Defense attorneys in a civil suit against Compass Academy founder Jay Brooks and Ohio-based Equity Trust Company filed a motion to dismiss the claims against Equity Trust either without prejudice or with leave to refile in the state of Ohio. The document was filed with the Aiken County Clerk of Court on March 26, and states that the claims of Janice and James Seely should be heard in Ohio, as agreed in a governing contract the Seelys signed. The defendant, Equity Trust, asks the court to dismiss the Seelys' claims against the company for failure to state a claim and, “in the alternative, because the Seelys signed a contract that requires this case to be heard in Lorain County, Ohio.”

Brooks was indicted last year on two counts of securities fraud, one count of forgery and a violation of the Securities Act. The felonies are punishable by up to 10 years in prison and/or fines.

Brooks, his wife Tracy and his companies have been accused by the S.C. attorney general's office of illegally selling unregistered securities to fund the establishment of their private school, Compass Academy. They have also been accused by the Securities Division of the attorney general's office of using those funds to buy groceries, their home, vacations and jewelry, rather than investing them. Additionally, they face multiple other civil suits.

This suit lists the Brookses, their companies, High Street Securities Inc., and Sterling Trust, a division of Equity Trust Co., as the defendants. It states that Brooks was a registered agent of Arkansas-based High Street Securities, and that Equity Trust “at all relevant times” engaged in South Carolina-based transactions with Brooks.

Additionally, the complaint stated Equity Trust “aided and abetted” the Brooks defendants' fraud by transferring money from the Seelys' individual retirement accounts to financial institutions in South Carolina in connection with the Brookses' “venture” based in Aiken.

The motion lists Columbia attorneys Kevin Hall and Todd Carroll, and Cleveland attorneys Frances Goins and Isaac Eddington as counsel for Equity Trust. Jay and Tracy Brooks are classified as “pro se,” or representing themselves, in the Aiken County court index.

Motion to dismiss

The Seelys, of Denton County, Texas, state in the original complaint that they gave Jay and Tracy Brooks permission to liquidate nearly $500,000 in annuities to fund investments in Compass Academy. The complaint states the Brookses had too much unity between their business ventures, which include Brooks Financial, Brooks Real Estate and Compass Academy, a private school on Toolebeck Road in Aiken.

The motion filed last week states the Seelys invested in Compass Academy on the advice of Brooks, the Seelys' financial advisor. They lost their investment and now allege the Brooks defendants “were running a Ponzi scheme.”

“Simply put, Equity Trust's only job was to hold and transfer the Seelys' funds according to their directions,” the document states. “The Seelys' relationship with Equity Trust was governed by contract, in which the Seelys both 1) acknowledged that Equity Trust was not the fiduciary or investment advisor, and 2) agreed to bring any claims against Equity Trust arising out of the contract in Lorain County, Ohio courts.”

The document states the Seelys made “some (but not all)” of their investments in Compass Academy through self-directed individual retirement accounts, of which Equity Trust was the passive custodian. The account application they signed “repeatedly makes clear that Sterling/Equity Trust has no discretion with respect to the Seelys' choice of investments, does not evaluate the propriety of those investments, and does not monitor the performance of those investments.”

According to the document, by signing the account applications, the Seelys confirmed they understood Brooks was not affiliated with Equity Trust.

Additionally, it stated, the Custodial Account Agreement “made clear that Equity Trust acted only as a passive account custodian and owed no special duties to the Seelys.”

Lastly, the motion to dismiss states that the Seelys' aiding and abetting claims against Equity Trust must be dismissed because they failed to adequately plead actual knowledge or substantial assistance.

The Seelys brought claims of aiding and abetting common law fraud and aiding and abetting securities fraud against Equity Trust, the document stated, adding that the Seelys' pleadings support neither allegation, and therefore the claims against Equity Trust must be dismissed.

Plaintiffs respond

An attorney for the Seelys filed a response on Monday, saying his clients allege “facts sufficient to support” the claims against Brooks and that the motion to dismiss should be denied.

The response first states the plaintiffs sufficiently “pled” the elements required to establish aiding and abetting liability for the tort of fraud; the existence of an underlying fraud; the defendant's knowledge of the fraud; and that the defendant lent substantial assistance or encouragement to another in furtherance of the underlying fraud. It also said the complaint “well pleads” a claim for aiding and abetting violations of state securities laws.

The response states that South Carolina policy precludes dismissal at this early in the pleading stage of a case, and that this case raises “novel” issues, such as whether or not state law requires nothing short of an admission of actual knowledge for an aiding and abetting claim, or whether the state accepts “willful blindness” or “conscious avoidance” as the equivalent of or a substitute for actual knowledge by aiders and abettors who choose to “look the other way” despite evidence of fraudulent behavior.

“The South Carolina Supreme Court instructs trial courts that such questions are ‘best decided in light of the testimony to be adduced at trial,' and not at the pleading stage,” the document stated.

Lastly, the response contended that Aiken County is the proper venue for the plaintiffs' action.

“As an initial matter, venue is proper against a foreign corporation when it is located in the county where the ‘most substantial part of the alleged act or omission giving rise to the cause of action occurred,'” the response stated, citing a portion of the S.C. Code.

“Plaintiffs complain that Equity Trust aided and abetted an underlying fraud that was substantially perpetuated in and from Aiken County, by individuals domiciled at the time in Aiken County, and corporate entities organized under South Carolina law with their principal places of business in Aiken County.”

Additionally, the response states that while the Brookses currently reside in Texas, they were “domiciled” in Aiken County during the relevant time period, “and perpetuated the most substantial part of the underlying fraud from and in Aiken County.”

Teddy Kulmala covers the crime beat for the Aiken Standard.