## Facts

- Nineteen Illinois investors and one Illinois corporation bought thousands of shares of C.I. Resources stock between July 1983 and August 1984 through Patten Securities Corporation and its salesperson, Saul Ring.
- Patten acted as market maker for the stock and solicited and executed the sales to plaintiffs.
- Neither the securities nor Patten and Ring were registered in Illinois as required by the Illinois Securities Act of 1953.
- Bear, Stearns served only as Patten’s clearing broker, performing back-office functions such as preparing confirmations and records, handling settlement and funds flows, and transmitting stock certificates and account statements.
- Bear, Stearns did not solicit purchases, recommend the stock, provide investment advice, or otherwise communicate with plaintiffs beyond disclosing the clearing arrangement.
- Bear, Stearns was paid a flat per-transaction clearing fee and did not share in selling commissions.

## Issues

1. Whether a clearing broker that performs only routine clearing and settlement functions “participated or aided in any way” in unlawful securities sales under § 13 of the Illinois Securities Act.
2. Whether such a clearing broker is a person “by or on behalf of whom said sale was made” under § 13, making it jointly and severally liable for the selling broker’s violations.

## Decision

- The Seventh Circuit affirmed the judgment for Bear, Stearns.
- The court held that Bear, Stearns’ ministerial clearing services did not constitute statutory “participation” or “aid” in making the sales.
- The court held that the sales were not made “by or on behalf of” Bear, Stearns because it was not a seller or principal in the transactions and did not benefit as such.

## Legal Principles

- Civil liability under § 13 of the Illinois Securities Act is limited to persons playing a direct and significant role in the sale; the statute does not create general civil liability for all persons tangentially connected to a violation.
- “Participated or aided in any way” requires involvement of the kind associated with selling or promoting the security (e.g., solicitation, structuring, control, or inducement), not routine clearing, recordkeeping, confirmations, and settlement.
- A clearing broker that performs standard back-office functions for a selling broker, without solicitation, advice, control, ownership interest, or selling commissions, is not jointly and severally liable under § 13 for the selling broker’s registration violations.
- “By or on behalf of whom said sale was made” refers to a seller or principal on whose account the sale is made, not a neutral service provider paid a fixed fee for processing transactions.

## Conclusion

Because Bear, Stearns acted solely as a clearing broker performing routine ministerial functions and did not function as a seller, promoter, or controlling participant, it was not liable under § 13 of the Illinois Securities Act for Patten’s unlawful sales of unregistered securities by unregistered personnel.


Carlson v. Bear, Stearns & Co., 906 F.2d 315 (7th Cir. 1990)