The Texas Court of Appeals has reinstated the Texas Securities Act control person claims against Merrill Lynch Pierce Fenner & Smith Inc. related to its former broker Terry Christopher Bounds’s allegedly fraudulent outside sales transactions.
According to the appeals court, Bounds, who owned two “outside” direct-marketing corporations, solicited David Fernea, who is now the appellant of this Texas securities case, to buy shares in both businesses. The latter purchased 50% interest in each company.
Fernea claims that after he bought into the companies, Bounds refused to uphold his part of the agreement and concealed his actions with the delivery of a fake stock certificate. He also contends that the ex-Merrill Lynch broker had made misrepresentations and omissions to persuade him to buy the stock. Among the alleged omissions was failing to disclose that Bounds’s companies were involved in a consumer protection dispute with the Texas Attorney General and that the stocks that Fernea had purchased were not registered with the Texas State Securities Board. The appellant also claims that Bounds tried to secretly resell the corporations he had already bought from him to other parties.
Fernea is suing Merrill Lynch for Texas securities fraud because he says that that Bounds’s working relationship with the investment bank had played an important part in his decision to buy into the broker’s companies. He is accusing the broker-dealer of violations of its own internal polices regarding its employees’ outside transactions, violating the Texas Securities Act’s Section 33, negligent supervision of Bounds related to his outside transactions, “control person” liability under the Texas Securities Act, and violation of several NASD and NYSE internal rules.
While the appeals court initially remanded the control person claim to a lower court, it has now reinstated the claim. The court says that it is up to the plaintiff to bear the initial burden of proving control, including that the alleged control person actually had influence or power of the controlled person and that this power to influence or control the specific activity or transaction led to the violation in question. The court has found that there is evidence that Merrill Lynch’s policies gave it control or issue over the “transaction at issue.”
Related Web Resources:
Texas Securities Act
BNA Securities Daily Law
Fernea v. Merrill Lynch Pierce Fenner & Smith Inc.
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