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Asplund v. Selected Investments in Financial Equities12/11/2000
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Hollinger v. Titan Capital Corp., supra, was a securities fraud action by investors against a broker-dealer and financial counseling firm seeking to recover for a registered representative's embezzlement of money entrusted to him. The trial court granted summary judgment for both defendants. The issue in Hollinger germane to the case before us was whether Titan, the defendant broker-dealer, could be held vicariously liable as a "controlling person" under section 20(a) of the Securities Exchange Act of 1934, which with certain exceptions extends vicarious liability of brokerage firms beyond common law respondeat superior liability: "Every person who, directly or indirectly, controls any person liable under any provision of this chapter or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action." (15 U.S.C. § 78t(a).) The district court felt Titan was not a "controlling person" within the meaning of the statute unless it exercised "actual power or influence" over the fraudulent dealings of Wilkowski, the registered representative, and was a "culpable participant" in his fraudulent dealings. It concluded Titan had no "power or influence" over Wilkowski because he was an independent contractor, Titan exercised no control over his defalcation of funds, did not benefit from that defalcation, and did not authorize Wilkowski to receive personal checks. The district court also determined that because Titan and Wilkowski had agreed that the latter would be an independent contractor, "Titan had no duty to supervise unauthorized and unknown transactions and therefore could not have been a 'culpable participant' in Wilkowski's misdeeds." (Id. at pp. 1572-1573.) The district court "made the question of whether Titan controlled Wilkowski turn on the particular business arrangement of the parties." (Id. at p. 1573.)
The Ninth Circuit rejected the district court's reasoning and conclusion, holding that "a broker-dealer is a controlling person under § 20(a) with respect to its registered representatives." (Hollinger v. Titan Capital Corp., supra, at p. 1573.) The court emphasized that that statute was designed to protect the investing public from representatives who were inadequately supervised or controlled. Purchasers of securities often rely heavily for investment advice on the broker's representative, and because representatives are usually compensated by commissions that are proportional to sales there is an "ever present" temptation to take advantage of the client. To ensure diligent supervision and control, Congress held broker-dealers vicariously liable for injury to investors caused by violations of the statute or rules promulgated thereunder. "The very nature of the securities business, as it has developed in this country, militates for such a rule as public policy and would seem to suggest strict court enforcement." (Id. at p. 1573.) Because the securities laws impose on broker-dealers a duty to supervise their registered representatives, and the representatives need the dealers to gain access to the securities markets, the Hollinger court held that, as a matter of law, a broker-dealer is a "controlling person" under the Securities Exchange Act of 1934 with respect to its registered representatives. Significantly, the court refused to make any distinction between employees or other agents of a broker-dealer and independent contractors, stating that ' o exclude from the definition of controlling person those registered represen
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