In re Cossu, 410 F.3d 591 (9th Cir. 2005)

Jefferson Pilot Securities filed a claim in the bankruptcy proceeding of Claude Cossu, one of its former broker-dealers, who had failed to report his outside business activities to Jefferson Pilot (for which he was an NASD-registered representative). Cossu was aware that under NASD guidelines, he was not permitted to engage in private securities transactions without obtaining Jefferson Pilot’s prior approval. Notwithstanding Cossu’s agreement with Jefferson Pilot, Cossu sold promissory notes from SafeRate Financial Services on which he earned approximately $500,000 in commissions. After the SEC closed down one of the companies from which Cossu’s clients had purchased the SafeRate notes, the SEC sued Cossu, and the customers sued Jefferson Pilot for losses they had suffered. Cossu, who had a “serious gambling habit,” filed a Chapter 7 bankruptcy petition. Jefferson Pilot then brought an adversary proceeding against Cossu to recover the amounts it had paid to defend and settle the claims brought against it by Cossu’s clients. The Bankruptcy Court awarded Jefferson Pilot $1.2 million against Cossu on the ground that the debt was non-dischargeable in Cossu’s bankruptcy since it amounted to fraud committed in a fiduciary capacity. The Ninth Circuit affirmed the judgment against Cossu based on his fraudulent activity, but remanded the matter to the lower court with orders to recalculate the appropriate amount of the non-dischargeable award against Cossu.