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Sennott Et Ux. v. Rodman & Renshaw
Citations: 414 U.S. 926; 94 S. Ct. 224; 38 L. Ed. 2d 160; 1973 U.S. LEXIS 1056Docket: 72 1740
Court: Supreme Court of the United States; October 15, 1973; Federal Supreme Court; Federal Appellate Court
The Supreme Court denied the petition for a writ of certiorari in the case of Richard J. Sennott et ux. v. Rodman Renshaw, concerning securities fraud. The initial action was brought by Sennott against Rodman Renshaw, a registered broker-dealer, along with William Rothbart and Jordan Rothbart, after a district court found all three defendants liable for fraudulent activities. However, the Court of Appeals reversed this decision, stating there was no basis for holding Rodman liable for the illegal scheme. Sennott, who had limited experience in securities investments, was influenced by Jordan Rothbart to open an account with Rodman Renshaw. Between 1964 and 1966, Sennott engaged in over $2 million in trading, primarily through accounts opened by Jordan. Unbeknownst to Sennott, Jordan had been terminated from Rodman in 1958 due to issues regarding integrity and had a history of violating securities regulations. In 1964, Jordan persuaded Sennott to invest $142,000 in non-existent stock options related to a secondary offering by Skyline Homes, Inc. Instead of being invested, Sennott's money was placed in Jordan's wife's account to cover trading losses. Suspicion arose only after several months, and despite attempts to clarify the situation, Sennott was misled by William Rothbart. It wasn't until 1966 that Sennott uncovered the fraudulent scheme and Jordan's past misconduct, leading to Jordan's expulsion from the Board of Trade. The trial judge found all three defendants liable, citing § 20(a) of the Securities Act of 1934 as a basis for Rodman's liability. However, the Court of Appeals concluded Rodman could not be held liable under this section due to a lack of advance knowledge or involvement in the fraudulent scheme. The 1934 Act emphasizes full disclosure over the caveat emptor principle, aiming to uphold high ethical standards within the securities industry. Section 20(a) holds individuals who control liable for violations under the Act, allowing for a liberal interpretation that requires only some level of influence without direct control to impose liability. Rodman is liable for the actions of its partner, William Rothbart, based on both Section 20(a) and general agency principles, which extend liability beyond formally authorized actions to encompass apparent authority. Rodman accepted orders from Jordan for over two years, profiting significantly from transactions facilitated by Jordan, who represented himself as an agent of Rodman. The court found that Rodman cannot deny knowledge of Jordan's activities, and by allowing Jordan to act as its agent and benefiting from his actions, Rodman is responsible for Jordan's misconduct. Rodman cannot claim good faith as a defense since it was aware of Jordan's questionable practices and failed to take protective measures against potential harm. The District Court determined that Rodman qualifies as a controlling person under § 20(a) and, as such, is liable to Sennott. This finding is not clearly erroneous and is supported by precedents, notably conflicting with the Court of Appeals' decision. The typical transaction involved Jordan advising Sennott based on recommendations from his father, leading Sennott to agree and place orders via Rodman's special phone at the Board of Trade, with fees collected by Rothbart. Jordan had also informed Sennott of his own purchases of options, consolidating payments into a single check. Section 20(a) establishes that anyone who controls a person liable under securities law shares that liability unless they acted in good faith and did not induce the violation. The term 'controls' does not require a traditional principal-agent or employer-employee relationship, as indicated by the quoted case law, suggesting that liability extends beyond such relationships.