Citation. Stephenson v. Paine Webber Jackson & Curtis, Inc., 839 F.2d 1095, Fed. Sec. L. Rep. (CCH) P93,675 (5th Cir. La. Mar. 15, 1988)
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Brief Fact Summary.
When tax attorney, Stephenson (Plaintiff)Â filed suit under, inter alia, Rule 10b-5, alleging that a broker for Paine, Webber, Jackson & Curtis, Inc (Paine) (Defendant), Welch (Defendant) participated in multiple trades in his account with Paine that were not authorized. Yet, Stephenson had ignoredmonthly statements and confirmation slips and did not attemptremedial action for almost a year, so his claims were dismissed.
Synopsis of Rule of Law.
Because of the due diligence prerequisite of Rule 10b-5, a sophisticated investorignoring monthly statements and confirmation slips is irresponsible when the investor recognizes that there have been illegal trades formulated in his trading account.
A tax attorney, Stephenson, had a trading account with Paine, Webber, Jackson & Curtis, Inc (Paine), and utilized the account to trade in options. Stephenson was informed that owed $4000 for an unauthorized trade made in his name by a Paine broker, Welch. He challenged Welch without challenging Paine then proceeded to ignore monthly statements and failed to ensure mistakes in his account were rectified. Almost a year later, Stephenson finally wrote a letter to Paine referencing 59 purportedlyillegal transactions in his account. Although such transactions were accounted for in monthly statements and confirmation slips, Stephenson had ignored them. Stephenson filed suit under, inter alia, Rule 10b-5. The district court dismissed, stating that Stephenson did not carry his onus of proving Rule 10b-5 violations and also found that his allegations were banned by the equitable defense for laches, waiver and ratification. The court of appeals granted review.
As a result of the due diligence prerequisite of Rule 10b-5, are sophisticated investors ignoring monthly statements and confirmation slips considered irresponsible when the investor recognizes that there have been illegal trades formulated in his trading account?
(Jones, J.) Yes. As a result of the due diligence prerequisite of Rule 10b-5, sophisticated investors ignoring monthly statements and confirmation slips are considered irresponsible when the investor recognizes that there have been illegal trades formulated in his trading account. A plaintiff must prove (1) a significant inaccuracy or omission by the defendant (2) scienter (3) dependence; and (4) due diligence by the plaintiff to follow his or her own interest with caution and good faith in order to showcase a violation of Rule 10b-5. Negligence alone fails to satiate the scienter obligation for liability under Rule 10b-5. In proportion, the pertinent question in deciding due diligence is if the plaintiff had carelessly and willfully declined to investigate in indifference of a hazard to him or so apparent that he could not be unaware of it, and so abundant as to make it extremely likely that damage would follow. Stephenson fails to mention precedent for his contention that the due diligence obligation of Rule 10b-5 action has been eliminated. His argument that the in pari delicto defense has been lessened in securities fraud cases filed by tippees fails to function as a sufficient comparison for a finding that other equitable defenses are similarly lessened, like waiver and laches. Equitable defenses such as those need an investor to be cognizant to self-protection, where the in pari delicto doctrine applies where the plaintiff has failed in his duty of disclosure to others. These standards require an investor to act cautiously and to complain immediately about violations of his rights, eliminating such diligence endorsing standards in private Rule 10b-5 causes of action would severely weaken the intent of the Securities and Exchange Commission and the securities laws. In this case, the district court’s discovery that Stephenson was careless is not blatantly wrong. His ignoring of monthly statements and confirmation slips constituted more than just negligence, with his pause in reporting the purported illegal trades was careless, especially because he is a tax attorney, whom is knowledgeable in securities transactions and financial affairs. This case is not of an unsophisticated investor who has depended on a broker’s proficiency. Affirmed.
The case Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299 (1985), where the Supreme Court virtually abolished the in pari delicto defense in securities fraud cases filed by tippees, was contended by Stephenson to be applicable equally to equitable defenses like laches, estoppel, ratification and waiver. Although, as the court reveals in this case, tippees are required to disclose that they have traded based on insider information, whereas equitable defenses are related to a plaintiff’s self-protection. The issue in Bateman Eichler was that insider trading would, for the most part, remain hidden from law enforcement officals if tippees were totally excluded by in pari delicto from filing suit against tippers. The Supreme Court felt that to reject the effects of this doctrine would encourage â€œa high standard of business ethicsâ€¦in every facet of the securities industry.â€