Wallace v. Buttar

At the urging of stockbroker Vivek Verma (defendant), North Carolina resident Daljit Buttar (plaintiff) opened an investment account at Verma’s firm, Montrose Capital Management (Montrose) (defendant). Verma and a senior Montrose broker, Robert Winston (defendant) persuaded Buttar to make unsuitable investments, causing Buttar to incur substantial losses. Buttar and his wife initiated arbitration against Montrose and Winston, alleging false representations with regard to the investments. Later, the Buttars added Michael Wallace, David Jacaruso, and Joseph Scotti (defendants) to the proceeding, claiming that the men were liable as control persons of Montrose, Winston, and Verma. Evidence at arbitration showed that Wallace, Jacaruso, and Scotti were variously identified in filed documents as “control person” of Montrose based on their ownership interests in Montrose. Wallace testified that he was “in control of everyone performing their functions” at Montrose. A former Montrose employee testified that Jacaruso was the chairman of Montrose and able to correct Winston’s misconduct. An expert witness testified that, as directors and owners, Jacaruso and Scotti “acquiesced, approved, [and] sanctioned” Winston’s activities. In briefing and argument, the Buttars presented uncontradicted legal principles on control-person liability under federal and state law. Based on the law as presented, the panel found that Wallace, Scott, and Jacaruso were liable to the Buttars as control persons of Winston. The district court vacated the award on grounds of manifest disregard of the law and the facts. In the court’s view, only Montrose could be held secondarily liable for Winston’s fraud and there was no evidence in the record that Wallace, Scott, or Jacaruso acted with intent to defraud. The Buttars appealed.