March 17, 2003

Public Citizen Urges Texas Supreme Court to Overturn Ruling That Would Strand Victims of Financial Fraud, Insulate Companies

Dean Witter Brokerage Firm Should Be Liable for Employee’s Fraud

AUSTIN, Texas – Public Citizen today urged the Texas Supreme Court to review a ruling that, if allowed to stand, would insulate brokerage firms and other financial institutions from most, if not all, intentional fraud perpetrated by their employees.

The ruling makes it far less likely that victims of fraud will be compensated for their losses. It also would send a message to firms that they won’t have to monitor their employees as closely as they do now, Public Citizen said in an amicus brief.

Courts throughout the country have ruled that employers are liable for their workers’ misdeeds when the workers commit those acts as part of their general scope of authority – that is, when the employer has the right and power to direct and control the worker in the performance of the act that caused the harm.

In the case, Millan v. Dean Witter Reynolds, Inc. , 90 S.W.3d 760, the Fourth District Court of Appeals in San Antonio acknowledged that the Dean Witter employee in question, Miguel Millan, stole about $287,000 over a three-year period from his mother’s Dean Witter account that he had established in his role as a Dean Witter broker. Millan engaged in a series of deceitful acts, such as forging his mother’s name on checks and creating false account statements. Dean Witter was hardly blameless, as it failed, for instance, to follow special rules for oversight of familial accounts.

The Court of Appeals ruled last year that, because Dean Witter had not specifically authorized Millan to engage in fraud, the brokerage firm was not liable for Millan’s wrongdoing.

But the appellate court was confusing specific authority with the general authority that Dean Witter had given Millan, Public Citizen said in the brief. If employers could be held liable only for acts they specifically authorized, employers would usually escape liability for fraud, because they would never authorize an employee to steal, the brief said.

"The Court of Appeals should have focused on Miguel’s general acts – the opening of the Dean Witter account, the receipt of money for investment, and the like," the brief says. "That conduct was in furtherance of the employer’s business, and [these] were exactly the kinds of acts that Miguel was hired to do."

Recent corporate scandals have shown that there is increased need to protect consumers from abuse whether it be at the hands of brokers, accounting firms, or other corporate actors, and yet the Court of Appeals decision moves in the other direction. The brief notes that, unless the Texas Supreme Court steps in, defrauded Texans will have little recourse, because the industry will hide behind its employees, who don’t have the resources to fully compensate their victims, said Brian Wolfman, an attorney with the Public Citizen Litigation Group, who filed the brief.

"The appellate court ruling is very disturbing because it flies in the face of settled law," Wolfman said. "If the Texas Supreme Court doesn’t overturn this decision, financial institutions will have far less incentive to oversee their employees’ conduct. Fraud victims could be left out in the cold."

Said Tom "Smitty" Smith, director of Public Citizen’s Texas office, "If the appellate court ruling stands, big corporations would be shielded, while consumers will be stripped of their assets and left without many options to recoup their losses."

To read Public Citizen’s brief, click here.

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