District Court Holds SEC Cannot Use CEO’s Criminal Conviction to Establish Company’s Liability
Recently, the Northern District of Illinois denied the SEC summary judgment on its claims against a company charged with fraudulently offering and failing to register securities. United States Securities and Exchange Commission v. Webb et al. In doing so, it rejected the SEC’s argument that, pursuant to the doctrines of collateral estoppel and respondeat superior, the company’s liability for the alleged securities violations was established through the criminal conviction of the company’s founder, CEO, and chairman for wire and mail fraud. The Court’s decision emphasizes the legal necessity of establishing and giving each defendant the opportunity to defend against the claims brought against them, even if claims against companies and their officers for purported securities violations seem inextricably related.
In SEC v. Webb., No. 11 C 7152 (N.D. Ill.), the SEC alleged that InfrAegis, Inc. and its founder, CEO, and chairman, Gregory Webb, violated the Securities Act of 1933 and the Securities Exchange Act of 1934 by (1) fraudulently raising funds from investors through a false portrayal of InfrAegis’s success; and (2) failing to register its securities. A separate, criminal case was brought against Webb “based on the same underlying facts in this case,” and this civil action was stayed pending the outcome of that matter. Order and Op. at 1 (Apr. 2, 2019). After a jury returned a verdict finding Webb guilty of both wire and mail fraud, however, the SEC, having separately settled with Webb, moved for summary judgment against InfrAegis in this case.
Specifically, despite the fact that “[t]he criminal case . . . did not include a finding that InfrAegis was vicariously liable for Webb’s actions, and neither Webb nor InfrAegis were tried or found guilty of any violations of the Securities Act or the Exchange Act,” id. at 4, the SEC argued that InfrAegis was precluded “from contesting its liability on the SEC’s securities fraud claims in light of Webb’s convictions for mail and wire fraud based on the same conduct at issue in this case and Webb’s role as InfrAegis’[s] chairman, CEO, and majority owner,” id. at 5. But the Court rejected this argument. While it found that “Webb’s criminal conviction establishe[d] all the elements necessary to support his civil liability,” id. at 6 (emphasis added), the Court held that InfrAegis was not “fully represented during Webb’s [criminal] trial,” as is required to establish issue preclusion. Id. at 1. In doing so, the Court further rejected the SEC’s contention that because Webb was represented at his criminal trial and was in privity with InfrAegis, InfrAegis had a full and fair opportunity to litigate the issues presented there. The Court found that no exception “to the rule against nonparty preclusion” applied here because (1) “[a] principal-agent or fiduciary relationship at the time the alleged acts occurred” is not a recognized exception; and (2) there was no evidence that InfrAegis controlled Webb’s criminal defense “or that Webb remained an agent or fiduciary of InfrAegis at the time of his trial.” Id. at 7-8.
Moreover, while neither party disputed that the doctrine of respondeat superior could apply to securities fraud claims “where the employee acted in the scope of his employment in furtherance of the corporation’s goals,” the Court also held that the SEC could not “use respondeat superior to circumvent the . . . requirement of issue preclusion that InfrAegis have had a full and fair opportunity to litigate the issues.” Id. at 9. Thus, the Court denied the SEC’s motion for summary judgment concerning the securities fraud claims against InfrAegis.