## Facts

- Hudson T. Harrison and his company sent about $4 million over roughly 18 months to Dean Witter employees John G. Kenning and John M. Carpenter, believing the money would be invested in low-risk municipal bonds through Dean Witter.
- Kenning and Carpenter proposed that Harrison send funds to them personally so they could invest through Carpenter’s Dean Witter employee account, promising reduced commissions and bond purchases at cost.
- The arrangement violated Dean Witter’s internal rules prohibiting use of employee accounts in this manner.
- Harrison paid mainly by checks mailed to Carpenter’s home and by wire transfers to Carpenter’s personal checking account.
- In exchange, Harrison received promissory notes promising unusually high returns (about 18% to 60% annually) and received paired notes per transaction, including a second set that materially understated returns for tax purposes.
- Kenning and Carpenter did not buy municipal bonds; they placed funds into risky put options, which failed, causing major losses to Harrison and many other investors.
- Harrison sued Kenning, Carpenter, and Dean Witter, asserting (among other claims) § 10(b) primary violations by the individuals and § 20(a) control-person liability against Dean Witter, plus state-law vicarious-liability theories.

## Issues

1. Whether Dean Witter could be liable as a “controlling person” under § 20(a) for its employees’ alleged § 10(b) violations, based on its actual control or power to control their operations and the relevant transactions.
2. Whether Dean Witter was entitled to summary judgment on § 20(a)’s affirmative defense by showing, as a matter of law, that it acted in good faith and did not directly or indirectly induce the violations.
3. Whether Dean Witter could be held vicariously liable under state-law respondeat superior for the employees’ fraud conducted through an employee account and outside firm rules.

## Decision

- The Seventh Circuit reversed summary judgment for Dean Witter on the § 20(a) control-person claim and remanded for trial.
- The court held the record presented genuine disputes of material fact on whether Dean Witter exercised actual control or had the power or ability to control Kenning and Carpenter’s operations and the transactions at issue.
- The court held that § 20(a) good faith and non-inducement could not be resolved as a matter of law on summary judgment on this record.
- The Seventh Circuit affirmed the rejection of Harrison’s state-law respondeat superior theory against Dean Witter.

## Legal Principles

- Section 20(a) imposes joint and several liability on persons who directly or indirectly control a primary violator of the Exchange Act, subject to an affirmative defense of good faith and lack of direct or indirect inducement.
- “Control” under § 20(a) focuses on practical supervisory power or the ability to control the primary violator’s conduct; it does not require proof that the alleged controller authorized, knew of, or actively participated in the specific fraudulent transactions.
- Whether a broker-dealer controlled its registered representative and related personnel, and whether it acted in good faith without inducing violations, are typically fact-intensive questions inappropriate for summary judgment when reasonable inferences support either side.
- Because good faith and non-inducement are affirmative defenses under § 20(a), the defendant bears the burden, and summary judgment is improper unless the evidence permits only one reasonable conclusion.

## Conclusion

The Seventh Circuit held that a jury could reasonably find Dean Witter to be a § 20(a) “controlling person” and could reject its good-faith defense based on the firm’s potential supervisory power and oversight failures, so summary judgment was improper on that federal claim; however, the court left intact the dismissal of state-law respondeat superior liability.


Harrison v. Dean Witter Reynolds, Inc., 974 F.2d 873 (7th Cir. 1992)