IN THE SUPREME COURT OF
TEXAS
════════════
No.
03-1001
════════════
Sterling
Trust Company, Petitioner
v.
Roderick
Adderley, et al., Respondents
════════════════════════════════════════════════════
On Petition for Review from
the
Court of Appeals for the
Second District of Texas
════════════════════════════════════════════════════
Argued September
29, 2004
Justice O’Neill delivered the opinion
of the Court.
Justice Johnson did not participate in
the decision.
The
Texas Securities Act (TSA) imposes liability
on a person who sells securities “by means of an untrue statement of a material
fact or an omission to state a material fact,” and imposes liability on a person
who “materially aids a seller, buyer, or issuer of a security” if the person
acts “with intent to deceive or defraud or with reckless disregard for the truth
or the law.” Tex. Rev. Civ. Stat. Ann. art. 581-33F(2)
(Vernon Supp. 2004-2005). The trial
court and court of appeals interpreted the latter provision to allow aider liability even if the aider
was unaware of its role in the securities violation. We conclude, however, that
the TSA’s requirement of “reckless disregard for the truth or the
law” means that an alleged aider is subject to
liability only if it rendered assistance to the seller in the face of a
perceived risk that its assistance would facilitate untruthful or illegal
activity by the primary violator. This standard does not mean that the aider must know of the exact misrepresentations or omissions
made by the seller, but it does mean that the aider
must be subjectively aware of the primary violator’s improper activity.
Accordingly, we reverse the court of appeals’ judgment and remand this case to
the trial court for further proceedings consistent with this opinion.
I
During
the early to mid-1990s, Norman Cornelius formed Avalon Custom Homes and a number
of related corporate entities (collectively referred to as “Avalon”) designed to
develop and sell luxury homes. At that time, Cornelius worked as an investment
advisor and broker for Sunpoint Securities. Cornelius
operated Avalon out of his Sunpoint office and
encouraged his brokerage clients to invest their money in Avalon. Cornelius also
persuaded members of his church and retirees from Mrs. Baird’s Bakery to invest
in Avalon, offering investors promissory notes that bore as much as an eighteen
percent rate of return and allowed conversion to Avalon stock.
Many
of the investors chose to invest their retirement savings in Avalon. Because
certain retirement accounts such as IRAs and lump-sum pension distributions must
be held by a third-party trustee to maintain their preferential tax status,
Avalon needed a third-party trustee in order to accept such funds. In 1994,
Cornelius began recommending that Avalon investors use Sterling Trust Company, a
custodian of self-directed IRA accounts, as their IRA custodian. From 1994 until
1997, Sterling served as the exclusive trustee over the retirement money that
the investors self-directed to Cornelius.
In
1997, the Securities and Exchange Commission
(SEC) filed suit against Cornelius, alleging
that Cornelius misrepresented the risks associated with the investments,
misrepresented the uses of investment funds, and misrepresented the commingling
and misappropriation of funds. Avalon was forced into receivership, and the
Avalon investors collectively lost millions of dollars. A number of elderly
investors lost their entire retirement savings. The investors sued Cornelius,
Sunpoint Securities, Van Lewis (the owner of Sunpoint), and Sterling Trust. After suit was filed, but
before the case was tried, Cornelius died and Sunpoint
entered receivership. The claims against Sunpoint were
severed from the suit as a result of the receivership, but Sunpoint was still included in the charge as a party to
which the jury could apportion responsibility.
At
trial, the investors put forth several theories of liability. The jury charge
asked (1) whether each of the defendants offered or sold securities “by means of
an untrue statement of material fact or the omission to state a material fact
necessary in order to make the statements made, if any, in light of the
circumstances under which they were made not misleading”; (2) whether Sterling
aided Cornelius in committing securities fraud by “directly or indirectly with
intent to deceive or defraud or with reckless disregard for the truth or the law
materially aid[ing] a seller of a security”;
(3) whether Sterling was “part of a conspiracy that damaged [the
investors]”; (4) whether Sterling “fail[ed] to comply with its fiduciary duty”
to its account holders; and (5) whether the defendants committed fraud against
the investors.
In
support of these contentions, the investors provided evidence that Cornelius
told investors that investing in Avalon carried “no risk” and that any principal
invested would be protected. There was also evidence that Avalon was not
profitable and that early investors were paid with the proceeds of later
investors, thus creating a pyramid effect that collapsed when new investments
dried up.
The
investors argued that Sterling played an essential role in allowing the
investment scheme to continue as long as it did. They argued that Sterling had a
duty to undertake a “suitability analysis” and that it should have informed the
investors that “too much of their net worth” was held in “overly risky
investments.” The investors provided evidence that Sterling’s failure to comply
with several of its own internal procedures facilitated Cornelius’s pyramid
scheme and allowed Cornelius to hide the nature of his scheme from the
investors. For example, the investors showed that, although Sterling’s policies
prohibited it from holding promissory notes that were in default, it
nevertheless held such notes. The investors also provided evidence that Sterling
failed to obtain many of the Avalon stock certificates and original promissory
notes; ordinarily, Sterling employees could not enter transactions into
Sterling’s computer system without such documents. When lower-level Sterling
employees alerted management to the lack of such documents, they were told that
Sterling had made an agreement allowing Avalon to retain those documents. There
was also evidence that Sterling failed to obtain copies of the security
agreements for the promissory notes that purported to be secured by real estate,
even though Sterling’s internal procedures required it to keep such documents on
file. In addition, the investors provided evidence that Sterling was aware that
Cornelius was commingling investors’ funds by having one or more of the Avalon
companies make payments on notes for which another Avalon company was indebted,
and that at least one of Sterling’s internal memos questioned this practice.
Finally, the investors demonstrated that Cornelius did not pay the principal
balance on a number of notes as they became due, but instead transferred the
investors’ money into new investment vehicles in other Avalon entities. There
was evidence that Sterling allowed Cornelius to unilaterally make such transfers
despite its own policy requiring documentation of investor approval for new
investments.
The
jury returned a verdict against Cornelius on all counts. On the issues
pertaining to Sterling, however, the verdict was mixed. Specifically, the jury
found that Sterling was not a “seller” of securities, that Sterling did not
conspire to damage the investors, and that Sterling did not commit fraud.
However, the jury found that Sterling aided Cornelius’s securities violation and
that Sterling breached its fiduciary duty to its account holders. The investors
elected to recover on the aiding-and-abetting finding, and the trial court
rendered judgment against Sterling for $6 million in actual damages and $250,000
in exemplary damages. The court of appeals affirmed the trial court’s award of
actual damages, but reversed the exemplary damages award. 119 S.W.3d 312. We
granted Sterling’s petition for review to consider the scope of its potential
liability to the investors and related issues.
II
The
Texas Securities Act establishes both primary and secondary liability for
securities violations. Primary liability arises when a person “offers or sells a
security . . . by means of an untrue statement of a material fact
or an omission to state a material fact necessary in order to make the
statements made, in the light of the circumstances under which they are made,
not misleading.” Tex. Rev. Civ. Stat. Ann. art. 581‑33A(2) (Vernon Supp.
2004-2005). Secondary liability is derivative liability for another person’s
securities violation; it can attach to either a control person, defined as “[a]
person who directly or indirectly controls a seller, buyer, or issuer of a
security,” or to an aider, defined as one “who
directly or indirectly with intent to deceive or defraud or with reckless
disregard for the truth or the law materially aids a seller, buyer, or issuer of
a security.” Id. art. 581‑33F(1)-(2). Both control persons and aiders are jointly and severally liable with the primary
violator “to the same extent as if [they] were” the primary violator.
Id.
In
this case, the jury found that Sterling was secondarily liable as an aider. Sterling argues that the trial court erred by failing
to instruct the jury that an alleged aider cannot be
held secondarily liable unless it had a “general awareness” of its role in the
primary violation. See Frank v. Bear, Stearns & Co., 11 S.W.3d 380,
384 (Tex. App.BHouston
[14th Dist.] 2000, pet. denied) (holding that “[i]n
order to establish liability” for aiding a securities violation, “a plaintiff
must demonstrate . . . that the alleged aider had ‘general awareness’ of its role in this
violation”) (citations omitted). At the charge conference, Sterling objected to
the trial court’s proposed instruction on aider
liability because it made no mention of the “general awareness” requirement. The
trial court overruled this objection. The court of appeals held that the failure
to include such an instruction was not error, concluding that “the
TSA does not require proof that an aider is generally aware of its role in the securities
violation to be liable as an aider.” 119 S.W.3d at
320. Sterling contends the court of appeals’ holding conflicts with opinions
from other Texas courts of appeals that have held that the
TSA does impose such a requirement. See
Goldstein v. Mortenson, 113 S.W.3d 769, 776 (Tex.
App.BAustin
2003, no pet.); Crescendo Invs., Inc. v. Brice,
61 S.W.3d 465, 472 (Tex. App.BSan
Antonio 2001, pet. denied); Bear, Stearns & Co., 11 S.W.3d at 384. In
this case, the court of appeals noted the conflict but concluded that, because
the “language of the TSA” does not explicitly
impose such a requirement, the proper course was to “decline to follow those
opinions . . . that have concluded that the
TSA contains a general awareness
requirement.” 119 S.W.3d at 319-20.
We
disagree with the court of appeals’ conclusion that the
TSA contains no awareness requirement. The
statute’s history demonstrates that the Legislature intended the
TSA to be interpreted in harmony with federal
securities law, and the TSA itself instructs
that “[t]his Act may be construed and implemented to effectuate its general
purpose to maximize coordination with federal and other states’ law and
administration.” Tex. Rev. Civ. Stat. Ann. art. 581-10-1A (Vernon Supp.
2004-2005). When the Legislature added the aider-liability provision to the
TSA in 1977, most federal courts considering
the issue had held that aider liability could be
imposed under the federal securities law only when the aider was generally aware of its role in an improper
scheme.
See Gould v. American-Hawaiian S.S. Co., 535 F.2d 761, 779-80 (3d Cir.
1976) (stating that “[t]he required knowledge of the act has been defined as a
‘general awareness (on the part of the aider and
abettor) that his role was part of an overall activity that is improper’” and
that “the proof offered must establish conscious involvement in impropriety or
constructive notice of intended impropriety”) (quoting
SEC v. Coffey, 493 F.2d 1304,
1316 (6th Cir. 1974)); Woodward v. Metro Bank of Dallas, 522 F.2d 84, 96
(5th Cir. 1975) (“The postman who mails a fraudulent letter is not covered by
the Act, nor is the company that manufactured the paper on which the violating
documents are printed. . . . [T]he proof must demonstrate actual
awareness
of the party’s role in the fraudulent scheme.”) (citations omitted).
The
investors argue that the federal cases are irrelevant because the Texas
Legislature chose a different, lesser standard for aider liability under the
TSA; specifically, the investors point out
that liability may be imposed on an aider who acted
“with intent to . . . defraud or with reckless disregard for the truth or the
law,” and argue that “reckless disregard” may be shown even if the aider had no awareness of its role in an improper scheme.
See Tex. Rev. Civ. Stat. Ann. art. 581-33F(2). As support for this
proposition, the investors point to a Texas court of appeals case which held
that a “failure to conduct minimal investigation and inquiry” before rendering
assistance with a securities transaction can suffice to create liability under
the “reckless disregard” standard. See Goldstein, 113 S.W.3d at 777.
We
disagree that the “reckless disregard” standard either imposes a lesser standard
than the “general awareness” requirement or allows liability to be imposed for a
mere failure to investigate. Instead, we conclude that the statute’s use of the
phrase “reckless disregard for the truth or the law” accords with the
requirement that an aider must be aware of the primary
violator’s improper activities before it may be held liable for assisting in the
securities violation. The Legislature’s use of the phrase “reckless disregard”
is consistent with a requirement of subjective awareness; at the time that the
Legislature enacted the TSA, this Court had
long held that “recklessness” required evidence of “conscious indifference” in
the context of gross negligence. See Rowan v. Allen, 134 S.W.2d 1022,
1025 (Tex. 1940) (holding that “reckless disregard of the rights of [the]
plaintiff” means “a conscious indifference to her rights or welfare”). The
United States Supreme Court has noted a number of other civil actions in which
recklessness requires a subjective awareness of, and indifference to, the risk
posed by the defendant’s conduct. See Kolstad v.
Am. Dental Ass’n, 527 U.S. 526, 535 (1999). In
Kolstad, the Court stated that “recklessness in
its subjective form” requires “a ‘subjective consciousness’ of a risk of injury
or illegality and a ‘criminal indifference to civil obligations.’” Id. at
536. The Court noted that “recklessness in its subjective form” has been applied
to the recovery of punitive damages in certain civil-rights actions and has also
been applied in defamation cases, which require “knowledge of falsity or
reckless disregard for the truth,” id., a requirement that has been
interpreted to mean that the defendant “in fact entertained serious doubts as to
the truth of his publication.” St. Amant v.
Thompson, 390 U.S. 727, 731 (1968). In Kolstad, the Court applied this subjective standard
to the award of punitive damages in certain employment discrimination actions,
holding that the statute’s “reckless indifference” requirement meant that “an
employer must at least discriminate in the face of a perceived risk that
its actions will violate federal law to be liable in punitive damages.” Kolstad, 527 U.S. at 536 (emphasis added).
We
conclude that the TSA’s scienter requirement of “reckless disregard for the truth or
the law” is similarly intended to impose a requirement of “recklessness in its
subjective form,” and this recklessness must be directly related to the primary
violator’s securities violation. Id. When the Texas Legislature adopted
the aider provision of the
TSA, it explicitly stated that aider liability should be imposed “only if the aider has the requisite scienter.”
Tex. Rev. Civ. Stat. Ann. art. 581‑33, Comment C
1977 Amendment (Vernon Supp.
2004-2005). Furthermore, at the time this amendment was adopted, some scholars
had suggested that the policy concerns favoring a subjective scienter standard outweighed the potential investor
protections available under a “should have known” standard:
In
most cases, the alleged aider and
abettor . . . will merely be engaging in customary business
activities, such as loaning money, managing a corporation, preparing financial
statements, distributing press releases, completing brokerage transactions, or
giving legal advice. If each of these parties will be required to investigate
the ultimate activities of the party whom he is assisting, a burden may be
imposed upon business activities that is too great. . . . The
essential point is that imposition of a duty to investigate under the guise of a
“should have known” standard in essence would amount to eliminating scienter as a necessary element in imposing aiding and
abetting liability and the substitution of a negligence standard.
Ruder,
Multiple Defendants in Securities Law Fraud Cases: Aiding and Abetting,
Conspiracy, In Pari Delicto, Indemnification, and Contribution, 120 U. Pa. L. Rev. 597, 632-33
(1972). The Legislature presumably weighed these policy concerns when it chose
to adopt the “reckless disregard” standard instead of a lower negligence or
“should have known” standard.
We
therefore hold that the TSA’s “reckless
disregard for the truth or the law” standard means that an alleged aider can only be held liable if it rendered assistance “in
the face of a perceived risk” that its assistance would facilitate untruthful or
illegal activity by the primary violator. Tex. Rev. Civ. Stat. Ann. art. 581-33F(2); Kolstad, 527
U.S. at 536. In
order to perceive such a risk, the alleged aider must
possess a “‘general awareness that his role was part of an overall activity that
is improper.’” Gould, 535 F.2d at 780.
We
further hold that the trial court’s failure to include the subjective awareness
requirement in the jury charge was harmful error. The investors assert that no
such instruction was needed; they acknowledge that “the
TSA aider liability
‘reckless disregard for the truth or the law’ language is not inconsistent with
the federal ‘general awareness’ language,” but argue that the charge’s inclusion
of the “reckless disregard” requirement was sufficient to instruct the jury on
the standard for liability. We disagree. The trial court is required to “submit
such instructions and definitions as shall be proper to enable the jury to
render a verdict.” Tex. R. Civ. P. 277. In this case, the jury may
well have thought that “reckless disregard” could be based on evidence of
Sterling’s negligent handling of accounts even if Sterling had no actual
knowledge of Cornelius’s improprieties; the plaintiffs themselves created such a
risk of misinterpretation by arguing repeatedly at trial that Sterling “either
knew fully what Cornelius was doing” or “exercised reckless disregard” by
ignoring internal procedures that would have brought Cornelius’s activities to
light. Ignoring internal procedures that might have alerted
Sterling to Cornelius’s scheme may
be negligence, but it is not “reckless disregard for the truth or the law.”
Therefore, “consider[ing] the pleadings of the
parties, the evidence presented at trial, and the charge in its entirety,” we
conclude that the absence of an instruction on the subjective awareness
requirement “was reasonably calculated [to] and probably did cause the rendition
of an improper judgment.” Island Recreational Dev. Corp. v.
Republic of
Tex. Sav. Ass’n, 710 S.W.2d 551,
555 (Tex. 1986).
III
Sterling
makes two other arguments that it should be absolved of liability for aiding a
securities violation. First, it argues that it cannot be liable as an aider “with respect to transactions and persons with which
Sterling had no contact.” As the
court of appeals correctly noted, however, the
TSA does not require the aider to have had direct dealing with the defrauded party;
indeed, a person who “materially aids a seller” may have no contact at all with
the investors. See Tex. Rev. Civ. Stat. Ann. art. 581‑33F(2).
Sterling
also argues that it cannot be liable as an aider
because the jury found in Sterling’s
favor on its affirmative defense that it did not know, and could not have known,
of the particular misrepresentations or omissions made by Cornelius. This
affirmative defense is available to persons alleged to have committed a primary
violation of the securities laws. As noted above, the statute provides that a
seller of a security may be held liable if it “offers or sells a
security . . . by means of an untrue statement of a material fact
or an omission to state a material fact necessary in order to make the
statements made, in the light of the circumstances under which they are made,
not misleading.” Id. art.
581‑33A(2). The statute permits the seller to avoid liability by proving the
affirmative defense that “he (the offeror or seller)
did not know, and in the exercise of reasonable care could not have known, of
the untruth or omission.”
Id.
Because
the jury was asked whether Sterling
should be held liable as a seller, it was also asked if
Sterling had established this
affirmative defense; specifically, the question asked whether
Sterling “did not know, and in the
exercise of reasonable care, could not have known of the untruth or omission”
made by the seller. The jury found that
Sterling lacked such knowledge and
thereby absolved Sterling of primary
liability as a seller. Sterling
argues that this lack of knowledge also establishes that it cannot be liable as
an aider. We disagree.
The
TSA provides different knowledge requirements
for different classes of defendants; one standard applies to sellers, another
applies to control persons, and a third standard applies to aiders. As noted above, sellers are absolved of liability if
they prove that they lacked knowledge of the “untruth or omission.”
Id. Control persons
may invoke a similar, but not identical, lack-of-knowledge defense:
A
person who directly or indirectly controls a seller, buyer, or issuer of a
security is liable under Section 33A, 33B, or 33C jointly and severally with the
seller, buyer, or issuer, and to the same extent as if he were the seller,
buyer, or issuer, unless the controlling person sustains the burden of proof
that he did not know, and in the exercise of reasonable care could not have
known, of the existence of the facts by reason of which the liability is alleged
to exist.
Id.
art. 581‑33F(1) (emphasis added). The control-person defense differs slightly
from the one applied to sellers; instead of proving that they did not know of
the “untruths or omissions,” control persons must show that they did not know of
“the facts by reason of which liability is alleged to exist.”
Id.
Finally,
the knowledge requirement for aiders is different from
both the standard for control persons and the standard for sellers:
A
person who directly or indirectly with intent to deceive or defraud or with
reckless disregard for the truth or the law materially aids a seller, buyer,
or issuer of a security is liable under Section 33A, 33B, or 33C jointly and
severally with the seller, buyer, or issuer, and to the same extent as if he
were the seller, buyer, or issuer.
Id.
art. 581‑33F(2) (emphasis added). Instead of requiring the aider to establish lack of knowledge as an affirmative
defense, the section on aider liability requires a
plaintiff to prove that the aider acted with “intent
to deceive or defraud or with reckless disregard for the truth or the law.”
Id.
The
legislative history of this provision reflects that the Legislature intended to
apply distinct liability standards to the different categories of defendants.
The Legislature’s comment to section 33F states that the provision “derives in
part from Uniform Securities Act '
410(b).” Id. art. 581‑33,
Comment C
1977 Amendment. Unlike the TSA, however, this
section of the Uniform Securities Act applies the same standard to control
persons and to aiders:
Every
person who directly or indirectly controls a seller liable [for unlawful sales
of securities], every partner, officer, or director of such a seller, . . .
every employee of such a seller who materially aids in the sale, and every
broker‑dealer or agent who materially aids in the sale are also liable jointly
and severally with and to the same extent as the seller, unless the nonseller who is so liable sustains the burden of proof that
he did not know, and in exercise of reasonable care could not have known, of the
existence of the facts by reason of which the liability is alleged to exist.
Unif. Securities Act § 410(b), 7C
U.L.A. 266 (1956).
It
thus appears that the TSA adopted the Uniform
Securities Act’s liability standard for control persons but modified its
standard for aiders; while the
TSA allows a broader class of persons to
qualify as aiders, it imposes a stricter scienter restriction on them. For example, the Uniform
Securities Act of 1956 limited aider liability to a
seller’s employees, brokers, or agents, id., but the
TSA permits “[a] person” who provides
material aid to be held liable. Tex. Rev. Civ. Stat. Ann. art. 581-33F(2). In contrast to its
narrow class of defendants, the Uniform Securities Act imposed a more relaxed
scienter requirement, allowing liability to be imposed
on an aider if it negligently failed to discover the
facts creating liability. § 410(b). Conversely, the
TSA creates a broader class of defendants,
but requires more than mere negligence to impose liability; the
TSA only imposes liability if the aider acted with “intent to deceive or defraud or with
reckless disregard for the truth or the law.” Tex. Rev. Civ. Stat. Ann. art. 581‑33F(2). Furthermore, the
TSA places the burden of proof on the
plaintiff to prove that the defendant acted with the requisite scienter, id., while the Uniform Securities Act
required the defendant to prove that it acted with reasonable care. § 410(b).
Finally, the TSA focuses on the aider’s reckless disregard “for the truth or the law,” art.
581-33F(2), instead of the aider’s knowledge “of the
existence of the facts by reason of which the liability is alleged.” § 410(b).
These modifications indicate that the Legislature gave significant consideration
to the proper scienter standard for aiders. We decline to imply an additional defense not
offered to aiders under the text of the statute.
Sterling
argues that the failure to imply such a defense renders the statute illogical
and allows secondary violators to be held liable even when a primary violator
could escape liability by invoking an affirmative defense. We disagree. First, a
secondary violator’s liability depends upon the primary violator’s culpability;
even without an additional affirmative defense, a secondary violator may only be
held liable “to the same extent as” the primary violator. Tex. Rev. Civ. Stat. Ann. art. 581‑33F(2). Thus, if it were
proven that the seller reasonably believed its statements to be true, there
would be no primary violation and no derivative liability to attach to the aider. Second, the Legislature did not act illogically by
adopting different scienter standards for primary and
secondary violators; the different standards make sense in light of the facts
that these parties may reasonably be expected to know. A primary violator is the
party actually making the misrepresentations or misleading omissions, and it
therefore makes sense to focus on whether it knew the statements were untrue. On
the other hand, an aider may know that the primary
violator is engaging in improper activity, but, if the aider is not involved in the actual sale or offer of the
securities, it may not know what particular misrepresentations or misleading
omissions were made to the investors. Consequently, it makes sense to predicate
liability on the aider’s “reckless disregard for the
truth or the law” rather than the aider’s knowledge of
specific misrepresentations or omissions. In this case, for example, Sterling
argued to the jury that its answer to Question 8Cwhether
Sterling lacked knowledge of the untrue statement or omission found to
constitute securities fraud in Question 1Chad
to be “yes” because “Sterling Trust Company had no way of knowing what Norman
Cornelius was telling or not telling these people.”
The
investors acknowledge that Sterling
may not have known the exact misrepresentations that Cornelius was making to the
investors, but they argue that
Sterling did know that Cornelius was
operating an illegal pyramid scheme. We agree that knowledge of such an illegal
scheme, if proven, could support a finding that
Sterling acted “with reckless
disregard for the truth or the law” even if
Sterling could not have known of the
particular misrepresentations made by Cornelius. See State ex rel. Goettsch v. Diacide Distribs., Inc., 561
N.W.2d 369, 382 (Iowa 1997) (permitting aider
liability under Iowa’s securities statute to be based on the aider’s knowledge that the primary violator was engaging in
“atypical business transactions [that] amounted to a Ponzi scheme”); see also Graham v. Sec. & Exch. Comm’n, 222 F.3d 994, 1005 (D.C. Cir. 2000) (scienter established when aider
continued to assist primary violator despite knowledge of his “irrational
trading” and financial difficulties).
We
acknowledge that there is some tension between the jury’s finding that Sterling
acted with “reckless disregard for the truth or the law” and its finding that
Sterling did not know and could not have reasonably known of “the untruth or
omission” made by Cornelius. However,
Sterling does not argue in this
Court that the two findings conflict, and
Sterling did not seek to have the
jury harmonize these two answers in the trial court. See
Tex. R. Civ. P. 295 (providing that, when a jury’s
verdict contains conflicting answers, “the court shall in writing instruct the
jury in open court of the nature of the . . . conflict, provide the jury such
additional instructions as may be proper, and retire the jury for further
deliberations”). Instead, Sterling
argues only that its lack of knowledge of Cornelius’s “untruth or omission”
establishes as a matter of law that it cannot have acted “with reckless
disregard for the truth or the law.” We disagree. Because the finding referred
specifically to knowledge “of the untruth or omission,” we conclude that this
finding does not establish whether
Sterling knew of Cornelius’s
improper activity in general, and therefore does not necessarily trump the
jury’s finding that Sterling acted
“with intent to deceive or defraud or with reckless disregard for the truth or
the law.”
In
this case, the jury may have agreed that
Sterling could not have known what
Cornelius was telling the investors but nevertheless believed that
Sterling knew that Cornelius was
operating an illegal pyramid scheme. Because the jury in this case was asked
only whether Sterling knew of “the
untruth or omission,” the jury’s “no” answer does not shed light on whether the
jury believed that Sterling knew
Cornelius was engaged in illegal activity.
Sterling’s argument to the jury also
focused on whether Sterling had
knowledge of Cornelius’s statements, not whether it had knowledge of the
underlying scheme. Specifically,
Sterling argued that the jury must
find that Sterling “did not know,
and in the exercise of reasonable care, could not have known of the untruth or
omission” because Sterling “had no
way of knowing what Norman Cornelius was telling or not telling these people.”
Consequently, we hold that the jury’s finding that
Sterling “did not know, and in the exercise of reasonable
care could not have known of the untruth or omission” is not dispositive of the question of whether
Sterling had knowledge of the
underlying wrongdoing.
IV
Sterling
also argues that the trial court improperly instructed the jury on the standard
for breach of fiduciary duty. The trial court instructed the jury that
Sterling failed to comply with its
fiduciary duties if:
a.
Sterling Trust Company did not make reasonable use of the confidence
placed in it; or
b.
Sterling Trust Company did not act in the utmost good faith and did not
exercise the most scrupulous honesty toward the plaintiffs; or
c.
Sterling Trust Company did not place the interests of the plaintiffs
before its own, used the advantage of its position to gain benefit for itself at
the expense of the plaintiffs, and placed itself in a position where its
self‑interest might conflict with its obligations as a fiduciary.
At
the charge conference, Sterling
objected to this instruction,
arguing that it failed to reflect
Sterling’s contractual limitation of
its fiduciary duties. For example, in a document signed by all account holders,
Sterling provided that “Sterling Trust has no responsibility to question any
investment directions given by the individual regardless of the nature of the
investment,” and that “Sterling Trust is in no way responsible for providing
investment advice.” The Texas Trust Code allows parties to contractually limit a
trustee’s duties. See Tex. Prop. Code § 113.059. Because
the question on breach of fiduciary duty did not account for these contractual
modifications, it was overly broad and rendered the question defective. See
Spencer v. Eagle Star Ins. Co. of Am., 876 S.W.2d 154, 157 (Tex. 1994)
(holding that a question in the jury charge that defined the “unfair practice in
the business of insurance” as “any act or series of acts which is arbitrary,
without justification, or takes advantage of a person to the extent that an
unjust or inequitable result is obtained” was defective because the statute
limited the actions for which the defendant could be liable and the instruction
did not reflect those limitations).
* * *
For
the foregoing reasons, we reverse the court of appeals’ judgment and remand the
case to the trial court for further proceedings consistent with this
opinion.
____________________________
Harriet
O’Neill
Justice
OPINION DELIVERED:
June 17, 2005