[707]*707DOOLING, District Judge:
Marbury Management, Inc., (“Marbury”) and Harry Bader sued Alfred Kohn and Wood, Walker & Co., the brokerage house that employed Kohn, for losses incurred on securities purchased through Wood, Walker allegedly on the faith of Kohn’s representations that he was a “lawfully licensed registered representative,” authorized to transact buy and sell orders on behalf of Wood, Walker.1 After a non-jury trial before the Honorable Lee P. Gagliardi, District Judge, the court found that Kohn was employed by Wood, Walker as a trainee and that his repeated statements that he was a stock broker and his use of a business card stating that he was a “portfolio management specialist” were undeniably false; the court found further that Kohn made the statements with intent to deceive, manipulate or defraud in making them, and that his misstatements were material. The court found that Kohn’s misrepresentations about his employment status caused Marbury and Bader to purchase securities from Kohn between summer 1967 and April 1969. The district court also found that the predictive statements Kohn made about various securities were not fraudulently made, and that there was no evidence that they were made without a firm basis.
Judge Gagliardi reasoned: a trainee at a brokerage firm can accept buy or sell orders by phone only under the supervision of a broker and cannot recommend the purchase of a security outside the brokerage office; moreover, the qualifications and expertise of a security salesman are particularly significant criteria in evaluating any information as inherently speculative as future earnings predictions; and a reasonable investor would consider the total mix of information that he received significantly altered if he learned that the investment advice was being furnished to him by a trainee in the field rather than by a specialist. Judge Gagliardi concluded that the important circumstance was that the terms “broker” and “specialist” themselves connote a level of competence to the reasonable investor. Thus, he held Kohn liable to plaintiffs under § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b). Inferentially Judge Gagliardi found that Kohn’s misstatements of his status not only induced the purchase of the securities involved but their retention as investments as well, until it became evident that Kohn was not, as his business card asserted, a “security analyst” and “portfolio management specialist” associated with Wood, Walker, but simply a trainee. Since both plaintiffs learned the true facts about Kohn’s status on about January 28, 1970, Judge Gagliardi computed the damage award to each plaintiff by taking the difference between the price each plaintiff paid for the securities and either the selling price of the securities, if sold before January 28, 1970, or the value within a reasonable time after that date, if the securities were still held on that date.
Judge Gagliardi dismissed the plaintiffs’ claims against Wood, Walker on the ground of plaintiffs’ failure to prove that Wood, Walker participated in the fraudulent manipulation or intended to deceive plaintiffs; treating plaintiffs as basing their claims against Wood, Walker solely on the theory that the firm aided and abetted Kohn’s fraud, the court found that the evidence supported neither a finding of conscious wrongful participation by the firm nor a legally equivalent recklessness but at best a finding of negligence in supervision.
Judge Gagliardi’s findings of fact are not clearly erroneous. The cross-appeals of defendant-appellant Kohn from the judgment against him and of plaintiffs-appellants from the judgment exonerating Wood, Walker from liability raise questions of law that are hardly novel but are not free from difficulty in application. It is concluded that the judgment against appellant Kohn must be affirmed and that in favor of Wood, Walker reversed.
[708]*7081. The substantial question that the appeal of defendant-appellant Kohn raises is whether Kohn’s misrepresentation was the legal cause of the loss for which Marbury and Bader have been allowed recovery. The securities bought did not lose value because Kohn was not a registered representative with Wood, Walker, and this case, accordingly, is not one in which a material misrepresentation of- an element of value intrinsic to the worth of the security is shown to be false, and in which it is shown that disclosure of the falsity of the representation results in a collapse of the value of the security on the market. In such cases one induced to buy the security on the faith of the misrepresentation of the value element is obviously damaged, and the chain of causation is clear.
Here the claim and finding are that Kohn’s statements by their nature induced both the purchase and the retention of the securities, the expertise implicit in Kohn’s supposed status overcoming plaintiffs’ misgivings prompted by the market behavior of the securities.2 Plaintiffs’ recovery of their whole loss measured by the decline in value of the securities to the date when they learned the truth certainly does not fit the familiar rubric, for example, of Section 11(e) of the Securities Act of 1933,15 U.S.C. § 77k(e) — limiting recovery on account of a false or misleading registration statement to the depreciation in value of the security resulting from the untruthfulness of the statement made about it. Cf. Restatement (Second) of Torts § 548A (Comment b, Illustration 1) (1977) (security bought on faith of untrue representation that issuer had received full consideration for it; later full consideration received by issuer, but a court invalidated the security on other grounds; buyer not allowed to recover his loss because it was not considered a proximate consequence of the untrue representation). But plaintiffs in such a case as this, whether or not their claims fall under the more familiar rubric, are, nevertheless, entitled to recover the damages that they suffered as a proximate result of the allegedly misleading statements, Globus v. Law Research Service, Inc., 418 F.2d 1276, 1291 (2d Cir. 1969), cert. denied, 397 U.S. 913, 90 S.Ct. 913, 25 L.Ed.2d 93 (1970).
As Judge Weinfeld observed in Miller v. Schweickart, 413 F.Supp. 1062, 1067 (S.D.N.Y.1970):
Proximate cause, of course, is a concept borrowed from the law of torts, and generally requires that one’s wrongful conduct play a “substantial” or “essential” part in bringing about the damage sustained by another.
The generalization is that only the loss that might reasonably be expected to result from action or inaction in reliance on a fraudulent misrepresentation is legally, that is, proximately, caused by the misrepresentation. Restatement (Second) of Torts § 548A (1977). See Levine v. Seilon, 439 F.2d 328, 333-34 (2d Cir. 1971). Oleck v. Fischer, Fed.Sec.L.Rep. (CCH) H 96,898, at 95,702-03 (S.D.N.Y.1979), aff’d 623 F.2d 791 (2d Cir. 1980), in effect requires that the damage complained of be one of the foreseeable consequences of the misrepresentation. The case for Marbury and Bader is that, since the misrepresentation was such as to induce both their purchases and their holding of the securities, their holding and its duration determined the extent of their losses. As in Schlick v. Penn-Dixie Cement Corp., 507 F.2d 374, 380-81 (2d Cir. 1974), cert. denied, 421 U.S. 976, 95 S.Ct. 1976, 44 L.Ed.2d 467 (1975), the claim is that the misrepresentation was the agency both of transaction causation and of loss causation.
Liability for representations having the effects of Kohn’s representation was famil[709]*709iar in the law even before the Securities Act of 1933. and the Securities Exchange Act of 1934 were enacted. For example, in Rothmiller v. Stein, 143 N.Y. 581, 38 N.E. 718 (1894), the defendant officers of a small corporation told plaintiff that the company was prospering and would pay at least a 10% dividend, and they recommended that plaintiff reject an offer of $80 a share for his stock and accept an offer at $50 a share plus a deferred payment of $50 a share if there were an interim dividend of 10% on the stock. Plaintiff acted on the advice, relying on the defendants’ fraudulent statements about the company’s affairs. In holding defendants liable, the court said that defendants
cannot in such case shelter themselves under the statement that they did not make the representations, i. e., commit the fraud with the motive or for the purpose of inducing the plaintiff to sell his stock. They intended to deceive the plaintiff and they were induced thereto by other causes, yet the natural, proximate and direct result of such deception they knew or had reasonable ground for believing would be this sale, although its accomplishment was not the particular purpose of their fraud. In such case their liability would seem to be plain.
Id. at 588, 38 N.E. at 719. So in David v. Belmont, 291 Mass. 450, 197 N.E. 83 (1935), plaintiff had retained stock of a certain company and bought additional shares of the same stock in reliance on certain representations made by defendant which were false. The court said:
Presumably [plaintiff] continued to hold the stock after the purchase in reliance on the representations. The fraud was therefore continuing in its effect until such time as the plaintiff discovered the falsity of the representations. A loss which he suffered would manifestly be the difference in the then value of the stock and the price which he paid for it.
Id. at 454, 197 N.E. at 85. Similarly in Cartwright v. Hughes, 226 Ala. 464, 147 So. 399 (1933), the plaintiff bought stock of the defendants’ bank on their representation that it was “a good investment,” that the bank was solvent, and that its assets were “good clean assets.” The bank ceased to function and its stock became worthless. The issue in the appellate court was the appropriate measure of damages. Agreeing that the ordinary rule measures damages by the difference between value at the time of the fraud and what the value would have been had the representations been true (the so-called “warranty” measure of damages), the court said:
The question of time is not often involved, but in such a transaction as this in 4 Sutherland on Damages, § 1172, at p. 4409, it is said that “the value of the stock sold is not uniformly fixed as of the time of the sale, especially if the purchase was made as an investment. The fraud in such a case has been considered operative until the purchaser learned of it; that is regarded as the time when his cause of action arose.”
Id. at 467, 147 So. at 401.
The proposition that fraudulent representations may induce the retention of securities as an investment and entail liability for the damages flowing from retention was given a more general form in Continental Insurance Co. v. Mercadante, 222 A.D. 181, 225 N.Y.S. 488 (1st Dept. 1927). The court there said:
Where the damage is caused by inducing plaintiff’s inaction, it is necessarily more difficult to allege or prove causation than in those cases where active conduct is induced. Indeed, in all fraud cases, the element of proximate cause is more impalpable than in negligence cases because we are dealing with the plaintiff’s state of mind. The defendants cannot, therefore, require the same exact proof of causation.
Id. at 186, 225 N.Y.S. at 494. See to the same effect Hotaling v. A.B. Leach & Co., 247 N.Y. 84, 93, 159 N.E. 870, 873 (1928) (“As long as the fraud continued to operate and to induce the continued holding of the bond, all loss flowing naturally from that fraud may be regarded as its proximate [710]*710result.”); Stern Bros. v. New York Edison Co., 251 A.D. 379, 381, 296 N.Y.S. 857, 859 (1st Dept. 1937) (“Fraud which induces non-action where action would otherwise have been taken is as culpable as fraud which induces action which would otherwise have been withheld.”); Hadden v. Consolidated Edison Co., 45 N.Y.2d 466, 470, 410 N.Y.S.2d 274, 276, 382 N.E.2d 1136 (1978). See 1 F. Harper and F. James, The Law of Torts 600-603 (1956).
Although the theory of plaintiffs’ case relates their damages to the inaction of retaining the securities on the faith of their belief in Kohn’s assertion of his status, the claim is nevertheless one within Section 10(b) and Rule 10b-5 because the representation relied upon was made in connection with the purchase of securities, and both Marbury and Bader sue as purchasers of securities. Cf. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 731, 755, 95 S.Ct. 1917, 1924, 1934, 44 L.Ed.2d 539 (1975) (private damage action under Rule 10b-5 is confined to actual purchasers or sellers of securities). The case is not one in which nothing has been shown except an- inducement to hold as in Parsons v. Hornblower & Weeks-Hemphill, Noyes, 447 F.Supp. 482, 487 (M.D.N.C.1977), aff’d, 571 F.2d 203 (4th Cir. 1978), if that case is a correct reading of Blue Chip. Nor is this case similar to Hayden v. Walston & Co., 528 F.2d 901 (9th Cir. 1975): there the plaintiffs had purchased securities through a salesman who was not a duly licensed registered representative, but did not show that the salesman’s nondisclosure of his status rendered his other statements misleading within the meaning of Rule 10b-5, and there was, evidently, no claim or proof that he held himself out to be a duly registered representative. The second ground of suit rejected in the Hayden case, that a private right of action could be predicated on the violation of the National Association of Securities Dealers rules, has not been relied upon in this case, and was not a ground of decision in the district court.
It follows from what has been said that the judgment against defendant-appellant Kohn must be affirmed.3
2. Marbury and Bader have appealed from the judgment in favor of Wood, Walker. Judge Gagliardi considered the case against Wood, Walker as one in which plaintiffs sought recovery against Wood, Walker only “as an aider and abettor of Kohn’s securities law violations.” Judge Gagliardi found that the evidence did not show that Wood, Walker intended to deceive plaintiffs, or knew of Kohn’s violations, or provided substantial assistance to Kohn in violating the securities law, but at most showed only negligence on Wood, Walker’s part. Applying the standard of Rolf v. Blyth, Eastman Dillon & Co., 570 F.2d 38, 44 — 48 (2d Cir.), cert. denied, 439 U.S. 1039, 99 S.Ct. 642, 58 L.Ed.2d 698 (1978), the district court held that plaintiffs [711]*711had failed to establish essential elements of their claim against Wood, Walker as an aider and abettor of Kohn’s securities law violations. The court did not consider Wood, Walker’s possible liability under the respondeat superior theory, or as a “controlling person” under Section 20(a) of the Securities Act of 1934, 15 U.S.C. § 78t(a). It is concluded, on this branch of the case, that the court’s disposition of the “aider and abettor” issues was correct, but that it was error, on the record before the court, not to consider and determine whether Wood, Walker was liable as a controlling person or as Kohn’s employer.
(a) Marbury and Bader have in this court again argued that Wood, Walker is liable because the evidence shows that it did aid and abet Kohn’s commission of the fraud. If Kohn and Wood, Walker are regarded as distinct actors liable for each other’s acts only to the extent of their conscious and intentional complicity in them, and the “aiding and abetting” theory requires that approach, Judge Gagliardi’s conclusion is unassailable on the evidence. The circumstances on which plaintiffs rely to show that Wood, Walker should be held liable as an “aider and abettor” may suggest inadequate supervision and lax control but they do not show that the firm was guilty of “knowing or intentional misconduct” or of equivalently reckless misconduct. See generally Ernst & Ernst v. Hochfelder, 425 U.S. 185, 197, 200-201, 96 S.Ct. 1375, 1382, 1384, 47 L.Ed.2d 668 (1976); Edwards & Hanly v. Wells Fargo Securities Clearance Corp., 602 F.2d 475, 483-85 (2d Cir. 1979), cert. denied, 444 U.S. 1045, 100 S.Ct. 734, 62 L.Ed.2d 731 (1980); Rolf v. Blyth, Eastman Dillon & Co., supra, 570 F.2d at 44-48.
(b) A threshold question on this aspect of plaintiffs’ appeal relates to plaintiffs’ right to argue that the court should have considered the respondeat superior and controlling person contentions. The district judge took the view, 470 F.Supp. at 515 n.ll, that plaintiffs had not alleged that Wood, Walker was liable either as a controlling person or as a principal under the respondeat superior doctrine, and that, in consequence, the court did not need to consider Wood, Walker’s liabilities on either of those theories. In the opinion, id. at 515, the court said that plaintiffs’ position, as expressed at the trial and in their post-trial memorandum of law, indicated that they sought recovery against Wood, Walker as an aider and abettor of Kohn’s violations.
While plaintiffs have not denominated their argument in this court and in the district court a respondeat superior argument, and the complaint did not contain the traditional allegation that Kohn made the representations relied upon in the course of his employment with Wood, Walker, the evidence upon which plaintiffs rely in this court, as in the district court, and the allegations of fact made in the complaint are alike completely descriptive of the transactions and of the roles of the actors in them, and they are the evidence and allegations relevant to a determination of the respondeat superior issue, and inevitably, of the Section 20(a) issue. Plaintiffs’ counsel argued the respondeat superior issue orally at the trial, and the bare failure to reiterate it in the closing brief in the district court cannot. be considered an abandonment of the point.
The way in which the ease was tried, and the shift in the emphasis of argument on the motion to dismiss arising from the introduction of Ernst & Ernst into the discussion may explain Judge Gagliardi’s taking the position that he had to consider only the aider and abettor analysis, but the record evidence tending to support the plaintiffs’ claim on the other two grounds was before the court, and, on the whole of that evidence, the three theories of liability— aider and abettor, controlling person, and respondeat superior — equally presented themselves for resolution. There was evidence of Kohn’s hiring, his compensation, his authority to accept orders over the telephone at the firm’s Bronx office, the execution by Wood, Walker of the orders Kohn obtained from plaintiffs, the fact that Wood, Walker received the brokerage commission on all the transactions, the extent to which and the circumstances in which [712]*712Kohn was authorized to recommend securities to the firm’s customers, the uncertain provenance of Kohn’s Wood, Walker business card, and the relation of the Bronx office of Wood, Walker to its main office. While plaintiffs’ motion to conform the pleadings to the proofs — if the very factual complaint required amendment — was made in general form and was almost at once apparently confined to a narrow point on damages, the evidence, although not complete in every particular, disclosed each operative factual element of the transactions involved, and it thus invoked the application of whatever principles of law determined the outcome of the issues raised by the evidence.4 Cf. Fed.Rules Civ.Proc. 15(b) (issues tried by implied consent treated as if raised in the pleadings, which may be amended to conform to the evidence at any time, although failure to amend does not affect the result of the trial of the issues); Wasik v. Borg, 423 F.2d 44, 46 (2d Cir. 1970) (third party defendant held directly liable to plaintiff although plaintiff did not plead against third party defendant where issues of fact tried between those parties).
It was then error not to pass on the respondeat superior and Section 20(a) issues which lurked in the record, unless resort to respondeat superior is precluded by Section 20(a) and the district court’s rejection of the claim that Wood, Walker aided and abetted Kohn’s violations implies a finding that Wood, Walker has a “good faith” defense under Section 20(a). That section provides in relevant part:
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.
This court has avoided explicit “resolution of the rather thorny controlling personrespondeat superior issue,” Rolf v. Blyth, Eastman Dillon & Co., supra, 570 F.2d at 48 n.19. SEC v. Management Dynamics, Inc., 515 F.2d 801, 812-13 (2d Cir. 1975), reasoned, in the light of the legislative history, that the “controlling person” provision of Section 20(a) was not intended to supplant the application of agency principles in securities cases, and that it was enacted to expand rather than to restrict the scope of liability under the securities laws;5 the court, however, intimated no view as to cases involving minor employees, claims for damages, or respondeat superior which might be broader than the apparent authority involved in Management Dynamics, which dealt with actions of a principal executive officer using corporate facilities to create a misleading appearance of activity in the stock in question. A little later in [713]*713SEC v. Geon Industries, Inc., 531 F.2d 39, 54-56 (2d Cir. 1976), the court, reiterating the view expressed in Management Dynamics, again rejected the theory that a brokerage firm called to account for an employee’s activities could be liable only as a controlling person under § 20(a). The court, however, declined to enjoin the firm on the theory that as employer it was responsible for the acts of its employee, a registered representative, finding that the firm had exercised reasonable supervision over him, that he had made no special use of his connection with the firm, and that the firm derived only ordinary commissions from his activities. Judge Friendly stated for the court that “we intimate no view as to cases with different facts, and that situations which fall between [Management Dynamics] and this one will have to await future resolution.” 531 F.2d at 55-56. Nevertheless, as a footnote in Woodward v. Metro Bank of Dallas, 522 F.2d 84, 94 n.22 (5th Cir. 1975), illustrates, it has been thought that the Second Circuit has taken the view that Section 20(a) is the exclusive way to impose secondary liability.
The cases in this court are not, however, to that effect. Moerman v. Zipco, Inc., 422 F.2d 871 (1970), affirming on the district court opinion, 302 F.Supp. 439 (E.D.N.Y. 1969), approved the imposition of liability on a corporation and its controlling directors under Section 20(a); but nothing in the district court opinion considered normal agency principles, or treated Section 20(a) as supplanting the doctrine of respondeat superior. The en banc decision in Lanza v. Drexel & Co., 479 F.2d 1277, 1299 (2d Cir. 1973), declined to impose Rule 10b-5 liability, through Section 20(a), on an outside director of BarChris Corporation for fraud perpetrated by other officials of the corporation in inducing the plaintiffs to exchange stock in their thriving company for shares of BarChris stock that soon became worthless. The Lanza case did not present any occasion for considering respondeat superior; only if the court had held that the director was in guilty complicity with the officials of the corporation who had perpetrated the fraud would the court have had to decide whether the investment banking firm of which the defendant director was an employee was liable on a respondeat superior or Section 20(a) theory for its employee’s delinquency. 479 F.2d at 1319-20 (opinion of Judge Hays, dissenting in part). The district court in Gordon v. Burr, 366 F.Supp. 156, 167-168 (S.D.N.Y.1973), adopted the view that Section 20(a) and not respondeat superior is the appropriate standard for determining secondary liability of a brokerage firm under the ’34 Act, but this court, reversing the district court’s imposition of Section 20(a) liability on a brokerage house by reason of the fraud of one of its stock salesmen, did not comment on the rationale of the decision in the court below; it said only that if the brokerage house was liable it must be “derivatively — as a ‘controlling person’ of [the salesman] within the meaning of § 20(a) of the 1934 Act.” Gordon v. Burr, 506 F.2d 1080, 1085 (2d Cir. 1974). The court cited SEC v. Lum’s Inc., 365 F.Supp. 1046, 1064-65 (S.D.N.Y.1973), which rejected the respondeat superior approach, with evident approval, but the part of the Lum’s opinion cited deals principally with the standard of culpability required for Section 20(a) liability, and that was the point on which this court cited it. Moreover this court has in Management Dynamics, supra, 515 F.2d at 813, stated that Gordon v. Burr does not dictate a result contrary to the application of agency principles to hold brokerage firms liable for acts of their employee; Geon Industries, supra, 531 F.2d at 54, states that this court has, in Management Dynamics, held the Lum’s view — that a brokerage house could be liable for its employee’s securities frauds only as a controlling person under Section 20(a) —to be erroneous. In Edwards & Hanly v. Wells Fargo Securities Clearance Corp., 458 F.Supp. 1110 (S.D.N.Y.1978), the court held that a defendant was liable for its president’s Rule 10b-5 frauds both on the respondeat superior and on the Section 20(a) theories, but the judgment was reversed because the evidence was insufficient to support a finding that the individual wrongdoer had aided and abetted the fraud [714]*714in question and because the damage to the plaintiff was occasioned by its own failure to exercise due diligence in the supervision of the account in question and by its own non-compliance with applicable regulations'. 602 F.2d at 485-89.
Cases in other circuits are not in agreement about the relation of respondeat superior to Section 20(a) liability. The Eighth Circuit, in Myzel v. Fields, 386 F.2d 718, 737-739 (8th Cir. 1967), imposed Section 20(a) liability in a Rule 10b-5 case in which, on the evidence, the liability of the allegedly controlling persons was governed “neither by principles of agency nor conspiracy,” but the court assumed that common law principles of agency would apply to impose liability on a principal for an agent’s deceit committed in the business he was appointed to carry out.
The Sixth Circuit, in Armstrong, Jones & Co. v. SEC, 421 F.2d 359, 362 (6th Cir.), cert. denied, 398 U.S. 958 (1970), held, adopting the position of the Securities Exchange Commission, that sanctions may be imposed on a broker-dealer for the wilful violations of its agents under the doctrine of respondeat superior; the court did not refer to Section 20(a). In Holloway v. Howerdd, 536 F.2d 690, 694-95 (6th Cir. 1976), the Sixth Circuit, following what it took to be the lead of the Second, Fourth, Fifth and Seventh Circuits, went farther in holding that the controlling person provisions, Section 15 of the ’33 Act and Section 20(a) of the ’34 Act, were not intended to preempt the operation of the doctrine of respondeat superior in eases involving unlawful activities of a brokerage firm’s employees. It imposed damage liability on the firm in favor of those customers of the firm who were ignorant of the limitations on the authority of the wrongdoing employee. The court relied on what had been said in Management Dynamics, supra, 515 F.2d at 812, to the effect that the controlling person provisions were intended to expand, rather than restrict, the scope of liability under the securities laws.
The Fourth Circuit, in Johns Hopkins University v. Hutton, 422 F.2d 1124 (4th Cir. 1970), cert. denied, 416 U.S. 916, 94 S.Ct. 1623, 40 L.Ed.2d 118 (1974), a case brought under § 12(2) of the ’33 Act, 15 U.S.C. § 771(2), held a brokerage house liable “under familiar [agency] principles, for the tortious representations of its agent”; although the partners of the defendant brokerage house were personally blameless, they had clothed their departmental manager with actual and apparent authority to provide the purchaser of the security with information about its yield, the manager acted within the scope of his employment in offering the security to the purchaser, and the firm received compensation based on the manager’s sales effort. The court held that Section 15 of the ’33 Act, 15 U.S.C. § 77o, which imposes a controlling person liability parallel to that imposed by Section 20(a) of the ’34 Act, was not intended to insulate a brokerage house from the misdeeds of its employees.
The Fifth Circuit in Lewis v. Walston & Co., 487 F.2d 617 (5th Cir. 1973), applied agency principles in imposing liability on a brokerage firm in a suit under Section 12(1) of the ’33 Act for an employee’s sale of unregistered stock to plaintiffs, notwithstanding that the brokerage house never received a commission or other benefit from the transactions, did not deal in unregistered securities in the course of its own business, and did not perform any of its usual brokerage functions in the completion of the sales transactions. Later, in a case in which liability under Rule 10b-5 could have been imposed only under Section 20(a) if the evidence had warranted it, the Fifth Circuit, under the mistaken impression that Gordon v. Burr, supra, had committed this circuit to the view that Section 20(a) was “the exclusive way to hold someone secondarily liable” in Rule 10b-5 cases, stated that such an approach might be unnecessarily restrictive to the securities acts but that it did not need to resolve that question in the case before it. Woodward v. Metro Bank of Dallas, 522 F.2d 84, 94 n.22 (5th Cir. 1975). The Seventh Circuit in a “churning” case, Fey v. Walston & Co., 493 F.2d 1036, 1052-53 (7th Cir. 1974), held a brokerage house liable for the conduct of [715]*715one of its officers, on the ground that “the general law rendered the broker liable for any churning conduct by its representative, and foundation for this result need not be sought within the confines of Section 20(a).” Id. at 1052. The Tenth Circuit in Richardson v. MacArthur, 451 F.2d 35, 41-42 (10th Cir. 1971), imposed Section 20(a) liability on an employing corporation in a Rule 10b-5 case, saying, “Liability under § 20(a) is not restricted by principles of agency or conspiracy.” ' Id. at 41. The court did not make a respondeat superior analysis of the facts.
The earliest of the cases usually cited for the proposition that Section 20(a) of the ’34 Act supplanted the doctrine of respondeat superior in securities cases, Kamen & Co. v. Paul H. Aschkar & Co., 382 F.2d 689, 697 (9th Cir. 1967), does not elaborate the point, and Hecht v. Harris, Upham & Co., 430 F.2d 1202, 1210 (9th Cir. 1970), which imposed liability in a churning case, did so under Section 20(a) on the basis that the brokerage house had failed to maintain adequate internal controls, and that its failure of diligence constituted failure to act in good faith; the court did not refer to the doctrine of respondeat superior. Later, in Zweig v. Hearst Corp., 521 F.2d 1129, 1132-33 (9th Cir.), cert. denied, 423 U.S. 1025, 96 5. Ct. 469, 46 L.Ed.2d 399 (1975), the court interpreted its earlier decision in Kamen as holding that Section 20(a) is to be applied to determine an employing corporation’s liability and as rejecting the contention that “the more stringent doctrine of respondeat superior remained effective to establish vicarious liability.” The court did not explain the basis for its conclusion. Most recently, in Christoffel v. E. F. Hutton & Co., 588 F.2d 665, 667 (9th Cir. 1978), the court, in a single sentence, and, again, without discussion, stated that it was “the established law of [the 9th] Circuit that section 20(a) supplants vicarious liability of an employer for the acts of an employee applying the respondeat superior doctrine.”
The Third Circuit, in Rochez Brothers, Inc. v. Rhoades, 527 F.2d 880, 884-886 (3rd Cir. 1975), concluded in what is, it may be, elaborate dictum, that, in the light of the legislative history and of earlier cases, “the principles of agency, i. e., respondeat superi- or, are inappropriate to impose secondary liability in a securities violation case.” Id. at 884. The court put its conclusion essentially on the ground that the defense furnished by the closing language of Section 20(a)—
. 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—
established a standard of conscious culpability that was inconsistent with the imposition of an essentially secondary liability on respondeat- superior grounds.6 Rochez Brothers was followed in Thomas v. Duralite Co., 524 F.2d 577, 586 (3rd Cir. 1975). In both cases liability was not in fact imposed under Section 20(a) because, in Rochez Brothers, the active wrongdoer, and not the corporation of which he was an officer, was the controlling person, and because, in Duralite, the active wrongdoers were not acting for the corporation in the transaction in the corporation’s shares.7
[716]*716(c) While the precise standard of supervision required of broker-dealers to make good the good faith defense of Section 20(a) is uncertain, where, as in the present case, the erring salesman completes the transactions through the employing brokerage house and the brokerage house receives a commission on the transactions, the burden of proving good faith is shifted to the brokerage house, Stern v. American Bankshares Corp., 429 F.Supp. 818, 823 (E.D.Wis.1977), and requires it to show at least that it has not been negligent in supervision, SEC v. Geon Industries, Inc., supra, 531 F.2d at 54; Gordon v. Burr, supra, 506 F.2d at 1085-86; SEC v. Lum’s, Inc., supra, 365 F.Supp. at 1064-65, and that it has maintained and enforced a reasonable and proper system of supervision and internal control over sales personnel. Zweig v. Hearst, supra, 521 F.2d at 1134-35. That Wood, Walker has successfully met the charge that it aided and abetted Kohn does not establish that it has borne the burden of proving “good faith” under the last clause of Section 20(a). The intimation of Judge Gagliardi’s findings of fact is to the contrary; he was very far from finding that Wood, Walker had shown due care in its supervision and control of Kohn’s activities.
Different considerations control the application of respondeat superior principles. Here the concern is simply with scope or course of employment and whether the acts of the employee Kohn can fairly be considered to be within the scope of his employment. See Restatement (Second) of Agency §§ 228, 229, 257, 258, 261, 262, 265. The evidence of record in the present case presents substantial issues of credibility and interpretation, but it indicates, if taken at face value, that Kohn at all times acted as an employee of Wood, Walker, and accounted to Wood, Walker for the transactions. The evidence contains no indication that he profited by any of the transactions other than by reason of his compensation from Wood, Walker as one of its employees. Whatever the specific limitations on his authority as between him and his employer, the evidence, again, indicates, although with some uncertainty, that it was his function as a trainee to be an intermediary in the making of transactions in securities, but that there were certain limitations on the manner in which he was to carry on his activities. Kohn’s deviant conduct, while it may have induced the purchase of securities that would not otherwise have been purchased, did not appear, on the record made at the trial, to mark any deviation from Kohn’s services to his employer. Arguably, what he did was done in Wood, Walker’s service, though it was done badly and contrary to the practices of the industry and the standing instructions of the firm. The record on the respondeat superior issue more than sufficed to require the trier of the fact to dispose of the issue on the merits.
Where respondeat superior principles are applied, the special good faith defense afforded by the last clause of Section 20(a) is unavailable. Quite apart from the fact that that conclusion was clearly adumbrated in SEC v. Management Dynamics, supra, 515 F.2d at 812-13, and has become settled law in other circuits, there is no warrant for believing that Section 20(a) was intended to narrow the remedies of the customers of brokerage houses or to create a novel defense in cases otherwise governed by traditional agency principles. On the contrary Section 28(a), 15 U.S.C. § 78bb, specifically enacts that the rights and remedies provided by the ’34 Act shall be in addition to any and all rights and remedies that may exist at law or in equity, and Section 16 of the ’33 Act, 15 U.S.C. § 77p, similarly provides that the rights and remedies of the ’33 Act are additional to pre-existing remedies.
The judgment against defendant Kohn is affirmed and the judgment in favor of Wood, Walker & Co. is reversed, and a new trial of the claims of Marbury Management and Harry Bader against Wood, Walker & Co. is granted.