Kane v. Shearson Lehman Hutton, Inc.

• Decision Date: 06 November 1990
• Docket Number: No. 89-5801,89-5801
• Citation: 916 F.2d 643
• Parties: Charles J. KANE, Charles J. Kane, P.A., Charles J. Kane and Natalie F. Kane, as Trustees of Charles J. Kane, P.A. Pension and Profit Sharing Plans and Trusts, Plaintiffs- Appellees/Cross- Appellants, v. SHEARSON LEHMAN HUTTON, INC., f/k/a Shearson Loeb Rhoades, Inc., and Rheta Raven, Defendants-Appellants/Cross-Appellees.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 643

916 F.2d 643

59 USLW 2344

Charles J. KANE, Charles J. Kane, P.A., Charles J. Kane and Natalie F. Kane, as Trustees of Charles J. Kane P.A. Pension and Profit Sharing Plans and Trusts Plaintiffs- Appellees/Cross- Appellants, v. SHEARSON LEHMAN HUTTON, INC., f/k/a Shearson Loeb Rhoades Inc., and Rheta Raven Defendants-Appellants/Cross-Appellees.

No. 89-5801.

United States Court of Appeals, Eleventh Circuit.

Nov. 6, 1990.

Stanley A. Beiley, Robert M. Sondak, Paul, Landy, Beiley & Harper, P.A., Miami, Fla., for defendants-appellants/cross-appellees.

Jeffrey Allen Tew, Kirkpatrick & Lockhart, Miami, Fla., for plaintiffs-appellees/cross-appellants.

Appeals from the United States District Court for the Southern District of Florida.

Before HATCHETT and CLARK, Circuit Judges, and MORGAN, Senior Circuit Judge.

MORGAN, Senior Circuit Judge:

FACTS

Plaintiffs/appellees (hereinafter referred to collectively as "Kane") opened an account with Shearson Loeb Rhodes (hereinafter referred to as "Shearson"), defendant/appellant, in 1979. Defendant/appellant Rheta Raven became Kane's broker in September 1980. Before that time, Raven had worked as a secretary at Shearson, and Kane knew he was Raven's first client at Shearson.

Raven had received no formal training to become a broker and had never done any research on the oil and gas industry. Shearson gave Raven no training after she became a broker and provided no instructions about Shearson's rules and administrative directives.

Administrative directives in effect at Shearson during the relevant period prohibited brokers from (1) soliciting securities not recommended by the firm, (2) informing customers of unsubstantiated rumors about public companies, and (3) contacting any official of an issuer. Branch managers were required to review all customers' accounts to detect "speculative activity," "concentration of any one security," or "low grade securities."

In October 1980, Raven told Kane about March Resources, a company she claimed was expecting an oil strike within weeks. At Raven's solicitation, Kane began purchasing March Resources stock. Although the oil strike never occurred, Kane continued purchasing and holding March Resources stock because of Raven's advice and encouragement. In December 1980, Raven told Kane that Amoco had offered $75 a share for March. This statement was not true.

Raven had become aware of March Resources when a customer asked her to investigate the company. Raven spoke with someone in the Shearson research library in New York about March Resources and was read the one page of information on file. Raven then contacted Frank Matthews, an executive at March Resources, and began receiving press releases from the company. On the basis of this information, she began soliciting buyers for March Resources stock.

March Resources was not on the list of Shearson's recommended stocks, and Raven at no time asked a Shearson research analyst to investigate the company. Larry Wasserman, the Shearson branch manager, was aware that Raven received press releases from March Resources and that she passed them on directly to her clients. He knew or should have known of the trading in March Resources stock in the Miami Beach office.

In March 1981 Kane hired Martin Raven, Rheta's husband, as his investment advisor but continued to rely on Rheta as well. On May 4, 1981, Rheta and Martin advised Kane to sell his March Resources stock during a "temporary market correction" and reinvest in March Resources after the correction. Kane sold his stock at a profit and three days later was notified to reinvest. On May 7, relying on the advice of Martin and Rheta Raven, Kane purchased 9600 shares of March Resources stock for $196,399.

Rheta Raven had advised all her customers to sell, then buy back, their March Resources stock. As a result of this trading activity, Shearson's compliance department in New York wired Wasserman to stop all solicitation of March stock until researchers could determine if March's prospects warranted the excessive investment by Shearson's Miami Beach customers. Three days later, Raven forwarded all information she had on March Resources to Shearson's director of research. Unfortunately, no further action was taken by Shearson in regard to March Resources, and the company remained uninvestigated. Had Shearson researched March Resources at that time, Shearson would have discovered negative information about the company on file at the Vancouver Stock Exchange.

Later in May, Kane became concerned after seeing an unfavorable article in Newsweek. Rheta Raven sought to reassure him and claimed to have contrary information from independent geologists. Raven also stated that the Shearson research department, Shearson's representative at the Vancouver Stock Exchange and the Securities Exchange Commission had all given March Resources a clean bill of health.

Despite Raven's assurances, the March Resources stock price began to decline. Kane ultimately sold his shares for a loss of $137,796.

Kane filed suit against the defendants in state court in 1981. That suit was dismissed in 1985 when the parties agreed to arbitration. The suit was refiled in 1986 in the Southern District of Florida with a stipulation for arbitration. Kane alleged in his complaint that Shearson and Raven violated civil RICO statutes, 19 U.S.C. Secs. 1962 and 1964 (count I); Sec. 12(2) of the Securities Act of 1933 (count II); Sec. 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder (count III); Florida securities laws, Fla.Stat. Secs. 517.301 and 517.211 (1980) (count V); committed common-law fraud (count IV) and negligence (count VI); and breached their fiduciary duty (count VII).

The arbitration panel found that defendants had violated Sec. 12(2) of the 1933 Act, Sec. 10(b) of the 1934 Act, and the state securities laws. The arbitrators found negligence and breach of fiduciary duty as well. Kane was awarded damages of $28,322.

Kane appealed the damages award to the district court pursuant to the Federal Arbitration Act, 9 U.S.C. Sec. 1 et seq., and the parties' stipulation for arbitration. Shearson and Raven cross-appealed. The district court held that there had been no violation of federal law. But the panel's decision was upheld on the Florida securities law claim, as well as on the common-law negligence and breach of fiduciary duty claims. The district judge disagreed with the measure of damages used by the arbitrators, however, and found that Kane should recover the entire $137,797 lost on the sale of the March Resources stock purchased May 7. Interest at a twelve percent annual rate was awarded as well. Both parties appeal to this Court.

DISCUSSION

The only issue is whether the district court erred in its determination of the correct measure of damages. Shearson contends that the district court should not have increased the arbitrators' award. The panel's award offset the profit Kane made on the May 4 sale of stock against the $137,797 loss suffered on the sale of the March Resources stock purchased May 7. Kane argues that the district judge was correct in his calculation of the award under Florida securities law, but asserts that the proper measure of damages for the common-law claims of negligence and breach of fiduciary duty produces an even higher figure than that awarded under the securities laws and that the higher amount should have been awarded.

A. Measure of Damages Under Florida Securities Law

Section 517.211 provides a remedy for violation of the antifraud provision, Sec. 517.301:

(2) Any person purchasing or selling a security in violation of s. 517.301, and every director, officer, partner, or agent of or for the purchaser or seller, if the director, officer, partner, or agent has personally participated or aided in making the sale or purchase, is jointly and severally liable to the person selling the security to or purchasing the security from such person in an action for rescission, if the plaintiff still owns the security, or for damages, if the plaintiff has sold the security.

(3) In an action for rescission:

(a) A purchaser may recover the consideration paid for the security or investment, plus interest thereon at the legal rate, less the amount of any...