Suit Tossed Against Firm Duped by Ponzi Scheme

     (CN) – An investment firm should not face negligence claims after allegedly buying more than $20 million in worthless securities from a now-defunct Ponzi scheme, a federal judge ruled.
     James Smith Jr. had led the putative class action against Questar Capital Corp., Yorktown Financial Companies and Allianz Life Insurance Companies of North America. The October 2012 complaint alleged that the companies should have discovered Diversified Business Services and Investments (DBSI) was a Ponzi scheme by performing due diligence on the investments.
     U.S. District Court Judge Susan Richard Nelson concluded Friday in Minneapolis that “the complaint pleads with considerable specificity the circumstances of DBSI’s fraud, but not that of Questar.”
     Nelson dismissed all seven counts of the complaint, five of which alleged violations of the Minnesota Securities Act. Smith can amend those claims as well as a sixth claim for negligent misrepresentation, but the court dismissed the common-law negligence count with prejudice.
     Smith’s evidence against Questar for fraud was severely lacking, according to the ruling.
     “First, regarding Questar’s alleged failure to heed due diligence advisors or adequately perform due diligence, Smith does not specify the contents of any due diligence reports, or when and where they were compiled,” Nelson wrote. “At most, Smith alleges that Mick and Associates, PC and Buttonwood Investment Services LLC, ‘among others,’ prepared these reports. Smith does not sufficiently allege that these reports contained red flags of a Ponzi scheme, or that Questar ignored any such indications.
     “Second, with respect to Questar allegedly distributing, offering, and selling DBSI-issued securities through materially misleading PPMs and marketing materials, Smith does not allege when, where, or by whom the PPM and other materials were transmitted to Smith or putative class members.
     “Third, with respect to Questar’s alleged assurances to Smith and the putative class members about the soundness of DBSI’s securities, Smith’s general allegations do not identify the time, place, or contents of the assurances, or by whom they were made.”
     As to the secondary liability against Questar, Nelson found that the claim was filed under the wrong subsection of the Minnesota Securities Act, a “scrivener’s error.”
     Questar claimed the statute of limitations had already run out on Smith’s Minnesota Securities Act claims, but the Judge Nelson sided with Smith who argued that “the first public documents accusing Questar of wrongdoing were filed less than two years before he began this litigation.”
     Nelson concluded that “the statute of limitations runs from the time that he reasonably should have understood that he had a claim against Questar, because this case names Questar and not DBSI as a defendant.
     “Thus, Smith’s receipt of DBSI’s PPM and the public documents alleging DBSI’s impropriety in 2008 does not time-bar his claims under the Minnesota Securities Act,” she added.
     In dismissing Smith’s putative class claims, Nelson agreed with Questar that “the fraud allegations of the putative class do not meet the heightened pleading standard.”

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