CONNOLLY, J.
The appellants are former customers of Rebecca Engle, a stockbroker formerly employed by Kirkpatrick Pettis, the predecessor of KFS BD, Inc. The appellants sued KFS BD, a Nebraska corporation and Mutual of Omaha company, and Mutual of Omaha Insurance Company (collectively the defendants). The appellants' theories of recovery hinged on the following allegations: (1) Kirkpatrick Pettis misrepresented to them and to federal regulators
The district court sustained the defendants' motions to dismiss all of the appellants' claims except their negligent misrepresentation claim. Later, it overruled the appellants' motion to file a third amended complaint and granted summary judgment to KFS BD on the appellants' negligent misrepresentation claim.
We affirm in part, and in part reverse as follows:
The background facts in the appellants' operative complaint are substantially the same as those set out in Knights of Columbus Council 3152 v. KFS BD, Inc.
Kirkpatrick Pettis employed Engle from January 1998 to November 2000. Kirkpatrick Pettis was a Mutual company and KFS BD's predecessor. KFS BD is a wholly owned subsidiary of Mutual.
Kirkpatrick Pettis received numerous customer complaints about Engle. In the spring of 2000, Kirkpatrick Pettis experienced a "catastrophic failure" of its compliance and supervisory obligations, leading to the eventual collapse of the business. Mutual's chairman and chief executive officer, president, and board of directors took "heightened" control of Kirkpatrick Pettis and the supervision of Engle.
In December 2000, the defendants knowingly filed or caused to be filed a false and intentionally misleading "Form U-5" with the National Association of Securities Dealers (NASD), now known as the Financial Industry Regulatory Authority, Inc., regarding Engle's separation from KFS BD. In the Form U-5, the defendants represented that Engle's separation from KFS BD's employment was the result of KFS BD's closing its office located in Nebraska City, Nebraska. The defendants also allowed Engle and "Schuster" (a coworker) to falsely represent to customers
The fraud was intended to conceal Engle's improper, wrongful, and negligent acts from the public, existing clients, and new clients. It allowed Engle to be hired by another broker-dealer and to continue offering investment advice to her customers. And it prevented the NASD from investigating Engle's separation from KFS BD, disciplining her, making a public record of her misdeeds, and preventing her from working in the industry. The appellants alleged claims of fraudulent misrepresentation, fraudulent concealment, and negligent misrepresentation. Additionally, they alleged separate claims of "control person" liability and agency liability solely against Mutual.
Upon the defendants' motions to dismiss, the court dismissed the appellants' fraudulent misrepresentation and fraudulent concealment claims. Also, it dismissed the appellants' control person liability and agency claims against Mutual. The only remaining claim was the appellants' negligent misrepresentation claim. Later, the court overruled the appellants' motion to file a third amended complaint and sustained KFS BD's second motion for summary judgment on the appellants' negligent misrepresentation claim.
The appellants assign that the district court erred as follows:
We review a district court's order granting a motion to dismiss de novo. We accept all the factual allegations in the complaint as true and draw all reasonable inferences for the nonmoving party.
Summary judgment is proper if the pleadings and admissible evidence offered show that there is no genuine issue as to any material facts or as to the ultimate inferences that may be drawn from those facts and that the moving party is entitled to judgment as a matter of law.
We first address the appellants' assignment that the court erred in dismissing their fraudulent misrepresentation and fraudulent concealment claims and their claims against Mutual.
The court dismissed the appellants' fraudulent misrepresentation claim because the appellants had failed to plead that they received, or were aware of, a misrepresentation about Engle's discharge upon which they could rely. We agree that the appellants must show that they relied upon some statement other than the Form U-5, or show that they received the information contained in the filing. As we held in Knights of Columbus Council 3152, to the extent that the appellants premised their misrepresentation and concealment claims on statements in the Form U-5, they must show that they were recipients of these statements. They cannot state a claim by alleging that they relied on the lack of regulatory action because of this filing.
But in their general allegations, the appellants alleged that the defendants allowed Engle and Schuster to falsely represent to customers that Kirkpatrick Pettis was closing the Nebraska City office. They alleged that Kirkpatrick Pettis had discharged Engle for misconduct. This allegation is sufficient to survive a motion to dismiss. We cannot say that the complaint fails to show a reasonable expectation that the appellants could prove their claim, i.e., show they received a misrepresentation authorized by Kirkpatrick Pettis that Engle was leaving its employment because it was closing the Nebraska City office. Nor can we say no reasonable expectation exists that they can prove Kirkpatrick Pettis knew its agents were making misleading representations to its customers. Thus, the court erred in dismissing the defendants' fraudulent misrepresentation claim.
Similarly, the court dismissed the appellants' fraudulent concealment claim. It found that the appellants failed to allege that they had access to or relied on the Form U-5. But again, the appellants alleged that the defendants concealed the reason for Engle's discharge by filing the false Form U-5 and by permitting its agents to conceal and misrepresent the facts. If, apart from the filing, the appellants could show that they were recipients of misleading representations that contained omissions amounting to a fraudulent concealment, their claim would be viable. The district court erred in dismissing their fraudulent concealment claim.
The appellants alleged that Mutual was jointly and severally liable as a controlling person under 15 U.S.C. § 78t (2006). Control person liability is a federal statutory remedy imposing joint and several liability on persons who have the power
Controlling persons under this section can include parent corporations.
Although we have determined that the appellants' claim of control person liability fails, most federal courts of appeals have held that control person liability does not exclude common-law agency claims.
"As a general rule, two separate corporations are regarded as distinct legal entities even if the stock of one is owned wholly or partly of the other."
Regarding their motion to dismiss, the appellants informed the court that they based their agency theory of liability against Mutual on apparent authority. The appellants stated that they did not intend to plead derivative theories of liability such as alter ego or piercing the corporate veil. We conclude that despite the
Separate from claims of derivative liability, a parent corporation can be liable for its own participation in its subsidiary's unlawful conduct if it used its ownership interest to intervene and direct the subsidiary's actions.
The appellants concede that their allegations that Kirkpatrick Pettis acted as Mutual's agent in discharging Engle could have been clearer. But they argue that their complaint was sufficient to survive a motion to dismiss. Also, they argue that discovery has revealed evidence that Mutual commanded Kirkpatrick Pettis' actions.
In scrutinizing the complaint, we find the following: (1) Paragraph 13 alleged that Mutual took heightened control of Kirkpatrick Pettis, including supervision of Engle; and (2) paragraph 14 alleged that the defendants allowed Engle and Schuster to falsely represent to customers and Kirkpatrick Pettis that the Nebraska City office was being closed because of a reduction in the sales force. These paragraphs are sufficient to survive a motion to dismiss.
The allegation in paragraph 13, that Mutual took heightened control of supervising Engle, implicitly included its involvement in a decision to discharge her for cause. And paragraph 14 alleged Mutual's direct involvement or authorization of false or misleading misrepresentations regarding Engle's discharge. These allegations were sufficient to suggest a claim for direct participant liability, and we cannot say that there was no reasonable expectation of proving this claim through discovery. Thus, the court erred in dismissing the appellants' claim against Mutual for failing to state a claim regarding its own conduct.
We emphasize, however, that the appellants' claim is not that Mutual controlled Kirkpatrick Pettis to the extent that we should not recognize their separate corporate identities.
The appellants' negligent misrepresentation claim rested solely upon their allegations that Kirkpatrick Pettis supplied false information to the NASD on the Form U-5. As stated above, this claim is insufficient as a matter of law because they failed to allege that they were recipients of the alleged misrepresentation.
We conclude that the appellants' negligent misrepresentation claim fails as a matter of law. We reverse, however, the court's order dismissing the appellants' fraudulent misrepresentation and fraudulent concealment claims. And we reverse the court's dismissal of their claim against Mutual to the extent that the appellants premised their claim upon Mutual's direct participation in Kirkpatrick Pettis' alleged misrepresentations or fraudulent concealment. We remand the cause for further proceedings consistent with this opinion.
AFFIRMED IN PART, AND IN PART REVERSED AND REMANDED FOR FURTHER PROCEEDINGS.
WRIGHT and STEPHAN, JJ., not participating.