In cases of financial ruin, there always seems to be a chain of blame — a series of linked commercial actors whose involvement may or may not equal at least some degree legal responsibility. But, both as a matter of fairness and also economic sense, the law must set limits on how far up (or down) the chain one can go both as to issues of civil liability and criminal liability.
From a civil plaintiffs’ point of view, though, this ability of some players in a financial collapse to profit during the heyday but to avoid liability in the aftermath is maddening.
Often, in financial disasters, the guiltiest evil-doers (say Tom Petters) are quickly penniless and other involved entities adamantly protest innocence, leaving the fraud victims without recourse. The victims of Diversified Business Services and Investments (DBSI), however, remain hot the trail.
DBSI appears to have been a scam. Questar Capital Corporation and others appear to have made some money along the way selling DBSI securities that eventually turned out to be worthless.
U.S. District Court Judge Susan R. Nelson (D. Minn.) rejected Questar’s motion to dismiss plaintiff’s first amended complaint in large part this past week. From Judge Nelson’s 31-page opinion, one gathers that Questar, presumably a relatively sophisticated financial actor in the financial services industry, had access to “red flags” about DBSI’s business and Questar not only did not act on the red flags but it failed to pass them on to the ultimate purchasers (and victims) of the DBSI scam.
Not only that, but Questar does disclose that it gets “compensation…over and above the standard concessions disclosed in the product prospectuses, and that compensation is a material factor in entering into the partnership….[and t]his compensation is used to offset the costs of …an in depth due diligence analysis of the product sponsor.”
Unless I am missing something, then, it would seem that scammer pays agent, Questar, a premium to peddle scammer’s snake oil, and agent, Questar, overlooks signs that the snake oil is worthless but takes care to tell its customers that it is getting extra payment to help finance its “in depth due diligence analysis.”
While it is true then that there must be some limit on the chain of blame, it seems that Questar, in this case, is and should be within the proverbial “zone of danger.”