Hedquist v. Merrill Lynch

• Decision Date: 02 February 1999
• Docket Number: No. A98A1766.,A98A1766.
• Citation: Hedquist v. Merrill Lynch, 236 Ga. App. 181, 511 S.E.2d 558 (Ga. App. 1999)
• Parties: HEDQUIST et al. v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC. et al.
• Court: Georgia Court of Appeals

511 S.E.2d 558

236 Ga. App. 181

HEDQUIST et al. v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC. et al.

No. A98A1766.

Court of Appeals of Georgia.

February 2, 1999.

Sumner & Anderson, William E. Sumner, Rosemary S. Armstrong, Atlanta, for appellants.

Rogers & Hardin, Brett A. Rogers, Richard H. Sinkfield, Atlanta, for appellees.

HAROLD R. BANKE, Senior Appellate Judge.

John H. Hedquist III, individually and as trustee of the John H. Hedquist III & Associates Profit Sharing Plan & Trust, and John H. Hedquist, Jr. (collectively "Hedquist") sued Merrill Lynch, Pierce, Fenner & Smith, Inc. ("Merrill Lynch"), Jack Camarda, Paul Brostrom, Suzanne D. Cook, and five members of the board of directors of Barton Industries, Inc. ("Barton"), an oil services company headquartered in Shawnee, Oklahoma. Merrill Lynch was sued for fraud, negligent misrepresentation, and for criminal violations of the Georgia and Florida Racketeer Influenced & Corrupt Organization ("RICO") statutes. Hedquist premised Merrill Lynch's liability on acts of fraud and negligent misrepresentation allegedly committed by Suzanne D. Cook, a former Merrill Lynch vice president and securities analyst. Hedquist claimed that Cook made false statements to John H. Hedquist III ("JHHIII") and also authorized the dissemination of false and misleading press releases on December 14 and 15, 1990, about Barton's financial health. These press statements were designed to minimize the seriousness of Barton's financial difficulties. Hedquist asserted that by relying upon the misleading press releases, it suffered losses by not selling its Barton stock before Barton filed bankruptcy.

The trial court granted Merrill Lynch's motion to dismiss finding that "the claims against Defendant Merrill Lynch are predicated on the purported acts of Suzanne Cook, a former Merrill Lynch employee ... [whom] Plaintiffs voluntarily dismissed with prejudice...."

Hedquist sued Camarda and Brostrom, the owners of Financial Marketing Services and the former employer of JHHIII, a broker registered with the Securities & Exchange Commission ("SEC"). The record shows that in late 1989, Camarda and Brostrom loaned $750,000 to JHHIII to purchase Barton stock. From October 1990 through the end of December 1990, Camarda and Brostrom also invested heavily in Barton on the advice of JHHIII. In the fall of 1990, JHHIII informed them that he had inside information about possible "padding" of Barton's inventory. JHHIII claimed that they assured him "they would investigate the matter." During November and December, JHHIII, Camarda and Brostrom discussed their mutual misgivings about Barton.

In early December, Coopers & Lybrand, independent auditors, documented and disclosed Barton's serious financial problems. JHHIII knew about the negative findings of this audit which were set forth in an early December press release not at issue here. In the meantime, JHHIII had been pursuing his own investigation and articulated his concerns in highly critical, detailed letters to C.W. Earl Johnson, Barton's president.¹

Notwithstanding JHHIII's knowledge of Barton's problems, Hedquist sued Camarda and Brostrom for fraud and negligent misrepresentation for making false statements to JHHIII about Barton's financial situation. But Camarda and Brostrom were not members of Barton's board of directors, and they testified that they "had no part in drafting, determining the content of, approving or deciding to issue" the press releases. No evidence showed otherwise. Determining that Hedquist failed to prove the existence of any genuine disputed issue of material fact, the trial court found Camarda and Brostrom were entitled to judgment as a matter of law. Hedquist appeals both judgments. Held:

1. Hedquist contends that the trial court erred in dismissing its complaint against Merrill Lynch due to its voluntary dismissal of Cook. The threshold inquiry is whether Merrill Lynch's liability was based solely on the doctrine of respondeat superior for the actions of its servant, Cook, or premised on the theory of joint and several liability as joint tortfeasors. Where the liability of the master "is purely derivative and dependent entirely upon the doctrine of respondeat superior, a judgment on the merits in favor of the servant and against the third person is res judicata in favor of the master in a suit by such third person. [Cits.]" Hosp. Auth. of Calhoun County v. Walker, 224 Ga.App. 163, 165(2), 480 S.E.2d 849 (1996). A dismissal with prejudice operates as an adjudication on the merits. Marchman & Sons, Inc. v. Nelson, 251 Ga. 475, 477, 306 S.E.2d 290 (1983).

Notwithstanding Hedquist's use of the phrases "jointly and severally liable" and "vicarious liability," all of the alleged acts of misconduct asserted against Merrill Lynch were rooted in the doctrine of respondeat superior stemming from the alleged misconduct and actions of Cook.² Having dismissed Cook with prejudice, Hedquist could not maintain its tort claims against Merrill Lynch which derive solely from Cook's purported misconduct. Harris v. Hanna Creative Enterprises, 208 Ga.App. 549, 550(1), 430 S.E.2d 846 (1993). Compare Rowland v. Vickers, 233 Ga. 67, 68, 209 S.E.2d 592 (1974).

RICO liability arises solely from the commission of certain predicate acts which must constitute independent criminal violations of one of the statutes specified in the RICO act. OCGA § 16-14-4(b); Fla. Stat. § 895.03(3); Larson v. Smith, 194 Ga.App. 698, 699, 391 S.E.2d 686 (1990). RICO requires a "pattern of racketeering activity," not isolated incidents. OCGA § 16-14-3(8) and (9)(A)(xxi); Fla. Stat. § 895.02(4) ("Pattern" means "at least two incidents of racketeering conduct ... not isolated incidents."). See Emrich v. Winsor, 198 Ga.App. 333, 401 S.E.2d 76 (1991).

Hedquist's Georgia and Florida RICO claims against Merrill Lynch were predicated on the misleading December press releases. But these releases were public statements approved by Barton's board of directors and disseminated by Barton, not Merrill Lynch. See Guthrie v. Gen. Motors Acceptance Corp., 172 Ga.App. 260, 262(2), 322 S.E.2d 752 (1984) (absent evidence of master-servant relationship, master cannot be held vicariously liable for another's alleged fraud under the doctrine of respondeat superior). No evidence showed that Barton was acting on behalf of Merrill Lynch when Barton released the information. Moreover, Hedquist's allegations, if proven, would show, at most, isolated misconduct, not a pattern of proscribed criminal activity by Merrill Lynch. Larson, 194 Ga.App. at 699,391 S.E.2d 686 (interrelated pattern of criminal activity required); see Cobb v. Kennon Realty Svcs., 191 Ga.App. 740, 741(2), 382 S.E.2d 697 (1989). Thus, assuming the truth of the allegations in the...