Section 20 Liability Discharged in Bankruptcy

Arbitrator Award Against Supervisors is Insufficient to Bar Bankruptcy Discharge for Fraud

Miller & McGavern, In Re: Owens v. Miller, No. 00-3720 (8th Cir., 1/10/02).

Bankruptcy, Effect of (“Nondischargeability”) – Rationale of Award – U.S. Statutes Interpreted (Bankr. Code, 11 U.S.C. §523) – Statutory Definitions (“Fraud”) – 1934 Act (§20(a)).

Actual fraud by supervising parties must be found, and not inferred from the stockbroker’s fraudulent acts, in order for an arbitration claim to be nondischargeable in bankruptcy.

Owens, et al., filed a NASD arbitration against Andover Securities, a broker/dealer and against Miller, Chairman of Andover and McGavern, its President. The Arbitrators found for the customers, holding the three Respondents liable for a total of $226,000, plus 9% interest. The Award was confirmed in federal court in January 1998 and Miller and McGavern each filed for bankruptcy later that year. The bankruptcy court did not rely directly upon the Award (NASD ID #94-03867, Albany, 6/30/97), as the Arbitrators made no findings, but it concluded that Andover’s broker committed fraud within the meaning of §523(a)(2)(A) and imputed that finding to Messrs. Miller and McGavern as “control persons” under §20(a) of the Securities Exchange Act of 1934. The Circuit Court refuses to discharge the claim in bankruptcy due to a finding of fraud on the part of the broker (Bohling) that is attributable to Miller and McGavern under Section 20(a).

The Court holds that to extend a finding of Section 20(a) liability to a finding of “fraud” under the Bankruptcy Code’s nondischargeability provisions would require congressional, not judicial, intervention. The dissent points out that all parties were adjudged jointly and severally liable and that Bohling’s claim would not be dischargeable. (SLC Ref. No. 2002-03-03)

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Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article. 


Mark J. Astarita, Esq. is a securities lawyer who represents investors, financial professionals and firms in litigation, arbitration and regulatory matters across the country. He is a partner in the national securities law firm of Sallah Astarita & Cox, LLC and can be reached by email at or by phone at 212-509-6544.

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Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.

He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page -, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.