                           PRECEDENTIAL
   UNITED STATES COURT OF APPEALS
        FOR THE THIRD CIRCUIT
             _____________

                 No. 12-1580
                _____________

         BARRY J. BELMONT;
PHILADELPHIA FINANCIAL SERVICES, LLC;
        THOMAS J. KELLY, JR.;
         FRANCES R. KELLY;
           GARY O. PEREZ,
                        Appellants,
                  v.

     MB INVESTMENT PARTNERS, INC.;
          CENTRE MB HOLDINGS;
  CENTRE PARTNERS MANAGEMENT, LLC;
 ROBERT M. MACHINIST; MARK E. BLOOM;
  RONALD L. ALTMAN; LESTER POLLACK;
WILLIAM M. TOMAI; GUILLAUME BEBEAR;
P. BENJAMIN GROSSCUP; THOMAS N. BARR;
 CHRISTINE MUNN; ROBERT A. BERNHARD
             _______________

 On Appeal from the United States District Court
    for the Eastern District of Pennsylvania
              (D.C. No. 09-cv-4951)
     District Judge: Hon. Berle M. Schiller
                _______________
                         Argued
                     November 13, 2012

Before: SCIRICA, FISHER, and JORDAN, Circuit Judges.

                 (Filed : February 22, 2013)
                      _______________

Joseph R. Loverdi
Paul C. Madden [ARGUED]
Buchanan Ingersoll & Rooney
50 South 16th Street , Suite 3200
Philadelphia, PA 19102
      Counsel for Appellants


Peter J. Hoffman
Jeffrey P. Lewis
Eckert, Seamans, Cherin & Mellott
50 South 16th Street – 22nd Floor
Philadelphia, PA 19102




                               2
Edward D. Kutchin [ARGUED]
Kerry R. Northup
Berluti McLaughlin & Kutchin
44 School Street – 9th Floor
Boston, MA 02108
      Counsel for Appellees, MB Investment Partners Inc.,
      Robert M. Machinist,P. Benjamin Grosscup, Thomas N.
      Barr, Christine Munn, Robert A. Bernhard

Joshua S. Amsel [ARGUED]
Weil, Gotshal & Magnes
767 Fifth Avenue – 27th Floor
New York, NY 10153

Teresa N. Cavenagh
Duane Morris
30 S. 17th Street
Philadelphia, PA 19103


Alan T. Gallanty [ARGUED]
Kantor, Davidoff, Wolfe, Mandelker, Twomey & Gallanty
51 E. 42nd Street – 17th Floor
New York, NY 10017


Joseph J. Langkamer
Samuel W. Silver
Schander Harrison Segal & Lewis
1600 Market Street , Suite 3600
Philadelphia, PA 19103
      Counsel for Appellee Ronald L. Altman
                     _______________




                                3
                OPINION OF THE COURT
                    _______________

JORDAN, Circuit Judge.

       This case arises from a now-defunct Ponzi scheme.
The defendants are MB Investment Partners, Inc. (“MB”), a
registered investment adviser, and various persons affiliated
with MB. The fraudulent scheme was perpetrated by Mark
Bloom while he was an employee and officer of MB, through
a hedge fund called North Hills, L.P. (“North Hills”) that
Bloom controlled and managed outside the scope of his
responsibilities at MB. Bloom was arrested and indicted in
the Southern District of New York in 2009 on a variety of
charges relating to the Ponzi scheme, by which time most of
the money invested in North Hills was gone. Plaintiffs
Barry J. Belmont, Philadelphia Financial Services LLC
(“PFS”), 1 Thomas J. Kelly, Jr. and his wife Frances R. Kelly,
and Gary O. Perez (collectively, the “Investors”) brought suit
in the Unites States District Court for the Eastern District of
Pennsylvania against MB, certain of its officers and directors,
including Bloom, and one of its employees, Robert L.
Altman, in an effort to recover money they had lost at the
hands of Bloom.

      The Investors offered various theories of liability
under both federal and state law, alleging (1) controlling
person liability under Section 20(a) of the Securities and

      1
         PFS is a Pennsylvania limited liability company that
serves as the personal investment vehicle for its sole member,
John F. Wallace.




                              4
Exchange Act (the “Exchange Act”), (2) negligent
supervision, (3) violations of Securities and Exchange
Commission (“SEC”) Rule 10b-5, (4) violations of the
Pennsylvania Unfair Trade Practice and Consumer Protection
Law (the “UTPCPL”), and (5) breach of fiduciary duty. The
District Court dismissed all of the claims against Altman and,
following discovery, granted summary judgment to all of the
remaining defendants on all of the Investors’ claims. For the
reasons that follow, we will affirm in part and vacate in part
the District Court’s orders and will remand the case for a trial
on the Investors’ claims against MB for violations of Rule
10b-5 and the UTPCPL.

I.     BACKGROUND

       A.     Facts 2

              1.        The Parties

      Defendant MB is a registered investment adviser
previously known as Munn Bernhard & Associates, Inc. It is
based in New York and registered to do business in
Pennsylvania. As a registered investment adviser, MB
managed client investments by trading securities on stock

       2
         In accordance with our standard of review, see infra
note 17, we set forth the facts in the light most favorable to
the Investors. See Funk v. CIGNA Grp. Ins., 648 F.3d 182,
190 (3d. Cir. 2011) (“Summary judgment is proper if there is
no genuine issue of material fact and if, viewing the facts in
the light most favorable to the non-moving party, the moving
party is entitled to judgment as a matter of law.” (internal
quotation marks omitted)).




                                 5
exchanges through custodial trading accounts held by third
parties, such as Charles Schwab & Co., Inc. MB’s primary
investment focus was on large-capitalization stocks. It ceased
operations in June 2009, following the discovery of the North
Hills fraud and Bloom’s arrest.

        Defendants Robert Machinist and Robert L. Altman
(together with MB, the “MB Defendants”) were executives
working at MB during the period that Mark Bloom also
worked there. Machinist was the chairman of MB’s board of
directors, and the chief operating officer and a co-managing
partner of MB, 3 and he owned 14 percent of the capital stock
of its parent company, Centre MB Holdings, LLC (“CMB”).
Machinist was listed as a “control person” 4 in MB’s Form
ADV, the reporting form used by investment advisers to
register with both the SEC and state securities authorities.
Altman was a senior managing director, 5 partner, and
portfolio manager of MB. Bloom was also an executive at
MB, serving as president, co-managing partner (with
Machinist), and chief marketing officer, and he too owned 14


      3
          Although Machinist, Altman and Bloom held the
titles of “partner,” MB was a New York corporation rather
than a partnership at all times relevant to this dispute.
      4
         The term “control” in Form ADV is defined as “the
power, directly or indirectly, to direct the management or
policies of a person, whether through ownership of securities,
by contract, or otherwise.” (App. at 1130.)
      5
       Altman held the title of “director” as a member of
MB’s senior management team but was not a member of
MB’s board of directors.




                              6
percent of the capital stock of CMB.      Bloom was also a
member of MB’s board of directors. 6

       Defendant Centre Partners Management, LLC
(“Centre Partners”) is a Delaware limited liability company
that provides advisory and management services for various
private equity investment funds, each of which is structured
as a limited partnership composed primarily of investors
otherwise unaffiliated with Centre Partners. Defendants
Lester Pollack, William M. Tomai, and Guillaume Bébéar
(together with Centre Partners and CMB, the “Centre
Defendants”) are Centre Partners executives. Pollack, Tomai,
and Bébéar were, at all times relevant to this dispute, non-
management members of MB’s board of directors, with no
role in the business’s day-to-day operations, and they do not
appear on MB’s organizational chart. However, Pollack and
Tomai are listed as control persons on MB’s Form ADV.

       Defendant CMB is a Delaware limited liability
company formed by Centre Partners, Machinist, and Bloom
to acquire a controlling interest in MB. In July 2004,
Machinist, Bloom, and Centre Partners (though an affiliated
fund) invested $14 million in CMB for the acquisition of MB,
with Centre Partners as the largest shareholder, followed by
Machinist and Bloom. CMB owned 57 percent of the capital
stock of MB, and controlled the operations of MB through a
contractual operating agreement. CMB is denominated as a
control person on MB’s Form ADV. After CMB acquired

      6
         Although Bloom was named as a defendant in the
Complaint, the District Court entered a default judgment
against him for failure to appear, plead, or otherwise defend,
and he is not a party to this appeal.




                              7
control of MB, it designated Bloom, Machinist, Pollack,
Tomai, and Bébéar to serve as members of the MB board of
directors.

       Defendants P. Benjamin Grosscup, Thomas N. Barr,
Christine Munn, and Robert A. Bernhard (together with
Machinist, Bloom, Pollack, Tomai, and Bébéar, the “MB
Directors”) were all MB executives who also served as
members of the MB board of directors. Grosscup, Barr, and
Munn are listed as “control persons” in MB’s Form ADV. 7

       Plaintiffs, the Investors, all had money in Bloom’s
North Hills fund, investing a total of approximately $4.4
million in North Hills from 2006 to 2008. Belmont and the
Kellys were also MB clients and entered into advisory
agreements with MB. PFS and Perez did not have any
advisory agreement with MB.

             2.     Bloom and the North Hills Ponzi Scheme

      Bloom worked as a certified public accountant in the
tax department of an accounting firm from 1979 to 1992.
From 1992 to 2001, he worked for a hedge fund management
company where he was responsible for marketing and client

      7
         Bernhard is not listed as a control person because he
ended his employment and resigned from the MB board of
directors in connection with the July 2004 purchase of MB by
CMB, although he continued to serve as an outside consultant
to the company. Although CMB held majority voting control
of MB, the minority shareholders were entitled to designate
three directors under the terms of the company’s Operating
Agreement. Those directors were Grosscup, Barr, and Munn.




                              8
services. Bloom left the hedge fund in 2001, and became
president of a registered investment adviser and broker-dealer
affiliated with his former accounting firm. He resigned from
that position and joined MB prior to the July 2004
acquisition of MB by CMB.

       Bloom formed North Hills in 1997, as an enhanced
stock index fund based on various stock indices. Bloom was
the sole principal and managing member of North Hills
Management, LLC, the general partner of North Hills, and he
had sole authority over the selection of the fund’s
investments. Although North Hills was founded as a stock
index fund, Bloom later described North Hills to investors as
a “fund of funds” that invested in hedge funds and other well-
managed funds and that provided financing to the widely-
known retailer Costco. Between 2001 and 2007, Bloom
raised approximately $30 million from 40 to 50 investors for
the North Hills fund.         He claimed that North Hills
consistently generated investment returns of 10-15 percent
per year without significant risk.

       In fact, however, North Hills was a Ponzi scheme that
Bloom used to finance his lavish personal lifestyle, and, over
time, he diverted at least $20 million from North Hills for his
own personal use. Bloom used those funds to acquire
multiple apartments and homes, furnishings, luxury cars and
boats, and jewelry, and to fund parties and travel.

       Bloom also engaged in self-dealing beyond the money
he converted from North Hills. For example, while acting as
a third-party marketer for the Philadelphia Alternative Asset
Fund (“PAAF’), he invested $17 million of North Hills’s
funds in PAAF, earning a lucrative commission for himself




                              9
without disclosing that conflict of interest to North Hills
investors. When PAAF, and another company in which
North Hills had invested, the futures and commodities broker
Refco, Inc., collapsed due to separate frauds, Bloom
misappropriated proceeds of legal settlements and residual
payments made to North Hills as an unsecured creditor.

             3.     Marketing of North Hills to the Investors

       In June 2006, Bloom met with plaintiff Belmont to
introduce himself and to discuss the investment advisory
services offered by MB. Bloom gave Belmont his MB
business card and described the investment philosophy of
MB. Bloom then discussed various investment funds,
including North Hills, that he recommended as suitable for
Belmont, supposedly based on Belmont’s objectives.

        In July 2006, John Wallace (the sole principal of
plaintiff PFS) and Belmont met with Bloom and Altman.
Altman repeated Bloom’s praise for North Hills, and he
suggested that MB’s access to North Hills was a selling point
for MB’s advisory services. 8 Bloom and Altman presented
Belmont with a proposed asset allocation that they had
prepared on MB’s letterhead. 9 Both Belmont and PFS

      8
          Altman disputes that account of the meeting. He
testified that he never commented on North Hills as an
investment and that he did not say that access to North Hills
was a selling point for MB.
      9
          The Investors contend that the proposed asset
allocation “recommend[ed] that Belmont invest 20% of the
funds he entrusted to MB in North Hills.” (Appellants’
Opening Br. at 7 (citing App. at 955).) However, the exhibit




                             10
subsequently invested in North Hills. Belmont also became
an investment advisory client of MB, with Altman serving as
Belmont’s portfolio manager and Bloom serving as his
relationship manager. In February 2008, allegedly on
Altman’s advice, Belmont transferred $1 million from his
MB-managed Charles Schwab account to North Hills, adding
it to money he had already invested in that fund. 10

       Altman also served as portfolio manager for Thomas
and Frances Kelly. He marketed North Hills to the Kellys as
an investment option available through MB. 11

       Perez had no formal relationship with MB. He had,
however, previously met Bloom and, in the fall of 2008, he
telephoned him at MB’s offices, seeking investment advice.
Bloom recommended that Perez invest in North Hills.

to which the Investors refer does not mention North Hills by
name, and the asset allocation at issue is simply labeled
“Credit Arbitrage.” (See id.)
       10
          Altman disputes that account of the $1 million
transfer. Altman testified that, when Belmont told him that
he was nervous about the stock market in early 2008, Altman
advised him concerning various money market investment
options. Altman also testified that the direction to transfer the
funds from the MB-managed Schwab account to North Hills
was relayed to him by Bloom.
       11
         Altman contends that he did not market North Hills
to the Kellys. He says that he was not their portfolio manager
and that the Kellys ultimately signed some 13 separate
advisory agreements for different MB products, none of
which was North Hills.




                               11
             4.     The Defendants’ Roles with Respect to
                    MB and North Hills

       Bloom operated North Hills the entire time that he was
an executive of MB, until his arrest in February 2009.
Although the business address for North Hills was one of
Bloom’s residences in Manhattan, he made no attempt, while
working at MB, to conceal his activities related to North
Hills. Investments in North Hills were administered by
Bloom and other MB personnel, using MB’s offices,
computers, filing facilities, and office equipment. MB
support staff sometimes carried out tasks related to North
Hills.

        MB officers and directors were aware that Bloom was
operating North Hills while he was also working as an
investment adviser at MB. As a result of financial dealings
with North Hills beginning in 2004, Machinist was familiar
with Bloom’s control over North Hills.             Machinist
participated in a number of business ventures with North
Hills, including North Hills’s investment in a company called
DOBI Medical International Inc. (“DOBI”). Machinist also
attended meetings in which Bloom marketed North Hills and
described it as an MB fund. Machinist’s successor as MB’s
CEO, Michael Jamison, was also aware of North Hills, and,
in December 2007, transferred funds to North Hills
Management, the general partner of North Hills, as part of a
personal loan to Bloom. Bloom’s position at North Hills was
also disclosed in a 2005 prospectus of DOBI, in connection
with North Hills’s investment in the stock of that company,
and defendants Machinist, Grosscup, Barr, Bernhard, and
Munn were investors in DOBI and had access to the
prospectus.




                             12
       As an investment adviser, MB was required by the
Investment Advisers Act of 1940 (the “Advisers Act”), and
by Rules promulgated under the Advisers Act, and by the
Pennsylvania Securities Act to supervise its personnel so as to
prevent violations of the Advisers Act. 12 However, during
the period of the North Hills fraud, MB did not have in place
basic compliance procedures employed throughout the
investment advising industry to identify and prevent fraud
and self-dealing by MB employees and affiliates.
Compliance weaknesses permitted Bloom to avoid required
disclosures to MB about North Hills as a personal investment
vehicle. MB officers and directors failed to make basic
inquiries about Bloom’s operation of North Hills, and did not
collect any information on North Hills or monitor sales of
investments in North Hills to MB’s own customers. 13

       12
           See 15 U.S.C. § 80b-3(e) (allowing the SEC to
censure, or suspend or deny the registration of, an investment
adviser, where such adviser “or any person associated with
such investment adviser” violates the federal securities laws);
Rule 204A-1, 17 C.F.R. § 275.204A-1 (requiring an
investment adviser to establish a code of ethics to ensure that
employees comply with the federal securities laws); Rule
206(4)-7(a), 17 C.F.R. § 275.206(4)-7(a) (requiring an
investment adviser to establish compliance policies and
procedures to ensure compliance with the securities laws); 70
Pa. Cons. Stat. Ann. § 1-102(j) (defining investment adviser
for state law purposes); id. § 1-305(a)(v) (authorizing the
suspension or revocation of the Pennsylvania registration of
an investment adviser that fails to comply with the federal
securities laws including the Advisers Act).
       13
         MB disputes these characterizations of its oversight,
arguing that it did have in place written compliance policies




                              13
       The Centre Defendants were also aware of North Hills
as a result of a due diligence investigation that the firm
conducted on Bloom in relation to his personal investment in
a fund managed by Centre Partners. The Centre Defendants
believed that North Hills was Bloom’s “family investment
vehicle” (App. at A515), and that it was “not an actual
business” (App. at 528). The background report that the
Centre Defendants obtained on Bloom stated that Bloom was
the “sole proprietor of North Hills Management, LLC, which
manages the investment partnership North Hills LP,” and that
Bloom “work[ed] approximately eight hours per month for
this fund of funds overseeing asset allocation and reporting
performance.” 14 (App. at 946.) Tomai and Bébéar were also


and procedures. As part of MB’s compliance program,
employees (including Bloom) were required to provide
annual certifications listing all of the securities they owned,
and were prohibited from managing accounts for third parties
who were not MB clients. MB places the blame on Bloom
and contends that, while Bloom provided those annual
certifications, he “falsely and misleadingly omitted his
ownership or operation of North Hills.” (MB Defendants’ Br.
at 7-8). Bloom did omit any reference to North Hills or any
other trading accounts in his annual certifications to MB.
However, shortly after Bloom was arrested, the SEC
investigated MB and issued a deficiency letter detailing
compliance failures.
      14
          The Centre Defendants contend that the facts set
forth in the background check were “consistent with [their]
understanding of North Hills as Mr. Bloom’s family, or
personal investment vehicle.” (Centre Defendants’ Br. at 19
(citing App. at 2621-23).)




                              14
aware of North Hills, and of Bloom’s control and operation of
the fund, based on an investor questionnaire Bloom
completed prior making his personal investment in the Centre
Partners fund.

             5.     The Downfall of Bloom and MB

        Ironically, losses suffered by North Hills because of
the PAAF and Refco frauds ultimately led to the collapse of
the North Hills fraud. In 2008, after Bloom was forced to
disclose those losses, two large investors in North Hills
requested a full redemption of their investments. By that
time, most of the money that had been invested in North Hills
was gone, and Bloom could only return a portion of those
investors’ funds. It is not clear from the record in this case
when federal authorities began to investigate Bloom, but he
was arrested on February 25, 2009, and he was terminated by
MB that same day. On July 30, 2009, the U.S. Attorney for
the Southern District of New York filed an Information
against Bloom that documented in detail a wide-ranging
scheme to defraud North Hills investors, beginning in 2001,
as well as Bloom’s sale of illegal tax shelters while he was
still practicing as an accountant.

        Bloom promptly pleaded guilty to all of the counts in
the Information, including charges that he had diverted at
least $20 million from the operating account of North Hills
for his own use, had misrepresented the value of North Hills
investors’ capital accounts in their monthly statements, had
solicited funds from new North Hills investors in 2007 and
2008 to honor redemption requests from prior North Hills
investors, had committed securities fraud in connection with
the sale of interests in North Hills, and had committed mail




                             15
and wire fraud and laundered money invested in North Hills.
Bloom is still the subject of a number of criminal and civil
proceedings brought by the United States and by North Hills
investors. 15

       After the North Hills fraud was exposed, MB, which
had been losing money and was already in some financial
distress, was forced to cease operations in June 2009.

      B.     Procedural History

       The Investors filed their original Complaint in this
action on October 28, 2009. They filed an Amended
Complaint on March 30, 2010, alleging (1) securities fraud in
violation of Rule 10b-5 on the part of Bloom, Altman, and
MB, (2) violation of the Pennsylvania UTPCPL by Bloom,
Altman, and MB, (3) breach of fiduciary duty by Bloom,
Altman, and MB, (4) controlling person liability under
Section 20(a) of the Exchange Act against the MB Directors,
and (5) negligent supervision against the MB Directors.

       On April 13, 2010, Defendants filed motions to
dismiss the Amended Complaint under Rules 12(b)(6) and
9(b) of the Federal Rules of Civil Procedure, arguing that the

      15
           See U.S. Commodity Future Trading Comm’n v.
Bloom, Civ. A. No. 09-1751 (S.D.N.Y); United States v.
Bloom, Crim. A. No. 09-MAG-501 (S.D.N.Y); In re North
Hills, L.P., No. 09-13035-AJG (Bankr. S.D.N.Y.); Alexander
Dawson Found. v. Bloom, Index No. 603590/08 (N.Y. Sup.
Ct.). Appellees are not parties to those proceedings, and the
Investors state that those proceedings do not involve the
issues raised in this appeal.




                             16
Investors had failed to state a claim and had not pled the
elements of fraud with the required particularity. On June 10,
2010, the District Court dismissed all of the Investors’ claims
against Altman. However, the Court denied all of the other
Defendants’ motions to dismiss.

        On October 31, 2011, following discovery and an
unsuccessful attempt at settlement, the MB Defendants
(excluding Altman), the Centre Defendants, and the MB
Directors filed motions for summary judgment. On January
5, 2012, the District Court granted summary judgment to all
of the remaining Defendants, with the exception of Bloom, on
all of the Investors’ claims. Because Bloom had previously
failed to appear, plead, or otherwise defend, the Court gave
the Investors leave to move for default judgment against him,
which they did. On February 17, 2012, the Court entered a
default judgment against Bloom and in favor of the Investors
in the amount of approximately $5.7 million.

      The June 10, 2010 dismissal of Altman and the
January 5, 2012 grant of summary judgment to the other
Defendants became final upon the entry of the default
judgment against Bloom. This timely appeal followed. 16




       16
         Investors appeal both that portion of the June 10,
2010 Order granting Altman’s motion to dismiss and the
January 5, 2012 Order granting the motions for summary
judgment by the MB Defendants, the Centre Defendants, and
Grosscup, Barr, Munn, and Bernhard.




                              17
II.    DISCUSSION 17

       17
           The District Court had subject matter jurisdiction
pursuant to 28 U.S.C. § 1331 and 15 U.S.C. §§ 77u, 78aa, and
supplemental jurisdiction pursuant to 28 U.S.C. § 1367(a).
The District Court alternatively had jurisdiction pursuant to
28 U.S.C. § 1332(a)(1), because there was complete diversity
of citizenship – the Investors are all citizens of the
Commonwealth of Pennsylvania, and Defendants are all
citizens of the State of New York – and the amount in
controversy exceeds $75,000. We have jurisdiction under 28
U.S.C. § 1291.
        Our review of a district court’s order granting a motion
to dismiss is plenary. Ill. Nat’l Ins. Co. v. Wyndham
Worldwide Operations, 653 F.3d 225, 230 (3d Cir. 2011).
“To survive a motion to dismiss, a complaint must contain
sufficient factual matter, accepted as true, to state a claim to
relief that is plausible on its face.” Id. (quoting Ashcroft v.
Iqbal, 556 U.S. 662, 678 (2009) (internal quotation marks
omitted)). “A claim has facial plausibility when the plaintiff
pleads factual content that allows the court to draw the
reasonable inference that the defendant is liable for the
misconduct alleged.” Iqbal, 556 U.S. at 678.
        We also exercise plenary review over the District
Court’s grant of summary judgment. Howley v. Mellon Fin.
Corp., 625 F.3d 788, 792 (3d Cir. 2010). “[S]ummary
judgment is proper if the pleadings, depositions, answers to
interrogatories, and admissions on file, together with the
affidavits, if any, show that there is no genuine issue as to any
material fact and that the moving person is entitled to a
judgment as a matter of law.” Celotex Corp. v. Catrett, 477
U.S. 317, 322 (1986) (quoting Fed. R. Civ. P. 56(c)) (internal
quotation marks omitted). A factual dispute is genuine “if the




                               18
        The Investors press on appeal all of the theories of
liability they argued before the District Court. First, they
contend that the MB Directors and the Centre Defendants are
liable for the North Hills fraud as “controlling persons” under
Section 20(a) of the Exchange Act, and that the MB Directors
are also liable under common law principles of negligent
supervision. Second, they argue that Altman is directly liable
for securities fraud, under both Rule 10b-5 and the
Pennsylvania UTPCPL, and that Altman’s and Bloom’s Rule
10b-5 and UTPCPL violations should be imputed to MB.
Third, they argue that Altman and MB are liable for breach of
fiduciary duty. We address each of those theories of liability
in turn.

       A.    Claims Against The MB Directors And The
             Centre Defendants 18



evidence is such that a reasonable jury could return a verdict
for the nonmoving party.” Anderson v. Liberty Lobby, Inc.,
477 U.S. 242, 248 (1986).
      18
          We note at the outset that Bernhard was entitled to
summary judgment on those claims because he resigned as
both an employee and director, and became a consultant, at
the closing of the acquisition of MB by Centre Partners
(through CMB), Machinist, and Bloom in July 2004.
Bernhard was therefore neither an officer nor a director of
MB, and thus was not in any position of “control” or
“supervision” over either Bloom or MB, during the relevant
timeframe. See supra note 7. We therefore affirm the
District Court’s grant of summary judgment to Bernhard on
that basis.




                              19
             1.     Section 20(a) Controlling Person Claim
                    Against the MB Directors and the Centre
                    Defendants
       The District Court granted summary judgment to the
MB Directors and the Centre Defendants on the Investors’
controlling person claim, finding no evidence of “culpable
participation” by those defendants in the North Hills fraud,
either in the form of active participation or intentional
inaction. (App. at 13-14.) The Investors argue that the
“reckless failure” of the MB Directors and the Centre
Defendants to monitor Bloom’s activities made them
“culpable participants” in Bloom’s fraud. (Appellants’
Opening Br. at 36.)

       Section 20(a) of the Exchange Act provides that

      [e]very person who, directly or indirectly,
      controls any person liable under any provision
      of this chapter or of any rule or regulation
      thereunder shall also be liable jointly and
      severally with and to the same extent as such
      controlled person to any person to whom such
      controlled person is liable ... , unless the
      controlling person acted in good faith and did
      not directly or indirectly induce the act or acts
      constituting the violation or cause of action.

15 U.S.C. § 78t(a). 19 Section 20(a) thus opens the possibility
of making “controlling persons jointly and severally liable
      19
        Although § 20(a) governs the Investors’ “controlling
person” claims, we have said that “§ 20(b), not § 20(a),
defines the general standard of lawfulness to which a




                              20
with the controlled person” for violations of the Exchange
Act. In re Merck & Co., Inc. Sec. Litig., 432 F.3d 262, 275
(3d Cir. 2005). “Under the plain language of the statute,
plaintiffs must prove not only that one person controlled
another person, but also that the ‘controlled person’ is liable
under the [Exchange] Act.” In re Alpharma Sec. Litig., 372
F.3d 137, 153 (3d Cir. 2004) (internal quotation marks
omitted), abrogated on other grounds by Tellabs, Inc. v.
Makor Issues & Rights, Ltd., 551 U.S. 308 (2007).

        In addition to the statutory elements of controlling
person liability, we have also held that, in order for secondary
liability to attach under § 20(a), the defendant “must have
been a ‘culpable participant’ in the ‘act or acts constituting
the violation or cause of action.’” 20 SEC v. J.W. Barclay &

controlling person must conform.” SEC v. J.W. Barclay &
Co., 442 F.3d 834, 844 n.14 (3d Cir. 2006) (citing SEC v.
Coffey 493 F.2d 1304, 1318 (6th Cir. 1974)). Section 20(b)
provides that “[i]t shall be unlawful for any person, directly or
indirectly, to do any act or thing which it would be unlawful
for such person to do under the provisions of this chapter or
any rule or regulation thereunder through or by means of any
other person.” 15 U.S.C. § 78t(b).
       20
           We derived that requirement from the legislative
history of § 20(a), comparing an “insurer’s liability” standard
proposed by the Senate, with the “fiduciary standard”
proposed by the House and ultimately adopted in the text of §
20(a). We thus determined that Congress did not intend for
controlling persons to be the “insurer against the fraudulent
activities of another,” but rather that “what Congress did
intend was to impose liability on those who were controlling
persons and who were in some meaningful sense culpable




                               21
Co., 442 F.3d 834, 841 n.8 (3d Cir. 2006) (citing Rochez
Bros., Inc. v. Rhoades, 527 F.2d 880, 889-90 (3d Cir. 1975));
see also Sharp v. Coopers & Lybrand, 649 F.2d 175, 185 (3d
Cir. 1981), overruled on other grounds by In re Data Access
Sys. Sec. Litig., 843 F.2d 1537 (3d Cir. 1988) (en banc) (“One
element of any case imposing liability under § 20(a) is
‘culpable participation’ in the securities violation.”).
Examples of such culpable participation include an
executive’s transfer of assets to himself so that the brokerage
firm he controlled would be unable to pay a penalty to the
SEC, see J.W. Barclay & Co., 442 F.3d at 841 n.8, and a
broker-dealer’s “active participation” in a scheme to induce
investors to purchase stock in an insolvent company in which
the role of the broker-dealer and its sole shareholder “was not
merely that of a facade for fraud but rather one of a culpable

participants in the fraud perpetrated by the controlled
persons.” Rochez Bros., Inc. v. Rhoades, 527 F.2d 880, 885
(3d Cir. 1975) (internal quotation marks omitted).
Notwithstanding our articulation of that culpable participation
requirement, a difference of opinion has emerged among
district courts of this Circuit as to the pleading requirements
for a § 20(a) claim. Compare In re Able Labs. Sec. Litig., No.
05-2681, 2008 WL 1967509, at *29 (D.N.J. Mar. 24, 2008)
(“[T]he Third Circuit does not require that culpable
participation be pled in order to establish controlling person
liability.”), with In re Nice Sys., Ltd. Sec. Litig., 135 F. Supp.
2d 551, 588 (D.N.J. 2001) (noting that culpable participation
is an element of a § 20(a) claim when deciding a motion to
dismiss). Because we hold that the Investors have failed to
satisfy the culpable participation requirement for purposes of
summary judgment, we need not, and do not, resolve the
pleading issue at this time.




                               22
confederate,” Straub v. Vaisman & Co., Inc., 540 F.2d 591,
596 (3d Cir. 1976).

        The Investors point to no acts by the MB Directors in
furtherance of the North Hills fraud, but rather seek to
proceed on a theory of inaction. “To impose secondary
liability on a controlling person for his inaction, the plaintiff
must prove that the inaction ‘was deliberate and done
intentionally to further the fraud.’” Sharp, 649 F.2d at 185
(quoting Rochez Bros., 527 F.2d at 890). The Investors
contend that culpable participation “may be premised on
inaction[] ... if it is apparent that the inaction intentionally
furthered the fraud or prevented its discovery.” (Appellants’
Opening Br. at 37 (quoting Rochez Bros., 527 F.2d at 890
(emphasis added in quotation) (internal quotation marks
omitted).) The Investors thus appear to suggest that any
inaction that prevented the discovery of the fraud is sufficient
for culpable participation.

        However, it is clear from Rochez Brothers that the
requirement that the inaction be intentional applies both to
furthering the fraud and to preventing its discovery, and that
knowledge of the underlying fraud is required in either case.
“[I]naction alone cannot be a basis for liability,” Rochez
Bros., 527 F.2d at 890, and a § 20(a) claim based on inaction
fails if the controlling person “had no knowledge of [the
controlled person’s] fraudulent acts and did not consciously
intend to aid” the controlled person, id. (internal quotation
marks omitted). Culpable participation requires knowledge
because, “[i]n order to be a participant, the defendant must
have some actual knowledge of the fraudulent activity taking
place or knowledge must be imputed to him or her… .”
Poptech, L.P. v. Stewardship Credit Arbitrage Fund, LLC,




                               23
792 F. Supp. 2d 328, 341 (D. Conn. 2011) (internal quotation
marks omitted); see also id. (noting also that “knowledge is a
first step in proving active participation” (internal quotation
marks omitted)). The Investors have not alleged that the MB
Directors or the Centre Defendants knew of the North Hills
fraud, and in fact they concede a lack of knowledge in that
“MB’s compliance officers failed to follow up on significant
‘red flags’ that, if investigated, would have undoubtedly
indentified Bloom’s fraud and prevented Investors’ losses.”
(Appellant’s Opening Br. at 40.)

        The Investors argue, however, that “because liability is
secondary and not primary, a plaintiff need only [prove] a
state of mind approximating recklessness … and not the sort
of knowing misconduct that would be required to state a
primary violation claim under Section 10(b).” (Appellants’
Opening Br. at 37 (citation and internal quotation marks
omitted).) They primarily rely on an unreported district court
case, Lautenberg Foundation v. Madoff, No. 09-816, 2009
WL 2928913, at *15 (D.N.J. Sept. 9, 2009), for the
proposition that “reckless failure to detect the fraud through
enforcement of a reasonably adequate system of internal
controls establishes ... participation in the fraud for purposes
of [a] Section 20(a) claim.” (Appellants’ Opening Br. at
38.) 21 As they see it, the failure of the MB Directors and the

       21
          The Investors’ reliance on Lautenberg Foundation at
this stage of the proceedings concerning their § 20(a) claims
is somewhat misplaced, because the quoted language
describes the district court’s view of the pleading standard
necessary to survive a motion to dismiss, and not the proof
required to survive a motion for summary judgment. See
Lautenberg Found., 2009 WL 2928913, at *15 (concluding




                              24
Centre Defendants to monitor Bloom’s activity with respect
to North Hills, and in particular their failure to install an
effective compliance system at MB, satisfies that recklessness
standard.

        That approach is problematic. To begin with, the
Investors’ contention that they need only prove recklessness
because § 20(a) liability is “secondary and not primary” is
contrary to the general principle that, when liability is
secondary or derivative, a more culpable mens rea, not a
lesser one, is required. See, e.g., MGM Studios, Inc. v.
Grokster, Ltd., 545 U.S. 913, 930 (2005) (noting that
secondary liability for copyright infringement requires
intentional inducement of direct infringement); Inwood Labs.,
Inc. v. Ives Labs., Inc., 456 U.S. 844, 854 (1982) (holding that
secondary liability for trademark infringement arises when a
manufacturer or distributor intentionally induces another to
infringe); Vita-Mix Corp. v. Basic Holding, Inc., 581 F.3d
1317, 1328 (Fed. Cir. 2009) (noting that secondary liability
for patent infringement requires a showing that the defendant
“knowingly induced the infringing acts” with “a specific
intent to encourage another’s infringement of the patent”);
Decker v. SEC, 631 F.2d 1380, 2387 n.12 (10th Cir. 1980)
(noting that many courts have concluded that secondary
liability for securities law violations requires either intent to
aid and abet or knowledge of the underlying violation).

       In addition, contrary to the Investors’ contention, there
is no support for the proposition that reckless inaction without
knowledge of the underlying fraud is sufficient to establish

only that “the Complaint satisfactorily pleads all elements of
a prima facie control person claim”).




                               25
culpable participation for purposes of a § 20(a) claim. The
discussion in Lautenberg Foundation does not appear to go
that far. See Lautenberg Found., 2009 WL 2928913, at *14
(“[T]he Complaint adequately pleads that [Defendant] knew
or should have known that [his company] was engaging in a
massive, multi-billion dollar Ponzi scheme.”); id. at *15
(“While mere inaction is not enough to rise to culpable
participation, this Complaint pleads more than that.”).
However, to the extent that that case can be read to suggest
that knowledge of the underlying securities law violation is
not required, we expressly reject it as incompatible with the
“culpable participation” standard we articulated in Rochez
Brothers.

       Moreover, even if reckless inaction on the part of
controlling persons, without knowledge of the underlying
fraud, were sufficient to satisfy the culpable participation
requirement, that standard is not met in this case. A failure to
oversee the enforcement of compliance protocols does not
necessarily constitute recklessness for purposes of a § 20(a)
claim. Cf. In re Advanta Corp. Sec. Litig., 180 F.3d 525, 539-
40 (3d Cir. 1999) (noting that recklessness for purposes of
Rule 10b-5 requires “an extreme departure from the standards
of ordinary care” and that “claims essentially grounded on
corporate mismanagement are not cognizable under federal
law” (citation and internal quotation marks omitted));
Henricksen v. Henricksen, 640 F.2d 880, 885 (7th Cir. 1981)
(acknowledging that the defendant “did not properly follow
its own compliance rules” but holding that “the technical lack
of compliance in these matters ... would not have constituted
a violation of Section 20(a)”).        The fact that sloppy
compliance practices at MB may have resulted in a lack of
knowledge about Bloom’s activities at North Hills is thus




                              26
insufficient to establish culpable participation for purposes of
§ 20(a) liability. 22

       As the District Court noted, “the only answer to the
question of what the [MB Directors and the] Centre
Defendants did that intentionally furthered the fraud of
Bloom is nothing.” (App. at 16.) Under the culpable
participation standard that we articulated in Rochez Brothers,
that answer is fatal to a § 20(a) claim, and the District Court
properly granted summary judgment to the MB Directors and
the Centre Defendants on that claim.




       22
          The recklessness alleged in this case also bears little
resemblance to that in Lautenberg Foundation. In that case,
the defendant was the chief compliance officer and general
counsel of the company that perpetrated a massive Ponzi
scheme. 2009 WL 2928913, at *2. The Court therefore held
that, “[a]ssuming the truth of the allegations, his reckless
failure to detect fraud through enforcement of a reasonably
adequate system of internal controls establishes his
participation in the fraud for purposes of the Section 20(a)
claim[]” because he was “charged with the responsibility and
authority to run [the company] in accordance with the law.
Id. at *15. In this case, none of the MB Directors or Centre
Defendants worked for, let alone had any compliance
responsibilities at, North Hills, the entity at which the actual
fraud occurred, so that their alleged failure to instill a culture
of compliance at MB cannot constitute recklessness as it
related to North Hills.




                               27
              2.     Negligent Supervision Claim Against the
                     MB Directors
       The District Court granted summary judgment to the
MB Directors on the Investors’ negligent supervision claim
because “[t]he cases applying this tort under Pennsylvania
law repeatedly note that liability is imposed upon an
employer” (Id. at 18), and “it does not follow that [Bloom’s]
employment with MB turned individual board members of
MB into Bloom’s employers as well” (id. at 19). The District
Court also held that, “[t]o succeed on this claim, there must
be evidence that the individuals charged with negligent
supervision knew or should have know that Bloom would
operate North Hills ... as a Ponzi scheme” (Id. at 19), and that,
absent a showing of such knowledge, “there is no evidence
that Bloom’s fraud was reasonably foreseeable.” (Id.).

       The Investors assert in response that “[p]ersons vested
with supervisory responsibilities like the individual MB and
Centre [defendants], who are corporate officers and directors
of MB, can be liable for negligent supervision” under
Pennsylvania law. (Appellants’ Opening Br. at 27.) They
further argue that the failure of the MB Directors to monitor
Bloom’s activities, when those directors were aware that he
was operating North Hills as a separate venture, rendered the
fraud foreseeable as a matter of law. Neither of the Investors’
arguments is persuasive.

                    i.      Negligent Supervision Claims
                            Against Corporate Directors

      To recover for negligent supervision under
Pennsylvania law, a plaintiff must prove that his loss resulted
from (1) a failure to exercise ordinary care to prevent an




                               28
intentional harm by an employee acting outside the scope of
his employment, (2) that is committed on the employer’s
premises, (3) when the employer knows or has reason to
know of the necessity and ability to control the employee. 23
       23
           Pennsylvania cases that recognize vicarious liability
for negligent supervision draw on both the Restatement
(Second) of Agency and the Restatement (Second) of Torts.
See, e.g., Dempsey v. Walso Bureau, Inc., 246 A.2d 418, 419-
20 (Pa. 1968); Heller v. Patwil Homes, Inc., 713 A.2d 105,
107 (Pa. Super. Ct. 1998). Section 213 of the Restatement
(Second) of Agency provides, in relevant part:
       A person conducting an activity through
       servants or other agents is subject to liability for
       harm resulting from his conduct if he is
       negligent or reckless: … [b] in the employment
       of improper persons or instrumentalities in
       work involving risk of harm to others; or [c] in
       the supervision of the activity; or [d] in
       permitting, or failing to prevent, negligent or
       other tortious conduct, by persons, whether or
       not his servants or agents, upon premises or
       with instrumentalities under his control.
Id. Section 317 of the Restatement (Second) of Torts
provides:
       A master is under a duty to exercise reasonable
       care so to control his servant while acting
       outside the scope of his employment as to
       prevent him from intentionally harming others
       … if
       (a) the servant (i) is upon the premises in
       possession of the master or upon which the




                               29
Dempsey v. Walso Bureau, Inc., 346 A.2d 418, 420 (Pa.
1968); Heller v. Patwil Homes, Inc., 713 A.2d 105, 107-08
(Pa. Super. Ct. 1998).

        Negligent supervision requires the four elements of
common law negligence, i.e., duty, breach, causation, and
damages. Brezenski v. World Truck Transfer, Inc., 755 A.2d
36, 42 (Pa. Super. Ct. 2000) (citing Restatement (Second) of
Agency § 213 cmt. a). It is specifically predicated on two
duties of an employer: the duty to reasonably monitor and
control the activities of an employee, and the duty to abstain
from hiring an employee and placing that employee in a
situation where the employee will harm a third party. 24 See


      servant is privileged to enter only as his servant,
      or (ii) is using a chattel of the master, and
      (b) the master (i) knows or has reason to know
      that he has the ability to control his servant, and
      (ii) knows or should know the necessity and
      opportunity for exercising such control.
Id. The MB Defendants argue that that provision “relates
solely to bodily harm, not the purely economic harm at issue
here.” (MB Defendants’ Br. at 20 (citing Semrad v. Edina
Realty, Inc., 493 N.W.2d 528, 534 (Minn. 1992) (“Nothing in
section 317 calls for its application in a case involving
economic loss only.”)).) However, Pennsylvania does not
appear to limit the tort of negligent supervision to cases of
physical injury. See Heller, 713 A.2d at 109 (considering an
“investment scam”).
      24
         We have also described negligent supervision under
Pennsylvania law as existing “where the employer fails to
exercise ordinary care to prevent an intentional harm to a




                              30
Hutchinson v. Luddy, 742 A.2d 1052, 1059-60 (Pa. 1999)
(affirming the applicability of common law negligence and
discussing the duty of an employer articulated in Section 317
of the Restatement).

       Negligent supervision differs from            employer
negligence under a theory of respondeat superior.

      A claim for negligent supervision provides a
      remedy for injuries to third parties who would
      otherwise be foreclosed from recovery under
      the principal-agent doctrine of respondeat
      superior because the wrongful acts of

third party which (1) is committed on the employer’s
premises by an employee acting outside the scope of his
employment and (2) is reasonably foreseeable.” Petruska v.
Gannon Univ., 462 F.3d 294, 309 n.14 (3d Cir. 2006)
(internal quotation marks omitted). The harm caused by the
employee must be reasonably foreseeable because “[l]iability
under Section 213 [of the Restatement [Second] of Agency]
exists only if all the requirements of an action of tort for
negligence exist.” Gigli v. Palisades Collection, L.L.C., No.
06-1428, 2008 WL 3853295, at *16 (M.D. Pa. Aug. 14, 2008)
(internal quotation marks omitted) (citing Brezenski v. World
Truck Transfer, Inc., 755 A.2d 36, 42 (Pa. Super. Ct. 2000)).
The definitions of negligent supervision set forth in Dempsey,
supra, and Petruska are the same, but the former emphasizes
the foreseeability of the need to control the employee, while
the latter stresses the foreseeability of the harm the employee
causes. We discuss these foreseeability requirements infra
Part II.A.2.ii.




                              31
       employees in these cases are likely to be outside
       the scope of employment or not in furtherance
       of the principal’s business.”

In re Am. Investors Life Ins. Co. Annuity Mktg. & Sales
Practices Litig., No. 05-3588, 2007 WL 2541216, at *29
(E.D. Pa. Aug. 29, 2007) (citing Heller, 713 A.3d at 107).

        The question of whether a corporate director, rather
than a corporation as employer, may be held liable for
negligent supervision can be resolved by asking whether a
director owes a duty to third parties to supervise the
corporation’s culpable employee. See Harris v. KFC U.S.
Props., Inc., No. 10-3198, 2012 WL 2327748, at *6 n.8 (E.D.
Pa. June 18, 2012) (noting that “in cases alleging negligent
hiring and supervising, the disputed issue is typically whether
a duty to a third party exists”). It is true that corporate
directors are often said to have, as part of their fiduciary duty
of loyalty, a duty to act in good faith for the benefit of the
corporation, see Stone ex rel. AmSouth Bancorp. v. Ritter, 911
A.2d 362, 370 (Del. 2006) (describing “the requirement to act
in good faith” as “a subsidiary element[,] i.e., a condition, of
the fundamental duty of loyalty” (internal quotation marks
omitted)), and that, in turn, has been held to incorporate a
duty of oversight, see In re Caremark Intern., Inc., Derivative
Litig., 698 A.2d 959, 971 (Del. Ch. 1996) (positing liability
due to “a sustained or systematic failure of the board to
exercise oversight – such as an utter failure to attempt to
assure [that] a reasonable information and reporting system
exists”). But that has never been understood as placing on
directors the responsibility for day-to-day supervision of
employees. On the contrary, those quotidian tasks are the
work of employee-supervisors, not the board of directors. See




                               32
id. (noting that “require[ing] directors to possess detailed
information about all aspects of the operation of the
enterprise[] ... would simpl[y] be inconsistent with the scale
and scope of efficient organization size in this technological
age”).

        The fiduciary duties of the board are of a different
character entirely. See Winer Family Trust v. Queen, 503
F.3d 319, 338 (3d Cir. 2007) (“Under Pennsylvania law,
corporate directors owe fiduciary duties ... ‘solely to the
business corporation ... [that] may not be enforced directly by
a shareholder or by any other person or group.’” (quoting 15
Pa. Cons. Stat. Ann. § 1717)). Consequently, “in the absence
of special circumstances it is the corporation, not its owner or
officer, who is the principal or employer, and thus subject to
vicarious liability for torts committed by its employees or
agents.” Meyer v. Holley, 537 U.S. 280, 286 (2003). “[A]
corporate employee typically acts on behalf of the
corporation, not its owner or officer,” id., so that there is no
agency relationship between an officer or director and an
employee.

       Virtually all of the cases in which liability for
negligent supervision has been found under Pennsylvania law
concern corporations and their employees. 25 See, e.g.,

       25
         The Investors rely heavily on Hutchinson v. Luddy,
742 A.2d 1052 (Pa. 1999), for the proposition that “claims for
negligent supervision may include ‘superiors’ of servants who
commit wrongful acts.” (Appellants’ Opening Br. at 28
(citing Hutchinson, 742 A.2d at 1059).) The Investors also
argue that “the court in Hutchinson focused on who had
‘supervisory responsibility or a real right to consider the




                              33
issues of [the employee’s] retention.’”          (Id. (quoting
Hutchinson, 742 A.2d at 1057.) Hutchinson concerned claims
of child molestation against a priest in the Roman Catholic
Diocese of Altoona-Johnstown. The Court found that the
bishop (as well as the Diocese) could be held liable for
negligent supervision because he “knew for certain that [the
priest] had a propensity for pedophilic behavior and [was]
aware of several specific instances of such conduct.”
Hutchinson, 742 A.2d at 1059.
        Hutchinson, however, is inapposite. The Investors
quote the phrase “supervisory responsibility or a real right to
consider the issue of [the employee’s] employment” (which
the trial court in Hutchinson had used as part of a jury
instruction) entirely out of context. That phrase was intended
to distinguish the supervisory role of the Diocese and the
bishop from that of the priest’s former parish and pastor, after
the priest had left the parish and was employed directly by the
Diocese. See id. at 1056-57. The statement does not suggest
general liability for those in a “supervisory” capacity, and all
the cases cited by the Hutchinson court as “analogous,” id. at
1058, involve a defendant that was a corporate entity and
harm that was caused by an employee or agent of that entity.
See id. at 1058-59 (discussing Dempsey, 246 A.2d at 418
(security agency defendant for assault by employee guard);
Golden Spread Council, Inc. v. Akins, 926 S.W.2d 287 (Tex.
1996) (local branch of Boy Scouts of America defendant for
sexual molestation by scoutmaster); Macquay v. Eno, 662
A.2d 272 (N.H. 1995) (school district defendant for
employees’ abuse of students)). Also, “in Hutchinson,
liability clearly was premised upon the master-servant
relationship between the priest and his superiors as well as the
special relationship between the parishioner, on the one hand,




                              34
Dempsey, 248 A.3d at 420-23 (discussing various early cases
of negligent supervision, in all of which the defendant was a
corporate employer); Harris, 2012 WL 2327748, at *7
(considering liability of fast food company for assault by
employee on a customer who was slow in ordering); Corr.
Med. Care, 2008 WL 248977, at *15-16 (considering liability
of employer for failure to supervise employees conducting
private investigations); In re Am. Investors Life Ins. Co., 2007
WL 2541216, at *29 (dismissing negligent supervision claims
against insurer for fraudulent sales practices by employees
because they were acting at the employer’s direction). We
take that clear feature to be dispositive, so that when, as in
this case, “Plaintiff alleges in the Complaint that [Defendant]
is ... not an employer ... ‘negligent supervision’ is not a viable
theory of liability.” Quandry Solutions, Inc. v. Verifone Inc.,
No. 07-97, 2007 WL 655606, at *5 (E.D. Pa. Mar. 1, 2007);
cf. id. (“In contrast to the employer-employee context, there is
no general duty for a parent corporation to supervise its
subsidiary; absent a piercing of the corporate veil, a parent
corporation is not normally liable for wrongful acts or
contractual obligations of a subsidiary ... .” (internal quotation
marks omitted)).

       As the District Court noted, the Investors brought their
negligent supervision claim only against the MB Directors,


and the superiors of the church, on the other hand.” F.D.P. ex
rel. S.M.P. v. Ferrara, 804 A.2d 1221, 1229 (Pa. Super. Ct.
2002). Bloom did not stand in the same relationship to the
MB Directors as a priest to his bishop, nor do the Investors
stand in the same sort of relationship to the MB Directors as
parishioners to the hierarchy of a Catholic Diocese.




                               35
and not against MB as Bloom’s employer, 26 and “[i]t does not
follow that [Bloom’s] employment with MB turned individual
board members of MB into Bloom’s employers as well.”
(App. at 19.) As a result, the Investors’ claim against the
directors under a theory of negligent supervision is not viable,
notwithstanding their efforts to cast the directors in a
“supervisory” role. 27




       26
           The Investors have included MB as one of the “MB
Parties” against whom they assert liability for negligent
supervision in their brief on appeal. (See Appellants’
Opening Br. at 5, 29, 35.) However, the Amended Complaint
alleged liability “[f]or Negligent Supervision By Officers and
Directors” only against the MB Directors. (See App. at 103.)
The reasons for that pleading choice are not clear from the
record, but MB was not the subject of the allegations in the
Investors’ negligent supervision claim.
       27
           The Investors allege that Machinist occupied a
different supervisory position from the other MB Directors in
that, as MB’s chief operating officer, he was Bloom’s
“immediate superior.” (Appellants’ Opening Br. at 29.)
However, the extent of Machinist’s supervisory authority
over Bloom is not clear from the record. Machinist and
Bloom were co-managing partners of MB and held the same
percentage ownership in the company, suggesting that they
may have been effectively of equal rank in the organization.
But even if Machinist had a supervisory role greater than that
of the other MB Directors, the Investors’ negligent
supervision claim against him still fails based on a lack of
foreseeability, as discussed infra Part II.A.2.ii.




                              36
                   ii.      Foreseeability Requirement for
                            Negligent Supervision

        Even assuming that corporate directors may be held
liable as “supervisors,” to prevail in their claim for negligent
supervision, the Investors would also have to satisfy two
separate foreseeability requirements.           First, “[u]nder
Pennsylvania law, ... an employer may be liable for
negligence if it knew or should have known of the necessity
for exercising control of its employee.” Devon IT, Inc. v.
IBM Corp., 805 F. Supp. 2d 110, 132 (E.D. Pa. 2011) (citing
Brezenski v. World Truck Transfer, Inc., 755 A.2d 36, 39-40
(Pa. Super. Ct. 2000) (citing Dempsey, 246 A.2d at 422)).
Second, the harm that the improperly supervised employee
caused to the third party must also have been reasonably
foreseeable. Petruska v. Gannon Univ., 462 F.3d 294, 309
n.14 (3d Cir. 2006); Mullen v. Topper’s Salon & Health Spa,
Inc., 99 F. Supp. 2d 553, 556 (E.D. Pa. 2000). The
requirement that the employer foresee the need to supervise
the employee comes from § 317 of the Restatement (Second)
of Torts, see supra note 23, and the requirement that the harm
itself is foreseeable comes from § 213 of the Restatement
(Second) of Agency, which requires that all of the elements of
the tort of negligence exist in order for liability for negligent
supervision to attach, see supra note 24.

       An employer knows, or should know, of the need to
control an employee if the employer knows that the employee
has dangerous propensities that might cause harm to a third
party. See Hutchinson, 742 A.2d at 1057-58 (citing Dempsey,
246 A.2d at 423 (holding employer not liable where
employee’s act of “horseplay” while on the job did not
suggest a propensity for violence)); see also Coath v. Jones,




                               37
419 A.2d 1249, 1250 (Pa. Super. Ct. 1980) (holding employer
liable where employer should have known of employee’s
inclination to assault women)). A harm is foreseeable if it is
part of a general type of injury that has a reasonable
likelihood of occurring. See Serbin v. Bora Corp., Ltd., 96
F.3d 66, 72 (3d Cir. 1996) (“The concept of foreseeability
means the likelihood of the occurrence of the general type of
risk rather than the likelihood of the occurrence of the precise
chain of events leading to the injury.”).

       The Investors’ negligent supervision claim fails both
foreseeability tests. First, there is no reason that the MB
Directors should have foreseen the need to supervise Bloom
with respect to his operation of North Hills. An employer is
under “no duty ... to discover, at its peril, the fraudulent
machinations in which [an employee] was involved outside
the scope of his employment.” Cover v. Cushing Capital
Corp., 497 A.2d 249, 253-54 (Pa. Super. Ct. 1985). While
some (and perhaps all) of the MB Directors were aware that
Bloom was running North Hills as a hedge fund outside of
MB, nothing in Bloom’s conduct as an employee of MB
suggested that Bloom would use North Hills to defraud
investors. Nor could the MB Directors have learned of the
fraud without considerable investigation, given Bloom’s
success at concealing the Ponzi-scheme nature of North Hills
for almost ten years. For the same reasons, the Ponzi scheme
and the harm that it would cause to North Hills investors were
not reasonably foreseeable by the MB Directors.

       As the District Court properly noted, the Investors
“failed to submit any evidence that any [of the MB Directors]
had reason to know at the time he was hired that Bloom was
defrauding North Hills, L.P.’s investors” (App. at 20), and the




                              38
Investors merely speculate about what the MB Directors
might have learned had they asked Bloom more questions.
Because a detailed inquiry into an employee’s personal
history or outside activities is not generally required, 28 see
Dempsey, 246 A.2d at 423 (finding no evidence that employer
was negligent in investigating employees’ past or that a more
thorough investigation would have uncovered misconduct),
the negligent supervision claim fails on the basis of
foreseeability, as well as on the defendants’ status as directors
of MB rather than as Bloom’s employers, and the District
Court properly granted summary judgment to the MB
Directors on that claim.

       B.    Claims Under Rule 10b-5 And The UTPCPL
            1.       Rule 10b-5 Violations

       The District Court dismissed the Rule 10b-5 claim
against Altman, noting that “the Amended Complaint makes
no allegations that Altman was aware of Bloom’s
squandering of North Hills’ assets.” (App. at 41.) The Court
explained that MB could not be liable under Section 10(b) of
the Exchange Act and Rule 10b-5 because Bloom’s
fraudulent statements, and Altman’s allegedly deceptive
statements, related solely to investments in North Hills, “an
entity unrelated to MB.” (App. at 21.) The Court noted that
“Plaintiffs do not charge that any individuals made false

       28
           We speak here strictly of the duties associated with
the common law tort of negligent supervision under
Pennsylvania law, and do not imply anything regarding duties
that may exist by virtue of other common law principles,
statutes, rules, or regulations.




                               39
statements about MB or its investments.” (Id.) Moreover, the
Court said, “[w]ere this case about Bloom acting on behalf of
MB, MB could not escape liability for Bloom’s conduct,” but
“this case presents a different set of circumstances” because
Bloom’s fraud was perpetrated through an entity that had
existed before he began working for MB and that had many
investors who were not investors in MB. (Id.)

        The Investors challenge the District Court’s reasoning
as to both Altman and MB, claiming that the Court
“referenced no factual support for it premise that North Hills
and MB were unrelated in the context of the Investors’ [10b-
5] claims.” (Appellants’ Opening Br. at 42.) The Investors
also argue that the District Court erred when it dismissed their
10b-5 claim against Altman because they had “allege[d] facts
sufficient to give rise to a strong inference that defendants
were reckless.” (Id. at 53.) Finally, the Investors say that
statements by Bloom and Altman may be imputed to MB,
“regardless of whether North Hills was affiliated with MB,
because [their statements] were made in the course of their
employment and with the apparent authority of MB.” (Id. at
43.)

       Rule 10b-5 makes it “unlawful ... [t]o engage in any
act, practice, or course of business which operates or would
operate as a fraud or deceit upon any person[] in connection
with the ... sale of any security.” 17 C.FR. § 240.10b-5. The
Rule implements Section 10(b) of the Exchange Act, which
makes it unlawful to “use or employ, in connection with the
purchase or sale of any security ... , any manipulative or
deceptive device or contrivance in contravention of such rules
and regulations as the [SEC] may prescribe.” 15 U.S.C.
§ 78j(b).




                              40
       To make out a securities fraud claim under Rule 10b-5,
“a plaintiff must show that (1) the defendant made a
materially false or misleading statement or omitted to state a
material fact necessary to make a statement not misleading;
(2) the defendant acted with scienter; and (3) the plaintiff’s
reliance on the defendant’s misstatement caused him or her
injury.” Marion v. TDI, Inc., 591 F.3d 137, 152 (3d Cir.
2010) (internal quotation marks omitted). Scienter is “an
intent to deceive, manipulate, or defraud.” Scattergood v.
Perelman, 945 F.2d 618, 622 (3d Cir. 1991) (citing Ernst &
Ernst v. Hochfelder, 425 U.S. 185, 194-214 (1976)). Rule
10b-5 thus requires “more than negligent nonfeasance ... as a
precondition to the imposition of civil liability.” Id., 425 U.S.
at 215. The pleading requirements for a Rule 10b-5 violation
are heightened by the Private Securities Litigation Reform
Act (PSLRA), Pub. L. No. 104-67, 109 Stat. 737 (1995),
which requires that a plaintiff “state with particularity facts
giving rise to a strong inference that the defendant acted with
the required state of mind.” 15 U.S.C. § 78u-4(b)(2).

                    i.      The 10b-5 Claim Against Altman

       The 10b-5 claim against Altman fails for the simple
reason that the Investors have provided no evidence of
scienter. To prove scienter, the Investors must show that
Altman, with “a mental state embracing intent to deceive,
manipulate, or defraud,” Tellabs, 551 U.S. at 319 (quoting
Ernst & Ernst, 425 U.S. at 193-94), made some material
misrepresentation or omitted some material fact and so left a
materially misleading impression on them. The Investors
have adduced no such proof. They do not contend that, when
Altman and Bloom met with Belmont and Wallace of PFS, or




                               41
that when Altman allegedly marketed North Hills as an MB
investment option to the Kellys, Altman knew that North
Hills was a fraud. The most they have said on this score is
that Altman “touted” North Hills.

        The Investors likewise fail to “specify the role” of
Altman in Bloom’s fraud or to “demonstrate[e] ... [his]
involvement in misstatements or omissions,” see Winer
Family Trust, 503 F.3d at 335-36, as required under the
PSLRA. Rather, the Investors attempt to satisfy the scienter
requirement, and the PSLRA’s heightened pleading standard,
by arguing that Altman’s praise of North Hills without
sufficient investigation gives rise to a “strong inference that
defendants were reckless.” (Appellants’ Opening Br. at 53.)
However, for purposes of a Rule 10b-5 claim, “[a] reckless
statement is one involving not merely simple, or even
inexcusable negligence, but an extreme departure from the
standards of ordinary care, and which presents a danger of
misleading buyers or sellers that is either known to the
defendant or is so obvious that the actor must have been
aware of it.” Inst. Invs. Grp. v. Avaya, Inc., 564 F.3d 242,
267 n.42 (3d Cir. 2009) (quoting In re Advanta Corp. Sec.
Litig., 180 F.3d 525, 535 (3d Cir. 1999)) (internal quotation
marks omitted). Even if Altman did discuss North Hills as an
investment option with Belmont, Wallace, or the Kellys, there
is no evidence that the danger of misleading them was either
known to Altman or so obvious that it should have been
known, given Bloom’s apparently successful investment track
record. Therefore, Altman’s statements about North Hills
were neither knowingly false nor reckless, and the District
Court properly dismissed the 10b-5 claim against him.




                              42
                  ii.      The 10b-5 Claim Against MB

       In contrast to Altman, Bloom’s violations of Rule 10b-
5 are beyond dispute, 29 and the Investors argue that those
violations may be imputed to MB as his employer. The
Investors argue for imputation of Rule 10b-5 liability to MB
because “Bloom jointly marketed MB and North Hills, led
Investors to believe [North Hills] was a[n] MB product[,] and
[Bloom] was not the only MB employee involved in
marketing North Hills,” the others being Machinist and
Altman. (Appellant’s Opening Br. at 42.)

       Although the Investors’ underlying securities fraud
claims are governed by federal law, the issue of imputation is
determined by state law. See O’Melveny & Myers v. Fed.
Deposit Ins. Corp., 512 U.S. 79, 84-85 (1994) (declining to
“adopt[] a special federal common-law rule divesting States
of authority over the entire law of imputation” and holding
that “[state] law, not federal law, governs the imputation of
knowledge to corporate victims of alleged negligence”).
Under Pennsylvania law,

      [T]he fraud of an officer of a corporation is
      imputed to the corporation when the officer’s
      fraudulent contact was (1) in the course of his
      employment, and (2) for the benefit of the
      corporation. This is true even if the officer’s
      conduct was unauthorized, effected for his own
      benefit but clothed with apparent authority of

      29
           Bloom pleaded guilty to all of the fraud-based
counts in the Information filed against him. See supra Part
I.A.5.




                             43
       the corporation, or contrary to instructions. The
       underlying reason is that a corporation can
       speak and act only through its agents and so
       must be accountable for any acts committed by
       one of its agents within his actual or apparent
       scope of authority and while transacting
       corporate business.

In re Pers. & Bus. Ins. Agency, 334 F.3d 239, 242-43 (3d Cir.
2003) (internal quotation marks omitted). 30

      “[T]he imputation doctrine recognizes that principals
generally are responsible for the acts of agents committed
within the scope of their authority.” Official Comm. of
Unsecured Creditors of Allegheny Health Educ. & Research
Found. v. PriceWaterhouseCoopers, LLP (AHERF), 989 A.2d
313, 333 (Pa. 2010). “This rule of liability is not based on
any presumed authority in the agent to do the acts, but on the
ground of public policy … that the principal who has placed

       30
         Although we did not base that imputation standard,
which we first articulated in Rochez Brothers, 527 F.2d at
884, specifically on Pennsylvania law, “the principles which
[we] espoused are consistent with Pennsylvania agency law,
succinctly stated by the Pennsylvania Supreme Court long
ago.” Greenberg v. Grant Thornton L.L.P. (In re Greenberg),
212 B.R. 76, 83-84 (Bankr. E.D. Pa. 1997) (citing Nat’l Bank
of Shamokin v. Waynesboro Knitting Co., 172 A. 131, 134
(Pa. 1934) (“The rule that knowledge or notice on the part of
the agent is to be treated as notice to the principal is founded
on the duty of the agent to communicate all material
information to his principal and the presumption that he has
done so.”)).




                              44
the agent in the position of trust and confidence should suffer,
rather than an innocent stranger.” Aiello v. Ed Saxe Real
Estate, Inc., 499 A.2d 282, 285 (Pa. 1985). The imputation
doctrine also advances public policy goals in that, “because it
is the principal who has selected and delegated responsibility
to [its] agents[,] ... the doctrine creates incentives for the
principal to do so carefully and responsibly.” AHERF, 989
A.2d at 333 (citing Aiello, 499 A.2d at 285-86); accord
Restatement (Third) of Agency § 5.03 cmt. b (2006)
(“Imputation creates incentives for a principal to choose
agents carefully and to use care in delegating functions to
them.”).

        Public policy concerns also implicate the “adverse
interest” exception to the imputation doctrine. Under the
“adverse interest” exception, “where an agent acts in his own
interest, and to the corporation’s detriment, imputation
generally will not apply.” AHERF, 989 A.2d at 333 (citing
Todd v. Skelly, 120 A.2d 906, 909 (Pa. 1956)). The District
Court applied the adverse interest exception only in the
context of the UTPCPL, discussed infra Part II.C.2, and held
that it barred imputation of Bloom’s violations of that statute
to MB. However, as the MB Defendants point out, arguments
as to the potential application of the adverse interest
exception “apply with equal force” to the Investors’ 10b-5
claim (MB Defendants’ Br. at 14), and so we turn to that
exception at this point.

        “The primary controversy surrounding the appropriate
application of the adverse-interest exception ... concerns the
degree of self-interest required, or, conversely, the quantum
of benefit to the corporation necessary to avoid the
exception’s application (where self-interest is evident).”




                              45
AHERF, 989 A.2d at 334. At one end of the spectrum are
cases holding that any benefit to the corporation will bar the
application of the exception and trigger imputation. Cf. Todd,
120 A.2d at 909 (“Where an agent acts in his own interest
which is antagonistic to that of his principal, ... the principal
who has received no benefit therefrom will not be liable for
the agent’s tortious act.”). At the other end of the spectrum
are cases that hesitate to impute liability, even in the face of
some benefit to the corporation. Cf. Adelphia Commc’ns
Corp. v. Bank of America (In re Adelphia Commc’ns Corp.),
365 B.R. 24, 56 (Bankr. S.D.N.Y. 2007) (finding that the
adverse interest exception might be applicable when there
was only “a peppercorn of benefit to a corporation from the
wrongful conduct”). Courts that favor “strong imputation
rules, including a low threshold for benefit, support[] a potent
form of in pari delicto defense,” AHERF, 989 A.2d at 334,
based on a concern “that weakening the defense and
associated rules of imputation would represent an
inappropriate reallocation of risks, as well as eviscerate
socially useful defenses which otherwise would be available
to those who transact with corporations,” id. (citing Am. Int’l
Grp., Inc. Consol. Derivative Litig. v. Greenberg, 976 A.2d
872, 889 (Del. Ch. 2009)). By contrast, courts that see
“difficulty with applying too liberal a litmus for benefit,”
AHERF, 989 A.2d at 334, are concerned about potential
“collusion between the agent and the defendant,” id., because
imputation, and the resulting availability of the in pari delicto
defense, “would provide total dispensation to defendants
knowingly and substantially assisting insider misconduct,” id.
at 335 (quoting In re Adelphia Commc’ns Corp., 365 B.R. at
56).




                               46
       Whatever conclusions the District Court may have
reached about the policy concerns affecting the adverse
interest exception, 31 it erred in applying it. Under the
exception, “the question generally should be whether there is
a sufficient lack of benefit (or apparent adversity) [to the
corporation] such that it is fair to charge the third party with
notice that the agent is not acting with the principal’s
authority.” AHERF, 989 A.2d at 338. The Court presumed
that knowledge of Bloom’s fraud is not imputable to MB
because “[[w]]here one in transacting the business of his
principal is committing fraud for his own benefit, he is not
acting within the scope of his authority as his principal’s
agent ... .” (App. at 26 (quoting Lilly v. Hamilton Bank of
N.Y., 178 F. 53, 56 (3d Cir. 1909) (internal quotation marks
omitted).) However, imputation to an employer is proper
based on “acts committed by one of its agents within his
actual or apparent scope of authority,” In re Pers. & Bus. Ins.
Agency, 334 F.3d at 243, and a swindler may still act with
apparent authority, even if he is acting for his own benefit.
Also, the District Court found sufficient “adversity of
interest” in the fact that the discovery of the North Hills fraud
ultimately destroyed MB as well. But that adverse impact
occurred only after the exposure of the North Hills Ponzi
scheme. While the scheme was on-going, at the time the
Investors put their money in North Hills, what they knew did
not necessarily give them notice that Bloom was acting

       31
           It does not appear that this case implicates the
concerns about the availability of the in pari delicto defense
that one might argue to support the District Court’s liberal
application of the adverse interest exception. No defendant
has tried to raise that defense – and with good reason, as there
does not appear to be any basis at all for invoking it here.




                               47
outside the scope of his employment. Indeed, what they
knew and what they should have concluded are contested
issues of fact.

        Ultimately, under Pennsylvania law,“[i]n light of the
competing concerns, the appropriate approach to benefit and
self-interest is best related back to the underlying purpose of
imputation, which is fair risk-allocation, including the
affordance of appropriate protection to those who transact
business with corporations.” AHERF, 989 A.2d at 335. We
therefore conclude that imputation may be appropriate in this
case, if the Investors can prove that the manner in which
Bloom marketed North Hills to them while he was working
for MB, and the apparent benefit to MB, made it appear that
he marketed North Hills within the scope of his authority as a
senior executive of MB.

       There is a genuine issue of material fact as to whether
Bloom’s fraudulent statements were made as part of his
employment with, and for the benefit of MB, so that those
statements might be imputed to MB. On the one hand, the
record indicates that Bloom made it clear that he, not MB or
any of its other employees, personally managed North Hills,
and North Hills’ marketing and subscription materials, tax
reporting documents, and capital account statements did not
include any references to MB. On the other hand, there is
evidence that Bloom marketed North Hills to existing and
potential clients of MB in meetings that were ostensibly held
to discuss MB’s investment advisory services, and that he at
times represented North Hills to be an MB fund. There is
also evidence that Bloom openly used other MB employees to
conduct North Hills business, used his MB business card in
meetings in which he marketed North Hills, and presented an




                              48
asset allocation recommending an investment in North Hills
on MB letterhead, all of which may have created the
impression for at least some of the Investors that Bloom
operated North Hills under the apparent authority of MB.
Also, Bloom’s operation of North Hills appears to have been
of at least some benefit to MB. There is evidence that MB
used access to North Hills as a selling point in the marketing
of MB’s investment advisory services, and MB used North
Hills as a source of potential clients, soliciting North Hills’
largest investors for business. If those points of evidence are
accepted, there is a basis for imputation.

       Imputation of Bloom’s violations of Rule 10b-5 to MB
would also be consistent with the public policy goals served
by the imputation doctrine. The record suggests that MB
placed Bloom “in [a] position of trust and confidence,” Aiello,
499 A.2d at 285, that it permitted him to mix the operation of
North Hills with his legitimate duties at MB, and that it
should therefore share responsibility for the resulting losses.
Likewise, MB “selected and delegated responsibility to”
Bloom, AHERF, 909 A.2d at 333, but arguably did not do so
“carefully and responsibly,” id., given that MB officers and
directors knew that Bloom was operating North Hills but
accepted compliance reports by Bloom that failed to
adequately disclose details of the North Hills’s operation.

       Recognizing that “imputation rules justly operate to
protect third parties on account of their reliance on an agent’s
actual or apparent authority,” id. at 336, we cannot say that
imputation of Bloom’s violations of Rule 10b-5 to MB is
inappropriate as a matter of law. The District Court thus
erred when it granted summary judgment to MB on the
Investors’10b-5 claim.




                              49
             2.     Unfair Trade Practice and Consumer
                    Protection Law Claims

       The District Court concluded that Altman could not be
held liable under the UTPCPL because “the Amended
Complaint does not sufficiently allege deceptive conduct on
the part of Altman,” and “[w]ithout any factual allegation that
Altman was somehow involved with Bloom’s fraud, ... [the
Investors] cannot simply call Altman’s actions deceptive and
equate it with Bloom’s stealing.” (App. at 49.)

        The District Court also granted summary judgment to
MB on the UTPCPL claim. The Court recognized that
statements by Bloom could potentially be imputed to MB, but
it looked to the adverse interest exception to the doctrine of
imputation to conclude that MB was not liable. The Investors
argue that the District Court improperly applied the adverse
interest exception because “[a]pplication of that exception is
not determined from the perspective of the employer, as the
District Court did, but rather on how the defrauded party
perceives the speaker’s authority.” (Appellants’ Opening Br.
at 25.)

        Pennsylvania’s UTPCPL, 73 Pa. Cons. Stat. Ann.
§ 201-1 et seq., “is designed to protect the public from fraud
and deceptive business practices.” Gardner v. State Farm
Fire & Cas. Co., 544 F.3d 553, 564 (3d Cir. 2008). The
statute provides that

       [a]ny person who purchases or leases goods or
       services primarily for personal, family or
       household purposes and thereby suffers any




                              50
       ascertainable loss of money or property, real or
       personal, as a result of the use or employment
       by any person of a method, act or practice
       declared unlawful by section 3 of this act, may
       bring a private action to recover actual damages
       or one hundred dollars ($100), whichever is
       greater.

73 Pa. Cons. Stat. Ann. § 201-9.2(a). “The UTPCPL
regulates an array of practices which might be analogized to
passing off, misappropriation, trademark infringement,
disparagement, false advertising, fraud, breach of contract,
and breach of warranty.” Ash v. Cont’l Ins. Co., 932 A.2d
877, 881 (Pa. 2007) (internal quotation marks omitted). The
statute lists twenty specific prohibited practices, see 73 Pa.
Cons. Stat. Ann. § 201-2(4)(i)-(xx), and also contains a
“catch-all” provision, see id. § 201-2(4)(xxi), which the
Investors cite as the basis for their UTPCPL claim. The
catch-all provision provides a private right of action against a
person “[e]ngaging in any other fraudulent or deceptive
conduct which creates a likelihood of confusion or of
misunderstanding.” Id.

       In the wake of an amendment to the UTPCPL in 1996
that expanded the catch-all provision to cover “deceptive” as
well as fraudulent conduct, “Pennsylvania law regarding the
standard of liability under the UTPCPL catchall is ‘in flux.’”
Fazio v. Guardian Life Ins. Co., No. 1240 WDA, 2012 WL
6177271, at *8 (Pa. Super. Ct. Dec. 12, 2012); see also id. at
*7-8 (comparing cases before and after the 1996 amendment
of the UTPCPL). 32 Consequently, we are called upon to

       32
            Division in our district courts parallels that in




                              51
predict what interpretation of the “deceptive conduct”
standard the Pennsylvania Supreme Court would adopt. The
Pennsylvania Superior Court’s recent decision in Fazio was
based on “decisions from the Commonwealth Court, the
federal courts interpreting Pennsylvania law, as well as the
statutory language of the post-amendment catchall provision.”
2012 WL 6177271 at *9. The district court decisions on
which Fazio relied suggest that deceptive conduct does not
require proof of the elements of common law fraud, but that
knowledge of the falsity of one’s statements or the misleading
quality of one’s conduct is still required. 33 See Wilson v.

Pennsylvania’s own courts. See Molley v. Five Town
Chrysler, Inc., No. 07-5415, 2009 WL 440292, at *3 (E.D.
Pa. Feb. 18, 2009) (“Clearly there is uncertainty within the
Circuit as to what type of conduct the ‘catch all’ provision of
the UTPCPL protects.”). Some district courts have held that
“it is no longer necessary for a plaintiff to allege all of the
elements of common law fraud in order to recover under the
[UTP]CPL,” Flores v. Shapiro & Kreisman, 246 F. Supp. 2d
427, 432 (E.D. Pa. 2002), and that a “plaintiff may allege
deception, as opposed to common law fraud,” Davis v. Mony
Life Ins. Co., No. 08-0938, 2008 WL 4170250, at *6 (W.D.
Pa. Sept. 2, 2008). Other courts have continued to require
plaintiffs proceeding under the catch-all provision of the
UTPCPL to prove the elements of common law fraud, even
when alleging mere deception. See Rock v. Voshell, 397 F.
Supp. 2d 616, 622 (E.D. Pa. 2005) (noting that “all of the
fraud elements are still required”).
      33
          It appears that a UTPCPL claim based on deceptive
conduct differs from a claim based on fraudulent conduct in
that a plaintiff “does not need to prove all of the elements of
common-law fraud or meet the particularity requirement of




                              52
Parisi, 549 F. Supp. 2d 637, 666 (M.D. Pa. 2008) (“A
deceptive act [under the UTPCPL] is the act of intentionally
giving a false impression or a tort arising from a false
representation made knowingly or recklessly with the intent
that another person should detrimentally rely on it.” (internal
quotation marks omitted)). Therefore, a defendant cannot be
held “derivatively liable” under the UTPCPL for the
fraudulent actions of a third party when “plaintiff fails to
allege or present any evidence that [the defendant] ever
knowingly engaged in misrepresentation.”            Canty v.
Equicredit Corp. of Am., No. 01-5804, 2003 WL 21243268,
at *3 (E.D. Pa. May 8, 2003).

                   i.      The UTPCPL         Claim    Against
                           Altman

       The deceptive conduct that the Investors allege against
Altman was limited to three things: (1) his preparing (with
Bloom) a proposed asset allocation plan for Belmont that
recommended placing 20 percent of Belmont’s MB-advised
investments in North Hills, (2) his describing to Belmont and
Wallace that MB had access to North Hills as an investment
vehicle, and (3) his advising Belmont to transfer $1 million
from his Schwab account into North Hills in February 2008.
In dismissing the UTPCPL claim against Altman, the District

Federal Rule of Civil Procedure 9(b).” Schnell v. Bank of
New York Mellon, 828 F. Supp. 2d 798, 807 (E.D. Pa. 2011).
In Fazio, the Superior Court held that that a jury instruction
that “deceptive conduct” for purposes of the UTPCPL is
“‘misleading’ conduct accurately set[s] forth the standard of
liability under the amended catchall provision.” 2012 WL
6177271 at *9.




                              53
Court followed the more plaintiff-friendly standard of courts
“that have allowed UTPCPL claims to move forward without
demonstrating all of the elements of common law fraud”
(App. at 48), but held that the three complained-of acts were
not sufficient to establish deceptive conduct.

        As a threshold issue, neither Perez nor the Kellys have
stated a UTPCPL claim against Altman because they have not
alleged any conduct on his part, deceptive or otherwise, that
caused them to invest in North Hills. Cf. Weinberg v. Sun
Co., 777 A.2d 442, 446 (Pa. 2001) (noting that a UTPCPL
plaintiff must demonstrate that he justifiably relied on the
defendant’s deceptive practice and that he suffered harm as a
result of that reliance).

       As to the claim of Belmont and PFS, there is no
evidence that, in any of the conduct noted above, Altman
acted either to defraud or deceive them. That claim fails even
under the “deceptive conduct” standard that the District Court
applied, because none of Altman’s conduct comprised either
“the act of intentionally giving a false impression” or “a false
representation made knowingly or recklessly,” Wilson, 549 F.
Supp. 2d at 666, given that he is not alleged to have had any
knowledge of the North Hills fraud at the time.
Consequently, the District Court correctly dismissed the
UTPCPL claims against Altman for a lack of factual
allegations sufficient to satisfy the requirements of the catch-
all provision of the UTPCPL.

                   ii.      The UTPCPL Claim Against MB

       The District Court held that the adverse interest
exception barred the imputation to MB of Bloom’s admitted




                              54
frauds, which all acknowledge were violations of the
UTPCPL. 34 Our earlier discussion of the proper application
of the adverse interest exception, supra, is equally applicable
to the Investors’ UTPCPL claim against MB. As noted
above,“[i]n light of the competing concerns, the appropriate
approach to benefit and self-interest is best related back to the
underlying purpose of imputation, which is fair risk-
allocation, including the affordance of appropriate protection
to those who transact business with corporations.” AHERF,
989 A.2d at 335.

        As a result, there remains a genuine issue of material
fact as to whether Bloom’s violations of the UTPCPL may be
imputed to MB. There is some evidence that MB benefitted
from Bloom’s operation of North Hills, to the extent that
access to North Hills was a selling point for MB, and MB was
able to solicit North Hills investors for advisory business.
There is, however, also evidence that the cross-marketing
benefit to MB was limited, given that the two entities had
only four clients in common, two of whom were Belmont and
the Kellys. Also, MB never collected any fees or received
any remuneration on account of any of the Investors’
investments in North Hills.

       Whether there was a sufficient lack of benefit to MB
such that the Investors should have known that statements by


       34
          Bloom’s violations of the UTPCPL are presumably
uncontested because he pled guilty to all of the fraud-based
counts in the Information against him, which included various
counts that involved deceptive practices with respect to the
marketing of North Hills. See supra Part II.A.5.




                               55
Bloom in violation of the UTPCPL were made without MB’s
authority is a question for the trier of fact.

       C.     Claims For Breach Of Fiduciary Duty
       The Investors contend before us, as they did before the
District Court, that Altman breached a fiduciary duty to them
“by failing to investigate North Hills before recommending it
as a suitable investment” (Appellants’ Opening Br. at 60), and
that MB also breached a fiduciary duty because “MB should
have recognized Bloom’s fraud,” (id. at 50). The District
Court rejected those contentions. It concluded that “[s]imply
because Altman was an investment advisor at the same
location where Bloom worked ... does not create a fiduciary
relationship” (App. at 52), and therefore Altman could not be
held liable for a breach of fiduciary duty owed to the
Investors. The Court granted summary judgment to MB on
the fiduciary duty claim because MB owed no such duty to
those Investors who invested directly in North Hills, i.e., PFS
and Perez, and because those Investors to whom MB did owe
fiduciary duties, i.e., Belmont and the Kellys, had adduced no
evidence that MB’s alleged failure to act in their best interests
was the cause of their North Hills losses.

        The Pennsylvania Supreme Court has said that a
plaintiff alleging a fiduciary breach must first demonstrate
that a fiduciary or confidential relationship existed, see Basile
v. H & R Block, Inc., 761 A.2d 1115, 1119-22 (Pa. 2000),
which requires that “one person has reposed a special
confidence in another to the extent that the parties do not deal
with each other on equal terms.” In re Estate of Clark, 359
A.2d 777, 781 (Pa. 1976) (internal quotation marks




                               56
omitted). 35 “Although no precise formula has been devised to
ascertain the existence of a confidential relationship, it has
been said that such a relationship ... exists whenever one
occupies toward another such a position of advisor or
counselor as reasonably to inspire confidence that he will act
in good faith for the other’s interest.” Silver v. Silver, 219
A.2d 659, 662 (Pa. 1966).


      35
          We note that the fiduciary duty claims present a
question of the proper choice of law. The claims are
purportedly brought under state law, even though, as is more
fully discussed herein, they are arguably an attempt to bring
claims under federal law despite there being no private right
of action available under federal of law. Assuming that the
claims can be brought under state law, the question remains
as to whether the law of Pennsylvania or of New York
applies. The Investors are all citizens of the Commonwealth
of Pennsylvania, and Altman and MB are citizens of the State
of New York. See supra note 17. The parties have briefed
only Pennsylvania law, and they explained at oral argument
before us that they viewed the law of the state whose citizens
claim the protection of the fiduciary relationship as
controlling. The record is unclear as to whether the alleged
fiduciary breaches by Altman and MB occurred in
Pennsylvania or New York.            However, following the
approach of the Pennsylvania Supreme Court, “[s]ince the
parties did not see fit to question the application of
Pennsylvania law, we infer that th[at] state was in fact the
situs of most of the allegedly wrongful conduct and
accordingly decide the issues of fiduciary responsibility on
the basis of [that state’s] law.” Vulcanized Rubber & Plastics
Co. v. Scheckler, 162 A.2d 400, 403 n.2 (Pa. 1960).




                             57
       The Investors claim a breach of fiduciary duty by MB
under state law, but, at least insofar as Pennsylvania law is
concerned, the evolution of duties governing investment
advisers as fiduciaries appears to have been shaped
exclusively by the Advisers Act and federal common law.
The Advisers Act makes it unlawful for an investment adviser

       (1) to employ any device, scheme, or artifice to
       defraud any client or prospective client; (2) to
       engage in any transaction, practice, or course of
       business which operates as a fraud or deceit
       upon any client or prospective client; (3) acting
       as principal for his own account, knowingly to
       sell any security to or purchase any security
       from a client, or acting as broker for a person
       other than such client, knowingly to effect any
       sale or purchase of any security for the account
       of such client, without disclosing to such client
       in writing before the completion of such
       transaction the capacity in which he is acting
       and obtaining the consent of the client to such
       transaction. ... ; (4) to engage in any act,
       practice, or course of business which is
       fraudulent, deceptive, or manipulative.

15 U.S.C. § 80b-6. 36

       36
         Broker-dealers are exempted from this provision of
the Advisers Act, provided that they are not otherwise acting
as investment advisers. 15 U.S.C. § 80b-6(3). At numerous
places in their brief, the Investors attempt to equate MB, an
investment adviser, with a “broker-dealer” or a “securities
firm.” (See Appellant’s Opening Br. at 29 n.20 (noting that




                              58
       In SEC v. Capital Gains Research Bureau, Inc., 375
U.S. 180 (1963), the Supreme Court interpreted the antifraud
provision of the Advisers Act as expressing Congress’s
recognition that an investment adviser is a fiduciary with a
duty of “utmost good faith, and full and fair disclosure of all
material facts, as well as an affirmative obligation to avoid
misleading his clients.” Id. at 194 (citations and internal
quotation marks omitted);        see also id. 191 (citing
Congressional recognition of “the delicate fiduciary nature of
an investment advisory relationship” (internal quotation
marks omitted)); id. at 201(holding that an investment adviser
who purchases a security for his own account and then

the “[r]ules of the SEC and self-regulatory organizations
provide a standard of care for the securities industry,” and
collecting cases); id. at 38 (citing Jairett v. First Montauk
Sec. Corp., 153 F. Supp. 2d 562, 572-73 (E.D. Pa. 2001)
(“[A] broker-dealer may be held liable for failing to strictly
supervise the acts of a registered agent ... .”)); id at 60 (citing
Hanley v. SEC, 415 F.2d 589, 595-96 (2d Cir. 1969)
(“Brokers and salesmen are under a duty to investigate, and
… cannot deliberately ignore that which [they have] a duty to
know and recklessly state facts about matters of which [they]
are ignorant.”)).)     However, “investment adviser” is not
synonymous with “broker-dealer,” and the Pennsylvania
Securities Act explicitly distinguishes broker-dealers from
investment advisers. See 70 Pa. Cons. Stat. Ann. § 1-
102(j)(iii) (excluding broker-dealers from the definition of
“investment adviser”). Because “MB was never a registered
broker-dealer, and [the Investors] have not even alleged
otherwise” (Centre Defendant’s Br. at 32 n.11), we decline
the Investors’ invitation to treat it as one.




                                59
recommends the same security to his client without disclosing
that ownership violates the antifraud provision of the Act and
breaches his fiduciary duty). The decision in Capital Gains
Research has been interpreted as establishing a federal
fiduciary standard for investment advisers. See Santa Fe
Indus., Inc. v. Green, 430 U.S. 462, 472 n.11 (1977)
(interpreting the Capital Gains Research Court’s “references
to fraud in the ‘equitable’ sense” as “recognition that
Congress intended the Investment Advisers Act to establish
federal fiduciary standards for investment advisers”);
Transam. Morg. Advisors (TAMA) v. Lewis, 444 U.S. 11, 17
(1979) (finding that “the [Advisers] Act’s legislative history
leaves no doubt that Congress intended to impose enforceable
fiduciary obligations”).

        Because of the federal fiduciary standard, some courts
dealing with private causes of action alleging fiduciary breach
by investment advisers have relied on federal, rather than
state, common law. See Laird v. Integrated Res., Inc., 897
F.2d 816, 837 (5th Cir. 1990) (“The Supreme Court has
recognized the investment advisers’ fiduciary status. Courts
may refer to [its] cases instead of state analogies in deciding
whether this status prohibits particular conduct.”); see also
id. (“[C]oncerning entanglement with state law, because our
holding encompasses a developed federal standard, it does
not require reference to state corporate and securities law or
the state law of fiduciary relationships.”); State ex rel. Udall
v. Colonial Penn Ins. Co., 812 P.2d 777, 785 (N.M. 1991)
(citing Capital Gains Research, and applying the standard set
forth therein, in ruling on a state law claim for breach of
fiduciary duty against an investment adviser); cf. Douglass v.
Beakley, ___ F. Supp.2d ___, 2012 WL 5250566, *11 & n.16
(N.D.Tex., Oct. 24, 2012) (citing Texas law for breach of




                              60
fiduciary duty claims, but noting that the Supreme Court in
Transamerica recognized “that Section 206 of the IAA
“establishes federal fiduciary standards to govern the conduct
of investment advisers” (citing Transamerica, 444 U.S. at
17)); but cf. In the Matter of O’Brien Partners, Inc., S.E.C.
Release No. 7594, 88 S.E.C. Docket 615, 1998 WL 744085,
*9 n.20 (Oct. 27, 1998) (noting that respondent “owed a
fiduciary duty to its clients, both as a financial advisor and as
an investment adviser[,]” and adding by footnote that “[i]n
addition to its duties under the Advisers Act, relevant state
law also imposed a fiduciary duty on [respondent],” with
citations to Wisconsin and California law). Among other
benefits, following the federal fiduciary standard has as the
particular virtue that, “because state law is not considered,
uniformity is promoted.” Laird, 897 F.2d at 837.

       Of course, if one looks to federal law for the statement
of the duty and the standard to which investment advisers are
to be held, one might reasonably wonder why the cause of
action is presented as springing from state law, and the
answer is straightforward: no federal cause of action is
permitted. With the exception of a private remedy relating to
certain investment advisory contracts, 37 “the [Advisers] Act
confers no other private causes of action, legal or equitable.”

       37
           There exists only “a limited private remedy under
the [Advisers Act] to void an investment advisers contract”
made in violation of the Act. Transam. Morg. Advisors
(TAMA) v. Lewis, 444 U.S. 11, 24 (1979); see also 15 U.S.C.
§ 80b-15 (providing that any contract whose terms would
violate the Advisers Act shall be void both as to parties to the
contract and as to third parties who acquire rights under the
contract).




                               61
Transam. Morg. Advisors, 444 U.S. at 24. That reality ought
to call into serious question whether a limitation in federal
law can be circumvented simply by hanging the label “state
law” on an otherwise forbidden federal claim. 38 Questionable
or not, however, that is the labeling game that has been
played in this corner of the securities field, and the confusion
it engenders may explain why there has been little
development in either state or federal law on the applicable
standards. Half a century later, courts still look primarily to
Capital Gains Research for a description of an investment
adviser’s fiduciary duties. See SEC v. DiBella, 587 F.3d 553,
567 (2d Cir. 2009) (citing Capital Gains Research for the
proposition that an investment adviser is a fiduciary).

       We need not resolve whether the Investors’ fiduciary
duty claims can properly be brought as a matter of state law
because, even if Pennsylvania and federal law permit a
private right of action for a breach of an investment adviser’s
fiduciary duties, and assuming that the proper standard of
care is the federal standard, 39 the Investors have not

       38
           And, in fact, the viability of a state law claim for a
fiduciary breach by an investment adviser has been
questioned. See Steadman v. SEC, 603 F.2d 1126, 1142 (5th
Cir. 1979) (“We do not think this overall purpose [of the
Advisers Act] is a warrant to read ... the [antifraud] sections
... as the vehicle to reach all breaches of fiduciary trust.”).
       39
           Given the paucity of Pennsylvania law on the
fiduciary duties owed by investment advisers, and given that
Pennsylvania statutory law expressly follows the Advisers
Act, we believe that, if Pennsylvania were to sanction such a
claim, it would follow the federal standard. Provisions of the
Pennsylvania Securities Act (“PSA”), 70 Pa. Cons. Stat. Ann.




                               62
§§ 1-101 et seq., applicable to investment advisers prohibit
fraudulent, deceptive, or manipulative practices. See 70 Pa.
Cons. Stat. Ann. § 1-404 (describing “prohibited advisory
activities”). The PSA does not impose any affirmative duty
to investigate investments, but merely says that an investment
adviser may not “make any untrue statement of material fact
or omit to state a material fact necessary in order to make the
statements made ... not misleading” as part of the “solicitation
of advisory clients.” Id. § 1-404(b). Pennsylvania
regulations governing registered investment advisers require
that they “exercise diligent supervision over the securities
activities ... of [their] agents, investment adviser
representatives, and employees” and require investment
advisers to adopt internal compliance procedures similar to
those mandated by the Advisers’ Act. See 10 Pa. Code
§ 305.011(a). However, the PSA also provides that the
requirements it imposes on investment advisers do not
establish a standard of care that can be the basis of civil
liability. See 70 Pa. Cons. Stat. Ann. § 1-506 (“Except as
explicitly provided in this act, no civil liability in favor of any
private party shall arise against any person by implication
from or as a result of the violation of any provision of this act
or any rule hereunder.”); see also Cover v. Cushing Capital
Corp., 497 A.2d 249, 253 (Pa. Super. Ct. 1985) (“Regulations
adopted pursuant to the [Pennsylvania] Securities Act were
intended to make broker-dealers responsible to the state,
rather than to any specific person or group. They were not
intended to provide an absolute standard of care to be applied
in a civil action against a broker where an agent,
unbeknownst to the broker, engaged in a private scheme to
defraud his friends and customers.”). Although “broker-
dealer” is generally not synonymous with “investment




                                63
succeeded in stating such a claim, let alone adducing proof
sufficient to withstand summary judgment for the reasons set
forth below. The federal fiduciary standard requires that an
investment adviser act in the “best interest” of its advisory
client. See, e.g., SEC v. Tambone, 550 F.3d 106, 146 (1st Cir.
2008) (“[15 U.S.C. § 80b-6] imposes a fiduciary duty on
investment advisers to act at all times in the best interest of
the fund and its investors.”). Under the “best interest” test, an
adviser may benefit from a transaction recommended to a
client if, and only if, that benefit and all related details of the
transaction are fully disclosed. See Capital Gains Research,
375 U.S. at 191-92. (stating that the Advisers Act was meant
to “eliminate, or at least to expose, all conflicts of interest
which might incline an investment adviser – consciously or
unconsciously – to render advise which was not
disinterested”). In addition to the clear statutory prohibition
on fraud, the federal fiduciary standard thus focuses on the
avoidance or disclosure of conflicts of interest between the
investment adviser and the advisory client. See 17 C.F.R.
§ 275.204A-1 (describing the required investment adviser
code of ethics, and its focus on conflicts of interest); cf.
Capital Gains Research, 375 U.S. at 191-92 (discussing the
obligations of investment advisers). 40

adviser,” the regulations cited apply both to “[e]very broker-
dealer and investment adviser registered under the [PSA] ... .”
10 Pa. Code. § 305.011(a). Ultimately, however, even if
Pennsylvania were to apply its own fiduciary duty standards,
the Investors’ claims would fail. See infra n.44.
       40
          It has been suggested that the fiduciary duty of
investment advisers under the federal standard goes beyond
the avoidance of fraud and conflicts of interest. At least one
court has held that an investment adviser has “a duty to his




                                64
      Because Altman and MB had different relationships
with various Investors – some advisory and some not – we




clients and readers to undertake some reasonable
investigation of the figures he [is] printing before he print[s]
them.” SEC v. Blavin, 557 F. Supp. 1304, 1314 (E.D. Mich.
1983), aff’d, 760 F.2d 706 (6th Cir. 1985). The SEC has also
proposed regulations that would expressly prohibit
investment      advisers     from       making      “unsuitable
recommendations to clients.” See Suitability of Investment
Advice Provided by Investment Advisers; Custodial Account
Statements for Certain Advisory Clients, Advisers Act
Release No. 1406, 59 Fed. Reg. 13,454, 13464 (Mar. 16,
1994) (describing a proposed “suitability rule” to be
promulgated at 17 C.F.R. 275.206(4)-5). In addition, the SEC
proposed a number of regulations aimed at hedge funds that
would have, inter alia, imposed a duty “to have a reasonable
basis for client recommendations”). See Registration Under
the Advisers Act of Certain Hedge Fund Advisers, Advisers
Act Release No 2333, 69 Fed. Reg. 72,054, 72054 (Dec. 2,
2004). Notably, that Release was later vacated by the United
States Court of Appeals for the District of Columbia Circuit.
Goldstein v. SEC, 451 F.3d 873, 882-83 (D.C. Cir. 2006).
Moreover, we find nothing in Capital Gains Research or the
Supreme Court cases that came after it that extended the
Court’s interpretation of the Advisers Act to encompass a
fiduciary duty of “reasonable investigation.” We also find
nothing in the record to suggest that North Hills, had it been
the successful hedge fund that Altman and MB believed it to
be, was “unsuitable” for any of the Investors.




                              65
discuss the Investors’ direct fiduciary duty claims against
each of them separately. 41

              1.     Fiduciary Duty Claim Against Altman

       The Investors appeal the District Court’s dismissal of
their breach of fiduciary duty claim against Altman only with
respect to Belmont and PFS, and do not appeal the dismissal
as it may pertain to Perez and the Kellys. 42 The Court
rejected the claim concerning Belmont and PFS because it
concluded that neither of those plaintiffs had established that
Altman was in a fiduciary relationship with them, and that
there was no evidence of conduct on the part of Altman that
would constitute a breach, even if such a relationship had
existed.




       41
          Because Bloom breached the federal fiduciary
standard when he deceived the Investors as to the true nature
of North Hills, in violation of 15 U.S.C. § 80b-6, our
discussion of the imputation doctrine, supra, may arguably be
applicable to the Investors’ claim that MB breached its
fiduciary breach to them. Unlike their 10b-5 and UTPCPL
claims, however, the Investors’ fiduciary duty claim against
MB is not one that they argue involves principles of
imputation. Consequently we do not address that question.
       42
          The District Court concluded that the Investors had
made “no allegation of any relationship between Altman and
Plaintiff Perez or the Kellys, let alone a fiduciary one” (App.
at 51), a conclusion that the Investors do not challenge in this
appeal.




                              66
       The Investors argue that Altman had a fiduciary
relationship with Belmont because Belmont was an advisory
client of MB’s, and that Altman was a fiduciary to PFS
because he took on an advisory role when he met with
Wallace, the sole principal of PFS, to discuss North Hills.
The Investors say that Altman breached his fiduciary duty
because he “tout[ed] North Hills and its claimed performance
to Belmont and [PFS]” and “recommend[ed]/directed[ed]
Belmont’s transfer of $1 million to North Hills from
[Belmont’s] MB-managed Schwab account.” (Appellants’
Opening Br. at 58.) Those arguments fall short. First, PFS
was not an MB advisory client, and Altman therefore owed
him no duty as an investment adviser. Altman met with
Wallace only once, in June 2006, and PFS did not invest in
North Hills until September 2008, suggesting that, to the
extent PFS relied at all on statements allegedly made by
Altman, that reliance was extremely limited. It is impossible
to infer from the minimal contact that Wallace and Altman
had that an investment advisory relationship was formed with
PFS, and the District Court thus properly dismissed the PFS
fiduciary duty claim against Altman.

       Unlike PFS, Belmont did have an investment advisory
agreement with MB, and Altman served as Belmont’s
portfolio manager. Also unlike PFS, Belmont invested in
North Hills shortly after the June 2006 meeting with Altman
and Bloom, at which they allegedly recommended such an
investment. For the sake of argument, then, we will accept
the assertion that Altman had a fiduciary relationship with
Belmont. Even accepting that premise, however, there is no
evidence of fraud on the part of Altman and no allegation that
he benefitted from his recommendation that Belmont invest in
North Hills in a manner that would constitute an undisclosed




                             67
conflict of interest. The mere fact that Altman made what
turned out to be an ill-advised recommendation to Belmont is
not sufficient to establish a breach of fiduciary duty under the
federal fiduciary standard. The District Court thus did not err
in dismissing Belmont’s fiduciary duty claim against Altman.

              2.     Fiduciary Duty Claim Against MB by
                     PFS and Perez

       The District Court granted summary judgment on the
fiduciary duty claim of PFS and Perez against MB because
there was no evidence of a fiduciary relationship. However,
Wallace and Perez argue that they “believed that North Hills
was an investment vehicle provided by MB and, as such,
[that] MB was their investment adviser with respect to their
North Hills investments.” (Appellants’ Opening Br. at 47).

       Although there may at one time have been some
confusion on the part of Perez and PFS as to the relationship
between North Hills and MB, there is no evidence that there
was an advisory relationship between MB and either Perez or
PFS pursuant to which they could claim the protection of the
federal fiduciary standard. Perez and PFS invested no money
with MB and signed no investment advisory agreement with
MB. Both Perez and PFS’s principal, Wallace, knew that
they were investing in North Hills, rather than MB, and that
Bloom was the sole portfolio manager of North Hills. Perez
had met Bloom in connection with a matter unrelated to MB,
telephoned Bloom directly for investment advice, and
invested in North Hills based on Bloom’s personal
recommendation. For his part, Wallace testified that he gave
the funds that he invested in North Hills directly to Bloom
and that he never discussed with Bloom the possibility of




                              68
investing that money in MB or any of its managed funds.
Wallace further admitted that in his only conversation with
Machinist, they discussed only funds offered by MB and not
North Hills or anything about Bloom’s separate fund.

       In the absence of any investment by Perez or PFS
through MB, or any other reason why Perez and PFS should
have thought that MB was their investment adviser with
respect to their North Hills investments, the District Court
properly held that there was no fiduciary relationship that
would support a claim by Perez and PFS for a breach of
fiduciary duty by MB, and the Court therefore correctly
granted summary judgment to MB on that claim.

             3.     Fiduciary Duty Claim Against MB by
                    Belmont and the Kellys

        The District Court acknowledged, and MB does not
contest, that MB owed a fiduciary duty to Belmont and the
Kellys based on their investment advisory agreements with
MB. The Investors argue that the District Court ignored
evidence that MB had breached its fiduciary duty to Belmont
and the Kellys by failing to uncover and disclose the North
Hills fraud.

       Applying the federal fiduciary standard to this case,
Belmont and the Kellys have failed to prove that MB
breached its fiduciary duty as their investment adviser. They
have not alleged any conflict of interest, in the context of
MB’s limited involvement in their North Hills investments.
And, to the extent they refer to Bloom’s fraud, it is merely to
repeat the allegation made in the context of their other claims
that “there was more than enough evidence – in MB’s




                              69
possession – from which MB should have recognized
Bloom’s fraud.” (Appellants’ Opening Br. at 50.) But, while
MB’s failure to uncover the North Hills fraud may have been
a “real factor” in the losses sustained by Belmont and the
Kellys, it is not sufficient to establish that MB failed to act
solely in their interest. 43 The District Court thus did not err in
granting summary judgment to MB on the claim for breach of
fiduciary duty to Belmont and the Kellys. 44


       43
          The fact that MB continued to manage investments
for the Kellys until it ceased operations in June 2009 also
suggests that they, at least, did not think that MB had acted in
bad faith or under a conflict of interest in connection with
their North Hills investments.
       44
           Even if Pennsylvania did not follow the federal
fiduciary standard for investment advisers, see supra note 39,
we do not think that it would affect the disposition of the
Investors’ direct fiduciary claims.         The Pennsylvania
Supreme Court has said that a plaintiff alleging a fiduciary
breach must first demonstrate that a fiduciary or confidential
relationship existed, see Basile v. H & R Block, Inc., 761 A.2d
1115, 1119-22 (Pa. 2000), which requires that “one person
has reposed a special confidence in another to the extent that
the parties do not deal with each other on equal terms.” In re
Estate of Clark, 359 A.2d 777, 781 (Pa. 1976) (internal
quotation marks omitted); see also eToll, Inc. v. Elias/Savion
Advertising, Inc., 811 A.2d 10, 23 (Pa. Super. Ct. 2002)
(“[T]he critical question is whether the relationship goes
beyond mere reliance on superior skill, and into a relationship
characterized by overmastering influence on one side or
weakness, dependence or trust, justifiably reposed on the
other side.” (internal quotation marks omitted)).




                                70
III.   CONCLUSION

      For the foregoing reasons, we will affirm in part and
vacate in part the District Court’s dismissal order and

        None of the Investors has demonstrated a relationships
characterized by such justifiable reliance or “overmastering
influence.” PFS and Perez were not clients of either Altman
or MB, and therefore could not justifiably rely on any advice
they received regarding North Hills. Altman met with
Wallace of PFS only once, in June 2006, and PFS did not
invest in North Hills until September 2008, suggesting that
any reliance on either Altman or MB was extremely limited.
Perez can point to nothing more than single phone
conversation with Bloom while he was in his office at MB.
Because they had advisory agreements with MB, Belmont
and the Kellys have better grounds on which to claim a
fiduciary relationship. However, Pennsylvania law is clear
that a fiduciary relationship does not exist merely because one
party receives, or even relies on advice from another, but
rather requires that “the parties do not deal with each other on
equal terms.” Estate of Clarke, 359 A.2d at 781. Nothing in
Belmont’s or the Kellys’ relationships with Altman and MB
suggests that they dealt on unequal terms. On the contrary,
both Belmont and the Kellys were at all times free to reject
any recommendation that Altman or MB may have made
concerning a possible investment in North Hills. Again, the
mere fact that one takes another’s advice does not, in itself,
demonstrate the “overmastering influence” that the law
requires.




                              71
summary judgment. We will affirm to the extent that the
Court dismissed all of the Investors’ claims against Altman,
granted summary judgment to all of the other defendants,
other than MB, on all of the Investors’ claims, and granted
summary judgment to MB on the claim for breach of
fiduciary duty. We will vacate the grant of summary
judgment to MB on the claims for violations of Rule 10b-5
and the UTPCPL, and we will remand this case for a trial
with respect to those claims against MB.




                            72
