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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition for Writ of Certiorari
- **Published:** January 1, 1973
- **Citation:** 414 U.S. 823

## Text

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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385607_0461%3A1. Public record. Not legal advice.