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In October 2010, Nicholas J. Guiliano, Esquire of the Guiliano Law Firm, P.C. in Philadelphia and Jeffrey Sonn of Sonn & Erez in Ft. Lauderdale, Florida filed nine actions in arbitration before the Financial Industry Regulatory Authority against Royal Alliance, Inc. and several of its former agents, in connection with the sale of the unregistered securities of the Draseena Funds Group, in what was later determined to be a Ponzi scheme.
Royal Alliance Associates, Inc. is a registered securities broker-dealer which, among other things, conducts its securities business through more than "1,500 "independent" financial advisors operating from more than 200 geographically dispersed "franchise" branch offices across the United States.
From April 2004 through September 2011, Royal Alliance operated a branch office located at 54 Friends Lane, Newtown, Pennsylvania 18940, consisting of at least three individuals, Emanuel L. Sarris, Anthony J. Sarris and Kevin A. De Carlo, each of whom were licensed registered representatives of Royal Alliance or held themselves out as agents of Royal Alliance on firm marketing materials and elsewhere.
This conduct is commonly referred to as "selling away." The individual investors seek to hold Royal Alliance responsible as a "control person," and for the failure to supervise the conduct and activities of its registered representatives.
See, e.g. , Royal Alliance Associates, Inc v. Davis , 897 F. Supp. 783, 788 (S.D.N.Y. 1995)(sale of unregistered promissory notes requiring arbitration as "supervision of its registered agents is certainly part of Royal’s ‘business’"); Royal Alliance v. Behrens, 619 F.3d 867 (8th Cir. 2010)(plaintiffs stated a claim for control person liability against a broker-dealer whose registered representative conducted a Ponzi scheme, even though the fraud was conducted through a third-party); In re Royal Alliance Assoc., Exchange Act Rel. No. 38174, 1997 SEC Lexis 113 (Jan. 15, 1997)(disciplining firm that failed to stop two branch managers from selling Ponzi schemes); In re Royal Alliance Associates, Inc., 63 S.E.C. Docket 1601 (Jan. 15, 1997)(inadequate system of effective supervision over geographically dispersed brokers).
In response to the filing of the FINRA arbitrations, Royal Alliance filed nine actions in four different jurisdictions (Pennsylvania, Delaware, Florida and North Carolina) seeking among other things to the nine different groups of individual investors from prosecuting claims against it in arbitration before FINRA because these individuals were not "customers" of Royal Alliance as defined by FINRA rules and as interpreted by the Courts, because among other things, Defendants did not maintain securities accounts held by Royal Alliance, and that its "business activities" do not include the supervision of its registered representatives (including persons operating from its branch offices holding themself out as a registered representative).
On December 31, 2011, Nicholas J. Guiliano, Esquire of the Guiliano Law Firm, P.C. in Philadelphia and Jeffrey Sonn of Sonn & Erez in Ft. Lauderdale, filed an Motion before the Judicial Panel on Multidistrict Litigation to transfer and consolidate these actions in the United States District Court for the Eastern District of Pennsylvania in Philadelphia.
Title 28 U.S.C. § 1407 authorizes the Judicial Panel on Multidistrict Litigation (the "Panel") to transfer and consolidate two or more civil cases for coordinated pretrial proceedings upon a determination that (i) the cases "involv]e] one or more common questions of fact", (ii) transfer will "be for the convenience of the parties and witnesses," and (iii) transfer "will promote the just and efficient conduct of such actions."
On March 29, 2012, Nicholas J. Guiliano, representing each of the nine individual investors appeared and provided oral argument before the Judicial Panel on Multidistrict Litigation sitting in San Diego, California as to why these cases ought to be transferred and consolidated.
The Judicial Panel on Multidistrict Litigation is comprised of seven United States District Court Judges. This case was heard by Kathryn H. Vratil (D. Kansas), W. Royal Furgeson, Jr. (N.D. Texas), Barbara S. Jones (S.D. New York), Paul J. Barbadoro (D. New Hampshire, Charles R. Breyer (N.D. California), John G. Heyburn II (W.D. Kentucky) and Marjorie O. Rendell (E.D. Pennsylvania).
Counsel for Royal Alliance vigorously opposed these efforts based upon a strategy of divide and conquer, hoping to potentially exploit inconsistent pretrial or other rulings.
As the Court observed "Plaintiff in all actions, Royal Alliance Assocs., Inc. (Royal Alliance), opposes centralization and argues that, inter alia, the facts surrounding each defendant’s purchase are likely to vary in material respects and that centralization is unnecessary, given that the few counsel involved in the litigation are already working together cooperatively."
On April 16, 2012, the Judicial Panel on Multidistrict Litigation ordered that these matters be transferred and consolidated in the United States District Court for the Eastern District of Pennsylvania in Philadelphia, stating: Considering all these factors, the papers filed and hearing session held, we find that these nine actions involve common questions of fact, and that centralization in the Eastern District of Pennsylvania will serve the convenience of the parties and witnesses and promote the just and efficient conduct of this litigation. The actions can be expected to share facts regarding the circumstances surrounding the sale of the investments and defendants’ losses in this alleged Ponzi scheme.
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