## Facts

- Individual investors alleged they were defrauded by Bryan Behrens through a Ponzi scheme involving promissory notes issued in the name of National Investments, Inc., an entity he controlled.
- Behrens promised to invest the funds and pay steady income, but instead misappropriated funds, used them for personal purposes, or circulated money among investors to conceal the fraud.
- Behrens was a registered representative of Sunset Financial Services, Inc., an SEC-registered broker-dealer, and president/CEO of 21st Century Financial Group, Inc., alleged to operate as a Sunset branch office.
- Sunset allegedly provided Behrens access to securities markets and had supervisory duties over his securities-related activities; the fraud was alleged to have been conducted through Sunset.
- Kansas City Life Insurance Company (KCL) wholly owned Sunset; Behrens was also a KCL general agent, and KCL allegedly promoted him with awards and other materials suggesting trustworthiness and affiliation.

## Issues

1. Whether the pleadings plausibly alleged federal control-person liability under Exchange Act § 20(a) against Sunset and/or KCL for Behrens’s securities fraud.
2. Whether dismissal of state statutory control-person claims was proper without determining applicable state law and analyzing the relevant statutes.
3. Whether Sunset or KCL could be liable under apparent-authority principles for Behrens’s sale of the promissory notes.
4. Whether Sunset could be vicariously liable under respondeat superior for Behrens’s fraudulent conduct as within the scope of his employment.
5. Whether denial of leave to file proposed second amended complaints was an abuse of discretion on futility grounds.

## Decision

- Affirmed dismissal of the federal § 20(a) control-person claim against KCL for insufficient allegations of control over Behrens’s operations or the specific violative acts.
- Reversed dismissal of the federal § 20(a) control-person claim against Sunset, holding the allegations plausibly showed Sunset’s control over Behrens’s securities-related activities.
- Reversed dismissal of state control-person claims against Sunset and remanded because the district court failed to conduct a conflicts analysis and evaluate the governing state statutes.
- Affirmed dismissal of apparent-authority claims against both Sunset and KCL because the pleadings did not allege principal manifestations indicating Behrens was authorized to sell the particular promissory notes on their behalf.
- Reversed dismissal of the respondeat superior claim against Sunset and held the district court abused its discretion in denying leave to amend as futile as to claims against Sunset; affirmed futility as to KCL.

## Legal Principles

- A complaint must allege sufficient factual matter to state a plausible claim for relief; conclusory assertions do not suffice.
- Exchange Act § 20(a) control-person liability requires allegations that the defendant actually exercised control over the primary violator’s general operations and possessed the power to control the specific acts underlying the violation.
- Parent-subsidiary relationship and generalized affiliation allegations, without facts showing actual control over the violator and the challenged transactions, are insufficient to plead § 20(a) liability.
- Dismissal of state statutory control-person claims requires identifying the applicable state law through conflicts principles and applying the elements of the relevant state securities statutes.
- Apparent authority depends on manifestations by the principal to third parties; the agent’s statements and generalized branding or promotional materials do not establish authority to undertake a specific transaction absent principal conduct indicating such authority.
- Respondeat superior may be plausibly alleged where misconduct is tied to the employee’s work setting and business role and is alleged to have been undertaken at least in part to serve the employer’s interests.
- Denial of leave to amend is improper where proposed amendments plausibly cure deficiencies; futility supports denial only when amended claims still fail as a matter of law.

## Conclusion

The Eighth Circuit allowed investors to proceed against Sunset on federal and state control-person theories and respondeat superior, while leaving in place dismissal of all claims against KCL and dismissal of apparent-authority claims against both entities, and remanded for further proceedings consistent with those rulings.


Lustgraaf v. Behrens, 619 F.3d 867 (8th Cir. 2010)