Gochnauer v. A.G. Edwards & Sons, Inc.

James and Patricia Gochnauer (plaintiffs) had a securities account with A.G. Edwards & Sons, Inc. (A.G. Edwards) (defendant). The Gochnauers were not highly sophisticated investors, and in April 1979, Mr. Gochnauer asked A.G. Edwards broker James Lester (defendant) about investment options. Lester recommended that the Gochnauers consult with John Kerr (defendant) regarding option writing, a risky and speculative investment. Kerr was not a licensed investment advisor and did not have substantial financial or securities-trading education, but Lester had observed Kerr and believed Kerr to be successful. Although Kerr was not employed by A.G. Edwards, Kerr offered to become the exclusive investment advisor for the Gochnauers’ A.G. Edwards account. Kerr guaranteed the Gochnauers a 15 percent return, which was highly unusual. Lester told the Gochnauers truthfully that Kerr was a successful investor with over $100,000 in an A.G. Edwards account and had a nice home. However, Lester did not discuss Kerr’s 15 percent guarantee or tell the Gochnauers about Kerr’s lack of formal qualifications and experience. The Gochnauers ultimately decided to pursue option writing and use Kerr as their advisor. The Gochnauers placed almost $37,000 into a trading account with Kerr. However, at the end of two years, the account had decreased to roughly $4,000. The Gochnauers sued A.G. Edwards, Lester, and Kerr, alleging securities fraud in violation of federal and state law and common-law breach of fiduciary duty. The trial court found that Lester and A.G. Edwards had breached a fiduciary duty of care to the Gochnauers. However, the court found no state or federal securities fraud. The court reasoned that although Lester had misrepresented and omitted material information about Kerr’s background, the Gochnauers had not relied on those misrepresentations and omissions because Mr. Gochnauer had testified that he would have taken Kerr’s advice even if Mr. Gochnauer had known Kerr was not licensed. The Gochnauers appealed.