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Utah Court of Appeals Briefs

1996Frank Brgoch and Seymour Isaacs v. Ronald Allen
Harry : Petition for Rehearing
Utah Court of Appeals

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Original Brief Submitted to the Utah Court of Appeals; digitized by the Howard W. Hunter Law
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OCR, may contain errors.
Randy B. Coke; Curtis C. Nesset; Nygaard, Coke & Vincent. Attorneys for Appellants
S. Baird Morgan; Strong & Hanni; Michael L. Kirby; Jeffrey P. Lendrum; Post; Kirby; Noonan &Sweat. Attorneys for Appellees
Recommended Citation
Legal Brief, Brgoch v. Harry, No. 950238 (Utah Court of Appeals, 1996).
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IN THE COURT OF APPEALS OF THE STATE OF UTAHFRANK BRGOCH and SEYMOURISAACS,
Plaintiffs/Appellants
Case No. 950238-CA
UTAH COURT OF APPEALSvs.
RONALD ALLEN HARRY, an
individual; PRIVATE LEDGERFINANCIAL SERVICES, INC.; LINSCOFINANCIAL SERVICES, INC.,
LINSCO/PRIVATE LEDGERCORPORATION; and DOES 1 to 10,

UTAH
DOCUMI^TKFU
50

DOCKET NO. ^KftgftKCfl

Defendants/Appellees.

PETITION FOR REHEARING
Appeal From an Order and Judgment of the Third Judicial
District Court, In and For Salt Lake County, State of Utah,
The Honorable Glenn Iwasaki, Judge Presiding.
Randy B. Coke
Curtis C. Nesset
NYGAARD, COKE & VINCENT
333 North 300 West
Salt Lake City, Utah 84103(801) 328-2506
Attorneys for Plaintiffs/Appellants

S. Baird Morgan
STRONG & HANNI
6th Floor, Boston Building
9 Exchange Place
Salt Lake City, Utah 84111(801) 532-7080
Michael L. Kirby
Jeffrey P. Lendrum
POST KIRBY NOONAN & SWEAT LLP
600 West Broadway, Suite 1100
San Diego, California 92101-3302(619) 231-8666
Attorneys for Defendants/Appellees[except Ronald Allen Harry]

PKNS\0090155.WP

m 1 G 1996
-OuttT r - APPEALSIN THE COURT OF APPEALS OF THE STATE OF UTAHFRANK BRGOCH and SEYMOURISAACS,;

Plaintiffs/Appellants
vs.

)
]

RONALD ALLEN HARRY, an
individual; PRIVATE LEDGERFINANCIAL SERVICES, INC.; LINSCOFINANCIAL SERVICES, INC.,
LINSCO/PRIVATE LEDGERCORPORATION; and DOES 1 to 10.

;
;
;
;
)
)

Defendants/Appellees.

Case No. 950238-CA}

PETITION FOR REHEARING
Appeal From an Order and Judgment of the Third Judicial
District Court, In and For Salt Lake County, State of Utah,
The Honorable Glenn Iwasaki, Judge Presiding.

Randy B. Coke
Curtis C. Nesset
NYGAARD, COKE & VINCENT
333 North 300 West
Salt Lake City, Utah 84103(801) 328-2506
Attorneys for Plaintiffs/Appellants

S. Baird Morgan
STRONG & HANNI
6th Floor, Boston Building
9 Exchange Place
Salt Lake City. Utah 84111(801) 532-7080
Michael L. Kirby
Jeffrey P. Lendrum
POST KIRBY NOONAN & SWEAT LLP
600 West Broadway, Suite 1100
San Diego, California 92101-3302(619) 231-8666
Attorneys for Defendants/Appellees[except Ronald Allen Harry]

PKNS\0090155.WP

TABLE OF CONTENTS
Page
CERTIFICATION OF COUNSEL

1PARTIES TO THE PROCEEDINGS1JURISDICTION

1INTRODUCTION

1

ARGUMENTI.
II.

THIS COURT OVERLOOKED OR MISAPPREHENDED POINTSOF LAW AND FACT IN ITS DECISION

2THIS COURT OVERLOOKED THE FACT THAT THE TRIAL
COURT'S ANALYSIS WAS SUPPORTED BY UNCONTROVERTEDEVIDENCE PRODUCED BY DEFENDANT, AND NOTCONTROVERTED BY PLAINTIFFS

7

A.

The Court's Memo Decision Ignores Rule 56(e) Of The
Utah Rules Of Civil Procedure, And Cases Construing
That RuleIII. THIS COURT ERRED IN ITS ANALYSIS OF THE OSTENSIBLE
AGENCY OR APPARENT AUTHORITY ISSUEIV.

THIS COURT'S MEMO DECISION ERRONEOUSLY RELIES ON
A GENERAL RULE OF LAW IN THE HORROCKS CASE, WHICH IS
CLEARLY DISTINGUISHABLE HERE

7
9

11

V.

THIS COURT'S MEMO DECISION IGNORES AT LEAST FIVE SEPARATE
DECISIONS HOLDING, AS A MATTER OF LAW, THATSECURITIES BROKER-DEALERS ARE NOT LIABLE FORUNAUTHORIZED ACTIVITIES OR "SELLING AWAY" ACTIVITIESOF THEIR REGISTERED REPRESENTATIVES
12

VI.

THE TRIAL COURT WAS CORRECT IN CONCLUDING THATHARRY COULD NOT BE PRIVATE LEDGER'S AGENT INCONNECTION WITH CONDUCT WHICH RESULTED IN HISCRIMINAL CONVICTION FOR DEFRAUDING PRIVATE LEDGER . . .

CONCLUSIONADDENDUMA.
B.
PKNS\0090155 WP

14
15

MEMORANDUM DECISION
TRANSCRIPT OF TRIAL COURT DECISIONiPKNS\0090155 WPC.

AFFIDAVIT OF JONATHAN A. BOYNTON IN SUPPORT OF MOTIONFOR SUMMARY JUDGMENTD.

BATES v. SHEARSON LEHMAN BROS., INC., 42 F.3d 79 (1stCir. 1994).

E.

HAUSER v. FARRELL. 14 F.3d 1338 (9th Cir. 1994).

ii

TABLE OF AUTHORITIESPage(s)FEDERAL CASES
Bates v. Shearson Lehman Brothers, Inc.,
42 F.3d 79 (1st Cir. 1994)

13, 14

Hauser v. Farrellf
14 F.3d 1338 (9th Cir. 1994)

13, 14

STATE CASESFSC Securities Corp. v. McCormack,
630 So. 2d 979 (Miss. 1994)
Harline v. Barker, et al.,912 P.2d 433, 1996 Utah LEXIS 11 (Utah 1996)
Horrocks v. Westfalia Systemat,
892 P.2d 14 (Utah Ct. App. 1995)
State v. Harry,
873 P.2d 1149 (Utah App. 1994)

9, 10
7
11, 14
14

Thayne v. Beneficial Utah, Inc.,
874 P.2d 120 (Utah 1994)

7

STATE STATUTES
Utah Code AnnotatedSection 78-2A-3(2)(j)Utah Rules of Appellate Procedure
Rule 35

1
1

Utah Rules of Civil Procedure
Rule 56(e)PKNS\0090155.WP

7, 12

iii

CERTIFICATION OF COUNSEL
I hereby certify that this Petition For Rehearing is presented
in good faith and not for the purpose of delay.
STRONG & HANNIPOST KIRBY NOONAN & SWEAT

LLP

By:
'S. Baird Morgan
Attorneys forCDef^fidants-Appellees,
Linsco Financial Services, Inc. and
Linsco Private Ledger Corporation
PARTIES TO THE PROCEEDINGSThe names of all parties to the proceedings in the lower court
are set forth in the caption of the case on appeal.
JURISDICTION
This Court has jurisdiction over this appeal pursuant to Utah
Code Ann. § 7 8-2A-3(2)(j), as amended.
This Petition For Rehearing is filed pursuant to Rule 35, Utah
Rules of Appellate Procedure, and pursuant to the Stipulation
Granting Enlargement of Time to file this Petition.
INTRODUCTION
Defendants-Appellees, Linsco Financial Services, Inc. and Linsco
Private Ledger Corporation (collectively referred to as "Private
Ledger") hereby submit this Petition For Rehearing with respect tothis Court's MEMORANDUM DECISION (Not For Official Publication) [the"Memo Decision"] filed April 18, 1996 in this matter.
Memo Decision is attached as Appendix A.

PKNS\0090155 WP

1

A copy of theFor the reasons set forth herein, this Court should grant arehearing to correct the errors of law and fact in its Memorandum
Decision which reversed the trial court's granting of summary
judgment in favor of Private Ledger.

This Court has misconstrued one

comment by the trial court, while ignoring the trial court's thoroughanalysis of the uncontroverted evidence, and has also ignored atleast five federal and state decisions which have resolved, as amatter of law, the same issue presented here in favor of the
securities broker-dealers.
ARGUMENTI.

THIS COURT OVERLOOKED OR MISAPPREHENDED POINTSOF LAW AND FACT IN ITS DECISIONAs noted in this Court's decision, "The trial court granted
defendants' summary judgment motion, concluding that Private Ledger
was not liable, as a matter of law, for the acts or omissions ofdefendant Harry."

Plaintiffs' claims all arise from an investment

each made in May 19 88 in Red River, an Arizona real estate limited
partnership.

Plaintiffs' investments in Red River were made by

defendant Ronald Allen Harry ("Harry"), to whom each plaintiff had
granted a discretionary power of attorney to make such investments.
The Red River investments were made from cash each plaintiff had in
an IRA account in the First National Bank ("FNB") of Onaga, Kansas.
[R. 463-465]
Harry was an independent contractor pursuant to a written
Registered Representative Agreement with Private Ledger.
52 3][R. 565,

It is undisputed that, for purposes of Private Ledger's

PKNS\0090155.WP

2

records, no mention was ever made of Red River, and the transfer ofplaintiffs' funds to bank accounts in their names at FNB in Kansas
was entirely proper.

[R. 567-568]

It was after the plaintiffs'

funds were in their individual accounts at FNB that the Red River
investments were made by Harry.

[R. 463-65, 600, 605]

Plaintiffs

did not produce a single shred of evidence indicating that Private
Ledger had any knowledge of, or involvement in, the Red Rivertransactions.
This Court, in reversing the trial court's summary judgment
ruling concluded:
In this case, the trial court's reasoning that "one cannot
be an agent of the principal at the same time engaging in
conduct which is criminally fraudulent," is simply not acorrect statement of the law. Questions of fact remain as
to the existence of the agency relationship between Harryand defendants and the scope of Harry's authority.
Private Ledger respectfully submits that this Court erred in
misconstruing, and then basing its entire ruling on, a single
statement made by the trial court based on the unique facts here, andin particular erred in ignoring the trial court's thorough analysisof the uncontroverted evidence in this case.
At the time of granting summary judgment, the trial court, theHonorable Glenn K. Iwasaki, stated in considerable detail his
analysis of the uncontroverted evidence presented in connection with
Private Ledger's summary judgment motion.

That analysis isparticularly pertinent to this Petition, and demonstrates that thetrial court was making its ruling regarding the lack of liability as
to Private Ledger based on a clear showing by Private Ledger

PKNS\0090155.WP

3

(including plaintiffs' own depositions), and a complete absence ofany contrary admissible evidence from the plaintiffs:
More critically, though, is my analysis as to the matter oflaw as to whether or not Private Ledger should be held
liable. I have no argument with Mr. Coke when he states tome the general proposition regarding respondeat superior,no controlling person.
The guestion I have is just how far can that be reachedwhen the defendant in this matter. Private Ledger, has goneto what I think is more than sufficient steps to ensurethat activities by their registered agent are pursuant totheir policies.
It is apparent that Red River was not an approved security
from Private Ledger, that there was no authorization from
Private Ledger to Mr. Harry to go beyond that policy. In
essence, it appears that when a registered representativeof a brokerage firm clearly violates the firm's policies
and engages in unauthorized activities without theknowledge of Private Ledger in this matter, I just cannot
see how liability can be imposed upon the principal.
Private Ledger, in this matter.
It did not appear on Private Ledger statements regarding
the purchase of this. There may have been indication thatthe money was transferred but that was all that was done
and that knowledge was to the plaintiffs in this matter.
Private Ledger, once again, never approved of the Red River
investment. It did not appear — a s I said the plaintiffs'
investments were not run through the Private Ledger
accounts to the extent of appearing on Private Ledger
statements. There had been no fees, no collections and noprior knowledge of Private Ledger of the activity of Mr.
Harry.
The fact Mr. Harry was criminally convicted of defrauding
Private Ledger crystallizes my opinion in that one cannot
be an agent of the principal at the same time engaging in
conduct which is criminally fraudulent. They are mutually
exclusive actions and terms.
The apparent reliance that Mr. Coke wishes the court toaccept regarding the activities of Messrs. Brgoch andIsaacs, I do not have to reach the point that they are
sophisticated and/or somehow registered investors by thefact they have had a long track record with Mr. Harry.
They did, in fact, move from different brokerage firms Mr.
PKNS\0090155.WP

4

Harry was employed with. Their reliance, in my opinionF
was on Mr. Harry and just incidentally with the firm that
he was employed by.
I think that in this situation, Private Ledger has done
anything and everything they could to ensure theirregistered agents are actually agents of them in doing what
their policies indicate that they are allowed to do, i.e.
trade in approved securities, have commissions paid
pursuant to that, have knowledge of the operations that theagents are doing in relations to the brokerage house andthe investors, and indicating which ones and gaining
thorough knowledge of activity, then, somehow ratifying theagent's position in this matter. I find that has not been
done so as a matter of law . . . .
Reporter's Transcript dated May 17, 1994 (emphasis added), a copy ofwhich is attached as Appendix B to this Petition.
As stated in Private Ledger's Brief [pp. 1-2], the following
issues for review were presented on appeal, but overlooked in thisCourt's Memo Decision:
1.
Did the trial court properly rule that a principal
cannot cloak its agent with apparent authority in one
transaction where the agent has acted so far out of the scope of
the authority granted to him that he has been criminallyconvicted of defrauding his principal in that specifictransaction?
2.
Did plaintiffs present sufficient admissible evidence
to show that a reasonable investor of like experience asplaintiffs would and did reasonably believe that Ronald Harry("Harry") had apparent authority from Private Ledger to sellinterests in the Red River Mountain Limited Partnership ("RedRiver") where the undisputed evidence showed:(a) Harry signed an independent contractor agreement with
Private Ledger stating he would only sell securities which had
been approved for sale by Private Ledger;(b) Private Ledger's written policies prohibited thepractice of "selling away", and Harry executed a separate
written memorandum agreeing to comply with that policy;(c) The Red River investment was never approved for saleby Private Ledger;

PKNS\0090155.WP

5

(d) The Red River investment by plaintiffs was not madethrough Private Ledger;(e) The Red River investment never appeared on any ofplaintiffs' Private Ledger account statements;(f) Private Ledger's name did not appear on any of the Red
River offering or pre-offering materials;(g) Private Ledger received no commissions or fees on the
Red River investments;(h) Private Ledger had no knowledge that Harry, who had
been plaintiffs' broker with other brokerage firms for over ten
years, had solicited and caused plaintiffs to invest in Red
River and Private Ledger promptly terminated Harry when Private
Ledger learned that information; and(i) Plaintiffs, after learning that Harry had caused theirmoney (in bank accounts in Kansas) to be invested in a limited
partnership (Red River) purportedly without their approval,
still made no inquiry or complaint to Private Ledger?
This Court's Memo Decision overlooks all of the uncontroverted
evidence set forth in paragraph 2 above (which the trial court had
analyzed), and ignores the uniform, reported decisions holding, as amatter of law, that a securities broker-dealer has no liability under
the ostensible or apparent agency theory for such wrongdoing on thepart of one of its registered representatives.

Indeed, if thisCourt's decision were uniformly applied in Utah, no securities
broker-dealer, or indeed any employer, could ever obtain summary
judgment, despite completely uncontradicted facts and evidence suchas presented here.

It is clear from reviewing the entire reasoning

by Judge Iwasaki, rather than misconstruing a single comment, that hecorrectly stated the applicable law:

"In essence, it appears thatwhen a registered representative of a brokerage firm clearly violates
the firm's policies and engages in unauthorized activities without

PKNS\0090155 WP

6

the knowledge of Private Ledger in this matter, I just cannot see how
liability can be imposed upon the principal, Private Ledger, in thismatter."[App. B, pp. 3-4]
II. THIS COURT OVERLOOKED THE FACT THAT THE TRIAL
COURT'S ANALYSIS WAS SUPPORTED BY UNCONTROVERTEDEVIDENCE PRODUCED BY DEFENDANT. AND NOTCONTROVERTED BY PLAINTIFFSA.

The Court's Memo Decision Ignores Rule 56(e) Of The Utah
Rules Of Civil Procedure, And Cases Construing That Rule

Private Ledger's moving papers demonstrated that it was entitledto summary judgment on the ground that Harry was not the actual orostensible agent of Private Ledger in connection with his activities
with plaintiffs involving Red River.

Having made that showing, Rule56(e) then shifted the burden to plaintiffs:
When a motion for summary judgment is made and supported asprovided in this rule, an adverse party may not rest upon
the mere allegations or denials of his pleading, but his
response, by affidavit or as otherwise provided in thisrule, must set forth specific facts showing that there is agenuine issue for trial. If he does not so respond,summary judgment, if appropriate, shall be entered against
him.1
In this case, Private Ledger produced extensive evidence as tothe policies and procedures it utilized, the prohibition against"selling away" activities, the fact that the Red River investment wasnever approved by Private Ledger for sale by its independent

1
In Thayne v. Beneficial Utah, Inc., 874 P.2d 120 (Utah 1994), the Utah Supreme
Court affirmed summary judgment, noting "Under Utah Rule of Civil Procedure 56(e) the
burden then shifted to Thayne to provide some evidence, by affidavit or otherwise,in support of the essential elements of his claim."[874 P.2d at 124] Similarly,
in a decision by the Utah Supreme Court filed February 14, 1996, Harline v. Barker,
et al., 912 P.2d 433, 1996 Utah LEXIS 11 (Utah 1996), the Court affirmed summary
judgment, citing Rule 56(e) and Thayne, and noting:On the other hand, we cannot turn a blind eye to the non moving party's
evidence when that party chooses to respond to the summary judgment. In
this case, Harline's own evidence compels us to affirm the trial court's
grant of summary judgment. [912 P.2d at 445]

PKNS\0090155.WP

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contractor registered representatives [R. 567], and its actions in
immediately terminating Harry upon learning of his activities inconnection with Red River.

[R. 568-569]

Plaintiffs' only theory against Private Ledger was that Harry
was somehow the ostensible agent of Private Ledger, but plaintiffs
produced no admissible evidence raising a genuine issue of fact tosuggest that plaintiffs had made their investment in Red River inreasonable reliance on the fact that Harry was selling the investment
as an authorized agent of Private Ledger.

It is respectfully

submitted that this important distinction has been overlooked by thisCourt in its Memo Decision.

More importantly, this Court overlooked

the threshold requirement to establish ostensible agency, or evenraise a triable issue of fact on that issue, with respect tosecurities brokerage firms.
Initially, it is significant that both plaintiffs filed
affidavits in connection with their opposition to Private Ledger's
summary judgment motion.

[R. 599-608]

In paragraph 3 of thoseaffidavits, both plaintiffs admit that "on or about May or June of1988 I received a statement from Private Ledger showing only that on
5/9/88 federal funds were sent to FNB Onaga in the amount of$30,600."

Both plaintiffs admitted that the only information which

they received from Private Ledger with respect to this investment wasa Private Ledger statement showing that monies had been transferredfrom their Private Ledger accounts to an IRA account in a bank in
Onaga, Kansas, in the plaintiffs' names.

PKNS\0090155 WP

8

It is undisputed that

P r i v a t e Ledger had no knowledge t h a t those funds were going to l a t e r
be used t o make an investment in the Red River p a r t n e r s h i p . 2
The t r i a l court was required to consider the evidence presented
in support of the motion, and the matters submitted in opposition
thereto.

As the f u l l t r a n s c r i p t of the t r i a l c o u r t ' s reasoning above

demonstrates, p l a i n t i f f s presented no evidence to show t h a t they had
in fact made t h e i r Red River investments in the belief t h a t Harry was
doing so as the authorized agent of Private Ledger.

The absence ofsuch evidence i s f a t a l to t h e i r apparent agency claim.
III.

THIS COURT ERRED IN ITS ANALYSIS OF THE OSTENSIBLE
AGENCY OR APPARENT AUTHORITY ISSUE

This Court's Memo Decision concludes t h a t "whether an agency
r e l a t i o n s h i p e x i s t s and the scope of the a g e n t ' s a u t h o r i t y arequestions of fact to be determined by a jury in a l l but the c l e a r e s tcases."[p. 2]

However, none of the cases c i t e d by t h i s Court

involved s e c u r i t i e s brokerage firms or " s e l l i n g away" a c t i v i t i e s , andt h i s was "the c l e a r e s t of cases" warranting summary judgment.
Moreover, t h i s Court's analysis i s c l e a r l y contrary to t h a t ofnumerous cases including the decision by the Mississippi Supreme
Court in FSC S e c u r i t i e s Corp. v. McCormack, 630 So. 2d 979 (Miss.
19 94), where the Court noted:
Federal and s t a t e courts in other j u r i s d i c t i o n s have beenr e l u c t a n t to find broker-dealers v i c a r i o u s l y l i a b l e for the

As t h i s C o u r t ' s Memo Decision p o i n t s o u t , t h e evidence e s t a b l i s h e d" p l a i n t i f f s ' concession t h a t they knew of some wrongdoing immediately upon t h e i rr e c e i p t of t h e f i r s t statement s e n t by t h e Bank of Onaga . . . . "Significantly,
p l a i n t i f f s made no complaint t o P r i v a t e Ledger about t h e i r funds having been i n v e s t e dfrom t h e i r FNB accounts i n t o Red River and made no attempt t o communicate with P r i v a t e
Ledger i n any form, f u r t h e r confirming t h e i r knowledge t h a t t h i s was not a t r a n s a c t i o napproved by P r i v a t e Ledger or an investment which involved P r i v a t e Ledger.
PKNS\0090155.WP

9

underhanded dealings of registered representatives incircumstances similar to the case sub judice. These cases
have turned on the doctrine of apparent authority.
Apparent authority is to be determined from the acts of theprincipal and requires reliance and good faith on the partof the third party. [Citation,] . . . The first elementof apparent authority is whether the principals knowingly
and/or negligently permitted their agents to claim they
were acting within the scope of their authority. Thiselement involves the conduct of the principal rather thanthat of the plaintiff. [Id. at 985 (emphasis added).]In rejecting the claim of apparent authority by plaintiffs, the
FSC Securities Court considered a record which is identical to theevidence here, and made the same observation made by the trial court
here in granting summary judgment:
The McCormacks [plaintiffs] had no contact with FSC [thebroker-dealer], made no effort to follow their investment
through FSC and relied on and dealt only with Manuel [theregistered representative] . . . .
The record clearly indicates that Manuel as well as FSC
Securities' other registered representatives act within thescope of employment only when soliciting or transacting
business in securities approved for sale by the brokerdealer. [Id. at 986.]
As pointed out in FSC Securities, and other cases cited to thetrial court and on appeal, the "first element of apparent authority
is whether the principals knowingly and/or negligently permitted
their agents to claim they were acting within the scope of theirauthority," and "involves the conduct of the principal rather thanthat of the plaintiff."

Private Ledger produced overwhelming

evidence that it had not done so, and that it had, as the trial court
noted, taken every reasonable step to prevent such unauthorized
conduct.

[R. 564-568, 508-510]

Moreover, plaintiffs produced noevidence that Harry claimed to be involved in the Red River

PKNS\0090155 WP

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transaction on behalf of Private Ledger.3

In the absence of any

contrary evidence, the trial court correctly concluded that theevidence was uncontroverted and that Private Ledger did not have any
liability as a matter of law, just as numerous federal and state
courts had previously determined in other cases involving securities
broker-dealers.
IV. THIS COURT'S DECISION ERRONEOUSLY RELIES ON
A GENERAL RULE OF LAW IN THE HORROCKS CASE, WHICH IS
CLEARLY DISTINGUISHABLE HERE
In its Decision, this Court cites Horrocks v. Westfalia
Systemat, 892 P.2d 14 (Utah Ct. App. 1995), for the general rule that"a principal is liable for the injuries resulting from the fraud of
its agent, committed during the existence of the agency, or within
the scope of the agent's actual or apparent authority."

PrivateLedger respectfully submits that the general rule of law recited in
Horrocks, based on entirely different evidence, is not applicable,
particularly in contrast to the numerous cases involving securities
broker-dealers which have resolved this very issue of non-liability
for "selling away" activities adverse to plaintiffs as a matter oflaw.4
3
It is significant that plaintiffs had taken the deposition of Jonathan Boynton(the individual in charge of Private Ledger's Compliance Department) in this action,
whose affidavit (copy attached as Appendix C) supported Private Ledger's summary
judgment motion, and could not, in their opposition to the summary judgment at thetrial court, or in either of their Opening or Reply Briefs in this Court, cite to asingle line of testimony in that deposition, or from Harry's criminal trial, to raisea purported issue of fact concerning Private Ledger's conduct here.
4

As noted at pages 15-16 of Private Ledger's Brief in this matter, the factsin Horrocks are completely different from this case because, Interalia,
the agent
there had used the principal's documentation to obtain the plaintiff's funds, theprincipal had cashed the plaintiff's check, the principal had provided a form which
the agent used to deceive the plaintiff and the Court of Appeal correctly found issuesof fact because there was a "record replete with facts sufficient to clothe [theagent] with apparent authority." No such evidence existed here.
PKNS\0090155 WP

11

In this case, had plaintiffs presented sworn affidavits ordepositions indicating that, for example, (1) they made their checks
for the Red River investment out to Private Ledger, (2) those checks
had been cashed by Private Ledger, (3) they executed investment forms
provided by Private Ledger to make the Red River investment, and(4) that the Red River investment had appeared on their Private
Ledger account statements, such evidence may have given rise toissues of fact precluding summary judgment.

However, as the trial

court correctly pointed out, and this Court's Decision has
overlooked, there was absolutely no evidence to that effect presented
by plaintiffs, as required by Rule 56(e).

Indeed, the trial court

correctly pointed out that the plaintiffs "did, in fact, move fromdifferent brokerage firms Mr. Harry was employed with" and that
"Their reliance, in my opinion, was on Mr. Harry and justincidentally with the firm he was employed by."
V.

[App. B. pp. 4-5]

THIS COURT'S DECISION IGNORES AT LEAST FIVE SEPARATE
DECISIONS HOLDING, AS A MATTER OF LAW, THATSECURITIES BROKER-DEALERS ARE NOT LIABLE FORUNAUTHORIZED ACTIVITIES OR "SELLING AWAY" ACTIVITIESOF THEIR REGISTERED REPRESENTATIVES

It is undisputed in this action that Harry executed a written
contract with Private Ledger confirming his independent contractor
status [R. 523], and confirming various prohibitions and restrictions
on what Harry could or could not do on behalf of Private Ledger inthe sale of securities, and executed a separate memo prohibiting"selling away."

In opposing the summary judgment motion, plaintiffs

failed to make any showing that they reasonably believed the Red
River investment had any connection with Private Ledger or had been
PKNS\0090155 WP

12

approved by Private Ledger, but stated only that they were never told"that defendant Harry was an independent contractor."[R. 602, 607]

Private Ledger's Brief [pp. 18-2 8] demonstrated that fivedifferent decisions, the most recent being Bates v. Shearson Lehman
Bros., Inc., 42 F.3d 79, 82 (1st Cir. 1994) (copy attached as
Appendix D ) , had all concluded, as a matter of law, that a securities
broker-dealer had no liability to one of its customers who had been
defrauded by unauthorized activity of its registered representatives.
This Court's Decision, albeit an unpublished one, is the only
authority to the contrary, and does not even distinguish or discussin any manner any of those five decisions.
Of particular significance is Hauser v. Farrell, 14 F.3d 1338
(9th Cir. 1994) (copy attached as Appendix E ) , where the Ninth
Circuit held, as a matter of law, that a securities broker-dealer was
not liable for the "selling away activities" of its registeredrepresentatives, including a rejection of any alleged liability forostensible agency.

In affirming the summary judgment, the Hauser

Court concluded:
Nevertheless, the District Court correctly concluded therecord left no room for genuine issue of fact, because it
established that the customers could not reasonably havebelieved that Rauscher/Pierce [the broker-dealer] hadanything to do with the NTE promotion [the subject
investment]. [Id. at 1343.]
The appropriate inquiry for this Court is whether the undisputed
facts of this case are more closely akin to those in Hauser, Bates
and the other decisions involving securities broker-dealers, or thosein Horrocks., where the principal's active involvement, receipt of

PKNS\0090155.WP

13

funds, and the knowledge and use of the principal's forms, wasreadily apparent.

This case is completely distinguishable fromHorrocksf but it is indistinguishable from Hauser and the other cases
cited by Private Ledger on this issue.

Indeed, this Court's Memo

Decision contradicts its own prior analysis of Private Ledger's rules
and procedures and the prohibited practice of "selling away," as set
forth in State v. Harry, 873 P.2d 1149, 1152 (Utah App. 1994), cited
at page 22 of Private Ledger's Brief.
VI.

THE TRIAL COURT WAS CORRECT IN CONCLUDING THATHARRY COULD NOT BE PRIVATE LEDGER'S AGENT INCONNECTION WITH CONDUCT WHICH RESULTED IN HISCRIMINAL CONVICTION FOR DEFRAUDING PRIVATE LEDGER

Again, Private Ledger respectfully submits that this Court
misconstrues the trial court's comment that "one cannot be an agentof the principal at the same time engaging in conduct which is
criminally fraudulent."

Here, unlike many cases involving criminal

activity of an agent, the purported agent was criminally convicted of
not only defrauding the customers, but criminally convicted ofdefrauding Private Ledger as well.

Given those facts, and noevidence from the plaintiffs, the trial court's comment wasappropriate.

As noted in Private Ledger's Brief, if Private Ledger

had any knowledge or culpability whatsoever, or had in any way
ratified or condoned such activities by Harry, that knowledge,
ratification or conduct would have presented a defense to Harry inthe criminal case, where he was convicted beyond a reasonable doubtof having defrauded Private Ledger.

PKNS\0090155.WP

14

Again, it is significant thatplaintiffs produced not a single line of testimony from Harry tosupport their claim of apparent agency against Private Ledger.
CONCLUSION
This Court should not misconstrue a single statement by thetrial court, which was clearly made in the unique context of thiscase, and thereby conclude that the trial court had misapplied thelaw entirely, warranting a reversal. A full and fair reading of thetrial court's reasoning, and a review of the overwhelming evidence
and legal authorities produced by Private Ledger in support of its
motion, and the complete absence of any admissible evidence fromplaintiffs showing any wrongful or negligent conduct on the part ofPrivate Ledger, supports the trial court's analysis, reasoning andruling.

For the foregoing reasons, and as set forth in Private

Ledger's Brief in this appeal, this Petition For Rehearing should be
granted.
DATED:

May 16, 1996

Respectfully submitted,
STRONG & HANNIPOST KIRBY NOONAN & SWEATBy:

PKNS\0090155 WP

15

s J^v?" ^' ^fa^S. Baird Mor^anV

LLP

CERTIFICATION OF HAND-DELIVERY
I hereby certify that on this 16th day of May, 1996, true andcorrect copies of the foregoing document were hand-delivered to:
J* Michael Coombs
50 West Broadway, 4th Floor
Salt Lake City, UT 84111
Randy B. Coke
NYGAARD, COKE & VINCENT
333 North 300 West
Salt Lake City, UT 84103

WP

ADDENDUM A:
MEMORANDUM DECISIONCOVER SHEETCASE TITLE:
Frank Brgoch and Seymour Isaacsr
Plaintiffs and Appellants,v.
Case No. 950238-CA
Ronald Allen Harry, an individual;
Private Ledger Financial Services, Inc. ;L m s c o Financial Services, Inc.;
Linsco/Private Ledger Corporation;
and Does 1 to 10,
Defendants and Appellees.
April 18, 1996. MEMORANDUM DECISION (Not For Official Publication).
Memorandum Decision of the Court by GREGORY K. ORME, Presiding Judge; NORMAN
H. JACKSON and MICHAEL J. WILKINS, Judges, concur.
CERTIFICATE OF MAILING
I hereby certify that on the 18th day of April, 1996, a true and correct
copy of the attached MEMORANDUM DECISION was deposited in the United States mailto the parties listed below:
Randy B. Coke
Curtis C. Nesset
Nygaard, Coke & Vincent
Attorneys at Law for Appellants
333 North 300 West
Salt Lake City, UT 84103-1215
S. Baird Morgan
Strong & Hanni
Attorneys at Law for Appellees
6th Floor, Boston Building
9 Exchange Place
Salt Lake City, UT 84111
J. Michael Coombs
Attorney at Law for Appellee Ronald Harry
50 West Broadway, 4th Floor
Salt Lake City, UT 84101-2006
Michael L. Kirby
Jeffrey P. Lendrum
Post, Kirby, Noonan & Sweat
Attorneys at Law for Appellees
1100 One American Plaza
600 West Broadway
San Diego, CA 92101-3302
and a true and correct copy of the attached MEMORANDUM DECISION was deposited in
the United States mail to the district court judge listed below:
Honorable Glenn K. Iwasaki
Third District Court
240 East 4th South, Room 503
Salt Lake City, UT 94111

/

,

!

{
'-t
U-U
'
-jC^ \(.yJudicial Secretary(

TRIAL COURT: Third District, Salt Lake County #C92-1463

FILED
APR 1 8 1996
IN THE UTAH COURT OF APPEALSCOURT OF APPEALS

00O00Frank Brgoch and Seymour
Isaacs,MEMORANDUM DECISION[Not For Official Publication)

Plaintiffs and Appellants,
Case No. 950238-CA
Ronald Allen Harry, anindividual; Private Ledger
Financial Services, Inc.;
Linsco Financial Services,
Inc., Linsco/Private Ledger
Corporation; and Does 1 to 10,

F I L E D
( A p r i l 1 8 , 1996]

Defendants and Appellees.

Third District, Salt Lake County
The Honorable Glenn K. Iwasaki
Attorneys:

Randy B. Coke and Curtis C. Nesset, Salt Lake City,
for Appellants
S. Baird Morgan, Salt Lake City, Michael L. Kirby andJeffrey P. Lendrum, San Diego, California, forAppellees
J. Michael Coombs, Salt Lake City, for Appellee
Ronald Harry

Before Judges Orme, Jackson, and Wilkins.
ORME, Presiding Judge:
The trial court granted defendants' summary judgment motion,
concluding that Private Ledger was not liable, as a matter oflaw, for the acts or omissions of defendant Harry. In its orderdenying plaintiffs' motion for reconsideration, the trial court
explained that }'one cannot be an agent of the principal at thesame time engaging in conduct which is criminally fraudulent as
to Private Ledger." However, the trial court cited no authority
in support of this proposition and we are aware of none. Nor
have defendants called car attention to any such authority.
Rather, the general rule is that a principal is liable for
injuries resulting from the fraua of its agent, committed during
the existence of the agency and within the scope of the agent's
actual or apparent authority. See Restatement (Second) of Agency§ 161 (1958); Horrocks v. Westfalia Systemat. 892 P.2d 14, 15-16(Utah App. 1995), Poulsen v. Treasure State Indus., Inc., 626

P.2d 822, 829 (Mont. 1981). Moreover, whether an agency
relationship exists and the scope of the agent's authority arequestions of fact to be determined by a jury in all but theclearest cases. Caraill, Inc. v. Mountain Cement Co.. 891 P.2d57, 62 (Wyo. 1995); Mauch v. Kisslina. 783 P.2d 601, 605 (Wash.
App. 1989). Simply because the agent commits an act that is
criminal does not automatically shield the principal from all
responsibility vis-a-vis an innocent third party.
In this case, the trial court's reasoning that "one cannot
be an agent of the principal at the same time engaging in conduct
which is criminally fraudulent," is simply not a correctstatement of the law. Questions of fact remain as to theexistence of the agency relationship between Harry and defendants
and the scope of Harry's authority.
Nor are we able to sustain the judgment on the alternative
ground urged by defendants before the trial court, namely thatplaintiffs' claims are barred by the statute of limitations.
While traditional application of the discovery rule might suggest
the claims are time-barred given plaintiffs' concession that theyknew of some wrongdoing immediately upon receipt of the firststatement sent by the Bank of Onaga, the result is otherwise
given the contention that Harry fraudulently concealed his
misdeeds. See Berenda v. Langford. 2 87 Utah Adv. Rep. 3 (Utah1996).

See also State v, Harry, 873 p.2d 1149, 1156 (Utah App.

1994) (noting that "Harry deceived [plaintiffs] both before andafter the transaction" in question).
Accordingly, we reverse the trial court's grant of summary
judgment in favor of defendants and remand the case for a trial
on the merits or such other proceedings as may now be
appropriate.

G rc go ry E^O rme,
Presiding Judge~WE CONCUR:

Michael J. Wilkins, Judge

950238-CA

2

ADDENDUM B:
TRANSCRIPT OF TRIAL COURT DECISION• • -^

L__ . „

1

IN THE DISTRICT COURT OF THE THIRD JUDICIAL DISTRICT2

IN AND FOR SALT LAKE COUNTY, STATE,.OF.UTAH,

3* * * * *4

FRANK BRGOCH and SEYMOURISAACS,

5
Plaintiffs,
6
CASE NO. 920901463 CV

VS.
7
8
9
10
11
12

RONALD ALLEN HARRY, an
individual; PRIVATE LEDGERFINANCIAL SERVICES, INC.;
LINSCO FINANCIAL SERVICES,SERVICES, INC., LINSCO//PRIVATE LEDGER CORPORATION,
and DOES 1 to 10,
Defendants.
* * * * *13
14

BEFORE THE HONORABLE GLENN K. IWASAKI

15
16

REPORTER'S TRANSCRIPT OF PROCEEDINGS

17(Bench Ruling)

18
19

SALT LAKE CITY, UTAH

20
21

May 17, 1994

22
23
24
25

COMPUTER-AIDED TRANSCRIPTION

1
2

A P P E A R A N C E S
FOR THE PLAINTIFF:

3

RANDY B. COKE

4

NYGAARD, COKE & VINCENT

5333 North 300 West Street

6Salt Lake City, Utah

7

84103

FOR THE DEFENDANT:

8S. BAIRD MORGAN

9STRONG & HANNI

10

9 Exchange Place, 6th Floor

11

Salt Lake City, UT

12

84111

and

13

MICHAEL L. KIRBY14POST KIRBY NOONAN & SWEAT

15701 "B" Street, Suite 1400

16

San Diego, CA

17

92101

ATTORNEY FOR DEPENDANT HARRY:18

JOHN MICHAEL COOMBS

19

72 East 400 South, Suite 220

20

Salt Lake City, UT

84111

21
22
23
24
25

COMPUTER-AIDED TRANSCRIPTION

1

SALT LAKE CITY, UTAH; MAY 17, 1994; A.M. SESSION

2(REPORTER'S NOTE:

3

The following is anexcerpt of proceedings in the above-entitled case:)

4

THE COURT:

Thank you, Mr. Kirby.

5

Dealing with the statute of limitations first, I

6think that Mr. Coke has presented an issue of fact

7

regarding the concealment issue by Mr. Harry and I think

8

that remains to be an issue of fact in ^ny mind.

9

More critically, though, is my analysis as to the10matter of law as to whether or not Private Ledger should

11

be held liable.

12

states to me the general proposition regarding respondeat

13

superior, no controlling person.

14

I have no argument with Mr. Coke when he

The question I have is just how far can that be15

reached when the defendant in this matter, Private Ledger,

16

has gone to what I think is more than sufficient steps to17

ensure that activities by their registered agent are

18

pursuant to their policies.

19

It is apparent that Red River was not an approved

20

security from Private Ledgerf that there was no21

authorization from Private Ledger to Mr. Harry to go

22

beyond that policy.

23

registered representative of a brokerage firm clearly24

violates the firm's policies and engages in unauthorized25

activities without the knowledge of Private Ledger in thisIn essence, it appears that when a

COMPUTER-AIDED TRANSCRIPTION

3

1

matter, I just cannot see how liability can be imposed2

upon the principal, Private Ledger, in this matter.

3

It did not appear on Private Ledger statements

4

regarding the purchase of this.

5

indication that money was transferred but that was all

6

that was done and that knowledge was to the plaintiffs in7

this matter.

8

There may have been

Private Ledger, once again, never approved of the9

Red River investment.

10plaintiffs' investments were not run through the Private

11

Ledger accounts to the extent of appearing on Private

12Ledger statements.

13

and no prior knowledge of Private Ledger of the activity

14of Mr. Harry.

15

It did not appear — a s I said theThere had been no fees, no collections

The fact Mr. Harry was criminally convicted of

16

defrauding Private Ledger crystallizes my opinion in that17

one cannot be an agent of the principal at the same time

18

engaging in conduct which is criminally fraudulent.

19

are mutually exclusive actions and terms.

20

They

The apparent reliance that Mr. Coke wishes the21

court to accept regarding the activities of Messrs. Brgoch

22

and Isaacs, I do not have to reach the point that they are

23

sophisticated and/or somehow registered investors by the24

fact they have had a long track record with Mr. Harry.

25

They did, in fact, move from different brokerage firms

COMPUTER-AIDED TRANSCRIPTION

4

1

Mr. Harry was employed with.

2

opinion, was on Mr. Harry and just incidentally with the3firm that he was employed by*

4

Their reliance, in myI think that in this situation, Private Ledger

5

has done anything and everything they could to ensure

6

their registered agents are actually agents of them in

7

doing what their policies indicate that they are allowed

8

to do, i.e. trade in approved securities, have commissions

9

paid pursuant to that, have knowledge of the operations

10

that the agents are doing in relations to the brokerage

11house and the investors, and indicating which ones and12

gaining thorough knowledge of activity, then, somehow

13

ratifying the agent's position in this matter.

14

that has not been done so as a matter of law, I am ruling15

for defendant, Private Ledger, regarding their motion for

16

summary judgment as to the statute of limitations.

17

remains to me to be a question of fact to be ferreted out

18if, any there be, at trial.

19

MR. KIRBY:

Thank you, your Honor.

20

THE COURT:With that, Mr. Kirby, Mr. Morgan,

I findIt

21

please prepare the appropriate orders in this matter and22

submit it to Mr. Coke for his approval prior to submission

23

to the court for signature.

24

MR. MORGAN:

I will do that, your Honor.

25

MR. KIRBY:

Thank you.

COMPUTER-AIDED TRANSCRIPTION

51(REPORTER'S NOTE:

Further pretrial

2

proceedings were had, being reported but not herein

3transcribed.)

4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25

COMPUTER-AIDED TRANSCRIPTION

61

REPORTER'S CERTIFICATE

2
3
4
5

STATE OF UTAH

)
:

SS.

County of Salt Lake )If Nora S. Worthen, do certify that I am a

6

Certified Shorthand Reporter and Official Court Reporter7

for the Third Judicial District Court, State of Utah; that8

as such reporter, I transcribed the proceedings of BRGOCH

9AND ISAACS VS. HARRY, ET. AL. , CASE NO.

10

the aforesaid time and place.

11

were reported by me in stenotype using computer-aided,

12

transcription, consisting of pages 3 through 6 inclusive.

13

That the same constitutes a true and correct transcription

14of said proceedings;

920901463 CV atThat the trial proceedings

15

That I am not of kin or otherwise associated with16

any of the parties herein or their counsel, and that I am

17

not interested in the events thereof.

18
19

WITNESS my hand at Salt Lake City, Utah, this25th day of May, 1994.

20
21
22
24

Noi^a S. Wortlien, RPR
Utah License No. 22-106373-7801

25

COMPUTER-AIDED TRANSCRIPTION

7ADDENDUM C:
AFFIDAVIT OF JONATHAN A. BOYNTON IN SUPPORT OF MOTIONFOR SUMMARY JUDGMENT

S. Baird Morgan, Esq. (Utah Bar No. 2314)
STRONG & HANNI
6th Floor, Boston Building
9 Exchange Place
Salt Lake City, Utah 84111(801) 532-7080
Michael L. Kirby, Esq. (Cal Bar No. 050895)
G. Patrick Connors III, Esq (Cal. Bar No. 137967)
POST KIRBY NOONAN & SWEAT
701 B Street, Suite 1400
San Diego, California 92101-8103(619) 231-8666
Attorneys for Defendants
PRIVATE LEDGER FINANCIAL SERVICES, INC.,
LINSCO FINANCIAL SERVICES, INC., and
LINSCO/PRIVATE LEDGER CORPORATION

IN THE THIRD JUDICIAL DISTRICT COURT OF SALT LAKE COUNTYSTATE OF UTAHFRANK BRGOCH and SEYMOURISAACS,

Civil No. : C92-1463
Judge:

Glenn K. Iwasaki

Plaintiffs,
AFFIDAVIT OF JONATHAN A.
BOYNTON IN SUPPORT OF MOTIONFOR SUMMARY JUDGMENT

v's.
RONALD ALLEN HARRY, an
individual; PRIVATE LEDGERFINANCIAL SERVICES, INC.;
LINSCO FINANCIAL SERVICES,
INC., LINSCO/PRIVATE LEDGERCORPORATION; and DOES 1 to 10,
Defendants.

PKNS\0022229 WPSTATE OF CALIFORNIACOUNTY OF SAN DIEGO

)
)
)

SS:

Jonathan A. Boynton, being first duly sworn, deposes and
says:
1.

I am an employee of Linsco/Private Ledger Corporation("Private Ledger"), a defendant in the above-captioned matter,and have personal knowledge of all the matters contained in thisaffidavit.

During the time relevant to this action (November

1987 through December 1989) my title with Private Ledger was Vice
President of Legal and Regulatory Affairs.

Prior to my

employment with Private Ledger, I worked as a field investigator,and later as a supervisor of examiners, for the National
Association of Securities Dealers ("NASD").

My present work

address with Private Ledger is 5871 Oberlin Drive, San Diego,
California 92121.
2.

Cregg Cannon ("Cannon") became a licensed independent

contractor registered representative of Private Ledger inSalt Lake City, Utah on November 25, 1987. A copy of theRepresentative Agreement executed by Cannon is attached as
Exhibit 18 to the Memorandum of Points and Authorities ("Memo of
P&A") filed herewith.
3.

Shortly thereafter, Ronald Allen Harry ("Harry") became

a licensed independent contractor registered representative ofPrivate Ledger in Salt Lake City, Utah on January 11, 1988. A
copy of the Representative Agreement executed by Harry is
attached as Exhibit 19 to the Memo of P&A filed herewith.
PKNS\0022229 WP

2

Both

Cannon and Harry had previously been with the securities firm ofPrudential Bache.
4.

As registered representatives of a licensed securities

broker-dealer (Private Ledger), Cannon and Harry, wereindependent contractors (as confirmed in Section 3 of theRepresentative Agreement) and were only authorized to sell
approved securities through their registered broker-deal.

This

requirement is referenced in paragraph 1 (A) of the Representative
Agreement signed by each of them at the time they contracted wi,thPrivate Ledger which states that they were "...to solicit
purchases of securities and investments offered through Private
Ledger."5.

[Emphasis added]
In the securities industry, an industry in which I havebeen continuously employed for more than 15 years, theunauthorized activity of a registered representative sellingsecurities which have not been approved by the broker-deal firm
is known as "selling away" from the firm.

To emphasize that its

representatives were strictly prohibited from engaging in any
selling away activities, Private Ledger made it a practice to soadvise its representatives, and in fact Private Ledger also had awritten form which it required its registered representatives tosign to acknowledge their awareness of Private Ledger's (and the
NASD's) prohibition against "selling away."
6.

At the time Cannon and Harry joined Private Ledger,

Cannon and Harry each signed a memorandum acknowledging the
PKNS\0022229 WP

3

prohibition against the solicitation and sale of private
securities transactions which were not approved by Private
Ledger.

Attached as Exhibits 12 and 13 to the Memo of P&A insupport of motion for summary judgment, are true and correct
copies of said memoranda signed by Cannon and Harry.

As setforth in that memorandum, the Private Ledger representatives,
including Harry, were specifically reminded:
Participation by a registered representative ina private securities transaction requires written
notification to and written approval by Private
Ledger, regardless of whether or not there is any
compensation involved in the transaction.
7.

Red River Mountain Limited Partnership ("Red River")was never approved for sale by Private Ledger.

In order for asecurity to be approved for sale by Private Ledger, it wasnecessary for the security to be reviewed by the Private Ledger
due diligence committee, and if approved, the name of that
security would then be included on a list of approved securities
distributed to Private Ledger representatives.

Red River neverappeared on any list of securities approved for sale throughPrivate Ledger representatives.
8.

Private Ledger first learned of Cannon's involvementwith Red River when Private Ledger received a letter from
Scott R. Frost of the State of Utah, Department of Business
Regulations, Securities Division, dated February 3, 1989.
Attached as Exhibit 14 to the Memo of P&A is a true and correct
copy of said letter.

Thereafter, Private Ledger promptly

conducted its own investigation and terminated its relationship
PKNS\0022229 WP

4with Cannon on March 8, 1989.

Attached as Exhibit 15 to the Memoof P&A is a true and correct copy of NASD Form U-5, dated
March 22, 1989, which confirms the termination of Private
Ledger's registered representative relationship with Cannon.
9.

Private Ledger subsequently learned that Red River was

an Arizona real estate limited partnership and that the generalpartners were Cannon and Ross N. Farnsworth, Jr.

The Court willnote that the written Pre-Offering Summary [Exhibit 7 to the Memoof P&A] does not once mention or refer to Private Ledger.
10.

Private Ledger did not become aware of Harry's

involvement with Red River until November 7, 1989.

Thereafter,

Private Ledger terminated its relationship with Harry on
November 15, 1989.

Attached as Exhibit 16 to the Memo of P&A isa letter from Private Ledger to Harry, dated November 15, 1989,
informing Harry of his termination for cause effective
immediately.

In addition, attached as Exhibit 17 to the Memo P&A

are the NASD Form U-5s, dated November 22, 198 9 and January 11,
1990, confirming the termination of Harry's registeredrepresentative status with Private Ledger.
11.

Plaintiffs' investments in Red River were not madethrough Private Ledger and the Red River investments neverappeared on any Private Ledger statements.

Private Ledger had no

prior knowledge that Harry had solicited plaintiffs to invest in
Red River and Private Ledger received no commissions or fees
whatsoever on such investments.

PKNS\0022229 WP

5Harry's activities regarding Red

River were improper and unauthorized selling away activities,
which were never approved by Private Ledger.
12.

Following their termination by Private Ledger, bothCannon (through a guilty plea) and Harry (following trial) wereconvicted of committing criminal fraud on Private Ledger inconnection with their unauthorized solicitation and sale ofinvestments in Red River.
13.

In engaging in criminal fraud on Private Ledger, Harry

was acting beyond the course and scope of any authority he had asa registered representative of Private Ledger.

By engaging in,selling away activities, after having agreed in writing never todo so, Harry violated the terms of his Representative Agreementwith Private Ledger and was not acting in the course and scope of
his duties as an independent contractor registered representativeof Private Ledger.

Further Affiant saith not.
DATED this <W day of March, 1994

Jonathan A. Bovnton
Subscribed and sworn to before me this <Q9 day of March, 1994.
Linda W. Humphreys ^TARYPU8UC CALIFORNIA"'^ S j B ^ ^ S S X COLNT^ 0^TLTe:NOV29<t996t
PKNS\0022038 WP/fa/k/M*
LP
Si/Q
•
(/
*
"-*^ ' 7 /(j////nJlM
^ •
" ~
7
r

NotaryPublic/
Residing at , f f e ^ QUp
6

/
(?/)

ADDENDUM D:
BATES V. SHEARSON LEHMAN BROS., INC., 12 F.3d 79 (1st Cir. 1«»«M».

BATES v. SHEARSON LEHMAN BROS., INC.

79

Cite as 42 F.3d 79 (1st Or. 1994)

Dorothy BATES, through her Guardian,Barbara MURPHY, PlaintiffAppellant,v.
SHEARSON LEHMAN BROTHERS,
INC., Defendant-Appellee.
No. 94-1300.
United States Court of Appeals,
First Circuit.
Heard Sept. 12, 1994.
Decided Dec. 16, 1994.
Investor brought suit seeking to holdbrokerage firm liable for acts of broker who
misappropriated investor's funds. The United States District Court for the District of
Rhode Island, Francis J. Boyle, J., granted
summary judgment for firm, and investor
appealed. The Court of Appeals, Torruella,
Chief Judge, held that: (1) firm was notliable under theory of apparent authority,and (2) trial court did not err in excluding
testimony proffered by investor.
Affirmed.
1. Principal and Agent <s=>99
Under Rhode Island law, agency may bebased upon apparent authority.
2. Principal and Agent <S=>101(1)Under Rhode Island law, apparent authority arises from principal's manifestationof such authority to party with whom agent
contracts; additionally, third party's belief inagent's authority to act on behalf of principal
must be reasonable.
3. Brokers <S=>35
Under Rhode Island law, brokerage firm
which employed broker during time he misappropriated investor's funds was not liable
for broker's actions under theory of apparent
authority, where firm's policy required brokers to open customer account before investing client's money, and broker never opened
up account for investor at firm, never deposited any of investor's funds with firm andnever expressly told or otherwise represent-

ed to investor that her funds would be invested with firm.
4. Brokers <®=>38(4)In action whereby investor sought tohold brokerage firm liable for broker's misappropriation of investor's funds under theory of apparent authority, broker's testimony
regarding' funds he received from anotherclient was irrelevant, where alleged diversionof other client's funds occurred before broker
was employed by firm and other client was
not client of firm.
5. Federal Civil Procedure ^2011
In action whereby investor sought tohold brokerage firm liable for broker's misappropriation of investor's funds under theory of apparent authority, trial court did notabuse its discretion in excluding, as cumulative and marginally relevant, witness' testimony that broker had told witness that partof the funds he had obtained from investor
were for personal use and part of the funds
was for investment.
6. Federal Courts <S=>901.1
Any error in trial court's exclusion of
testimony proffered by investor was harmless, since testimony would not have established that broker had apparent authority to
act for brokerage firm.
Quentin Anthony, with whom Sheffield &Harvey, Newport, RI, was on brief, for appellant.
David A. Wollin, with whom Paul V. Curcio, Christopher C. Whitney, and Adler Pollock & Sheehan Inc., Providence, RI, were on
brief, for appellee.
Before TORRUELLA, Chief Judge,
CAMPBELL, Senior Circuit Judge, andSTAHL, Circuit Judge.
TORRUELLA, Chief Judge.
Dorothy Bates, through her guardian Barbara Murphy ("Bates"), brought an action
against Shearson Lehman Brothers, Inc.
("Shearson"), Bates claimed that Shearson
was liable for the acts of its alleged agent,Carl P. Nykaza, a broker at Shearson, who

80

42 FEDERAL REPORTER, 3d SERIES

diverted approximately $70,000 of Bates'
funds, for his own personal account. A trial
commenced, and at the conclusion of Bates'
case, Shearson moved for judgment as amatter of law. The court granted Shearson's
motion, finding that Bates had failed to present sufficient evidence to support her theory
that Shearson should be held liable for Nykaza's actions under the theory of apparent
authority. Bates now appeals. Although
Bates was the victim of a tremendous inequity and we sympathize with her situation, we
do not believe that liability can be attributed
to Shearson. Therefore, for the following
reasons, we affirm.

I. BACKGROUND
In reviewing the court's decision to grant
Shearson's motion for judgment as a matterof law, we consider the evidence in the lightmost favorable to Bates, the nonmoving party. Jordan-Milton Machinery, Inc. v. F/V
Teresa Marie, II, 978 F.2d 32, 34 (1st Cir.
1992).
At the time of trial, Bates was an 82-yearold woman. In 1991, Bates entered a nursing home in Providence, Rhode Island.
Bates is mentally incompetent and unable todescribe the events and transactions which
form the basis of this lawsuit.
Nykaza began working in the securities
industry as a broker for E.F. Hutton in 1984.
E.F. Hutton assigned Nykaza to Bates' account in 1985, at which time Nykaza met with
Bates at her home in Providence to discuss
the status of her accounts and to solicit money for investment.
Nykaza left E.F. Hutton in 1988 and began
working for Thomson McKinnon Securities,
Inc. ("Thomson").
Nykaza transferred
Bates' account, as well as fifteen or twenty
other accounts, from E.F. Hutton to Thomson at that time. While at Thomson, Nykazacontinued to manage Bates' account andwould visit her at her home two or threetimes a month.
In the spring of 1989, Nykaza closed
Bates' account at Thomson. Nykaza's employment with Thomson also ceased. At thistime, Nykaza was attempting to secure a
broker position at Shearson in Westport,

Connecticut. Shearson hired Nykaza as a
broker sometime in June or July, 1989.
Shearson policy required brokers to open an
account for a customer before a broker could
invest any of that customer's money. A
branch manager then had to approve all new
accounts. Nykaza transferred approximately
twelve accounts from Thomson to Shearson,
but he never opened an account for Bates at
Shearson.
On June 13, 1989, Nykaza went to Bates'
home to obtain money. Nykaza prepared acheck from her account at Fleet National
Bank ("Fleet") in the amount of $25,000,
payable to Rhode Island Hospital Trust National Bank ("Hospital Trust"), and had
Bates sign it. Nykaza then deposited thecheck into his personal account at Hospital
Trust, without endorsement.
On August 3, 1989, Nykaza went to Bates'
home and prepared a second check from
Bates' account at Fleet in the amount of$20,000, made it payable to Hospital Trust,and had Bates sign the check. Nykaza thendeposited the check into his personal accountat Hospital Trust.
On January 9, 1990, Nykaza again went toBates' home, prepared a third check from
Bates' account at Fleet in the amount of$25,000, and made it payable to Hospital
Trust. After Bates signed the check, Nykaza deposited it in his personal account at
Hospital Trust.
Nykaza's employment with Shearson encP
ed on February 16, 1990. During Nykaza's
employment with Shearson, no one atSheai*
son was aware that Nykaza was receiving
money from Bates. Nykaza never depositedat Shearson the funds he received fron[Bates. Nykaza also never told Bates, ofotherwise represented, that he was going m
deposit the funds reflected by her checks mShearson. Nykaza used all the funds p «tained from Bates for his own personal bene!
fit.
After leaving Shearson, Nykaza beglB
working for Dominick and Dominick, W |("Dominick") as a broker. Nykaza continuafl
to prepare checks from Bates' accountiS
Fleet for her signature and deposit themMg
his personal account at Hospital Trawl

BATES v. SHEARSON LEHMAN BROS., INC.

81

Cite as 42 F 3d 79 (IstCir. 1994)

These checks, prepared after he left Shearson, totalled $95,000.
On June 12, 1990, Nykaza set up an account at Dominick in the name of "D.M.
Bates." Nykaza listed Bates' social security
number, but all of the other information on
the account was false. Nykaza signed Bates'name to the new account form and all otherrequired documentation. Nykaza then invested approximately $5,000 from money hehad previously obtained from Bates. His
stated purpose in opening the account was totry to make some money through trading inorder to repay Bates.
After Bates discovered Nykaza's diversionof her funds, she brought this lawsuit against
Nykaza and Shearson to recover the $70,000
allegedly lost during Nykaza's employment
with Shearson. Nykaza subsequently allowed judgment to be entered against him in
the sum of $70,000. Bates then proceeded totrial with her suit against Shearson, claimingthat it was liable for the acts of its agent
Nykaza. After Bates concluded presenting
her case at trial, Shearson moved for judgment as a matter of law. The court granted
its motion. Bates then moved for a newtrial, and the court denied her motion.
Bates now appeals.
II. ANALYSIS

scope or in the course of employment or
agency. Certainly there must be somebasis which one might believe that indeed
this was so. So that there are two prongs
here, (1) a manifestation by the principal,
and (2) a reliance to some extent by thethird party dealing with the agent or employee.
I must consider the evidence at thispoint in the point of view most favorable to
the Plaintiff. However, having said thatthe evidence it seems to me is totally lacking of any manifestation by Shearson Lehman to the putative investor that Mr. Mykaza [sic] was acting as its agent or employee in receiving funds. Furthermore,
there is no evidence at all, even from thepoint of view of viewing the evidence mostfavorable to the Plaintiff, of any basis,
reasonable or otherwise, for a belief that
this was indeed what was happening.
The checks were drawn to Rhode Island
Hospital Trust Company. We might havea different situation if they had beendrawn to Shearson Lehman but any dealings that were had here were with Mr.
Mykaza [sic] and Hospital Trust and thethird party. It seems to me given thosecircumstances I have no choice but togrant the Defendant's motion for judgment
as a matter of law and it is granted.

A. The Court's Judgment
as a Matter of Law
In granting Shearson's motion for judgment as a matter of law, the court found that
Shearson's liability hinged upon whether Nykaza acted as an agent of Shearson. Afterconcluding that there was no evidence that
there was an actual agency, the court determined that the issue was whether Nykaza
had apparent authority from Shearson. The
court stated:
That essentially there are two prongs to a
determination as to whether or not a principal is liable for the acts of its agents or
employees in these circumstances, that is,that there must be some kind of manifestation to the third party from the principalthat the agent or employee is acting in the

As a preliminary matter, we set forth theappropriate standard of review. Appellate
review of a motion for a judgment as amatter of law is de novo. Jordan-Milton
Machinery, 978 F.2d at 34. When a motion
for a judgment as a matter of law has been
granted, we review the evidence and theinferences reasonably drawn therefrom, inthe light most favorable to the nonmoving
party. Id; Fashion House, Inc. v. K Mart
Corp., 892 F.2d 1076,1088 (1st Cir.1989). To
affirm, we must find that the evidence led to

1. On appeal, Bates does not challenge the district
court's ruling that Nykaza lacked actual authon-ty to act as an agent of Shearson in his dealings
with Bates.

Bates took exception to this ruling. On appeal, she now claims that the court erred,
and that the evidence was sufficient to permit the jury to reasonably conclude that Nykaza did have "apparent authority" to act asan agent of Shearson.1

82

42 FEDERAL REPORTER, 3d SERIES

only one reasonable conclusion
JordanMilton Machinery 978 F 2d at 34, Fashion
House, Inc, 892 F2d at 1088, see Commer
cial Assocs v Tilcon Gammino, Inc, 998
F 2d 1092, 1099 (1st Cir 1993) In perform
mg this analysis, we will not make credibility
determinations or evaluate the weight of theevidence Jordan-Milton Machinery, 978F 2d at 34, Fashion House, Inc, 892 F 2d at
1088 "Nevertheless, the evidence to which
the nonmovant points must comprise morethan fragmentary tendrils a mere scintillaof evidence is not enough to forestall [judgment as a matter of law], especially on aclaim or issue as to which the burden of
proof belongs to the objecting party " Fash
ion House, Inc, 892 F 2d at 1088 (citations
omitted)[1,2] Under Rhode Island law, agenc\
may be based upon apparent authority2
Commercial Assocs, 998 F 2d at 1099
"To establish the apparent authority of anagent to do a certain act, facts must be
shown that the principal has manifestly
consented to the exercise of such authority
or has knowingly permitted the agent toassume the exercise of such authority,that a third person knew of the fact and,acting in good faith had reason to believe
and did actually believe that the agent
possessed such authority; and that thethird person, relying on such appearanceof authority, has changed his position andwill be injured or suffer loss if the act doneor transaction executed by the agent does
not bmd the principal"
American Title Ins Co v East West Finan
cud Corp, 16 F3d 449, 454 (1st Cir 1994)(quoting Calenda v Allstate Ins Co, 518
A^d 624, 628 (R11986)) (other citations
omitted) Apparent authority arises fromthe principal's manifestation of such authority to the party with whom the agent contracts Commercial Assocs, 998 F2d at
1099 (citing Menard & Co. Masonry Bldg
Contractors v Marshall Bldg Systems Inc,
539 A 2d 523, 526 (RJ.1988)). The focus istherefore on the conduct of the principal, andnot on the putative agent. Commercial As
socs, 998 F 2d at 1099. Additionally, a third
party's belief m the agent's authority to act
2

The parties both agree that Rhode Island law

on behalf of the principal must be a reasonable one Id (citing Rodngues v Miriam
Hospital, 623 A2d 456 (R 11993))[3] In the present case, there is simply
no evidence of anv representation or conduct
by Shearson that would suggest to Bates that
Nykaza had authority to act for it When
Nykaza commenced working at Shearson,
Nykaza never opened up an account for
Bates at Shearson Thereafter, when Nykaza would go to Bates' home, and prepare
checks for Bates to sign, he never had her
issue them to Shearson Rather the checks
were made out to Hospital Trust Nykaza
nevei deposited any of Bates' funds with
Shearson Additionally, Nykaza never expressly told or otherwise represented toBates that her funds would be invested with
ShearsonShearson did not give Nvkaza any authority to solicit money from Bates in such afashion Shearson policy in no way countenanced Nykaza's actions Rather, its policy
required brokers to open a customer accountbefore investing a client's money A Shearson branch manager then had to approve any
new account Furthermore, Shearson required that all money placed into an accountfor investment purposes be made payable to
Shearson Moreover, Shearson had no way
to know of Nykaza's dealings with Bates—
Nykaza never opened an account at Shearson
for Bates, and all of his dealings with her
took place at her home
Even if Bates m fact believed that Nykaza
lepresented Shearson, no reasonable jury
could have found that belief justifiable A
generous reading of the evidence would suggest that Bates gave Nykaza money to invest
for her, and while Nykaza was working at
Shearson, Bates learned, "at one point," that
he was working there Based on this reading, Bates contends that by virtue of Shearson hiring Nykaza to work as a broker for it,
she assumed that the money she gave Nykaza would be invested at Shearson. See Restatement (Second) of Agency, § 261 A
third party's belief m an agent's authority to
act on behalf of a principal, however, must be
reasonable* Commercial Assocs, 998 F2dcontrols this diversity actionBATES v. SHEARSON LEHMAN BROS., INC.
Cite as 42 I .3d 79 ( I s t C i r .

83

1994)

at 1099; see American Soc. of Mechanical tion more probable or less probable than it
Engineers, Inc. v. Hydrolevel Corjx. 456 U.S. would be without the evidence." Fed.
556, 566, 102 S.Ct. 1935, 1942, 72 L.Ed.2d 330 R.Evid. 401.
(1982) (citing Restatement (Second) of Agen1. The Proffered Testimonycy § 261 and explaining that under an apparRegarding Justin Graceent authority theory, liability can be based
upon the fact that the agent's position facili[4] Bates claims that the court erred bytates the consummation of the fraud, where excluding testimony from Nykaza regardingfrom the point of view of the third person, funds he had received from Justin Grace. To
the transaction seems regular on its face and support this contention, Bates argues thatthe agent appears to be acting in the ordi- Nykaza testified that the first check he renary course of the business confided to him). ceived from Bates was a loan in anticipation
Here, the reasonableness of Bates' conten- of his move to Connecticut and his temporarytion is undermined by the fact that the al- unemployment. To rebut the credibility ofleged investments with Shearson did not ap- this testimony, Bates offered to prove thatpear regular on their face—Nykaza never one month prior to Nykaza's solicitation of
told her that he was investing her money at Bates for a loan, Nykaza had deposited into
Shearson, Bates never filled out an applica- his own account a check in the amount oftion to open an account at Shearson, and the $21,000 from another client, Justin Grace,checks she gave Nykaza were not made out and that these funds were still available toto Shearson. See Veranda Beach Club Ltd. Nykaza on June 13th. Therefore, Bates arPartnership v. Western Surety Co., 936 F.2d gues that because Nykaza did not need a1364, 1378 (1st Cir.1991) (when applying loan from Bates on June 13, 1983, he had
analogous Massachusetts law, court found other purposes for her check, such as investthat plaintiffs knowledge that employee was ment.
officer of company did not create a reasonThe court excluded this testimony because
able belief that employee had apparent auit
determined that the evidence was irrelethority to act for employer). There is simplyvant.
We do not believe that the court
no evidentiary basis from which to reasonabused
its discretion in so finding. The cenably conclude that Nykaza had apparent autralissue
in this case was whether or notthority to act as an agent of Shearson in his
Nykaza had apparent authority from Sheardealings with Bates.
son in his dealings with Bates. As we havepreviously
stated, the focus in determining
B. The Evidentiary Rulings
whether an agent has apparent authority
Bates claims that the district court erredfrom its principal is not on the conduct of thein excluding certain testimony. Before weanalyze the substance of these claims, we set putative agent, but rather on the conduct offorth the standard of review and certain evi- the principal. Commercial Assocs., 998 F.2d
dentiary principles. The admission and ex- at 1099. Nykaza's testimony regarding
clusion of evidence is primarily committed to Grace in no way related to conduct by Shearthe discretion of the trial court, and we will son. Nykaza's alleged diversion of Grace's
not disturb this determination absent a show- funds occurred before he was employed bying of an abuse of discretion. Doty v. SewaU, Shearson. Additionally, Grace was not a
908 F.2d 1053,1058 (1st Cir.1990). In gener- Shearson client. Moreover, Bates' overly*lt "[alU relevant evidence is admissible" and speculative argument fails to have any tenlejvidence which is not relevant is not ad- dency to show that Nykaza somehow had
missible." Fed.R.Evid. 402. A trial court apparent authority to act on behalf of Shear^ appreciable flexibility in admitting or son.
deluding evidence on relevancy grounds.
2. The Proffered Testimony•wmcfa Beach Club, 936 F.2d at 1373. Eviof William Harvey<*»<* is "relevant" if it has "any tendency to**•<* the existence of any fact that is of[5] Bates claims that the court erred in°*sequence to the determination of the ac- excluding the testimony of William Harvey,

42 FEDERAL REPORTER, 3d SERIES

84

who had two telephone conversations with
Nykaza in July 1991, over a year after Nykaza left Shearson. Harvey's testimony, if allowed, was to the effect that Nykaza had told
him that part of the funds he had obtained
from Bates were for personal use and part of
the funds were for investment. Harvey's
testimony also would have shown that Nykaza told him that the purpose of the Domimckaccount he subsequently opened with $5,000
was to regain the monies he had previously
taken from Bates. Bates argues that thisevidence was necessary to prove that Nykaza
obtained the funds from Bates for investment
purposes, presumably at Shearson.
The court excluded this testimony because
it did not believe that Harvey's testimony
added anything to assist the jury with respect to the issue of whether Nykaza wasacting as an a^ent of Shearson in his dealings
with Bates. We do not believe that the court
abused its discretion in excluding the evidence because it was cumulative and only
marginally relevant at best.
The issue in this case was whether or not
Shearson had engaged in any conduct thatgave Nykaza apparent authority to act as its
agent in his dealings with Bates. None ofHarvey's proposed testimony was to the effect that Nykaza was going to invest Bates'
money at Shearson. In fact, Harvey's proffer indicated that Nykaza never mentioned
Shearson at all to him.
[6] As a final matter, we note that even if
we were to find error in the court's twoevidentiary decisions, which we do not, we
would be bound to hold the error harmlesson this record. Even if this evidence had
been admitted, none of the testimony was
sufficient to establish that Shearson engaged
in any conduct that gave Nykaza apparent
authority to act as its agent in his dealings
with Bates.
For the foregoing reasons, the decision of
the district court is affirmed.

(o| KEY NUMBER SYSTEM >UNITED STATES AVIATIONUNDERWRITERS, INC.,
Plaintiff, Appellee,v.
FITCHBURG-LEOMINSTER, FLYING
CLUB, INC., et al., Defendants,
Appellees,
andDeborah G. Crocker, Defendant,
Appellant.
No. 94^1644.
United States Court of Appeals,
First Circuit.
Heard Sept. 15, 1994.
Decided Dec.Ad, 1994.
Aviation liability insurer brought diversity action seeking determination that accident
Victim was "passenger" within meaning oi
policy, even though she was outside of aircraft at time of injury. The United States
district Court for the District of Massachusetts, Nathaniel M. Gorton, J., entered summary judgment for insurer, and accident victim appealed. The Court of Appeals, Coffin,
Senior Circuit Judge, held that accident victim who was injured when she walked intoplane's propeller upon exiting airplane to
Seek help in parking it was passenger" who
Was subject to $100,000 cap on liability coverage for passengers in aviation liability policy.
Affirmed.
\. Insurance <&=>146.1(1, 2)
Both to probe fair and reasonable meaning and to test for ambiguity, court examines
Actual language of insurance policy used, con^text, parties, reasonable expectations, andRelevant cases.
%. Insurance @=>435.37
Under Massachusetts law, accident vie*
tim who was injured when she walked into
Mane's propeller upon exiting airplane- ttf^eek help in parking it was "passenger" wb0!

ADDENDUM E:
HAUSER v. FARRELL, 14 F.3d 1338 (9th Cir. 1994).

14 FEDERAL REPORTER, 3d SERIES

1338

Willis V. HAUSER, Rafael Acosta,
Plaintiffs-Appellants,v.
John FARRELL, Alvin Harvey, Rauscher,
Pierce, Refsnes, Inc., a California Corporation, Janice Industries, Inc., d/b/a
Janmar Lighting, a California Corporation, Truman Aubrey, Defendants-Appellees.
No. 91-16400.
United States Court of Appeals,
Ninth Circuit
Argued and Submitted Dec. 16, 1992.
Decided Jan. 14, 1994.
Investors brought securities fraud action
against stockbrokers and brokerage firm.
The United States District Court for theDistrict of Nevada, Lloyd D. George, Chief
Judge, granted summary judgment for firm,
and investors appealed. The Court of Appeals, Kleinfeld, Circuit Judge, held that: (1)firm was not liable as "controlling person"
under Securities Exchange Act in relation to
stockbrokers' promotion of investment; (2)firm was not liable as aider and abettor ofstockbrokers' alleged misrepresentations toinvestors; (3) firm was not vicariously liable
for stockbrokers' alleged misrepresentations
under Nevada law doctrine of respondeat
superior; and (4) investors' counsel's obstructive refusal to make reasonable accommodation for firm's counsel in setting deposition dates warranted protective order andaward of $1,600 in attorney fees.
Affirmed.
1. Federal Civil Procedure <3»2553
District court did not abuse its discretion in denying continuance of summary
judgment proceeding for purpose of allowing
plaintiffs to take deposition, where plaintiffs
offered no reason why they did not deposethat person during 27 months from date that
lawsuit was filed to close of discovery. Fed.
Rules Civ.Proc.Rule 56(f), 28 U.S.C.A.

2. Federal Courts <B»776
Court of Appeals reviews grant of summary judgment de novo, determining whether, viewing evidence in light most favorable
to nonmoving party, there are any genuine
issues of material fact and whether district
court correctly applied relevant substantivelaw.
3. Securities Regulation <3=*60.40
Securities brokerage firm did not qualify
as "controlling person" in relation to stockbrokers' promotion of investments in partnership, and, thus, firm did not have controlling person liability for stockbrokers' alleged
misrepresentations to investors; investors
placed their money with stockbrokers forpurposes other than investment in markets
to which stockbrokers had access only byreason of their relationship with firm, investment scheme was stockbrokers' own personal
project in which they held personal interests,
firm had no knowledge of or financial interest in venture, and there was no evidence
that investors relied on stockbrokers' association with firm in their investment decisions.
Securities Exchange Act of 1934, § 20(a), 15
U.S.C.A. § 78«a).
See publication Words and Phrases
for other judicial constructions and definitions.
4. Securities Regulation @»60.41
To be liable as aider and abettor under
section of Securities Exchange Act, proof of
three things is required: existence of independent primary wrong; actual knowledge
by alleged aider and abettor of wrong and of
his or her role in furthering it; and substantial assistance in the wrong. Securities Exchange Act of 1934, § 10(b), 15 U.S.C.A.
§ 78j(b).
5. Securities Regulation <3=>60.41, 60.45(2)Securities brokerage firm was not liable
as aider and abettor for stockbrokers' alleged
misrepresentations about investments, eventhough stockbrokers were denoted as vicepresidents by firm, where there was no evidence of wrong, scienter, or assistance inwrong by anyone other than stockbrokers
themselves. Securities Exchange Act of1934, § 10(b), 15 U.S.CA. § 78j(b).

HAUSER v. FARRELL

1339

Cite as 14 F J d 1338 (9th Cir. 1994)

6. Securities Regulation <s=»35.16
Aider and abettor liability under Securities Exchange Act is means of holding responsible someone other than wrongdoer
who, knowing of independent wrong and hisor her role in furthering it, substantiallyassists in the wrong. Securities Exchange
Act of 1934, § 10(b), 15 U.S.C.A. § 78j(b).
7. Securities Regulation <3=»35.16
Concept of aider and abettor liability
under Securities Exchange Act cannot beapplied through legal fiction to entity which
does not know of wrong or its role if any infurthering it. Securities Exchange Act of1934, § 10(b), 15 U.S.C.A. § 78j(b).
8. Securities Regulation <3»60.42
Securities brokerage firm was not vicariously liable pursuant to Nevada law doctrineof respondeat superior for stockbrokers' alleged misrepresentations about investmentsin partnership, even though stockbrokers
were firm's employees, where investors could
not have reasonably believed that firm hadanything to do with promotion of investments; investors placed their money withstockbrokers for purposes other than investment in markets to which stockbrokers hadaccess only by reason of their relationshipwith firm, and investment scheme was stockbrokers' own personal project in which theyheld personal interests.
9. Federal Civil Procedure <3=»2774(4)Securities brokerage firm's motion for
disqualification of investors' attorney in securities fraud action, based on investors' attorney's interview of stockbroker without first
notifying firm, was by no means frivolous,
legally unreasonable, without legal foundation, or brought for any improper purpose,
and, thus, Rule 11 sanctions would not be
imposed against firm following denial of motion, where question of disqualification wasclose one. Fe&Rules Civ.Proc.Rule 11, 28
U.S.C.A.; Nev. Sup.CtRules, Rule 182.
10. Federal Courts <3>870
Court of Appeals would review for clear
error a magistrate judge's granting of defendant's motion for protective order, and ordering that plaintiffs pay $1,600 to defendant asreasonable expenses including attorney feesof seeking protective order. Fed.Rules Civ.
Proc.Rule 26(c), 28 U.S.C.A.
11. Federal Civil Procedure <3=>1359, 1366
Investors' obstructive refusal to makereasonable accommodation for securities brokerage firm's attorney's schedule in setting
deposition dates warranted protective orderand requirement that investors pay $1,600 tofirm as reasonable expenses including attorney fees of seeking protective order; firm's
counsel had requested change in dates because first date was legal holiday and counsel
had trial beginning on second date, andfirm's counsel had offered numerous alternative dates. FedRules Civ.Proc.Rule 26(c), 28
U.S.C.A.

Richard McKnight, Las Vegas, NV, forplaintiffs-appellants.
Rodney M. Jean, Evan J. Wallach, Lionel
Sawyer & Collins, Las Vegas, NV, for defendant-appellee Rauscher, Pierce, Refsnes, Inc.
Appeal from the United States District
Court for the District of Nevada.
Before: NORRIS, BEEZER andKLEINFELD, Circuit Judges.
KLEINFELD, Circuit Judge:
Appellants Hauser and Acosta invested ina business venture with two stockbrokers at
Rauscher, Pierce, a securities brokeragefirm. The venture failed. The appellants
sued the stockbrokers and the firm, and obtained a judgment against the stockbrokers
based on fraud. The appellants proposedseveral theories of vicarious liability to holdthe brokerage firm liable, but the district
court granted summary judgment in favor of
the firm on the ground that the businessventure was outside Rauscher, Pierce's control. We affirm.
I. Facts.
The undisputed facts establish the following. The stockbrokers, John Farrell and
Alvin Harvey, worked for Rauscher, Pierce
between October 1986 and November 1987.
They sold the appellants interests in a part-1340

14 FEDERAL REPORTER, 3d SERIES

nership, intended to be incorporated, called
New Technologies in Energy (NTE), which
was promoted as a provider of energy efficient lighting to hotels and casinos. Some of
the conversations in which the stockbrokers
promoted the business to the customers, andthe exchange of the customers' money for theagreements to sell them interests in NTE,
took place at Rauscher, Pierce. NTE was
not a Rauscher, Pierce promotion. The twostockbrokers owned it themselves. No one
at the firm except the two stockbrokers
themselves knew the brokers were sellinginterests in NTE. Although their supervisor
reviewed their orders daily, the NTE investment did not pass through that process. The
broker who sold the NTE investment to Mr.
Hauser, John Harvey, testified at his deposition that he considered it a private transaction having nothing to do with Rauscher,
Pierce and he did not report it to Rauscher,
Pierce.
The stockbrokers testified at their depositions that they told Mr. Hauser and Mr.
Acosta several times that the NTE investment had nothing to do with Rauscher,
Pierce, and Rauscher, Pierce had nothing to
do with the transactions. The NTE transactions were not listed on the statements Mr.
Hauser and Mr. Acosta received from
Rauscher, Pierce or the previous firms thestockbrokers had worked for when they previously sold the appellants NTE interests.
Both customers were sophisticated, experienced investors. Mr. Hauser first learned of
NTE in 1984, and began investing money in
it in February 1986, some months before thestockbrokers went to work for Rauscher,
Pierce. After the brokers began working for
Rauscher, Pierce, they continued to promote
NTE to Mr. Hauser, and he invested moremoney in October 1987. For a while, Mr.
Hauser would meet one or both of the stockbrokers at the Rauscher, Pierce office about
twice a week, and they would go to lunch
together. The October 1987 sale was concluded at the Rauscher, Pierce office, withthe two stockbrokers and a secretary present Mr. Hauser acknowledged at his deposition that when he first invested in NTE, he
understood that it was a side deal unconnected with his trading activities through thebrokerage firm for which they then worked.
He never received anything on Rauscher,
Pierce stationery encouraging him to invest
in NTE. He did not recall any discussion ofwhether Rauscher, Pierce had any interest in
NTE, but he "presumed" the firm was involved.
Mr. Acosta testified at his deposition that
he too became acquainted with the two stockbrokers before they went to work for
Rauscher, Pierce, although he did not invest
in NTE until the summer of 1987, when thestockbrokers were working for the firm. He,
like Mr. Hauser, understood from the stockbrokers that they were planning to quit
working for Rauscher, Pierce and go to work
full-time in the lighting company they werecreating, NTE. His conversations with thebrokers about NTE took place at their
Rauscher, Pierce office. Although the stockbrokers' supervisor walked into the office atleast once while they were discussing NTE,
Mr. Acosta did not recall what they said thatthe supervisor might have overheard, and did
not know if Rauscher, Pierce received a commission or owned any interest in NTE. He
assumed that the supervisor knew the brokers were promoting NTE.
The complaint alleged that Harvey andFarrell had violated Rule 10b-5 by misrepresenting certain facts in connection with the
NTE investment Rauscher, Pierce was alleged to be liable as an "aider and abettor" of
the Rule 10b-5 violation, as a "controllingperson" within 15 U.S.C. § 78t(a), and under
the theory of respondeat superior. The district court granted Rauscher, Pierce's motion
for summary judgment on all of these claims.
The court also denied appellants' motion for
sanctions against Rauscher, Pierce on thebasis of their motion to disqualify appellants'
counsel, and affirmed the magistrate's order
granting Rauscher, Pierce's request for attorney's fees incurred in bringing a motion
for a protective order.
II. Rule 56(f) Continuance.
[1] The customers' attorney moved for acontinuance to take the deposition of a Mr.
Ruhl under Federal Rule of Civil Procedure
56(f). Plaintiffs' counsel represented that hebelieved Mr. Ruhl would testify that the

HAUSER v. FARRELL

1341

Cite a* 14 F.3d 1338 (9th Cir. 1994)

stockbrokers' supervisor knew something
about the NTE venture. The judge did notabuse his discretion in denying the motion.
Plaintiffs offered no reason why they did not
depose Mr. Ruhl during the 27 months fromthe date the lawsuit was filed to the close of
discovery.
III. Summary Judgment.
[2] We review the grant of summary
judgment de novo, determining whether,viewing the evidence in the light most favorable to the non-moving party, there are any
genuine issues of material fact and whether
the district court correctly applied the relevant substantive law. Federal Deposit Ins.
Corp. v. O'Melveny & Meyers, 969 F.2d 744,
747 (9th Cir.1992).
A. Controlling Person.
[3] The main issue in this case is whether
Rauscher, Pierce is liable as a "controllingperson" for purposes of the Securities Exchange Act of 1934. The relevant provisionextends vicarious liability of brokerage firms
beyond common law respondeat superior liability, subject to certain exceptions:
Every person who, directly or indirectly,
controls any person liable under any provision of this chapter or of any rule orregulation 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 isliable, 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). We held in Hollinger v.
Titan Capital Corp., 914 F.2d 1564,1573 (9thCir.1990), cert, denied, 499 U.S. 976, 111
S.Ct 1621, 113 L.Ed.2d 719 (1991), that as amatter of law, a broker-dealer is a controllingperson under that provision with respect to
its registered representatives. We reasoned
that the securities laws impose on brokerdealers a duty to supervise their registeredrepresentatives, and the representatives
need the dealers to gain access to the securities markets. We saw no basis for a distinction between employees or other agents andindependent contractors. The statute bases

liability solely on the control relationship,subject to the good faith defense.
We explained in Hollinger that a brokerdealer is not necessarily liable "for all actions
taken by its registered representatives," andis not an insurer of its representatives. Id.
at 1575. In addition to the good faith defense, we noted the possibility of actions by
the stockbroker outside the firm's control:
The broker-dealer may also, of course, rely
on a contention that the representative wasacting outside of the broker-dealer's statutory "control." For example, [the brokerdealer] could argue that when appellants
entrusted their money to [the representative] they were not reasonably relying
upon him as a registered representative of[the broker-dealer], but were placing themoney with [the representative] for purposes other than investment in markets towhich [the representative] had access only
by reason of his relationship with [the]broker-dealer.
Id. at 1575-76, n. 26. We have not previously had occasion to consider what conduct by arepresentative is "outside of the broker-dealer's statutory control."The district judge carefully analyzed theevidence submitted on the motion for summary judgment, and, finding no genuine issue of fact, held as a matter of law that thiswas an "outside" transaction for purposes ofcontrolling person liability:
However, this litigation does not involve
the type of securities transactions that
could only be performed through Harvey's
and FarrelTs association with a brokerdealer. The dispute here centers on an
investment promoted as an interest in asmall enterprise that was unrelated to anyof the securities offered by Rauscher/Pierce through its registered agents.
Harvey and Farrell were not acting intheir capacity as "registered agents" ofRauscher/Pierce when they approached
the plaintiffs with this supposed investment opportunity. Rather, the NTE investment scheme proposed by Harvey andFarrell was their own personal project, inwhich they held personal interests. On
the other hand, Rauscher/Pierce has never
had an interest in the venture. There has

14 FEDERAL REPORTER, 3d SERIES
Deen no evidence offered to suggest that
Rauscher/Pierce even had any meaningfulknowledge of the scheme or that it was thetype of transaction that Rauscher/Pierce
dealt with or had an interest in at all as a
brokerage house. In fact, it was not
Rather, the NTE "deal" was a separate
arrangement entered into by the co-defendants as private individuals, not as "registered agents" of Rauscher/Pierce. As
such, that scheme and any related transactions fall outside the scope of that activity
that Rauscher/Pierce, as a broker, is statutorily required to supervise. There is noevidence that Harvey and Farrell usedtheir "access to the trading markets"
through Rauscher/Pierce to promote theNTE venture. Nor is there a suggestionthat Harvey and Farrell could not havelegally promoted this scheme without being registered with the SEC or with abroker-dealer. This was simply not a "securities transaction" of the type contemplated by 15 U.S.C. § 77o.
Moreover, there is no evidence to suggest that the plaintiffs relied on Harvey
and FarrelTs association with Rauscher/Pierce as registered agents of a brokerdealer in their decision to invest in NTE.
On the contrary, the deposition of plaintiff
Willis Hauser demonstrates that helearned about the NTE venture throughhis association with the co-defendants in
1984, long before Harvey and Farrell became employed with Rauscher/Pierce.
Additionally, plaintiff Rafael Acosta's deposition testimony makes clear that the investment promotion by Harvey and Farrell
was completely divorced from their relationship with Rauscher/Pierce. In fact,
Acosta's testimony reflects the fact that
Harvey and Farrell suggested that theywould quit their jobs as registered agentsof Rauscher/Pierce if they were able to get
the NTE venture off the ground.
In HoUinger the court explicitly recognized that the "broker-dealer" rule, imposing vicarious liability on brokerage houses
as "controlling persons," could only be applied in instances where the alleged wrongdoer was involved in transactions normallysupervised by his/her employer under its

15 U.S.C. § 77o statutory duty. The court
held:
The broker-dealer may also, of course,
rely [as a defense] on a contention thatthe representative was acting outside of
the broker-dealer's statutory "control".
For example, [the defendant/broker]
could argue that when appellants entrusted their money to [the co-defendant/registered agent], they were notreasonably relying upon him as a registered representative of [the defendant/broker], but were placing the money with [the co-defendant/registeredagent] for purposes other than investment [in markets] to which [the co~defendant/registered agent] had accessonly by reason of his relationship with[the defendant-broker],
HoUinger, at 1575 n. 26 (emphasis added).
This is just such a case.
There has been no evidence offered that
substantiates the claim that Harvey andFarrell were acting in anything other thantheir individual capacity in promoting theNTE venture. There is no evidence which
reasonably suggests that the plaintiffs relied on Harvey and Farrell as registeredrepresentatives of Rauscher/Pierce inchoosing to invest in NTE. Therefore,
even viewing the evidence before the courtin the light most favorable to the plaintiffs,
Rauscher/Pierce does not qualify as a "controlling person" in relation to their employee/codefendants* promotion of NTE.
Congress could not have reasonably contemplated imposing "controlling person" liability on brokerage houses for all of thetortious acts of their employees, no matter
how unrelated that wrongdoing may be tothose persons' employment Since thestatutory duty of control imposed by 15
U.S.C. § 77o must be limited to thosetransactions which could have reasonably
been regulated and controlled by an employer, there can be no liability imposed
upon the defendant Rauscher/Pierce in thiscase under the "controlling person" theory.
Our de novo review of the record reveals
no error in this analysis. Considering all thecircumstances of the transactions, Mr. Hauser and Mr. Acosta were not reasonably rely-

1343

HAUSER v. FARRELL
Cite as 14 F.3d 1338 (9th Clr. 1994)

ing upon the stockbrokers as registered representatives of Rauscher, Pierce. They wereplacing the money with the stockbrokers forpurposes other than investment in markets
to which stockbrokers had access only byreason of their relationship with Rauscher,
Pierce. As the district court pointed out, thebrokers did not need Rauscher, Pierce topromote NTE, it was not the kind of investment for which a customer typically relies on
a broker with access through his firm to a
stock exchange, and Hauser bought into
NTE before the brokers even went to workfor Rauscher, Pierce. Acosta knew that thebrokers were planning to quit working for
Rauscher, Pierce so that they could devote
more of their efforts to NTE. Rauscher,
Pierce had no knowledge of or financial interest in the NTE venture. In addition to theevidence expressly alluded to by the district
judge, we note that Mr. Hauser's and Mr.
Acosta's statements from Rauscher, Pierce
did not list the NTE investments. Mr. Hauser and Mr. Acosta did not, in the deposition
excerpts provided to the district court, contradict the brokers1 representations that they
told the customers that the NTE investment
would not be through Rauscher, Pierce andhad nothing to do with Rauscher, Pierce.
B. Aider and Abettor Liability.
[4-7] Appellants argue that Rauscher
Pierce is liable as an aider and abettor under
15 U.S.C. § 78j(b). This requires proof of
three things under Durham v. Kelly, 810
F.2d 1500, 1505 (9th Cir.1987): (1) existenceof an independent primary wrong; (2) actual
knowledge by the alleged aider and abettorof the wrong and of his or her role in furthering it; and (3) substantial assistance in thewrong. Appellants offered no evidence ofwrong, scienter, or assistance in the wrong
by anyone other than the stockbrokers themselves at Rauscher, Pierce. They argue thatsince the stockbrokers were denoted as vicepresidents by their firm, their rank was highenough so that the firm must be held responsible for their knowledge. But aider andabettor liability is a means of holding responsible someone other than the wrongdoer who,
knowing of the independent wrong and his or
her role in furthering it, substantially assistsin the wrong. The concept cannot be applied

through a legal fiction to an entity which
does not know of the wrong or its role if any
in furthering it.
C. Respondeat Superior Liability.
[8] Appellants also argue that Rauscher,
Pierce was vicariously liable under Nevada
law doctrine of respondeat superior. The
theory appears to be that, since the stockbrokers were Rauscher, Pierce employees, customers would reasonably rely on Rauscher,
Pierce. We recognized that such a state law
claim is not supplanted by controlling person
liability, in Hollinger, 914 F.2d at 1577. Nevertheless, the district court correctly concluded the record left room for no genuine
issue of fact, because it established that thecustomers could not reasonably have believedthat Rauscher, Pierce had anything to dowith the NTE promotion. OeKLer v. Humana, Inc., 105 Nev. 348, 775 P.2d 1271, 1273
(1989); Ellis v. Nelson, 68 Nev. 410, 233 P.2d
1072, 1076 (1951).
IV. Sanctions.
A. Rule 11.
[9] Rauscher, Pierce moved to disqualify
the customers' attorney on the ground that
he interviewed one of the stockbrokers, atabout the same time that the stockbroker
was going back to work for Rauscher, Pierce,
without notifying Rauscher, Pierce's attorney. The Nevada ethical rule, S.C.R. 182,
like Model Rule of Professional Conduct 4.2,
prohibited a lawyer from communicating
about the subject of representation with aparty, or persons whose conduct would be
imputed to the party, whom the lawyer knew
to be represented, except with consent of theother lawyer or authorization by law. Basically the motion accused the customers' attorney of going behind the back of the brokerage firm's attorney to the stockbroker.
The judge demed the motion for disqualification, and also denied plaintiffs' motion forRule 11 sanctions. Plaintiffs appeal the denial of Rule 11 sanctions. Although the court
ultimately had denied the motion to disqualify, the question was close. The judge did notabuse his discretion. Cooler & Gell v. Hartmarx Corp., 496 U.S. 384, 405, 110 S.Ct
2447, 2460, 110 L.Ed.2d 359 (1990); Moore v.
Local Union 569 of the Int'l BhdL of Elec.

1344

14 FEDERAL REPORTER, 3d SERIES

Workers, 989 F.2d 1534, 1537 (9th Cir.1993).
The motion was by no means frivolous, legally unreasonable, without legal foundation, or
brought for any improper purpose.
B. Discovery Sanction.
[10,11] Plaintiffs' counsel on January 24
noticed up the depositions of the stockbrokers' secretary and "the person most knowledgeable of Rauscher Pierce Refsnes, Inc."
for February 19 and 20, at plaintiffs' attorneys' office in Las Vegas. Defense counsel
asked him to change the dates, because February 19 was a legal holiday, and he had atrial beginning February 20 in a case which
he had been handling exclusively for many
years. He offered numerous alternative
dates. The magistrate not only granted defense counsel's motion for a protective order,
but also ordered plaintiffs to pay $1,600 to
defendant as the reasonable expenses including attorneys' fees of seeking the protective
order, under Federal Rule of Civil Procedure26(c). We review for clear error, Grimes v.
City and County of San Francisco, 951 F.2d
236, 240 (9th Cir.1991), and find none. Obstructive refusal to make reasonable accommodation, such as plaintiff exhibited, not only
impairs the civility of our profession and thepleasures of the practice of law, but also
needlessly increases litigation expense toclients.
AFFIRMED.

Court of Guam, affirming his convictions forfirst and second-degree criminal sexual assault on a minor. The Court of Appeals,
William A. Norris, Circuit Judge, held that:(1) instruction that victim's testimony did nothave to be corroborated if victim was believed beyond a reasonable doubt did not,when viewed in context of instructions as awhole, accord special weight to victim's testimony, (2) instruction that support person
would be allowed to be present during "childvictim's" testimony did not improperly single
out victim from other witnesses; and (3)Guam law did not require that trial court
give special child witness instruction, andcourt in instant case was justified in refusing
to give such special instruction.
Affirmed.
Reinhardt, Circuit Judge, dissented andfiled opinion.

1. Criminal Law <3=»770(3)Trial judge has substantial latitude informulating jury instructions so long as instructions fairly and adequately cover issues
presented.
2. Criminal Law <3»1152(1)Jury instructions, even if imperfect, arenot basis for overturning conviction absent
showing that they constitute abuse of trial
court's discretion.
3. Criminal Law <S»822(14)The PEOPLE OF the TERRITORYOF GUAM, Plaintiff-Appellee,v.
Thomas V. McGRAVEY, DefendantAppellant.
No. 92-10003.
United States Court of Appeals,
Ninth Circuit
Argued and Submitted Nov. 4, 1992.
Decided Jan. 14, 1994.
Defendant appealed from order enteredby the Appellate Division of the District

When viewed in context of instructions
as a whole, instruction in prosecution relating
to sexual abuse of child that no corroborationof victim's testimony was necessary if victim
was believed beyond a reasonable doubt did
not improperly imply that jury was to evaluate victim's testimony differently and morefavorably; jury was fully instructed that itwas not to treat testimony of victim any
differently from testimony of any other witness, and nothing in instructions would cause
reasonable juror to believe that defendant
was required to produce corroborating evidence in support of his testimony.