500, 503 (2011) (quotation omitted). “But whether conduct found to be unfair and deceptive rises to the level of a chapter 93A violation is a question of law.” H1 Lincoln, 489 Mass. at 14 (quotation omitted). To qualify as unfair and deceptive, conduct must be “within at least the penumbra of common-law, statutory, or other established concept of unfairness,” be “immoral, unethical, oppressive, or unscrupulous,” or “cause[ ] substantial injury to consumers.” Id. (quotation omitted). Based on the judge's subsidiary findings that the defendants were not acting as financial advisers and did not know that funds in the HSBC account could be accessed by others, there was no error in his conclusion that the plaintiff did not prove that the defendants engaged in unfair and deceptive trade practices in violation of G. L. c. 93A, § 2.

Judgment affirmed.

FOOTNOTES

3.   The plaintiff has not argued that her claims for breach of contract and breach of the implied duty of good faith and fair dealing improperly were dismissed, and we do not address those claims. Mass. R. A. P. 16 (a) (9) (A), as appearing in 481 Mass. 1628 (2019) (“The appellate court need not pass upon questions or issues not argued in the brief”).

4.   At the time, Dividium was known as International Invest, LTD. The name was changed to Dividium in December of 2008 following a merger. For simplicity, we use the name Dividium throughout this decision.

5.   EFMC was also referred to as “Eaton” in the engagement agreement. The judge found that EFMC, Eaton, and the Eaton Group all referred to the same entity. Reichter's son, defendant Bradley A. Reichter, was the entity's chief financial officer. Defendant Dr. Robert Kellan was identified as a “senior advisor.”

6.   The joint venture agreement provided, in essence, that the plaintiff would deposit $100,000 in the HSBC bank account and, in exchange, Dividium would “provide on a best effort basis the adequate day-trading opportunities in order to secure the necessary profit.” Profits from the trades were to be divided equally between Dividium and the plaintiff.

7.   The plaintiff recovered twenty-three percent of her investment, as did Reichter and his business associates.

8.   The definition of “security” includes a “certificate of interest or participation in any profit-sharing agreement.” G. L. c. 110A, § 401 (k).

9.   The plaintiff's argument on the negligence claim is limited to two sentences.