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Keywords

contractliabilityappealsummary judgmentcorporationfelonygood faithcommon law
trustcorporation

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Hollinger v. Titan Capital Corp., 914 F.2d 1564, 59 USLW 2222, Fed. Sec. L. Rep. P 95,500

Facts

Emil Wilkowski, a registered representative associated with Titan Capital Corporation, embezzled funds from clients while falsely representing that he was investing their money. Wilkowski had a prior felony conviction for forgery, which he failed to disclose when applying for registration with the NASD. After the NASD registered him, Titan learned of his conviction but did not disclose it to clients. Wilkowski's fraudulent activities were eventually discovered, leading to his criminal conviction and this civil action by the investors seeking to recover their losses.

Emil Wilkowski, a dishonest securities salesman, embezzled money entrusted to him by four clients. As a result, Wilkowski was convicted of criminal securities fraud and grand theft.

Issue

1. What standard of recklessness meets the scienter requirement for a claim under § 10(b) and Rule 10b–5? 2. Is a broker-dealer a 'controlling person' with respect to its registered representatives under § 20(a) of the 1934 Act? 3. May broker-dealers be held vicariously liable under the common law doctrine of respondeat superior for securities law violations committed by their registered representatives?

What standard of recklessness meets the scienter requirement for a claim under § 10(b) and Rule 10b–5? Is a broker-dealer a 'controlling person' with respect to its registered representatives within the meaning of § 20(a) of the 1934 Act?

Rule

The court held that recklessness may satisfy the scienter requirement for securities fraud, defined as highly unreasonable conduct that constitutes an extreme departure from ordinary care. Additionally, a broker-dealer is considered a controlling person under § 20(a) of the 1934 Act, and the burden of proving good faith lies with the broker-dealer.

The standard of recklessness, for purposes of satisfying the scienter requirement of a securities fraud action, requires highly unreasonable conduct that amounts to an extreme departure from standards of ordinary care.

Analysis

The court applied the recklessness standard by evaluating Titan's failure to disclose Wilkowski's prior conviction. It determined that Titan's actions did not constitute an extreme departure from ordinary care, as the NASD had not revoked Wilkowski's registration despite the conviction. The court also clarified that a broker-dealer's control over its registered representatives establishes liability under § 20(a), regardless of whether the representatives are classified as independent contractors.

In applying the Sunstrand test to the facts of this case, the essential inquiry becomes: Was Titan's failure to disclose Wilkowski's eleven-year old forgery conviction highly unreasonable and did it constitute an extreme departure from standards of ordinary care?

Conclusion

The Court of Appeals affirmed the district court's summary judgment in favor of Painter Financial Group and vacated in part regarding Titan, establishing that Titan could be held liable as a controlling person under the securities laws.

Affirmed in part and vacated in part.

Who won?

Titan Capital Corporation prevailed in the case because the court found that its failure to disclose Wilkowski's conviction did not meet the standard of recklessness required for liability under securities fraud laws.

Titan Capital Corporation prevailed in the case because the court concluded that Titan's failure to disclose Wilkowski's eleven-year old conviction did not create such an unreasonable risk to investors that Titan's failure to disclose the conviction was an extreme departure from the standard of ordinary care.

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