## Facts

- W. Monroe Stephenson, a tax attorney and experienced options trader, maintained brokerage accounts at Paine Webber and traded options actively beginning in 1979.
- In early 1982, Stephenson’s accounts were transferred to broker James E. Welch, and Stephenson continued options trading through late 1983.
- Paine Webber sent Stephenson written trade confirmations after transactions and monthly account statements detailing trades and margin interest.
- In October 1982, Stephenson received notice of a margin obligation for a September 1982 trade he claimed was unauthorized; he complained to Welch, who allegedly said he would fix it.
- Stephenson did not promptly complain to Paine Webber’s management, demand written corrections, or otherwise take effective action, despite continued receipt of confirmations and statements reflecting the trades and increasing margin debt.
- In September 1983, Stephenson sent Paine Webber a written complaint alleging 59 unauthorized or illegal transactions.
- In May 1984, Stephenson sued Paine Webber and Welch asserting federal securities claims (including Rule 10b-5 and 1933 Act claims), RICO, and state-law claims.

## Issues

1. Whether Stephenson proved unauthorized or fraudulent trading sufficient to establish liability under Rule 10b-5, including scienter, reliance, and the plaintiff’s due diligence.
2. Whether a sophisticated investor who receives confirmations and monthly statements but delays reporting alleged misconduct can recover for allegedly unauthorized trades.
3. Whether waiver, ratification, and laches barred Stephenson’s claims based on his delay and continued acceptance of account activity.
4. Whether dismissal of the 1933 Act § 17(a) claim, RICO claim, and state-law claims was proper, and whether any § 12(2) theory survived.
5. Whether the trial judge should have been recused based on an alleged conflict raised for the first time on appeal.

## Decision

- The Fifth Circuit affirmed the district court’s dismissal of all claims.
- The court upheld the post-trial dismissal of the federal securities-fraud theories, concluding Stephenson failed to prove any trades were “unauthorized” as legally defined.
- The court held Stephenson failed the Rule 10b-5 due-diligence requirement given his sophistication, repeated written notice of the trades, and prolonged inaction.
- The court agreed that waiver, ratification, and laches independently barred recovery.
- The court upheld Rule 12(b)(6) dismissal of the § 17(a), RICO, and state-law claims; on rehearing it clarified that any § 12(2) theory failed for the same lack of proof of unlawful transactions or actionable misstatements/omissions.
- The court rejected the recusal argument as waived and unsupported on the record.

## Legal Principles

- A private Rule 10b-5 plaintiff must prove a material misrepresentation or omission, scienter, reliance (transaction causation), and due diligence in protecting the plaintiff’s own interests.
- Negligence alone does not satisfy Rule 10b-5’s scienter requirement.
- A sophisticated investor who receives transaction confirmations and monthly statements yet disregards them and delays meaningful complaint may fail Rule 10b-5 due diligence.
- Customer delay and continued acceptance of account activity after notice can support equitable defenses, including waiver, ratification, and laches, barring securities-fraud relief.
- A § 12(2) claim requires proof of a material misstatement or omission by the seller in connection with an offer or sale; failure to prove actionable misconduct defeats the claim.
- Recusal objections generally must be timely raised in the trial court; raising them first on appeal is typically waived absent a record showing mandatory disqualification.

## Conclusion

The court affirmed judgment for the brokerage and broker because the investor did not prove trades were unauthorized under the governing legal standard and, given his sophistication and access to confirmations and statements, failed to exercise the diligence required for Rule 10b-5; his prolonged inaction also supported waiver, ratification, and laches, and his remaining statutory, RICO, state-law, and recusal arguments did not warrant relief.


Stephenson v. Paine Webber Jackson & Curtis, Inc., 839 F.2d 1095 (5th Cir. 1988)