Citation. 914 2.2d 1564 (9th Cir. 1990); cert denied, 499 U.S. 976 (1991)
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Investors (Plaintiff) were looking to recover the losses they suffered due to Wilkowski’s (Defendant) misappropriation of the assets they had trusted him with.
Synopsis of Rule of Law.
A broker-dealer may be held liable as a “controlling person” by proxy under § 20(a) of the Securities and Exchange Act of 1934, whenone of its registered agents violates the federal securities laws.
Facts.
Painter Financial Group was formed to counsel investors and sell insurance. Painter rented space to Wilkowski while operating as an agent of Painter. To register as securities salesmen with a broker-dealer firm, Titan Capital Corp., Wilkowski and other representatives applied to the National Association of Securities Dealers (NASD). On Wilkowski’s registration application, he stated that he never intentionally made an untrue statement, was never included in a major legal proceeding and never pled guilty to or was convicted of a felony. NASD granted Wilkowski registration, although a print check through the FBI showed that Wilkowski did indeed plead guilty to three counts of felony forgery at a previous date. The NASD provided this information to Titan, requiring a letter from Wilkowski explaining himself. Wilkowski replied saying that he thought the conviction was removed from his record in accordance with his plea agreement and presentedd a new application admitting the forgery conviction. Painter removed him from his financial advisor position, even though neither NASD nor Titan revoked his registration. When Wilkowski was employed by Titan, he had clients make checks payable directly to him and offered fabricated statements on Titan stationery. Wilkowski was then found guilty of criminal securities fraud and grand theft. Investorvictims of Wilkowskiwere seeking to recover losses founded on the antifraud stipulations of federal and state securities laws. The district court gave summary judgment in favor of Painter and Titan on federal claims while dismissing the state claims. The investors appealed.
Issue.
Can a broker-dealer be held liable as a “controlling person” by proxy under § 20(a) of the Securities and Exchange Act of 1934, when one of its registered agents violates the federal securities laws?
Held.
(Norris, J.) Yes. A broker-dealer may be held liable as a “controlling person” by proxy under § 20(a) of the Securities and Exchange Act of 1934, when one of its registered agents violates the federal securities laws. Broker-dealers have a definite duty to oversee the activities of their registered agents. By holding the broker-dealer liable for § 10(b) violations committed by its registered agents via proxy, the legislative objective inspiring the passing of § 20(a) was to promise the broker-dealers would oversee their agents with the necessary diligence and control. To establish liability by proxy, the plaintiff needs to confirm that the broker-dealer is a controlling person by showing that the registered agent was an employee of, or affiliated with, the broker-dealer. In this case, the record adequately confirms that in relation to Wilkowski, that Titan was a “controlling person”. Yet, the broker-dealer defendant can still seek to elude liability if it can carry the onus of proving that it operated with good faith, was unaware of the action and failed to nurture the violations, whether directly or indirectly. This may be achievedvia the display of the existence of a sensible internal system of management. In this case, the evidence demonstrates a significant issue of fact was present with regard to the availability to Titan of the good faith defense. So, the district court was erroneous in granting summary judgment on this issue. Reversed.
Discussion.
20(a) holds a “controlling person” jointly and individually liable in the same way as the “controlled” person for all violations. The plaintiff has no need toprove that the broker-dealer aggressivelycontributed in the misconduct to hold it liable. The broker-dealer will not be excusedfrom liability by merely demonstrating that it had managerialtechniques in place
