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Houston v. Southeast Investments N.C., Inc.

Court of Appeals of Colorado, Seventh Division

May 18, 2017

Susan Houston, Plaintiff-Appellant,
Southeast Investments N.C., Inc., Defendant-Appellee.

         City and County of Denver District Court No. 14CV32252 Honorable John M. McMullen, Judge

          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

          Davidson* and Nieto [*] , JJ., concur.



         ¶ 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, 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.

         ¶ 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 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.

         ¶ 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 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 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 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 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 - 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 ...

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