Cengage Advantage Books: Fundamentals of Business Law Today 10th Edition by Roger LeRoy Miller

Exercise 26

FACTS In 1997, Mark Bloom formed North Hills, LP, as a stock investment fund. Bloom had sole authority over the fund's investments. Between 2001 and 2007, Bloom raised nearly $30 million from investors for the fund. At the time, Bloom was also an investment adviser, an officer, and a director of MB Investment Partners, Inc. Bloom and other MB personnel administered investments in North Hills using MB's offices, computers, filing facilities, and equipment. MB officers and directors were aware that Bloom was operating North Hills while he was also working at MB.
In 2008, two investors in North Hills requested a full redemption of their investments. By that time, however, most of the money that had been invested in North Hills was gone. Bloom was arrested, and MB terminated his employment. Barry Belmont and other North Hills investors filed a suit in a federal district court against MB, alleging fraud. From a summary judgment in MB's favor, the investors appealed.
ISSUE Should MB have been held liable for Bloom's acts?
DECISION Yes. The U.S. Court of Appeals for the Third Circuit vacated the summary judgment in MB's favor and remanded the case for trial with respect to the investors' claims against MB. Belmont v. MB Investment Partners, Inc. United States Court of Appeals, Third Circuit, 708 F.3d 470 (2013).
REASON Liability can be attributed to a corporation for the acts of its agent committed within the scope of his or her authority (employment). The appellate court pointed out that the North Hills investment vehicle was a Ponzi scheme that Bloom used to finance his lavish personal lifestyle. Over time, he diverted at least $20 million from North Hills for his own personal use.
During this period, MB "did not have in place basic compliance procedures employed throughout the investment advising industry to identify and prevent fraud and self-dealing by MB employees and affiliates." Further, "MB officers and directors failed to make basic inquiries about Bloom's operation of North Hills and did not collect any information on North Hills or monitor sales of investments in North Hills to MB's own customers."
Whenever the fraud of a corporate officer is involved, it is imputed (attributed) to the corporation when the officer's fraudulent contact was in the course of his or her employment and for the benefit of the corporation. It did not matter that Bloom's conduct was unauthorized. His conduct was "clothed with apparent authority of the corporation."
FOR CRITICAL ANALYSIS -Legal Environment Consideration What circumstances in this case suggest that MB should be held liable for Bloom's fraud?