Foley v. Allard
1988 WL 77049, 427 N.W.2d 647, 1988 Minn. LEXIS 169 (1988)
Rule of Law:
A broker-dealer is not secondarily liable for a securities violation under an aiding and abetting theory unless it had knowledge of the primary violation and provided substantial assistance, nor is it liable under an apparent authority theory unless it affirmatively held out the individual as an agent and the third party reasonably inquired into that authority.
Facts:
- Deborah Foley met Roger Allard through mutual friends in late November 1983, and saw him almost daily afterward.
- Foley had obtained $10,000 to prevent foreclosure on residential property she had sold on a contract for deed, needing the money by December 15, 1983.
- Allard learned of Foley's financial situation and offered to double her money through stock investments, guaranteeing "no risk" and the return of her principal by December 15.
- Allard identified himself to Foley as a "securities dealer" and told her he had a conference room and phone privileges at R.J. Steichen & Company, but neither he nor anyone else informed her he was employed or formally affiliated with Steichen.
- On December 7, 1983, Foley wrote Allard a personal check for $10,000, payable to Allard, after he told her Steichen would not accept a personal check made out to them.
- After verifying the check's authenticity, Allard obtained a cashier's check and deposited the funds into a Steichen account registered under the name of Edward Mattson, over which Allard had trading authority.
- Around December 15, 1983, Allard informed Foley that he had lost her money.
- Foley never visited the Steichen offices, received no business cards or documents identifying any affiliation between Allard and Steichen, and never informed anyone at Steichen of her relationship with Allard or her investment prior to the transaction.
Procedural Posture:
- Respondent Deborah Foley brought suit against Roger Allard and R.J. Steichen & Company in district court for securities violations.
- A default judgment against Roger Allard in the amount of $42,338.83 was entered on March 6, 1985.
- The district court granted R.J. Steichen & Company’s motion for summary judgment on June 20, 1986, finding no specific facts to create a genuine issue for trial under theories of secondary liability (aiding and abetting or apparent authority).
- Foley appealed the district court's decision to the Minnesota Court of Appeals (appellant Foley vs. appellee Steichen).
- The Minnesota Court of Appeals reversed the summary judgment, holding that genuine issues of material fact precluded summary judgment regarding whether Steichen was negligent in allowing Allard to receive calls (apparent authority) and whether Steichen aided Allard in his violation of securities laws.
- R.J. Steichen & Company (appellant) sought review of the court of appeals’ decision by the Minnesota Supreme Court.
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Issue:
Did the district court properly grant summary judgment dismissing claims that R.J. Steichen & Company was secondarily liable for a securities violation, either by materially aiding a fraudulent scheme or by clothing Roger Allard with apparent authority to act as its agent, where Steichen had no knowledge of the fraud and did not affirmatively represent Allard as its agent?
Opinions:
Majority - Justice Wahl
No, the district court properly granted summary judgment dismissing Deborah Foley's claims against R.J. Steichen & Company for secondary liability under an aiding and abetting theory and for apparent authority. The court first addressed the aiding and abetting claim, adopting the federal three-prong test for Rule 10b-5 violations, which requires (1) a primary securities law violation, (2) knowledge of the violation by the aider and abettor, and (3) “substantial assistance” by the aider and abettor. While a primary violation by Allard was conceded, Steichen had no knowledge of the violation; Foley herself admitted that no one at Steichen knew of her investment or the circumstances, and the funds were deposited into an account not bearing Foley's name. Furthermore, the court found no "substantial assistance" from Steichen, as the few phone calls Allard received there from Foley were minimal, predated the investment, and involved no business transactions, thus lacking a substantial causal connection to Foley's loss. A negligence theory was deemed inapplicable due to the absence of a duty owed by Steichen to Foley. Regarding the apparent authority claim, the court reiterated that apparent authority is based on the principal's conduct in holding out an agent or knowingly permitting an agent to assume authority, and the party dealing with the agent must have actual knowledge of this and prove it through the principal's actions. The court found no affirmative conduct by Steichen holding out Allard as an authorized agent; merely permitting customers to receive calls was insufficient. Moreover, Foley failed to discharge her duty of reasonable inquiry into Allard's authority, given several highly irregular activities such as the check being payable directly to Allard, assurances of "no risk," no documents, and no commission. The presumption of authority for an employee answering a business phone (from Sauber) was not applicable here, as Allard was neither an employee nor an agent of Steichen.
Analysis:
This case is significant for solidifying the standards for secondary liability under the Minnesota Securities Act by explicitly adopting the federal three-prong test for aiding and abetting claims. It establishes a high bar for proving such liability, requiring both knowledge and substantial assistance from the alleged aider and abettor, thus limiting the reach of strict liability. The decision also reinforces the stringent requirements for establishing apparent authority, emphasizing that a principal's passive allowance of incidental use of facilities does not constitute a 'holding out,' and places a substantial duty on third parties to investigate an agent's authority, especially in the face of unusual transaction details. This ruling protects broker-dealers from liability when their facilities are misused without their knowledge or active endorsement, shifting greater responsibility to investors for due diligence.
