### T E X A S C O U R T O F A P P E A L S , T H I R D D I S T R I C T , A T A U S T I N

NO. 03-09-00566- CV

David Fe rnea, Appellant

v. Mer rill Lyn ch P ierc e F enner & Sm ith, Inc., App ellee

F ROM TH E DISTRI CT COURT O F TRAVIS CO UNTY, 200 TH JUDICI AL DISTRICT NO. D-1 -GN-0 9-0 0219 5, H ONO RAB LE JO HN K. DIETZ, JUDGE PRESI DING

O P I N I O N
Appellant David Fe rnea sued appellee Merr ill L y nch P i er ce Fe nner & Smit h, I nc. (“Me rrill L y

nch”) asser

ting various cause s of action arising from its alleg ed failure to adequately supervise its employ ee, Terr y Christopher Bounds, in the sale of a portion of his outside businesses
to Fe rn ea . Merr ill L y

nch moved for summary judgme nt, attaching aff idavits to its motion as evidenc e. Fe rnea

objected to the aff

idavits on sever al g rounds. The trial court overr uled Fe rnea ’s objections and g rante d summary judgme nt in favor of Merr ill L y nch. I n eleve n issues, Fe rnea asser ts that the trial court err ed in overr uling his objections to Merr ill L y nch’s summary -judg ment aff idavits and in g ranting summary judgme nt for Merr ill L y nch on eac h of his claims. We will aff irm in part and re verse and re mand in part.F ACTUAL AND P ROCEDURAL BACK GR OUND Bounds is an employ ee of Merr ill L y nch and a licensed secur ities broker

. Bounds also owned two “ outside” direc t-marke ting c orpora tions that were unr elated to his employ ment at Merr ill L y

nch. Boun d s decide d to sell his interests in those companies and, acc ording to Fe rnea , solicited Fe rnea

to “purc hase shares” in the bus inesses. After neg otiation, Fe rnea ag ree d to buy a fifty -per cent interest in eac h company . Fe rnea alleg ed that, “[a]fter rec eiving pay ment, Bounds ref used to p erform his side of the ag ree ment, conce aling his actions by delivering a fake stock

cer tificate for 1000 share s of ‘B ounds & Pinto, I nc.,’ an i lleg al, non-existent corpor ation with a dece ptively simil ar name [t o the companies’ actua l names].” Fe rnea asser ted t h at Bo unds made

numerous misrepre sentations and omissions to induce Fe rnea to purcha se the stock. The alleged omissions included Bounds’ s failure to disclose that the stock being sold was not and had never been
reg istered with the Texas State Securities Boa rd and that Bounds’ s companies had been the subject of consumer- protec tio n li ti g a ti on by the Texas Attorney Gene ral. Fe rnea also contende d that Bounds “sec retly and repe atedly attempted to rese ll to o t h er s t h e same corpor ations previously sold to Fe rnea .” Although Fe rnea and Bounds had become acqua inted socially , and Fe rnea was not a customer of Merr ill L y

nch, Fe rnea asser

ted that the “re lationship betwee n Merr ill L y nch and Bounds

wa s important” to him in deciding to invest in Bounds’ s companies beca use he “thoug ht that [affiliation] . . . would weig h heavily [aga inst] any

possible dece ption on [ Bounds’ s] part.” The p arties dispute the extent of Merr ill L y nch’s awa

rene ss of Bounds’ s sale to Fe rnea . Merr ill L y

nch admitted that it knew of the attorney g ener al’s consumer- protec tion litigation and had, as a result, undert ak en an investigation of Bounds’ s outside companies, specific ally

2inquiring into whether Bounds had met his disclosure responsibilities to Merr ill L y nch. Refer encing Merr ill L y

nch’s internal documents and testimony by Bounds, Fe rnea alleg es that “[a]s a part of its investigation, Merr ill L y

nch was notified that Bounds intended to sell a portion of his interest in the
corpor ations.” I n particula r, Fe rnea points to a “L etter of Educa tion” addre ssed to Bounds from his

s uperiors at Merr ill L y

nch that repr imanded him for failing to acc urate ly repor t his outs i d e compani es ’ l i n es of business. The letter noted that, as a “mitiga ting fac tor” in Merr ill L y nch’s decision not to take ster

ner disciplinary action, Bounds had dec ided to “sell [his] outside business
to devote more time and ef fo rt t o g rowing [hi s] business at the Firm.” Fe rnea asser ts that this document is evidenc e that “Mer rill L y nch knew the corpor ations wer e both Sub-C corpor ations and knew that Bounds’ s holdings in the corpor ations wer e evidenc ed by stock.” Fe rnea also alleg es that “[ a]lthough Merr ill L y nch knew that Bounds was try ing to sell his interest in t h e corpor ations—interests held in stock—Merr ill L y nch made no attempt to inquire about the sale, its terms, or the r eg istration of the sec urities.”

Fe rnea filed suit ag ainst Bounds, Bounds’s companies, and Mer rill L y nch, see king damag es and resc ission of the transac tion. Fe rn ea alleg ed five cause s of action ag ainst Merr ill L y nch: (1) violation of section 33 of t h e T ex as S ecurities Act, the “aide r and abettor” liability provision; ( 2) violations of sever al internal rules of the Ne w York Stock Exchang e (“N YSE”) and the National Association of Securities Dea lers (“N ASD”); (3) negl i gen ce for violating Merr ill L y nch’s internal polici es wi t h respect to outside transac tions conducte d by its employ ees;

3(4) neg lige nt supervision of Bounds with respe ct to his outside transac tions; and (5) “contr ol person”

liability under the Texas Securities Act. 1 Merr ill L y

nch moved for summary judgme nt, asser ting that (1) Fe rnea could provide

no evidenc e on sever al of the elements of aider -and- abettor liability ; (2) there is no private rig ht of action for a violation of NYSE and NASD rules or internal company policies, or, in the alternative, the evidenc e conclusively proved that no violations occur red; (3) Merr ill L y

nch had no d uty to Fe rnea with respe ct to a violation of its interna l p o l i ci es , or, in the alternative, the evidenc e conclusively proved that n o v i o l ati on occur red; (4) Fe rnea failed to state a claim for neg lige nt training and supervision beca use Merr ill L y

nch did not owe him a d u t y and the evidenc e conclusively disproved proxi mate cause ; and (5) Merr ill L y nch was not lia b l e u n d er the Texas Securi t i es Ac t b ec ause, as a matter of l aw, it was not a “control person” as t hat t erm is define d in the statute. Fe rnea objecte d t o p ortions of the aff idavits attache d to Merr ill L y nch’s motion. After a hear ing, the trial court overr uled Fe rnea ’s objections and g rante d summary judgme nt in favor of Merr ill L y

nch on all of Fe rnea ’s claims. The court then sever ed Fe rnea ’s claims ag ainst Merr ill L y nch from those ag ainst the other defe ndants, making the summary judgme nt final and appea lable as to Merr ill L y

nch. F erne a per fec ted this appea l.

Fe rnea also pleade d that Bounds was acting as Merr ill L y nch’s ag ent in the transac tion, but 1 d o es n o t appea l the t rial court’s g rant of summary judgme nt on the claims founded on that theory of liability

. 4STANDARD OF REVIEW Whether summary

judgme nt is proper is a que stion of law that we r eview de novo. FM Props. Operating Co. v. City of Austin , 22 S. W

. 3 d 8 6 8 , 8 7 2 (Tex. 2000). “Tra ditional”
summary judgme nt is proper if (1) there are no g enuine issues of materia l f act, and (2) the movant is entitled to judgment as a matter of la

w. Tex. R. Civ. P. 166a(c ). “I f the movant e stablishes the rig ht to judgme nt, the burden shifts to the nonmovant to rais e a fac t issue that would prec lude
summary judgme nt.” Virginia Indonesia Co. v. Harris County Appraisal Dist. , 9 1 0 S. W. 2 d 905, 907 (Tex. 1995). A defe ndant who conclusively neg ates at least o n e essential element of a plaintiff’s

cause of action is ent i t l ed t o s ummary judgme nt on that claim. IHS Cedars Treatment Ctr. of DeSoto, Tex., Inc. v. Mason , 143 S.W .3d 794, 798 (Tex

. 2003). “When revie wing a summary judgme nt, we take as true all evidenc e favor able to the nonmovant, and we indulge ever y rea sonable infere nce and resolve any doubts in the nonmovant’s fa v o r.” Provident Life & Acc ident Ins. Co. v. Knott , 128 S.W .3d 211, 215-16 (Te x . 2003).

“To preva il on a no-evide nce summary -judg ment motion, a movant must alleg e that there is no evidence of an e ssential element of the adve rse pa

rty ’s claim.” Southwest Elec. Power Co. v. Grant , 73 S.W .3d 211, 215 (Tex. 2002) (c i t i n g T ex . R. Civ. P. 166a(i))

. The burden then shifts to the nonmovant to produce more than a scin t i l l a o f p robative evidenc e to support eac h challeng ed element of its claims. Forbes, Inc. v. Granada Bioscience s , 124 S.W .3d 167, 172 (Tex. 2003). More than a scintilla of evidenc e exis ts when rea sonable and fair- minded people could differ in their conclusions based on the evidenc e in the rec ord. Id. ; see also Ford Motor Co. v. Ridgway , 135 S.W .3d 598, 601 (Tex. 2004) (“When the evidence offer ed to prove a vital fac t is s o weak as

5to do no more than cre ate a mere surmise or suspicion of its exis tence , the evidenc e is no more than

a scintilla and, in leg al eff ect, is no evidenc e.” (quoting Kindred v. Con/Chem, Inc. , 650 S.W .2d 61, 63 (Tex. 1983)))

. “B oth direc t and circumstantial evidenc e may be used to establish any materia l fac t.” Ford Motor Co. , 135 S.W .3d at 601. “To raise a g enuine issue of materia l fac t, howeve r, the evidenc e must tra

nscend mere suspicion. .

. . Evidence that is so sli g ht a s to ma ke any infere nce a g uess is in leg al ef

fec t no evidence .” Id. We review“the e vidence . . . in the light most favor able to the non-movant.” Id.

DISCUSSIO N No-Evidence

Sum m ary Judgm ent Generally We beg in by addre ssing Fe rnea ’s eleve nth issue, in which he asser ts in g ener al terms that the trial court err ed in g ranting Merr ill L y nch’s no-evide nce motion. Al t h o u gh the parties briefe d this appea l as if Merr ill L y nch had proper ly s o u g h t b o th traditional and no-evide nce summary judgme nt on eac h of Fe rn ea ’s claims , a review of the m otion shows that Merr ill L y nch asserted a
proper no-evide nce motion only as t o Fe rnea ’s aider -and- abettor c laim under the Te x as Secur ities Act. Although Merr ill L y

nch’s motion also stated that “[t] here has been adequate time for discovery , and there is no evidenc e of one or more essential elements of the Plaintiff’s cause s of action ag ainst Merr ill L y

nch,” such a statement does not, by itself, meet the require ments of a no-evide nce motion for summary judgme nt. See Tex. R. Civ. P. 166a(i) (“The motion must state the elem en ts as to which there is no evidenc e.”) ; Dibco Undergr o u n d , In c. v. JCF Bridge & Concrete, Inc. , No. 03-09-00255- CV, 2010 WL 1413071, at *6 (Tex. A pp.—Austin A

pr. 8, 2010, no pet.) (me m. op.) (movant’s motion must clea rly set out specific no-evide nce challeng e to elements of eac h cause

6of act i o n ). E x cept as to the aider -and- abettor claim, there fore , we consider only whether

“t raditional” summary judgme nt was proper as to Fe rnea ’s cause s of action and need n o t ad d re s s Fe rnea ’s eleve nth issue.

V iolation of NASD and NY SE R ules 2 I n his fi rs t two issues, Fe rnea asser ts that the t rial court err ed in g ranting summary judgme nt on his claim that Merr ill L y nch violated three secur ities-industry rules—two promulg ated by the NASD and one by the NYSE. He arg ues that he is entitled to bring a private cause of action
ag ainst Merr ill L y

nch for its a lleg ed violations a nd that a fac t question exis ts as to whether Merr ill L y nch viol ated the rules in question. I n its motion for summ ary judgme nt, Merr ill L y nch arg ued 3 that Congr ess did not intend to cre ate a private cause of action for a violation of NASD and NYSE rules or, in the a lternative, tha t its evidence c onclusively proved tha t no violation took pl ace . ( i) Private Cause of Action The San Antonio Court of Appea ls is the o n l y Texas appellate court that has addre ssed whether there is a private cause of action for violation of secur ities-industry rules. Rely ing

The NASD is a “a self-r eg ulat o ry org anization overse eing secur ities transac tions.” 2 In re Next Fin. Group, Inc. , 271 S.W .3d 263, 265 (Tex. 2008) (pe r curiam). Although the NASD “absor

bed the enfor ceme nt arm of the New York Stock Ex chang e and beca me the Financ ial I ndustry Reg ulation Authority (F I NR A) o n J uly 30, 2007,” see McArdle v. Jack Nelson IRA , No. 03-08-00057- CV, 2010 WL 1253571, at *1 n.1 (Tex. App.—Austin M ar . 3 1 , 2010, no pet.) (mem. op.), we will still ref er to the NASD and the NYSE for co n venienc e. Pursuant to SEC reg ulations, licensed secur ities broker s must reg iste r w it h a n d a b id e b y th e o r g anization’s g uidelines. Id. ; see also 17 C.F.R. § 240.15b7-1 (2009)

. Although Fe rnea does not state whether his private cause of action arises under fede ral 3 secur ities law or Texas law, self-r eg ulating secur ities org anizations are entities cre ated and g overne d by fede ral statute and reg ulation

. Ac cordingly , we assume that any private cause of action would arise f rom fede ral sec urities law. 7on a fede ral district court opinion from the Southern District of Texas, and without further

discussion, the court of ap p ea l s held that “ther e is no independe nt cause of action for NASD violations.” Milan v. Dean W itter Rey nolds, Inc. , 90 S.W .3d 760, 767 (Tex. Ap p .—San Antonio 2002, pet. denied) (citing Porter v. Shear s on Lehman Bros., Inc. , 802 F. Supp. 41, 63 (S.D. Tex. 1992)). The Fifth Circuit ha s not a ddresse d the issue, see Lang v. French , 154 F.3d 217, 222 n.26 (5th Cir. 1998), and fede ral district courts in Texas are sp l i t , co mp a re Cook v. Goldman, Sachs & Co. , 726 F. Supp. 151, 156 (S.D. Tex. 1989) (implied private cause of action exis ts), with Porter , 8 0 2 F. Supp. at 63 (implied private cause of action does not exis t), and Lange v. H. Hentz & C o . , 418 F. Supp. 1376, 1383 (N.D . Tex. 1976) (same).

Fe rnea relies on two c ases to support his assertion that Cong ress intende d to cre ate

a private cause of action: Buttery v. Merrill, Lynch, Pierce , Fenne r & Smith, Inc. , 410 F.2d 135, 142 (7 t h Cir. 1969), and Cook , 726 F. Supp. at 156. The g reat weig ht of authority , howeve r, hold s agai n s t i n fe rr ing a private cause of action for violations of NASD and NYSE rules. We find the

case s Fe rnea cites for the opposite view unpersua sive. Buttery , a Seventh Circuit case , was decide d prior to three key Supreme Court decisions setting forth the test for imply ing statutorily based private

cause s of action. See Transamerica Mortgage Advisors, Inc

. v. Lewis , 444 U.S. 11, 15 (1979) (“The question whether a statute cre ates a cause of action, either expressly or by implication, is basica lly

a matter of statutory construction.”) ; Tou ch e Ross & Co. v. Redington , 442 U.S. 560, 568 (1979) (“A s we rec ently have emphasized, the fac t that a fede ral statute has been violated and some person harme d does not automatically g ive rise to a private cause of action in favor of that person. I nstead,

our task is limit ed solely to deter mining whether Congr ess intended to cre ate the private ri g ht of

8action.” (interna l q u otation marks omitted)); Cort v. Ash , 422 U.S. 66, 78 (1975) (establishing

four- fac tor test later compre ssed and ref ined by Touche Ross and Transamerica ). Des p i t e b ei ng handed down a deca de afte r Transamerica , Cook , a Texas fed er al d i s t rict court opinion, relied heavily on Buttery , its prog eny , and other case s that pre- date Cort

. The Cook court did not discuss whether Buttery was still g ood authority considering that Transamerica larg ely reje cted the test that the Buttery court had employ ed. See Transamerica , 444 U.S. at 15-16 (“While some opinions of the Court have place d considera ble emphasis upon the desirability of imply ing private rig hts of action in order to provide reme dies t h o u gh t to eff ectua te the purposes of a g iven statute, what must ultimately be deter

mined is whether Congr ess intended to cre ate the private reme dy asser ted, as our

rec ent dec isions have made c lear .”). Thus, like Buttery , Cook ’s authority is questionable. Post- Transamerica decisions employ ing that case ’s rea soning consistently hold that Congr ess did not intend to cre ate a private ca u s e of action for violations of self-r eg ulating
org anizations’ rules. See, e.g. , In re Verifon e S ec . L itig. , 11 F.3d 865, 870 (9th Cir. 1993) (dismissing claims for violations of NASD and NYS E rul es beca use “[i] t is well established that violations of an exchang e rule will not suppo rt a private claim”) ; Hosworth v. Blinder, Robinson & Co. , 903 F.2d 186, 200 ( 3rd Cir. 1990) (no pr ivate rig ht of ac tion for violation of NASD rules); Craighead v. E.F. Hutton & Co. , 89 9 F.2d 485, 493 (6th Cir. 1990) (same) ; Thompson v. Smith Barney, Harris Upham & Co. , 709 F.2d 1413, 1419 (11th Cir. 1983) (same) ; Jablon v. Dean W itter & Co. , 614 F.2d 6 7 7 , 6 8 1 (9 t h Cir. 1980) (“B ased upon the standards in Touche Ross and Transamerica , we conclude there is no implied rig ht of action for an NASD rule violation.”); Porter , 802 F. Supp. at 63; Emmons v. Merrill Lynch, P i erce, Fenne r & Smith, Inc. , 532F. Supp. 480

9(S.D. Ohio 1982) (under Cort , no implied rig ht of action under NYS E or NASD rules); Klit zman

v. Bache Halsey , 499 F. Supp. 255 (S.D.N.Y. 1980) (no private rig ht of action under NASD rules). Even the NASD’s own arbitra tion panel has rec og nized that no private cause of action exis ts for violating its rules. See Penzer v. Adve st, Inc. , No. 92-0040 0 , 1 9 9 3 WL 603507, at *5 (NASD Nov. 5, 1993) (“[C] ase law supports the conclusion that no private rig ht of action exis ts for brea ch of NASD rules.” (c i t i n g S S H Co. v. Shearson Lehman Bros., Inc. , 678 F. Supp. 1055, 1058 (S.D.N.Y. 1987)) ).

We ag ree . Although we need not revisit here the detailed analy ses perf ormed in the

case s cited above, we will briefly summarize them. The rele vant inqu i ry is to deter mine whether Congr ess intended to cre ate a private cause of action for a violation of NASD and NYSE rules in the Securities and Ex chang e Act of 1934 by employ ing the usual rul es of statutory construction. See T r a n s a merica , 444 U.S. at 15; Jablon , 614 F.2d at 681; see also Touche Ross , 442 U.S. at 5 6 8 (desc ribing inquiry in deter mining Congr essional intent). As the Jablon court and others have noted, Congr ess spec ifically provided for private causes of action for violations of som e securities rules,
y et did not provide a cause of action for violations of NASD and NYSE rules. See Jablon , 614 F.2d
at 681. Acc ording ly , we conclude that Congr ess did not intend to cre ate a private ri gh t of action here

. Id. at 680-81; see also Touche Ross , 442 U.S. at 568 (“The source of plaintiffs’ [private rig ht of action] must be found, if at all, in the substantive provisions o f t h e 1934 Act which they seek to enforc e . . . .”)

.

10Be cause there is no private cause of action for violation of NYSE and NASD rules,

the trial court did not err in g ranting summary judgme nt in favor of Merr ill L y nch as to that claim. We overrule Fe rnea ’s first and se cond issues.
Negligence

Claim for V

iolation of Merrill Lynch’s Internal Com pany Policies I n his third issue, Fe rnea asser ts that the trial court err ed in g rantin g s u m m ar y judgme nt on his claim that Merr ill L y nch n egl i gen tly brea ched its internal policies “whe n the evidenc e showed that [Merrill L y nch] had rec eived the notice to trig g er its duties under its policies.” Fe rnea as s er t s t h at Merr ill L y nch had a leg al duty under its policies to monitor Bounds’ s outside business activities for the protec tion of the investing public once it undertook to adopt those policies. Although the g ener al rule is that, outs ide of cer tain specia l rela tionships, the l aw impos es no duty
to take action to preve nt harm to another , Fe rnea premises the exis tence of such a leg al duty here on the “voluntary -under

takin g” exception. Merr ill L y nch arg ues that it owed no duty to Fe rnea as a matter of law or, alternatively , that it prese nted conclusive evidenc e that it complied with its internal
company policies. A cause of action for

neg lige nce a

rises whe n an ac tor brea ches a leg al duty

and the b rea ch proxi mately cause s damag es. Columbia Med. Ctr. of Las Colinas, Inc. v. Hogu e , 271 S.W .3d 238, 246 (Tex. 2008). Whether a leg al duty exis ts is a question of law. Trammell Crow Cent. Tex., Ltd. v. Gutierrez , 267 S.W .3d 9, 12 (Tex. 2008). “Te x as law g ener ally imposes no duty
to take action to preve nt harm to others absent cer tain specia l rela tionships or circumstances.” Torringt on Co. v

. Stutzman , 46 S.W .3d 829, 837 (Tex. 2000). The supreme court has rec og nized, howeve r, that “a duty to use rea sonable car e may arise when a person undertakes to provide service s
11to another , either g ratuitously or for compensa tion.” Id. ; see also Carter v. Abbyad , 299 S.W .3d 892,

895 (Tex

. App.—Austin 2009, no pet.) (“A party who agr ees to attempt to help s omeone else has

a duty to provide that help without neg lige ntly harming the person in need.” ); Keightley v. Republic Ins. Co. , 946 S.W .2d 124, 129 (Tex. App.—Austin 1997, no writ ) (“ [T] he law place s a duty of ordinary car e upon any person who voluntarily enter s upon an aff irmative course of action aff ecting another ’s interest.”)

. “A person’ s d u t y to exercise rea sonable car e in perf orming a voluntarily assumed und er t ak i n g is limit ed to that undertaking.” Torringt on Co. , 46 S.W .3d at 837 (quoting Fort Bend County Drainage Dist. v. Sbrusch , 818 S.W .2d 392, 397 (Tex. 1991)).

The supreme co urt has cited the voluntary -under taking test articula ted in section 323 of the Restate ment (Second) of Torts:

One who undertakes, g ratuitously or for consideration, to rende r service s to another which he should rec og nize as nece ssary for the protec tion of the other’s perso n or things, is subject to liability to the other for phy sical harm resulting from his failure to exercise re asonable car e to per form his undertaking, if (a) his failure to e x erc ise such ca re inc rea ses the risk of suc h harm, or (b) t h e h ar m i s s u ff er ed beca

use of the other’s reli an ce u p o n t h e undertaking.

Id. at 838 (quoting Restatement (Second) of Torts § 323 (1965))

. Although it has been debate d whethe r t h e s u p reme court has actua lly adopted this section of the Restatement, see Texas Farm Bureau Ins. Co. v. Sears , 54 S.W .3d 361, 368 (Tex. Ap p . — W ac o 2001), rev’ d on other grounds , 84 S.W .3d 604 (Tex. 2002), the elements of the test the court has applied are substantially simil ar. To hold a defendant liable for neg lige nce under a voluntary -under

taking theory , the plaintiff must

12establish that (1) the defe ndant voluntarily undertook to perf orm service s that it knew or should have known wer e nece ssary for the plaintiff’s protec tion, (2) the defe ndant failed to exercise rea sonable

car e in perf

orming those service s, and either (3) the plaintiff r e li e d upon the defe ndant’s perf ormanc e

or (4) the defe ndant’s perf ormanc e incre ased the plaintiff’s ri s k o f h arm. Torringt on Co. , 46 S.W .3d at 838-39.

Fe rnea as s er t s that the voluntary undertaking in question was Merr ill L y nch’s adoption of internal proce dures reg arding employ ee- owned outside interests. He asser ts that Merr ill L y nch’s duty arises from its voluntary adoption of measure s desig ned to protec t members o f the public, like Fe rnea , who transac t b u s i n es s with Merr ill L y nch broker s acting outside the scope of their business with the firm.

As to relianc e, there is no indication that Fe rnea was even awa re of the exis tence of Merr ill L y

nch’s internal company policies, much less that he reli ed o n s u ch policies. As to risk

o f harm, we conclude that Merr ill L y nch’s adopting a set of internal opera ting policies and
proce dures did not, without more, incre ase the risk of harm to Fe rnea . Although the contours of the voluntary -under

taking doctrine are not clea rl y d ef i n ed, voluntarily undertaking to rende r service s require s, at a minimum , that an actor take some active st ep d irec ted toward a third person—something more than mere ly enac ting g ener al g uidelines. Cf. id. at 839 (manufa cture r of helicopter rotor bear ings undertook vol u n t ar y eff orts to investigate helicopter acc ident and alleg edly provided neg lige ntly incomplete informatio n about scope of problem to customers); Colonial Sav. Ass’n v. Taylor , 544 S.W .2d 116, 119 (Tex. 1976) (lende r voluntarily under to ok action to insure borrow er’ s proper ty and did so neg lige ntly ); W illow brook Foods, Inc. v . Grinnell Corp. ,

13147 S.W .3d 492, 499 (Tex. App.—San Antoni o 2004, pet. denied) (af firming summary judgme nt beca use plaintiff provided no evidenc e that third-par ty financ e company , which knew o f product d efe ct, vol untarily undertook to inform pl aintiff of that defe ct before purchase ). Her e, there i s n o

nexus betwee n Merr ill L y nch’s voluntary undertaking—i.e ., the adoption of its policies

— an d its alleg ed neg lige nce. That is, Fe rnea does not alleg e that Merr ill L y nch neg lige ntly adopted its policies. Rather, he asser ts that Merr ill L y

nch was neg lige nt in later failing to follow them. To fall within the voluntary -under taking exception, howeve r, the plaintiff must alleg e that the defe ndant’s
neg lige nce occur

red in per fo rm i ng the underta king itself. Torringt on Co. , 46 S.W .3d at 838-39. Thus, to rec over here , Fe rnea neede d to alleg e that M err ill L y nch was neg lige nt in adopting its poli ci es, not in later failing to car ry them out. Consequently , even assuming that Merr ill L y

nch neg lige ntly failed to follow its policies, it ca n n o t be liable to Fe rnea under the voluntary -under

taking doctrine. 4 We hold that Merr ill L y nch’s adoption of policies and proce dures did not itself incre ase the risk of harm to Fe rnea and there fore did n o t create a duty to Fe rnea under the

v o l u n t ar y -under

taking exception to the no-duty rule. Thus, the trial court did not err in g ranti n g summary judgme nt in favor of Merr ill L y nch on Fe rnea ’s claim for neg lige nce in violating Merr ill L y nch’s inter

nal company

policies. We overr

ule Fe rnea ’s third issue.

Moreove r, some courts have held that the voluntary -under taking exception to the no-duty 4 rule applies only to “situations wher e bodily injury or [phy sical] injury to proper ty belong ing to the party is involved.” W

al-Mart Stores, Inc. v. Lane , 31 S.W .3d 282, 293 (Tex. App.—Corpus Christi 2000, pet. denied) ; see also Sibley v. Kaiser Found. Health Plan of Tex. , 998 S.W .2d 399, 403 (Tex. App.—Texarkana

1999, no pet.). He re, no phy sical injury or prope rty

damag e wa s alleg ed. 14Negligent Supervision 5 Be fore addre ssing Fe rnea ’s fourth and fifth issues, we turn to his six th, in which he

asser ts that the trial court err ed in g ranting summary judgme nt in favor of Merr ill L y nch on his claim for neg lige nt supe rvision. Fe rnea asser ts tha t Me rrill L y

nch owed him a duty to supe rvise Bounds b ec au s e Fe rnea was “a member of the g ener al public” and, more specific ally , a member o f “t h e investing public.” He asser ts that his injury , economic harm stemming from alleg ed secur ities fra ud, “is prec isely the ty

pe of harm by one of its investment advisors that would be fore seea ble to Merr ill L y nch.” Citi ng NASD rules, he arg ues that Merr ill L y nch had the authority and the duty to supervise Bounds in this transac tion. Mer ri l l L y nch arg ues that Fe rnea ’s neg lige nt-supervision claim fails beca use (1) Merr ill L y

nch did not owe Fe rnea a duty ; (2) there was no co n n ection betwee n the damag es Fe rnea suffe red and Bounds’ s employ ment with Merr ill L y

nch; (3) Fe rnea cannot establish the element of proxi mate causation; and (4) the evidenc e shows that Merr ill L y n ch proper ly supervised B ounds.

As discussed above , a ca

use of a ction for ne g lige nce a rises whe n an actor brea ches

a leg al duty and the brea ch proxi mately cause s damag es. Hogue , 271 S.W .3d at 246. Although the Texas Supreme Court has “not ruled definitively on the exis tence , elements, and scope of such torts

. . . as neg lige nt training and hiring ,” see W affle House, Inc. v. W

illiams , 313 S.W .3d 796, 804 n.27 (Tex. 2010), this Court and other court s o f appea ls have held that the law imposes a duty on an

Although sometimes arg ued by the parties as a cause of action for neg lige nt supervision 5 and training , Fe rnea ’s petition alleg ed only that Merr ill L y nch negli g ently failed to supervise Bounds. Ac cording ly , we ne ed only addre ss the parties’ arg uments with respec t to that claim.

15employ er under cer tain circ umstances to use rea sonable car e in hiring , training , and supervising its employ ees, see Houser v. Sm ith , 968 S.W .2d 542, 544 (Tex. App.—Austin 1998, no pet.). 6

“While the employ ee need not be acting in the scope of his employ ment to impose liability on the employ er, the theory of neg lige nt hiring and supervision does require that a plaintiff’s harm be the re s u lt of the employ ment.” Id. Stated another way , “[t] he employ er- employ ee rela tionship

. . . may cre ate a duty to a third party only if the third party ’s harm is br oug ht a bout by

rea son of the employ

ment and is, in some manner , job-rela ted.” Capece v. Navisite, Inc. , 7 No. 03-02-00113- CV, 2002 WL 31769032, at *4 (Tex. App.—Austin Dec

. 12, 2002, no pet.) (mem. op.); see also Guidry v. National Freight, Inc. , 944 S.W .2d 807, 809 (Tex. App.—Austin 1997, no writ).

The tort of neg lige nt hiring , supervision, or t ra i ning is a direc t tort broug ht ag ainst an

6 employ er, separ ate and apar t from a claim for vicar ious liability

. Houser v. Smith , 968 S.W .2d 542, 544 n.4 (Tex. App.—Austin 1998, no pet.). Severa l of our sister courts have also held that an employ er’ s duty in hir ing, training , and 7 supervision only require s it to preve nt its employ ees fr o m causing physical harm to third parties. See W renn v. G.A.T.X. Logist ics, Inc ., 73 S.W .3d 489, 496 (Tex. App.—For t Worth 2002, no pet.) (“The duty of the employ er extends only to preve nt the empl oy ee or independe nt contra ctor from causing phy sical harm to a third party .”); Sibley , 998 S.W .2d at 403-04 (same) ; Verinakis v. Medic al Profiles, In c. , 987 S.W .2d 90, 97-98 (Tex

. App.—Houston [14t h Dist.] 1998, pet. denied) (same) (citing Restatement (Sec ond) of Tor ts § 315); see also McClure v. Kingwood Pines Hosp., L.L.C

. , No. 14-09-00339- CV, 2010 WL 3583193, at *2 (Tex. App.—Houston [14t h Dist.] Sept. 16, 2010, pet. filed) (mem. op.) (dec lining to rec onsider whether phy sical harm is require ment for rec overy ); Doege v. S i d Peterson Mem ’l Hosp. , No. 04-04-00570- CV, 2005 WL 1521193, at *7 (Tex. App.—San Antonio J une 29, 2005, pet. denied) (mem. op.) (phy sical harm require d for rec overy ). This Court has not addre ssed whether the duty to hire, train, and supervise only extends to protec ting third parties from phy sical harm, nor is it nece ssary for us to do so here

. Merr ill L y nch did not arg ue to the trial court—nor does it arg ue on appea l—that Fe rnea ’s lack of phy sical damag es was a g round for g ranting summary judgme nt. See Johnson v. Brewer & P r i t ch a rd, P.C. , 73 S.W .3d 193, 204 (Tex. 2002) (“Acourt c annot g rant summary judgme nt on gr ounds that were not presente d.”). 16This “nexus” require ment has also been stated in terms of proxi mate cause . See

LaBella v. Charlie Thomas, Inc. , 942 S.W .2d 1 2 7 , 137 (Tex. App.—Amar illo 1997, writ denied) (“[T]he ne g lige nce in [hiring , training , or supervising ] must be the proxim ate c ause of the injuries
to the plaintiff.”) ; Robertson v. Church of God, Int’l , 978 S.W .2d 120, 125 (Tex. App.—Ty ler 1997, pet. denied) (same)

. Courts discuss the nexus require ment in terms of both duty and proxi mate cause beca use the require ment is, at its core , one of fore seea bility , and fore seea

b i l i t y i s an essential component of both proxi mate cause and du t y . Mellon Mortg. Co. v. Holder , 5 S.W .3d 654, 659 (Tex. 1999) (“The q u estions of duty and proxi mate cause are often used in a confuse d and overla pping way beca

use both rest on a deter

mination of fore seea

bility .” (interna l quotation marks omitted)). The nexus require ment limit s an employ er’ s liability to preven t an empl oy er from becoming “an insurer of the safe t y o f ev ery person who happens to come into contac t with his employ ee simply beca

use of his status as an employ ee.” Houser , 968 S.W .2d at 544 (interna l quotation marks omitted); see LaBella , 942 S.W .2d at 137.

Fe rnea asser

ts that Merr ill L y

nch’s duty to him arose as a result of NASD rules that,

acc ording to Fe rnea , define d Merr ill L y nch’s duty to supervise Bounds. Assuming without deciding that NASD rules define d Merr ill L y nch’s duty to Fe rnea u n d er T ex as neg lige nce law, see Lange , 418 F. Supp. at 1383 (“[R] ules of t his sort have served as bench marks for a det er m i n at i o n o f the

rea sonablene ss of a defe ndant’s actions.”) , nonetheless Merr ill L y nch’s evidenc e conclusively established that it did not have sufficie nt notice of the transac tion to trig g er the supervisory duty at issue in the prese nt case

.

17Fe rnea cites NASD Rules 3030 and 3040 a s releva nt here . Rule 3030 states:

No person associate d with a member in any reg istered capa city shall be employ ed by , or acce pt compensa tion from, any other person as a result o f an y business activity , other than a passive investment, outside the scope of his rela tionship with his employ er f

irm, unless he has pr ovided prompt written notice to the m ember

. Such notice shall be in the form require d by the member. Activities subject to t he require ments of Rule 3040 shall be exempted from this requir ement.

NASD Rule 3030. The plain lang uag e of that rule does not impose a duty on Merr ill L y nch; rathe r, it imposes a duty on Bounds to disclose his outside interests to the firm. As s u ch , i t d o es not, by itself, support a neg lige nce c laim ag ainst Merrill L y nch. Rule 3040 prohibits any person—e .g ., Bounds—“ associate d with [an NASD] member” —e.g ., Merr ill L y nch—fr om participa ting in a private s ecurities transac tion “except in

acc ordanc e with the require ments of this Rule.” Id. R. 3040( a). A private secur ities tra nsaction is define d as “any secur ities transac tion outside the reg ular course or scope of an associate d person’ s employ ment with a member.” Id. R. 3040(e) (1). Be cause the secur ities in a private transac tion are sold “aw ay ” from the member firm—i.e., not as part of the member’ s business—these sales are often called “selling awa

y ” tra nsactions and a

re disfa vored be cause of a heig htened potential for fraud. Thus, rule 3040 prohibits selling a way unless such a transac tion is conducted “in a ccor dance with the require ments of this Rule.” The rule require s that if, as here , a secur ity is sold for compensa tion, the asso ci at ed person is require d to g ive written notice to the member “desc ribing in detail the proposed transaction and the person’ s proposed role there in and stating whether [t he associate d person] has rec eived or may rec eive selling compensa tion in connec tion with this transac tion.” After

rec eiving notice, the member must either approve or disapprove of the outside transac tion in writing

. 18Id. R. 3040(b)- (c)

. I f i t disa pproves of the t ransa ction, the associated person may not “par ticipate in the transac t i o n i n an y m atter, direc tly or indirectly .” Id. R. 3040(c) (3). I f it approve s the
transac tion, the member is require d to rec ord the transac tion on its books and “super vise the person’ s participa tion in the transac tion as if the transac tion wer e executed on behalf of the member.” Id. R. 3040(c)( 2).

Merr ill L y

nch arg ues that its summary -judg ment evidenc e conclusively established that it did not rec eive sufficie nt notice of Bounds’ s transac tion with Fe rnea to trig g er its supervisory duty under rule 3040, and thus it owed no duty to Fe rnea . As ev i d ence, i t prese nted affidavit and deposition testimony from Bounds and Charlotte L og ann, Mer ri ll L y nch’s Austin-are a Business Administrative Manag er, who also serve d as the loca l compliance of fice r. As Fe rnea corr ectly notes, both L og ann and Bounds are interested witnesses beca use they are Merr ill L y

nch employ ees. Nonethele ss, rule 166a states that “[a] summary judgme nt may be based on the uncontrove rted testimonial e vidence of an inter ested witness

. . . if the evidenc e is clea r, positive and direc t, otherwise cre dible and fre e from contra dictions a nd inconsistencies, and

co u l d have been rea dily controve rted.” Tex. R. Civ. P. 166a(c ). Fe rnea asser ts that the aff

idav i t testimony of Bounds and L og ann fails to conclusively prove lack of notice beca use (1) the testimony h as b ee n controverted by Merr ill L y nch’s documentar

y evidenc e and by the witnesses’ own testimony ; (2) the testimony is “not clea r, positive, and direc t, or fre e of contra dictions”; and (3) the underlying issue of fac t—whet h e r notice was g iven—ca

nnot be rea dily controve rted beca use Merr ill L y nch “has sole possession of its documentation, and has objected to discovery rela ted to this issue on the basis of a ttorney

/client privileg e.”

19We agre e wi t h Fe rnea that Bounds’ s aff idavit testimony cannot be used t o support summary judgme nt for Merr ill L y nch. Fe rnea ’s testimony reg arding Bounds’ s alleg edly fra udulent conduct casts doubt on Bounds’ s g ener al cre dibilit y as a wi t n es s . Thus, we conclude that his testimony is not the “other wise cre dible” evidenc e of an interested witness that is require d to support summary judgme nt. See Tex. R. C iv. P. 166a(c). L og ann’s testimony , howeve r, is a d i fferent matter. L og ann, on behalf of Merr ill L y nch, aver red that the company never rec ei v ed n o t ice of the transac tion betwee n Bounds and Fe rnea . She stated that, in late 2005, Bounds “informe d Merr ill L y nch verba lly that he had decide d
to sell his outside businesses.” She testified by aff idavit that Bo u n d s “occ asionally mentioned to [her] that he was still in the proce ss of selling his business, or that he thought he might have a g ood
prospec t for the sale. He never reve aled any more detailed i n formation than that.” L og ann also

s t ated that “B ounds never g ave Merr ill L y nch written notice of any kind reg arding the sale [t o Fe rnea ],” and that “B ounds never g ave Merrill L y nch w ri tten notice that he int ended to eng ag e in
any activity that might constitute a private secur ities transac tion under NASD Conduct Rule 3040.” L og ann stated that, befor e the lawsuit, she had no knowledg e that Bounds h ad ac t ually consummated a sale, sold only a portion of his businesses, sold them to Fe rnea , or prepa red a stock

cer tificate in connect i o n wi t h t h at transac tion. L og ann’s deposition testimony as to these fac ts is substantially

simil ar. ( i) Fernea’

s Objections to Logann’s Affidavit Be fore we addre ss Fe rnea ’s asser tions that L og an n ’s testimony is contra dicted by other evidenc e, we must c onsider his se venth throug h tenth issues in which he asser ts tha t the trial

20court erre d in overru l i ng his objections to Bounds’ s and L og ann’s summ ary -judg ment aff idavits. Be cause we have alre ady deter mined that Bounds’ s testimony is insufficient to stand as conclusive interested- witness summary -judg ment evidenc e, we will limit our discussion to L og ann’s aff idavit. We revie w the trial court’ s ev i d entiary ruling s for an abuse of discretion. Horizon/CMS Healthcare Corp. v. Auld , 34 S.W .3d 887, 906 (Tex. 2000). “A trial court ‘abuse s its discretion when it rea ches a decision so arbitra ry and unrea sonable as to amou n t t o a clea r and prejudicia l er ro r of law.’” BMC Software Belg., N.V. v. Marchand , 83 S.W .3d 789, 800 (Tex. 2002) (quoting Johnson v. Fourth Court of Appeals , 700 S.W .2d 916, 917 (Tex. 1985)). Moreove r, “[u] nless the trial cour t’s err oneous evide ntiary

ruling probably cause d the rendition of

an improper judgme nt, we will not reve rse the ruling .” Owens-Corning Fiberglas Corp. v. Malone , 972 S.W .2d 35, 43 (Tex. 1998).

Fe rnea objecte d to L og ann’s entire aff idavit, and specific ally to para g raphs 12, 13, 14, 18, and 20, as not based on persona l knowledg e. Fe rnea asser ts that L og ann testified in her d ep o s i t i o n that she “play ed no role in draf ting the contents of her aff idavit and that Merr ill L y nch’s lawy er was in char g e of what was contained in it.” He also asser ts that L og ann testified that she “lac ked enoug h persona l knowledg e ‘to g et her throug h a conver sation sometimes.’” He arg ues that L og ann’s deposition testimony casts into doubt whether she had any persona l knowledg e of the fac ts in her af

fidavit, and thus re nders he r af fidavit testimony

incompetent. We ag ree , but only as to para g raphs 14 a

nd 18. L og ann testified as a repr esenta tive of Merr ill L y nch. An individual’s position or job responsibilities can qualify her to testify to fac ts she lear ns throug h her actions and responsibilities

21at her co m p an y . Equisource Realty Corp. v. Crown Life Ins. Co. , 854 S.W .2d 691, 695 (Tex.

App.—Dallas 1993, no w rit) (pe rsonal knowledg e may be esta blished by

person’ s position wit hin
company ). A corpor ate employ ee is g ener ally presumed to possess persona l knowledg e of fac ts that she would lear

n in the usual course of her employ ment without having to otherwise prove persona l knowledg e. See id. ; see also Miller v. Raytheon Aircraft Co. , 229 S.W .3d 358, 365-66 (Tex. App.—Houston [1st Dist.] 2007, no pet.) (abse nt evidenc e to contra ry , aff iant’s persona l knowledg e of corpor ate employ

ment matters assumed beca use of his position as vice president of financ e); Nortex Drug Distrib., Inc. v. S u n set Trail

s, Inc. , No. 05-98-00676- CV, 2000 WL 1230766, at *5 (Tex

. App.—Dallas Aug

. 31, 2000, no pet.) (mem. op.) (pre sident of company assumed to have
p er s o nal knowledg e of high- level contra ct neg otiations beca use of his position with company ). Thus, absent indications to the contra ry , L og ann is presumed to possess persona l knowledg e of fac ts within the scope of her job as the Austin compliance office r for Merr ill L y nch. M o re o v er, L og ann testified that the information in he r aff idavit, w hich was draf

ted by her lawy er, came from “attorne y -client conver sations” that she had with the lawy er. She also testified that she revie wed the aff idavit a nd made se vera l chang es bef ore sig ning it, and that her aff idavit te stimony was her own and was acc urate

. As to para g raphs 14 and 18, howeve r, L og ann admitted having limit ed persona l 8 knowledg e. I n light of such an admission, it was arg uably an abuse of discretion to overr ule Fe rnea ’s objections to those two p a

r a g raphs. Any err or, howeve r, was harmless beca use removing para g raphs

I n p ar agr ap h s 14 and 18, L og ann aver red that Merr ill L y

nch did not broker the sale of 8 Bound’ s companies and otherwise had no conta ct with Fe rnea , and that Mer rill L y nch maintained a re asonable compliance protocol that it did not breac h here

. 2214 and 18 does not aff ect the strengt h o f L og ann’s testimony that Merr ill L y nch never rec eived written notice f

rom Bounds g iving de tails of his sale of sec urities to Fer nea. Fe rnea also objected t o v arious portions of L og ann’s aff idavit as conclusory or unsupported by documentar y evidenc e. He also objected to the court’s allowing L og ann to amend her aff idavit to corr ect an improperly made authentica tion of its exhibi ts. We need not addre ss these objections beca

use Fe rnea does not object (other than for lack of persona l knowledg e) to the portions of L og ann’s testimony that would aff ect her testimony reg arding a lac k of notice. Thus, assuming without deciding that the court err ed and should have struck the offe nding para g raphs, any such err or would have be en har

mless for the sa

me re ason discussed a

bove.
( ii) Logann’s Affidavit Substantively , Fe rnea

asser ts that L og ann’s statements conce rning Merr ill L y nch’s lack of notice under rul e 3 040 are inconsistent with her later testimony and various documents showing that she knew Bounds was prepa ring to sell his outside business es and that he held his business in stock. We disag ree . Merr ill L y nch does not dispute that i t k n ew , at some point in l ate 2005, that Bounds was planning to sell his businesses. Such knowledg e, however, i s n o t inc o n s is te nt with L og ann’s testimony that Merr ill L y nch never rec eived detailed written notice about Bounds’ s eventua l sale of se curities to Fe rnea .

Fe rnea asser

ts that Bounds’ s aff

idavit testimony contra dicts L og ann’s and cre ates a fac t question as to whether Bounds g ave Merr ill L y nch the require d written notice. Fe rnea relies on the following statements from B ounds’s aff idavit: “At no time did any of this transac tion involve Merr ill L y

nch or any

thing to do with my employ ment at Merr ill L y

nch. The anticipated listi ng and

23sale of my outside interests was disclosed by me to Merrill Lynch as required .” (Emphasis added.)

Fe rnea asser

ts that, beca

use we must construe all rea sonable infere nces in his favor , we must assume that when Bounds said he disclosed his “anticipa ted listi ng and sale

. . . as require d” what he rea lly
meant was that he g ave Merr ill L y nch the detailed written notice of an impending selling- awa y transac tion require d by rule 3040 to i m pose on Merr ill L y nch a duty to supervise the transac tion. Considering the vag ueness of the statement itself and the context in which it appea rs, howeve r, we conclude that it gives r ise to no more than a suspi cion or surmise that Bounds g ave Me rrill L y nch detailed written notice o f h i s s ec u ri t ies sale to Fe rnea . See Ford Motor Co. , 135 S.W .3d at 601 (suspicion or surmise of exis tence of fac t is no more than scintilla of evidenc e). Viewe d in context, this is particula

rly clea r. Bounds’ s aff

idavit states that he did not know he was selling a secur ity , and that “the stock cer

tificate was never considere d by Mr. Fe rnea o r m e t o repr esent an officia l or reg istered secur ity .” He then discusses that his outside companies did not benef it from the sale and that Merr ill L y

nch had nothing to do with the s ale. I t would not be a rea sonable infe renc e to re ad Bounds’ s statement that he disclosed the “anticipa ted listi ng and sale” of his outside businesses to

mean that, despite the fac t that he was unawa re that he was selling secur ities, he g ave Merr ill L y nch detailed notice that he wa s selling securities to Fe rnea , espec ially as t he parties ag ree that Bounds
g ave Me rrill L y

nch notice in late 2005 that he anticipa ted selling his outside companies. Fi n al l y , Fe rnea asser

ts that he is unable to prese nt contra dictory documenta ry evidenc e beca

use Merr ill L y

nch withheld such evidenc e under the g uise of attorney -client privileg e. But Fe rnea did not move to compel producti o n o f t h e documents in question despite sufficie nt

24opport u n i ty to do so. Wit hout availing himself of the mecha nisms at his disposal to acquir e the evidenc e he soug ht, he ca nnot now asser

t that its absence is g rounds for r ever sal.
( iii) Conclusion We hold that Merr ill L y nch conclusively established that it d id not rec eive the detailed written notice require d by ru l e 3 0 4 0 to trig g er its duty to supervise Bounds’ s outside business sale under NASD rules. Consequently , it has conclusively neg ated the duty element of Fe rnea ’s claim for neg lige nt supervision. Having conclusively neg ated an eleme n t o f F e r n e a ’ s c la im, Merr ill L y

nch was entitled to summary judgme nt on that claim. We overr ule Fe rnea ’s six th issue. Also, beca

use any err or in the trial court’s overr uling o f Fe rnea ’s objections to Merr ill L y nch’s aff idavits was har

mless, we over

rule his seve nth throug h tenth issues.

Aider-and-Abettor Liabil ity I n his fo u rt h i ssue, Fe rnea asser ts that the trial court err ed in g ranting summary judgme nt on his claim that Merr ill L y nch violated section 2 of article 33(F ) of the Texas Securities Act, which imposes joint and sever al liabil i t y on aider s and abettors in fra udulent secur ities
transac tions. That section states:

A person who direc tly or indirectly with intent to dece ive or defr aud or with rec kless disreg ard for the truth or the law materia lly aids a seller, buy er, or issuer of a secur ity is liable under Section 33A, 33B, or 33C jointly and sever ally with the seller, buy er, or issuer, a

nd to the same e x tent as if he w ere the seller, buyer, or issuer.

Tex. Rev. Civ. Stat. Ann. art. 581-33F § 2 (West Supp. 2009). To prove aider -and- abettor liability , the plaintiff must demonstrate:

25(1) that a primary violation of the secur ities laws occur red; (2) that the alleg ed aider had “g ener al aw ar en es s ” of its role in this violation; (3) that the actor rende red “substantial assistance ” in this violation; and (4) that th e alleg ed aider either (a) intended to dec eive plaintiff or (b) acte d with r eckle ss disre g ard for the truth of the repr esenta tions made by

the primary

violator.

Frank v. Bear, Stearns & C o . , 11 S.W .3d 380, 384 (Tex. App.—Houston [14t h Dist.] 2000, pet. denied) ; see also In r e E n r o n C o r p. Sec., Derivative & ERISA Liti g. , 235 F. Supp. 2d 549, 568 (S.D. Tex. 2002). Merr ill L y nch asser ts that Fe rnea has no evidenc e of three el em ents : g ener al

awa rene ss, assistance, a

nd either of

the two possible culpable me ntal states.
( i) Gene ral Awareness The parties ag ree that the alleg ed “primar y violation ” h ere is Bounds’ s sale of
unreg istered securities t o Fe rnea . Merr ill L y nch asse rts that it had no awa rene ss of Bounds’s sale of those sec urities to F erne a or that such secur ities w ere unreg istered. Fe rnea asser ts that “Merr ill L y nch had ‘g ener al aware ness’ of the t ransa ction [because it] knew that Bounds had eng ag ed in a sale of secur ities, as evidenc ed by the testimony of [t wo Merr ill L y nch repr esenta tives], and by the letter of e ducation.”

I n addition to the letter of education, which we discussed in mor e detail in the fac ts section above, Fe rnea cites the following testimony from L og ann and Kent Var ner, the Direc tor of Merr ill L y

nch’s Austin “Capitol Complex ” whe re B ounds worked. L og ann testified:
Q. Do y ou know how in [ t h e l etter of education] this sentenc e was added, “Additionally , manag emen t has also considere d y our decision to sell y our outside business to devote more time a nd eff ort to g rowing y our business at the firm? ” How did that e nd up in the letter? Do y ou know?

26A. No. That could have come from conver sations with the attorney s and Chris Bounds.

. . . . Q. I just—what we do know is that somebody , at least, was notified of [Bounds’s] int ent to sell [hi s companies]. A. Yes. Mr. B ounds notified them that he wa nted to sell his companies.

. . . . Q. You mention that when Mr. Bounds—a fter this investigation was started—or afte r this attorney

g ener al i nvestig ation that ended in the le tter of e ducation dated De cembe r 30, 2005—ar e you with me? A. Yes. Q. After that, Mr. Bounds notified y ou he was selling his business interests, corr ect? A. Well, y es. Ve rbally

.

Fe rnea also points to L og ann’s deposition testimony wher e she states that she lear ned in “Nove mber or Decembe r”—pr esumably 2006—that Bounds “sold a piece [ o f his company ], not half, but just a portion of [sic] whatever tha t meant.”

Mr. Var ner te stified:
Q. Ms. L og ann made a comment [in her deposition] at one point that we knew of the transac tion, and I as k ed what—who “we ” was ref err ing to. Do y ou rec all the question? A. Ido. Q. And she said that the “we ” ref err ed to y ou and she and Mr. Bounds. Correc t? A. So the transac tion, meaning what?

27Q. The sale to David Fe rnea .

A. I am awa

re that—I was awa

re that—that Mr. Bounds was attempting to se ll his business. Q. Okay . How did y ou become awa re of that? A. Throug h both Ms. L og ann and f rom Chris Bounds himself. Q. Okay . When y ou—when did y ou lear n that? A. Idon’t rec all the spec ific timeline on that. Q. Can y ou g ive me a y ear ? A. Probably

’06.

R ev i ewing this testimony and the letter of educa tion in the light most favor able to Fe rnea and indulging all rea sonable infere nces in his favor , we conclude that, althoug h the evidenc e could lead a rea sonable fac t finder to conclude that Merr ill L y nch had a g ener al awa

rene ss that Bounds wa s try ing to se ll his companies, it does not c reate more than a mere suspicion or surmise that Merr ill L y

nch knew of this specific transac tion with Fe rnea . And, more importantly , it does not g ive rise to more than a mere suspicion that Merr ill L y nch had “a g ener al awa

rene ss of its role in the violation ”—i.e., the actua l sale of unreg istered secur ities to Fe rnea . See Frank , 11 S.W .3d at 384. L og ann testified that she discovere d at some point that Bounds “sold a piece [of his companies], not half, but just a portion” of them. Fa r from g iving rise to a rea sonable infere nce tha t Merrill L y nch had a g ener al awa

rene ss about the violation before it happene d, her testimony is consistent with a conclusion that Merr ill L y nch did not become awa

re of the violation itself until afte r i t h ad taken place

. L ikewise, Var

ner’ s testimony and the letter of education, which Var ner approve d and signe d,

28mere ly support a conclusion that, at some point prior to Bounds’ s sale to Fe rnea , Merr ill L y nch had knowledge that Bounds was attempting to sell his companies. That testimony would not allow a

rea sonable fac t finder to conclude that Merr ill L y nch had awa

rene ss about the nature of the specific
transac tion at issue here , much less that the sale was c onducted illeg ally

.

We conclude that Fe rnea prese nted no more than a scintilla of evidence as t o the
g ener al-a war eness element of the aider -and- abettor t es t

. T h er efor e, the trial court did not err in
g ranting summary judgme nt in favor of Merr ill L y nch on this claim. We need not discuss whether the rec ord contains evidenc e supporting the other challeng ed elements of aider -and- abettor liability

. We overrule Fe rnea ’s fourth issue.

“Cont rol Person” Liabil

ity I n his fifth issue, Fe rnea ass erts that the trial court err ed in g ranting summary judgme nt in favor of Merrill L y nch on his claim t hat M err ill L y nch was liable a s a control person of B ounds under se ction 1 of ar ticle 33F of

the Texas Securities Ac t. That sec tion states: 9

A person who direc tly or indirectly controls a seller, buy er, or issuer of a secur ity is liable under Section 33A, 33B, or 33C jointly and sever ally with the seller, buy er, or issuer, an d t o t h e s ame extent as if he wer e the seller, buy er, or issuer, unless the controlling person sustains the burden of proof that he did not know, and in the exercise of rea sonabl e ca re could not have known, of the exis tence of the fac ts by rea son of which the liability is alleg ed to exist

.

As discussed above, Merr ill L y nch did not move for a no-evide nce summary judgme nt on 9 Fe rnea ’s control-pe rson claim. Thus, it bore the burden of either conclusively neg ating an element of Fe rnea ’s cause of action or conclusively proving eac h element of an applicab l e af fi rm ative defe nse. See IHS Cedars Treatment Ctr. of DeSoto, Te x. , Inc. v. Mason , 143 S.W .3d 794, 798 (Tex. 2003). 29Tex. Rev. Civ. Stat. An n . ar t

. 5 8 1 -3 3F § 1 (West Supp. 2009). The Act does not define “contr ol

person,” but the word “ control”

“is used in the same broad sense as in fede ral secur ities law” and means “the possession, direc t or indirect, of the power to direc t or cause the direc tion of the manag ement or policies o f a p erson, whether throug h the owner ship of voting secur ities, by

contra ct, or other

wise.”

Barnes v. SW

S Fin. Servs. Inc. , 97 S.W .3d 759, 763 (Tex. App.—Dallas 2003, no pet.) (quoting Tex. Rev. Civ. Stat. Ann. art. 581-33F cmt.). “De pending on the circ umstances, a control person might include an employ er, an office r or direc tor, a larg e share holder, a pare nt company , and a manag ement company .” Tex. Rev. Civ. Stat. Ann. ar t. 581-33F c mt. “ The rationale for control person liability is that a control person is in a position to prevent the violation and ma y be able to compensate the injured investor whe n the primary violator . . . is not.” Id. At trial, the plaintiff bear s the initial burden of proving control. To do so, the plaintiff
must prove that the alleg ed control person (1) had actua l power or influence over the controlled
person, and (2) had the power to control or influence the specific transac tion or activity that g ave rise
to the underly ing violation. Barnes , 97 S.W .3d at 763; Frank , 11 S

. W

. 3 d at 384; see also Abbott

v. Equity Group, Inc. , 2 F.3d 613, 620 (5th Cir. 1993). The plaintiff need not prove that the alleg ed control person culpably participa ted in the primary violation. Barnes , 97 S.W .3d at 763-64. Nor 1 0

The fede ral courts are split as to whether the plaintiff bear s the burden to prove culpable 1 0 participa tion. Compare SEC v. F irst Jerse y Sec., Inc. , 101 F.3d 1450, 1472-73 (2d Cir. 1996) (plaintiff must prove that controlling person “wa s in some meaning ful sense a culpable participa nt in the fraud perpetrate d by the controlled person”) , with Abbott v. Equit y Group, Inc. , 2 F.3d 613, 620 n.18 (5th Cir. 1993) (noting that ear lier Fifth Circuit opinion did not “ac curately ref lect our reje ction . . . of the ‘c ulpable par ticipation’ requir ement”)

.

30is it an element of the plaintiff’s case to prove that the alleg ed control person had any knowledg e of

the fac ts on which liability is based. Id. Rather, such a showing constitutes an aff irmative defe nse for whic h the def

endant be ars the bur den of pr oof:

There is a defe nse that the control person d i d not know and, in the exercise of rea sonable car e could not have known of the fac ts on which the liability is based, e.g . th e untruth or om ission of m ater ial information, or the fact that the s ecur ities wer e not reg istered a

nd should have be en.

Tex. Rev. Ci v. Stat. Ann. art. 581-33F cmt.; see also Barnes , 97 S.W .3d at 763-64.

Merr ill L y

nch asserts that it was not a control person of Boun d s b ec au s e i t did not have the power to control or influence the specific trans action or activity that g ave rise to the underlying violation. Merr ill L y nch acknow ledg es that it has day -to-day contr o l o v er Bounds in
matters conce rning his e mploy ment, but it asser

ts tha t be cause the violation in question conce rned Bounds’ s outside businesses, it cannot be considere d to have had the power t o co n t rol Bounds in that transac tion.

Fe rnea arg ues that “Mer

rill L y nch had control of all aspec ts of Mr. Bounds’ s business rele vant in this case .” He asser ts that Merr ill L y

nch had the power t o “a p p ro ve and monitor and

The Te x arka

na Court of Appe als has held that culpable participation i s a re quired e lement to establish control-pe rson liability

. See Texas Capital Sec. Mgmt., Inc. v. Sandefer , 80 S.W .3d 260, 268 (Tex. App.—Texarkana 2002, pet. struck). I n doing so, the Texarkana court relied solely on the Fifth Circuit’s opinion in Dennis v. Gene ral Imaging, Inc. , 918 F.2d 496, 509 (5th Cir. 1990), which that court late r held to be ina ccur ate. See A bbott , 2 F.3d a t 620 n.18. We j o i n o u r sister courts in Houston and Dallas in reje cting the culpable- participa tion require ment. See Barnes v. SW S Fin. Servs. Inc. , 9 7 S.W .3d 759, 763 (Tex. App.—Dallas 2003, no pet.); Frank v. Bear, Stearns & Co. , 11 S.W .3d 380, 384 (Tex. App.—Houston [14t h Dist.] 2000, pet. denied)

. 31prohibit Mr. Bounds’s sa le to Mr. Ferne a” and to prohibit the transac tion altoge ther. As e vidence

of its control, Fe rnea cites Merr ill L y nch’s response s to his reque sts for admission and the deposition testimony of Ms. L og ann. F erne a’s r equest for admission 18 stated:
REQUEST : [Admi t] that y ou autho ri zed Bounds’ [si c] owner ship of the

Companies. RESPONSE: Admitted. Although NAS D C onduct Rule 3030 does not

require that the firm “author ize” outside intere s t s, Merr ill L y nch imposes such a require ment. Merr ill L y nch admits that it authorized Mr. Bounds’ s role as a direc t o r and office r of PBC Marke ting Co., Bounds & P i n to Marke ting, and Au s t re nds Co., and employ ment by Bounds & Pinto Marke ting.

I n her de position, Ms . L og ann testified:
Q. Okay

. Can y ou tell me what happens when—a ssuming [NASD Rule] 3040 applies, wha t happens whe n Merr ill L y nch appr oves the tra

nsaction. A. When Merrill L y

nch appr oves—I

would not know that. Q. Okay . Well, is n’t it contained in this rule her e, 3040? A. Well, and I can—le t me—allow me to re ad it. Q. Sure.

. . . . Q. Okay . What happens if Mer rill L y nch appr oves the tra

nsaction? A. Well, we’d first have to ge t written notification. Q. Okay

.

32A. And then if they rec eive—if Merr ill L y nch approve d it, then it would g o on the re cords of

Merr ill L y

nch. Q. Okay . And they

would supervise a

nd monitor the transac tion? A. Yes. The y

would be re quired to. Q. As if it were basica lly a sale by Merr ill L y

nch. A. Yes. Q. And what would ha ppen if Mer

rill L y nch disapprove d the transa ction? A. Then the tra

nsaction should not take plac e. Q. I n any

form or f ashion? A. I n any

form or f ashion.

I n addition, Me rrill L y

nch’s pr ivate-c lient branc h office policy manual stated tha t: “Merr ill L y nch policy prohibits employ ees from eng ag ing in any private secur iti e s tr a n s a c ti o n w it

h o ut f u ll disclosure
to and prior written approva l from the corpor ation.” L og ann testified that the prac tical eff ect of this polic y was that, as a condition of Bounds’ s employ ment, he was prohibited from eng ag ing in a private se curities sale unless he obtained w ritten permission from Mer rill L y nch. Merr ill L y

nch arg ues that it did not have the power to control Bounds’ s sale to Fe rnea beca use it conclusively established that “it had no knowledg e of that transac tion and no participa tion in it.” Above, we have held that Merr ill L y nch conclusively proved it did not rec eive written notice of the secur ities sale to Fe rnea as require d by NASD rule 3040. As previously discussed, such lack of notice means that Merr ill L y nch did not have a duty imposed by the rule to a

pprove or deny the
transac tion. See NASD Rule 3040. Merr ill L y nch appea

rs t o eq u at e t h is duty with the power to

33control or influence the t ransa ction. We do not think, howeve r, t hat t he d u t y t o co n t rol Bounds’ s outside secur ities transac tion is sy nony mous with the power t o “contr ol or influence ” that
transac tion. See Barnes , 97 S.W .3d at 763

. L og ically , conclusive proof of the absenc e of a duty to control does not constitute conclusive proof of the absenc e of the power to control or influence

. See Bla ck’s L aw Dictionary 580, 1288 (9th ed. 2009) (def ining duty as “a leg al obliga tion that is owed

or due to another and t h at n ee d s t o be satisfied; an obliga tion for which somebody else has a

corr esponding rig ht”; defining po we r as “t h e ability to act or not act; esp., a person’s capacity for acting in such a manne r as to contr ol someone else’ s responses” ).

We conclude tha t the rec ord contains more than a scinti lla of evidence that Merr ill L y nch’s policies—which define the scope of Bounds’ s empl oy ment rela tionship with Merr ill L y nch—g ave Merr ill L y

nch the power to control or influence the transac tion at issue here

. See Tex. Rev. Civ. Stat. Ann. art. 581-33F cmt. (powe r to control or influence can arise by contra ct). First, the policies require d that Bounds obtain permis s i o n t o own and participa te in his outside business. Second, they prohibited Bounds “fr om eng ag ing in any private secur ities transac tion without full disclosure to and prior written approva l from [Merrill L y nch].” Thus, as a condition of Bounds’ s employ

ment, he ag ree d not to enter into any outside secur ities transac tions without Merr ill L y nch’s pe rmission. S uch powe r t o control i s not depende nt on any notice, but ra ther a rises fr om the employ

ment barg ain that Bounds struck with Merr ill L y nch. I n light of this barg ain, we cannot say that Merr ill L y

nch has conclusively proved that it did not have the power to control or influence the spec ific transa ction at issue her e.

34Moreove r, even if we focused ex clusively on rule 3040 and concluded that Merr ill

L y nch’s power was only co-e x tensive with its duty —i.e., that it only had the power to control when rule 3040 imposed a duty to do so—Merrill L y nch would still not be entitled to summary judgme nt. Although Merr ill L y

nch conclusively proved that it did not rec ei v e the detailed, written notice require d by rule 3040, the absenc e of s u ch d etailed notice (or lack of notice g ener ally ) would not conclusively neg ate either element of the control-pe rson test. Although Fe rnea would, at trial, bear the burden of proof on the two elements of the control-pe rson test, he would not need to prove that Merr ill L y

nch had notice of the transac tion. Rather, the leg islature decide d to pla ce the burden on the defendant to prove “that he did not know, and in the exercise of rea sonable car e could not have known, of the exis tence of the fac ts by rea son of which the liability is alleg ed to exis t.” Tex. Rev. Civ. Stat. Ann. art. 581-33F § 1. Allowing Merr ill L y nch to d ef

ea t Fe rn ea ’s prima fac ie case by proving lack of notice would mean, in essen ce , that lack of notice was an element of Fe rnea ’s claim—which it is not. Rather, lack of actua l notice is the first element of the statutory aff irmative defe nse. As to that aff

irmative defe nse, we need not decide whether Merr ill L y nch has conclusively proved that it lacke d actua l notice of the secur ities sale beca use Merr ill L y

nch has not attempted to prove the second e lement of the de fense —that in the exercise of rea sonable care it could not have known of the r eleva

nt fac ts. Merr ill L y

nch argue s t h at B arnes v. SW S Financial Servic es is dispositi ve here

. Although the fac ts in Barnes are simil ar in some respe cts to those i n t h e prese nt case , there are critica l differ ence s. I n that case , Br ooks, a reg istered ag ent for a broker -dea ler, operated an outside business specia liz ing in selling churc h-re lated secur ities. Barnes , 97 S.W .3d at 761. I n s t ead of

35investing the money he rec eived from the secur itie s s al es , Br ooks spent the money on persona l

expenses. Id. Br ooks’s investors sued his brokera g e firm, a sserting that it was liable to them as a

co n t ro l p er son. The trial court g rante d summary judgme nt in favor of the firm, holding that t h e evidenc e conclusively established that the firm lacke d the power to control the transac tions at issue.

Barnes differ s from the prese nt case in two cruc ial way s. First, and most importantly h ere, Merr ill L y

nch’s policies conditioned Bounds’s employ ment on the power to control o u t s i d e transac tions such as the one at issue here

. There was no evidenc e of such an ag ree ment in Barnes

. Second, the de fenda

nt in Barnes moved for both no- evidenc e and tr aditional summary judgme nt. Her e, Merr ill L y

nch filed only a traditional motion as to this claim. The Barnes court focuse d larg ely

on the lack of evidenc e establishing control, not solely on the evidenc e aff irmatively demonstrating lack of control, as we must do. See id. at 765. I n sum, we hold that Merr ill L y nch has neither conclusively negat ed o n e o f the elements of the control-pe rson test, nor conclusively established both elements of the rele vant af fi rm at i v e defe nse; thus, it has not shown itself entitled to summary judgme nt as to Fe rnea ’s control-pe rson claim. Ac cording ly , we sustain F erne a’s f ifth issue.

CONCLUSION Be cause the trial court err ed in g ranting summ ary judgme nt for Merr ill L y nch on Fe rnea ’s control-pe rson cause of action, we reve rse the court’s judgme nt as to that claim and rema nd that portion of t he ca

use to the trial cour

t for fur ther proc eeding s. We affirm the rema inder of the trial court’ s judgme nt in favor of Merr ill L y

nch.

36J . Woodfin J ones, Chief Just ice

Be fore Chief J ustice Jones, J ustices Pury ear and Pember

ton Affir med in part; Rever sed and Rema nded in par

t Filed: January

7, 2011

37