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

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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