Investment advisors defending fraud claims from a former client recently asked the Business Court to place them within the three-year statute of limitations applicable to those who provide professional services. In Pridgen v. Carlson, 2025 NCBC 36, the advisors contended that “because investment advisory services are considered professional services” they are “in essence claims for professional malpractice.” Id. ¶ 80.
Under N.C.G.S. §1-15(c), a malpractice claim “arising out of the performance of or failure to perform professional services” gets a three-year statute measured from the defendant’s last act “giving rise” to the cause of action. While a court might know a statutory “essence” when it sees it, Judge Robinson cut to the quick of it in noting “the parties have not cited any case, and the Court has found none, in which this statute has been applied to investment advisors.” Id. ¶ 83. The Business Court was disinclined to be the first.
It noted that at least once before, the Court had resisted the ask. In Burton v. Hobart Fin. Grp., Inc., 2024 WL 774901, at *18 (N.C. Super Ct. Feb. 26, 2024), the Court held there was no “authority to support the legal proposition that a professional negligence claim exists in North Carolina for the negligent acts of investment advisors.” Moreover, the Court noted that the statutory scheme of §1-15(c) had been interpreted so that “professional” services were considered to exist in situations “such as a physician-patient or attorney-client relationship.” Id. ¶ 84 (quoting Barger v. McCoy Hollard & Parks, 346 N.C. 650, 665 (1997).
In Pridgen, the plaintiff’s husband had died and she had roughly $2.5 million to watch over between insurance proceeds and a retirement plan. She retained defendants Roy Carlson and Carlson Financial Services to manage her investment portfolio, relying on what she alleged were a series of in-person representations regarding their status as her fiduciaries and their affiliation with defendant Repple & Company, a federally and state registered investment advisor. Plaintiff also alleged the Carlson defendants had cast their investment philosophy as “Christ-centered” and “faith-based,” which were of particular importance to her. Id. ¶¶ 10-13.
Pridgen alleged that her relationship with Carlson did not proceed on nearly so lofty a set of principles.
Her complaint alleged that Carlson invested her money in a series of private investments described to her as “fixed income corporate bonds” as well as “church bonds” and commercial real estate projects. But most of their financial statements were not audited for GAAP compliance. She alleged that Carlson did not track the accurate value of her “investments,” instead reporting artificial or inflated rates. Some of Pridgen’s investments were reported to her with “unavailable” values, which Carlson allegedly told her merely indicated they were difficult to value. Carlson allegedly told her “[t]hat does not mean they are without value[,] it means that the value cannot be calculated now[.]” Id. ¶¶ 18, 21.
Pridgen asserted that upon inquiry, Carlson ensured her that all was well. Indeed, “[w]hen some of the companies Mr. Carlson invested [her] funds in when into bankruptcy, Mr. Carlson represented that these events made her investments more valuable because the underlying real estate would be repurposed.” Id. ¶ 22. Pridgen’s investment in DBSI, she alleged, was an unhappy exemplar of defendants’ investment strategy. DBSI allegedly followed few corporate formalities, produced no audited financial statements, and was bankrupt by the close of 2008, with a bankruptcy investigator finding it never “had any reasonable likelihood of generating income sufficient to ever repay” its obligations. Id. ¶¶ 25-29. Yet, Carlson told her the bankruptcy increased her investment value because it “removed DBSI’s management fees” and increased its income. Four years later, Carlson told her that one of her DBSI investments maintained a full value of $600,000. Id. ¶¶ 31, 33.
Defendants argued for dismissal of a trio of fraud claims as time-barred: fraud and fraudulent concealment (3 years) and constructive fraud (10 years). Examining the “discovery rule” landscape of allegations, the Court held Pridgen had pled enough for the motion to dismiss phase that under the circumstances a reasonably prudent person would not have uncovered the alleged misdeeds as early as the Carlson Defendants contended they should have. The Court did not isolate its holding to the facts pled about Pridgen’s status as an inexperienced investor facing atypical claims about the standing of unaudited and bankrupt companies, but did observe that “the failure of the defrauded person to use diligence in discovering the fraud may be excused where there exists a relation of trust and confidence between the parties.” Id. ¶ 100 (quoting Vail v. Vail, 233 N.C. 109, 116 (1951)).
Worth Noting
- Carlson received a cease and desist letter from State securities regulators, cited in the Complaint, that provided a glimpse into the alleged profitability of his activities. That notice stated that he had “unlawfully generated” more than $450,000 in management fees as an unregistered investment adviser in just a bit more than two years. Id. ¶¶ 62-63.
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