Futureselect Portfolio Mgmt., Inc. v. Tremont Grp. Holdings, Inc.

175 Wash.App. 840

309 P.3d 555

FUTURESELECT PORTFOLIO MANAGEMENT, INC., FutureSelect Prime Advisor II LLC, The Merriwell Fund, LP, and Telesis IIW, LLC, Appellants,

v.TREMONT GROUP HOLDINGS, INC., Tremont Partners, Inc., Oppenheimer Acquisition Corporation, Massachusetts Mutual Life Insurance Co., Goldstein Golub Kessler LLP, Ernst & Young LLP and KPMG LLP, Respondents.

No. 68130–3–I.

Court of Appeals of Washington, Division 1.

Aug. 12, 2013.

Jeffrey M. Thomas, Jeffrey Iver Tilden, Gordon Tilden Thomas & Cordell LLP, Seattle, WA, Steven W. Thomas, Emily Alexander, Mark Forrester, Thomas, Alexander & Forrester LLP, Venice, CA, for Appellants.

Timothy J. Filer, Charles Philip Rullman III, Foster Pepper PLLC, David F. Taylor, Cori Gordon Moore, Perkins Coie, Christopher Holm Howard, Virginia Nicholson, Claire Louise Been, Schwabe Williamson & Wyatt PC, Stephen Michael Rummage, John Goldmark, Davis Wright Tremaine LLP, Seattle, WA, David A. Kotler, Dechert LLP, Princeton, NJ, Carol E. Head, Joseph L. Kociubes, Bingham McCutchen, LLP, Boston, MA, Robert B. Hubbell, Morrison Foerster,LLP, Los Angeles, CA, for Respondents.

VERELLEN, J.

[175 Wash.App. 849]¶ 1 Bernard Madoff's incredible “success” as an investor spurred some investment firms to contract with Madoff to manage their “feeder funds.” ¹ An investment firm sold such funds to a group of local investors, who lost $195 million when Madoff's notorious Ponzi scheme collapsed.

¶ 2 The investors (FutureSelect) sued the investment firm (Tremont), its corporate parent (Oppenheimer) and grandparent (Mass Mutual), as well as an auditor (Ernst & Young) for Washington securities fraud and tort claims. The King County Superior Court dismissed all of the claims pursuant to CR 12(b)(6) and the claims against Oppenheimer also for lack of personal jurisdiction.

¶ 3 Ten points drive the outcome of this appeal. First, the “most significant relationship” choice-of-law standards for misrepresentation and fraud claims favor the application of Washington law to all but one of the claims asserted.

¶ 4 Second, under CR 12(b)(6) we consider the allegations of the complaint and consistent hypothetical facts, but not limited samples of disputed transactional documents.

¶ 5 Third, under the generous CR 12(b)(6) standard, the investors adequately allege they relied upon representations and omissions by the investment firm in deciding to invest and maintain their investments.

¶ 6 Fourth, an auditor may be liable as a “seller” under The Securities Act of Washington (WSSA), chapter 21.20 RCW, if the auditor provides false and misleading information that was a “substantial contributive factor” in investors' decisions to invest and maintain their investments.

¶ 7 Fifth, the corporate parent and grandparent of an investment firm may face liability as a “control person” under the WSSA if they actively managed and controlled key aspects of the investment firm's operations, including the specific investments and representations that give rise to the investor's claims.

¶ 8 Sixth, the allegation that the investment firm failed to conduct the due diligence and monitoring of Madoff that it promised its investors states a negligent misrepresentation claim.

¶ 9 Seventh, in their role as limited partners, the investors lack standing to pursue the derivative claim that the investment firm, as the general partner, negligently managed the limited partnerships (applying Delaware law).

¶ 10 Eighth, the corporate parent and grandparent may be liable for the acts of the investment firm under an agency theory if they actually controlled and actively managed key operations of the investment firm, but apparent agency requires that the parent or grandparent held the subsidiary out to others as their agent.

¶ 11 Ninth, an auditor may be liable for negligent misrepresentation if the auditor included untrue statements and omissions in materials provided to the limited partners knowing that the limited partners relied upon those materials.

¶ 12 Finally, the Washington contacts of the investment firm may be imputed to its parent corporation for purposes of long-arm jurisdiction if the parent actively managed and controlled key aspects of the investment firm's activities in Washington, which activities gave rise to the claims of the investors.

¶ 13 We conclude that FutureSelect's complaint adequately alleges WSSA claims against all respondents. Moreover, the complaint adequately alleges negligent misrepresentation claims against Tremont and Ernst & Young, agency claims against Mass Mutual and Oppenheimer, and an apparent agency claim against Mass Mutual. Based upon the allegations of the complaint, the exercise of long-arm jurisdiction over Oppenheimer does not offend due process.

[175 Wash.App. 852]¶ 14 We affirm the dismissal of FutureSelect's apparent agency claim against Oppenheimer and its negligence claim against Tremont. We reverse the dismissal of all other claims.

FACTS

¶ 15 Because this is an appeal from a trial court order dismissing claims pursuant to CR 12(b)(6), we focus on the facts as alleged in the complaint.

The Parties

¶ 16 Delaware corporation FutureSelect Portfolio Management Inc. is the operations manager of Delaware limited liability companies FutureSelect Prime Advisor II and Telesis IIW and Delaware limited partnership The Merriwell Fund (collectively FutureSelect). These entities have their principal place of business in Redmond, Washington.

¶ 17 Delaware corporation Tremont Group Holdings Inc. is the parent holding company of Connecticut corporation Tremont Partners Inc. and has its principal office in New York.² Tremont was the general partner in Delaware limited partnerships the Rye Select Broad Market Fund ³ (Broad Market), Rye Select Broad Market Prime Fund (Prime), and Rye Select Broad Market XL Fund (XL) (collectively Rye Funds).

¶ 18 Delaware corporation Oppenheimer Acquisition Corporation (Oppenheimer) owns subsidiary entity OppenheimerFunds Inc. Oppenheimer acquired Tremont in 2001 and made it a wholly owned subsidiary. Employees of Oppenheimer and OppenheimerFunds Inc. served as Tremont board members and officers.

[175 Wash.App. 853]¶ 19 Massachusetts corporation Massachusetts Mutual Life Insurance Company (Mass Mutual) wholly owns Oppenheimer. Mass Mutual conducts business in Washington.

¶ 20 Delaware limited partnership Ernst & Young is an accounting firm conducting business worldwide, including Washington. Ernst & Young audited the Broad Market and Prime funds from 2000 to 2003 and issued annual financial statements.⁴ Ernst & Young disseminated unqualified audit opinions ⁵ to the Rye Funds partners, including FutureSelect. Ernst & Young is headquartered in New York.

FutureSelect Invests with Tremont

¶ 21 Tremont was one of a limited number of investment firms that afforded investors access to feeder funds managed by Bernard L. Madoff Investment Securities LLC (Madoff). Investors accessed the funds by becoming limited partners in Rye Funds partnerships managed by Tremont Partners Inc. as general partner. The Rye Funds partnerships created accounts managed by Madoff. The Rye Funds' agreements with Madoff did not require him to disclose key details of how he allegedly invested the accounts. In order to invest in funds managed by Madoff, FutureSelect became a limited partner in the Rye Funds and invested approximately $195 million between 1998 and 2007. The Rye Funds assets managed by Madoff were lost as a result of his Ponzi scheme.

¶ 22 A Tremont representative visited FutureSelect principal Ron Ward in Redmond in 1997 to solicit investment in the Rye Funds. Ward soon visited Tremont's New York office and discussed the funds and Madoff.In both meetings, “Tremont told Ward that the Rye Funds invested all of their assets with Madoff and Madoff was given complete investment discretion over those assets, subject to Tremont's oversight and ongoing due diligence.” ⁶ Tremont provided Ward written materials, including “the 1996 audited financial statements of Broad Market and Broad Market Prime prepared by [accounting firm Goldstein Golub Kessler LLP], which certified that the funds had tens of millions in assets.” ⁷

¶ 23 Relying on “Tremont's representations that it had a comprehensive understanding of Madoff's operations and conducted continuous monitoring and oversight” and on Goldstein Golub Kessler's unqualified audit report, FutureSelect invested in the Rye Funds.⁸ Ward and Tremont communicated monthly thereafter about Madoff and the Rye Funds.

¶ 24 Ward regularly visited Tremont in New York. During the visits, Tremont “represented to Ward that its ongoing oversight and testing of Madoff were satisfactory in every respect.” ⁹ Ward learned from Tremont in June 2000 that the United States Securities and Exchange Commission reviewed Madoff and identified “no issues” of concern.¹⁰ After Mass Mutual acquired Tremont in 2001, Tremont told Ward that “Mass Mutual and its investment banker ... had sent due diligence teams who evaluated Madoff's operations and had been completely satisfied.” ¹¹ In both 2005 and 2007, Ward had “lengthy phone calls” with Tremont employee Bob Schulman “reviewing Tremont's ongoing due diligence of Madoff.” ¹²

¶ 25 Both during and after the initial 1997 meeting, Tremont explained the specific monitoring it purported to conduct on Rye Funds accounts managed by Madoff. The steps Tremont claimed to take were detailed in a July 10, 2001 letter sent to Ward. The letter claimed that each month,

[w]e record the purchases and sales by security and analyze whether the purchase and sale orders on the individual securities were within the published traded range that particular day. We also analyze the trading volume by stock to calculate the percentage of the overall activity. Once we have reviewed each account, we then compare the accounts to each other to insure that all accounts are treated equally.¹³

Tremont also claimed to monitor Madoff's option...