## Facts

- Emil Wilkowski, a securities salesman, embezzled money entrusted to him by several clients and was later convicted of criminal securities fraud and grand theft.
- Painter Financial Group, Ltd. operated a financial counseling and insurance business; Wilkowski rented office space there and acted as a Painter representative for counseling and insurance sales.
- To sell securities, Wilkowski sought registration through Titan Capital Corp., a registered broker-dealer, with the NASD.
- Wilkowski falsely denied prior felony convictions on his initial registration materials; an NASD background check revealed felony forgery convictions, after which he submitted an amended application.
- Painter discharged Wilkowski as a financial advisor after learning of the convictions, but Wilkowski remained registered through Titan.
- While associated with Titan, Wilkowski induced investors to write checks payable to him personally, issued fabricated account statements (including on Titan stationery), and misrepresented that investor funds were placed in legitimate securities.
- Investors sued Titan and Painter asserting federal securities violations and related state-law claims to recover their losses.

## Issues

1. What level of “recklessness” satisfies the scienter requirement for a private damages claim under Exchange Act § 10(b) and SEC Rule 10b-5?
2. Whether a broker-dealer can be a “controlling person” of its registered representative under Exchange Act § 20(a), and which party bears the burden of proving the statute’s good-faith defense.
3. Whether a broker-dealer may be held vicariously liable under respondeat superior for securities-law violations committed by its registered representative acting with apparent authority.
4. Whether summary judgment for Titan and Painter was proper on the federal claims, and what disposition should follow for the pendent state-law claims.

## Decision

- The en banc court adopted a strict definition of recklessness for Rule 10b-5 scienter: a highly unreasonable omission or act constituting an extreme departure from ordinary care, where the danger was known or so obvious the actor must have been aware.
- Applying that standard, the court held Titan was not primarily liable under § 10(b) and Rule 10b-5 on the record presented because plaintiffs did not show Titan’s scienter as to Wilkowski’s fraudulent scheme.
- The court held a broker-dealer may qualify as a § 20(a) controlling person of its registered representatives due to its supervisory authority and duties.
- The court held the defendant bears the burden of proving the § 20(a) good-faith defense once the plaintiff shows a primary violation and control.
- The court recognized that respondeat superior may provide an additional basis for vicarious liability for a representative’s violations committed within the scope of apparent authority, depending on applicable law and facts.
- The judgment was affirmed in part and reversed in part; the case was remanded for further proceedings consistent with the en banc holdings, including Titan’s potential § 20(a) liability and related theories. The disposition as to Painter largely left the summary judgment on federal claims intact and did not retain supplemental state-law claims in federal court.

## Legal Principles

- Scienter under § 10(b) and Rule 10b-5 may be shown by recklessness, but only where conduct is a highly unreasonable extreme departure from ordinary care and the risk of misleading investors is known or glaringly obvious.
- A broker-dealer can be a “controlling person” under § 20(a) with respect to its registered representatives because broker-dealers have supervisory power and regulatory duties to oversee representatives’ securities activities.
- Under § 20(a), good faith functions as an affirmative defense; after a plaintiff proves a primary violation and control, the controlling person bears the burden to prove it acted in good faith and did not induce the violation.
- Respondeat superior can impose vicarious liability for securities misconduct committed by an agent within the scope of apparent authority, and may operate alongside § 20(a) depending on the governing legal framework.

## Conclusion

The Ninth Circuit defined a demanding recklessness standard for Rule 10b-5 scienter, rejected primary liability for the broker-dealer on the summary-judgment record, and held broker-dealers can face secondary liability as § 20(a) controlling persons with the burden on defendants to prove good faith, while also recognizing potential vicarious liability under agency principles.


Hollinger v. Titan Cap. Corp., 914 F.2d 1564 (9th Cir. 1990) (en banc)