Tuesday, May 22, 2018
Cynthia Boyd; Thomas Flanders v. Kingdom Trust Company; PENSCO Trust Company; John Does 1-25, Case no. 2017-1336
U.S. District Court, Southern District of Ohio
Disciplinary Counsel v. Robert M. Owens, Case no. 2018-0257
Delaware County
Mahoning County Bar Association v. Michael V. Sciortino, Case no. 2018-0259
Mahoning County
Pamela Portee et al. v. Cleveland Clinic Foundation et al., Case no. 2017-0616
Eighth District Court of Appeals (Cuyahoga County)
Can Investors Fleeced in Ponzi Scheme Recover from Trust Companies?
Cynthia Boyd; Thomas Flanders v. Kingdom Trust Company; PENSCO Trust Company; John Does 1-25, Case no. 2017-1336
U.S. District Court, Southern District of Ohio
ISSUE: Does R.C. 1707.43 impose joint and several liability on the custodian of a self-directed IRA, who purchased an illegal security on behalf of, and at the direction of, the owner of the self-directed IRA?
BACKGROUND:
Cynthia Boyd and Thomas Flanders are victims of a Ponzi scheme operated by William Apostelos of Warren County, and are representatives of a class-action lawsuit against Apostelos filed in U.S. District Court for the Southern District of Ohio. Apostelos persuaded Boyd, Flanders, and the other investors to open self-directed individual retirement accounts (IRAs) with one or more trust companies, including PENSCO and Kingdom Trust.
IRAs were authorized by federal law in 1974, and traditional IRAs are offered by financial institutions that typically invest in easily tracked and valued assets such as publicly traded stocks, bonds, and mutual funds. Because the law doesn’t limit the types of investments that can be held in an IRA, companies entered the market agreeing to serve as the “custodians” of “self-directed IRAs.” Self-directed IRAs could invest in real estate, precious metals, livestock, and other assets. The IRA owner directs the custodian to purchase assets to hold in the IRA, but the custodian doesn’t evaluate the risk of the asset and charges a lower fee to manage the IRA than a traditional financial institution.
Once the self-directed IRA accounts were established, Apostelos would either have the investors request that the trust companies purchase his illegal securities, or would have the investors execute powers-of- attorney giving him the ability to request that the trusts purchase the illegal securities. Other than purchasing the securities, Boyd and Flanders don’t allege the trust companies knew Apostelos was attempting to defraud investors or were involved in the Ponzi scheme.
Investors Sue Trusts
The investors sued the trust companies claiming that the “Ohio Securities Act” imposed liability on the trust companies for having “participated in or aided the seller in any way” in selling the fraudulent securities. The trusts asked the federal district court to dismiss the case at the initial stages, citing R.C. 1707.43. They argued that the law shields trusts from liability when the financial institutions are engaged in “normal commercial banking activities.” The court found that because the investors hadn’t alleged the trusts were engaged in anything other than normal banking activities, they couldn’t be held liable for the money the investors lost in Apostelos’ Ponzi scheme.
The investors appealed to the Sixth U.S. Circuit Court of Appeals, arguing the district court dismissed the case at such an early stage that they couldn’t conduct discovery to learn more about the trusts’ involvement with Apostelos. They also argued that while Ohio courts have found R.C. 1707.43 to have exempted “financial institutions” from liability when conducting normal banking activities, the law has never been applied to a trust company. A three-member panel of the Sixth Circuit determined this question was unsettled in Ohio and that the panel shouldn’t move ahead with the appeal until giving the Ohio Supreme Court the opportunity to decide whether the trust companies can be held liable under state law. The Sixth Circuit submitted the question to the Supreme Court, which agreed to consider the legal question.
Trusts Were Involved and Liable, Investors Maintain
Boyd and Flanders argue that the trusts were far more involved in the transaction than they admit, and that the sale of illegal securities couldn’t have happened without the trusts’ “participation in and execution of” the sale of illegal securities. They maintain that the Ohio Securities Act doesn’t limit the liability of the illegal sale of securities to the primary actor, such as Apostelos, but also includes any secondary actor that assists the primary actor. They point to a provision of R.C. 1707.43(A), which states: “Every person that has participated in or aided the seller in any way in making such sale or contract for sale, are jointly and severally liable to the purchaser....” They point to decisions by other courts that found the secondary actor doesn’t need to commit fraud to be liable, but only needs to participate in or aid in the sale to be held liable.
The investors note the trusts’ defense is that liability only applies to those who assist the seller in any way of making a sale. The trusts claim they are involved in the purchase of the asset on behalf of the investor, which is the opposite side of the sales transaction.
The investors point to a 2006 U.S. District Court decision (Hardin v. Reliance Trust Co.) where the court found the trust in Hardin acted almost exactly like the trusts in this case and was held liable. The investors note in their brief that the trust in Hardin made the same argument as Kingdom Trust and PENSCO, but the court rejected it, finding the law didn’t limit liability to those only on the seller side.
“Being involved in and facilitating the transaction by actually purchasing the illegal securities on behalf of the buyer qualifies as aiding or participating in the sale of the security in any way,” the brief states.
Custodian Plays No Role in Sale, Trusts Argue
Kingdom Trust and PENSCO filed separate briefs that generally make the same argument. Kingdom Trusts notes the Securities and Exchange Commission issued an “Investor Alert” warning investors about the risks of self-directed IRAs that included warnings of potential for fraudulent schemes and that the custodians and trustees have limited duties and “generally will not evaluate the quality or legitimacy of an investment or its promoters.” Kingdom Trust describes its services as acting as a passive custodian that receives a fee for limited administrative tasks, including recordkeeping, making required reports to the IRS, and executing investments as directed by its customers.
The trusts argue that Boyd and Flanders describe the trusts as the “purchasers” in their complaint. R.C. 1707.43(A) indicates the seller and those who aided in the illegal sale are liable to the “purchaser,” and because the investors describe the trusts as entities that helped the investor with the purchase, they are not liable.
The trusts note that R.C. 1707.43(A) requires a person to be actively involved in the sale or helping, assisting, promoting, or encouraging the sale. They note that in other cases in which financial institutions were held liable, those businesses were active in the transactions by setting up meetings, marketing the broker, promoting the sale of investments, and other similar acts. The trusts argue in this case they did nothing to assist Apostelos other than purchasing from him the securities the investors directed them to purchase.
“Indeed, Petitioners fail to cite a single case imposing liability under R.C.1707.43(A) on a defendant that did not participate in the issuance, offer, solicitation or marketing of a security allegedly sold in violation of the Ohio Securities Act,” Kingdom Trust’s brief states.
Friend-of-the-Court Briefs
An amicus curiae brief supporting the trusts’ position has been submitted by Retirement Industry Trust Association.
The Public Investors Arbitration Bar Association has filed an amicus brief that doesn’t support either party, but urges the Court to adopt a position that if a custodian of a self-directed IRA goes beyond “normal commercial activity” and assists in fraud, then the custodian can be held liable.
- Dan Trevas
Docket entries, memoranda, briefs (including amicus briefs), and other information about this case may be accessed through the case docket.
Contacts
Representing Cynthia Boyd and Thomas Flanders: Toby Henderson, 937.222.2500
Representing Kingdom Trust Company: Frances Goins, 216.583.7000
Representing PENSCO Trust Company: Caroline Gentry, 937.449.6748
Attorney Discipline
Disciplinary Counsel v. Robert M. Owens, Case no. 2018-0257
Delaware County
The Ohio Board of Professional Conduct recommends to the Ohio Supreme Court that Delaware attorney Robert M. Owens be suspended from practicing law for six months. The board’s proposed sanction stems from Owens’ handling of a payment of a client’s overdue spousal support to keep the client out of jail.
Judge Orders Man Jailed Until Spousal Support Paid
Owens represented Edward Bittner in a divorce from his wife, Dolores, in Delaware County. The final divorce decree, issued in November 2012, required Edward to pay $8,000 per month in spousal support for 12 years.
About a year later, Dolores filed a motion for contempt stating that Edward hadn’t paid more than $26,000 in spousal support. After several continuances and a hearing before a magistrate, a judge concluded in February 2015 that Edward was nearly $61,000 behind on his spousal support payments. The judge ordered Edward to serve 30 days in jail unless he brought his payments up to date within 30 days.
The decision was appealed and eventually returned to the common pleas court where, on Friday, July 29, 2016, the judge ordered Edward to immediately serve 30 days in jail, adding that Edward could be released if he paid his ex-wife $58,242.93 in overdue spousal support. After the hearing, Edward told Owens that his new wife, Yulia Nedelko, would wire that amount of money to the attorneys’ client trust account (IOLTA) to obtain his release from jail.
Owens went to his bank that day, but found that Nedelko hadn’t yet wired the money into his account. The professional conduct board determined that Owens had $79,070 in his IOLTA account, and $73,918 of that amount was being held in trust for 19 other clients. However, Owens obtained a check drawn on the account for $58,242.93 to pay Edward’s spousal support. Owens gave the check to the Delaware County Child Support Enforcement Agency (CSEA), which handles spousal, as well as child, support payments, and took the receipt to the court. Edward was released from jail.
On Monday, Aug. 1, Nedelko, having not wired money, wrote a check payable to Owens and overnighted it to him for Tuesday delivery. Owens stopped payment on the check he had given to CSEA, and went to the agency to give them Nedelko’s check as a replacement. He had signed over Nedelko’s check to the payment processor, but the agency said it couldn’t accept a check that wasn’t directly payable to the organization. Owens didn’t tell CSEA staff that he had stopped payment on the first check.
The agency director contacted Owens soon after because the first check from his IOLTA account was returned due to the stop-payment order. The agency eventually received a check directly from Nedelko. The director said she didn’t know when it was received, but it was processed on Sept. 16.
Board Recommends Six-Month Suspension for Misconduct
The professional conduct board agreed with its panel that reviewed the case that Owens violated three rules governing Ohio attorneys. The board concluded that Owens misrepresented to the court and the CSEA that Edward had paid his overdue spousal support with the July 29 check, even though Owens knew the money hadn’t been received. Owens placed the funds of 19 clients “in jeopardy for the sole purpose of having Edward released from jail” and participated in actions that deprived Dolores of overdue spousal support, the board report to the Court stated.
After reviewing aggravating factors and mitigating circumstances, the board recommended that Owens receive a six-month suspension and complete a two-hour continuing legal education course on IOLTA compliance as a condition of reinstatement.
Attorney Insists No Misconduct Occurred
Owens, who is representing himself, objects to the board’s factual findings, legal conclusions, and proposed sanction.
The attorney states that he expected Nedelko’s funds to be deposited on July 29 in his IOLTA account “at any moment” and that he explained the situation to CSEA staff. He said CSEA told him the check wouldn’t be processed anyway until the following Wednesday. When the money hadn’t been deposited on Monday into the attorney’s IOLTA account, Owens maintains that he contacted Edward and told him the funds must be wired immediately into the account. But Edward and Nedelko mailed a check, which added to the delay for Dolores because CSEA wouldn’t accept a third-party check. Owens adds that Nedelko’s check made payable directly to CSEA was dated Aug. 19, received by the agency on Aug. 21 or 22, but not processed until Sept. 16.
Given the time it would take CSEA to process the first check from his IOLTA, Owens argues that his clients’ funds were never in jeopardy. He testified at the hearing that he told CSEA he had stopped payment on the first check and contends that the Office of Disciplinary Counsel, which submitted the disciplinary complaint to the board, has offered no evidence showing that he intended to mislead the court or the CSEA.
Overall, Owens concludes that the board’s determinations aren’t supported by clear and convincing evidence and that the case should be dismissed. However, if the Supreme Court doesn’t dismiss the matter, he asks for the lesser sanction of a public reprimand because the “payment snafus” were an isolated incident in his legal career that resulted in “little or no harm.”
Disciplinary Counsel Offers Different Perspective
The disciplinary counsel responds that Owens is asking the Court to believe his version of events over the credibility determinations made by the board’s panel that heard the matter. Owens floated his other clients’ funds to obtain Edward’s release from jail – an action the disciplinary counsel describes as “reckless.” Knowing that the funds hadn’t been deposited on Monday, Aug. 1, Owens also failed to disclose to the court that Edward hadn’t paid any of his long-overdue spousal support and that he had secured Edward’s release with an invalid receipt of payment, the disciplinary counsel argues.
In its 35-page answer to the Owens’ objections, the disciplinary counsel details the evidence it presented to support the misconduct allegations. The office notes that Edward was years behind on spousal support and, after being sent to jail for non-payment, was released within hours without paying any of what he owed, in direct violation of the court’s order. Dolores incurred additional attorney fees to ask the court to impose the sentence and deal with the further lack of payment. Contrary to Owens’ view, Dolores was harmed, the disciplinary counsel maintains. The office also asserts that Owens has been misleading and hasn’t acknowledged his misconduct, and it supports a six-month suspension for the attorney.
- Kathleen Maloney
Docket entries, memoranda, briefs (including amicus briefs), and other information about this case may be accessed through the case docket.
Contacts
Robert M. Owens, pro se: 740.368.0008
Representing the Office of Disciplinary Counsel: Karen Osmond, 614.461.0256
Attorney Discipline
Mahoning County Bar Association v. Michael V. Sciortino, Case no. 2018-0259
Mahoning County
The Board of Professional Conduct recommends that the Ohio Supreme Court indefinitely suspend from practicing law the former Mahoning County auditor who was indicted on 96 charges, mostly related to an influence-peddling scandal that led to the criminal conviction of prominent public officials.
Michael V. Sciortino doesn’t contest the recommendation to indefinitely suspend him for his role in what was known as the “Oakhill” corruption scandal. Sciortino held the county auditor’s post from his appointment in 2005 until the end of 2014 when he lost his re-election bid. As part of his felony sentence plea agreement, Sciortino agreed to place himself on inactive status as an Ohio lawyer while he served his community control sanctions. The Court also imposed an interim felony suspension in April 2016.
The Mahoning County Bar Association filed a complaint with the professional conduct board based on Sciortino’s conviction. The parties stipulated that Sciortino committed four violations of the rule barring lawyers from committing an illegal act that adversely reflects on the lawyer’s honesty and trustworthiness, and one violation of engaging in conduct involving dishonest, fraud, deceit, or misrepresentation.
Charges Stem from Attempt to Relocate County Agency
The Mahoning County Commissioners leased space in Garland Plaza, owned by the Carfaro Company, to house the offices of the county department of job and family services (JFS). At the time Sciortino was appointed auditor in 2005, the office space lease had lapsed, the county was proceeding with a month-to-month lease, and the commissioners were discussing moving the JFS offices. In 2006, the commissioners voted to acquire the former Southside Hospital on Oakhill Avenue in Youngstown to use as a county office building. The local organization that owned the building was struggling to operate and filed for bankruptcy in 2006.
Sciortino objected to the commissioners’ attempts to purchase the building, indicating the liens on the Oakhill property would be a significant burden on the county. The commissioners voted to assume $430,000 in debt owed by the current operators to the state. Sciortino and two other county officials asked the bankruptcy judge to block the sale, but the judge authorized it, and the county purchased the property. Sciortino refused to issue a warrant authorizing the commissioners to make the payment.
Mahoning County Prosecutor Paul Gains filed a writ of mandamus with the Ohio Supreme Court seeking to compel Sciortino to make the payment. In the meantime, a company owned by Anthony and John J. Carfaro filed a taxpayer lawsuit attempting to rescind the county’s purchase of Oakhill and to keep JFS at their Garland Plaza property. The Carfaros then filed a breach of contract claim against the county, seeking $1 million in renovations and repairs for the time JFS was a Garland Plaza tenant. Gains concluded from the litigation that Sciortino was working in concert with the Carfaros to defeat the Oakhill purchase.
Prosecutor Pursues Auditor
Prosecutor Gains began to pursue Sciortino, writing a letter of complaint to the Ohio Ethics Commission and convening a grand jury in which he subpoenaed several individuals including Sciortino. The investigation eventually led to a 2010 indictment against Sciortino, other public officials, members of the Carfaro family, and the county JFS former director.
Objections to the indictment in Mahoning County derailed immediate action, but in 2014, a Cuyahoga County grand jury indicted Sciortino on 71 counts, including tampering with records, perjury, money laundering, bribery, and receiving improper compensation. A year later, a Mahoning County grand jury issued 25 charges against Sciortino, including 21 counts of unauthorized use of government property.
Sciortino agreed to plead guilty to three charges in Cuyahoga County that resulted in a seven-year prohibition against holding public office along with three years of community control. He pleaded guilty to two counts in Mahoning County and received two years of community control, including attendance of three Alcoholics Anonymous (AA) or similar group, meetings a week.
Panel Recommends Indefinite Suspension
The panel that reviewed the disciplinary case noted that the Supreme Court has held lawyers acting as public officials to a higher standard than others. In cases where lawyers have pleaded guilty to felony charges, indefinite suspensions have been imposed. The bar association recommended an indefinite suspension with credit for time served for the interim felony suspension. Sciortino proposed he receive a two-year suspension, with six months stayed, and credit for time served.
The panel determined that Sciortino doesn’t present a risk to the public as long as he doesn’t abuse alcohol. It recommended he be indefinitely suspended, and that to be reinstated, he must:
- Complete all his probation and community control terms
- Regularly attend AA meetings and present proof of his attendance
- Be evaluated by the Ohio Lawyers Assistance Program (OLAP) and enter into an OLAP contract, if appropriate, and remain in compliance with any terms imposed by OLAP.
- Complete sufficient continuing legal education
- Not commit any further misconduct.
The board adopted the recommendation and proposes the Supreme Court adopts it.
Sciortino Objects to OLAP Requirment
Sciortino doesn’t object to the board’s findings, but notes that he has been actively participating in alcohol treatment since 2014 and shouldn’t be subjected to an OLAP contract that would direct his care from outside of Mahoning County. Sciortino’s brief states he has no complaints about the OLAP program, but believes a more effective treatment program would be one where he reports to a local monitor. He has recommended that attorney William S. Fowler be the monitor and suspects the bar association wouldn’t object to the appointment.
Bar Association Not Arguing Case
The bar association didn’t file a brief in the case and has forfeited its opportunity to present oral arguments in the case.
- Dan Trevas
Docket entries, memoranda, briefs (including amicus briefs), and other information about this case may be accessed through the case docket.
Contacts
Representing Michael Sciortino: John Juhasz, 330.758.7700
Was Medical Malpractice Lawsuit Originally Filed in Indiana Submitted Too Late in Ohio?
Pamela Portee et al. v. Cleveland Clinic Foundation et al., Case no. 2017-0616
Eighth District Court of Appeals (Cuyahoga County)
ISSUE: Does Ohio’s “savings statute,” R.C. 2305.19, permit a lawsuit that was filed and dismissed in a federal court located in another state to be refiled in an Ohio state court?
BACKGROUND:
Pamela Portee, an Indiana resident, traveled to Cleveland to have elbow surgery on Oct. 3, 2012, at the Cleveland Clinic. She underwent a second surgery on May 8, 2013.
Portee and her husband, Daniel, sued the Cleveland Clinic Foundation and two doctors, alleging that a nerve in her arm was severed during the first surgery, requiring the second procedure. She filed the medical malpractice lawsuit on Oct. 2, 2013, in a federal court located in Indiana. The clinic and the doctors asked the federal court to dismiss the case, arguing that the court didn’t have jurisdiction in the matter. The court agreed, dismissing the lawsuit on July 28, 2014, because the clinic and the doctors didn’t have sufficient contacts in Indiana for the federal court to have authority to consider the case.
On July 17, 2015, the Portees filed the medical malpractice suit against the clinic and the doctors in Cuyahoga County Common Pleas Court. The clinic defendants filed a motion for summary judgment, contending that the claims were made after the one-year statute of limitations had passed. The court granted the motion and dismissed the case in June 2016.
Portee appealed to the Eighth District Court of Appeals, which reversed the trial court’s decision and found that the Portees filed the claims within the appropriate time frame under R.C. 2305.19 after the federal court dismissed the suit. The clinic and the doctors appealed to the Ohio Supreme Court, which agreed to the review the case.
Savings Statute Applies to Lawsuits Filed in Ohio Only, Clinic Argues
The clinic notes that the lawsuit filed in Ohio in 2015 was past the one-year statute of limitations unless it was “saved” by R.C. 2305.19. The statute reads:
“(A) In any action that is commenced or attempted to be commenced, if in due time a judgment for the plaintiff is reversed or if the plaintiff fails otherwise than upon the merits, the plaintiff or, if the plaintiff dies and the cause of action survives, the plaintiff's representative may commence a new action within one year after the date of the reversal of the judgment or the plaintiff’s failure otherwise than upon the merits or within the period of the original applicable statute of limitations, whichever occurs later. This division applies to any claim asserted in any pleading by a defendant.”
In Howard v. Allen (1972), the Ohio Supreme Court ruled that R.C. 2305.19 “is not applicable to actions commenced or attempted to be commenced in foreign states” and that “[s]uits must be brought in Ohio before the Ohio statute has run.” The Court also concluded in Howard that court rules for civil cases in the state limit the application of the statute “to actions before the courts of this state, absent an express provision to the contrary.”
The Portees and the Eighth District cite the Ohio Supreme Court’s later ruling in Vaccariello v. Smith & Nephew Richards, Inc. (2002) to support their position. In Vaccariello, the Court concluded that the “filing of a class action, whether in Ohio or the federal court system, tolls the statute of limitations as to all asserted members of the class who would have been parties had the suit been permitted to continue as a class action.” The clinic argues, however, that Vaccariello stops the statute of limitations from running only in class-action lawsuits.
The clinic also notes that the Eighth District incorrectly drew a distinction between Howard and the Portees’ case because this case was originally filed in federal court. The clinic counters, though, that other Ohio appeals courts have ruled that R.C. 2305.19 can’t “save” a lawsuit filed in another state, regardless of the type of court in which the case was filed.
Savings Statute Applies to Cases First Made in Federal Courts, Couple Maintains
In the Portees’ view, R.C. 2305.19 can be used to restart the statute of limitations for lawsuits initially filed in federal courts and dismissed for reasons other than on the merits of the case. Their case was dismissed by the Indiana federal court based on jurisdictional issues, not on its merits, and they had one year from the dismissal date in July 2014 to file the medical malpractice case in Cuyahoga County, the Portees contend.
They maintain that Vaccariello supports their positionbecause it involved federal courts and explicitly stated that the ruling modified Howard. In addition, the Ohio Supreme Court’s 2002 decision in Osborne v. AK Steel/Armco Steel Co. also applies to this case, the Portees argue. In Osborne, the Court ruled that an age discrimination claim that was filed but dismissed in federal court restarted the timeframe for filing suit in state court under R.C. 2305.19.
“The Appellants would have this Court read Howard and its progeny and then cover its eyes and ears to all other Ohio case law,” the brief to the Court states.
The Portees add that in the 46 years since Howard, three of the five other states the Court cited in that decision now allow plaintiffs to refile lawsuits in their state under their specific savings statutes when the original suit was filed in “a foreign state.” That interpretation is important because it gives litigants the opportunity to have their cases heard on the merits, the Portees conclude.
Association Backs Portees’ Position
The Ohio Association for Justice has filed an amicus brief supporting the Portees.
- Kathleen Maloney
Docket entries, memoranda, briefs (including amicus briefs), and other information about this case may be accessed through the case docket.
Contacts
Representing the Cleveland Clinic Foundation, Dr. Peter J. Evans, and Dr. Nathan Everding: Brian Sullivan, 216.687.1311
These informal previews are prepared by the Supreme Court's Office of Public Information to provide the news media and other interested persons with a brief overview of the legal issues and arguments advanced by the parties in upcoming cases scheduled for oral argument. The previews are not part of the case record, and are not considered by the Court during its deliberations.
Parties interested in receiving additional information are encouraged to review the case file available in the Supreme Court Clerk's Office (614.387.9530), or to contact counsel of record.