Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 79-C-373 -- Thomas R. McMillen, Judge.
Bauer, Circuit Judge, Fairchild, Senior Circuit Judge, and Hoffman, Senior District Judge.*fn*
FAIRCHILD, Senior Circuit Judge.
Plaintiff commenced this action under the federal securities laws, alleging that the brokerage firm handling his account had defrauded him through various misrepresentations and by engaging in excessive trading ("churning") for the purpose of generating commissions. In a special verdict, the jury found against defendant on both grounds and awarded damages of $97,000. The district court then denied a motion for a new trial, but granted defendant's motion for judgment n.o.v. to the extent of reducing the award to $53,500. On appeal, we conclude: (1) that there was insufficient evidence to support liability for misrepresentation; (2) that notwithstanding the absence of expert testimony or traditional forms of statistical evidence churning was adequately established; and (3) that as to churning damages, plaintiff proved entitlement to $15,065.92 in wrongfully charged commissions, but failed to prove the amount of realized losses sustained by his account. Therefore plaintiff will have the option of remitting that portion of the award in excess of $15,065.92 or submitting to a new trial on the issue of churning and resulting damages.
In September 1976, Thomas F. Costello opened an options trading account at Oppenheimer & Co., Inc. A college graduate with a degree in business administration and a vice-president of National Can Corporation, Costello was not unfamiliar with options markets. His career had given him some exposure to various commodities programs and since 1975 he had traded options through two other brokerage firms, Merrill Lynch and White Weld. At Merrill Lynch, Costello's account was handled by Ronald Brownlow. When Brownlow moved to Oppenheimer in 1976, he solicited Costello's business and eventually secured the transfer of Costello's Merrill Lynch and White Weld accounts.
Costello testified that prior to the transfer he told Brownlow that he wanted the principal of his new account to be absolutely protected, just as it had been at Merrill Lynch. According to Costello, Brownlow assured him that the principal would remain safe and sound, that there would be better record keeping than at Merrill Lynch, and that he could expect to earn about a 20% return on his investment. Brownlow insisted that he would only handle the account on a discretionary basis, so that he could take advantage of quick shifts in the market without securing Costello's prior approval of transactions. Costello agreed to this condition and executed a power of attorney. Costello said that he asked Brownlow to put into writing the details of their understanding as to how the account would be handled, but that Brownlow suggested that Costello draft the memorandum to which Brownlow would then object if there was any difference. Costello testified that thereafter he sent a handwritten letter to Brownlow, dated September 4, 1976, which read as follows:
"Confirming the agreement reached in my office, you will receive my signed transfer forms before the week is over. I'll transfer the Merrill Lynch first and then the $100,000 from White Weld when the certificate matures.
"We've agreed to continue on the plan which protects my equity completely. I don't want to change that, since some of the money has been borrowed. Your assurance that we can continue to realize at least 20% return on the trading is fine. Lets not worry about trying to extend that by any long chances.
"You'll set options naked -- at least 20% out of the money and cover when options between $2 and 5 move 1/2 point against us or 1 1/2 to 2 points favorable. Stop action will occur on those priced at $5-7 at $1 unfavorable and $3 favorable. The proceeds will be immediately re-invested in more tax free issues. The tax free income is to be sent to me.
"Since I'm traveling -- I have to trust you and Oppenheimer. Keep me informed. The new records look like my old problem with Merrill is over. Every three months is O.K. -- but if you say every 30 days its fine with me!
"Good luck in the new job. Let's make some money together.
At trial, there was conflicting testimony as to whether Brownlow received or acknowledged the letter. In any event, the Merrill Lynch account was transferred on September 7, 1976, and the White Weld account in April 1977. As a result, Costello placed a total of $235,384.65 with Oppenheimer.
Costello received confirmation slips informing him of each of the trades in his new account. But these, he said, were sometimes late and frequently inaccurate, with correction statements for the same transaction often being issued two or three times. Monthly summaries were also issued, but, according to Costello, were received irregularly. While conceding that he tried to match up confirmations to see whether he was making money, Costello maintained that it was impossible to fully follow the activity in his account, because of the record dissemination problem, the fact that he had been periodically hospitalized, and because the opposing action upon which the profitability of any particular transaction depends frequently does not occur until many months after a position is first placed in an account.
Brownlow testified that he traded Costello's account "pretty heavily" in January and February 1977 because the market was "relatively high," and that as the market then moved on the downside he was able to close out many positions. Profits during this period, he said, were "real fine," in the area of 20-25%, realized gains. By mid-March, however, too limited a number of positions were available to allow much account activity, so Brownlow decided to go on vacation. From March 25 to April 10, 1977, Daniel Piet, Brownlow's partner whom Costello had previously met, handled his accounts.*fn1 Prior to leaving, Brownlow instructed Piet on how to manage the Costello account and asked him to close out a few spread positions, but not to put on any new ones.
While Brownlow was away, Costello received certain confirmation slips which seemed to him "completely out of line" with the trading parameters upon which he and Brownlow had agreed. Costello informed Piet of this and objected when Piet said that the trades were within the framework of the program. Costello testified that when he returned Brownlow called and told him "we have a little problem with your account. There [have] been some positions put on and some taken off that I do not agree with. . . ." According to Costello, Brownlow further said that "on these trades . . . there were losses incurred, that if he [Brownlow] had made them himself they would not have occurred, but not to worry, that he would solve the situation." Brownlow corroborated this testimony, saying that when he learned of the trades he was "upset" because "some of the positions that were put on . . . did not fit my criteria" and were "outside the parameters for the handling of the account." Brownlow did not specify which trades were non-conforming, nor did he estimate the damage caused by each improper trade.*fn2
According to Brownlow, an unspecified number of trades were again put in the account by Piet, while he was away from the office between June 25 and July 5, 1977. Although he was not asked to identify these trades or to quantify their effect upon the account, he did say that immediately upon his return on July 5 he and Piet decided to terminate their partnership.
Brownlow periodically informed Costello of the status of his account. Around July 25, 1977, he notified Costello that performance had been good but that there had been a slight drop-off due to the trades which Piet had made. Brownlow testified, after examining a writing dated July 22, that he told Costello that the market value of the account then stood at $253,000. On October 31, 1977, Brownlow provided another written valuation which stated that the account was down $1,188 (from its starting position of $235,384.65). According to Costello, Brownlow apologized for the poor performance and said "I want you to know the facts, that the performance is not as I have promised but that there were things done with your account that I am not responsible for and I have been unable to cover for you to make up those losses."*fn3 On November 18, 1977, Brownlow again advised Costello of the account's status and said that its net value had dropped to $222,710.
Between July and November 1977, there was little activity in Costello's account. Brownlow testified that his trading was mainly defensive and that he was trying to reduce losses that were occurring in the account.
On December 2, 1977, Brownlow's employment with Oppenheimer terminated.*fn4 Prior to that date, he wrote to Thomas O'Donnell, an Oppenheimer vice-president and local branch manager, explaining why he had kept Costello's and other accounts relatively inactive. The memo, dated November 19, 1977, stated:
"In my opinion, you deserve to know exactly 'why' I have 'held off' in the last several months. You may not want to know -- but you deserve it. Here goes:
"Dan & I split; good accounts, rather all accounts since we began in January to Dan. -- All were in trouble from the view of 'loss' and outstanding positions. During the months of June & July, Dan, not Ron, churned these accounts; not for the benefit of the clients (his house) but because he could see 'the end' in sight. 'The end' meant -- the closing of the accounts, lawsuits, etc. Truthfully and ...