Source: https://m.openjurist.org/630/f2d/1111
Timestamp: 2019-09-21 08:55:36
Document Index: 153949402

Matched Legal Cases: ['§ 240', '§ 10', '§ 78', '§ 17', '§ 77', '§ 240', '§ 20', '§ 78', '§ 20', '§ 15', '§ 77', '§ 15', '§ 20', '§ 15', '§ 15', '§ 20', '§ 78', '§ 15', '§ 77', '§ 15', '§ 12', '§ 77', '§ 12', '§ 15', '§ 77', '§ 15', '§ 20', '§ 15', '§ 77', '§ 15', '§ 28', '§ 78', '§ 20', '§ 20', '§ 20', '§ 20', '§ 20', '§ 20', '§ 20', 'art, 506', '§ 20', '§ 15', '§ 20', '§ 20']

630 F2d 1111 Paul F. Newton & Company v. Texas Commerce Bank | OpenJurist
630 F. 2d 1111 - Paul F. Newton & Company v. Texas Commerce Bank
630 F2d 1111 Paul F. Newton & Company v. Texas Commerce Bank
630 F.2d 1111
Fed. Sec. L. Rep. P 97,702, 7 Fed. R. Evid. Serv. 1080
PAUL F. NEWTON & COMPANY and Daniel O'Connell, Receiver,
TEXAS COMMERCE BANK et al., Defendants,
Pressman, Frohlic & Frost, Defendants-Appellees.
Butler, Binion, Rice, Cook & Knapp, Norman J. Riedmueller, Tom Alexander, Houston, Tex., for defendants-appellees.
Paul F. Newton & Company (Newton) appeals from the district court's grant of a directed verdict to Pressman, Frohlich & Frost, Inc. (Pressman) in its action against Pressman predicated upon alleged violations of the Securities and Exchange Commission's Rule 10b-5, 17 C.F.R. § 240.10b-5 (1979), by one of its employees, and upon common law fraud. Following the presentation of evidence by the parties, the district court granted Pressman's motion for a directed verdict, reasoning that the only basis for imposing liability upon Pressman shown by the evidence presented was the doctrine of respondeat superior, which it concluded did not apply to actions brought under the federal securities act. We reverse and remand for a new trial.
This action arises out of an allegedly fraudulent scheme to inflate the price of the stock of the Imperial Investment Company (Imperial), which stock was traded in the over-the-counter market. Newton alleged that several individuals, after acquiring control of all the tradeable shares of Imperial stock, conspired to create an active market for the stock in which they could profit from their acquisition.
In 1970, Newton initiated this action against Pressman and several other brokerage firms and individuals allegedly involved in the conspiracy to inflate the price of Imperial stock, alleging violations of the Securities Act of 1933, the Securities Exchange Act of 1934, and the Texas common law of fraud. By the time the suit finally went to trial in May 1978, Pressman was the only defendant who had not defaulted, settled, or been dismissed. Newton alleged that Pressman's employee Stanleigh Bader, was involved in the conspiracy to manipulate the price of Imperial stock. It contended that the conspirators had violated § 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b); § 17 of the Securities Act, 15 U.S.C. § 77q; Rule 15c2-7 of the Securities and Exchange Commission (SEC), 17 C.F.R. § 240.15c2-7 (1979); and the Texas common law doctrine of fraud.2 Newton sought to impose liability upon Pressman for the acts of its employee under the doctrine of respondeat superior and § 20(a) of the Securities Exchange Act, 15 U.S.C. § 78t(a).
Congress modeled § 20(a) upon § 15 of the Securities Act of 1933, 15 U.S.C. § 77o, which reads:
Every person who, by or through stock ownership, agency, or otherwise, or who, pursuant to or in connection with an agreement or understanding with one or more persons by or through stock ownership, agency, or otherwise, controls any person liable under sections 77k or 77l of this title, 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 is liable, unless the controlling person had no knowledge of or reasonable ground to believe in the existence of the facts by reason of which the liability of the controlled person is alleged to exist.
Congress enacted § 15 to prevent persons from evading liability for violations of the registration requirements of the Securities Act by employing others to act in their stead. See SEC v. Management Dynamics, Inc., 515 F.2d 801, 812 (2d Cir. 1975); S.Rep. No. 47, 73d Cong., 1st Sess. 5 (1933); H.R.Conf.Rep. No. 152, 73d Cong., 1st Sess. 27 (1933). The initial draft of the Securities Act prepared by the Senate proposed an "insurer's liability" standard, under which any officer or director of a corporation would be liable for violations committed by it regardless of his personal fault. S.Rep. No. 47, 73d Cong., 1st Sess. 5 (1933). See also Rochez Brothers v. Rhoades, 527 F.2d 880, 885 (3d Cir. 1975). The draft bill promulgated by the House of Representatives, however, predicated such secondary liability upon a "fiduciary standard," which imposed liability upon only those controlling persons who breached a duty of due care. H.R.Rep. No. 85, 73d Cong., 1st Sess. 5 (1933), H.R.Conf.Rep. No. 152, 73d Cong., 1st Sess. 27 (1933). A conference committee adopted the House version. Id.
The legislative history of § 20(a) discloses that Congress deliberately patterned it after § 15, with the identical purpose of preventing persons from avoiding liability under the provisions of the Securities Exchange Act by utilizing "dummies" to commit the prohibited acts. See SEC v. Management Dynamics, Inc., 515 F.2d at 812; Hearings before the Senate Comm. on Banking and Currency on S.Res. 84 (72d Cong.) and S.Res. 56 and 97 (73d Cong.), 73d Cong., 1st Sess., pt. 15, at 6571 (1934). When enacting the Securities Exchange Act, Congress also amended § 15 to provide a defense, similar to that included in the newly enacted § 20(a), to those controlling persons who in good faith exercise due care to avoid violations by the controlled person of the Securities Act. Section 20(a) excluded from liability those controlling persons who established that they had "acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action," see 15 U.S.C. § 78t(a), whereas § 15 excluded those persons who "had no knowledge of or reasonable ground to believe in the existence of the facts by reason of which the liability of the controlled person is alleged to exist," see 15 U.S.C. § 77o. These good faith defenses merely made explicit Congress's intention of imposing liability under the controlling persons provisions only on the basis of a failure to exercise due care. The inconclusive legislative history of §§ 15 and 20(a) supports neither of the positions advocated by the parties before us on this appeal. We look next for guidance to the case law dealing with the two securities acts.
Newton relies upon Lewis v. Walston & Co., 487 F.2d 617 (5th Cir. 1973), to support its argument that this court has previously determined that the federal securities acts do not preclude the imposition of secondary liability on the basis of agency principles, such as the doctrine of respondeat superior. In Lewis the court addressed the potential liability of a brokerage firm for a violation of § 12(1) of the Securities Act of 1933, 15 U.S.C. § 77l (1), by one of its registered representatives. It affirmed the judgment entered against the registered representative based upon her selling of unregistered securities in violation of § 12(1), but it reversed the district court's grant of a judgment notwithstanding the verdict to the brokerage firm. The court found that the evidence presented sufficiently demonstrated that the registered representative had been acting within the course and scope of her employment to support the verdict rendered by the jury against the firm. Lewis v. Walston & Co., 487 F.2d at 621-24. While the court clearly utilized agency principles to impose liability upon the brokerage firm for the acts of its employee, it did not decide, nor apparently did the parties raise, the issue whether § 15 of the Securities Act, 77 U.S.C. § 77o, was the exclusive means by which secondary liability could be imposed upon the brokerage firm for the acts of its employee. We are unwilling to read Lewis as deciding by implication the question before us on this appeal.3
Other circuits that have clearly addressed the question have reached differing conclusions concerning the viability of the respondeat superior doctrine in an action brought under the federal securities acts. The Second, Fourth, Sixth, and Seventh Circuits have held that the controlling person provisions are not the exclusive methods by which secondary liability may be imposed under the securities acts, while the Third and Ninth Circuits have reached the opposite conclusions. Compare Marbury Management, Inc. v. Kohn, 629 F.2d 705, Fed.Sec.L.Rep. (CCH) P 97,357 (2d Cir. 1980);4 Holloway v. Howerdd, 536 F.2d 690 (6th Cir. 1976); Fey v. Walston & Co., 493 F.2d 1036 (7th Cir. 1974); Johns Hopkins University v. Hutton, 422 F.2d 1124 (4th Cir. 1970), cert. denied, 416 U.S. 916, 94 S.Ct. 1622, 40 L.Ed.2d 118 (1974); with Rochez Brothers v. Rhoades, 527 F.2d 880 (3d Cir. 1975); Zweig v. Hearst Corp., 521 F.2d 1129 (9th Cir.), cert. denied, 423 U.S. 1025, 96 S.Ct. 469, 46 L.Ed.2d 399 (1975).5 See also Reyos v. United States, 431 F.2d 1337 (10th Cir. 1970), aff'd in part and rev'd in part sub nom., Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972); Myzel v. Fields, 386 F.2d 718 (8th Cir. 1967), cert. denied, 390 U.S. 951, 88 S.Ct. 1043, 19 L.Ed.2d 1143 (1968).
Those circuits that have applied the doctrine of respondeat superior in actions brought under the federal securities acts have also focused upon the congressional intent underlying the enactment of the controlling persons provisions, the general policies promoted by the securities acts, and the resulting effect of imposing such secondary liability. Those courts have concluded that by enacting § 15 of the Securities Act and § 20(a) of the Securities Exchange Act, Congress intended to extend the coverage of the acts to encompass persons who exercised effective control over persons directly liable for violations of the acts and upon whom agency law or other common law principles would not impose liability. See Marbury Management, Inc. v. Kohn, 629 F.2d 705, (1980) Fed.Sec.L.Rep. P 97,357 at P 97,405; Holloway v. Howerdd, 536 F.2d at 694-95; SEC v. Management Dynamics, Inc., 515 F.2d at 812-13. To limit secondary liability for violations of the securities acts to the situations encompassed by §§ 15 and 20(a) in the employer-employee context, they reasoned, would allow an employer who would otherwise be responsible for the acts of its employees to escape liability merely by showing that it acted in good faith and neither had knowledge of nor participated in the unlawful acts. Observing the pervasive application of agency principles elsewhere in the law, the Second Circuit stated in SEC v. Management Dynamics that it would find those principles to be inapplicable to securities actions only upon a demonstration that Congress clearly intended to exclude their application. 515 F.2d at 812. The Second Circuit also observed that by including corporations within the meaning of "person" in the definitional sections of the acts, 15 U.S.C. §§ 77b, 78c(a)(9), Congress intended that corporations fall within the acts' reach, which necessitates the use of agency principles since a corporation can act only through its agents. The court then reasoned that "(w)ere §§ 15 and 20(a) the sole measures of corporate liability, ... the inclusion of corporations under the definitions of 'person' would be not only unnecessary but also misleading." SEC v. Management Dynamics, Inc., 515 F.2d at 812. In Marbury Management, Inc. v. Kohn, the Second Circuit found further support for the application of agency principles in § 28(a) of the Securities Exchange Act, 15 U.S.C. § 78bb(a), which provides that the rights and remedies created by the Securities Exchange Act did not displace, but were in addition to, all other rights and remedies that might exist at law or in equity. 629 F.2d at 716, (1980) Fed.Sec.L.Rep. P 97,357 at P 97,405.
In its memorandum opinion the district court ruled that Newton had failed to present any evidence showing "that (Pressman) furthered or even knew of Bader's activities or that any of its officers, employees or agents participated in the securities fraud." This essentially constitutes a finding that as a matter of law Pressman had satisfied the requisites for the good faith defense incorporated in § 20(a). Newton contends that this finding was erroneous, the district court applied an incorrect standard in deciding whether Pressman acted in good faith, and the issue should have been submitted to the jury because the evidence reflected a clear failure on Pressman's part to supervise adequately Bader's activities. Pressman responds that Newton failed to show that it was a culpable participant in or had any knowledge of the fraud. It contends that it presented sufficient evidence about its supervision of Bader's activities to warrant a directed verdict under the good faith defense provided by § 20(a).
The evidence presented by Newton, at a minimum, sufficiently established Pressman's control over Bader to warrant submission of the issue to the jury. Whether Bader had committed a violation of the Securities Exchange Act for which he might be liable was a question not expressly decided by the district court. The court, however, did state "(t)here was ample evidence that there was a conspiracy to manipulate the market in Imperial Investment Company Stock, and that Stanleigh Bader, an employee of Defendant Pressman, Frohlic & Frost, was a member of such conspiracy."
The correctness of the district court's grant of a directed verdict to Pressman on Newton's § 20(a) claim therefore depends upon whether it correctly found as a matter of law that Pressman had acted in good faith. The burden of establishing this defense to § 20(a) liability rested upon Pressman. See Hill York Corp. v. American International Franchises, Inc., 448 F.2d 680, 695 n.22 (5th Cir. 1971). Under the prior decisions of this circuit, a showing that Pressman, as a controlling person, "failed to establish, maintain, or diligently enforce a proper system of supervision and control" of activities of Bader, the controlled person, would suffice to show its lack of good faith. See Cameron v. Outdoor Resorts of America, Inc., 608 F.2d 187, 194-95 (5th Cir. 1979), modified on rehearing, 611 F.2d 105 (5th Cir. 1980); DelPorte v. Shearson, Hammill & Co., 548 F.2d 1149, 1154 (5th Cir. 1977). Thus the district court's finding that Pressman neither participated in nor had knowledge of the fraudulent activities of its employees was insufficient to warrant the grant of a directed verdict to it on Newton's § 20(a) claim in the absence of evidence establishing as a matter of law that Pressman adequately supervised Bader's activities. While Pressman did present evidence concerning its supervision of Bader's activities, this evidence is not sufficient to establish as a matter of law that Pressman "diligently enforce(d) a proper system of supervision and control." We also reverse the grant of a directed verdict to Pressman on Newton's § 20(a) claim.
Fed.R.Evid. 801(d)(2)(E) excludes from the definition of "hearsay" a statement that "is offered against a party and is ... a statement by a coconspirator of a party during the course and in furtherance of the conspiracy." In United States v. James, the en banc court interpreted Rule 801(d)(2)(E) to remove a statement made by a coconspirator from the application of the hearsay rule if the party seeking to introduce the statement has established by a preponderance of the evidence independent of the statement itself that (1) a conspiracy existed, (2) the declarant and the party against whom the statement is offered were members of the conspiracy, and (3) the declarant made the statement during the course and in furtherance of the conspiracy. 590 F.2d at 582. The court then outlined the procedures by which the district court should make the threshold determination of the statement's admissibility and the standard to be applied in making that determination. Id. at 577-82.
On this appeal Pressman questions whether Newton satisfied the requirement of Rule 801(d)(2)(E) that the statements have been made by a coconspirator of a "party." Pressman contends that none of the evidence presented by Newton showed any connection between it and the alleged conspiracy. Without deciding whether this particular requirement of Rule 801(d)(2)(E) was satisfied, we would note that Pressman is a corporate entity and Bader, the alleged member of the conspiracy, was its employee. One often repeated tenet of corporate law is that a corporation can act only through its directors, officers, and employees, and that the acts of a corporate officer or employee may be attributed to the corporation. See e.g., New York Central & Hudson River Railroad v. United States, 212 U.S. 481, 29 S.Ct. 304, 53 L.Ed. 613 (1909); Rochez Brothers v. Rhoades, 527 F.2d at 884; Nelson Radio & Supply Co. v. Motorola, Inc., 200 F.2d 911, 914 (5th Cir. 1952), cert. denied, 345 U.S. 925, 73 S.Ct. 783, 97 L.Ed. 1356 (1953). If Bader was a member of the conspiracy and if his actions are attributable to Pressman, then the requisite connection between Pressman and the conspiracy would exist. Resolution of this issue, however, will depend upon factual findings concerning, inter alia, whether Bader acted in the course and scope of his employment. In the absence of any such findings by the trier of fact below, we decline to reach the issue but leave it to be determined upon retrial.
In Dupuy v. Dupuy, 551 F.2d 1005 (5th Cir.), cert. denied, 434 U.S. 911, 98 S.Ct. 312, 54 L.Ed.2d 197 (1977), this court delineated the nature of the showing that must be made by a plaintiff asserting a Rule 10b-5 claim to establish that he justifiably relied upon the fraudulent activities of the defendant. This showing is a precondition to recovery and is frequently characterized as a requirement that the plaintiff show he acted with due diligence. See also Clement A. Evans & Co. v. McAlpine, 434 F.2d 100 (5th Cir. 1970), cert. denied, 402 U.S. 988, 91 S.Ct. 1660, 29 L.Ed.2d 153 (1971). Noting that "scienter" must be shown before liability will be imposed upon a defendant charged with violating Rule 10b-5, the court in Dupuy held that the standard of care imposed upon a 10b-5 plaintiff by the due diligence requirement should not be more exacting than the corresponding standard imposed upon the defendant. Thus the court concluded that the plaintiff should not be barred from recovering under Rule 10b-5 where he merely acts negligently. Rather, at a minimum, he must have acted recklessly to have acted without due diligence. Dupuy v. Dupuy, 551 F.2d at 1020.6 The evidence presented by the parties presents a sufficiently close factual question concerning whether Newton acted with due diligence to prevent us from deciding the issue as a matter of law under the rule of Boeing Co. v. Shipman, 411 F.2d 365 (5th Cir. 1969) (en banc).
The majority extends to civil actions the rule that this circuit established, sitting en banc, in the criminal case of United States v. James, 590 F.2d 575 (5th Cir.), cert. denied, 442 U.S. 917, 99 S.Ct. 2836, 61 L.Ed.2d 283 (1979). James, we said, presented an "appropriate opportunity ... to establish a new standard and procedure for handling the admissibility of co-conspirator statements in criminal conspiracy trials." James, 590 F.2d at 578 (emphasis added). Admittedly, the logic the James court employed could be made to apply to all statements susceptible to a hearsay objection. James, 590 F.2d at 593 (Tjoflat, J., concurring specially). Nevertheless, the issue in James was specifically framed in terms of the circumstances that criminal conspiracy trials present. This factor, coupled with the significance of the holding, mandates a narrow, precise reading of the case's precedential value. Extension of the James rule to civil actions, based solely on the authority of James, is an inappropriately broad application of the case. Proper resolution of hearsay questions in civil actions, therefore, should turn upon application of the federal rules of evidence, without the alterations effected by the judicial "gloss" of James.
The district court made no findings of fact in granting the directed verdict to Pressman at the close of the parties' presentation of evidence. The factual summary included in this opinion is drawn primarily from the allegations of the parties and our examination of the record below. We express no opinion as to whether these allegations are supported by the evidence presented. The summary is made merely to establish the context within which we decide the legal issues raised by this appeal
Decisions by the Texas courts have indicated that a corporation may be held liable for the fraudulent acts of its officers or directors under common law agency principles. See American Bank & Trust Co. v. Freeman, 560 S.W.2d 444 (Tex.Civ.App.1977) (bank not liable for alleged fraudulent acts of the chairman of its board of directors where he was not acting in the scope of his authority, either actual or apparent); R. O. McDonnell Development Co. v. Schlueter, 339 S.W.2d 701 (Tex.Civ.App.1960) (writ ref., n. r. e) (court affirms imposition of liability upon corporation for fraudulent acts committed by its president). On this appeal neither Newton nor Pressman has addressed the issue of whether the district court erred in granting a directed verdict to Pressman on Newton's common law fraud claim. Therefore we pretermit that issue
In Woodward v. Metro Bank of Dallas, 522 F.2d 84 (5th Cir. 1975), the issue confronting the court was whether the defendant bank could be held liable for aiding and abetting a violation of Rule 10b-5. The court acknowledged that the Second Circuit at that time had apparently adopted the view that § 20(a) was the exclusive means by which a defendant could be held secondarily liable for a violation of the Securities Exchange Act. See Gordon v. Burr, 366 F.Supp. 156 (S.D.N.Y.1973), aff'd in part, rev'd in part, 506 F.2d 1080 (2d Cir. 1974). Although it characterized that view as "an unnecessarily restrictive approach to the securities acts," the court in Woodward pretermitted the question whether § 20(a) was the exclusive means by which secondary liability could be imposed because it concluded that the plaintiff had failed to show that the defendant bank had aided and abetted the violation of Rule 10b-5. Woodward v. Metro Bank of Dallas, 522 F.2d at 94 n. 22
Prior to the Second Circuit's decision in Marbury, which clearly held that respondeat superior principles applied in actions brought under the securities acts, the position adopted by the Second Circuit was unclear. Compare SEC v. Geon Industries, Inc., 531 F.2d 39 (2d Cir. 1976) (injunction will not be imposed in an SEC enforcement action upon defendant brokerage firm for acts of its registered representative on the basis of respondeat superior), with SEC v. Management Dynamics, Inc., 515 F.2d 801 (2d Cir. 1975) (SEC entitled to an injunction in an enforcement action against the defendant company for acts of its employee who utilized his apparent authority as vice president in charge of trading to commit the fraudulent acts)
While the Ninth Circuit has held that agency principles are inapplicable in actions predicated upon the securities acts, see Christoffel v. E. F. Hutton & Co., 588 F.2d 665 (9th Cir. 1978); Zweig v. Hearst Corp., 521 F.2d 1129 (9th Cir.), cert. denied, 423 U.S. 1025, 96 S.Ct. 469, 46 L.Ed.2d 399 (1975), the court has never directly addressed the question. Those Ninth Circuit decisions holding that agency principles do not apply have relied primarily upon the court's prior decision in Kamen & Co. v. Paul H. Aschkar & Co., 382 F.2d 689 (9th Cir. 1967), cert. dismissed, 393 U.S. 801, 88 S.Ct. 40, 21 L.Ed.2d 85 (1968). In Kamen, however, the court did not address the issue. Instead, the court ruled the plaintiff investor was not entitled to recover under a theory of common law fraud because it found that the defendant's employee had no ostensible authority to act on behalf of his employer upon which the plaintiff could have relied. Id. at 694-96. The court then examined the plaintiff's claims brought under the 1933 and 1934 securities acts and ruled that the defendant employer could not be held liable under either § 15 or § 20(a). Id. at 697. Because of its ruling that the defendant's employee acted without actual or apparent authority, the court did not have to determine whether the defendant employer could be held liable under agency principles for the violations of the securities acts committed by its employee, and the court's opinion does not indicate whether it considered the issue
Pressman asserts that the court in Dupuy adopted a sliding scale approach in determining the degree of care required of a plaintiff by the due diligence requirement. Under such an analysis, the standard of care imposed upon the plaintiff varies according to the degree of culpability that must be shown to impose liability upon the defendant. Since Pressman's liability under the respondeat superior doctrine or under § 20(a) would not depend upon a showing that it acted with scienter, it argues that a more stringent standard of care than the recklessness standard utilized in Dupuy should be imposed upon Newton. To recover from Pressman under the Securities Exchange Act for the actions of its employee, Bader, however, Newton must show under either theory that Bader violated the Act, which requires it to demonstrate that Bader acted with scienter. See Cameron v. Outdoor Resorts of America, Inc., 611 F.2d 105, 106-07 (5th Cir. 1980) (on rehearing). Because Pressman's liability will depend in part upon a showing by Newton that Bader acted with scienter, the court's conclusion in Dupuy that no greater standard of care than recklessness should be required of the plaintiff under the due diligence requirement remains valid