## Facts

- James and Patricia Gochnauer held a securities account at A.G. Edwards & Sons, Inc., managed through broker James Lester at the firm’s Fort Walton Beach office (managed by Gene Roach).
- The Gochnauers’ investments were primarily conservative (e.g., municipal bonds); Mr. Gochnauer asked Lester about higher-return alternatives.
- Lester discussed options trading and recommended that the Gochnauers consult John Kerr, an unlicensed “investment adviser,” representing that Kerr was successful in the options market.
- Lester recommended Kerr without investigating Kerr’s education, experience, or qualifications; Kerr lacked significant securities-trading training or experience.
- Kerr met with the Gochnauers, promised to serve as their exclusive adviser, and guaranteed a 15% annual return (including by using his own funds if necessary).
- The Gochnauers executed an agreement granting Kerr exclusive trading authority over their A.G. Edwards account, and Kerr implemented an options strategy.
- The account sustained losses exceeding $25,000 during the first year; despite the losses and the unmet guarantee, the Gochnauers renewed Kerr’s authority for a second year and incurred additional losses.
- The Gochnauers sued A.G. Edwards, Lester, Roach, and Kerr alleging federal securities fraud, Florida securities-law violations, and common-law claims including breach of fiduciary duty.
- The district court found liability for common-law breach of fiduciary duty against Lester/A.G. Edwards, rejected the federal and Florida securities claims, and limited damages to losses from the first year on a ratification/assumption-of-risk theory.

## Issues

1. Whether a broker may breach state common-law fiduciary duties yet not violate federal securities antifraud provisions or Florida’s securities statute.
2. Whether the Gochnauers proved the elements of securities fraud—particularly reliance—based on Lester’s statements and conduct regarding Kerr and the options strategy.
3. Whether damages for the fiduciary breach were properly limited to first-year losses because the Gochnauers knowingly renewed Kerr’s authority for a second year.

## Decision

- The Eleventh Circuit affirmed the judgment in all material respects.
- The court held that a broker can breach common-law fiduciary obligations and still not violate federal or Florida securities antifraud provisions.
- The court upheld rejection of the federal and Florida securities-law claims because the Gochnauers failed to establish legally sufficient reliance on any material misrepresentation or omission by Lester regarding Kerr.
- The court affirmed the finding that Lester breached fiduciary duties by recommending a speculative options approach and referring the Gochnauers to Kerr without adequate investigation.
- The court affirmed limiting damages to losses incurred during the first year, concluding that the Gochnauers’ informed renewal of Kerr’s authority constituted ratification that cut off liability for subsequent losses.

## Legal Principles

- Federal securities antifraud liability (including Rule 10b-5-type claims) requires proof of specific elements, including material misrepresentation or omission, scienter, reliance, causation, and damages.
- Common-law breach of fiduciary duty by a broker may be established based on lack of due care and prudence in recommendations and referrals, even if securities-fraud elements (especially reliance) are not met.
- Reliance is a required element for securities antifraud claims; where the factfinder determines the investor acted on independent judgment rather than relying on the broker’s misstatements or omissions, securities-fraud recovery fails.
- A customer’s informed decision to continue or renew a speculative trading arrangement after learning of substantial losses can constitute ratification (or an intervening decision) that limits damages by breaking the causal chain for later losses.

## Conclusion

The Eleventh Circuit affirmed that the broker’s imprudent recommendation and referral supported a state-law fiduciary-breach judgment, but the investors’ failure to prove reliance defeated federal and Florida securities-fraud claims, and their informed renewal of the adviser’s authority limited recoverable damages to first-year losses.


Gochnauer v. A.G. Edwards & Sons, Inc., 810 F.2d 1042 (11th Cir. 1987)