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Penrod v. Merrill Lynch

OPINION FILED JANUARY 26, 1979.

LELAND PENROD ET AL., PLAINTIFFS-APPELLANTS,

v.

MERRILL LYNCH, PIERCE, FENNER & SMITH, INC ET AL., DEFENDANTS-APPELLEES.



APPEAL from the Circuit Court of La Salle County; the Hon. THOMAS R. FLOOD, Judge, presiding.

MR. PRESIDING JUSTICE BARRY DELIVERED THE OPINION OF THE COURT:

The action underlying this appeal was instituted by Leland Penrod, his wife, Ruth, and their two children, Jeffrey and Stephen, by their father and next friend, Leland Penrod. The suit, filed against Merrill Lynch, Pierce, Fenner & Smith, Inc., hereinafter referred to as Merrill Lynch, and James Hume, their personal stockbroker and an account executive with Merrill Lynch, sought a determination of negligence and breach of fiduciary duty against the defendants. After a bench trial, judgment was entered for the defendants. The plaintiffs' post-trial motion was denied, and from this determination, the plaintiffs appealed.

At the trial, the testimony established that, since their marriage in 1955, Mr. & Mrs. Penrod had invested in stocks and bonds. While living in Pittsburgh in 1964, they purchased 100 shares of Marcor common stock through the brokerage house of Merrill Lynch.

Upon moving to Mendota, Illinois, in June of 1964, the Penrods purchased another 100 shares of Marcor stock through the defendant, James Hume, the Merrill Lynch account executive whom they were assigned and with whom they dealt exclusively through July or August of 1974. However, the Penrods held their own securities.

Over the years, additional purchases of Marcor common stock and Marcor convertible bonds were made by the Penrods and their two sons so that by August 1, 1974, the Penrods owned 730 shares of Marcor common stock and the equivalent of 567 additional shares of Marcor common stock through convertible bonds. While the Penrods had their account with Merrill Lynch, they bought mainly Marcor stock. From 1964 to 1974, the Penrods had 22 transactions with James Hume, including eight transactions from January of 1973 through July of 1974, seven of which involved Marcor. Approximately two-thirds of the Penrods' total assets, or 70 percent of their stock and bond holdings, were in Marcor as of August 1974.

James Hume appreciated that the Penrods had heavily invested in Marcor stock. Earlier in their dealings with Mr. Hume, Mrs. Penrod had told him of her husband's and her interest in Marcor. Mr. Hume sent the Penrods information on Marcor stock.

Since June 3, 1964, James A. Hume had in his possession a customer holding sheet which showed the Penrods' holdings. This sheet shows the Penrods' transactions in the market, their objectives and the type of securities they wished to own. It also shows the home phone number for the Penrods and Leland Penrod's business phone. By looking at this document, Mr. Hume could tell the nature of the Penrods' portfolio.

Prior to August 10, 1974, the Penrods learned of a possible tender offer from Mobil regarding Marcor stock. The newspapers indicated that the government was requesting a delay on the tender offer. As of August 1, 1974, the Penrods had plans for a vacation from August 10, 1974, to August 24, 1974, in an isolated area of Minnesota. On August 7, 1974, Mrs. Penrod telephoned James Hume and in a detailed conversation asked about the specifics of the tender offer and told him that she and her husband were interested in it. Mrs. Penrod was unaware of the specifics of the tender offer, never having been involved in one before. She called Mr. Hume for all the information she could get about it.

According to Mrs. Penrod, Mr. Hume agreed that government interference might delay the tender offer. He said the stockholders would have to approve the tender offer and that since Marcor stock was selling at around $26, this indicated that the tender offer was far in the future. Mr. Hume knew that the possible tender price was $35. Mrs. Penrod said that this was good and asked if it were safe for the Penrods to take their intended vacation. Mr. Hume said to go on vacation and have a good time, there being no reason to worry as the tender offer was far in the future. (No notes regarding this conversation were made by Hume on the Penrod's customer holding sheet, however.)

The Penrods left on vacation on August 10, 1974, and returned two weeks later. While on vacation, the Penrods saw nothing about the tender offer in the newspapers. On opening their mail after their return they discovered that the tender offer was at an end, having lasted from August 12 to August 23, 1974. The next business day following the expiration of the tender offer Marcor closed at $18.75. Subsequently, the Penrods sold their convertible bonds. When Marcor and Mobil merged the Penrods received Mobil stocks and bonds for their Marcor shares.

While the Penrods had been dealing with Merrill Lynch, the brokerage firm offered a service whereby a customer's securities would be held by Merrill Lynch, to be handled upon directions from the customer. During their phone conversation, Mr. Hume did not tell Mrs. Penrod that he could hold her securities for her. Mr. Hume admitted that if Merrill Lynch had held the Penrods' stock, Mr. Penrod could have tendered his shares by a call from Mr. Hume. Merrill Lynch also offered a service at this time by which a customer could give Mr. Hume his shares of stock to be sold when the stock reached a given price. By this frequently utilized vehicle, a customer places an order on a "good until cancelled" basis, and Merrill Lynch does not even require a confirmation when the event occurs. James Hume also did not discuss this service with the Penrods.

At the time of the tender offer, James Hume had about six more customers who held their own shares of Marcor. He did not call any of these customers.

Although he knew that the Penrods had invested heavily in Marcor, James Hume did nothing with regard to the Penrod account. He was aware of the short period of the tender offer, but he did not peruse his customer holding sheets to see which of his customers held Marcor stock. The phone numbers on the customer holding sheet were there so that Mr. Hume could contact the Penrods if he felt it necessary, but he did not do so.

Mr. Hume stated that at the time of the tender offer he did not recollect the prior phone conversation with Mrs. Penrod. He said that he recalled none of his customers who held their own Marcor stock calling about Marcor stock within the week before the tender offer except the Penrods. He admitted that on other occasions he would possibly have called a customer or two whose stock he was not holding. This would ...


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