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Asplund v. Selected Investments in Financial Equities12/11/2000
As modified 1/11/01. Certified for publication.
The chief question in this case is whether a broker-dealer of securities has a common law duty to supervise sales by its registered representatives of investments in which the broker-dealer has no economic interest to persons who are not customers of the broker-dealer. We hold that where, as here, the registered representative is not an employee of the broker-dealer, has no actual or apparent authority to sell the investment at issue, and the broker had no notice of and did not in any way benefit from the transaction, the broker-dealer has no such duty.
FACTS AND PROCEEDINGS BELOW
In 1996 and 1997, appellants Kenneth and Sandra Asplund and Marguerite Summers, purchased promissory notes issued by Medco, Inc. (Medco), a Florida based medical equipment company, from Joseph P. Tufo. Tufo was a registered representative of respondent Selected Investments in Financial Equities (SIFE), a California corporation that is registered as an investment advisor with the Securities and Exchange Commission (SEC) and also as a broker-dealer with the National Association of Securities Dealers (NASD). SIFE's only purpose is to act as a management company for a mutual fund, the SIFE Trust Fund.
In October 1997 a federal court enjoined Medco from offering or selling promissory notes, which the SEC alleged to be "an elaborate Ponzi scheme" in violation of federal securities laws. On June 24, 1997, the California Department of Corporations, acting under the authority of section 25532 of the Corporations Code, issued an order directing Medco, Tufo and others to desist and refrain from the further offer or sale in the State of California of investment contracts, promissory notes or any other securities of Medco on the ground such securities were unqualified for sale in this state. Five months later SIFE terminated its relationship with Tufo, who was subsequently charged by the SEC with violating federal securities laws and by the Department of Corporations for violating the California Corporations Code.
Medco eventually failed and was placed in receivership. As a result of their investments in Medco, appellants lost approximately $154,000.
Appellants commenced this action in March 1998 by filing a complaint against Tufo, his wife, and his family trust, naming also numerous Doe defendants. In May 1998 appellants amended their complaint by naming SIFE a defendant. In August 1998 Tufo filed for bankruptcy . Thereafter appellants dismissed their complaint as against him without prejudice.
All but one of appellants' seven causes of action against SIFE are based on a theory of vicarious liability. Alleging that Tufo had actual or ostensible authority to act in its behalf, appellants sought to impose vicarious liability on SIFE for misrepresentation, breach of fiduciary duty, fraud, negligence and breach of an oral contract. The remaining cause of action against SIFE asserted direct liability for negligent failure to supervise Tufo in his representative capacity.
In March 1999, SIFE moved for summary judgment claiming (1) that SIFE could not be found vicariously liable because Tufo's sales of investments in Medco were not within the scope of his agency relationship with SIFE, and (2) that direct liability could not be imposed because SIFE had no duty to supervise Tufo with respect to his sale of investment products such as Medco in which it had no financial interest, as such sales were outside the scope of its agency relationship with Tufo.
The trial court granted the motion for summary judgment on September 20, 1999, and on that basis thereafter entered judgment for SIFE.
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