Appeal of Stockbroker Found Liable in Unauthorized Trades of Cyberonics Stock is Rejected by 7th Circuit

The U.S. Court of Appeals for the Seventh Circuit is rejecting the appeal filed by stockbroker Kevin Wells, who was found liable for making unauthorized trades of Cyberonics Inc. (CYBX) in a customer’s account. In an initial default judgment, the customer, plaintiff William Wehrs, was awarded approximately $49,861 in damages.

Per the court, Wehrs sued Wells after the alleged unauthorized trades occurred and cost him “significant losses.” When Wells did not appear in court or respond to the securities fraud lawsuit, a default judgment was entered in Wehrs’s favor. Meantime, Wells’ supervisor and his financial firm chose to settle with Wehrs.

Following the default judgment, Wells filed an appeal, challenging the decision by the district court to deny his motion to vacate the default judgment as it pertains to liability. He also contended that the district court abused its discretion when it did not consider evidence that he believes demonstrates he not the proximate cause of a large amount of the losses that Wehrs suffered.

Seeing as Wells only made one conclusory statement regarding the transactions in Wehrs’s account having been “authorized,” and to vacate a default judgment the party submitting the motion has to show a meritorious defense to the complaint (in addition to other factors), the seventh circuit pointed out that a general denial of the lawsuit’s allegations isn’t enough to make a “meritorious defense.” It also noted that it considered the district court to be correct in its observation that considering the commissions charged to Wehrs’s account were eventually reversed this undermines Wells’s claim that the transactions were “authorized.”

As for Wells’s argument that the lower court abused its discretion when it did not factor in evidence showing that he may not have been the proximate cause of most of the damages (he doesn’t believe he should be liable for financial losses that took place after June 27, 2005, which was when Wehrs discovered the alleged unauthorized transactions in his account), the appeals court rejoined that for Wells to argue that Wehrs should have sold Cyberonics shares soon after discovering the transactions rather than holding on to the stock as the price kept dropping would allow the stockbroker to contest his liability but not the degree of damages sustained by Wehrs.

However, seeing as Wells is a “defaulting party,” he cannot dispute liability and, because “the duty to mitigate damages is an affirmative defense,” he waived his right to make this type of defense when he did not submit a responsive pleading to Wehrs’s securities lawsuit. Therefore, following the default judgment against him, Wells is no longer able to make a waived defense while claiming proximate cause in order to contest the damages that were awarded to Wehrs.

If you suffered financial losses because your broker made unauthorized trades, you should speak with an experienced securities lawyer right away.

Read the Opinion (PDF)

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Ex-Financial Adviser Pleads Guilty to Unauthorized Trading Involving Disabled Children’s Assets, Stockbroker Fraud Blog, December 28, 2010

Even With Securities Lawsuits Over MF Global’s $1.6 Billion Customer Funds Loss, Don’t Expect Criminal Charges, Institutional Investor Securities Blog, August 16, 2012

Securities and Exchange Commission Charges Former UGA Football Coach Jim Donnan Over Alleged $80M Ponzi Scam, Stockbroker Fraud Blog, August 16, 2012