Sennott Et Ux. v. Rodman & Renshaw

Background

An individual investor, a brokerage firm, a partner at that firm, and the partner’s son were involved in a dispute about a fraudulent stock option scheme. The son, who had no official connection to the firm after 1958, encouraged the investor to trade through accounts tied to him and the partner. Over 1964–1966 the investor traded more than $2 million and paid $142,000 for options that turned out not to exist. The firm accepted orders placed through a special firm phone and collected fees on the trades.

Reasoning

The central question was whether the brokerage could be held liable because it had allowed the son to act with apparent authority and had accepted the benefits of his trading. The son had a prior SEC order finding violations and a revoked registration. The Court of Appeals reversed a district court finding of firm liability under §20(a) — a law that can make someone who controls a wrongdoer also liable unless they acted in good faith. The Supreme Court declined to review that reversal, leaving the appeals court judgment intact.

Real world impact

Because the Supreme Court refused to review the case, the appeals court’s decision stands and the brokerage is not held liable by that court. The investor’s claim will not be decided further by the Supreme Court, and the factual findings about the son’s conduct and the firm’s role remain central to who bears responsibility.

Dissents or concurrances

Justice Douglas (joined by Justice Blackmun) dissented from the denial, arguing the facts showed the firm knowingly allowed the son’s apparent agency and could not claim good faith to avoid liability.