Iota Phi Lambda Sorority, Inc. v. Contenta Global Capital Group, LLC

Background

Iota Phi Lambda Sorority, Inc. sued Contenta Global Capital Group, LLC and Cheryl Broussard. The complaint asserted federal securities claims and state-law claims arising from an investment advisory arrangement. IPL alleged that Broussard and Contenta represented that they were experienced investment advisers, would manage IPL’s money, would keep the funds liquid, and would hold the funds with an independent third-party custodian.

IPL entered an Investment Advisory Agreement with the defendants on February 11, 2015. It sent $100,000 to a bank account held in Contenta’s name and paid $6,000 in management fees from 2015 through 2017. The court found that the defendants never invested the money, used it for their own personal benefit, and sent fraudulent monthly financial statements that falsely indicated the investment was profitable. The defendants also did not return the funds after IPL sought to terminate the agreement. Broussard pleaded guilty to one count of wire fraud based on the same underlying conduct.

The defendants were served but never answered or otherwise responded. The clerk entered default, and IPL moved for default judgment. In a default case, the court accepted the complaint’s factual allegations as true, except allegations concerning the amount of damages, but independently examined whether those facts supported each claim.

Liability

The court applied California law to IPL’s state-law claims after concluding that Minnesota and California law did not materially conflict for the claims at issue. It granted default judgment on the following state-law claims:

- Negligence, count 6: The defendants owed IPL fiduciary duties and breached them by putting their own interests first and taking IPL’s funds. - Intentional fraud, count 7: The defendants made false statements about their investment experience, services, expected returns, liquidity, and custody of the funds, intending to induce IPL to invest. - Breach of fiduciary duty, count 9: The defendants owed IPL fiduciary duties because of the investment adviser relationship and agreement, and breached those duties by taking the funds. - Breach of contract, count 12: The defendants breached the Investment Advisory Agreement by failing to invest and safeguard IPL’s funds and by failing to return them. - Constructive trust, count 15: The court imposed a constructive trust over $106,000, with IPL as beneficiary and the defendants as involuntary trustees. - Conversion, count 16: The defendants wrongfully took control of IPL’s $106,000 and used it for themselves.

The court did not grant default judgment on these state-law claims:

- Unjust enrichment, count 8: California law barred recovery under an unjust-enrichment theory because the parties had an express contract and IPL established its contract claim. - Aiding and abetting, counts 10 and 11: Contenta was a sole proprietorship rather than a separate legal entity, so Broussard and Contenta were legally the same for this issue and could not aid and abet each other. - Account stated, count 13: IPL did not prove an enforceable final balance because the financial statements and amounts above $100,000 were based on fraud. - Equitable accounting, count 14: IPL sought information about what happened to its funds rather than an accounting needed to determine an unknown amount owed, and the court found that post-judgment discovery could provide that information.

For the federal claims, the court granted default judgment on:

- Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, count 1: The defendants made material false statements with the intent to defraud IPL, IPL relied on those statements, and the defendants’ conduct caused IPL’s loss. - The Investment Advisers Act of 1940, count 5: The defendants acted as investment advisers, were not registered with the Securities and Exchange Commission, and used a fraudulent scheme to obtain IPL’s funds.

The court did not grant default judgment on:

- Section 12(a) of the Securities Act of 1933, count 2: The defendants were investment advisers, not issuers or controlling shareholders, and IPL did not establish the type of public offering or prospectus-related conduct covered by that provision. - Section 20(a) controlling-person liability, count 3: Broussard and Contenta were legally indistinct, so Broussard could not be both the controlling person and the directly liable party for the same violation. - Section 15 controlling-person liability, count 4: Because IPL did not establish the underlying Section 12 violation, there was no primary violation supporting derivative controlling-person liability.

Damages and interest

The court awarded IPL $106,000 in compensatory damages: $100,000 for the investment funds and $6,000 in management fees. It rejected IPL’s request for consequential damages because the supporting financial statements were fraudulent and the remaining spreadsheet evidence did not sufficiently establish the amount claimed.

The court awarded $636,000 in punitive damages, six times the compensatory damages, based on the defendants’ deliberate misrepresentations, fraud, breach of fiduciary duty, and conversion. The total damages award was $742,000.

The court also awarded $5,953.20 in prejudgment interest. It applied a 10% annual rate to the $106,000 in compensatory damages from March 5, 2019, the date the action was commenced, through September 26, 2019. The total default judgment was $747,953.20.

Fees, costs, and postjudgment interest

The court denied IPL’s request for $19,320 in attorneys’ fees because no statute or contract authorized them, and the defendants’ pre-litigation conduct could not support a federal bad-faith fee award. The court also found that the state-law theories IPL cited did not authorize fees.

The court denied IPL’s request for $734 in costs at that time without prejudice. IPL could seek costs by filing a verified bill of costs within 30 days after judgment, supported by sufficient documentation. The court likewise denied the request for postjudgment interest at that time without prejudice and directed IPL to file a later motion addressing the applicable federal interest rate and any updated request for costs.

Disposition

The court granted IPL’s corrected motion for default judgment with respect to counts 1, 5, 6, 7, 9, 12, 15, and 16, and denied the motion with respect to counts 2, 3, 4, 8, 10, 11, 13, and 14. It entered default judgment against Contenta Global Capital Group, LLC and Cheryl Broussard in favor of IPL for $747,953.20.