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Lillie v. Stanford Trust Co.

Court of Appeals of Louisiana, First Circuit

November 1, 2017

TROY LILLIE, LEAH FARR, KENNETH DOUGHERTY, CHARLES WHITE, MARTHA JEAN WITMER, SHARON WITMER, OLIVIA SUE WARNOCK, CLYDE J. CHISHOLM, RONALD MCMORRIS, ARTHUR ORDOYNE, WILLIAM DAWSON, TERRY TULLIS, JAMES STEGALL, ANTHONY VENTRELLA, ROBERT SMITH, THOMAS SLAUGHTER, LARRY PERKINS, WILLIAM PHILLIPS, CHARLES HART, RICHARD FEUCHT, LONNIE ORDOYNE, ARTHUR WAXLEY, DARRELL COURVILLE, MERRILL LAPLANTE, JAMES BROWN, IRA CAUSEY, JERRY BURRIS, JACQUELINEMILLET, LOUIS MIER, MAMIE BAUMANN, CHARLES SANCHEZ, JOSEPH CHUSTZ, JR., ROBERT BUSH, BOBBY NIX, CLAUDE MARQUETTE, GWEN FABRE, ROBERT SCHWENDIMANN, WANDA BEVIS, TERRY TARVER, MARCEL DUMESTRE, RONALD VALENTINE, BENNIE O'REAR, JULIE SAVOY, LAURA LEE, DENNIS KIRBY, BILLIE RUTH MCMORRIS, LARRY SMITH, KENNETH WILKEWITZ, MURPHY BUELL, KERRY KLING, LYNN GILDERSLEEVE MICHELLI, WILLA MAE GILDERSLEEVE, ANITA ELLEN CARTER, FRED DEMAREST, NANCY GILL, LINDA BOYD, VIRGINIA BUSCHEME, ROBERT GILDERSLEEVE, WALTER STONE, VIRGINIA MCMORRIS, CAROL STEGALL, GARY MAGEE, MONTYPERKINS, JOAN FEUCHT, KATHLEEN MIER, MAMIE SANCHEZ, MARGARET S. NIX, MARGARET DUMESTRE, CLAUDIA O'REAR, GORDON C. GILL, JOHN BUSCHEME, AND CHARLIE L. MASSEY, THOMAS E. BOWDEN, G. KENDALL FORBES, DEBORAH S. FORBES, WILLIAM BRUCE JOHNSON, TERENCE BEVEN, M.D., RALPH D. D'AMORE, DANIEL P. LANDRY, RONALD R. MARSTON, RODNEY P. STARKEY, STEPHEN WILSON, JEANNE ANNE MAYHALL, JOHN WADE, LYNN J. PHILIPPE, LISA SCRANTZ
v.
STANFORD TRUST COMPANY, STATE OF LOUISIANA, OFFICE OF FINANCIAL INSTITUTIONS, AND SEI INVESTMENTS COMPANY

         Appealed from the Nineteenth Judicial District Court In and for the Parish of East Baton Rouge State of Louisiana Docket Number 581, 670 Honorable R. Michael Caldwell, Judge.

          Phillip W. Preis Charles M. Gordon, Jr. Crystal D. Burkhalter Caroline P. Graham Baton Rouge, LA, Counsel for Plaintiffs/ Appellees Troy Lillie, et al.

          Jeff Landry Attorney General David M. Latham Keary L. Everitt Marie G. Everitt Special Assistant Attorneys General New Orleans, LA, Counsel for Defendant/ Appellant State of Louisiana through the Office of Financial Institutions.

          Robert E. Kerrigan, Jr. Duris L. Holmes New Orleans, LA, Counsel for Defendants/ Appellees SEI Investments Company and SEI Private Trust Company.

          BEFORE: WHIPPLE, C.J., GUIDRY, AND McCLENDON, JJ.

          GUIDRY, J.

         A state agency appeals a trial court's judgment certifying as a class action the plaintiffs' negligence claims premised on allegations that the agency's failure to properly perform its regulatory duties contributed to the injuries they sustained as a result of a fraudulent investment scheme perpetrated by an individual affiliated with a regulated entity.

         FACTS AND PROCEDURAL HISTORY

         Pursuant to a federal securities action initiated by the United States Securities and Exchange Commission ("SEC"), the United States District Court for the Northern District of Texas took possession of the "assets, monies, securities, properties, real and personal, tangible and intangible, of whatever kind and description, wherever located" of Stanford International Bank Limited (SIB), Robert Allen Stanford, and other related defendants[1] and issued a temporary restraining order freezing their assets on February 16, 2009.[2] The Eastern Caribbean Supreme Court, in the High Court of Justice of Antigua and Barbuda later liquidated and dissolved SIB, a foreign bank chartered in Antigua, based on the finding that SIB had acted in contravention of the International Business Corporations Act, Cap. 222 of the laws of Antigua and Barbuda. The nature and extent of Mr. Stanford's conduct that led to the aforementioned court actions is detailed in the following account from Mr. Stanford's criminal prosecution:

After a failed fitness-club venture in Texas, Robert Allen Stanford eventually rebranded himself as a banker in the Caribbean, forming Guardian International Bank, Ltd., ("Guardian"), on the island of Montserrat. Guardian advertised certificates of deposit ("CDs")[3] averaging higher returns than those offered by banks in the United States, and Guardian's marketing materials and annual reports assured its customers that the bank pursued sound, conservative investment strategies and subjected itself to rigorous independent audits. In 1990, however, Montserrat's Ministry of Finance and Economic Development notified Stanford of its intent to revoke Guardian's banking license, citing various regulatory violations. In response, Stanford relocated the bank to the nearby island of Antigua, renaming it Stanford International Bank, Ltd. ("SIB").
Like its predecessor, SIB offered higher-return CDs supported by detailed marketing materials and annual reports showing steady growth. Stanford then established the Stanford Group Company ("SGC"), a broker-dealer and investment advisor headquartered in Houston, Texas, to expand the SIB CD market into the United States. Stanford's financial empire grew rapidly over the following years while Stanford spent lavishly, purchasing boats, mansions, and personal aircraft and sponsoring high-dollar cricket tournaments.
During the financial crisis of 2008, Stanford's investors sought CD redemptions in large numbers while new sales slowed down. SIB was unable to pay the redemptions. In February of 2009, a court-appointed receiver took control of Stanford's companies. At the time, SIB owed billions of dollars to its investors.
By 2008, Stanford was bilking approximately $1 million dollars per day from investors to finance his personal endeavors while simultaneously providing false assurances regarding the strength and solvency of the organization. Stanford's bank's inability to repay its investors in late 2008 and early 2009 promptly led to the collapse and exposure of his fraudulent financial empire.

United States v. Stanford, 805 F.3d 557, 563-64 (5th Cir. 2015), cert, denied, __U.S.__, 137 S.Ct. 491, 196 L.Ed.2d 402 (2016).

         On August 20, 2009, eighty-six individuals, who claimed to have heavily invested in SIB CDs and consequently suffered substantial financial losses, filed a class action lawsuit against the Stanford Trust Company ("Stanford Trust"), SEI Investments Company ("SEI"), [4] and the State of Louisiana, Office of Financial Institutions ("OFI") for alleged breaches of fiduciary, statutory, and contractual duties. In the petition, plaintiffs claimed that investment advisors, working as agents for Stanford Trust, induced the plaintiffs to invest either directly in SIB CDs held in trust with Stanford Trust as the trustee or to designate Stanford Trust as the custodian of their IRA accounts, whereby Stanford Trust converted the funds in the IRA accounts to SIB CDs.

         With respect to the OFI, plaintiffs asserted that the agency wrongly allowed the SIB CDs to be marketed and sold to Stanford Trust without proper examination of the risk profile of the CDs or assurance that such information was being disclosed to investors. Moreover, despite examinations that eventually caused the OFI to first restrict the sales of SIB CDs, and later order the removal of SIB CDs from Stanford Trust, plaintiffs alleged that the OFI failed to disclose the perceived risks that prompted its actions to investors who purchased or renewed SIB CDs from January 1, 2007 to February 13, 2009, or to suspend the sale of the CDs in the state after discovering the risk associated with the CDs.

         With respect to the other two defendants, SEI and the Stanford Trust, the plaintiffs noted that the entities had entered into an agreement whereby SEI would perform the trust functions of accounting and reporting of investments in SIB CDs; however, the plaintiffs claimed that the companies failed to properly determine and report the value of the SIB CDs, and in doing so, engaged in unfair trade practices and committed violations of Louisiana securities law.[5]

         In response to the plaintiffs' petition, the OFI initially filed exceptions urging the objections of prematurity and no cause of action, which were overruled by the trial court. The OFI then filed an answer generally denying liability. The OFI also filed a writ application seeking supervisory review of the trial court's overruling of its exceptions, which was subsequently denied by this court. Lillie v. Stanford Trust Company, 10-0075 (La.App. 1st Cir. 4/12/10) (unpublished writ action). Similarly, SEI filed a peremptory exception urging the objection of no cause of action as to the plaintiffs' claims of unfair trade practices and violations of Louisiana securities law. The trial court sustained the exception as to the plaintiffs' claims of unfair trade practices, but overruled the exception as to the plaintiffs' claims premised on Louisiana securities law. SEI then answered the plaintiffs' petitions to generally deny liability as well.

         On March 5, 2010, the plaintiffs filed a motion for class certification and to conduct discovery on class certification issues. The trial court granted the motion to conduct discovery and scheduled the motion for class certification for a contradictory hearing. Thereafter, a motion was filed to voluntarily dismiss Stanford Trust from the litigation without prejudice, which the trial court granted on March 24, 2010. Hence, the matter of class certification proceeded against SEI and the OFI only.

         At the class certification hearing, the plaintiffs offered the testimony of five of the named plaintiffs as potential class representatives. SEI introduced into evidence the depositions of two of those plaintiffs, as well as twelve other plaintiffs.[6] Additionally, the trial court heard testimony from the president of the SEI Private Trust Company, Al Delpizzo, and Harry Stansbury, who was offered as an expert witness on Louisiana Securities Law. The trial court also considered other documentary evidence offered by the parties. Following the two-day hearing, the trial court took the matter under advisement, and for reasons pronounced on December 5, 2012, the trial court certified the plaintiffs' lawsuit against SEI and the OFI as a class action consisting of: (1) persons who purchased SIB CDs in Louisiana between January 1, 2007 and February 13, 2009; (2) persons who renewed any SIB CD in Louisiana between January 1, 2007 and February 13, 2009; and (3) persons for whom Stanford Trust purchased SIB CDs in Louisiana between January 1, 2007 and February 13, 2009. The trial court later signed a judgment and an amended judgment in conformity with its reasons on December 17, 2012 and January 16, 2013, respectively.[7]

         SEI and the OFI both filed motions to devolutively appeal the December 17, 2012 judgment, as amended, which were granted by the trial court on February 5 and 8, 2013, respectively.[8] However, on February 1, 2013, the plaintiffs filed a "First Amended and Restated Class Action Petition, " wherein three new plaintiffs were named and seven insurance companies, as insurers of SEI, were added as defendants to the lawsuit.[9] Subsequently, six of the newly added insurance defendants filed a motion to remove the lawsuit to the United States District Court for the Middle District of Louisiana. Following the removal, the plaintiffs filed a motion to remand the entire action to state court. The OFI filed a separate motion with the federal court to sever the claims against it and to remand those claims to state court, citing its immunity from suit in federal court under the Eleventh Amendment as the basis for remand. See Lillie v. Stanford Trust Company, CIV.A. 13-150-JJB-RLB, 2013 WL 5524865, at * 1-2 (M.D. La. Oct. 3, 2013).

         Before the United States District Court for the Middle District of Louisiana could act on the motions filed by the plaintiffs and the OFI, the United States Judicial Panel on Multidistrict Litigation ("MDL Panel") issued an order transferring the plaintiffs' claims against SEI and its insurers from the Middle District of Louisiana to the United States District Court for the Northern District of Texas, where other Stanford-related securities litigation was pending. As for the plaintiffs' claims against the OFI, the MDL Panel separated those claims and maintained them in the United States District Court for the Middle District of Louisiana, because it determined that those claims focused on "factual issues unique to OFI, with respect to the conduct of its examiners and nature and scope of its regulatory authority." Lillie, 2013 WL 5524865, at *2. As a consequence of the actions of the MDL panel, the United States District Court for the Middle District of Louisiana denied the OFFs request to sever as moot, but granted the OFI's motion to remand. Lillie, 2013 WL 5524865, at *1.

         Consequently, SEI has abandoned its devolutive appeal of the instant class certification judgment and is not a party to the appeal pending before us. However, the plaintiffs have filed an answer to the OFI's appeal seeking review of the trial court's decision to exclude from the class those persons who made a decision not to redeem their SIB CDs prior to maturity between January 1, 2007 and February 13, 2009.

         ISSUES PRESENTED FOR REVIEW

         On appeal, the OFI raises the following issues regarding the trial court's class certification determinations:

1. The Plaintiffs failed to set forth any allegation in any pleading concerning the elements required to prove the application of fraud on the market theory and Plaintiffs produced no evidence at the class certification hearing to support the trial court's reliance on the presumption created by that theory. Thus[, ] the question for review is whether it was proper for the trial court to find that issues common to the class predominate over individual issues?
2. In a case where plaintiffs set forth vastly different allegations covering different time periods, against three separate and distinct original defendants, considering different theories of law (as set forth in Counts One-Seven of the Original Petition) is it proper for ...

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