SVGRP LLC v. Sowell Fin. Servs., LLC

SVGRP LLC, et al., Plaintiffs, v. SOWELL FINANCIAL SERVICES, LLC, et al., Defendants.

Case No.5:16-cv-07302-HRL

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA SAN JOSE DIVISION

November 16, 2017

ORDER DENYING MOTION TO DISMISS FIRST AMENDED COMPLAINT

Re: Dkt. No. 19

In this diversity action, plaintiffs SVGRP, LLC (SVGRP) and Concert Wealth Management, Inc. (Concert) sue for alleged breach of contract, fraud, libel/slander, and unfair business practices. In sum, they claim that defendant Sowell Financial Services, LLC (Sowell Financial) entered into an agreement with SVGRP to reap the benefits of a transfer of Concert's advisor representatives and assets, with no intent of following through with its end of the bargain.

The court granted defendants' Fed. R. Civ. P. 12(b)(6) motion to dismiss the complaint, with leave to amend. The contract claim was dismissed on the ground that the Master Service Agreement (Master Agreement) between SVGRP and Sowell Financial is indefinite with respect to the compensation to be paid to SVGRP. The fraud claim was dismissed because the complaint failed to allege fraud with sufficient specificity. The court dismissed the claim for libel/slander because the complaint did not allege sufficient facts providing context or meaning, such that the alleged statements in question could reasonably be interpreted as defamatory. Because plaintiffs' unfair business practices claim depended upon the existence of a viable substantive claim for relief, it too was dismissed.

Plaintiffs timely filed a First Amended Complaint (FAC) re-alleging the same claims for relief. Pursuant to Fed. R Civ. P. 12(b)(6), Sowell Financial and defendant William C. Sowell (Sowell) move to dismiss the FAC, arguing that plaintiffs still fail to state a plausible claim for relief. Upon consideration of the moving and responding papers, as well as the oral arguments presented, the court denies the motion.¹

BACKGROUND

The facts, as now alleged in the FAC, are as follows:

Concert, a Registered Investment Advisor (RIA) with the Securities Exchange Commission, provided regulatory services, as well as office and technical support to multiple investment advisor representatives, who were all registered with Concert. The representatives' client funds are held by financial custodians, such as Fidelity.

In July 2016, Fidelity notified Concert that Fidelity required a different RIA to provide regulatory services to Concert's investment advisors who used the Fidelity platform. Concert says that, at that time, it had 26 advisors using the Fidelity platform and $700 million in client funds managed by those advisors, generating over $7 million in annual revenues. Concert was required to find a suitable RIA and transfer its regulatory services by the end of October 2016.

Because Concert did not want to lose advisor representatives using the Fidelity platform (and corresponding assets under management), Concert's principals (Felipe and Elizabeth Luna) created SVGRP, a separate entity that would provide office and technical support to the advisor representatives. Concert then began its search for an RIA that could provide the advisors with regulatory services, as required by Fidelity. Sowell Financial was one of three RIAs Concert identified as a viable candidate.

According to plaintiffs: Concert, SVGRP, and Sowell Financial agreed that Concert wouldfacilitate the transition of its advisors to Sowell Financial under the same terms as the advisors' contracts with Concert. (FAC ¶ 15). Additionally, the parties reportedly also agreed that Sowell Financial would enter into a Master Agreement that would allow Sowell Financial to retain SVGRP to provide the advisors with office and technical support, using Concert's proprietary software (Omniscient), and under the same terms as the advisors' contracts with Concert. (Id.; Dkt. 19-1, FAC Ex. B at ECF p. 22).

Claiming that it was under exceptional time pressure to find a suitable RIA and effect the transfer of regulatory services, Concert says that on or around August 9, 2016 it entered into a written Mutual Non-Disclosure Agreement with Sowell Financial that allowed the parties to exchange confidential and proprietary information. As part of its disclosures, Concert says it provided Sowell Financial with a list of its advisors and customers, as well as the advisors' contact information. The FAC goes on to allege that due to time constraints imposed by Fidelity, Concert and Sowell Financial began to transition advisors from Concert to Sowell Financial in September 2016 before the Master Agreement was executed.

The Master Agreement was executed on September 26, 2016 by SVGRP and Sowell Financial. (Dkt. 19-1, FAC, Ex. B). In relevant part, the Master Agreement's "Compensation" clause provides: "In exchange for the Services provided hereunder, [Sowell Financial] shall pay to SVGRP a percentage of fees, commissions, or payments that it receives from [advisors] pursuant to the [Sowell Financial/advisor] agreements entered into [sic] the [advisors] formerly registered with [Concert] as set forth in each Statement of Work attached hereto as Exhibit A." (Id. ¶ 3). The FAC alleges that the referenced Statements of Work meant the prior agreements between Concert and its advisors that, among other things, set out the percentage of fees that would be paid to the advisor and the percentage that Concert retained. (Id. ¶ 19). The FAC further alleges that the prior Concert-advisor agreements were disclosed to defendants and were to be appended to the Master Agreement as each advisor transferred from Concert to Sowell Financial. (Id.). Although not specifically alleged in the FAC, there is no dispute that no Statements of Work were appended to the Master Agreement.

The Master Agreement contains an integration clause that provides:

Entire Agreement; Amendment. This Agreement is intended by the Parties to be the full and final expression of their agreement and shall not be contradicted by evidence of any prior written agreement or any oral agreements or representations. The captions in the Agreement are for reference purposes only. This Agreement may not be amended, modified, altered, or changed in any respect whatsoever except by a further written agreement signed by both Parties. All exhibits and documents referenced by this Agreement are made a part of this Agreement.

(FAC, Ex. B ¶ 11.a.).

Following execution of the Master Agreement, the majority of Concert advisors who used the Fidelity platform transitioned to Sowell Financial. And, Sowell allegedly sent an email blast to all representatives, welcoming them to Sowell Financial and stating: "So 'what's the deal?' Let me be very clear; this was not a merger, acquisition or a buyout. This structure is one that will allow the operations and service team in San Jose to stay intact along with the ongoing development of Omniscient. Under a service agreement, we will utilize the San Jose office to facilitate the services they have been providing you." (FAC ¶ 23). Sowell closed stating, "In short, there are no new systems to learn, you won't lose your data, you don't need to negotiate new contracts, and your contracts won't change." (Id.).

At the same time, Sowell reportedly sent correspondence to his previous advisors, stating: "We are onboarding advisors from a 'beleaguered' competitor, which has provided a tremendous opportunity for Sowell Management Services. At the end of the day, we anticipate tripling our AUM (assets under management) to over 1.5 billion with over 10,000 accounts. . . . This gives us much better negotiating power with our custodians for transactional based pricing as well as asset based pricing. We have already been elevated with Fidelity and TD AmeriTrade to a higher level service teams and relationship managers." (FAC ¶ 24).

SVGRP says it provided back office and technical services to the advisor representatives in September, October, and November 2016; and, for these months, Sowell Financial paid SVGRP what plaintiffs claim was the agreed-upon compensation contemplated by the Master Agreement, i.e., 100% of the fees retained from the advisor representatives (less agreed expenses), pursuant to the advisors' prior contracts with Concert (now being continued with Sowell Financial). (FAC ¶ 25).

By November 14, 2016, plaintiffs say that approximately $700 million in assets and $7 million in annual revenues had been transferred from Concert to Sowell Financial. (Id. ¶ 26).

However, on November 29, 2016, Sowell Financial sent a letter notifying SVGRP and Concert that it was terminating the Master Agreement pursuant to Paragraph 4 of the contract, and advising that "[e]ffective immediately, [Sowell Financial] will no longer accept services from [SVGRP]." (FAC ¶ 27, Ex. D). The letter goes on to state: "Additionally, considering there were no agreed upon terms in place for compensation, the money sent to [SVGRP] for the November Billing was sent in error. Please return these funds immediately to [Sowell Financial]." (Id.) SVGRP alleges that the letter did not comply with the Master Agreement's termination provisions.

Further, plaintiffs allege that, immediately afterward, defendants "engaged in a campaign of disparaging" plaintiffs (and Felipe and Elizabeth Luna), both orally and in writing, with the aim of harming their reputations and luring additional Concert advisors to join Sowell Financial. For example, the FAC alleges that Sowell sent a letter to all of Concert's advisors, falsely telling them that Concert and the Lunas were interfering in Sowell Financial's management and that Fidelity might remove the advisors from the Fidelity platform. (Id. ¶ 46). Sowell also allegedly sent letters to all of Concert's advisors (whether or not they had transferred to Sowell Financial), "falsely claiming that Felipe Luna and Elizabeth Luna breached the agreement with [Sowell Financial] and claimed that Concert was improperly monitoring [Sowell...