§ 5.1.2.6 RESPONSIBLE-CORPORATE-OFFICER LIABILITY

• Jurisdiction: Arizona

§ 5.1.2.6 Responsible-Corporate-Officer Liability

Respondeat superior is a theory of vicarious-employer liability.¹⁸⁵⁷ The theory is not, though, one that can be used to bypass the corporate form and hold the employer's management liable. Attempts to use respondeat superior to hold corporate officers vicariously liable for the acts of employees they oversee have been unsuccessful.¹⁸⁵⁸ But a doctrine does exist that is occasionally used to impose extended liability on corporate officers not too different from respondeat superior.¹⁸⁵⁹

The doctrine, known as the responsible-corporate-officer doctrine, emerged in criminal cases involving public-welfare statutes.¹⁸⁶⁰ It has not been clearly applied in a reported securities case.¹⁸⁶¹ The securities statutes are, however, public-welfare statutes.¹⁸⁶² They are intended to protect the public from dishonest investment schemes.¹⁸⁶³ In part, the statutes create strict liability. Awareness of wrongdoing is not required to establish a registration violation,¹⁸⁶⁴ nor for violations of subsections (2) or (3) of § 44-1991(A).¹⁸⁶⁵ Unless the defendant establishes the reasonable-care defense provided by
§ 44-2001(B), even an innocent misrepresentation may create liability.¹⁸⁶⁶ These strict-liability features of the securities statutes and the overarching goal of public protection match the public-welfare rationale that underpins the responsible-corporate-officer doctrine.¹⁸⁶⁷

In criminal cases the courts have applied the doctrine to corporate officers who have the responsibility and authority to prevent or correct corporate misconduct.¹⁸⁶⁸ The doctrine has been applied in a variety of prosecutions including cases involving antitrust violations, unfair business practices, and false advertising.¹⁸⁶⁹ Although it began as a criminal doctrine, as did civil liability for aiding and abetting and conspiracy, the doctrine's application to civil cases is logical.¹⁸⁷⁰ Because the securities laws are, in part, strict-liability, public-welfare laws,¹⁸⁷¹ applying the doctrine to them is reasonable. The doctrine has been invoked in civil antitrust litigation and was applied in an unpublished Arizona securities case.¹⁸⁷²

To establish a prima facie case under the responsible-corporate-officer doctrine, it must be shown "that the defendant had, by reason of his position in the corporation, responsibility and authority either to prevent in the first instance, or promptly to correct, the violation complained of, and that he failed to do so."¹⁸⁷³ The corporate officer need not participate in the criminal act.¹⁸⁷⁴ The officer may be liable even though the officer is entirely unaware of the wrongdoing.¹⁸⁷⁵ The defendant does, though, have a limited defense. The law does not require what is "objectively impossible."¹⁸⁷⁶ The defendant can defeat liability by proving that he or she was "powerless" to prevent or correct the violation.¹⁸⁷⁷

--------

Notes:

^[1857]Seeinfra § 7.2.

^[1858]See, e.g., Hardy v. Walsh Manning Sec., L.L.C., 341 F.3d 126, 130 (2d Cir. 2003) ("The principle that respondeat superior is a form of secondary liability that cannot be imposed upon the fellow employee of a wrongdoer is certainly well-defined and explicit in New York.").

^[1859]See BEC Corp. v. Dep't of Envtl. Prot., 775 A.2d 928, 938 (Conn. 2001) (discussing the responsible-corporate-officer doctrine and stating that: "[A] corporate officer's liability under the act is not tantamount to vicarious liability where the corporate officer may be held liable simply because the officer occupies the position of officer or director; rather, we hold that a corporate officer's conduct must have a responsible relationship to a violation of the act.").

^[1860] The history of the doctrine is traced from its English common-law roots to modern times in Noël Wise, Personal Liability Promotes Responsible Conduct:...