Roos v. KFS BD, Inc.

• We affirm the court’s dismissal of the appellants’ negligent
misrepresentation claim. This claim, which was based solely on
statements in a securities regulations filing, fails because the
appellants did not allege that they received the statements.
• We reverse the court’s dismissal of the appellants’ fraudu-
lent misrepresentation claim to the extent that it is based on
statements made in letters Kirkpatrick Pettis sent or autho-
rized Engle to send to its customers. The appellants plausibly
claimed that the letters created a false impression about Engle’s
leaving her employment with Kirkpatrick Pettis.
• We reverse the court’s dismissal of the appellants’ fraudu-
lent concealment claim that was also based on these letters.
The appellants plausibly claimed that they would not have
transferred their business to Engle’s new broker-dealer if mate-
rial facts regarding her discharge had been disclosed.
A ffirmed in pArt, And in pArt reversed And
remAnded for further proceedings.
W right and stephAn, JJ., not participating.
A llen roos And deAn roos , cotrustees of the leslie d.
roos And ruby s. roos trust, et Al ., AppellAnts , v.
Kfs bd, inc., A nebrAsKA corporAtion, And
mutuAl of omAhA insurAnce compAny,
A nebrAsKA corporAtion, Appellees.
799 N.W.2d 43
Filed December 10, 2010. 	No. S-09-477.
1. Motions to Dismiss: Pleadings: Appeal and Error. An appellate court reviews
a district court’s order granting a motion to dismiss de novo. It accepts all the
factual allegations in the complaint as true and draws all reasonable inferences
for the nonmoving party.
2. Motions to Dismiss: Pleadings. To prevail against a motion to dismiss for failure
to state a claim, a plaintiff must allege sufficient facts, accepted as true, to state a
claim for relief that is plausible on its face.
3. ____: ____. When a plaintiff does not or cannot allege specific facts showing a
necessary element, the factual allegations, taken as true, are nonetheless plausible
if they suggest the existence of the element and raise a reasonable expectation
that discovery will reveal evidence of the element or claim.
930 	280 NEbrASKA rEPorTS
Nebraska Supreme Court Online Library
www.nebraska.gov/apps-courts-epub/
11/01/2026 04:47 AM CST

4. Summary Judgment. Summary judgment is proper if the pleadings and admis-
sible 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.
5. Pleadings: Appeal and Error. Permission to amend a pleading is addressed to
the discretion of the trial court, and an appellate court will not disturb the trial
court’s decision absent an abuse of discretion.
6. Securities Regulation: Federal Acts: Liability: Words and Phrases. Control
person liability is a federal statutory remedy imposing joint and several liability
on persons who have the power to control the conduct of a person violating secu-
rities laws.
7. Securities Regulation: Federal Acts: Liability. Liability for controlling persons
is secondary and depends upon showing liability for a primary violation of the
Securities Exchange Act of 1934.
8. Securities Regulation: Federal Acts: Courts: Jurisdiction. Federal courts have
exclusive jurisdiction over violations of the Securities Exchange Act of 1934.
9. ____: ____: ____: ____. because a claim of control person liability under
15 U.S.C. § 78t (2006) depends upon showing an underlying violation of the
Securities Exchange Act of 1934, federal courts also have exclusive jurisdiction
over such claims.
10. Corporations. 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.
11. Corporations: Liability. A parent corporation is not liable for the acts of its
subsidiary merely because of stock ownership.
12. ____: ____. 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.
13. Corporations: Liability: Proof. Under the theory of direct participant liability, it
is not sufficient to show that the parent and subsidiary corporations shared com-
mon directors.
14. ____: ____: ____. For a plaintiff to prevail in a direct participant claim, it must
distinguish the intervening conduct from a parent corporation’s normal control
of a subsidiary—such as supervising the subsidiary’s finance and budget deci-
sions or general policies. The critical question is whether, in degree and detail,
actions directed to the facility by an agent of the parent alone are eccentric under
accepted norms of parental oversight of a subsidiary’s facility.
Appeal from the District Court for otoe County: pAul W.
Korslund, Judge. Affirmed in part, and in part reversed and
remanded for further proceedings.
J.L. Spray and randall V. Petersen, of Mattson, ricketts,
Davies, Stewart & Calkins, for appellants.
rooS v. KFS bD, INC. 	931
Cite as 280 Neb. 930

James M. bausch and Andre r. barry, of Cline, Williams,
Wright, Johnson & oldfather, L.L.P., for appellee KFS bD,
Inc.
Joseph E. Jones and Timothy J. Thalken, of Fraser Stryker,
P.C., 	L.L.o., 	for 	appellee 	Mutual 	of 	omaha 	Insurance
Company.
heAvicAn, 	c.J., 	connolly, 	gerrArd, 	mccormAcK, 	and
miller-lermAn, JJ.
connolly, J.
I. SUMMArY
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 defend-
ants). The appellants’ theories of recovery hinged on the fol-
lowing allegations: (1) Kirkpatrick Pettis misrepresented to
them and to federal regulators why Kirkpatrick Pettis termi-
nated Engle’s employment; and (2) the defendants concealed
the true reason for Engle’s discharge.
The district court sustained the defendants’ motions to dis-
miss all of the appellants’ claims except their negligent mis-
representation claim. Later, it overruled the appellants’ motion
to file a third amended complaint and granted summary judg-
ment to KFS bD on the appellants’ negligent misrepresenta-
tion claim.
We affirm in part, and in part reverse as follows:
• We reverse that part of the court’s order dismissing the
appellants’ fraudulent misrepresentation and fraudulent con-
cealment claims.
• We affirm that part of the court’s order dismissing the
appellants’ “control person” liability claim against Mutual of
omaha Insurance Company (Mutual).
• We reverse that part of the court’s order dismissing the
appellants’ agency claim against Mutual.
• We affirm the court’s order of summary judgment for
the defendants on the appellants’ negligent misrepresenta-
tion claim.
932 	280 NEbrASKA rEPorTS

• We affirm the court’s order denying the appellants leave to
amend their complaint.
II. bACKGroUND
1. complAint’s A llegAtions
The background facts in the appellants’ operative com-
plaint are substantially the same as those set out in Knights of
Columbus Council 3152 v. KFS BD, Inc.1 Although the parties
presented additional evidence in this case at the summary judg-
ment hearing, that evidence was only relevant to the appellants’
negligent misrepresentation claim. As we explain below, the
appellants’ negligent misrepresentation claim fails as a mat-
ter of law. but we do not consider the evidence presented at
the summary judgment hearing to analyze the court’s order
sustaining the defendants’ motions to dismiss. For reviewing
that order, we accept as true the following factual statements
and reasonable inferences from the appellants’ complaint and
attached exhibits.2
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 experi-
enced a “catastrophic failure” of its compliance and supervi-
sory obligations, leading to the eventual collapse of the busi-
ness. 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
1 See Knights of Columbus Council 3152 v. KFS BD, Inc., ante p. 904, 791
N.W.2d 317 (2010).
2 See id.
rooS v. KFS bD, INC. 	933
Cite as 280 Neb. 930

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 that Kirkpatrick Pettis was closing the Nebraska
City office because of a reduction in its sales force. In reality,
Kirkpatrick Pettis had asked Schuster to stay and operate the
office and had discharged Engle for cause.
The 	fraud 	was 	intended 	to 	conceal 	Engle’s 	improper,
wrongful, and negligent acts from the public, existing cli-
ents, 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 investi-
gating 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 sepa-
rate claims of “control person” liability and agency liability
solely against Mutual.
2. district court’s orders
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 misrepresenta-
tion 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.
III. ASSIGNMENTS oF Error
The 	appellants 	assign 	that 	the 	district 	court 	erred 	as
follows:
(1) in dismissing their claims of fraudulent misrepresenta-
tion and fraudulent concealment;
(2) in dismissing their claims against Mutual;
(3) in sustaining KFS bD’s motion for summary judgment
on their negligent misrepresentation claim;
934 	280 NEbrASKA rEPorTS

(4) in sustaining KFS bD’s objection to exhibit 30, a wit-
ness’ affidavit; and
(5) in denying their motion for leave to file a third amended
complaint.
IV. STANDArD oF rEVIEW
[1-3] 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.3 To prevail against a motion to dismiss for
failure to state a claim, a plaintiff must allege sufficient facts,
accepted as true, to state a claim for relief that is plausible on
its face.4 When a plaintiff does not or cannot allege specific
facts showing a necessary element, the factual allegations,
taken as true, are nonetheless plausible if they suggest the
existence of the element and raise a reasonable expectation that
discovery will reveal evidence of the element or claim.5
[4] Summary judgment is proper if the pleadings and admis-
sible 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.6
[5] Permission to amend a pleading is addressed to the
discretion of the trial court, and we will not disturb the trial
court’s decision absent an abuse of discretion.7
V. ANALYSIS
1. order dismissing clAims
We first address the appellants’ assignment that the court
erred in dismissing their fraudulent misrepresentation and fraud-
ulent concealment claims and their claims against Mutual.
3 Id.
4 Id.
5 Id.
6 State ex rel. Wagner v. Gilbane Bldg. Co., ante p. 223, 786 N.W.2d 330
(2010).
7 See Ferer v. Aaron Ferer & Sons, 278 Neb. 282, 770 N.W.2d 608 (2009).
rooS v. KFS bD, INC. 	935
Cite as 280 Neb. 930

(a) The Fraudulent Misrepresentation
Claim Survives
The court dismissed the appellants’ fraudulent misrepresen-
tation 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 appel-
lants 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.8
We also agree that they did not allege they were recipients of
statements in the Form U-5.
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 autho-
rized by Kirkpatrick Pettis that Engle was leaving its employ-
ment 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 rep-
resentations to its customers. Thus, the court erred in dismiss-
ing the defendants’ fraudulent misrepresentation claim.
(b) The Fraudulent Concealment
Claim Survives
Similarly, the court dismissed the appellants’ fraudulent con-
cealment 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
8 Knights of Columbus Council 3152, supra note 1.
936 	280 NEbrASKA rEPorTS

Engle’s discharge by filing the false Form U-5 and by permit-
ting its agents to conceal and misrepresent the facts. If, apart
from the filing, the appellants could show that they were recipi-
ents 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.
(c) Control Person Liability
[6] The appellants alleged that Mutual was jointly and sev-
erally 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 to control the conduct of a person violating securities
laws. Section 78t(a) sets out the elements required for control
person liability under the Securities Exchange Act of 1934
(Securities Exchange Act):
Every person who, directly or indirectly, controls any
person liable under any provision of this chapter or of
any rule or regulation thereunder shall also be liable
jointly and severally with and to the same extent as such
controlled person to any person to whom such controlled
person is liable, unless the controlling person acted in
good faith and did not directly or indirectly induce the act
or acts constituting the violation or cause of action.
[7-9] Controlling persons under this section can include
parent corporations.9 but liability for controlling persons is
secondary and depends upon showing liability for a primary
violation of the Securities Exchange Act.10 Federal courts have
exclusive jurisdiction over violations of the Securities Exchange
Act.11 because a claim of control person liability under 15
U.S.C. § 78t depends upon showing an underlying violation of
the Securities Exchange Act, federal courts also have exclusive
jurisdiction over such claims. The court dismissed this claim
9 See Annot., 182 A.L.r. Fed. 387 (2002).
10 See, e.g., In re Cutera Securities Litigation, 610 F.3d 1103 (9th Cir. 2010);
Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124 (2d Cir. 1994).
11 See 15 U.S.C. § 78aa (2006).
rooS v. KFS bD, INC. 	937
Cite as 280 Neb. 930

because control person liability applies only to a federal securi-
ties fraud claim. The appellants do not specifically argue this
ruling in their brief, and we conclude that the court did not err
in dismissing the appellants’ claim to the extent it relied on
control person liability.
(d) Direct Participant Liability
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.12 The appellants contend that their allegations
of Mutual’s control over Kirkpatrick Pettis are relevant to their
agency theory of recovery. The court rejected the appellants’
claim of agency liability. It determined that the appellants
failed to allege that Kirkpatrick Pettis had acted on Mutual’s
behalf in firing Engle or filing the Form U-5.
[10,11] “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.”13 So a parent corpora-
tion is not liable for the acts of its subsidiary merely because
of stock ownership.14 but circumstances exist when a parent
corporation can be directly or derivatively liable for the acts of
its subsidiary.
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 appellants’ label of apparent authority, the issue
raised by their allegations is direct participant liability. Under
the theory of direct participant liability, Mutual could only be
liable for actions taken by Kirkpatrick Pettis if it had directed
12 2 Thomas Lee Hazen, The Law of Securities regulation § 7.12[2] (6th ed.
2009).
13 1 William Meade Fletcher, Fletcher Cyclopedia of the Law of Corporations
§ 43 at 285 (perm. ed., rev. vol. 2006).
14 See, e.g., United States v. Bestfoods, 524 U.S. 51, 118 S. Ct. 1876, 141 L.
Ed. 2d 43 (1998).
938 	280 NEbrASKA rEPorTS

its subsidiary to conceal material facts or make false represen-
tations about Engle’s discharge or to permit Kirkpatrick Pettis’
agents to do so.
[12-14] Separate from claims of derivative liability, a par-
ent 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.15 but under
the theory of direct participant liability, it is not sufficient to
show that the parent and subsidiary corporations shared com-
mon directors.16 For a plaintiff to prevail in a direct participant
claim, it must distinguish the intervening conduct from a parent
corporation’s normal control of a subsidiary—such as supervis-
ing the subsidiary’s finance and budget decisions or general
policies.17 “The critical question is whether, in degree and
detail, actions directed to the facility by an agent of the parent
alone are eccentric under accepted norms of parental oversight
of a subsidiary’s facility.”18
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 suffi-
cient to survive a motion to dismiss.
15 See, Bestfoods, supra note 14; Esmark, Inc. v. N.L.R.B., 887 F.2d 739 (7th
Cir. 1989); Forsythe v. Clark USA, Inc., 224 Ill. 2d 274, 864 N.E.2d 227,
309 Ill. Dec. 361 (2007); 10 William Meade Fletcher, Fletcher Cyclopedia
of the Law of Corporations § 4878 (perm. ed., rev. vol. 2010).
16 See Bestfoods, supra note 14.
17 See id.
18 Id., 524 U.S. at 72.
rooS v. KFS bD, INC. 	939
Cite as 280 Neb. 930

The allegation in paragraph 13, that Mutual took heightened
control of supervising Engle, implicitly included its involve-
ment 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 dis-
charge. 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.19
Instead, their claim is that in this specific instance, Mutual
used its ownership control to achieve the intended result of
misleading the appellants about Engle’s discharge. The appel-
lants cannot premise direct participant liability on the mere
fact that Kirkpatrick Pettis shared directors with Mutual. The
evidence must show that a Mutual officer intervened in the
management of Kirkpatrick Pettis to direct its conduct.
2. the A ppellAnts’ negligent misrepresentAtion
clAim fAils
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.20 The appellants’ third amended complaint
similarly failed to allege that they were recipients of statements
in the Form U-5. So the court’s ruling that they could not file
the third amended complaint does not change our analysis.
Similarly, exhibit 30, a witness’ affidavit, was relevant only
to their claim that they could rely on the lack of regulatory
19 See Hayes v. Sanitary & Improvement Dist. No. 194, 196 Neb. 653, 244
N.W.2d 505 (1976).
20 Knights of Columbus Council 3152, supra note 1.
940 	280 NEbrASKA rEPorTS

action taken because of the Form U-5 filing. We rejected that
argument in Knights of Columbus Council 3152.21 because the
appellants failed to allege that they received statements made
in the Form U-5, the court did not err in (1) granting KFS bD
summary judgment, (2) excluding exhibit 30, and (3) denying
leave to file a third amended complaint.
VI. CoNCLUSIoN
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 participa-
tion in Kirkpatrick Pettis’ alleged misrepresentations or fraudu-
lent concealment. We remand the cause for further proceedings
consistent with this opinion.
A ffirmed in pArt, And in pArt reversed And
remAnded for further proceedings.
Wright and stephAn, JJ., not participating.
21 See id.
WrIGHT v. oMAHA PUb. SCH. DIST. 	941
Cite as 280 Neb. 941
feliciA Wright, individuAlly And As speciAl A dministrAtor
of the estAte of chAsity Wright, AppellAnt, v.
omAhA public school district, Appellee .
portiA denAy loyd, A minor , by And through her mother
And next friend, deidrA loyd, AppellAnt, v.
omAhA public school distrct, Appellee .
791 N.W.2d 760
Filed December 10, 2010. 	Nos. S-10-048, S-10-067.
1. Jurisdiction: Appeal and Error. before reaching the legal issues presented for
review, it is the duty of an appellate court to settle jurisdictional issues presented
by a case.
2. ____: ____. A jurisdictional question which does not involve a factual dispute is
determined by an appellate court as a matter of law.