Gochnauer v. A.G. Edwards & Sons, Inc., 86-3169
| Decision Date | 20 February 1987 |
| Docket Number | No. 86-3169,86-3169 |
| Citation | 810 F.2d 1042 |
| Parties | Blue Sky L. Rep. P 72,483, Fed. Sec. L. Rep. P 93,133 James R. GOCHNAUER and Patricia M. Gochnauer, Plaintiffs-Appellants-Cross Appellees, v. A.G. EDWARDS & SONS, INC., James Lester, Gene Roach, Defendants-Appellees-Cross Appellants, John Kerr, Defendant-Appellee. |
| Court | U.S. Court of Appeals — Eleventh Circuit |
John C. Lovett, Tallahassee, Fla., for plaintiffs-appellants-cross appellees.
Donald A. Rett, Fred F. Harris, Jr., Roberts, Baggett, LaFace & Richard, Tallahassee, Fla., for defendants-appellees-cross appellants.
Appeals from Final Judgment of the United States District Court of the Northern District of Florida.
Before JOHNSON and ANDERSON, Circuit Judges, and GARZA *, Senior Circuit Judge.
The issue before us is whether a stockbroker can violate his fiduciary obligations under state common law and still fail to violate the anti-fraud provisions of federal securities law or the Florida "blue sky" securities statute. The district court so held, and after review of governing law we affirm the ruling of the court below.
Both parties agree on the findings of fact presented in the district court's order. In April of 1979, plaintiffs/appellants James R. and Patricia M. Gochnauer ("Gochnauers" or "appellants") maintained a securities account with A.G. Edwards & Sons, Inc., a brokerage firm. James Lester was employed as a broker by appellee A.G. Edwards and under the supervision of appellee Gene Roach, branch manager of A.G. Edwards' Ft. Walton Beach office. At that time the Gochnauers' investments were primarily municipal bonds, and since interest rates were high Mr. Gochnauer asked Mr. Lester if other investments could yield more rewarding financial returns. Lester discussed a number of alternative investments with Mr. Gochnauer, including stocks, gold and silver, and option writing. Lester recommended that the Gochnauers consider option writing and consult with John Kerr, 1 a self-styled investment advisor. Lester told Gochnauer that he had known Kerr for a number of years and that Kerr had been successful in the options market. Gochnauer did not meet with Kerr at that time.
Lester made this recommendation of Kerr without investigating Kerr's qualifications, experience, or education. Kerr was not a licensed investment advisor (though Florida law did not require him to be), nor did he have significant financial experience or education in securities trading. Lester's recommendation of Kerr was based on his personal observations of Kerr and discussions with customers and Kerr's stockbroker (also employed at A.G. Edwards) about Kerr's investment success. Kerr was not employed by A.G. Edwards. Lester arranged a meeting a few months later between the Gochnauers and Kerr, and Kerr offered to become the Gochnauers' exclusive investment advisor for their account at A.G. Edwards.
As part of this arrangement, Kerr told the Gochnauers that if he were given authority to trade their account he would guarantee them a fifteen percent (15%) return on their investment; if the account lost money or failed to earn a 15% return, Kerr promised he would make good the difference. Lester's comment on this proposed arrangement consisted solely of assuring the Gochnauers that Kerr was a successful investor with an account at A.G. Edwards "of over $100,000," and that Kerr had "a fine home." These were factually correct statements at the time.
The Gochnauers had been provided a prospectus concerning the options writing program, which stated on its cover that option writing was a risky venture. The Gochnauers' previous investment instructions on file with Lester and A.G. Edwards directed the brokers to pursue conservative investments for income and growth; by contrast, option writing can only be described as highly speculative. Lester had given the Gochnauers a number of forms to sign in the event they decided to grant Kerr the trading authority for their account. The Gochnauers signed a "Customer's Option Agreement" which stated that the Gochnauers had been furnished with the options prospectus, had read it, and understood the risks and obligations attendant to options trading. The Gochnauers accepted Kerr's offer and signed a contract assuring them a 15% return on their options writing investment program. The contract between Kerr and the Gochnauers stated that there were no other parties to the agreement. 2
The Gochnauers then liquidated a number of their bonds and, in September, 1979, they placed $36,831 into an exclusive trading account with Kerr, approximately one-half of their life savings.
After substantial losses between September of 1979 and April of 1980, A.G. Edwards inquired of branch manager Roach why an account desiring income and growth was involved in heavy trading and risky option writing. Roach asked Lester, and Lester contacted Kerr and the Gochnauers to consult with them about their investment goals. Lester subsequently changed the instructions on file at A.G. Edwards from "income and growth" to "speculation." The Gochnauers received a financial statement once a month from A.G. Edwards showing the trading activity of their account and the mounting losses.
By the end of the first year the Gochnauers' account had lost approximately $25,000. Rather than demand the 15% return on the contract, the Gochnauers extended the agreement with Kerr for another year. After the two year period, instead of a guaranteed amount of $54,036.00, the balance in the Gochnauers' trading account had fallen to $4,092.18. Over $13,000 in commissions had been paid to Lester and A.G. Edwards due to the high volume of trading that occurred, approximately one-fourth of the losses. Kerr has ratified the obligation owing to the Gochnauers but has insufficient funds to make good the shortfall of $49,943.82. 3 Lester, Roach, and A.G. Edwards deny any and all responsibility for this financial debacle and steadfastly refuse to compensate the Gochnauers for the funds lost through this venture. Appellees contend that the Gochnauers were experienced investors and that the contract between Kerr and the Gochnauers expressly excluded appellees, thereby absolving them from any liability. The Gochnauers filed suit to recover their losses.
After a bench trial before the court, the district judge came to two important conclusions. First, the court concluded that there was no violation of federal or state securities laws because the Gochnauers had placed no reliance upon Lester's recommendation of Kerr as an investment adviser. Second, the district court found that "Lester breached his fiduciary duty to the Gochnauers when he advised them and assisted them in hiring Kerr and in establishing the speculative option trading account," since "but for the breach of duty, the plaintiffs would not have experienced the heavy losses of approximately $25,000." 4 Both parties challenge these two findings as contradictory; each party urges this court to resolve the contradiction in its favor, thereby providing either total success to appellants or complete vindication for appellees' disclaimer of liability. After studying the
district court order and applicable case law, we decline to disturb the judgment below.
The issue is whether a finding of a breach of fiduciary duty necessitates a finding of statutory securities law violations. It is important to separate the two types of claims raised on appeal. The securities fraud claims are based on Section 10(b) of the Securities Exchange Act of 1934, 5 Rule 10b-5 of the Securities Exchange Commission, 6 and Florida Statute Section 517.301, 7 the state's "blue sky" securities law. The common law breach of fiduciary duty claim is based on Florida common law.
The trial court found for the Gochnauers on the breach of fiduciary duty claim but found for appellees Lester, Roach and A.G. Edwards by holding there was no violation of state of federal securities law. The Gochnauers claim that an investment broker's breach of fiduciary duty necessarily implies a violation of federal and state securities law--that the trial judge made an error as a matter of law in not finding statutory violations. Conversely, the appellees contend the judge's specific conclusion that no securities violation occurred compels the court to find that there was no common law breach of fiduciary duty--that the trial judge made an error as a matter of law in finding a common law breach.
The trial court correctly sets out the elements for a cause of action under federal securities law. A successful cause of action under Section 10(b) or Rule 10b-5 requires that the plaintiff prove (1) a misstatement or omission (2) of a material fact (3) made with scienter (4) upon which the plaintiff relied (5) that proximately caused the plaintiffs' loss. Huddleston v. Herman & MacLean, 640 F.2d 534, 543 (5th Cir. Unit A 1981), modified on other grounds, 459 U.S. 375, 103 S.Ct. 683, 74 L.Ed.2d 548 (1983). The Florida statutory requirements are identical to Rule 10b-5, Alna Capital Associates, et al v. Wagner, 758 F.2d 562, 565 (11th Cir.1985), except that the scienter requirement under Florida law is satisfied by a showing of mere negligence, whereas the minimum showing under Rule 10b-5 is reckless disregard. Cf. Merrill Lynch, Pierce, Fenner & Smith v. Byrne, 320 So.2d 436, (Fla. D.C.A. 3d 1975) () with Ernst & Ernst v. Hochfelder, 425 U.S. 185, 201 96 S.Ct. 1375, 1385, 47 L.Ed.2d 668, reh'g denied, 425 U.S. 986, 96 S.Ct. 2194, 48 L.Ed.2d 811 (1976) (); Rolf v. Blyth, Eastman Dillon & Co., 570 F.2d 38, 44 (2nd Cir.1978) ().
The trial judge found evidence to satisfy the first three elements essential to prove a statutory...
To continue reading
Request your trial
-
Apa Excelsior III, L.P. v. Windley
...proposition, however, do not involve the forced seller doctrine and are therefore inapposite.28 See generally Gochnauer v. A.G. Edwards & Sons, 810 F.2d 1042 (11th Cir.1987) (examining reliance in traditional 10(b) case where standing and forced seller doctrine were not at issue); Huddlesto......
-
In re Sahlen & Associates, Inc. Securities Lit.
...723, 728 (11th Cir.1989) (en banc), cert. denied, ___ U.S. ___, 110 S.Ct. 1924, 109 L.Ed.2d 287 (1990); Gochnauer v. A.G. Edwards & Sons, Inc., 810 F.2d 1042, 1046 (11th Cir.1987). Defendants move to dismiss those counts of the complaints asserting federal securities fraud, arguing, among o......
-
Laird v. Integrated Resources, Inc.
...federal statute, unlike state fiduciary duty law, requires proof of reasonable reliance and due diligence. Gochnauer v. A.G. Edwards & Sons, Inc., 810 F.2d 1042, 1048 (11th Cir.1987). The Supreme Court has also clearly held that Sec. 10(b) does not cover "a breach of fiduciary duty [by majo......
-
Abrams & Wofsy v. Renaissance Inv. Corp.
...the plaintiff's loss." McDonald v. Alan Bush Brokerage Co., 863 F.2d 809, 814 (11th Cir.1989) (citing Gochnauer v. A.G. Edwards & Sons, Inc., 810 F.2d 1042, 1046 (11th Cir.1987)). 4 The 1985 version of section 10-5-12(a)(2) (a) It shall be unlawful for any person: . . . . . (2) to offer to ......
-
Holmes v. Grubman
...to disclose "information which is relevant to affairs entrusted to him of which he has notice."); Gochnauer v. A.G. Edwards & Sons, Inc., 810 F.2d 1042, 1049 (11th Cir. 1987) (citing Leib with approval as to the duties of broker in a nondiscretionary account). These duties are mirrored in R......
-
Theories of Stockbroker and Brokerage Firm Liability
...occurred in litigated claims. 5. 15 U.S.C. 78j(b) (2000). 6. 17 C.F.R. 240.10b-5 (2000). 7. See Gochnauer v. A.G. Edwards & Sons, Inc., 810 F.2d 1042, 1046 (11th Cir. 1987); McDonald v. Alan Brokerage Co., 863 F.2d 809 (11th Cir. 1989). 8. TCS Industries, Inc. v. Northway, Inc., 426 U.S. 43......
-
Common Fact Patterns of Stockbroker Fraud and Misconduct
...is fiduciary in nature, resulting in an obligation to exercise the utmost good faith."); Gochnauer v. A. G. Edwards & Sons, Inc., 810 F.2d 1042, 1049 (11th Cir. 1987) ("The law is clear that a owes a fiduciary duty of care and loyalty to a securities investor."); accord RESTATEMENT (SECOND)......