Palmer v. Shearson Lehman Hutton, Inc.

Citations: 622 So. 2d 1085; 1993 WL 288738Docket: 92-2115, 92-2692

Court: District Court of Appeal of Florida; August 4, 1993; Florida; State Appellate Court

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Joan C. Palmer and Luther E. Young, along with Young Packaging Products, Inc., appeal summary final judgments against Shearson Lehman Hutton, Inc., a Florida-registered securities dealer. The appellants allege that Hutton was negligent in failing to report to the Department of Banking and Finance that David Kury, a former employee who defrauded clients, had been terminated. The appellants, who claim to have been defrauded by Kury after his termination, argue that the trial court erred in ruling that Hutton owed no legal duty to them. 

While the court agreed that Hutton did not owe a common law duty independent of statutes, it found that the complaints sufficiently alleged a statutory duty under Florida's Securities Act, which requires dealers to notify the Department of an associated person's termination and the reasons for it. The appeals court reversed the trial court's decision, indicating that Hutton could be held accountable for the alleged damages under a statutory negligence theory. The case centers on regulations established by chapter 517, Florida Statutes, which governs securities transactions and the registration of dealers and associated persons.

In early 1983, Fred Brown, Kury's supervisor, discovered Kury had misappropriated funds from customers through personal and corporate promissory notes. Brown reported this to Hutton's regional vice president and legal department, which instructed him to obtain a list of Kury's debts. Hutton subsequently informed the creditors that it bore no responsibility for Kury's notes. Brown, aware of Kury's violations of SEC regulations and Hutton's rules, secured Kury's resignation in January 1984. Hutton then filed a Form U-5, falsely claiming no knowledge of Kury's legal violations.

After leaving Hutton, Kury was re-registered with Prudential-Bache Securities Corporation and later with Associated Planners Securities Corporation. In 1986, he began providing financial services to Luther and Marlene Young, subsequently persuading them to purchase a $50,000 promissory note from Kury Financial in early 1987. Kury left Associated in April 1987 and joined American Capital Equities Corporation, where he induced the Youngs to invest further and also solicited Appellant Palmer for financial services, leading to her purchase of a $20,000 note in December 1987.

In May 1988, the Department initiated an investigation into Kury, ultimately filing a complaint to revoke his registrations for selling unregistered securities. A January 1989 hearing revealed Kury had sold notes to 50 investors totaling between $5,000 and $200,000, using proceeds for personal and business expenses without maintaining proper records or disclosures. The Department permanently revoked Kury's securities license in April 1989. Subsequently, Appellants filed complaints against Kury and Hutton, alleging negligence in concealing Kury's fraudulent activities and misrepresenting his termination to the Department.

Hutton's motion for summary final judgment was supported by an order from the U.S. District Court for the Northern District of Florida, which granted partial summary judgment in related cases involving similar facts and causes of action. The trial court ruled that Hutton owed no legal duty to the Appellants, as the complaints did not demonstrate any facts establishing such a duty, aligning with the federal court's decision. Appellants contended that Hutton had a common law duty to protect potential investors from Kury's fraudulent actions, given Hutton's awareness of his misconduct during his employment. However, the court rejected this argument, stating that under common law, a party does not have a duty to control the actions of another unless a special relationship exists. In this case, no such relationship was present between Hutton and Kury at the time of the alleged harm, as Kury was no longer employed by Hutton. Additionally, there was no special relationship between Hutton and the Appellants, who were never customers of Hutton nor did they interact with Kury while he worked there. Consequently, the trial court correctly concluded that Hutton had no common law duty to the Appellants. However, the court erred by stating that Hutton did not have a statutory legal duty regarding the alleged negligent conduct. Relevant Florida statutes and rules impose legal obligations on Hutton that could support a negligence claim in this context, particularly noting the requirement for dealers to report the termination of associated persons and the reasons for such terminations.

Section 517.301 prohibits individuals from knowingly falsifying or concealing material facts, making false statements, or using fraudulent documents in matters under the jurisdiction of the department. Rule 3E-600.08 mandates that a registrant, like Hutton, must notify the department of an employee's termination within twenty days, using specified forms, including Form U-5. Hutton had a legal duty to accurately report Kury's termination, including the reasons and any known misconduct. Allegations against Hutton claim it breached this duty by falsely reporting Kury's resignation and asserting no violations occurred. Hutton's submission of Form U-5, which stated Kury voluntarily resigned without violations, could lead a jury to conclude that Hutton willfully provided false information, violating statutory obligations aimed at protecting investors. While statutory violations can indicate negligence per se, actionable negligence also requires demonstration that the plaintiff belongs to the protected class, suffered a relevant injury, and that the statutory violation was the proximate cause of that injury. The allegations presented are deemed sufficient to meet these legal criteria.

The Florida Securities Act, outlined in chapter 517, aims to protect investors from fraudulent and deceptive practices in the securities market, as established in case law such as Rudd v. State and Nichols v. Yandre. The act is designed not to shield investors from market losses but specifically from fraud. The reporting requirements in subsection 517.12(11)(b) and the prohibition against false reports in subsection 517.301(3) are intended to facilitate the Department's ability to gather truthful information about registered securities sellers, thereby enabling it to prevent fraud.

Appellants, as investors dealing with Kury, a registered broker, fall within the protective scope of chapter 517 and have suffered losses due to Kury's fraudulent actions. The argument presented by Hutton that Appellants do not qualify for protection under the Act, based on a privity requirement noted in E.F. Hutton & Co., Inc. v. Rousseff, is rejected. Rousseff's ruling specifically addressed claims involving direct transactions between buyers and sellers and did not pertain to the statutory violations claimed in this case. The referenced subsections in Rousseff are limited to certain buyer-seller disputes and do not exclude other remedies available under chapter 517, including those in subsection 517.301(3), which Appellants rely on for their claims.

Subsection 517.301(3) of the Florida Statutes establishes that it is unlawful for any individual to knowingly falsify or conceal material facts or make false statements within the jurisdiction of the Department, extending beyond mere sales transactions. This provision applies broadly to actions such as filing false reports, indicating that Hutton’s alleged act of knowingly filing a false report regarding Kury’s termination constitutes a violation of chapter 517, regardless of whether the harmed party had a direct relationship with Hutton. The key legal question is whether Hutton’s actions can be linked as the proximate cause of damages suffered by the Appellants. Although the Florida Supreme Court in Rousseff ruled that proof of loss causation is not required in civil securities proceedings, the Appellants' claims are based on a negligence cause of action that necessitates establishing this causation. The complaints assert that Hutton’s fraudulent reporting delayed appropriate action against Kury, which would have prevented his continued fraudulent activities and protected future clients like the Appellants. The Department has the authority to deny or revoke registrations based on violations of chapter 517, reinforcing the importance of accurate reporting following employee terminations in the securities industry.

A jury may lawfully find that had Hutton accurately reported the termination of Kury and its reasons, the Department would likely have investigated Kury's eligibility to reregister and continue working in securities. Hutton had a legal duty to the Appellants to prevent the losses they incurred. Concerns raised by Hutton's counsel regarding potential liability to third parties are acknowledged, but the court maintains that holding Hutton accountable for knowingly violating clear reporting requirements does not expand existing liability. The court emphasizes that securities dealers can protect themselves by filing truthful reports. The requirement for plaintiffs to prove Hutton's knowing and willful violation of the statute, and that this violation caused their damages, effectively limits the scope of liability. The court concludes that the Appellants' allegations sufficiently demonstrate a legal duty owed by Hutton, but it does not assess the credibility or value of the evidence or determine if Hutton's actions were willful or caused the damages. The court reverses the summary judgments and remands the cases for further proceedings.

Subsection 517.021(7) of the Florida Statutes (1983) defines a 'dealer' as an individual engaged in the business of trading securities issued by others, excluding registered salesmen. This definition was updated in 1991 to replace 'salesman' with 'associated person.' Subsection 517.021(4) defines 'associated person' as any individual in a senior position within a dealer or investment adviser, or one controlling or controlled by them, excluding clerical employees. Summary judgments are based on facts from complaints and discovery responses. Shearson Lehman Hutton, Inc. acquired E.F. Hutton & Co., Inc. through merger, while Kury Financial Planning Group, Inc., owned solely by Kury, issued corporate promissory notes. A hearing officer found that Kury had borrowed approximately $327,172 from 17 clients, characterizing his activities as a 'pyramid' or 'Ponzi' scheme, where new investor funds were used to pay off earlier investors. The legal issues of common law and statutory duty were addressed separately, with the acknowledgment that a statutory violation can satisfy common law duty of care in negligence if the injured party falls within the statute's protective scope. Although the appellants claimed Hutton failed to properly terminate Kury's employment, the trial court did not rule on this issue. The Florida legislature has rebranded Chapter 517 as the 'Florida Securities and Investor Protection Act.' Subsection 517.241(2) states that statutory or common-law rights to bring actions related to securities sales remain unaffected. Following awareness of Kury's fraudulent activities, the Department revoked his registration.