## Facts

- Pearl Mae Blackburn, an elderly widow with no business experience and no family advisers, retained securities salesman Long as her investment adviser after her husband’s death.
- Long, while employed as a registered representative of Walston & Co., regularly visited Blackburn, recommended purchases and sales, and executed her securities transactions through the firm.
- Long left Walston and shortly thereafter became a registered representative of Dean Witter & Co.; he continued to act as Blackburn’s financial counselor while associated with that firm.
- Long induced Blackburn to place money into a purported “American Commercial Investment Company,” representing it as a large construction business willing and able to pay 10% interest.
- Blackburn raised funds by selling legitimate securities through Long acting as agent for his brokerage employer; Long provided informal receipts and later promissory notes for the “investment.”
- Unlike her legitimate securities trades, the American Commercial transactions did not appear on the brokerage firms’ monthly statements and used nonstandard paperwork; when questioned, Long offered explanations (including that company stationery was being printed).
- American Commercial was fictitious, and Long misappropriated Blackburn’s funds.
- Blackburn sued the brokerage firms, asserting they were liable because their conduct and Long’s position created ostensible (apparent) authority for his solicitations.

## Issues

1. Whether the brokerage firms were liable for Long’s fraudulent solicitations and misrepresentations under ostensible (apparent) authority, despite the transactions being off-book and unauthorized.
2. Whether the irregular features of the transactions made Blackburn’s reliance on Long’s apparent authority unreasonable as a matter of law.

## Decision

- The Court of Appeal affirmed the judgment for Blackburn.
- The court held substantial evidence supported the finding that Long acted with ostensible authority created by the brokerage firms’ manifestations and by the position of trust they gave him.
- The court rejected the argument that the off-book nature of the scheme and paperwork irregularities compelled a finding that Blackburn’s reliance was unjustified.

## Legal Principles

- A principal may be liable for an agent’s fraudulent misrepresentations made in a transaction that appears to be within the agent’s authority, even if the agent acts solely for personal benefit and contrary to actual authority.
- Ostensible (apparent) authority exists when the principal’s conduct causes a third party reasonably to believe the agent is authorized; liability may follow when the third party acts in good faith reliance.
- Whether reliance is reasonable in light of suspicious circumstances is generally a fact question; an appellate court will uphold the finding if supported by substantial evidence.
- When a principal places an agent in a position enabling the agent to gain a customer’s trust and deal with the customer as the firm’s representative, the principal may bear the loss resulting from the agent’s abuse of that position.

## Conclusion

The court held the brokerage firms responsible for their representative’s fraudulent solicitation of a fictitious investment because the firms’ placement of the representative in a trusted advisory role supported a finding of ostensible authority and the customer’s good-faith reliance, notwithstanding off-book execution and irregular documentation.


Blackburn v. Witter, 201 Cal. App. 2d 518 (Ct. App. 1962)