Opinion ID: 696235
Heading Depth: 4
Heading Rank: 1

Heading: Vicarious Corporate Liability

Text: 32 Federal argues that the corporation may have been independently liable because it may have faced vicarious liability under the doctrine of respondeat superior for actions by Nordstrom employees such as personnel director Joseph Demarte and public relations director Chris Bridenbaugh. Even if we were to find that persons other than the named directors and officers engaged in activity in furtherance of securities fraud, however, the insured directors and officers would be liable for these same acts because they are controlling persons under section 20(a). 3 Although respondeat superior liability is independent of section 20(a) liability, Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1578 (9th Cir.1990), cert. denied, 499 U.S. 976, 111 S.Ct. 1621, 113 L.Ed.2d 719 (1991), in the present case any corporate respondeat superior liability would be concurrent with the directors' and officers' section 20(a) liability. See Raychem, 853 F.Supp. at 1183. In Raychem, the court rejected the claim that independent corporate liability arose from the dissemination of misleading statements by employees other than the named defendants for two reasons applicable to the present case: (1) the named defendants approved the misleading statements, and (2) there was no evidence that the employees' activities increased the amount of the settlement. Id. 33 Federal theorizes that liability was not necessarily concurrent because the directors and officers may have been able to avoid section 20(a) liability by invoking the good faith defense. See 15 U.S.C. Sec. 78t(a). Citing an unpublished decision, Federal argues that because corporations cannot employ this statutory defense to avoid respondeat superior liability, Nordstrom would then be solely liable for some of the fraudulent activity, thus necessitating allocation. 34 Federal's theory fails in this instance because these directors and officers cannot invoke the good faith defense. According to the statute, the defense is only available when the directors and officers did not directly or indirectly induce the act or acts constituting the violation or cause of action. 15 U.S.C. Sec. 78t; see Hollinger, 914 F.2d at 1575 (holding that a controlling person need not be a culpable participant). The defense is unavailable even when the defendants who induced the fraud believed in good faith that they were not perpetrating a fraud. See Myzel v. Fields, 386 F.2d 718, 738-39 (8th Cir.1967) (stating that a controlling person who approves actions constituting fraud activity cannot invoke the good faith defense, even if he has no knowledge of the deceit), cert. denied, 390 U.S. 951, 88 S.Ct. 1043, 19 L.Ed.2d 1143 (1968); see also Zweig v. Hearst Corp., 521 F.2d 1129, 1133 (9th Cir.) (addressing the non-inducement prong of the good faith defense before considering the good faith prong), cert. denied, 423 U.S. 1025, 96 S.Ct. 469, 46 L.Ed.2d 399 (1975); First Interstate Bank v. Pring, 969 F.2d 891 (10th Cir.1992) (stating that nonparticipation in the fraud and good faith are parts of the good faith defense), rev'd on other grounds, --- U.S. ----, 114 S.Ct. 1439, 128 L.Ed.2d 119 (1994). 35 In this instance, the allegedly misleading public disclosures, press releases, and statements to the press that constituted the fraud were all approved by one or more of the insured directors and officers. The Federal attorney's interviews of Nordstrom directors, officers, and employees, reveal that an Executive Committee consisting of four of the insured directors and officers reviewed and approved the press releases. James Nordstrom specifically stated that the public relations department reported directly to him. Most significantly, public relations director Chris Bridenbaugh stated that she was involved in all press disclosures, and that these responses to the media were cleared through a member of the Nordstrom family. By authorizing the misleading statements, the insured directors and officers induced the fraud. Cf. Kersh v. General Council of Assemblies of God, 804 F.2d 546 (9th Cir.1986) (noting that when a broker had knowledge that transactions were occurring, and approved of and accepted the benefits of the transactions, he had participated and induced the unlawful activity, even though he did not know that the transactions were unlawful) (citing Hecht v. Harris, Upham & Co., 283 F.Supp. 417, 439 (N.D.Cal.1968), modified on other grounds, 430 F.2d 1202 (9th Cir.1970)). Federal has presented no evidence to indicate that Demarte, Bridenbaugh, or any other Nordstrom employee violated the established policy and issued unauthorized statements that contributed to the fraud. Thus, the fact that the directors and officers induced the fraud by approving the allegedly misleading public statements precludes invocation of the good faith defense. Accordingly, we find no genuine issue of material fact on whether vicarious corporate liability could establish a basis for allocation.