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Prior Guilty Plea Helps Cement Broker’s Fate in Rule 10b-5 Civil Action: Charney v. Wilkov
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By Jill I. Gross

*Where third parties’ criminal conduct is a foreseeable consequence of a broker’s negligent due diligence and misrepresentations, the broker may be liable for the injury to her clients caused by the criminal conduct, even if the broker was not aware of that misconduct. **A defendant’s admission in a guilty plea that she knew she made misrepresentations is sufficient to prove the element of scienter in a Rule 10b-5 civil case against her.

Charney vs. Wilkov, No. 16-3239 (2nd Cir., 5/9/18).

A Guilty Plea and a Suit

On the recommendation and referral of New York-based financial adviser and defendant Jennifer Wilkov, nineteen individuals purchased a real estate investment operated by two individuals in California. The investment turned out to be fraudulent, and the California operators absconded with plaintiffs’ money. After the scheme unraveled, Wilkov pled guilty in a related state criminal action, admitting fraudulent misrepresentations to plaintiffs regarding her experience with the California operators, her undertaking to monitor the investment and her due diligence into the investment. The investors subsequently sued Wilkov and the two California operators in federal court in New York, alleging claims for, inter alia, securities fraud under §10(b) of the Securities Exchange Act of 1934 and common law fraud under New York State law. After the district court granted plaintiffs’ summary judgment motion, Wilkov appealed, appearing pro se.

Reliance

In a Summary Order, the Second Circuit affirms the district court’s grant of summary judgment to plaintiffs. First, the Court concludes that the district court properly found that there was no genuine issue of material facts as to each individual plaintiff’s reliance on defendant’s misrepresentations, and that, but for those misrepresentations, plaintiffs would not have invested in the scheme. Thus, plaintiffs established the required element of transaction causation for purposes of both the federal and common law fraud claims.

Foreseeability and Scienter

Second, the Court of Appeals agrees with the district court that plaintiffs are entitled to summary judgment on the element of loss causation. Plaintiffs’ investment losses were “within the zone of risk concealed by [defendant’s] misrepresentations,” and the criminal conduct of the perpetrators of the scheme did not break the chain of causation because they were the “normal or foreseeable consequence of” defendant’s negligent due diligence and false statements. The fact that defendant did not know that the perpetrators would commit criminal acts does not excuse defendant from liability. Finally, the Court of Appeals affirms the district court’s finding that defendant acted with scienter, in light of her guilty plea, in which she admitted knowing misrepresentations.

(J. Gross: According to news reports, defendant Wilkov recommended the investments while a Certified Financial Planner at American Express Financial Advisors, but they were sold “away” from the firm. As she describes it: “The trouble started when a relative recommended an investment opportunity in California — an operation that was buying foreclosed homes, fixing them up, then reselling them at a profit. He'd invested himself, and I followed suit.” See https://www.marieclaire.com/politics/news/a2745/jennifer-wilkov-rikers-island-prison/. Wilkov served four months in New York’s notorious Rikers Island, and maintains her innocence, as she and other family members also invested in the scheme and lost money.) (EIC: Wilkov unsuccessfully sued her former employer, Ameriprise Financial Services, Inc., and the New York County District Attorney in state court; her case was removed to federal court and dismissed (see SOLA 2017-23).)

(SOLA Ref. No. 2018-21-07)

NOTICE: The court decision synopsis published above represents an abbreviated description of the actual decision and is re-printed here for its educational value. The author's effort is to report concisely the substance of the decision or a selected portion of the decision; commentary or analysis is generally reserved for the italicized section at the bottom of the summary. Subscribers to SAC's Online Litigation Alert (SOLA), from which this synopsis is excerpted, have immediate access to the full decision, in addition to the synopsis.

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