Client Alerts

Ohio Supreme Court Clarifies the Definition of “Participating in or Aiding” Securities Fraud

By: Frances Floriano Goins and Daniela Paez

About: Financial Services, Banking & Commercial Finance, Broker-Dealer & Investment Litigation, Corporate Restructuring, Bankruptcy & Creditors’ Rights

In a recent landmark decision, the Ohio Supreme Court declared that R.C. 1707.43 does not impose joint and several liability on a custodian of a self-directed individual retirement account (IRA) that purchased illegal securities on behalf of and at the direction of its IRA account holder. Responding to a question of first impression that had been certified by the U.S. Court of Appeals for the Sixth Circuit, the Ohio Supreme Court in Boyd v. Kingdom Trust Co., rejected an argument to expand the reach of the Ohio Securities Act that plaintiffs’ attorneys often advance in various forums in an effort to implicate financial institutions in fraudulent schemes.

The Boyd plaintiffs sought to hold the defendant trust companies liable for “participating . . . or aiding” in the sale of unregistered securities under R.C. 1707.43(A), solely because they had purchased the securities on behalf of and at the direction of their customers. Plaintiffs did not allege the defendant financial institutions had any role in the underlying Ponzi scheme that caused their losses, nor that the they knew or had reason to know of the fraudulent scheme. Plaintiffs filed their claims in a putative class action in federal court, claiming that the Ohio Securities Act’s use of the phrase “in any way” should be “broadly construed” to impose liability on financial institutions who participated in the “transaction.”

The U.S. District Court for the Southern District of Ohio granted the defendants’ motion to dismiss the complaint, holding that defendants’ mere involvement in the transactions in the context of “normal banking activities,” without more, was insufficient to impose liability on them under the Ohio Securities Act. In doing so, the lower court relied on earlier Ohio intermediate appellate decisions. Plaintiffs appealed the dismissal to the Sixth Circuit Court of Appeals. Following briefing and oral argument, the Sixth Circuit certified a single question of state law to the Ohio Supreme Court:

Does R.C. 1707.43 impose joint and several liability on a person who, acting as the custodian of a self-directed IRA, purchased – on behalf and at the direction of the owner of the self-directed IRA – illegal securities?

In answering the certified question in the negative, the Ohio Supreme Court applied the unambiguous language of Section 1707.43 and the Ohio Securities Act’s definitional distinction between “purchase” and “sale.” The Court rejected the plaintiffs’ attempt to conflate both terms as part of a “transaction” – a term not defined in the Act. In so holding, the Court further noted that the plaintiffs’ proposed construction of the statute found no support in the existing case law.

Critically, the Ohio Supreme Court also acknowledged and adopted the previous construction of the Act by lower Ohio courts, which had held the mere participation in a transaction by way of “routine banking activities,” absent any active aid or participation in the sale, does not give rise to liability under the Act.

This decision will give self-directed IRA custodians and other financial institutions the certainty that their routine activities in situations that later turn out to involve fraudulent schemes or sales of illegal securities will not give rise to liability against them in future cases.

The authors Partner Frances Floriano Goins and Associate Daniela Paez, with Partner Robin Miller, defended The Kingdom Trust Company in this matter.