Antitrust Law Daily Wrap Up, CONSUMER PROTECTION—SDFla: Rule 9(b) Did Not Apply to FTC Act Claims Against Participant in Alleged Investment Scam, (Feb 19, 2013)

By Tobias J. Gillett, J.D., LLM.

The FTC does not have to satisfy the pleading requirements of Federal Rule of Civil Procedure 9(b) to bring claims under the FTC Act and the Telemarketing and Consumer Fraud and Abuse Prevention Act (Telemarketing Act) against a member of an alleged precious metals investment telemarketing scheme, and the FTC sufficiently pled its claims against the member personally, the federal district court in West Palm Beach, Florida, has ruled (FTC v. Sterling Precious Metals, LLC, February 14, 2013, Marra, K.).

The FTC filed suit against Sterling Precious Metals, LLC and three individuals associated with the company, alleging that they had engaged in a telemarketing operation that sold precious metals investments to consumers without adequately revealing that the investments were “sold as a leveraged or financed transaction,” and while misleading them regarding the terms and conditions of the investments, among other claims. The suit charged the defendants with violations of the FTC Act and the Telemarketing Act.

The FTC’s complaint alleged that Kerry Marshall, one of the individual defendants, had “formulated, directed, controlled, had the authority to control, or participated in the acts and practices of Sterling Precious Metals,” had “held himself out as a broker with the company,” was “a signatory on Sterling Precious Metal’s financial accounts,” and had “receive[d] and respond[ed] to consumers’ complaints and inquiries.”

Marshall filed a motion to dismiss or for a more definite statement, contending that the complaint did not sufficiently allege that he “participated in, ratified, or committed any specific acts” as an individual that violated the FTC Act or the Telemarketing Act, and that the FTC’s claims did not satisfy the heightened pleading requirements of Federal Rule Civil Procedure 9(b).

The court explained that the FTC Act prohibits “unfair or deceptive acts or practices in or affecting commerce,” and that the FTC must “establish that (1) there was a representation; (2) the representation was likely to mislead consumers acting reasonably under the circumstances; and (3) the representation was material.” The court also explained that the FTC’s Telemarketing Sales Rule (TSR), issued pursuant to the Telemarketing Act, requires sellers to disclose various costs, limitations, or conditions of the sales offer, and prohibits misrepresentations regarding “[a]ny material aspect of an investment opportunity.”

The court initially noted a split in judicial authority regarding whether claims brought under the FTC Act and the TSR must satisfy the pleading requirements of Rule 9(b). Faced with the split, the court chose to follow the decisions finding that Rule 9(b) did not apply, because “[a] § 5 claim simply is not a claim of fraud as that term is commonly understood or as contemplated by Rule 9(b) . . . Unlike the elements of common law fraud, the FTC need not prove scienter, reliance, or injury to establish a § 5 violation.”

The court therefore applied the Rule 8(a) pleading standard, and concluded that the FTC had adequately alleged its claims against Marshall. In the process, the court rejected his argument that the complaint did not sufficiently address him since he was not an owner, member, owner, corporate officer, supervisor, or hiring authority at Sterling. The FTC’s allegations against the defendants as a group “provided the context” that permitted that court “to understand and weigh the significance of the FTC’s claims” regarding Marshall personally, including that he “formulated, directed, controlled, had the authority to control, or participated in” Sterling’s allegedly illicit acts and practices; that he held himself out a member of, and broker at, Sterling; that he “is a signatory on Sterling’s financial accounts”; and that he “receives and responds to consumers’ complaints and inquiries.”

Moreover, Marshall’s status as a broker and financial accounts signatory at Sterling supported the FTC’s claims against him. According to the FTC, Sterling’s brokers were heavily involved in the scheme through their alleged use of deception and misrepresentation to “spark consumer interest and participation.” Furthermore, a signatory on Sterling’s accounts “would seem to be uniquely positioned to verify the veracity of claims relating to potential profitability or risk of investment.” Therefore, the FTC’s allegations were sufficient to permit the court to “infer that Marshall was aware of, and complicit in, Sterling’s unlawful conduct,” and the court denied Marshall’s motion to dismiss or for a more definite statement.

The case is No. 12-80597-CIV-MARRA.

Attorneys: Dama J. Brown for FTC. Howard Seth Goldfarb (Homer Bonner, P.A.) for Sterling Precious Metals, LLC. Jeffrey M. Glotzer for Kerry Marshall.

Companies: Sterling Precious Metals, LLC

Cases: ConsumerProtection FederalTradeCommissionNews FloridaNews