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Financial-Advice Firm Has No Duty to Warn Non-Clients of Imposter Posing as Agent—C.A.
Opinion Says Agency Not Obligated to Announce Impersonation of Employee, Defeating Plaintiff’s Attempt to Hold Company Liable for Loss Under Scheme
By a MetNews Staff Writer
Div. Three of the Fourth District Court of Appeal has affirmed an order granting summary judgment in favor of a financial advisory firm in a lawsuit filed by a man who lost his life savings after investing with a person who falsely identified himself as one of the defendant’s agents, saying the company owed no duty to warn non-clients of the possible phishing scheme even though it had received earlier reports of the impersonation.
In an opinion, filed Friday and authored by Acting Presiding Justice Thomas M. Goethals, the court rejected the plaintiff’s assertion that two Financial Industry Regulatory Authority (“FINRA”) regulations impose upon brokerages a duty to warn potential investors of known fraudulent schemes. Justices Joanne Motoike and Martha K. Gooding joined in the opinion.
Specifically, the plaintiff sought to rely on FINRA Rule 4530, which requires brokerage firms to “promptly report” any “written customer complaint involving allegations of theft or misappropriation of funds or securities or of forgery” by the company “after [the organization] knows or should have known” about the claims.
Alternatively, he relies on FINRA Rule 2210, which requires that such firms communicate with the public “based on principles of fair dealing and good faith,…provide a sound basis for evaluating the facts in regard to any particular security,” and not “omit any material fact or qualification if the omission, in light of the context of the material presented, would cause the communications to be misleading.”
Imposter Contact
The dispute arose after plaintiff Mark Harding handed over more than $300,000 to a man identifying himself as “Daniel Cory Payne.” The actual Payne was an agent of defendant Lifetime Financial Inc. from 2018-22.
The imposter, whose true identity is not revealed in the complaint, reached out in February 2020, after Harding’s previous financial company notified its clients that it was planning on ceasing its trading practice.
Representing that Lifetime was taking over the clients of Harding’s former firm, the impersonator convinced the plaintiff to invest his entire retirement savings. Before providing the funds, Harding confirmed, in April 2020, that Payne and Lifetime were registered with the appropriate regulatory authorities.
In September 2020, Harding discovered that the imposter’s email address and phone number were no longer active. He reached out to Lifetime President Randall Luebke, who informed him that the imposter was using a false email address that was not affiliated with the company.
Lifetime did not warn the public nor notify authorities of the possible fraudulent scheme, despite having received at least three reports, in March and April 2020, that a man falsely identifying himself as Payne was contacting non-clients to offer his services on behalf of the company.
In 2021, Harding filed a complaint against Lifetime and an affiliated company, as well as Luebke and Payne. In the operative complaint, the plaintiff asserts causes of action for negligence and negligent supervision, referencing the FINRA Rules as a basis for the duty to warn.
Harding opposed a subsequent defense motion for summary judgment, including a declaration from his securities expert, Mason Dinehart, a FINRA arbitrator. Dinehart opined that Luebke and Payne owed a duty, under existing regulations, to prospective clients to publicly post information about the impersonation on the company’s website and to contact federal regulators.
Orange Superior Court Judge Glenn R. Salter granted the summary judgment motion, finding that Harding had failed to establish that the defendants owed him any duty. Salter reasoned:
“The fundamental problem is that there is no fiduciary relationship [between Harding and Defendants]. Although Payne and his firm would owe a fiduciary duty to his or her customer as to investment decisions, [Harding] was not their customer. And [there is no] authority that holds a fiduciary relationship could arise merely because the imposter used Payne’s name and credentials as a licensed investment advisor to perpetuate the fraud.”
Duty to Report
Goethals wrote that “Harding’s claims against Defendants hinge on whether Defendants owed Harding, a nonclient, a duty to report those inquiries on their website or to notify FINRA that an imposter was using Payne’s name and identity to solicit funds.”
Saying “[w]e have found no statutory or case authority holding that an investment advisor owes a duty to nonclients to post a notice on its website or notify law enforcement that someone has been impersonating the investment advisor,” he turned to the two FINRA Rules.
As to Rule 4530, he noted that a “customer” is defined in the regulations as “any person…with whom the member has engaged, or has sought to engage, in securities activities.” He reasoned:
“[I]n order for Defendants to have had a reporting duty under this rule, they would have had to receive a written complaint which alleged Defendants engaged in theft, misappropriation of funds or securities, or forgery, and that written complaint would have had to come from a person whom Defendants engaged or sought to engage in security activities. That is not what happened here.”
Public Communications
Turning to Rule 2210, he declared “[w]e find nothing in this rule that would impose an affirmative duty on Defendants to warn the general public about a third party impersonator” and “[t]he fact that Harding’s retained experts offered a contrary opinion concerning the import of the FINRA Rules is of no consequence.”
Under these circumstances, he commented:
“In the absence of any existing authority creating a duty for these Defendants to report this imposter, we decline the invitation to create such a duty in this case.”
In a footnote, the jurist said:
“We are sympathetic to Harding’s plight as we recognize that financial scams and identity theft unfortunately are rampant in our society. But…‘the Legislature is best suited’ to investigate and determine whether public policy requires the creation of statutory liability here.”
The case is Harding v. Lifetime Financial Inc., G063109.
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