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Fey v. Walston & Co.

decided: March 14, 1974.


Appeals from the United States District Court for the Northern District of Illinois, Eastern Division. No. 68-C-162. JOSEPH SAM PERRY, Judge.

Swygert, Chief Judge, Hastings, Senior Circuit Judge, and Christensen,*fn* Senior District Judge.

Author: Christensen

CHRISTENSEN, Senior District Judge.

These are consolidated appeals in a suit for damages brought by a former customer (plaintiff-appellee Hetty Fey) against a stockbroker (defendant-appellant Walston & Co., Inc.) and its salesman (defendant-appellant Robert A. Spira) for alleged "churning"*fn1 of the customer's account. Jurisdiction was alleged and existed by virtue of Section 22(a) of the Securities Act of 1933, 15 U.S.C. § 77v(a), and Section 27 of the Securities Exchange Act of 1934, 15 U.S.C. § 78aa.*fn2

The case was submitted by the trial court to the jury on the issue of whether the conduct of the defendants constituted account "churning", and thus a device, scheme or artifice to defraud within the meaning of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5, and in view of the Rules of Fair Practice of the National Association of Securities Dealers, Article III, Sec. 15(a).*fn3

Trial was held in the district court before a jury of six members pursuant to local rule, despite defendants' motion to empanel a twelve member jury. A verdict was returned in favor of the plaintiff and against both defendants for $15,560 and judgment entered on the verdict. Motions for a directed verdict and for judgment notwithstanding the verdict were denied, as were motions for a new trial and Spira's motion for remittitur. A separate judgment in favor of the plaintiff for costs in the sum of $18,227.04, including $15,660 for attorneys' fees, was entered by the trial court. Both the judgment on the verdict and the supplemental judgment were appealed by both defendants. Appellants contend here the prejudicial error was committed by the trial court in numerous instances, which to the extent deemed to justify discussion may be categorized as follows:*fn4

I. The claimed insufficiency of the evidence to warrant the verdict.

II. The preclusion or limitation of evidence both concerning plaintiff's objectives for maintaining her account with the defendant broker, and relating to her control, or that of her son under power of attorney from her, over the trading in question.

III. Claimed failure to instruct the jury correctly or adequately concerning appellee's theory of the case.

IV. Claimed errors in instructions concerning the measure of damages, and in denial of Spria's motion for damage remittitur.

V. The award of various elements of cost, including attorneys' fees.

Paragraph 5 of the complaint as originally filed alleged that prior to November, 1963, plaintiff Hetty Fey had little or no investment experience; that in that month, when she first became a client of the defendants, Robert A. Spira was so advised; that he was advised also that she would rely heavily on his advice, and that as a widow her investment requirements were "maximum security and long term growth".

Elsewhere in the complaint it was alleged in substance that the defendants represented themselves as trustworthy for handling of plaintiff's securities; that in reliance upon these representations plaintiff on or about November, 1963, opened a cash account with the defendant broker which on or about December, 1963, on the advice and recommendations of the defendants was expanded to include a margin account, for the purpose of buying and selling securities as plaintiff Hetty Fey would from time to time instruct; that thereby a fiduciary relationship arose between plaintiff and the defendants; that plaintiff reposed complete trust and confidence in defendants and relied upon their advice, counseling and expertise but that her account with Walston & Co. was "not a discretionary account".

The complaint charged that in violation of their legal duties defendants purchased and sold securities on plaintiff's behalf without her authority and without her knowledge, failed to follow her instructions of purchase or sale, furnished false and misleading information, recommended purchases without disclosing the facts of such recommendations, recommended further purchases that were unsound in view of the financial condition of the companies and plaintiff's personal financial condition, without plaintiff's knowledge or authority effected repeated purchases and sales of securities on her behalf "and otherwise churned the plaintiff's . . . . account".

The defendant broker, according to the complaint, failed properly to supervise Spira's conduct "as agent and registered representative for its Chicago, Illinois office . . . . failed to provide adequate internal controls [for] its Chicago, Illinois office, failed to review the activities of the Chicago, Illinois office and failed . . . ." to examine the account of plaintiff to detect and prevent the violations.*fn5

The acts, practices, statements, representations and course of conduct employed by the defendants, the complaint continued, constituted a device, scheme and artifice to defraud the plaintiff through utilization of the instrumentalities of interstate commerce and particularly of the mails and the facilities of the national security exchanges, and were carried on wilfully, maliciously, knowingly and with intent to defraud and deceive the plaintiff to her actual damages in the sum of $50,000. Punitive damages in the amount of $750,000 also were demanded, together with "costs".

Defendants denied the incriminatory assertions of the complaint and specifically denied that plaintiff had no investment experience. It was admitted that plaintiff's account was not a "discretionary account", denied that plaintiff advised Spira that she would rely heavily on his advice, and affirmatively alleged that plaintiff had stated that she was quite proud of her son's knowledge and ability and wanted him to trade for her and that some of the trades in question also were on the advice of other brokers and their salesmen.

Prior to the trial plaintiff filed a motion in limine seeking to bar inquiry into her prior stock dealings through other brokers by reference to her federal income tax returns. The trial court indicated that it would be "reversible error" for him to grant the motion in view of the allegations of paragraph 5 of the complaint, already summarized, and suggested that the only means by which such inquiry could be rendered irrelevant would be to strike that paragraph. Plaintiff readily embraced this suggestion and her motion accordingly was granted by the court. Apparently it was then the court's view that the striking of paragraph 5 rendered the controlling issue simply one of authority or lack of authority on the part of the defendants to make the trades in question and that any previous trading experience would not be material to this issue, despite the contrary analysis of the gist of plaintiff's claim by Spira's counsel prior to the court's ruling.*fn6

The plaintiff, who was a widow, testified that she had been employed since her husband's death in 1956, having been left little or no assets. In November, 1963, she had $11,000 or $12,000 which she had accumulated in part "through some investments". When her counsel sought to establish what part her earned income played in this accumulation the trial court sustained an objection, saying, "the issue here is whether or not she authorized these people to make sales." When plaintiff later pressed a similar line of inquiry and argued that it went to the point of what would be considered "excessively trading her account" the court commented:

"Then you open it up for them to come in and show her experience in the field of investing. ...

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