Atlantic Financial Management, Inc. Securities Litigation, In re

• Decision Date: 19 February 1986
• Docket Number: No. 85-1454,85-1454
• Citation: 784 F.2d 29
• Parties: , Fed. Sec. L. Rep. P 92,482 In re ATLANTIC FINANCIAL MANAGEMENT, INC. Securities Litigation, Petitioners.
• Court: U.S. Court of Appeals — First Circuit

Page 29

784 F.2d 29

54 USLW 2468, Fed. Sec. L. Rep. P 92,482

In re ATLANTIC FINANCIAL MANAGEMENT, INC. Securities Litigation, Petitioners.

No. 85-1454.

United States Court of Appeals First Circuit.

Argued Nov. 14, 1985.

Decided Feb. 19, 1986.

Jerome Gotkin, with whom Gordon P. Katz, Steven M. Sayers, Widett, Slater & Goldman, P.C., Alvin K. Hellerstein, and Stroock & Stroock & Lavan, were on brief, for appellant AZL Resources, Inc.

Peter J. Schneider with whom Lawrence G. Cetrulo, Burns & Levinson, Samuel Adams and Warner & Stackpole, were on brief, for appellees.

Before COFFIN and BREYER, Circuit Judges, and WYZANSKI, ^* Senior District Judge.

BREYER, Circuit Judge.

This appeal presents a certified question, 28 U.S.C. Sec. 1292(b), arising in a Securities Act misrepresentation case. Securities Exchange Act of 1934, Sec. 10(b), 15 U.S.C. Sec. 78j(b); Rule 10b-5, 17 C.F.R. Sec. 240.10b-5. The plaintiffs in the case claim that Maurice Strong, the chairman of AZL Resources, Inc., misrepresented certain facts as a result of which they bought AZL stock and later (when the stock's price declined) lost money. The plaintiffs want to recover damages for the misrepresentation, not only from Strong, but also from AZL, Strong's corporate employer. They assert a common law theory of agency--based on "apparent authority"--as a ground for holding the corporation 'vicariously' liable for Strong's misdeeds.

The certified question concerns the relationship between a special section of the Securities Act of 1934, section 20(a), 15 U.S.C. Sec. 78t(a), and various common law theories of vicarious liability (of which "apparent authority" is one). That section reads as follows:

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.

(Emphasis added.)

The significance of this section here lies in the contrast between its proviso and the common law. The proviso requires a finding of liability unless the controlling person 1) "acted in good faith" and 2) did not "induce" the violation. By way of contrast, common law agency theories may impose liability upon a principal or an employer without these two preconditions. The case before us asks whether the Securities Act means that section 20(a) is an exclusive remedy. That is to say, does the existence of this section foreclose holding a principal (say, a corporation) or an employer (who 'controls' an agent or employee) 'vicariously' liable when the proviso's two conditions are not met?

The circuits seem to be split about the proper answer to this question. The Second, Fourth, Fifth, Sixth, Seventh and Tenth Circuits have held that section 20(a) does not constitute an exclusive substitute for vicarious liability that might otherwise exist. E.g., Marbury Management, Inc. v. Kohn, 629 F.2d 705, 712-16 (2d Cir.), cert. denied, 449 U.S. 1011, 101 S.Ct. 566, 66 L.Ed.2d 469 (1980); John Hopkins University v. Hutton, 422 F.2d 1124, 1130 (4th Cir.1970), cert. denied after later appeal, 416 U.S. 916, 94 S.Ct. 1622, 40 L.Ed.2d 118 (1974); Paul F. Newton & Co. v. Texas Commerce Bank, 630 F.2d 1111, 1118-19 (5th Cir.1980); Holloway v. Howerdd, 536 F.2d 690, 694-95 (6th Cir.1976); Fey v. Walston & Co., Inc., 493 F.2d 1036, 1051-52 (7th Cir.1974); Kerbs v. Fall River Industries, Inc., 502 F.2d 731, 740-41 (10th Cir.1974). The Ninth, and (with exceptions) the Third Circuits, have held the contrary. Zweig v. Hearst Corp., 521 F.2d 1129, 1132-33 (9th Cir.), cert. denied, 423 U.S. 1025, 96 S.Ct. 469, 46 L.Ed.2d 399 (1975); Sharp v. Coopers & Lybrand, 649 F.2d 175, 180-84 (3d Cir.1981), cert. denied, 455 U.S. 938, 102 S.Ct. 1427, 71 L.Ed.2d 648 (1982); Rochez Brothers, Inc. v. Rhoades, 527 F.2d 880, 884-86 (3d Cir.1975). We have not previously considered whether, despite section 20(a), principals may be held 'vicariously' liable for the 'securities related' misrepresentations of their agents. But cf. Holmes v. Bateson, 583 F.2d 542, 560 (1st Cir.1978) (discussing related questions). We now consider this question; and we join the majority expressly--at least in respect to the common law "apparent authority" theory here at issue.

Because there are several different common law agency theories that may lead to 'vicarious liability' and because not all courts use the same terminology in respect to each, it may help to clarify the exposition of our reasons if we divide this opinion into two parts. First, we shall explain the basis for liability that would exist in this, and similar cases, in the absence of section 20(a). Second, we shall ask whether, or when, the existence of section 20(a) might make a difference.

I

In the absence of section 20(a) a corporate principal's (or employer's) 'vicarious' liability for the misrepresentations of an agent (typically an employee) must find its source in Securities Act Sec. 10(b)--the statutory provision that makes it "unlawful for any person, directly or indirectly ... to use ... any manipulative or deceptive device" in connection with the purchase or sale of securities. The "majority rule" circuits have at least implicitly read these words as encompassing some kinds of vicarious liability. (See cases cited at pp. 30-31, supra.) And, the Supreme Court, while restricting the liability of primary actors to persons who act with "scienter," Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976), has nonetheless cited with approval cases imposing 'vicarious' liability upon corporations who employ those who knowingly or recklessly make misrepresentations. American Society of Mechanical Engineers, Inc. v. Hydrolevel Corp., 456 U.S. 556, 568, 102 S.Ct. 1935, 1943, 72 L.Ed.2d 330 (1982) (hereinafter ASME), citing with approval Holloway, supra; Kerbs, supra.

These legal facts are not surprising. The common law has long imposed vicarious liability upon principals arising from torts committed by their agents. Whether broad language, such as that found in the Securities Act, embraces such principles is a matter of statutory interpretation based upon congressional intent. ASME, 456 U.S. at 569-70, 102 S.Ct. at 1944-45. And, the courts have tended to read congressional statutes that impose tort-like liability to embrace at least some of these well established common law agency principles, where language permits and doing so furthers basic statutory purposes. Id. at 568, 102 S.Ct. at 1943 (liability imposed upon principals for antitrust violations committed by agents). The courts must also decide which common law rules apply under the statutory scheme. And, it will help our exposition if, for this purpose, we divide relevant agency liability rules into three different kinds.

First, the common law typically holds principals liable when an agent's tortious representation is actually authorized, whether the agent's authority be express or implied. Restatement (Second) of Agency Secs. 7, 257 (1958); W. Seavey, Handbook of the Law of Agency Sec. 91 (1964). Such liability is not of great practical importance when the principal is a corporation, however, for a corporation (its charter, bylaws, directors' actions, etc.) rarely, if ever, actually authorizes torts. (Indeed, were it to do so, the corporation might be 'directly' rather than 'vicariously' liable.)

Second, a corporation's liability for an agent's misrepresentations may rest upon a theory of "apparent authority." Restatement (Second) of Agency Sec. 8; cf. id. at Sec. 8B (a related, but distinguishable theory of 'estoppel'). The agent's tortious action, while not actually authorized by the corporation, appears so to those adversely affected. Vicarious "[l]iability is based upon the fact that the agent's position facilitates the consummation of the fraud, in that from the point of view of the third person the transaction seems regular on its face and the agent appears to be acting in the ordinary course of the business provided to him." ASME, 456 U.S. at 566, 102 S.Ct. at 1942, quoting with approval from Restatement (Second) of Agency Sec. 261, comment a, p. 571. Courts have commonly imposed liability based on "apparent authority" upon a corporation in both state and federal "misrepresentation" cases--particularly when the person making the misrepresentation is an important corporate official. See 10 R. Eickhoff, Fletcher on Corporations Sec. 4886 (1978 & Supp.1985).

A third basis for imposing vicarious liability consists of what commentators have called "inherent agency powers " or (in the master/servant context) "respondeat superior" or sometimes simply "the agent's position." Restatement (Second) of Agency Sec. 8A; W. Seavey, supra, at Sec. 8F and Sec. 58. We shall for convenience refer to this basis of liability as "status based" (in contrast with "authority based") liability. This non-authority based vicarious liability rests upon certain important social and commercial policies. See, e.g., W. Seavey, supra, at Sec. 58 ("[T]he business enterprise should bear the burden of the losses created by the mistakes or overzealousness of its agents [because such liability] stimulates the watchfulness of the employer in selecting and supervising the agents."); and at Sec. 61 ("[T]he principal, [having] ... the opportunity of investigating the agent ... should guarantee the [agent's] honesty"). The precise scope of "status based" liability is unclear, with liability often depending upon the relationship of the social policy to the type of "principal/agent" circumstance at hand. Id. at Sec. 8F. A "master," for example, is not held vicariously liable (on these grounds) for the torts of a "servant" where the...