United States District Court, Northern District of Illinois, E.D
November 25, 1985
J.L. GRISWOLD AND PATRICIA GRISWOLD, PLAINTIFFS,
E.F. HUTTON & CO., INC., ARTHUR LASSILA AND ROBERT STIEREN, DEFENDANTS.
The opinion of the court was delivered by: Shadur, District Judge.
MEMORANDUM OPINION AND ORDER
J.L. Griswold and his wife Patricia ("Griswolds") sue E.F.
Hutton & Co., Inc. ("Hutton") and two Hutton account
executives, Arthur Lassila ("Lassila") and Robert Stieren
("Stieren"), for civil damages based on the Racketeer
Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961-1968,
the Commodity Exchange Act ("CEA"), 7 U.S.C. § 1-26
and violations of fiduciary duty under state law. Hutton
and Lassila have moved under Fed.R.Civ.P. ("Rule") 12(b)(6) to
dismiss the Amended Complaint (the "Complaint") in its entirety
as to them.*fn1 For the reasons stated in this memorandum
opinion and order, their motion is denied.
In November 1983 Lassila, a former classmate of J.L.
Griswold, learned Griswolds had sold their business and had a
large sum of money available for investment
(¶ 14).*fn3 During November and December 1983 Lassila had
several conversations with J.L. Griswold in which he "extolled"
the advantages of Hutton's Managed Commodity Account Program
("MCAP") as an investment vehicle (¶ 15). Griswolds were
convinced by Lassila's presentation of MCAP and decided to
invest in it. On December 7, 1983 Griswolds opened several
accounts with Hutton, depositing some $775,000 for use in
trading commodities (¶ 25). On January 26, 1984 Griswolds
invested a further $250,000 (¶ 26).
Lassila described MCAP to Griswolds as a program for trading
commodity futures by drawing on the abilities of several
Commodity Trading Advisers ("Advisers") at once. MCAP provided
Hutton's customers with a number of Advisers, each of whom
would separately trade an account established in the
customer's name by Hutton. Thus MCAP was supposed to be a
means of diversifying the risk associated with commodities
trading (¶ 15).
Lassila ultimately introduced J.L. Griswold to six Advisers.
Five of those — Cresta Commodity Management, Inc. ("Cresta"),
Orion, Inc. ("Orion"), A.O. Management Corp. ("A.O."),
Institute for Computer Studies of Commodities ("ICSC") and
Colorado Commodities Management Corp. ("Colorado") — were
"outside" Advisers participating in Hutton's program. Stieren,
a Springfield, Illinois Hutton account executive, was the
sixth. All were recommended to Griswolds by Lassila, who
promised he would oversee the activities of the Advisers on a
daily basis to insure adherence to a trading plan and to
control risks (¶ 22-23, 25).
Griswolds signed a client agreement (the "Client Agreement")
with Hutton that included authorization for Stieren to trade
on their behalf (Ex. A-1). Griswolds also signed individual
authorization agreements with Cresta,*fn4 Orion, A.O., ICSC
and Colorado, each authorizing the individual Adviser to trade
a designated dollar amount on account with Hutton (Exs. A-2 to
On January 28, 1984 Lassila sent a handwritten note (Ex. E)
to J.L. Griswold:
I wish to acknowledge the managed commodity
account established in our Springfield office
being managed by Bob Stieren. The account was
funded in December, 1983 with $150,000 and an
additional $250,000 on January 26, 1984. My
understanding through your discussion with Bob is
that the $150,000 is a general trading account
with a maximum approximate stop-loss of $75,000.
Further the $250,000 sized account is for the
special situation which Bob perceives to be
unfolding in the relatively near term. The
stop-loss on this part of the account is an
The nature of Stieren's trading since the
account's inception has involved large positions
and heavy trading resulting in heavy commission
generation approximating 50 to 100% of original
account equity per month. While the nature of
markets could change from trading markets to
trending markets and therefore reducing
transaction activity, it can not be anticipated
when this might occur. It is acknowledged that
commissions in this account are running well
above the usual commissions in managed commodity
accounts. In view of this I will make an effort
to obtain a large discount for this account
retroactive to early December.
Letter and Stop-loss.
/s/ J. Griswold Jim Griswold Jan. 28, 1984
J.L. Griswold signed the acknowledgment.
On February 21, 1984 J.L. Griswold met Lassila at Hutton's
Peoria, Illinois office to
obtain the discount mentioned in Lassila's January 28 letter.
Lassila tendered Hutton's check (Ex. G) for $59,134 made out
to "James Griswold & Patricia R. Griswold JTWROS."*fn5
Lassila said that was the amount due Griswolds after the
commissions were discounted, and he also tendered a one-page
single-spaced typed document (the "Release," Ex. F), which he
said Hutton needed signed to show the discount on Stieren's
commissions was final. In relevant part the Release reads:
RECEIPT AND GENERAL RELEASE AND ASSIGNMENT OF CLAIM
1. For and in consideration of the sum of Fifty
Nine Thousand One Hundred Thirty Four  dollars
($59,134), receipt of which is hereby
acknowledged, __________ and __________
("GRISWOLDS") hereby release, discharge and
acquit E.F. Hutton & Compnay [sic] Inc.
("HUTTON") and its representatives, including,
without limitation, its agents, employees,
servants, directors, officers, attorneys, assigns
and successors, and each of them, with the
exception of Mr. Robert D. Stieren of and from
any and all claims, demands, sums of money,
actions, rights, causes of action, obligations
and liabilities of any kind or nature whatsoever
which the GRISWOLDS may have had or claim to have
had, or now have or claim to have, hereafter may
have or assert to have, including, without
limitation, those which arise out of or are in
any manner whatsoever, directly or indirectly,
connected with or related to a certain account
number F73-99919 standing in the GRISWOLDS name
at Hutton's branch office in Springfield,
Illinois and any act, omission, transaction,
dealing conduct or negotiation of any kind
whatsoever between the GRISWOLDS and Hutton or
between anyone acting or purporting to act on
their respective behalves.
3. The GRISWOLDS warrant, represent and agree
that in executing this release, and in accepting
the consideration described herein, they do so
with full knowledge of any and all rights which
they may have with respect to the controversies
herein compromised and that they have received
independent legal advice from their attorney with
regard to the facts relating to said
controversies and with respect to the rights and
asserted rights arising out of said facts. In
this regard, the GRISWOLDS understand,
acknowledge and agree that such payment is not an
admission of liability on the part of Hutton, but
to the contrary, represents a compromise of
claims asserted against Hutton, which are
expressly contested, disputed and denied.
5. This release shall inure to the benefit of
Hutton and shall be binding upon the GRISWOLDS,
their assigns, representatives and successors.
The GRISWOLDS acknowledge that they have read
this receipt, general release and assignment of
claim, and that they fully know, understand and
appreciate its contents and that they execute the
same and make the settlement provided for herein
voluntarily and of their own free will. In
witness whereof, the undersigned have executed
this receipt and general release as of the date
When J.L. Griswold signed the Release he believed, based on
Lassila's statements, he was agreeing only not to seek further
discounts on Stieren's trades (¶ 34).
Stieren's last trade on Griswold's account was on February
15, 1984. During the two-month-plus trading period, Stieren
generated $196,893 in total commissions on the $400,000
entrusted to him (¶ 29 and Ex. B).
Although Stieren's account had been funded in full for
$400,000, the accounts of the other Advisers were not. Lassila
told Griswolds it was Hutton's practice to fund
such accounts with "fifty-cent dollars," so the Advisers
believed there was twice as much money available for trading
as was actually the case. Lassila told Griswolds that
procedure would work to their benefit (¶ 24).*fn6 Each
individual agreement with an Adviser (other than Stieren)
indicates account funding at twice the amount actually
deposited by Griswolds with Hutton.
Griswolds' investment in MCAP was a disaster. By May 4, 1984
they had sustained losses of $542,232 in trading, while
incurring $298,827 in commissions to Hutton and $19,708 in
fees to the outside Advisers (¶ 31). In total about 84% of some
$1,025,000 Griswolds invested in Hutton's MCAP had evanesced.
Griswolds' Complaint asserts (with considerable redundancy)
various forms of fraud and misrepresentation as predicates for
their RICO, CEA and state-law claims:
1. churning of accounts by Stieren;
2. intentional failure by Hutton and Lassila to
supervise and curtail Stieren's trading;
3. misrepresentation of the profit and risk
potential of MCAP;
4. failure to coordinate the Advisers' trading
to achieve the promised coherent plan;
5. concealment of reasons for trading losses;
6. misrepresentation of the amount of funds
available to the outside Advisers with the intent
to generate increased trading and higher
7. rendition of statements in a form (by
individual Adviser's account) designed to
disguise the total volume of trading and
8. misrepresentation of the contents and legal
impact of the Release; and
9. breach of the common-law fiduciary duty to
account for secret profits obtained through
improper use of Griswolds' funds on deposit.*fn7
Two grounds for Rule 12(b)(6) dismissal have been asserted on
the current motion:
1. This action is barred as a matter of law by
2. Even if the Release is not a bar, the
Complaint (including its attached Exhibits) does
not state a claim under any of the legal theories
Griswolds initially argue the Release cannot be considered
on a Rule 12(b)(6) motion because it is an affirmative defense
required by Rule 8(c) to be made by way of a responsive
pleading. That argument is simply incorrect, and Griswolds'
attorney should know better.
Of course "release" is included in Rule 8(c)'s list of
affirmative defenses and must be pleaded to be considered at
all, National Compressor Corp. v. Carrow, 417 F.2d 97, 102 (8th
Cir. 1969).*fn8 But it is black-letter law that on a Rule
12(b)(6) motion a court may take into account "the allegations
in the complaint . . . and exhibits attached to the complaint..
. ." 5 Wright & Miller, Federal Practice & Procedure: Civil §
1357, at 593 (1969) (emphasis added); see also 2A Moore's
Federal Practice ¶ 12.07[2.-5], at 12-68 (2d ed. 1985 revision)
("material which is submitted as part of the complaint . . .
may be considered by the court"). See also Goodman v. Board of
Trustees of Community College District 524, 498 F. Supp. 1329,
1337 (N.D.Ill. 1980). Griswolds themselves brought the Release
into this litigation by
attaching it as Complaint Exhibit F. Hence this Court may
unquestionably consider it.*fn9 Quiller v. Barclays
American/Credit, Inc., 727 F.2d 1067, 1069 (11th Cir. 1984),
aff'd and reinstated en banc, 764 F.2d 1400 (11th Cir. 1985).
Next the parties argue the choice-of-law question.
Defendants' contentions in that area are varied, while
Griswolds' contention is simple.
Hutton and Lassila urge the Release must be interpreted
according to New York law because all Griswolds' claims arise
from their customer relationship with Hutton — a relationship
governed by the Client Agreement (Ex. A-1), which reads in
This agreement and its enforcement shall be
governed by the laws of the state of New
York. . . .
Though the RICO and CEA claims concern federally created
rights, Hutton and Lassila also assert a federal court should
look to state law (again New York law, in their view) to
interpret a contract releasing federal claims.*fn10
they say the Release is a valid bar to this action even if
Illinois law were applied.
To all this Griswolds retort that no choice-of-law language
appears in the Release itself, which was signed and dated in
Illinois. Griswolds therefore say the Release must be
interpreted under Illinois law, especially because (in their
view) it concerned solely the discounts on Stieren's trading,
all of which took place in Illinois.
Were this Court limited to a choice between Illinois and New
York law, it would incline toward the former. Clearly the
Release is not the same as (nor does it refer to) the Client
Agreement. So it is not, in the words of the latter document,
"this agreement." And only by a tortured leap of logic could
the Release be considered an effort to "enforce" the Client
Agreement — especially when Hutton expressly denied any
liability in the Release.*fn11 Thus the New York choice-of-law
provision is by its terms inapplicable to the Release. Because
the Release was executed by the parties in Illinois and
released claims relating to transactions more closely related
to Illinois than New York, the Release's "most significant
contacts" are with Illinois. See Dr. Franklin Perkins School v.
Freeman, 741 F.2d 1503, 1515 n. 19 (7th Cir. 1984); Sears,
Sucsy & Co. v. Insurance Co. of North America, 392 F. Supp. 398,
403 (N.D.Ill. 1974).
But both sides have ignored controlling precedent holding
federal law must apply here. That is so because the litigants
do not stand in the same position as those in Three Rivers
Motors or Oberweis (see n. 10). Both those actions sought to
construe and enforce the release of federally-created claims.
By contrast, Griswolds challenge their Release as void on
fraudulent misrepresentation grounds.*fn12 They specifically
allege Lassila misrepresented to J.L. Griswold the contents and
legal impact of the
Release. See Seredinski v. Clifton Precision Products Co.,
776 F.2d 56, 59-60 (3d Cir. 1985) (discussing distinction between
actions to enforce and actions to void settlements of federal
No doubt the broad language of the Release ("any and all
claims, demands, sums of money, actions, rights, causes of
action, obligations and liabilities of any kind or nature
whatsoever . . . including, without limitation, those which
arise out of [the Stieren account]") could be found sufficient
(more of this later) to release Hutton and Lassila from RICO
and CEA claims of which Griswolds were aware or that they
"could have discovered upon reasonable inquiry."
Oberweis, 568 F. Supp. at 1101. Compare, e.g., Green v. Valve
Corp. of America, 428 F.2d 342, 345 (7th Cir. 1970) (typical
broad general-release language) with Oglesby v. Coca-Cola
Bottling Co. of Chicago/Wisconsin, 620 F. Supp. 1336 at 1341-42
(N.D.Ill. 1985) (construing release language narrowly). But
even if the language of the Release sufficed as a general
release under Illinois or New York law, the validity of a
release of federally created rights is a question of federal
law. Dice v. Akron, Canton & Youngstown Railroad Co.,
342 U.S. 359, 361-62, 72 S.Ct. 312, 314-15, 96 L.Ed. 398 (1952). See
also Locafrance U.S. Corp. v. Intermodal Systems Leasing, Inc.,
558 F.2d 1113, 1115 (2d Cir. 1977) (citing Dice):
It is well established that federal law governs
all questions relating to the validity of and
defenses to purported releases of federal
statutory causes of action.*fn13
There is substantial authority for the view federal law
would require submission of the question of fraud to the jury
even in the face of the Release's inclusive language.
Dice involved a railroad employee who sued for a job-related
injury under the Federal Employers' Liability Act ("FELA"),
45 U.S.C. § 51-60. He admitted signing a comprehensive and
unequivocal release but claimed he had relied on the railroad's
"deliberately false statement" that the document was merely a
receipt for back wages (342 U.S. at 360, 72 S.Ct. at 313). That
was held by the Court to pose a question of fact for the jury,
not one of law for the trial court (id. at 363, 72 S.Ct. at
315), because (id. at 362, 72 S.Ct. at 314-15):
We hold that the correct federal rule is . . . a
release of rights under [FELA] is void when the
employee is induced to sign it by the
deliberately false and material statements of the
railroad's authorized representatives made to
deceive the employee as to the contents of the
Dice's result was reached without recourse to such familiar
arguments as duress, inequality of bargaining power, the
employee's lack of sophistication or the absence of
arms'-length negotiations. Nor did the Court point to special
equities that might distinguish FELA cases from actions under
other federal statutes. Nonetheless some courts have suggested
those factors ought to be considered in limiting Dice's scope.
For example Locafrance, 558 F.2d at 1114-15 held a release
"signed in a commercial context by parties in a roughly
equivalent bargaining position and with ready access to
counsel" would be enforced if unambiguous on its face, though
in personal injury cases, "where mistake, fraud, or
overreaching against an individual is suspected," courts may
look behind the agreement.*fn14
Absent controlling authority in our Circuit (and the parties
have identified none*fn15), it appears to be an open question
whether Dice is to be given full force and effect outside the
personal injury context. There is something to be said on each
side of that proposition.
On the one hand, venerable authority supports the idea that
failure to read a contract does not excuse performance. As
Vargas v. Esquire, 166 F.2d 651, 654 (7th Cir. 1948), cert.
denied, 335 U.S. 813, 69 S.Ct. 29, 93 L.Ed. 368 (1948) (some
citations omitted) put it:
And in the absence of fraud, which must be proved
by clear and convincing evidence . . ., a man in
possession of all his faculties, who signs a
contract, cannot relieve himself from the
obligations of the contract by saying he did not
read it when he signed it, or did not know or
understand what it contained. Upton v. Tribilcock,
91 U.S. [(1 Otto)] 45, 50, 23 L.Ed. 203. To be
sure, if his signature is secured by some
fraudulent trick or device as to the context of the
contract, which prevents him from reading the
agreement, he may by proper action avoid the
contract. . . . But the contract cannot be avoided
by proof that one of the parties, if he was sound
in mind and able to read, did not know the terms of
the agreement. One must observe what he has
reasonable opportunity for knowing; the law
requires men, in their dealings with each other, to
exercise proper vigilence [sic] and give their
attention to those particulars which may be
supposed to be within reach of their observation
and judgment and not to close their eyes to the
means of information which are accessible to them.
A person is presumed to know those things which
reasonable diligence on his part would bring to his
That same concept was reflected in the portion of
Upton cited in Vargas:
It will not do for a man to enter into a
contract, and, when called upon to respond to its
obligations, to say that he did not read it when
he signed it, or did not know what it contained.
If this were permitted, contracts would not be
worth the paper on which they are written.
On the other side of the coin, there is something
disquieting about the notion an agreement is conclusively
deemed free of fraud — as a matter of law — unless the
instrument evidencing that agreement is ambiguous. Fraudulent
misrepresentation, after all, is a classic example of a fact
This case does not force a choice between those competing
perspectives. It must be remembered one of the elements of
fraudulent misrepresentation is that the representation shall
have been reasonably relied upon. Classic Bowl, Inc. v. AMF
Pinspotters, Inc., 403 F.2d 463, 466 (7th Cir. 1968) (quoting
Wilkinson v. Appleton, 28 Ill.2d 184, 187, 190 N.E.2d 727,
729-30 (1963) but reflecting the universal common-law rule).
And one useful way of looking at the Upton-Vargas canon is that
it reflects the conclusive unreasonableness of relying on a
misstatement as to a crystal-clear document that is before the
hearer's eyes for examination.
From that viewpoint the Release and Lassila's claimed
misrepresentation as to its purpose leave room for a jury's
determination. Certainly the middle portion of Release ¶ 1,
with its classic "any and all claims . . ." language, were it
the sole language in the release, could properly be
characterized as unambiguous. But after all the "including,
without limitation" clause — with its specific reference to
the Stieren account alone — was being read by an unrepresented
nonlawyer*fn16 who was simultaneously being assured the
document was linked only to the commission payment on that
account. And that assurance could reasonably be viewed as
buttressed by the fact that the middle portion
of Release ¶ 1 (the broad general-language part) specifically
excepted Stieren from the persons released.*fn17
That factual matrix renders the determination whether
reliance on that assurance was reasonable (effectively a
determination whether the Release as a totality could be
perceived as ambiguous under all the circumstances) peculiarly
appropriate for lay jurors who have not (unlike judges) read
— and prepared — releases by the hundreds or thousands. There
are many respects in which it is not a fiction (even an amiable
one) for a judge to decide that no reasonable person could
reach a particular conclusion, but in the context of a release
document such as the one at issue in this case it is
self-delusive to think a judge can wipe out the effect of
decades of legal training and practice, restoring himself or
herself to the pristine condition of having to read a release
for the first (or second or third) time.
Consequently it is unnecessary to decide whether
Dice, which left to a jury the question of the reasonableness
of reliance on misrepresentations contradicted by the text of
an FELA-claim release, should be extended to all federally
created causes of action. This Court need hold only that given
the language of the Release here and the environment in which
it was signed, it is likewise for a jury to decide whether a
misrepresentation was in fact made and whether J.L. Griswold
reasonably relied on that representation in signing the
Release.*fn18 And this Court does so hold (at least as to
federal claims, where the Dice concept is part of the web of
authority for judicial decision). In sum, the Release is not a
bar to Griswolds' suit under RICO and CEA at this stage of the
Griswolds' state-law claims pose even less of a problem. It
has already been said Illinois conforms to the universal rule:
Reliance on a misrepresentation must be reasonable to
constitute fraud invalidating a contract. Thus the
just-completed analysis might perhaps apply (even absent a
Dice-type Illinois precedent) in any event. But there is more,
for the gravamen of Griswolds' state-law claims is breach of
fiduciary duty. Commodities brokers are related to their
customers as agent and principal. Martin v. Heinold
Commodities, Inc., 139 Ill. App.3d 1049, 94 Ill.Dec. 221,
487 N.E.2d 1098 (1985). Further, as Nairn v. J.A. Acosta & Co. (In
re Rosenbaum Grain Corp.), 103 F.2d 656, 660 (7th Cir. 1939)
This relation, contemplating as it does the
holding by the broker of the customer's money and
other property, is primarily fiduciary in nature.
Contracts between fiduciaries are "especially vulnerable to
attack" when a fiduciary has misrepresented material facts.
Wilkinson, 28 Ill.2d at 188, 190 N.E.2d at 730. Such contracts
must be "open, fair and deliberately made" to be valid. Id.
Griswolds allege Lassila both (1) concealed facts giving rise
to claims against Hutton (e.g., lack of a coordinated trading
plan, aggregate total trading and commissions and failure to
supervise Advisers' activity) and (2) misled J.L. Griswold as
to the extent of the Release.*fn19
or not those actions by Lassila amounted to fraud under
Illinois law via the earlier analysis in this opinion, at a
minimum the allegations state a claim for breach of fiduciary
duty. Martin, 139 Ill. App.3d at 1057, 94 Ill.Dec. at 226, 487
N.E.2d at 1103.
Failure To State a Claim
With the Release eliminated as a legal (though not
necessarily a factual) bar to this action, this opinion can at
last turn to the Hutton-Lassila challenges to the Complaint's
statement of substantive claims. Those challenges address both
of Griswolds' principal allegations of fraud:
2. various instances of material nondisclosure
Churning is a broker's trading for the purpose of generating
commission fees without regard to the client's investment
objectives. Hecht v. Harris, Upham & Co., 283 F. Supp. 417, 435
(N.D.Cal. 1968), aff'd as modified, 430 F.2d 1202 (9th Cir.
1970) stated the classic definition:
Churning cannot be and need not be, established
by any one precise rule or formula. The essential
question of fact for determination is whether the
volume and frequency of transactions, considered
in the light of the nature of the account and the
situation, needs and objectives of the customer,
have been so "excessive" as to indicate a purpose
of the broker to derive profit for himself while
disregarding the interests of the customer.
Churning is a fraudulent practice under Securities Exchange
Act § 10(b), 15 U.S.C. § 78j(b) (Hecht, 283 F. Supp. at 433) as
well as under the CEA, 7 U.S.C. § 6b (Johnson v. Arthur Espey,
Shearson, Hammill & Co., 341 F. Supp. 764, 766 (S.D.N.Y. 1972)).
Though the principles governing proof of a churning claim are
the same whether a securities or commodities fraud is alleged,
it should be understood an amount of trading "excessive" in a
securities account may not be "excessive" in a commodities
account. That is so because (Booth v. Peavey Co. Commodity
Services, 430 F.2d 132
, 134 (8th Cir. 1970)):
The commodity markets are highly volatile and are
thus trading rather than investing vehicles.
And that is especially true where the customer, like
Griswolds, is speculating rather than hedging (id. at 135).
Hutton and Lassila say Griswolds cannot meet the
Hecht test because Stieren's trading was not excessive in light
of Griswolds' "needs and objectives." Their Mem. 12 argues J.L.
Griswold's "acknowledgement" of Lassila's January 28, 1984
letter "confirm[ed] that the specified level of trading was
consistent with plaintiffs' objectives."
In the initial pleading posture of this case, that is a weak
reed at best. Quite to the contrary, a fair reading of
Lassila's letter and J.L. Griswold's acknowledgement
(especially with all reasonable inferences drawn in Griswolds'
favor, see n. 2) could just as well be that the commissions
(and trading) were running too high and a discount was in
order. Lassila's letter is simply too opaque, and J.L.
Griswold's "acknowledgement" too curt, to constitute a
satisfactory expression of Griswolds' investment objectives.
Compare, e.g., Costello v. Oppenheimer & Co., 711 F.2d 1361,
1363-64, 1368-69 (7th Cir. 1983) (discussing evidence
supporting jury finding customer's "investment objectives were
not unduly ambitious," id. at 1368).
Even were J.L. Griswold's acknowledgement viewed as an
approval of Stieren's trading strategy, that would not bar a
churning claim as a matter of law. Brokers bear some
independent responsibility to see that trading on a customer's
behalf is not inappropriate to the customer's "known financial
condition." Hecht, 283 F. Supp. at 432.*fn20 Though an
stated objectives "significantly illuminate" a claim of
excessive trading and make it "easier to conclude" trading is
not excessive if the goals are "aggressive or speculative,"
the goals alone do not decide the issue. Costello, 711 F.2d at
As already stated, Stieren's account trading generated
commissions in just two months' time that ate up almost
exactly 50% of the original funding of $400,000. Griswolds'
claim of churning on that score survives Hutton and Lassila's
motion to dismiss.
2. Material Nondisclosure and Deceptions
Lastly Hutton and Lassila say everything Griswolds now
allege as nondisclosure or deception was in fact disclosed in
the various documents signed by Griswolds when setting up
their accounts with Hutton and the Advisers. All those
documents are attached to the Complaint and (for the reason
already discussed) may be considered on this motion to
In particular, Hutton and Lassila point to Client Agreement
¶ VIII(b) (Ex. A-1 at 3):*fn21
I understand that your corporation is no way
responsible for any loss to me occasioned by the
actions of the individual or organization named
above [i.e., the Adviser] and that your
corporation does not, by implication or
otherwise, endorse the operating methods of such
That language is not dispositive here for two reasons:
First, Griswolds allege Lassila promised he would oversee
and coordinate the activities of the Advisers for purposes of
risk control, and he failed to do so (¶ 23). That promise, if
proved, would be a separate agreement, rendering inapplicable
the Hutton-Lassila reliance on Amfac Mortgage Corp. v. Arizona
Mall of Tempe, Inc., 583 F.2d 426, 430 (9th Cir. 1978).
Griswolds do not ask this Court to assume a state of facts
contrary to the undertaking in the Client Agreement. Instead
they allege additional facts.
Second and more importantly, Griswolds do not claim Hutton
and Lassila liable for the "actions of the individual or
organization" or for the "operating methods of such
organization" — a kind of agency notion. They rather contend
Hutton operated MCAP as a scheme to defraud. According to the
Complaint, Griswolds' losses are ascribable to Hutton's overall
design of the plan, not to individual mistakes of the Advisers.
Nothing in the Client Agreement is a disclaimer of that risk.
Hutton and Lassila direct one last salvo at Griswolds' claim
about the use of "fifty cent dollars" to generate excess
trading activity and thus excess commissions. They rightly
point out each of the individual contracts signed with the
outside Advisers (Exs. A-2 to A-7) reflects an account size of
twice the actual funds deposited with Hutton. It is also true
the Cresta and ICSC contracts (but not the others) specify
fees would be based in part on account size.
But again Hutton and Lassila fail to grasp the essence of
Griswolds' claim. Griswolds charge Lassila represented to them
funding in "fifty-cent dollars" was customary and would be
advantageous to Griswolds, all the while knowing that was
false and the purpose of funding in "fifty-cent dollars" was
to generate increased commissions.*fn22 Griswolds do not seek
to lay the excess trading at the Advisers' doors (except in
the case of Hutton's own employee, Stieren, who did not trade
in "fifty-cent dollars"). Rather they assert the
representation that "fifty-cent-dollars" funding would be
beneficial to their investment interests was a fraud.
Disclosure to Griswolds of the method by which Advisers'
fees would be calculated does not bear on that issue.*fn23
In sum, the threshold attack on the misrepresentation claims
fails as well. They too remain viable at the pleading stage.
Hutton's and Lassila's motion for their dismissal from the
Complaint is denied. They are ordered to answer the Complaint
on or before December 6, 1985.