Petition for Writ of Certiorari — H. Hentz & Co. v. Kasner

s? FILE sp | Supreme Court, U. S.

papi 1)

in the MAY 14 1973

Supreme Cotten.

| nes

of the ;

Gnited States

October Term, 1972

No. 72715383

H. HENTZ & CO. and RALPH NERNBERG,

Petitioners,

vs.

DAVID KASNER and JOAN KASNER,

Respondents.

Petition for Writ of Certiorari to the United States

Court of Appeals for the Fifth Circuit

ARONOVITZ, SILVER & BOOTH

908 Ainsley Building

Miami, Florida 33132

Attorneys for Petitioners

By SIDNEY M. ARONOVITZ

MIAMI REVIEW — 371-4853 — 377-3721

Page

PY MI oo 2

JURISDICTION _......... 2

QUESTIONS PRESENTED __.. domed Palen aem ec 3

STATUTES AND REGULATIONS INVOLVED _ 4

STATEMENT OF THE CASE _........

igs AREA LIE EAE Rec

B. Basis for Federal Jurisdiction in United

States District Court... 10

REASONS FOR GRANTING THE WRIT _._. 11

I. A. Fraud v. Negligence—10b(5) 11

I. B. Scienter—10b-5 16

I. C. Insuror-Guarantor of Discretionary

I ctor Se ee eee 18

II. Violation of Stock Exchange Rule ___ 19

III. Civil Action on Fla. Stat. 517.301 ___ 20

CONCLUSION ~ 22

CERTIFICATE OF SERVICE 23

INDEX TO APPENDIX sis 24

APPENDIX _.... - A1-A12

II

TABLE OF CITATIONS

Case Page

Carroll v. First National Bank of Lincolnwood,

413 F.2d 353 (C.A. 7-1969), cert. den., 90 S.Ct.

552, 396 U.S. 1008, 24 L.Ed. 494. 13

Ellis v. Carter,

291 F.2d 270 (C.A. 9-1961) 12,17

City National Bank of Fort Smith, Ark. v.

Vanderboom,

422 F.2d 221 (8th Cir. 1970), Cert. den., 399

U.S. 905, 90 S.Ct. 2196, 26 L.Ed.2d 560 13, 17

Crosby v. Weil,

382 Ill. 5388, 48 N.E.2d 386, 145 A.L.R. 1252 __ 21

Clement A. Evans & Co. v. McAlpine,

434 F.2d 100, (C.A. 5-1970), Cert. den.,

91 S.Ct. 1660 (1971) 2 dB, 15, 17

Hecht v. Harris, Upham & Co.,

283 F.Supp. 417, (N.D.Cal. 1968) 18

Hines v. Davidowitz,

312 U.S. 52, 61 S.Ct. 399, 85 L.Ed. 581. 21

Frank Lanza, Jr., Vincent Sharbo, et al., v. Drexel

& Co., John Ames Ballard, Bertram D. Coleman,

et al.,

CCH Fed. SEC Rptr. #93,959 (2nd Cir. 1973) 11, 16

LFA EO AT

III

TABLE OF CITATIONS (cont.)

Case Page

Myzell v. Fields,

386 F.2d 718 (C.A. 8-1967), Cert. den., 88 S.Ct.

1048, 390 U.S. 951, 19 L.Ed.2d 1148 12,17

Nichols & Co. v. Columbus Credit Corp.,

126 N.Y.S.2d 715, aff’d. 184 N.Y.S.2d 590 19

Rice v. Board of Trade,

331 U.S. 247, 67 S.Ct. 1160, 91 L.Ed. 1468 ___ 21

Rospigliasi v. Clogher,

46 So.2d 170 (Fla. 1950) 19

S.E.C. v. Van Horn,

371 F.2d 181 (C.A. 7-1966) _ 17

Shemtob v. Shearson, Hammill & Co.,

(C.A. 2, 1971) 448 F.2d 442 me 12

United Mineworkers v. Gibbs,

(1966) 86 S.Ct. 1180, 373 U.S. 715,

16 L.Ed.2d 218 20

Vanderboom v. Sexton,

422 F.2d 1233, 1288 (C.A. 8-1970)_ 12,17

Irving Weis & Co. v. Offenberger,

220 N.Y.S.2d 1001 19

Whyte v. New York Mercantile Exchange,

oe 8 |b Seen eee 19

IV

TABLE OF CITATIONS (cont.)

Case Page

STATUTES AND REGULATIONS INVOLVED

Title 15, U.S. Code—$78}j 4

Securities Exchange Commission Rule 10b-5 -....... 4

Florida Statutes 517.301 5, 20, 21

MISCELLANEOUS

3 C.J.S. 36 (Agency, $156) 18

Bucklo, Scienter and Rule 10b-5

67 N.W.U. L.Rev. 562 (1972) ---...-------------- 12, 13, 17

in the

Supreme Court

of the

Gnited States

October Term, 1972

NO.

H. HENTZ & CO. and RALPH NERNBERG,

Petitioners,

v8.

DAVID KASNER and JOAN KASNER,

Respondents.

Petition for Writ of Certiorari to the United States

Court of Appeals for the Fifth Circuit

H. HENTZ & CO. and RALPH NERNBERG pray

that a Writ of Certiorari issue to review the Judgment

and Opinion of the United States Court of Appeals for the

Fifth Circuit entered in the above-entitled cause on March

15, 1973 (infra, p. A. 2, 3).

2

OPINIONS BELOW

The opinion of the United States Court of Appeals,

Fifth Circuit, to which this Petition is directed was en-

tered on March 15, 1973. It is unreported. (infra, p. A. 3)

JURISDICTION

The Judgment of the United States Court of Appeals,

Fifth Circuit, to which this Petition is directed is unre-

ported and was rendered under date of March 15, 1973

(infra, p. A. 2); the Opinion of the United States Court

of Appeals, Fifth Circuit, upon which the aforesaid Judg-

ment was entered, likewise was rendered under date of

March 15, 1973 (infra, p. A. 3); a Petition for Rehearing

was denied by that Court under date of April 4, 1973

(infra, p. A. 7); Stay of Mandate was granted to May 18,

1973 (infra, p. A. 8).

The Final Judgment for Defendants on Directed Ver-

dict entered in the United States District Court, Southern

District of Fiorida, by the Honorable Emmet C. Choate,

Senior United States District Judge, dated January 17,

1972, and from which appeal was taken to the United

States Court of Appeals, Fifth Circuit, by respondents, is

unreported (infra, p. A. 10).

The jurisdiction of this Court is invoked under 28

U.S.C. §1254(1) ; and pursuant to Rule 19.1(b), Supreme

Court Rules. The Court of Appeals, Fifth Circuit, has

rendered herein a decision in conflict with the decision of

other courts of appeals on the same matter, and has de-

cided an important question of federal law which has not

been, but should be, settled by this Court.

3

QUESTIONS PRESENTED

I

WHETHER IN THE ABSENCE OF FRAUD

AND SCIENTER DAMAGES ARE RECOVER-

ABLE FOR ALLEGED VIOLATION OF SEC-

TION 10(b) OF THE SECURITIES EX-

CHANGE ACT OF 1934 AND RULE 10b-5 OF

THE SECURITIES EXCHANGE COMMIS-

SION BY CUSTOMER AGAINST STOCK

BROKER AND ITS REGISTERED REPRE-

SENTATIVE FOR LOSS SUSTAINED IN A

DISCRETIONARY ACCOUNT.

II

WHETHER THE MERE VIOLATION OF A

RULE OR REGULATION OF A STOCK EX-

CHANGE GIVES RISE TO CIVIL LIABILITY.

Ill

WHETHER IN THOSE INSTANCES WHERE-

IN THE NATURE OF SECURITIES MATTER

IS INTERSTATE FLA. STAT. 517.301 CON-

FLICTS WITH AND IS SUPERSEDED BY

SECTION 10b OF THE SECURITIES EX-

CHANGE ACT OF 1934 AND RULE 10b-5 OF

THE SECURITIES EXCHANGE COMMIS-

SION SO THAT A CIVIL ACTION PREDI-

CATED UPON VIOLATION OF THE STATE

STATUTE DOES NOT LIE.

4

STATUTES AND REGULATIONS INVOLVED

1. Title 15, U.S. Code—§78j (infra, p. A. 11) in per-

tinent part as follows:

“Manipulative and deceptive devices.

“It shall be unlawful for any person directly

or indirectly, by the use of any means or instru-

mentality of interstate commerce or of the mails,

or of any facility of any national securities ex-

change —

“(b) To use or employ, in connection with

the purchase or sale of any security registered

on a national securities exchange or any security

not so registered, any manipulative or deceptive

device or contrivance in contravention of such

rules and regulations as the Commission may

prescribe as necessary or appropriate in the pub-

lic interest or for the protection of investors”

2. Securities Exchange Commission Rule 10b-5.

“Employment of Manipulative and Deceptive

Devices

“It shall be unlawful for any person, directly

or indirectly, by the use of any means or in-

strumentality of interstate commerce, or of the

mails, or of any facility of any national securi-

ties exchange,

5

“(1) to employ any device, scheme, or arti-

fice to defraud,

“(2) to make any untrue statement of a ma-

terial fact or to omit to state a material fact

necessary in order to make the statements made,

in the light of the circumstances under which

they were made, not misleading, or

“(3) to engage in any act, practice, or course

of business which operates or would operate as

a fraud or deceit upon any person, in connection

with the purchase or sale of any security.”

3. Florida Statutes 517.301

“Fraudulent transactions; falsification or con-

cealment of facts. —It is unlawful, and a viola-

tion of the provisions of this chapter, for any per-

son:

“(1) in the sale or purchase of any security

in this state, including any security exempted

under the provisions of $517.05, and including

any securities sold in any transaction exempted

under the provisions of $517.06, directly or in-

directly:

“(a) To employ any device, scheme or arti-

fice to defraud;

“(b) To obtain money or property by means

of any untrue statement of a material fact or

any omission to state a material fact necessary

6

in order to make the statements made, in the

light of the circumstances under which they were

made not misleading;

“(ce) To engage in any transaction, practice,

or course of business which operates or would

operate as a fraud or deceit upon any person in

connection with the purchase or sale of any se-

curity.

“(2) To publish, give publicity to, or circulate

any notice, circular, advertisement, newspaper,

article, letter, investment service, communica-

tion or broadcast which though not purporting

to offer a security for sale, describes such

security for a consideration received or to be

received directly or indirectly from an insurer,

underwriter, or dealer, or from an agent or em-

ployee of an insurer, underwriter or dealer, with-

out fully disclosing the receipt, whether past or

prospective, of such consideration and the amount

thereof.

“(3) In any matter within the jurisdiction of

the department to knowingly and willfully falsify,

conceal or cover up by any trick, scheme, or de-

vice, a material fact, or make any false, fictitious

or fraudulent statement or representation, or

make or use any false writing or document,

knowing the same to contain any false, fictitious

or fraudulent statement or entry.”

7

STATEMENT OF THE CASE

A. HISTORY

Respondent — Dr. David Kasner, a practicing ophthal-

mologist, had engaged in the purchase and sale of securities

in cash and margin accounts, including long and short

sales and purchases, since 1961, and with H. Hentz & Co.

— Petitioner through its registered representative —

Ralph Nernberg — Petitioner, commencing in 1962. All

transactions until September 1969 were initiated ex-

clusively by said Respondent and without advice from

either Petitioner. During the calendar year 1968 Kasner

at his own instance traded in his Hentz account through

Nernberg 42 sales and 15 purchases (both long and short)

upon advice received from investment advisory services

to which Kasner had subscribed. The account as structured

at the commencement of September 1969 had suffered a

decline of his cash investment of $100,000. to approxi-

mately $50,000. by reason of the market action which went

against the low-priced gold stocks and the short sale of

650 shares of Honeywell, Inc. in his account. Kasner was

not unknowledgeable or inexperienced in securities even

though his own results were unsatisfactory.

In September 1969 Kasner consulted another broker-

age firm and was advised to liquidate his position. He

discussed the matter with Nernberg, indicating his inten-

tion to liquidate, and was advised that in Nernberg’s

judgment it would be a mistake and that he thought he

could help Kasner restructure the account for a rising

market and help him recoup his losses. Kasner accepted

Nernberg’s judgment and advice, resulting in a written dis-

cretionary authority executed November 14, 1969 (R. 241,

8

infra, A.11) for the joint account of David and Joan

Kasner. When Nernberg began trading the account it was

already under-margined, but above maintenance require-

ments, and Kasner knew this. He was informed by Nern-

berg that to restructure the account it would have to be

done by the so-called “substitution” rule of disposing of

the undesired stocks and purchasing a like dollar amount

of other and more diversified securities. This was done

primarily between September and December 1969 during

which the equity remained relatively intact. During the

entire nine-month period for which claim is made by Re-

spondents (September 1969 through May 1970) there were

only nine in-and-out transactions in the account, each of

which were in 100 share lots and involved different se-

curities. All other securities acquired by substitution re-

mained in the account through a severe bear market

decline until either (a) liquidated for failure to respond

to margin calls largely occurring in April and May 1970,

or (b) upon the admitted direct order of Kasner to

liquidate the remainder of the account on May 26, 1970—

the very day when the 1970 bear market reversed itself

into a booming bull market. During that interval Kasner’s

equity had shrunk from approximately $50,000. to $3,000.

All transactions related to securities listed on the New

York and American Stock Exchanges.

Kasner admitted that from September 1969 through

May 1970 he had received each monthly statement from

Hentz relating to his account, that he had likewise received

confirmations of each and every transaction, nine margin

calls in the form of letters or telegrams, seven of which

occurred in April and May 1970, that he had “repeatedly”

discussed the equity in his account with Nernberg during

the period from January to May 1970 when the substantial

9

decline was occurring and was informed and knew at vary-

ing times that his equity had shrunk to $33,000., then to

$28,000. and later to $22,000., but never at any time did

he move to revoke the discretionary authority because he

relied on Nernberg’s judgment that it would be a mistake

to liquidate the account and move out of the market before

it turned upward — this despite the fact that in J anuary

1970, concerned about the shrinkage in the account, Kasner

admitted having again consulted the same outside broker-

age firm as he had first consulted in September 1969 and

having been advised again to get out of the market, which

he disregarded in favor of accepting Nernberg’s judgment.

Kasner testified that he knew of no fraud or fraudu-

lent act and did not believe that Nernberg and/or Hentz

committed any fraud or fraudulent act against him

(R. 130) ; that he never doubted and does not doubt Nern-

berg’s honesty (R. 114, 130); that Nernberg never gave

or made a misstatement or a false statement to Kasner

other than what he characterized Nernberg’s advice that

it was a mistake to get out of the market and that he could

help him recoup some of his losses by restructuring the

account in anticipation of a rising market (R. 131) ; that

Nernberg never gave Kasner any misinformation about

any stock bought or sold for Kasner in his account

(R. 132); that he did not believe Nernberg traded the

discretionary account for the purpose of generating com-

missions (R. 144); that he found no objection to or fault

with or wrong in connection with the purchase or sale of

any individual security or transaction in his account.

(R. 128)

The trial judge found as a matter of law that there

was no “churning” (R. 214) ; that admittedly not a single

10

purchase was bad other than that the market went down

(R. 210) ; that Respondents knew and were aware by their

own admission of the downgrade in the market generally

(R. 209); that the proof not only failed to establish

negligence, but it did not establish mishandling of the

account (R. 218) ; that “in other words all we found, in

my opinion, does not violate the Securities Act and does

not constitute negligence to make them responsible for

any losses incurred.” (R. 219-220)

At the conclusion of presentation of Plaintiffs’-Re-

spondents’ case, Petitioners moved for a directed verdict,

and the court after hearing extensive argument granted

the motion, entered a Directed Verdict, and thereafter the

Final Judgment for Defendants on Directed Jury Verdict

(infra, p. A. 10). From that Final Judgment Respondents

filed their Appeal to the United States Court of Appeals,

Fifth Circuit, resulting in the decision Reversing and

Remanding for new trial (infra, p. A. 2, 3). This Petition

for Writ of Certiorari is directed thereto.

B. BASIS FOR FEDERAL JURISDICTION IN

THE UNITED STATES DISTRICT COURT.

Respondents alleged in their Complaint jurisdiction

in the United States District Court under and by virtue

of Sections 6(b) (15 U.S.C. $78(f)): 10(b) (15 U.S.C.

$78(j) ; 15(e) (1)-(2) (15 U.S.C. $78 (0)(c)(1)-(2); 27

(15 U.S.C. §78(aa)) of the Securities Act of 1934; and

Rules 10b-5 and 15 (c) (1)-(2) of the Securities Exchange

Commission; and pendent jurisdiction of the causes of

action arising under state law.

11

The United States Court of Appeals, Fifth Circuit,

in its opinion (infra, p. A.3) found jurisdiction under

28 U.S.C. §§1331 and 1337; §22(a) of the Securities Act

of 1933 [15 U.S.C. 877v(a)], and §27 of the Securities

Exchange Act of 1934 [15 U.S.C. §78aa]; and pendent

jurisdiction over the counts alleging state securities law

violations and common law negligence.

REASONS FOR GRANTING THE WRIT

I

A. FRAUD v. NEGLIGENCE — 10b-5

The United States Court of Appeals, Second Circuit,

in a recent case, CCH Fed. SEC Rptr. #93,959 (2nd Cir.

1973), Frank Lanza, Jr., Vincent Sharbo, et al., v. Drexel

& Co., John Ames Ballard, Bertram D. Coleman, et al.,

decided April 26, 1973, bearing Docket No. 35794, stated

with regard to the necessity of fraud as distinguished from

negligence in the maintenance of a civil action for violation

of 10b-5 as follows:

“We recognize, of course, that other circuits

have expressed approval of a ‘negligence’ stand-

ard. See, e.g., Ellis v. Carter, 291 F.2d 270, 274

(9th Cir. 1961). But we do not find these state-

ments persuasive. In addition to the inappropriate-

ness of a negligence standard demonstrated by

comparing liability under Section 10b of the Se-

curities Exchange Act with liability under Sec-

tion 11 of the Securities Act, supra, we believe

the actual language of Section 10b bars adoption

of a negligence standard. Rule 10b-5(b), the

12

provision under which the Lanzas seek relief,

makes it unlawful ‘to make any untrue statement

of a material fact or to omit to state a material

fact necessary in order to make the statements

made in the light of the circumstances under

which they were made, not misleading ....’ Yet

the rule-making power granted to the Securities

and Exchange Commission by Section 10b au-

thorizes rules making it unlawful ‘[t]o use or

employ ... any manipulative or deceptive device

or contrivance...’ (emphasis added). These

words negate liability for a mere negligent omis-

sion or misrepresentation. Rather, ‘proof of fraud

is required in suits under §10b of the 1934 Act

and Rule X-10b-5 .. . ’ Fischman v. Raytheon

Mfg. Co., 188 F.2d 788, 786 (2d Cir. 1951). See,

VI Loss, Securities Regulations 3884-86.”

To like effect see also Shemtob v. Shearson, Hammill & Co.

(C.A. 2, 1971) 448 F.2d 442.

In the Eighth Circuit, Rule 10b-5 applies to negligent

as well as fraudulent misrepresentations. Vanderboom v.

Sexton, 422 F.2d 1238, 1288 (C.A. 8-1970). Likewise, in

Myzell v. Fields, 386 F.2d 718 (C.A. 8-1967), cert. denied,

88 S.Ct. 1043, 390 U.S. 951, 19 L.Ed. 2d, 1148, that court

stated: “The present rule in the Eighth Circuit is that Rule

10b-5 applies to negligent as well as intentional misrep-

resentations.”

The Ninth Circuit held in Ellis v. Carter, 291 F.2d 270

(C.A. 9-1961) that in a 10b-5 action one need not establish

genuine fraud as distinguished from mere misstatement or

omission. As observed by a commentator, Bucklo, Scienter

13

and Rule 10b-5, 67 N.W.U. L.Rev. 562, 565 (1972) this

case and statement have subsequently been cited as pro-

hibiting not only negligent, but even innocent misstate-

ments.

The Seventh Circuit in Carroll v. First National Bank

of Lincolnwood, 413 F.2d 353 (C.A. 7-1969), cert. denied,

90 S.Ct. 552, 396 U.S. 1008, 24 L.Ed. 494, interpreted

10b-5 to “prohibit all fraudulent schemes in connection

with purchase or sale of securities, whether the artifices

employed involve a garden-type variety of fraud or present

a unique form of deception.”

The Fifth Circuit in Clement A. Evans & Co. v. Me-

Alpine, 434 F.2d 100, 104 (C.A. 5-1970), cert. denied, 91

S.Ct., 1660 (1971), in laying down a diligence-negligence

test for plaintiffs quoted the Eighth Circuit language in

City National Bank of Fort Smith, Ark. v. Vanderboom,

422 F.2d, 221 (8th Cir. 1970), cert. denied, 399 U.S. 905,

90 S.Ct. 2196, 26 L.Ed.2d, 560, creating a diligence-neg-

ligence standard for defendants and proceeded to state that

its test for plaintiffs, though first suggested “in the con-

text of negligent misrepresentations (by defendants) .. .

is not altered merely because the misrepresentations are

alleged to be intentional rather than negligent.”

Relating the aforegoing to the case at bar, it is per-

tinent to examine the direct testimony with regard to fraud

appearing in the record wherein Kasner, under cross-exami-

nation (R. 130) testified as follows:

“Q. (Mr. Aronovitz) Now, what was it that

Mr. Nernberg did or did not do that you say con-

stituted fraudulent action on his part for fraud?

14

“A. (Dr, Kasner) He mismanaged the ac-

count.

“Q, What particular act did he do that you

consider to have been fraudulent?

“Mr. Nachwalter: Your Honor, that calls for

a legal conclusion. We are talking about fraud

in the equitable sense —

“(162) The Court: I think that is impor-

tant. Mismanagement and fraud are two different

animals.

“Mr. Nachwalter: Mr. Aronovitz uses the

term —

“The Court: Remember how many cases you

mismanaged, and how many more I mismanaged?

It was not fraud.

“Mr. Nachwalter: Well, your Honor, the

term ‘fraud’ is used in the complaint in this case

in an equitable sense under the securities laws.

“The Court: The Securities Exchange did not

change the definition of the word fraud. Fraud

means evil, deliberate, conscientious ( sic). I think

this honest witness is telling the truth. He says it

was just plain inability to manage the account.

“So he is asking, was that fraud or mismanage-

ment, which it was. If it is fraud, let us define

wherein and whereby it was fraud. That is the

proper question.

“Q, (Mr. Aronovitz) Your answer is there

was no fraud in your definition of the term?

“A, Excuse me?

Te NL by ne ES

15

“Q. Then your answer is that there is no

(163) fraud in your definition of the term?

“A. No, there wasn’t fraud. I never doubted

the man’s honesty. What I’m trying to point out

was, I felt there was incompetence. As a doctor,

I looked upon this as malpractice. You know, I

can think in terms of medicine better than I can

in terms of —” (Emphasis supplied.)

So, there was no fraud. Therefore, it is difficult to

comprehend how the appellate court construed a violation

of 10b-5 to be maintainable unless the alleged violations

to which it referred in recognizing the first theory of the

plaintiffs cause of action were related to negligence as

applied to 10b-5 or negligent misrepresentations applied

to 10b-5. Consequently, the Fifth Circuit has thereby rec-

ognized a standard other than fraud as the basis for al-

leging a civil action for damages in violation of 10b-5. See

the first paragraph of the Fifth Circuit Court’s opinion

(infra, p. A.3) wherein it designated the first of three

theories by which plaintiffs sought recovery as “(1) viola-

tions of 15 U.S.C. 78j, 15 U.S.C. §780(e) (1)-(2) and Se-

curities Exchange Commission Rules 10b-5 and 15(e¢) (1)-

(2) promulgated thereunder.” This view is confirmed by

the direction expressed in Evans v. McAlpine, supra, re-

lating to the diligence-negligence standard.

By reason of the aforegoing, it is respectfully sug-

gested that the several courts of appeals have rendered de-

cisions in conflict with each other, and that the decision

of the Fifth Circuit in the instant case is in conflict with

some of those other decisions ; and that this presents an

important question of federal law which has not been,

but should be, settled by this Court.

16

B. SCIENTER — 10b-5

The Second Circuit in Lanza, et al. v. Drexel & Co.,

et al., supra, stated and held with regard to the necessity

of scienter in a 10b-5 action as follows:

« .., Although one commentator recently stated

that ‘The question whether scienter is a required

element under rule 10b-5 . . . must be regarded

as open at this time [because] [t]he circuit courts

are either split or in confusion,’ Ruder, Multiple

Defendants in Securities Law Fraud Cases: Aid-

ing and Abetting, Conspiracy, In Pari Delicto,

Indemnification, and Contribution, 120 U. Pa. L.

Rev. 597, 631 (1972), our recent decision in Shem-

tob v. Shearson, Hammill & Co., supra, eliminated

any doubt that proof of scienter is required in

private actions in this circuit. There, in the con-

text of a private action for damages, we stated

that no violation of Rule 10b-5 occurs ‘in the ab-

sence of allegations of facts amounting to scienter,

intent to defraud, reckless disregard for the truth,

or knowing use of a device, scheme, or artifices to

defraud. It is insufficient to allege mere negli-

gence.’ 448 F.2d at 445. Under the Shemtob test,

a plaintiff claiming a violation of Rule 10b-5 who

cannot prove that the defendant had actual knowl-

edge of any misrepresentations and omissions

must establish, in order to succeed in his action,

that the defendant’s failure to discover the mis-

representations and omissions amounted to a will-

ful, deliberate, or reckless disregard for the truth

that is the equivalent of knowledge.”

17

The Eighth Circuit in Myzell v. Fields, supra, held

that proof of scienter is not required under 10b-5. See also

City National Bank v, Vanderboom, supra, and Vander-

boom v. Sexton, supra. It was held in S.E.C. v. Van Horn,

871 F.2d 181 (C.A. 7-1966) that proof of scienter or fraud-

ulent intent is not essential in a suit for injunctive relief.

Ellis v. Carter, supra, has been indicated as a holding

by the Ninth Circuit rejecting a scienter requirement.

Bucklo, supra, page 565. The latter author points out that

the use of ambiguous language may be a principal cause

of confusion, and suggests that much of the confusion sur-

rounding the scienter requirement can be dispelled if

greater concern were evidenced by the meaning of the

phrases used in some of the decisions relating thereto.

The language used by the Fifth Circuit in Evans v.

McAlpine, supra, strongly Suggests that the Fifth Circuit

is prepared to treat defendants’ negligence as a sufficient

scienter for 10b-5. The holding in the case at bar confirms

this when related to the opinion herein finding jury issues

on remand limited to the simple determination “of whether

false statements were made, if so whether they were ma-

terial, and if plaintiffs were justified in their reliance

thereon,” (and citing Evans v. McAlpine as authority) in-

asmuch as such a standard for assessment of liability com-

pletely ignores the element of scienter. Consequently, this

places the instant decision of the Fifth Circuit in conflict

with Lanza and Shemtob of the Second Circuit, but in

apparent conformity with Vanderboom in the Eighth Cir-

cuit, and confirms the direction indicated in Evans v. Me-

Alpine, supra.

18

By reason of the aforegoing, it is respectfully sug-

gested that the several courts of appeals have rendered

decisions in conflict with each other, and that the decision

of the Fifth Circuit in the instant case is in conflict with

some of those other decisions; and that this presents an

important question of federal law which has not been, but

should be, settled by this Court.

C. INSUROR-GUARANTOR OF

DISCRETIONARY ACCOUNT

Ancillary to the first question presented herein, it

should be noted that the effect of the appellate court de-

cision, in the absence of fraud, has the effect of making

the stock broker and registered representative guarantors-

insurors against losses in a discretionary account. An

agent, in the absence of an express agreement is not an

insuror of the success of his undertaking and does not

guarantee the principal against incidental losses or under-

take that he will commit no errors or mistakes. See 3 C.J.S.

36 (Agency, $156); Hecht v. Harris, Upham & Co., 283

F.Supp. 417, 430 (N.D.Cal. 1968). There was no express

agreement herein alleged or proven between either Hentz

or Nernberg and the Kasners. A holding that the broker

or agent is liable for damages occurring in a severe bear

market decline, and resulting from the management of a

discretionary account, in the absence of fraud, has the

effect of making the broker and the agent the insuror or

guarantor of the customer’s account against loss. This was

never intended to be the type of protection afforded an

investor by the Securities Acts or the Rules promulgated

thereunder.

19

II

VIOLATION OF STOCK EXCHANGE RULE

Even the violation of a statute or ordinance does not

in every instance give rise to a civil cause of action. In

Rospigliasi v. Clogher, 46 So.2d 170 (Fla. 1950), the Su-

preme Court of Florida held that a violation of a rule of

the New York Stock Exchange would not have such force

and dignity that violation of it would be a transgression

of the federal statute creating the Securities and Exchange

Commission which in turn supervised the New York Stock

Exchange. It differentiates between rules and regulations

promulgated by the Securities and Exchange Commission

under direct authority of the federal statute, as distin-

guished from rules governing the operation of and adopted

by the New York Stock Exchange.

The aforegoing decision of the Florida Supreme Court

is consistent with the principle generally observed that mere

violation of a rule or regulation of a stock exchange does not

of itself, per se, give rise to a civil cause of action. Nichols

& Co. v. Columbus Credit Corp., 126 N.Y.S. 2d 715, aff'd.

134 N.Y.S. 2d 590; Irving Weis & Co. v. Offenberger, 220

N.Y.S. 2d 1001; Whyte v. New York Mercantile Exchange,

233 N.Y.S. 2d 37.

The second theory recognized by the Fifth Circuit as

applicable herein is “(2) Negligent failure to properly

supervise and administer a discretionary account in viola-

tion of New York Stock Exchange Rules 401 and 405.”

This apparently purports to be founded upon common law

negligence under state law—but Rules 401 and 405 of the

New York Stock Exchange were promulgated in New York,

20

the account was handled in Florida, part of the supervision

occurred in New York and part in Florida, so there is doubt

as to whether this is common law negligence and strictly a

state-founded theory. Additionally, it should be noted that

there is no diversity of citizenship in this cause of action,

and if in fact there never was fraud as Kasner admitted

and therefore no cause of action for violation of 10b-5,

then pendent jurisdiction was lacking ab initio on this

state-founded claim or federal claim not involving a fed-

eral question. It was within the discretion of the trial judge

even at a point during or at the end of trial to either dis-

pose of a state-founded claim or not to do so. United Mine-

workers v. Gibbs, (1966) 86 S.Ct. 1130, 373 U.S. 715, 16

L.Ed.2d 218. Finally, as previously observed, the trial court

found as a matter of law that there was no negligence as

shown by the testimony (R. 219-20).

Ill

CIVIL ACTION ON FSS. 517.301

All securities transactions involved in this litigation

occurred on the New York and American Stock Exchanges

in New York City. No securities originated by or issued

out of the State of Florida or registered therein were in-

volved. The mails were extensively used to transmit con-

firmations, margin calls, monthly statements and the tele-

phone was likewise used extensively. It therefore appears

that the nature and scope of the transactions involved were

interstate in character.

A comparison, element by element, of F.S. 517.301

with Rule 10b-5 indicates the close approximation between

21

the two. Also, it becomes apparent immediately that both

are predicated upon fraud. Again, we observe that if, as

Kasner indicates, there was no fraud and he does not charge

it against Petitioners, then there could be no violation of

F.S. 517.301.

It likewise seems that notwithstanding the “savings

clauses” appearing at 15 U.S.C. 77¢ (a) (11), 77 p, 77r,

nevertheless because the transactions involved are inter-

state as contrasted with intra-state in nature, there is a

conflict between the application of Rule 10b-5 and F-.S.

517.301. See Rice v. Board of Trade, 331 U.S. 247, 67

S.Ct. 1160, 91 L.Ed. 1468; Crosby v. Weil, 382 Ill. 538,

48 N.E.2d 386, 145 A.L.R. 1252. The Act of Congress may

touch a field in which the federal interest is so dominant

that the federal system will be assumed to preclude en-

forcement of state law on the same subject. Hines v. David-

owitz, 312 U.S. 52, 61 S.Ct. 399, 85 L.Ed. 581. If the area

covered by F.S. 517.301 has been pre-empted, then no civil

cause of action should lie for damages thereunder.

We submit to the Court that this is a matter of great

public interest for determination of whether or not a state

statute closely paralleling Rule 10b-5 and founded upon the

same relative elements can be supported in a securities mat-

ter interstate in nature as the basis for a civil action for

its violation, or whether the state statute is not rendered

repugnant to and superseded by the federal rule and stat-

ute. This affects the securities laws of a number of states.

22

CONCLUSION

For the reasons stated, this Petition for Writ of Cer-

tiorari should be granted. The issues suggested for retrial

on the facts by the appellate court are all resolved as a

matter of law and were so resolved by the trial court and

argued herein accordingly.

Respectfully submitted,

ARONOVITZ, SILVER & BOOTH

908 Ainsley Building

Miami, Florida 33132

Attorneys for Petitioners

By Nedra tala i adubse

Sidney M. Aponovitz, of Counsel

23

CERTIFICATE OF SERVICE

I HEREBY CERTIFY that three copies of the afore-

going Petition for Writ of Certiorari and Appendix an-

nexed thereto were served upon Michael Nachwalter, Es-

quire, of Kelly, Black, Black & Kenny, P.A., 1409 Alfred

I. duPont Building, Miami, Florida 33131, counsel for

David Kasner and Joan Kasner, Respondents, by de-

positing same in a United States mail box with first class

postage prepaid, addressed accordingly, and in accord-

ance with Rule 33, Supreme Court Rules, this SLL day

of May 1973.

f ( rf /

By AvApiyt eh ete pp egy

Sidney M. Argnovitz, of Counsel,

ARONOVITZ, SILVER & BOOTH

908 Ainsley Building

Miami, Florida 33132

Attorneys for Petitioners