Securities Regulation Daily Wrap Up, FRAUD AND MANIPULATION—Tex. App.: Morgan Stanley not liable for a former employee’s independent business venture, (May 12, 2026)

By R. Jason Howard, J.D.

Dissenting opinion concluded that the trial court erred in dismissing the claims to the extent it based its decision on the claims having no basis in fact.

The Texas Court of Appeals for the Fifth District has affirmed a December 15, 2020 trial court’s order in which it granted Morgan Stanley’s motion to dismiss all claims brought by Collingwood USA, Inc., and Collingwood Brookshire USA, LLC, denied Collingwood’s motion for reconsideration, and awarded attorney fees and costs to Morgan Stanley (Collingwood USA, Inc., v. Morgan Stanley & Co., LLC, No. 05-24-00629-CV (Tex. App. Apr. 10, 2026)).

Collingwood. Collingwood’s lawsuit arose from a contractual relationship with an employee of Morgan Stanley in which the employee pursued an independent business venture through an entity named Source Rock, L.L.C., and proposed to advise investors of opportunities in the oil and gas industry. Source Rock contracted with the owner of the Collingwood entities who later assigned the contract to Collingwood.

Collingwood’s pleading stated that the contract made the individual responsible for “deal sourcing, deal valuation, due diligence (including technical, commercial, and management due diligence), deal coordination, deal staffing and ‘working with Source Rock’s proprietary network of industry experts to evaluate and execute deals.’” In return, Collingwood paid “deal fees” based upon the size of acquisitions recommended. Collingwood also made payments to the individual for his services. Collingwood alleged that over a four-year period that it worked with the individual, it invested more than $250 million in acquisitions that it should not have invested in if there had been true diligence.

Trial ruling. Collingwood’s suit against Morgan Stanley asserted that it was responsible as the individual’s employer for the damages Collingwood suffered. In defense of that argument, Collingwood offered a single paragraph which stated that all of the individual’s actions complained of were performed while he was an employee and representative of Morgan Stanley. Because he was listed as a managing director, he had the authority to bind Morgan Stanley and Morgan Stanley, as a control person under the Texas Securities Act, was liable to the same extent as the individual.

Collingwood alleged that Morgan Stanley was directly responsible for negligently supervising the individual and indirectly responsible for his conduct based on theories of vicarious liability, respondeat superior, and vice-principal liability. Morgan Stanley filed a Rule 91a motion under the Texas Rules of Civil Procedure seeking a dismissal of all of Collingwood’s causes of action on the grounds that the action had no basis in law or fact. The trial court granted the motion in its entirety.

Appeal. Pursuant to Rule 91a, the motion to dismiss must “identify each cause of action to which it is addressed and must state specifically the reasons the cause of action has no basis in law, no basis in fact, or both.” The appeals court applied a fair-notice pleading standard to determine whether the allegations in the pleading were sufficient to survive a motion to dismiss and first addressed the claim of negligent supervision. Here, the court explained that following its own mandatory precedent, and “the persuasive precedent of our sister courts,” an employer’s duty in a negligent supervision case “extends only to the prevention of physical injury by its employee.” Absent such an injury, the claim fails as a matter of law. Accordingly, the court found that Collingwood was not entitled to the relief it sought for that claim.

Collingwood’s control person claim also failed because Collingwood did not allege that Morgan Stanley had the power to direct the management policies of Source Rock in its dealings with Collingwood, “whether by equitable ownership, through a contractual relationship, or otherwise.” Collingwood also failed to sufficiently plead that Morgan Stanley had the power to control the specific transactions or activities on which the primary violation was based. The court concluded that without factual allegations of Morgan Stanley’s power to direct the specific breaching and tortious conduct alleged against the individual and Source Rock, Collingwood’s derivative securities claim had no basis in law.

Collingwood’s claims for vicarious liability and that Morgan Stanley was responsible for the individual’s conduct under the common law theory of respondeat superior also failed as did its argument that Morgan Stanley was vicariously liable for the individual’s actions because he was a vice-principle of the company because Collingwood did not allege any facts that the conduct complained of was related to the business of Morgan Stanley in any manner.

The court also addressed Collingwood’s motion for reconsideration and the award of attorney fees and costs, but the court found no abuse of discretion in denying the motion and explained that pursuant to Rule 91a, “the court may award the prevailing party on the motion all costs and reasonable and necessary attorney fees incurred with respect to the challenged cause of action in the trial court.” Here, the court agreed that Morgan Stanley was the prevailing party and affirmed the trial court’s award for fees and costs.

Conclusion. Collingwood’s issues on appeal were overruled, and the trial court’s order dismissing the matter with prejudice was affirmed.

Concurring and dissenting opinion. Justice Goldstein concurred with the decision to affirm the trial court’s dismissal of Collingwood’s negligent supervision cause of action but stated that “in the hopes that the lack of clear guidance regarding the use of rule 91a instead of special exceptions and summary judgment will be addressed by the legislature or the Texas Supreme Court, I respectfully dissent from the remainder of the opinion and judgment.”

The case is No. 05-24-00629-CV.

Judge: Breedlove, M.

Attorneys: Ellen Sessions (Norton Rose Fulbright U.S. LLP) for Morgan Stanley & Co., LLC. Todd Harlow (Frost Brown Todd, LLC) for Hay Mineral Resources, LLC. Konor Cormier (MehaffyWeber, PC) for Collingwood U.S., Inc. and Collingwood Brookshire U.S., Inc.

Companies: Morgan Stanley & Co., LLC; Hay Mineral Resources, LLC; Collingwood U.S., Inc. and Collingwood Brookshire U.S., Inc.

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