## Facts

- Two brokerage employees used their positions to solicit customer funds for a fraudulent investment scheme involving promises of high returns.
- The scheme was largely conducted outside ordinary customer accounts, using the employees’ personal trading accounts and off-book cash arrangements.
- Hudson T. Harrison and his company invested substantial sums and lost approximately $3.4 million.
- Trial evidence indicated unusual trading patterns in the employees’ personal accounts, few corresponding customer accounts, and significant commissions tied to the branch’s compensation structure.
- The brokerage firm had supervisory and compliance rules, including restrictions on using personal accounts for customer-related transactions, but evidence supported a finding that supervision was superficial and warning signs were ignored.
- The plaintiffs established a primary securities fraud violation by the employees and pursued the brokerage firm under Exchange Act § 20(a) as a controlling person.

## Issues

1. Whether the evidence permitted a reasonable jury to find the brokerage firm was a “controlling person” of the employees for purposes of Exchange Act § 20(a).
2. Whether the evidence supported rejection of the brokerage firm’s § 20(a) defense that it acted in good faith and did not directly or indirectly induce the violations.
3. Whether the prior rejection of state-law respondeat superior liability precluded § 20(a) controlling-person liability.
4. Whether the jury instructions and the district court’s denial of post-trial relief were erroneous given the evidentiary record.

## Decision

- The Seventh Circuit affirmed the judgment entered on the jury’s verdict for the plaintiffs.
- The court held the evidence supported a finding that the brokerage firm had the power or ability to control the employees’ conduct tied to the securities violations.
- The court held the evidence supported the jury’s conclusion that the firm failed to prove good faith and non-inducement, given inadequate supervision and disregard of red flags.
- The court held the absence of state-law respondeat superior liability did not bar § 20(a) liability because the federal statute applies a distinct standard.
- The court upheld the § 20(a) jury instructions as consistent with the statute and Seventh Circuit precedent, and found no basis to overturn the verdict or order a new trial.

## Legal Principles

- Under Exchange Act § 20(a), a person who directly or indirectly controls a primary violator is jointly and severally liable unless the defendant proves it acted in good faith and did not directly or indirectly induce the violation.
- “Control” may be shown by evidence that the defendant actually exercised control or possessed the power or ability to control the violator’s conduct relevant to the primary violation.
- Once a primary violation and control are established, the defendant bears the burden to prove the statutory good-faith/non-inducement defense.
- Written supervisory procedures are insufficient by themselves; the factfinder may reject good faith where supervision is ineffective and the defendant fails to respond reasonably to warning signs.
- State-law respondeat superior standards do not govern § 20(a); controlling-person liability turns on statutory control and the good-faith/non-inducement defense.

## Conclusion

The Seventh Circuit upheld a jury verdict imposing § 20(a) controlling-person liability on a brokerage firm where evidence showed it had supervisory authority over employee fraud and failed to establish good-faith supervision and non-inducement despite significant warning signs.


Harrison v. Dean Witter Reynolds, Inc., 79 F.3d 609 (7th Cir. 1996)