Man in cuffs - arrested for laundering

The matters before District Judge Linda R. Reade in this case included the plaintiffs’ Motion for Partial Summary Judgment on Count IV against investment advisor Enterprise. This count alleged negligence and engaging in and attempting to engage in money laundering transactions.

Initially, 70 plaintiffs filed a complaint in October 2012 against 13 defendants.  Count I of the Complaint alleged that Enterprise violated the Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. § 1962(c). Count II of the complaint alleged that Enterprise conspired to violate RICO.  Count III alleged a breach of contract against Enterprise, and Count IV of the complaint alleged negligence against Enterprise. Counts 3 and 4 were brought by 41 individuals who maintained self-directed IRAs with Enterprise. The only remaining Defendants in this action were Enterprise and Sigillito, another investment advisor.

As custodian of the accounts, Enterprise mailed customers periodic account statements that purported to show the assets in their IRAs, periodic interest payments and other information. These statements “reinforced the belief that the loans were secure” because the statements falsely showed that the value of the accounts increased with yearly interest payments. Without the fraudulent account statements, the customers would not have made or re-invested their loans. However, Enterprise sent the money to Sigillito, rather than to the agreed-upon destination (Distinctive Properties), and never confirmed if Sigillito ever sent the money to the proper recipient.  Enterprise also misrepresented that the repayment of principal and interest was made directly from Distinctive Properties.  Enterprise never received any repayment directly from Distinctive Properties, but increased the value in the plaintiffs’ accounts with roll-over principal and interest, even when Enterprise never received this income.

In April 2011, the government filed a 22-count indictment against Sigillito and others, charging them with wire fraud, mail fraud, conspiracy to commit mail and wire fraud, and engaging in and attempting to engage in money laundering transactions.

The plaintiffs alleged in Count IV that Enterprise was negligent in providing the agreed-upon services as memorialized in the Custody Agreements.  The plaintiffs specifically claimed that, pursuant to those agreements, Enterprise owed the plaintiffs “the duty to use such skill, prudence and diligence as other IRA Custodians commonly exercise for the safekeeping of the [lenders’] IRA assets.  This includes the duty to prevent prohibited transactions, conflicts of interest, and inside dealings.”

In analyzing the issues in the motions, Judge Reade applied Missouri law to the plaintiffs’ state-law claim in Counts IV, and the parties agreed.  The Custody Agreements also provided that they were to be “governed by the laws of the State of Missouri.”  Judge Reade explained that in Missouri, the elements that must be proven in order for a party to recover for negligence are:

  1. the existence of a legal duty owed to the plaintiff;
  2. the breach of that duty through a negligent act by the defendant;
  3. proximate causation between the breach and the resulting injury; and
  4. resulting damages.

Missouri does not recognize degrees of negligence and, as a result does not distinguish between negligence and gross negligence.When applying Missouri law to a situation involving both negligence and breach of contract, the Eighth Circuit held that, “[u]nder Missouri law, a breach of contract alone does not give rise to a tort. The Missouri courts have recognized a distinction between negligence and nonperformance of a contract obligation.”  The mere failure to complete the actions required by contract does not give rise to a cause of action in tort.  Rather the remedy for such a failure is in contract.  A plaintiff is required to show negligent misfeasance, such as ‘the failure to exercise due care in the performance of contract undertakings, as distinguished from mere failure to complete such undertakings.’”

In the written opinion, the judge quoted other Missouri case law which held that in professional negligence cases, “the specific duty is defined by the profession, itself.”  As a result, Judge Reade reasoned that an expert witness was extremely vital in explaining to the jury what the defendant should or should not have done under the particular circumstances and whether the defendant’s actions “violated the standards of care of the profession” and constituted negligence.  However, Missouri courts also have an exception to this general rule requiring expert testimony in professional negligence cases where the alleged negligence is “clear and palpable.”  In Roberts v. Sokol, (Mo.Ct.App.2011), the Missouri Supreme Court held that “[I]n order to escape the requirement of expert testimony, the alleged negligence or the question of negligence, must be clear and palpable to a jury of laymen.”

Also, in Pedigo v. Roseberry (Mo.1937), that court explained why expert testimony was necessary in some negligence actions:

If laymen are not to be guided on issues requiring peculiar and thorough special training in a science or art beyond the experience and knowledge common to mankind by witnesses possessing the necessary testimonial qualifications, juries will be cast into a river of doubt and must establish an arbitrary standard of their own founded upon conjecture and surmise in their effort to reach certain and sure ground.

Enterprise argued that the court should grant summary judgment in its favor on Count IV because the plaintiffs did not designate an expert witness who would establish the applicable standard of care owed by self-directed IRA custodian banks.  Expert testimony was essential, the defendants argued, to make a submissible claim for negligent conduct by a custodian bank because this “standard of care [is] outside the knowledge of a lay jury.”

Plaintiffs contended that the Custody Agreement, Enterprise’s Policy Manual for the Trust Department, and the Bank Secrecy Act/Anti–Money Laundering Manual established the applicable standard of care in this case.  In addition, they claimed that expert testimony was not required to prove that Enterprise acted negligently because “[a] layperson could easily understand the concept that Enterprise could not transfer funds without written authorization” and “in clear cases[,] expert testimony is unnecessary.”

Unfortunately for the plaintiffs, Judge Reade found no merit in this argument. The plaintiffs lacked any authoritative case law that recognized a duty arising from a company’s internal policies or the Bank Secrecy Act.  In fact, the judge stated that numerous courts had rejected this argument.  The plaintiffs could not rely on Enterprise’s internal policies or the Bank Secrecy Act to establish the standard of care, so they had no evidence to define the relevant standard of care of a reasonably competent IRA custodian.

Plaintiffs insisted that expert testimony was not necessary to establish the standard of care in this case because it was a clear case where expert testimony was unnecessary. The court disagreed and held that the duties owed by an IRA custodian bank were beyond the knowledge of a layperson. This was not a case where the alleged negligence constituted “clear and palpable” negligence, the judge said;  Missouri law required expert testimony to establish the applicable standard of care in a negligence claim such as this one.  Without establishing the applicable standard of care at trial, the court found that there was no genuine issue of material fact as to Count IV.  As a result, the court granted Enterprise’s motion to grant summary judgment in Enterprise’s favor on Count IV.

In light of that finding, the court found that it was not necessary to address the parties’ specific arguments with respect to the plaintiffs’ motion.  Because the court granted summary judgment in Enterprise’s favor on Count IV, it denied the plaintiffs’ motion on Count IV.

Rosemann v. Sigillito, Slip Copy, 2013 WL 3457057 (E.D.Mo. July 09, 2013)

By: Kurt Mattson, J.D., LLM