Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 81 C 3938- BERNARD M. DECKER, Judge.
Before: CUMMINGS, Chief Judge, CUDAHY, Circuit Judge, and FAIRCHILD, Senior Circuit Judge.
FAIRCHILD, Senior Circuit Judge.
Plaintiff, Virginia Zurad, filed a five-count complaint against Defendants Lehman Brothers Kuhn Loeb Inc. (Lehman Brothers) and William Curry, a salesman at Lehman Brothers. The complaint alleged (1) violation of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. 240.10b-5, (2) violation of the New York Stock Exchange (NYSE) "Know Your Customer" rule, (3) violation of the "suitability" rules of the National Association of Securities Dealers (NASD), and, as pendent state law claims, (4) common law fraud, and (5) negligent misrepresentation.
Before trial the district judge dismissed counts (2) and (3) of the complaint on the ground that no implied private right of action exists under NYSE or NASD rules.
Following a two-day bench trial, Zurad moved to amend her complaint to add two new counts, one alleging breach of fiduciary duty and the other alleging negligence. The district judge denied the motion, made findings, and entered judgment for defendants and against plaintiff on the three remaining counts. Zurad appeals. We reverse, deeming clearly erroneous the finding that Curry exercised reasonable care in supplying information to Zurad. Although some discussion of the 10b-5 claim remains appropriate, we need not, because of the disposition of the negligent misrepresentation claim, resolve the 10b-5 claim with finality, nor reach the several other allegations of error.
This case arises out of the purchase and subsequent sale of 5,000 shares of Walter E. Heller International Corporation (Heller) stock by Zurad through defendant Lehman Brothers.
At the time of the events complained of, appellant Zurad was 54 years old and had been employed by the United States Postal Service for over twenty years as a mail handler and sorter. She was earning $18,000 a year. At the time she opened her account at Lehman Brothers her net worth totaled approximately $110,000. About $20,000 came from inheritance. She kept her money in a bank until about 1976 or 1977.
Zurad had some experience in the stock market before she opened an account at Lehman Brothers. Prior to her commencement of trading in common stock and options in 1977, she invested in a mutual fund through Hornblower Weeks Hemphill Noyes (Hornblower Weeks). Zurad subsequently left Hornblower Weeks when she saw a television commercial for the firm and believed that she was the person being referred to by the brokers in the commercial. In 1977 Zurad opened an account with Merrill Lynch, Pierce, Fenner & Smith (Merrill Lynch). There she traded in options and also opened a margin account. In May 1978, after losing approximately $15,000 at Merrill Lynch, she transferred her account to Dean Witter Reynolds & Company (Dean Witter), where she purchased stock in Abbott Laboratories. After some dispute with her Dean Witter broker over the amount of Abbott stock to be purchased-the broker advising Zurad to purchase only 1,000 shares, and Zurad insisting on 2,000 shares, Zurad ultimately purchased 2,000 shares. Zurad also purchased 1,000 shares of Sears, Roebuck & Company (Sears) through Dean Witter, which were eventually sold, at a point earlier than that suggested by her broker, for a $3,000 loss. Zurad closed her account at Dean Witter after approximately six months.
Zurad testified that while holding the Sears share, she followed the price in the newspaper. She also indicated that she occasionally purchased a newspaper. She sometimes checked price quotations but only rarely looked at the rest of the financial section before the purchase of Heller stock.
The district judge found that while Zurad was not a sophisticated investor (in one colloquy he said "a long ways from a sophisticated investor") she did have substantial experience in the stock market and at least a moderate understanding of the complexities of stock market transactions. He also concluded, based on Zurad's dealings with the Abbott and Sears stock at Dean Witter, that she sometimes entered into transactions on her own volition and contrary to the advice of her broker.
In late 1978 or early 1979, Zurad went to the Chicago office of Lehman Brothers on an unsolicited basis and asked for a broker to handle her account. Zurad was referred to Curry, a registered broker/dealer. Zurad did not open an account at this initial meeting.
On or about January 24, 1979 Zurad telephoned Curry and requested that he handle her account. Zurad opened a cash account, transferring into it the following: $26,803 in cash, 2,000 shares of Abbott, 45 shares of Walt Disney Productions and 45 shares of International Business Machine Corp. (IBM). Zurad informed Curry that she had investable funds of approximately $100,000. She also told him that she was a postal worker and that ...