Broker-Dealer Litigation - Greenberg Traurig LLP

Fernea v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 2011 Tex. App. LEXIS 5286 (Tex. App.
July 12, 2011).
A registered representative owned two corporations that were unrelated to his
employment at a broker-dealer. The registered representative disclosed his ownership of the two
corporations to the broker-dealer and later mentioned selling them. The investor who bought the
corporations alleged that the registered representative fraudulently induced him to purchase
unregistered stock in the corporations and brought suit against the registered representative and
broker-dealer alleging control person liability under the Texas Securities Act. Tex. Rev. Civ.
Stat. art. 581-33. The broker-dealer moved for summary judgment, and the trial court granted
the broker-dealer’s motion. The investor appealed the trial court’s grant of summary judgment.
To prove control person liability, the plaintiff must prove that the alleged control person: (1) had
actual power or influence over the controlled person; and (2) had the power to control or
influence the specific transaction or activity that gave rise to the underlying violation. The court
of appeals concluded that the evidence presented established a question of fact regarding the
element of control. First, the policies required that the registered representative obtain
permission to own and participate in his outside business. Second, it prohibited the registered
representative “from engaging in any private securities transaction without full disclosure to and
prior written approval from [the broker-dealer].” Thus, as a condition of the registered
representative’s employment, he agreed not to enter into any outside securities transactions
without the broker-dealer’s permission. In sum, the court of appeals held that the broker-dealer
had neither conclusively negated one of the elements of the control person claims, nor
conclusively established both elements of the relevant affirmative defense. Accordingly, the
summary judgment on the claim alleging control person liability was reversed and remanded.
Narnia Investments Ltd. v. Harvestons Sec. Inc., 2011 Tex. App. LEXIS 6182 (Tex. Civ. App.
Aug. 9, 2011).
Plaintiff investment company brought suit against a broker-dealer and its individual
employees for violations of Texas securities laws, including deceptive trade practices, fraud, and
control person liability. Tex. Rev. Civ. Stat. Ann. Art. 581-33(F)(1). Defendants moved for
summary judgment asserting, among other things, that the individual defendants alleged to be
control persons were not acting within the course and scope of employment and therefore could
not be control persons. The trial court granted defendants’ motion for summary judgment.
Plaintiff appealed. The appellate court held that plaintiff need not prove culpability of the
alleged control person or that he acted within the course and scope of his employment in order to
be liable as a control person. As such, the court reversed the trial court’s granting of summary
judgment.
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