Opinion
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
APPEAL from a judgment of the Superior Court of Los Angeles County, Richard Fruin, Judge, Los Angeles County Super. Ct. No. BC305370
Shulman Hodges & Bastian, J. Ronald Ignatuk and Evan W. Granowitz for Defendant and Appellant.
Passman & Cohen, Sanford M. Passman and J. Jason Cohen for Plaintiffs and Respondents.
KRIEGLER, J.
Defendant and appellant Steven Roth appeals from a judgment in favor of plaintiffs and respondents Robert Merette, Herb Warme, and Larry Kleinfeld (the investors), following a trial to the court in this action arising out of investments in currency trading. The trial court found Roth liable for negligent misrepresentation, reasoning that Roth represented to the investors that their investment accounts were increasing in value and subject to withdrawal, without revealing that the accounts were held under the unsupervised control of one currency trader and not insured for fidelity risk. Among the issues raised on appeal, Roth contends the trial court erroneously based liability for negligent misrepresentation on implied representations or omissions. We agree. The trial court’s findings are contrary to California law, and we therefore reverse the judgment.
FACTS
The Tradex Investments
Roth sold insurance as an authorized agent for New York Life Insurance Company. In 1994, he passed an examination to obtain a securities license and became a registered representative for NYLife Securities, Inc. Roth met foreign currency trader Susan Lok, who was trading foreign currency through a business known as the Money Center through International Bright Investments. Roth knew little about foreign currency trading. He spoke with Lok about her trading techniques and philosophy, met with her several times, and observed her making trades. In September 1995, Roth made an initial investment of $5,000 with Lok.
In late 1995, Lok and her partner, Arthur Fertig, formed Tradex, Ltd. to provide private managed accounts for individuals. Tradex was located in the Bahamas and Lok was its sole currency trader. Roth continued to make investments in Tradex and reviewed his monthly account statements for consistency. He withdrew sizable amounts from his account periodically. This confirmed to him that cash was available in a bank account for withdrawal. Roth also communicated with Fertig. Lok allowed Roth to see bank account statements for the Tradex account she maintained for her clients, although she told him that Fertig did not want Tradex’s financial records disclosed.
Roth honestly believed in Tradex. He sold Tradex investments to his insurance clients and others, although Tradex was not a product sold or approved for sale by New York Life agents. Roth received ten percent of the amounts that his clients invested as a referral fee, which was credited to his account. Each client entered into a joint venture agreement with Tradex providing that the invested funds would be deposited in a pooled trading account under Tradex’s control. Roth told his clients that foreign currency trading was risky, but Lok had developed techniques to limit the risk. He also told his clients that he had “checked out” Tradex and it appeared legitimate.
Lok prepared monthly statements for her Tradex clients using data she received from the Tradex office. She mailed the monthly statements to Roth, and he mailed the statements to his clients. At the beginning of each year, Tradex employees prepared a graph showing Tradex’s historical performance as demonstrated by the annual growth of a hypothetical investment of $100,000 from 1994 onward. The annual increases in the value of the hypothetical investment ranged from 117 percent in 1995 to 26 percent in 1998. At the beginning of each year, Roth enclosed a copy of the annual performance graph with the monthly statements that he mailed to his clients.
The investors are experienced businessmen who own commercial collection agencies. They invested in Tradex through Roth. Warme invested $10,000 in Tradex in July 1996, $10,000 in November 1996, and $5,000 in May 1997. Merette invested $50,000 in Tradex in April 1998. Warme withdrew $10,000 from his Tradex investment in September 1998. A year later, in August 1999, Warme invested $11,000. After Roth provided Tradex investment materials to Kleinfeld in September 1999, Merette and Kleinfeld each invested $25,000. In April 2000, Kleinfeld invested $25,000. The investors received monthly statements showing that their investment balances were growing. They met with Roth quarterly at a minimum. They discussed their Tradex investments during the meetings, especially the growth of the investments as reported in their monthly statements.
In the middle of 2000, Lok began making an increasing percentage of her currency trades on paper only. The monthly statements and historical performance graphs prepared after the middle of 2000 were false. Kleinfeld invested $50,000 in March 2001.
In 2001, Roth wrote an E-mail message to Fertig noting that he had asked Lok for information on Tradex and background concerning bank relationships, account auditing, financial statements, trust company background and assurances for investors, and investor safeguards against losses aside from those resulting from trading activity. Roth requested any available information addressing these issues and attached a document with specific questions. Roth wrote, “My account has become quite substantial[,] as have those of the investors that I have referred to TRADEX. I wish to bring several million $ of new assets to TRADEX in the coming month[s]. I can only do this provided my questions are adequately addressed. [¶] I look forward to your response. [¶] Also, I would like to meet with you in September when you are in [California]. I would like to invite you for dinner and revisit our business relationship.”
The attached document was not introduced into evidence at trial and is not part of the record on appeal.
Fertig responded by E-mail on August 15, 2001. He provided the following general comments about Tradex: He and Lok went into business together in 1995 to provide private managed accounts for individuals. Lok was not a commodities trading advisor (CTA) and did not intend to become one. They did not want to attempt to qualify for a public offering. They had followed their course successfully to the benefit of their private investors. Fertig had recently been approached by several large, licensed broker-dealers who were impressed with Tradex’s performance and wished to invest large sums if Tradex would restructure its business with CTA status. Fertig was tempted to comply with the due diligence requirements, but he and Lok recognized the limitations of their personalities and talents. Lok had efficiently balanced her roles as a trader, wife, and mother. She was comfortable and pleased with the gentle rate of growth that she had achieved. She did not want the pressures associated with regulated hedge funds. Fertig was sympathetic and respected her feelings. He commended Lok’s performance and stated that he would not pressure her into a business configuration that did not fit her comfort zone, especially one that required significant restructuring of their original business plan. He noted that the original business plan had worked well and their personal clients had no complaints.
Fertig advised Roth that he would be meeting with Lok in September “to discuss these issues, also the possibility of a fidelity bond to protect clients from loss of capital via potential errors, negligence or malfeasance, etc. [¶] Also, I am going to discuss the need to increase due diligence on new investors and whether to actually put a cap on the acceptance of new investors. I’m sure we will discuss several other aspects of our related efforts as well. [¶] I would also be more than happy to meet with you personally and discuss any aspect of [Tradex] that you would like to discuss.”
Fertig also provided the following information in response to Roth’s request. Tradex had ceased working with Private Trust Co. Ltd. in Nassau because financial legislation in the Bahamas had made it onerous to work and protect the privacy of their clients. Tradex had been reincorporated in the Commonwealth of Dominica. Fertig provided details about the new bank that he was working with and vouched for the bankers. He stated: “TRADEX is a private company that provides capital management services to clients who want to invest in [foreign currency exchange] spot trading. . . . The company chose to have no licenses and left the Bahamas for this and other reasons, as our only activity is client services in an unregulated market (spot trading). Our credentials are honesty, integrity, attentive customer service, and over 25 years in the offshore services sector. The company has never been audited, and there is no need for a company audit at this point. However, the trading activity is reviewed quarterly to confirm that the trading results from the trading floor in the trading bank are properly allocated to-the-penny to client accounts each month, pursuant to our database computations and pursuant to [Tradex]/client agreements. We publish a third-party CPA/Chartered Accountant review each quarter confirming the accuracy of our client allocations of trading profit/loss. I think we have fallen behind schedule in 2001 because of our move to Dominica, but please bear with us until we get caught up.” Fertig extolled the merits of doing business in Dominica. He stated that he and another executive had been subject to a thorough background check, which included a detailed investigation of any possible criminal activity or civil judgments. Fertig provided the names, titles, and qualifications of key Tradex personnel.
“Your personal account is not in our database, but is handled as a client account of Susan[’s]. You and I discussed this a long time ago, and you expressed no desire to change that arrangement. Therefore, Susan has an omnibus account with [Tradex] that holds her client[s’] funds and she runs statements for her respective clients. I have a concern that there isn’t sufficient due diligence done on her clients, as international money laundering laws [require] a whole lot more ID, references, source of funds documents, etc., than when we began back in ‘95. We require this on every one of our clients, old or new.
“Your [E-]mail indicates that you would like banking signatory control of your invested funds and those of your clients. This is an impossibility as we are now structured, and it does not appear practical to alter the structure to try to accommodate this service. The only alternative to consider is to have you invest your and your client’s funds directly with [Tradex] (removed from Susan’s omnibus account with [Tradex]), and deal directly with Jeff Lockhart at our Dominica office. This would not give you banking signatory power, as no client has that (it simply wouldn’t allow us to function). But you could have a single account or an omnibus account directly in our database. [¶] In summary, I think it is premature to try to discuss other issues you raised [or] come to conclusions regarding much of the above until after my meeting with Susan next month. We will have a better picture [of] our current thinking and future planning at that time.”
Merette invested $100,000 in Tradex in December 2001, and Warme invested $20,000 in January 2002. In March 2002, Roth and a partner established R&D Asset Growth Fund, Ltd., and deposited approximately $2.4 million in investments into R&D’s trading account. Warme invested $100,000 with R&D in July 2002, and Kleinfeld signed a contract with R&D. Merette continued to invest in Tradex with an investment of $100,000 in October 2002.
Roth’s monthly statement from Tradex showed an investment balance on February 28, 2003, of $1,625,834.27. Tradex failed to honor several client requests for withdrawal of their funds. In March 2003, Roth told his clients that the funds they had invested in Tradex were gone. He reported Lok to the Federal Bureau of Investigation. In December 2005, Lok pled guilty to four counts of wire fraud, based on wiring funds into Tradex’s account at Banc Caribe in Rosseau, Dominica. The first criminal transfer that she was convicted of making took place on October 17, 2001. The other three criminal transfers occurred in 2002.
The Instant Action
The investors and other plaintiffs filed a complaint against several defendants, including Roth. In pertinent part, the amended complaint alleged negligent misrepresentation, breach of fiduciary duty, and negligence against Roth. The investors’ causes of action against Roth were tried to the court on April 25, 26, and 28, 2006, and May 1, 2006. On May 4, the trial court issued a statement of tentative decision. Roth filed objections pursuant to Code of Civil Procedure section 632.
On June 1, 2006, the trial court issued its statement of final decision. The court found that “the principal material representations upon which each [investor] relied, after he made his initial investment, were the Tradex statements that he received monthly, any enclosures therewith, and assurances that they could withdraw their money. The monthly statements showed the [investors] that their investments were continuously increasing in value and were available in their individualized accounts for withdrawal. That is what the [investors] wanted to know, and that is what they relied on.”
“[S]o far as the evidence reveals, Tradex became fraudulent only in mid-2000 when its sole currency trader started falsifying her trading profits.” The trial court found the annual performance graphs and the monthly statements from 2000 onward were fraudulent. The trial court further found that the performance graphs were material misrepresentations, because if the investors had received honest graphs for 2000 and 2001, they would have made no further investments in Tradex and would have withdrawn the funds they had deposited with Tradex.
The trial court found that Fertig’s August 2001 E-mail should have raised red flags for Roth. “Roth knew from Fertig’s [E-]mail that Tradex, besides being [an] unlicensed and unregulated offshore currency trading operation, was also unaudited and uninsured. He knew Lok, rather than Tradex’s corporate headquarters, had control over Roth’s clients’ money because the trading fund for Lok’s clients was banked separately . . . under Lok’s control. He knew there was no fidelity insurance for the Lok-controlled bank account. So for Lok’s client (that category includes Roth’s clients), Roth knew that the fund was unsupervised by Tradex home office personnel, in addition to being unregulated, unlicensed, unaudited and uninsured.” The trial court concluded that Roth understood the risks presented by Tradex’s lack of customary internal controls to protect investor funds.
“Based on what Roth learned from Fertig’s August 15, 2001 [E-]mail, his subsequent representations to [the investors] that their accounts were subject to withdrawal were negligent misrepresentations. Roth made such representations impliedly if not expressly during his frequent meetings with each [investor], at which time Roth and his clients discussed Tradex’s performance, and by sending to [the investors] their monthly statements and, annually, the Historical Performance Graphs. [¶] Roth’s representations were incomplete and thus false because he did not tell [the investors] what he knew: that they faced fidelity risk because the Tradex fund containing their monies was controlled by Lok and was not audited nor safeguarded by fidelity insurance from misfeasance.”
The trial court noted that the testimony was undisputed that Roth did not tell the investors of the substantial fidelity risks inherent in their Tradex accounts that Roth learned from Fertig’s E-mail. “If Roth had told [the investors] about his concerns and his discoveries, the [investors] may have determined that the risk was too great to make additional investments. . . . [¶] Each of the [investors] would have had the opportunity to withdraw [the] money they had previously invested had Roth timely advised them of the fidelity risk.”
The trial court concluded the standard for negligent misrepresentation in the sale of securities was that a seller of financial products with knowledge of a significant risk factor was obligated to inform the buyer if he knew the buyer did not have such knowledge. In formulating this standard, the court relied on Restatement Second of Torts, section 551, subdivision (2)(e), which states: “One party to a business transaction is under a duty to exercise reasonable care to disclose to the other before the transaction is consummated, . . . facts basic to the transaction, if he knows the other is about to enter into it under a mistake as to them, and that [the] other, because of the relationship between them, . . . would reasonably expect a disclosure of those facts.”
The trial court further stated: “Roth told the [investors], before they had invested in Tradex, he had ‘checked out’ Tradex; they relied on that representation, even though they recognized that Roth’s investigation was limited [to] those particular inquiries he had undertaken through that date. When Roth later discovered facts through his further inquiries that indicated his clients’ monies invested in Tradex [were] not protected, his failure to disclose that information in his subsequent communications with his clients, bearing in mind that Roth met regularly with his clients to discuss their Tradex investments as reported in the monthly statements, constituted negligent misrepresentation. Roth, in other words, did not exercise reasonable care in telling his clients what he had learned (from Arthur Fertig) about the Tradex exposure to fidelity loss and its management’s unwillingness to protect against such risks.”
“Roth argues in his opposition to the court’s Tentative Decision that this court’s standard makes him a guarantor of his clients’ investments. The court only finds that Roth had to tell his clients the risks he knew about. Once he conscientiously did that, he discharged his common law obligations: He is liable for negligent misrepresentation because, during his continuing relationship with his clients after telling them that Tradex appeared to be prudently managed, he did not pass on to his clients the warnings his own due diligence had revealed. Had he done so, his clients would have assumed the risk of continuing their Tradex investments.”
“Roth’s oral assurances to [the investors] that their investments were available for withdrawal, after he had notice from summer[] 2001 that Tradex’s accounts were not audited and that Lok’s separate bank account holding his clients’ funds was not insured against fidelity loss, were material misrepresentations that were not reasonable. They were, under California law, material misrepresentations that were negligently made and relied upon by [the investors].”
The court awarded damages of $285,000 to Merette, $46,000 to Warme, and $100,000 to Kleinfeld. However, the trial court found Roth did not have a fiduciary relationship with the investors with respect to their investment decisions, and therefore, denied recovery for breach of fiduciary duty. The trial court also denied recovery for negligence on the ground that Roth did not have a duty to investigate Tradex, as long as he did not misrepresent the information he knew that was material to their investments.
The trial court entered judgment against Roth on June 30, 2006, in favor of the investors. Roth filed a timely notice of appeal.
DISCUSSION
Standard of Review
“When considering a claim of insufficient evidence on appeal, we do not reweigh the evidence, but rather determine whether, after resolving all conflicts favorably to the prevailing party, and according the prevailing party the benefit of all reasonable inferences, there is substantial evidence to support the judgment.” (Scott v. Pacific Gas & Electric Co. (1995) 11 Cal.4th 454, 465.)
“The statement of decision provides the trial court’s reasoning on disputed issues and is our touchstone to determine whether or not the trial court’s decision is supported by the facts and the law. (In re Marriage of Ditto (1988) 206 Cal.App.3d 643, 647.)” (Slavin v. Borinstein (1994) 25 Cal.App.4th 713, 718.) “A statement of decision is as much, or more, for the benefit of the Court of Appeal as for the parties.” (In re Marriage of Sellers (2003) 110 Cal.App.4th 1007, 1010.) “We may consider the trial judge’s opinion for the purpose of ascertaining the process of reasoning by which he arrived at his conclusion.” (England v. Christensen (1966) 243 Cal.App.2d 413, 426, fn. 20.)
Negligent Misrepresentation
Roth contends the trial court erred by finding him liable for negligent misrepresentation based on implied statements or a failure to disclose information. We agree.
The tort of negligent misrepresentation consists of making a false statement honestly believing it to be true, but without reasonable ground for such belief. (Diediker v. Peelle Financial Corp. (1997) 60 Cal.App.4th 288, 297-298.) If the defendant’s belief is honest and reasonable, there is no tort liability. (Ibid.) There must also be justifiable reliance by the plaintiff. (Ibid.)
Deceit includes “[t]he assertion, as a fact, of that which is not true, by one who has no reasonable ground for believing it to be true.” (Civ. Code, § 1710, subd. 2.) Actual fraud similarly includes “[t]he positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true.” (Civ. Code, § 1572, subd. 2.)
Under California law, a cause of action for negligent misrepresentation requires a positive assertion. (Byrum v. Brand (1990) 219 Cal.App.3d 926, 941.) California law does not recognize a cause of action for negligent nondisclosure (id. at pp. 940-941), and an implied assertion is not sufficient to state a cause of action. (Diediker v. Peelle Financial Corp., supra, 60 Cal.App.4th at pp. 297-298.) “Parties cannot read something into a neutral statement in order to justify a claim for negligent misrepresentation. The tort requires a ‘positive assertion[.]’ (Wilson v. Century 21 Great Western Realty (1993) 15 Cal.App.4th 298, 306.)” (Diediker v. Peelle Financial Corp., supra, 60 Cal.App.4th at pp. 297-298.)
In this case, it is clear from the final statement of decision that the trial court incorrectly found Roth liable for negligent misrepresentation based on his failure to communicate certain information to his clients. The court found that by sending monthly statements and annual performance graphs to his clients and discussing their accounts with them, Roth represented the accounts were increasing in value and subject to withdrawal, which Roth honestly believed to be true. The trial court did not find Roth’s belief was unreasonable, because he should have known the representations were false based on the information he learned from Fertig. Instead, the trial court found the representations were “incomplete” because Roth failed to also disclose risks to the security of the funds that he had learned about from Fertig’s E-mail message. California law does not permit negligent misrepresentation claims to be predicated upon implied representations or nondisclosure of information. (Cf. First Marblehead Corp. v. House (2006) 473 F.3d 1, 9-10 [Massachusetts law allows negligent misrepresentation claims based on nondisclosure in accordance with Rest.2d Torts, § 551].) The judgment must be reversed.
DISPOSITION
The judgment is reversed. Appellant Steven Roth is awarded his costs on appeal.
We concur: TURNER, P. J., ARMSTRONG, J.