``Subjective'' Knowledge Required to Sue Broker-Dealers for Fraud on the Transfer of Securities.

Business Editors/Legal Writers

NEW YORK--(BUSINESS WIRE)--March 24, 2003

Case of First Impression Decided By California Court of Appeal Has

National Implications on UCC Article 8 According to Dorsey & Whitney

The California Court of Appeal has ruled that "subjective" knowledge of fraud is required to sue broker-dealers for fraud related to the transfer of securities. The case of first impression has national implications on the Uniform Commercial Code (UCC) Article 8, because the California Code at issue is based on the UCC. The decision in Decker v. Yorkton Securities, Inc., was filed by California Court of Appeal, First Appellate District, Division Five Judge David A. Garcia on March 13, 2003. The complete decision can be accessed online at http://www.courtinfo.ca.gov/opinions/documents/A096965.PDF.

"This ruling is of interest to all brokers, dealers and transfer agents across the country who are concerned about how the industry's increased focus on responsibility to clients and shareholders will apply to them," stated Dorsey Securities & Financial Litigation Practice Group Co-Chair Stewart D. Aaron, who orally argued the appeal. "It is the first time any U.S. court at this level has interpreted this provision."

Dorsey client Yorkton Securities, Inc., a Canadian investment dealer, and other securities dealers were sued by InnovaCom, Inc., a Florida company born out of a merger. Immediately prior to the creation of InnovaCom, executives from one of the merged entities fraudulently issued millions of dollars of InnovaCom stock certificates. Some of the certificates were then deposited with Yorkton, who forwarded them to the transfer agent for conversion into "street name," and then these certificates were deposited with a securities depository in New York, to enable them to be sold in U.S. securities markets.

InnovaCom sued the former executives and transfer agent. InnovaCom also pursued the Canadian investment dealers, arguing that they should have acted as "gatekeepers" for the securities markets in detecting and preventing the transfers of the fraudulent certificates. Yorkton argued immunity to InnovaCom's adverse interest claim pursuant to UCC Article 8, and the trial court agreed.

In this decision, the California Court of Appeal affirmed, clearing the defendants of liability, as they did not have knowledge of the fraud or, in other words, did not know facts that subjectively would have led them to believe there was an adverse claim. The Court specifically held, "(a)n introducing broker does not have actual notice of an adverse claim . . . unless it believes there is significant probability of an adverse claim and nevertheless deliberately avoids further information that would confirm its suspicion."

Dorsey's representation of Yorkton Securities, Inc. was led by Aaron and Benjamin J. Catalano, a corporate attorney and litigator, with assistance from paralegal Veronica Guevara, each from Dorsey's New York office, with assistance from Gilda R. Turitz of San Francisco-based Sideman & Bancroft.

About Dorsey

Dorsey's Securities & Financial Litigation Practice Group consists of 45 lawyers throughout its offices experienced in handling cases ranging from the defense of complex class actions to broker-customer and broker-broker disputes. Lawyers in the Group have a history representing national and regional financial institutions and underwriters, as well as issuers, directors and officers, and individuals on a wide range of matters. The complementary Broker-Dealer Practice Group handles securities and regulatory matters for firms in the securities industry, including many Canadian investment dealers.

Dorsey & Whitney, with a team of more than 700 lawyers in 21 offices in the USA, Canada, Europe and Asia, is a fully integrated multipractice law firm that has served its clients for nearly 100 years. Dorsey is the only U.S. law firm with offices in the two principal Canadian financial centers, Toronto and Vancouver. One of the world's largest law firms, Dorsey represents Fortune 500 companies, multinational companies, nonprofits and governments as well as leaders in the life sciences, technology, securities, financial services, investment banking and energy sectors.