Harrison v. Dean Witter Reynolds, Inc.

79 F.3d 609 (1996)

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Harrison v. Dean Witter Reynolds, Inc.

United States Court of Appeals for the Seventh Circuit
79 F.3d 609 (1996)

Facts

Hudson Harrison (plaintiff) lost money in a Ponzi scheme orchestrated by John Kenning and John Carpenter, who were employees of Dean Witter Reynolds, Inc. (Dean) (defendant). Harrison sued Dean for violating Securities and Exchange Commission (SEC) Rule 10b-5 on the theory that Dean had control over Kenning and Carpenter. At trial, the district court instructed the jury that Dean could not be liable if it acted in good faith by implementing and enforcing a reasonable system of supervision and did not directly or indirectly induce Kenning or Carpenter to violate Rule 10b-5. Dean sought to prove its good faith with evidence of its comprehensive internal rules, corporate compliance officers, supervision by the relevant branch manager, and the nature of the specific fraudulent transactions. However, the jury also was presented with evidence that Dean’s supervision of Kenning and Carpenter was casual or grossly indifferent and that Dean ignored clear signs that something was amiss. For example, the relevant branch manager admitted that he did not inquire about unusually substantial trading in Kenning’s and Carpenter’s personal trading accounts, where they obtained the money for such trades, or why they opened very few accounts for other customers. This despite a Dean rule prohibiting traders from using their own accounts for customer transactions. The branch manager also admitted that Kenning and Carpenter’s activities indirectly increased his own compensation. The jury found Dean liable. Dean appealed, arguing that, among other things, the evidence at trial was insufficient to establish that it did not act in good faith and that it was unreasonable to expect Dean to oversee what its employees do on their own time or with their own bank accounts or oversee when they meet clients away from the office and do business in cash.

Rule of Law

Issue

Holding and Reasoning (Wood, J.)

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