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In re E.F. Hutton & Co.

United States Securities and Exchange Commission

Exchange Act Release No. 34-25887, 41 S.E.C. Docket 413 (1988)

Facts

William Manning (plaintiff) was a sophisticated investor, meaning he had significant knowledge and experience in investing. Manning placed a limit order with E. F. Hutton & Company Inc. (Hutton) (defendant) to sell shares of Genex Corporation stock, which were over-the-counter securities. Manning was aware that Hutton was a registered NASDAQ market maker in Genex. While Hutton was holding Manning’s order, Hutton sold shares of its own Genex stock at prices higher than the price of Manning’s limit order. However, the inside bid price—the highest bid from dealers entering quotations into the NASDAQ system—never reached the price of Manning’s order. The Genex stock price subsequently fell, and Manning’s order was never executed. The National Association of Dealers (NASD) determined that Hutton had breached its fiduciary duty by not prioritizing Manning’s order over its own trades. Hutton appealed to the United States Securities and Exchange Commission, arguing that it had no obligation to execute or prioritize Manning’s order because Manning knew of Hutton’s role as a market maker and because the inside bid price never reached the price of Manning’s order.

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Holding and Reasoning

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Dissent (Grundfest, Comm’r)

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