COLORADO COURT OF APPEALS 2017COA66
Court of Appeals No. 16CA0293
City and County of Denver District Court No. 14CV32252
Honorable John M. McMullen, Judge
Susan Houston,
Plaintiff-Appellant,
v.
Southeast Investments N.C., Inc.,
Defendant-Appellee.
JUDGMENT AFFIRMED
Division VII
Opinion by CHIEF JUDGE LOEB
Davidson* and Nieto*, JJ., concur
Announced May 18, 2017
The Law Offices of Michael L. Poindexter, Michael L. Poindexter, Golden,
Colorado, for Plaintiff-Appellant
Snell & Wilmer, LLP, James D. Kilroy, Luke M. Mecklenburg, Denver, Colorado,
for Defendant-Appellee
*Sitting by assignment of the Chief Justice under provisions of Colo. Const. art.
VI, § 5(3), and § 24-51-1105, C.R.S. 2016.
¶1 In this securities fraud case, plaintiff, Susan Houston, appeals
the district court’s grant of summary judgment in favor of
defendant, Southeast Investments N.C., Inc. (Southeast). We
affirm.
I. Background
¶2 This case arises out of Craig Sorenson’s and Frederick
Hornick’s efforts to allegedly defraud Houston, a retired, unmarried
woman, in order to finance and establish 1st Consumer Financial
Services, Inc. (CFS), a financial investment company created and
owned by Sorenson. Although the factual background of this case
is somewhat complicated, the sole issue on appeal is whether the
district court erred in granting summary judgment for Southeast,
based on its conclusion that, as a matter of law, Southeast was not
liable as a control person under section 11-51-604(5)(b), C.R.S.
2016, of the Colorado Securities Act (the Colorado Act).
¶3 The pertinent facts are largely undisputed. In 2008, through a
program at their church, Hornick became a spiritual mentor to
Houston. As part of the program, Hornick would voluntarily visit
Houston once a month with another church member to discuss
matters of faith and provide spiritual guidance. Over time,
1
however, Hornick began to visit Houston significantly more often,
and alone. During his solo visits, Hornick would help Houston with
house repairs and yardwork and, occasionally, would take her to
medical appointments or out to dinner along with his wife.
Eventually, Houston and Hornick became close friends.
¶4 In late 2010 or early 2011, Sorenson hired Hornick to work for
CFS. Around this time, Hornick began to mention his investment
advising expertise to Houston and occasionally suggested that
Houston let him handle her investments. Houston largely ignored
these invitations because she owned two relatively safe and secure
annuity contracts that adequately provided for her needs.
¶5 At all relevant times, Southeast was an authorized and
registered broker-dealer of securities. In February 2013, Sorenson
signed an Independent Contractor Agreement and Registered
Representative Agreement with Southeast. Under these agreements
(and pursuant to federal regulations), Sorenson was prohibited from
engaging in outside business activities not involving Southeast
(sometimes referred to in the securities industry as “selling away”)
without disclosing such activities to Southeast and obtaining
written approval.
2
¶6 Also, in February of 2013, Houston was involved in a car
accident and sustained a neck injury that caused her significant
pain. After the accident, Hornick became increasingly aggressive
about assisting Houston with her investments, even going so far as
to insinuate that Houston could repay him for all of his help over
the prior years by letting him manage her investments. Eventually,
in the spring of 2013, Houston agreed to Hornick’s requests and
liquidated her entire retirement savings — worth approximately
$700,000 — and transferred the money into a self-directed IRA
account to be managed by Hornick.1
¶7 Almost immediately after the funds were placed in the IRA,
Hornick transferred all of the money to his own holding company —
through a $700,000 loan to himself. Hornick took out this loan
from Houston’s IRA even though he had no ability to repay it.
Shortly thereafter, Hornick loaned nearly all of Houston’s funds to
1 It appears from the record that, in 2009, Hornick had been
permanently barred from acting as a broker, or associating with
broker-dealers, in securities sales as the result of a civil action
brought by the Securities and Exchange Commission (the SEC)
against him.
3
two people, Troy West and Sorenson.2 These loans were exchanged
for promissory notes to Hornick — none of which was adequately
secured. West and Sorenson then invested funds from the loans in
CFS (i.e., Sorenson’s company).3
¶8 A few months after she gave Hornick control of her savings,
Houston demanded a full return of the money. To her dismay,
however, Houston discovered that the entire $700,000 had been
squandered and all of the promissory notes were in default. Soon
thereafter, Houston sued a number of parties under various
theories of liability. As pertinent to this appeal, the only remaining
issue concerns her control person liability claim against Southeast,
as alleged in her third amended complaint.
2 As compensation for these loans, Hornick compensated himself
with approximately $74,000 of Houston’s money. Hornick took this
money and invested it in CFS on his own behalf.
3 There were multiple promissory notes issued to Hornick from
West and Sorenson. Of these, however, only one note was actually
secured — by a $7000 annuity owned by Troy West’s father. Troy
West had pledged to secure another loan with a $100,000 annuity,
but that security was never finalized. Thus, it appears from the
record that, for her $700,000, Houston was secured for only
approximately $7000. After the original complaint in this action
was filed against Hornick and other parties, Hornick purported to
assign the various promissory notes to Houston.
4
¶9 In that complaint, Houston alleged that Southeast was in
control of Sorenson with regard to his fraudulent conduct
underlying this case and, therefore, was liable as a control person
under Colorado law. After discovery, Southeast moved for summary
judgment, arguing that it was not in control of Sorenson in the
context of this case because the undisputed evidence demonstrated
that it had absolutely no direct or indirect involvement with, or
knowledge of, Sorenson’s outside investment activities on behalf of
CFS and, specifically, regarding Houston.
¶ 10 The district court agreed with Southeast and granted its
motion for summary judgment. First, the court noted that the
analytical framework for determining control person liability under
section 11-51-604(5)(b) of the Colorado Act was a matter of first
impression. It therefore looked to persuasive federal authorities
that had interpreted and applied section 11-51-604(5)(b) and its
federal counterpart, section 20(a) of the Securities Exchange Act of
1934 (the 1934 Act), 15 U.S.C § 78t(a) (2012).
¶ 11 After its consideration of various authorities, the district court
adopted the control person liability analysis set forth in Hauser v.
Ferrell, 14 F.3d 1338, 1341-43 (9th Cir. 1994), overruled on other
5
grounds by Cent. Bank v. First Interstate Bank, 511 U.S. 164, 173
(1994) (holding that there is no private right of action for aiding and
abetting under section 10(b) of the 1934 Act, 15 U.S.C. § 78j
(1988)), as applied in Stat-Tech Liquidating Tr. v. Fenster, 981 F.
Supp. 1325, 1337-38 (D. Colo. 1997). As noted by the district
court, Hauser established, and Stat-Tech applied, an exception to
the test for control person liability where a registered representative
engaged in conduct outside the broker-dealer’s statutory control.
Specifically, where the undisputed evidence established all of the
following facts, the broker-dealer could not be considered a control
person for its registered representative’s conduct as a matter of law:
(a) the registered representative did not make
use of the broker-dealer’s access to the
securities market to promote or effectuate the
sale of the violating security; (b) the
broker-dealer had no knowledge of the
complained-of transaction; (c) the security
being sold by the registered representative was
unrelated to any securities sold or offered by
the broker-dealer; and (d) the plaintiff did not
rely on the registered representative[’]s
relationship with the broker-dealer in making
his/her division to invest in the security.
¶ 12 The district court next concluded that the following evidence
was undisputed in this case: (a) Sorenson did not make use of
6
Southeast’s access to the securities market to promote or effectuate
the sale of the violating security in this case; (b) Southeast had no
knowledge of Sorenson’s conduct; (c) the securities being sold by
Sorenson were unrelated to any securities sold or offered by
Southeast; and (d) Houston did not rely on Sorenson’s relationship
with Southeast in making her decision to invest in the challenged
securities transaction.4 Applying these undisputed facts to the test
articulated in Hauser and Stat-Tech, the district court concluded
that, as a matter of law, Southeast was not a control person with
regard to Sorenson’s conduct underlying Houston’s securities fraud
claim and, therefore, Southeast was entitled to summary judgment
as a matter of law.5
¶ 13 Houston now appeals.
II. Standard of Review
¶ 14 We review de novo a grant of summary judgment. Georg v.
Metro Fixtures Contractors, Inc., 178 P.3d 1209, 1212 (Colo. 2008).
Summary judgment is appropriate only if the pleadings and
4 Houston does not dispute any of these facts on appeal.
5 The court also entered summary judgment for Southeast on
Houston’s claim for common law negligence, but Houston has not
challenged that ruling on appeal.
7
supporting documentation demonstrate that no genuine issue of
material fact exists and the moving party is entitled to judgment as
a matter of law. C.R.C.P. 56(c); W. Elk Ranch, L.L.C. v. United
States, 65 P.3d 479, 481 (Colo. 2002). In determining whether
summary judgment is proper, we give the nonmoving party the
benefit of all favorable inferences that may reasonably be drawn
from the undisputed facts, and all doubts must be resolved against
the moving party. Brodeur v. Am. Home Assurance Co., 169 P.3d
139, 146 (Colo. 2007).
¶ 15 The moving party has the initial burden to show that there is
no genuine issue of material fact. Greenwood Tr. Co. v. Conley, 938
P.2d 1141, 1149 (Colo. 1997). When a party moves for summary
judgment on an issue upon which the party would not bear the
burden of persuasion at trial, the moving party’s initial burden of
production may be satisfied by showing an absence of evidence in
the record to support the nonmoving party’s case. Casey v. Christie
Lodge Owners Ass’n, 923 P.2d 365, 366 (Colo. App. 1996). “[O]nce
the moving party has met its initial burden of production, the
burden shifts to the nonmoving party to establish that there is a
triable issue of fact.” Greenwood Tr., 938 P.2d at 1149. Failure to
8
meet that burden will result in summary judgment in favor of the
moving party. Casey, 923 P.2d at 366.
III. Applicable Law
¶ 16 The only issue in this case is whether, under the
circumstances here, Southeast is liable as a “controlling person” for
Sorenson’s fraudulent conduct pursuant to section 11-51-604(5)(b)
of the Colorado Act. No Colorado state court has articulated the
appropriate analytical framework for analyzing such claims.
Accordingly, Houston’s contention presents a matter of first
impression.
¶ 17 “In the wake of the 1929 stock market crash and in response
to reports of widespread abuses in the securities industry, the 73d
Congress enacted two landmark pieces of securities legislation: the
Securities Act of 1933 (1933 Act) and the Securities Exchange Act
of 1934 (1934 Act).” Cent. Bank of Denver, N.A. v. First Interstate
Bank of Denver, N.A., 511 U.S. 164, 170-71 (1994). Together, these
acts were designed to promote greater accountability in the
securities market by providing investors with express and implied
private rights of action against securities brokers and others —
9
effectively creating “an extensive scheme of civil liability.” Id. at
171.
¶ 18 As pertinent here, in addition to allowing fraud claims to be
asserted directly against individual securities brokers, the 1934 Act
permitted investors to assert fraud claims against persons,
including brokerage firms, who controlled the person directly liable
for the fraud.6 Specifically, section 20(a) of the 1934 Act provides:
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 (including to the
[SEC] in any action [it brings]), 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) (emphasis added).
6 “A broker-dealer is a person or company that is in the business of
buying and selling securities — stocks, bonds, mutual funds, and
certain other investment products — on behalf of its customers (as
broker), for its own account (as dealer), or both. Individuals who
work for broker-dealers — the sales personnel whom most people
call brokers — are technically known as registered representatives.”
Financial Industry Regulatory Authority, Brokers (2017), available
at https://perma.cc/PR7U-CTQQ.
10
¶ 19 Section 11-51-604(5)(b) of the Colorado Act is nearly
coterminous with section 78t(a). It reads:
Every person who, directly or indirectly,
controls a person liable [for securities fraud] is
liable jointly and severally with and to the
same extent as such controlled person, unless
such controlling person sustains the burden of
proof that such person acted in good faith and
did not, directly or indirectly, induce the act or
acts constituting the violation or cause of
action.
(Emphasis added).
¶ 20 Although the respective control person liability provisions in
the Colorado Act and the 1934 Act are relatively straightforward,
neither statute defines the term “control.” Indeed, the only
operative definition of “control” is found in the SEC’s regulations,
which define control as “the possession, direct or indirect, of the
power to direct or cause the direction of the management and
policies of a person, whether through the ownership of voting
securities, by contract, or otherwise.” 17 C.F.R. § 230.405 (2016).
However, even the SEC’s definition provides little guidance
regarding the scope of a broker-dealer’s control person liability.
Accordingly, the scope of “control” has been subject to extensive
interpretation by courts nationwide. See, e.g., Alan R. Bromberg &
11
Lewis D. Lowenfels, Securities Fraud §§ 7:339, 7:340, 7:345-:347,
7:358, Westlaw (2d ed., database updated Dec. 2016).
¶ 21 The seminal case construing the term “control” under section
20(a) of the 1934 Act, in the context of a broker-dealer/registered
representative relationship, is Hollinger v. Titan Capital Corp., 914
F.2d 1564, 1578 (9th Cir. 1990) (en banc). In Hollinger, the Court
of Appeals for the Ninth Circuit was presented with the question
whether a broker-dealer could be held liable for the fraudulent
conduct of its registered representative when that representative
was an independent contractor and not an employee. Id. at 1566.
The court answered that question in the affirmative, holding that,
as a matter of law, “a broker-dealer is a controlling person under
§ 20(a) with respect to its registered representatives.” Id. at 1573.
¶ 22 Importantly, however, in Hollinger, the Ninth Circuit
recognized that a broker-dealer is not in statutory control of, and
therefore not liable under section 20(a) of the 1934 Act for, all
fraudulent conduct by its registered representatives:
By recognizing this control relationship, we do
not mean that a broker-dealer is vicariously
liable under § 20(a) for all actions taken by its
registered representatives. Nor are we making
the broker-dealer the “insurer” of its
12
representatives, which is a result we [have
previously rejected] . . . as going beyond the
scope of the vicarious liability imposed upon a
broker-dealer by § 20(a).
Id. at 1575. For instance, the court explained that
[t]he broker-dealer may also, of course, rely on
a contention that the representative was acting
outside of the broker-dealer’s statutory
“control.” For example, [the broker-dealer]
could argue that when [the investors]
entrusted their money to [the registered
representative,] they were not reasonably
relying upon him as a registered representative
of [the broker-dealer], but were placing the
money with [him] for purposes other than
investment in markets to which [he] had
access only by reason of his relationship with
[the] broker-dealer.
Id. at 1575 n.26 (emphasis added).7 Hollinger itself did not involve
“selling away” or outside business. However, in acknowledging this
7 The Hollinger court’s language on the matter of outside business
reflects the general trend in the case law that “the courts do not
hold the firm liable. The rationale [for this result] is usually that
the claimed loss resulted from a private transaction consummated
outside of the normal customer-broker relationship and therefore
outside of the normal brokerage firm-salesman control
relationship.” Alan R. Bromberg & Lewis D. Lowenfels, Securities
Fraud § 7:341, Westlaw (2d ed., database updated Dec. 2016)
(citing Hauser v. Farrell, 14 F.3d 1338, 1343 (9th Cir. 1994)
(discussing evidence necessary to impose vicarious liability on
broker-dealer), overruled on other grounds by Cent. Bank v. First
Interstate Bank, 511 U.S. 164, 173 (1994) (holding that there is no
13
scenario, the court signaled that such a situation would inevitably
be presented to the court for consideration. Id.
¶ 23 The opportunity to do so was presented a few years later, in
Hauser. In Hauser, investors sued a registered representative for
securities fraud and, under section 20(a) of the 1934 Act, also sued
the representative’s brokerage firm. 14 F.3d at 1339. The primary
question at issue was whether the broker-dealer was entitled to
summary judgment on the grounds that it was not a controlling
person because, under the exception recognized in Hollinger, “the
representative was acting outside of the broker-dealer’s statutory
‘control.’” Id. at 1341 (quoting Hollinger, 914 F.2d at 1575 n.26).
The Ninth Circuit noted that it had “not previously had occasion to
consider what conduct by a representative is ‘outside of the
broker-dealer’s statutory control,’” id. at 1341 (quoting Hollinger,
914 F.2d at 1575 n.26), and it established the following four-part
private right of action for aiding and abetting under section 10(b) of
the 1934 Act, 15 U.S.C. § 78j); Carpenter v. Harris, Upham & Co.,
594 F.2d 388, 393-95 (4th Cir. 1979) (same); Sennott v. Rodman &
Renshaw, 474 F.2d 32, 39-40 (7th Cir. 1973) (same); Lake v. Kidder
Peabody & Co., No. S 75-147, 1978 WL 1101, at *12-15 (N.D. Ind.
May 22, 1978) (unpublished opinion) (same)).
14
test for determining whether a registered representative’s actions
were outside the scope of the broker-dealer’s control:
1. Whether the investor(s) reasonably relied on the
registered representative’s relationship with the
broker-dealer in making their investment.
2. Whether the investor(s) invested in markets other than
those promoted by the broker-dealer.
3. Whether the registered representative relied on its
relationship with the broker-dealer to access that
investment market on behalf of the investors.
4. Whether the broker-dealer knew of or had a financial
interest in the investor’s business with the registered
representative.
Id. at 1341-43.
¶ 24 In light of the undisputed evidence in the record in Hauser
and the four-part test announced therein, the court concluded that
the brokerage firm was not in control of — and, therefore, not liable
for — the fraudulent conduct of its registered representative.
Accordingly, the court affirmed summary judgment in the brokerage
firm’s favor. Id. at 1339, 1342-43. Together, Hollinger and Hauser
15
established the Ninth Circuit’s analytical framework for addressing
broker-dealer control person liability claims under section 20(a) of
the 1934 Act.
¶ 25 The Court of Appeals for the Tenth Circuit appears to have
adopted Hollinger’s basic concept of control person liability, albeit
not in the context of a broker-dealer/registered representative
relationship. For example, in First Interstate Bank of Denver, N.A. v.
Pring, 969 F.2d 891, 896-97 (10th Cir. 1992), rev’d on other grounds
sub nom. Cent. Bank of Denver, 511 U.S. 164, the Tenth Circuit
concluded that a plaintiff could establish a prima facie case of
control person liability where the plaintiff demonstrated that (1) a
primary violation of securities fraud occurred and (2) the defendant
had a control person relationship with the primary violator, subject
to the defendant’s good faith affirmative defense. Id. As noted,
however, Pring did not involve a broker-dealer relationship with its
registered representatives, nor has the Tenth Circuit addressed the
applicability of the Hauser “outside acts” exception.
¶ 26 The Federal District Court for the District of Colorado has
addressed these issues and, in doing so, adopted the Hauser
exception. Stat-Tech, 981 F. Supp. at 1337. In Stat-Tech, a
16
registered representative of a broker-dealer induced various
investors to purchase shares in a corporation by “grossly
overstat[ing]” its revenues. Id. at 1334. Less than a year later, the
corporation filed for bankruptcy. Id. Among other parties, the
investors sued the broker-dealer under section 20(a) of the 1934 Act
and section 11-51-604(5)(b) of the Colorado Act. Id. at 1336-37.
¶ 27 The broker-dealer moved for summary judgment, arguing that
the investors could not make a sufficient evidentiary showing that
the firm was in control of its registered representative for purposes
of control person liability. Id. In a lengthy written
recommendation, a federal magistrate judge — who oversaw the
pretrial litigation of the case — recommended that the district court
deny the motion for the following reasons.
¶ 28 First, the magistrate judge concluded that section 11-51-
604(5)(b) of the Colorado Act and section 20(a) of the 1934 Act were
substantially similar and, therefore, federal precedent was
persuasive in analyzing both claims. Id. at 1337. Next, the
magistrate judge applied Hollinger and Pring, stating that “[i]n order
to establish a prima facie case of control person liability, the
plaintiff must present evidence from which a reasonable fact finder
17
could conclude that (a) a primary violation of the securities laws
occurred; and (b) the defendant controlled the person or entity
committing the primary violation.” Id. (citing Pring, 969 F.2d at
896). Finally, the magistrate judge examined and applied the four-
part Hauser exception to determine whether the broker-dealer was
in control. Id. at 1338. In so doing, the magistrate judge
determined, contrary to the facts in Hauser, that the evidentiary
record supported a conclusion that (1) the plaintiffs relied on the
registered representative’s relationship with the brokerage firm in
deciding to make their investment and (2) the brokerage firm
promoted the same type of securities that were sold by its
representative to the plaintiffs. Id. The magistrate judge thus
concluded that, under Hauser, the broker-dealer was in control of
the representative and, therefore, recommended that the
defendant’s motion for summary judgment on that basis be denied.
Id. at 1338-39. The district court summarily adopted the
magistrate judge’s recommendation and analysis on this issue. Id.
at 1333.
18
IV. Analysis
¶ 29 Houston contends that Southeast was in control of Sorenson
with regard to his conduct underlying this case and that the district
court erred by applying the Hauser exception in its analysis. We
disagree.
¶ 30 For the following reasons, we are persuaded by the analyses
set forth in Hollinger, Hauser, and Stat-Tech, and conclude that,
together, these cases provide an instructive analytical framework
for analyzing control person liability claims, in the context of the
broker-dealer/registered representative relationship, under section
11-51-604(5)(b).
¶ 31 Initially, as noted above, the language of section
11-51-604(5)(b) of the Colorado Act is substantially similar to its
federal counterpart, section 20(a) of the 1934 Act. Therefore,
“[w]hile this court is not bound by federal law in the interpretation
of the Colorado Securities Act, we find that insofar as the provisions
and purposes of our statute parallel those of the federal
enactments, such federal authorities are highly persuasive.”
Lowery v. Ford Hill Inv. Co., 192 Colo. 125, 129, 556 P.2d 1201,
1204 (1976). Indeed, the Colorado Act specifically declares:
19
The provisions of this article and rules made
under this article shall be coordinated with the
federal acts and statutes to which references
are made in this article and rules and
regulations promulgated under those federal
acts and statutes, to the extent coordination is
consistent with both the purposes and the
provisions of this article.
§ 11-51-101(3), C.R.S. 2016.
¶ 32 Because no Colorado appellate case has considered the
applicable framework for control person liability claims under
section 11-51-604(5)(b), we conclude that the analysis set forth in
Stat-Tech, together with the Hollinger and Hauser framework,
constitute highly persuasive authority to decide the issue before us
in this case. See § 11-51-101(2); see also Lowery, 192 Colo. at
129-30, 556 P.2d at 1204.
¶ 33 In our view, the analyses and reasoning in these cases strike
an appropriate balance between the competing public policies
reflected in the Colorado Act, which are “to protect investors and
maintain public confidence in securities markets while avoiding
unreasonable burdens on participants in capital markets.”
§ 11-51-101(2); see also Hollinger, 914 F.2d at 1574-75. We further
note that section 11-51-604(5)(b) is “remedial in nature and is to be
20
broadly construed to effectuate its purposes.” § 11-51-101(2). This
balance recognizes that, in general, a broker-dealer will be a control
person of its registered representatives, thus promoting the
remedial purpose of the Colorado Act; but, at the same time, in the
context of outside business (or “selling away”), this balance furthers
the statutory policy articulated in Hollinger and Hauser, that
broker-dealers are not meant to be insurers of their registered
representatives in all cases.
¶ 34 Accordingly, we conclude that the framework for analyzing
claims under section 11-51-604(5)(b) is as follows: a plaintiff
establishes a prima facie case of control person liability where the
plaintiff demonstrates that (1) a primary violation of securities fraud
occurred and (2) the defendant was a controlling person. As a
general rule, a broker-dealer is statutorily in control of its registered
representatives as a matter of law. See Hollinger, 914 F.2d at 1574;
see also Pring, 969 F.2d at 897. Of course, even when a
broker-dealer is found to be a controlling person, liability is still
subject to the broker-dealer’s affirmative defense of good faith.
§ 11-51-604(5)(b).
21
¶ 35 However, we also recognize an exception to control where, as
in Hauser, a broker-dealer is not in statutory control of its
registered representative’s underlying conduct when all of the
following factors are undisputed:
1. The plaintiff(s) did not reasonably rely on the registered
representative’s relationship with the broker-dealer in
making their investment.
2. The plaintiff(s) invested in markets other than those
promoted by the broker-dealer.
3. The registered representative did not rely on its
relationship with the broker-dealer to access the
securities market in order to sell the subject securities to
the plaintiff(s).
4. The broker-dealer did not know of, or have a financial
interest in, the investor’s business with the registered
representative.
See Hauser, 14 F.3d at 1342-43; Stat-Tech, 981 F. Supp. at 1337;
see also Fraioli v. Lemcke, 328 F. Supp. 2d 250, 273 (D.R.I. 2004)
(finding no control person liability for a broker-dealer where the
plaintiffs dealt exclusively with the registered representative, relied
22
on their close relationship with him, and where the broker-dealer
was unaware of, and did not benefit from, the transaction at issue);
Mosley v. Am. Exp. Fin. Advisors, Inc., 230 P.3d 479, 485-87 (Mont.
2010) (applying Hauser to determine that a registered
representative’s actions were “outside the [brokerage] firm’s
control”). In such cases, the broker-dealer, as a matter of law,
cannot be a controlling person of its registered representative.
¶ 36 We now apply this analytical framework to the undisputed
facts of this case.
¶ 37 Here, the parties do not dispute that Sorenson’s conduct in
this case involved a primary violation of securities fraud under the
Colorado Act. Thus, the only remaining issue is whether Southeast
was a controlling person under section 11-51-604(5)(b). The district
court found, and — based on our de novo review of the record, see
Georg, 178 P.3d at 1212 — we agree, that the following facts are
undisputed:8
Sorenson hid his conduct in this case from Southeast, by
failing to notify Southeast of his outside securities sales
8 Indeed, Houston appears to concede that these facts are
undisputed in her briefs on appeal.
23
on behalf of CFS and by using undisclosed, private e-mail
accounts to engage in the subject transactions.
No one from Southeast knew about Sorenson’s
involvement with Houston.
Sorenson did not use Southeast’s access to the securities
markets to promote or conduct his deals with Houston
(through Hornick), since CFS was a private venture
created and owned by Sorenson.
Southeast never held any of Houston’s money because
Sorenson never opened a Southeast account for Houston.
Southeast accordingly had no financial interest in
Houston’s investments with Sorenson.
Prior to February 2014, Houston had not heard of
Southeast, nor did she have any knowledge of Sorenson’s
relationship with Southeast. Therefore, she did not rely
on Sorenson’s relationship with Southeast in deciding to
invest with Sorenson, indirectly through Hornick, in
2013.
¶ 38 Thus, under the Hauser/Stat-Tech control person analysis
applicable here, we conclude that Southeast was not in control of
24
Sorenson with respect to his conduct underlying this case. Even
construing all reasonable inferences in Houston’s favor, there is
simply no genuine issue of material fact regarding any of the four
factors of the “outside acts” exception and, therefore, Southeast was
entitled to judgment as a matter of law on the issue of control.
C.R.C.P. 56(c); W. Elk Ranch, 65 P.3d at 481. We accordingly
perceive no error by the district court in applying the
Hauser/Stat-Tech analysis or granting Southeast’s motion for
summary judgment on this basis.
¶ 39 Notwithstanding the substantial persuasive authority on the
issue of control discussed above, Houston contends that we should
not adopt the Hauser/Stat-Tech exception because it does not take
into consideration Southeast’s affirmative obligations to adequately
supervise Sorenson. Indeed, the heart of Houston’s contention on
appeal is that a broker-dealer’s failure to supervise its registered
representatives is relevant in the control analysis, and we should
include it in the analytical framework for addressing such claims,
even in the context of outside business or “selling away.” We
disagree.
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¶ 40 To the extent that a control person has purportedly failed to
adequately supervise its registered representatives — in
contravention of SEC, Financial Industry Regulatory Authority, or
state regulations, or internal policies — we conclude that such
evidence is more appropriately considered in analyzing a
broker-dealer’s affirmative good faith defense under section
11-51-604(5)(b).9 Our view on this issue comports with the majority
of authorities who have addressed it. See, e.g., Bromberg &
Lowenfels at § 7:358 (“The broker-dealer’s defense that it
established, maintained and enforced a proper system of
supervision and control” is relevant to its good faith defense under
section 20(a) of the 1934 Act.).
¶ 41 Here, because Houston failed to establish Southeast’s control
over Sorenson under the Hauser/Stat-Tech exception, we need not
9 We express no opinion on the relevance of such alleged failures as
to common law claims against the broker-dealer. Cf. Dolin v.
Contemporary Fin. Sols., Inc., No. 08-CV-00675-WYD-BNB, 2010 WL
5014498, at *3-6 (D. Colo. Dec. 3, 2010) (unpublished opinion)
(discussing the broker-dealer’s supervisory obligations in
addressing the plaintiff’s various common law claims against it);
Asplund v. Selected Invs. in Fin. Equities, Inc., 103 Cal. Rptr. 2d 34,
41-51 (Cal. Ct. App. 2000) (discussing the broker-dealer’s
supervisory obligations in relation to its purported duty of care
under plaintiff’s negligence per se claim against it).
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determine how, if at all, Southeast’s alleged failure to adequately
supervise Sorenson would impact any good faith defense it might
have raised under section 11-51-604(5)(b).
¶ 42 We also reject Houston’s argument in her reply brief that
consideration of the broker-dealer’s knowledge under the fourth
factor of the Houser exception effectively eviscerates the need for the
broker-dealer’s affirmative good faith defense under section
11-51-604(5)(b). To the contrary, where the evidence shows that
any one of the four factors of the outside business exception is in
dispute, the exception would be inapplicable and summary
judgment for the broker-dealer would be inappropriate. See
Stat-Tech, 981 F. Supp. at 1338-39. In such circumstances, where
a plaintiff establishes a prima facie case of control person liability,
the broker-dealer could still raise the good faith affirmative defense,
and all relevant evidence of the broker-dealer’s supervision (or lack
thereof) could be considered in the analysis of that defense.
V. Conclusion
¶ 43 The judgment is affirmed.
JUDGE DAVIDSON and JUDGE NIETO concur.
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