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GRISWOLD v. E.F. HUTTON & CO; INC.

November 25, 1985

J.L. GRISWOLD AND PATRICIA GRISWOLD, PLAINTIFFS,
v.
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.

Facts*fn2

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 A-7).

  On January 28, 1984 Lassila sent a handwritten note (Ex. E)
to J.L. Griswold:
  Dear Jim:
  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
  additional $75,000.
  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.
  Cordially,
  Arthur Lassila
  Acknowledgement of
  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
  hereinafter appearing.

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 ...

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