## Facts

- Norman Cornelius, a broker and investment adviser, solicited investors to purchase Avalon-related promissory notes promising high returns and potential conversion to stock.
- Many investors placed retirement funds into these investments; the venture later collapsed and was characterized as an illegal pyramid scheme, causing substantial losses.
- Sterling Trust Company acted as a third-party trustee/custodian for certain retirement investments that investors directed into the Avalon transactions through Cornelius.
- Investors sued Sterling under the Texas Securities Act (TSA) on a secondary-liability theory, alleging Sterling “materially aided” Cornelius’s unlawful securities sales.
- At trial, the jury found Sterling not liable as a primary violator (finding Sterling did not know, and could not have known, of specific misrepresentations or omissions), but found Sterling liable as an aider under the TSA; the trial court awarded actual damages and initially exemplary damages.
- The court of appeals affirmed actual damages and reversed exemplary damages, agreeing that aider liability did not require Sterling to be aware its conduct assisted a securities violation.

## Issues

1. Under the TSA’s aider-liability provision, does “intent to deceive or defraud or reckless disregard for the truth or the law” allow liability when the alleged aider is unaware its conduct is assisting a securities violation?
2. If “reckless disregard” applies, must the plaintiff prove the alleged aider was subjectively aware of the primary violator’s improper activity (even without knowing the exact misrepresentations or omissions)?

## Decision

- The Texas Supreme Court reversed the court of appeals’ judgment and remanded to the trial court.
- The court held that “reckless disregard for the truth or the law” in the TSA’s aider-liability provision requires that the alleged aider rendered assistance while perceiving a risk that the assistance would facilitate untruthful or illegal activity by the primary violator.
- The court rejected a standard permitting aider liability when the alleged aider was unaware of its role in the securities violation.
- The court clarified that the aider need not know the exact misrepresentations or omissions, but must be subjectively aware of the primary violator’s improper activity.

## Legal Principles

- TSA secondary (“aider”) liability requires proof that the defendant materially aided a seller, buyer, or issuer and acted with intent to deceive or defraud, or with reckless disregard for the truth or the law.
- For TSA aider liability, “reckless disregard” is a subjective standard: assistance must be provided in the face of a perceived risk that it would facilitate unlawful or untruthful conduct.
- The aider’s awareness need not extend to the precise misstatements or omissions; it must extend to awareness of improper activity and the risk its assistance would further it.
- Routine transactional or custodial services, without subjective awareness of perceived risk, are insufficient to impose TSA aider liability.

## Conclusion

The Texas Supreme Court narrowed TSA aider liability by requiring subjective awareness of a perceived risk that the aider’s assistance would facilitate securities wrongdoing, and remanded because the lower courts applied a broader, awareness-free standard.


Sterling Tr. Co. v. Adderley, 168 S.W.3d 835 (Tex. 2005)