Klein v. Oppenheimer & Co., Inc.

• Decision Date: 24 March 2006
• Docket Number: No. 91,778.,91,778.
• Citation: 130 P.3d 569
• Court: Kansas Supreme Court
• Parties: Roger KLEIN, Appellant, v. OPPENHEIMER & CO., INC., Appellee.

Page 569

130 P.3d 569

Roger KLEIN, Appellant, v. OPPENHEIMER & CO., INC., Appellee.

No. 91,778.

Supreme Court of Kansas.

March 24, 2006.

COPYRIGHT MATERIAL OMITTED

Joseph C. Long, of Norman, Oklahoma, argued the cause, and Diane A. Nygaard, of Leawood, and Susan F. Meagher, of Leawood, were with him on the briefs for appellant.

Tracy J. Cowan, of Thompson Coburn LLP, of St. Louis, Missouri, argued the cause, and David Wells and Karen M. Volkman, of the same firm, and Roger N. Walter, of Morris, Laing, Evans, Brock & Kennedy, of Topeka, were with him on the brief for appellee.

The opinion of the court was delivered by ALLEGRUCCI, J.:

The principal issue in this case is the liability of a clearing broker for the sale of unregistered securities under the Kansas Securities Act. It is an issue of first impression.

Roger Klein had a brokerage account with L.T. Lawrence. L.T. Lawrence, functioning as an originating or introducing broker, sold unregistered securities through Oppenheimer & Co., Inc. (Oppenheimer), a clearing broker, to Klein. The sale of nonexempt, unregistered securities is prohibited by K.S.A. 17-1255. Klein sued Oppenheimer under K.S.A. 17-1268(a) and (b) of the Kansas Securities Act. (Note: Effective July 1, 2005, the entire Kansas Securities Act was repealed and replaced by the new Kansas Uniform Securities Act, K.S.A.2005 Supp. 17-12a101 et seq. The provisions of that Act are not relevant to this appeal.) On cross-motions for summary judgment, the district court ruled in favor of Oppenheimer. Klein appealed. This court granted Oppenheimer's motion to transfer the appeal from the Court of Appeals. K.S.A. 20-3017.

The issues on appeal are:

1. Is Oppenheimer liable under K.S.A. 17-1268(a) for aiding and abetting L.T. Lawrence in the sale of unregistered securities?

2. Is Oppenheimer liable under K.S.A. 17-1268(b) for "materially aiding" L.T. Lawrence in the sale of unregistered securities?

3. Were the securities at issue exempt from registration?

4. Were the transactions that occurred on and after October 11, 1996, preempted by the National Securities Markets Improvement Act of 1996, 15 U.S.C. § 78a et seq. (2000)?

Procedural history. This action originally was filed in 1999 by Klein and his uncle, Daniel Brenner, who died in 2002. L.T. Lawrence is currently or has been in bankruptcy and is no longer a named defendant in this case. Klein and Oppenheimer are the only remaining parties.

This is the second time the case has been before this court. In the first instance, Klein and Brenner appealed from the entry of summary judgment in favor of Oppenheimer on the ground that a clearing broker was not liable for the sale of unregistered securities under New York law. Brenner v. Oppenheimer & Co., 273 Kan. 525, 44 P.3d 364 (2002). Appellants argued that the choice of law provision in Oppenheimer's standard form brokerage agreement was unenforceable and that Kansas law should be applied. Concluding that Kansas law governed, the court reversed and remanded for further proceedings. 273 Kan. at 549, 44 P.3d 364.

Governing Kansas statutes. The purpose of the Kansas Securities Act, K.S.A. 17-1252 et seq., "is to place the traffic of promoting and dealing in speculative securities under rigid governmental regulation and control to protect investors, thereby preventing, so far as possible, the sale of fraudulent and worthless speculative securities." Activator Supply Co. v. Wurth, 239 Kan. 610, 615, 722 P.2d 1081 (1986). The Act generally accomplishes its purpose by requiring registration of securities, K.S.A. 17-1256, K.S.A. 17-1257, and K.S.A. 17-1258, and prohibiting the sale of unregistered securities, K.S.A. 17-1255. Certain securities and transactions are exempt from the registration requirement. K.S.A. 17-1261 and K.S.A. 17-1262. An action to enforce the Kansas Securities Act may be prosecuted by the Kansas Securities Commissioner under K.S.A. 17-1266, and K.S.A. 17-1268 authorizes a private right of action.

District court decision. Upon remand from the first appeal, the parties filed cross-motions for summary judgment, which were decided entirely in Oppenheimer's favor. The district court first concluded that Oppenheimer could not be liable for the sale of unregistered securities under K.S.A. 17-1268(a) as an aider and abettor. Second, the district court concluded that, even if there is secondary liability under 17-1268(a) for the sale of unregistered securities, the stipulated facts would not support a finding that Oppenheimer was liable as an aider and abettor. Third, the district court concluded that Oppenheimer was not jointly and severally liable under 17-1268(b) because it did not "materially aid" in the sales of unregistered securities within the meaning of the statute. Fourth, the district court concluded that all of the securities at issue, with the exception of MetroGolf, Inc. (MetroGolf), were exempt under K.S.A. 17-1262(b) from the registration requirements. The district court did not address the question whether the security registration requirements of the Kansas Securities Act were preempted by the National Securities Markets Improvement Act of 1996.

Factual statement. For their cross-motions for summary judgment, the parties filed a Joint Statement of Stipulated Undisputed Facts. The following facts are drawn from the stipulated facts and the district court's decision:

L.T. Lawrence was an introducing broker-dealer registered with the Kansas Department of Securities. Oppenheimer, also a broker-dealer registered with the Kansas Department of Securities, acted as a clearing broker for L.T. Lawrence.

In its memorandum opinion, the district court described the functions of an introducing broker and a clearing broker as follows:

"A buyer opens a brokerage account with a broker, who is the agent of the buyer. When the buyer tells his broker that he wishes to purchase a particular stock, whether it is a solicited or unsolicited purchase, the actual stock purchase happens one of two ways. Larger brokerage houses have a seat on the stock exchange and they buy directly for their clients. Smaller brokerage firms frequently do not have a seat on the exchange, so they cannot make direct purchases for their clients. Instead, they contract with one of the larger houses which does have a seat and the larger broker actually executes the purchase. The larger firm is known as the `clearing broker.' The smaller firm is known as the `introducing broker.'"

In 1993, Oppenheimer and L.T. Lawrence entered into a clearing agreement that specified what services and functions Oppenheimer was to provide to L.T. Lawrence. Oppenheimer agreed to provide services such as (a) accepting instructions from L.T. Lawrence for the creation of customer account records in Oppenheimer's automated data system, (b) preparing and transmitting confirmations of trades and monthly account statements to L.T. Lawrence and/or its customers, and (c) extending and maintaining margin credit to L.T. Lawrence customers, where required. Oppenheimer agreed to hold cash and securities received for the L.T. Lawrence accounts and collect and disburse dividends and interest and process reorganization and voting instructions with respect to securities held in custody. Oppenheimer also agreed to (a) receive and deliver cash and securities from, to, and for the L.T. Lawrence accounts in accordance with instructions from L.T. Lawrence or written instruments from L.T. Lawrence customers and be responsible for transferring securities for L.T. Lawrence accounts as directed by L.T. Lawrence customers, (b) extend and maintain margin credit to L.T. Lawrence customers to the extent transactions for them require the extension of credit but subject to Oppenheimer margin policies and applicable margin regulations, and (c) be responsible for calculating margin requirements and initiating margin calls and for the administration of the rehypothecation and lending of securities in customer accounts. ("Hypothecation" is the pledging of something as security without delivery of title or possession. Black's Law Dictionary 759 [8th ed.2004]).

The clearing agreement was a fully disclosed agreement, meaning that the accounts were carried in the customers' names with a notation on Oppenheimer books that the account came to Oppenheimer through L.T. Lawrence. Oppenheimer sent confirmation notices, account statements, and margin calls directly to the customers. Form letters sent from Oppenheimer to investors notifying them of a margin call were addressed "Dear Client." Customers were to send all funds directly to Oppenheimer.

L.T. Lawrence was required by the clearing agreement to provide the following disclosure statement to its customers:

"[Oppenheimer] does not control, audit or otherwise supervise the activities of [L.T. Lawrence] or its registered representatives or employees. [Oppenheimer] does not verify information provided by [L.T. Lawrence] regarding your account or transactions processed for your account nor undertake responsibility for reviewing the appropriateness of transactions entered by [L.T. Lawrence] on your behalf."

Oppenheimer reserved the right to refuse any transactions entered for a customer account.

Under the clearing agreement, L.T. Lawrence was required to maintain compliance and supervisory procedures adequate to assure the compliance of its registered representatives and employees with all federal and state securities laws. At the time of the transactions at issue, Oppenheimer had a reasonable belief that L.T. Lawrence, its agents, and its employees were maintaining compliance and supervisory procedures that were adequate to assure compliance by L.T. Lawrence's registered representatives and employees with all federal and state securities laws.

Oppenheimer did not solicit, recommend, or offer the sale or purchase of any securities purchased by Klein. Oppenheimer cleared all the trades in Klein's account, but acted in...