David Fernea v. Merrill Lynch Pierce Fenner & Smith, Inc.
559 S.W.3d 537
Tex. App.2011Background
- Fernea sued Merrill Lynch for negligent supervision of Bounds in a sale of Bounds's outside business interests to Fernea; Bounds owned two outside marketing corporations and Fernea bought 50% of each.
- Bounds delivered a fake stock certificate for 1000 shares of an illegal, non-existent corporation and made misrepresentations/omissions about registration and litigation involving the outside companies.
- Merrill Lynch investigated Bounds after Texas AG consumer-protection litigation; a Letter of Education reprimanded Bounds for reporting failures and noted he intended to sell his outside interests.
- Fernea alleged five claims against Merrill Lynch: aider-and-abettor liability under the Texas Securities Act; violations of NYSE/NASD rules; negligence for internal policies; negligent supervision of Bounds; and control-person liability.
- The trial court granted summary judgment to Merrill Lynch on all claims after Fernea’s objections to affidavits were overruled; the court severed and affirmed summary judgment as to Merrill Lynch, with remand on the control-person claim.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Private right of action for NASD/NYSE rules | Fernea contends private action exists | No private action; or evidence shows no violation | No private right of action; granted summary judgment on NASD/NYSE claim |
| Negligence for internal policies | Merrill Lynch owed duty to monitor outside sales | No duty; no increased risk from policies | No duty; summary judgment affirmed on this claim |
| Negligent supervision | Merrill Lynch owed duty to supervise Bounds | No notice/duty under NASD 3040; no nexus | Summary judgment proper; no notice to trigger supervisory duty |
| Aider-and-abettor liability under Texas Securities Act | Merrill Lynch aided Bounds's sale to Fernea | No general awareness or substantial assistance | No triable issue on awareness/assistance; reaffirmed summary judgment except where noted |
| Control-person liability | Merrill Lynch controlled Bounds and the transaction | Lacked knowledge and power to control the specific sale | Fact question; district court erred; remanded for further proceedings |
Key Cases Cited
- Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11 (U.S. 1979) (test for implying private rights of action under statutes)
- Touche Ross & Co. v. Redington, 442 U.S. 560 (U.S. 1979) (Congressional intent governs private rights of action)
- Cort v. Ash, 422 U.S. 66 (U.S. 1975) (four-factor test for implying private rights of action)
- Jablon v. Dean Witter & Co., 614 F.2d 677 (9th Cir. 1980) (no implied private right of action for NASD rule violations)
- Abbott v. Equity Group, Inc., 2 F.3d 613 (5th Cir. 1993) (discussion of control-person liability standards)