Conway v. Icahn & Co., Inc.

• Decision Date: 15 February 1994
• Docket Number: 547,Nos. 313,D,s. 313
• Citation: 16 F.3d 504
• Parties: Thomas CONWAY, Plaintiff-Appellee-Cross-Appellant, v. ICAHN & CO., INC., Defendant-Appellant-Cross-Appellee. ockets 93-7282, 93-7342.
• Court: U.S. Court of Appeals — Second Circuit

Page 504

16 F.3d 504

Thomas CONWAY, Plaintiff-Appellee-Cross-Appellant, v. ICAHN & CO., INC., Defendant-Appellant-Cross-Appellee.

Nos. 313, 547, Dockets 93-7282, 93-7342.

United States Court of Appeals Second Circuit.

Argued Oct. 4, 1993.

Decided Feb. 15, 1994.

Matthew Farley (Charles D. Donohue, Maureen J. Cunningham, Mark C. Catana, Shanley & Fisher, P.C., New York, NY, of counsel) for Defendant-Appellant-Cross-Appellee.

Jack Minoff, Esq., New York, NY (George J. Castrataro, Esq., New York, NY, of counsel) for Plaintiff-Appellee-Cross-Appellant.

Henry F. Minnerop (Joseph McLaughlin, Stephen T. Paine, Brown & Wood, New York, NY, of counsel) for Amicus Securities Industry Association.

Before: MINER and ALTIMARI, Circuit Judges, ELFVIN, District Judge. ^*

MINER, Circuit Judge:

Defendant-appellant-cross-appellee Icahn & Co., Inc. ("Icahn") appeals from a money judgment in favor of plaintiff-appellee-cross-appellant Thomas Conway in the sum of $357,240 with interest, entered in the United States District Court for the Southern District of New York (Ward, J.) following a jury trial. Conway maintained an account with Icahn, a stock broker, and his claim arises from the liquidation of a portion of that account to satisfy a margin call. The jury specifically found that Icahn breached its fiduciary duty to Conway and was negligent in liquidating the account. On appeal, Icahn argues that Conway waived any claim of negligence or breach of fiduciary trust by executing a Customer Agreement that permitted liquidation without notice to meet margin requirements. The Agreement was executed by Conway and Cowen & Co. ("Cowen"), the clearing broker that ordered Icahn to undertake the partial liquidation of Conway's account. Icahn also argues that In his cross-appeal, Conway contends that the district court erred in concluding that the jury's assessment of damages in the sum of $357,240 on each of the claims on which it returned a verdict was duplicative. Conway also contends that the district court erred in directing that interest be computed from the date the action was commenced rather than from a more appropriate earlier date.

Conway's losses were not proximately caused by its negligence or breach of fiduciary duty and that the district court improperly restricted the introduction of certain medical records.

Finding no merit in any of the arguments advanced on either the appeal or the cross-appeal, we affirm the judgment of the district court in all respects.

BACKGROUND

Conway came to the United States from Ireland in 1950 with less than $200. After working as a laborer, he acquired a license that enabled him to work as a maintenance engineer. Now 67 years of age, he has been employed as a night maintenance engineer at Macy's for the past 25 years. Conway also is a very sophisticated and knowledgeable investor in the stock market. He is a self-taught expert in the identification of undervalued securities and has bought and sold stock for some 20 years.

By October 16, 1987, the date of the steepest one-day drop in the stock market to that date, Conway held securities valued at $12,580,000 in his securities account with Icahn. His equity in the account was approximately 49% of its value at that time. Conway had opened the account with Icahn in March of 1981 as a non-discretionary margin account. He understood that Cowen, as clearing broker, was in charge of administering the margin aspects of his account with Icahn. See generally Henry F. Minnerop, The Role and Regulation of Clearing Brokers, 48 Bus.Law. 841 (1993); Ronald T. Carmen & William J. Fitzpatrick, An Analysis of the Business and Legal Relationship Between Introducing and Carrying Brokers, 40 Bus.Law. 47 (1984). This understanding was confirmed in a Customer Agreement between Conway and Cowen. The Customer Agreement, executed on March 24, 1981, covered the extension of credit to customers carrying margin accounts. It provided to Cowen a general lien against Conway's account as well as the authority to sell any asset in the account, in any manner and without notice, to satisfy any indebtedness.

The account that Conway opened with Icahn in 1981 actually was a transfer of an existing brokerage account that Conway held with Merrill Lynch. Conway testified that he moved the account because he wanted to have the benefit of the reduced commission rates available at a discount brokerage firm such as Icahn. Although Cowen ordinarily required that a margin account be maintained at 35% equity, i.e., that the value of the equity net of debt could not be less than 35% of the total value of the account, it made an exception in the case of Conway and fixed his margin requirement at 30%. This arrangement was made through Lou Fiore, Manager of the Icahn Retail Discount Department. Conway previously had sought and received reduced house equity maintenance requirements of 30% in his margin accounts at other firms. Under the Customer Agreement, however, Cowen had the right to increase its equity percentage requirement without notice to Conway. If the existing holdings were insufficient to satisfy equity requirements, the increase could be satisfied by depositing additional assets into the account or by selling assets. Both brokers were aware of the fact that Conway never met a margin call by liquidating securities in his account. The few margin calls that were made were settled by cash payments or other arrangements. Mr. Fiore of Icahn also requested and received permission from Cowen to charge Conway a special low interest rate on his margin account borrowings. Clearly, Conway was a preferred customer of both Icahn and Cowen.

Although he was fully aware of the substantial losses he had sustained in the precipitous stock market decline that occurred on October 16, 1987, Conway perceived an investment opportunity in the then-current market situation. Accordingly, on Monday, October 19, 1987, Conway placed more than a On October 17, Cowen had made a determination to rescind previous exceptions to its house margin requirements and to bring all its margin requirements to 35% equity. It is questionable whether Icahn ever was notified of this change as applied to Conway's account. Conway himself denies he ever was advised of the change. In any event, by the close of trading on October 19, the equity level of Conway's account was 31.31%. By Friday, October 23 or Saturday, October 24, Conway received confirmations for his purchase orders and for the sale of his Bank of America shares. By the close of the market on October 26, the equity in Conway's account with Icahn had fallen to 22.80%, which was below the New York Stock Exchange requirement of 25%. An additional sharp drop in the market that occurred on October 26 was responsible for this further deterioration in Conway's equity.

dozen orders by telephone with Barry Ferrari of Icahn. Ferrari had replaced Lou Fiore as Manager of Icahn's Retail Discount Department and accepted the orders after discussing with Conway the "buying power" of the net equity in the Conway account. The orders were "limit" orders and as such were not subject to execution until the market price specified by Conway was reached. These orders were effective only on October 19, and would be cancelled if not executed on that date. As of October 19, Conway also had outstanding "good until cancelled" orders to purchase shares of stock in three companies as well as a sell order for Bank of America preferred stock. The orders placed accounted for over one-and-one-half million dollars of the buying power in Conway's account. On October 19, 1987, "Black Monday" as it became known to investors, the stock market sustained its largest single day decline in its history. Except for Conway's order to sell his Bank of America preferred stock, which was only partially executed, all of Conway's October 19 orders were executed on that date or "as of" that date.

Conway testified that, during the week following October 19, he regularly attempted to reach Icahn by telephone from his home but that the lines were busy and he never was able to get through to discuss the condition of his account. Mr. Ferrari of Icahn, on the other hand, testified that he tried to call Conway several times during the week but got no answer. Although Conway received some "minor margin calls" by mailgram on October 22 or October 23, he said that he did not understand, in light of what he perceived to be his buying power at the time, "why [Ferrari] was sending out a margin call like that." Attempts to reach Ferrari with regard to these margin calls also failed, according to Conway. It was Ferrari's recollection that he spoke by telephone with Conway "regarding a large maintenance call in Mr. Conway's account," but he was not certain who initiated the call or on what date it took place. He did recall being instructed by Conway to "do what you have to do" to meet the call. He took that statement to mean that Conway was giving him discretion as to what securities should be sold. Conway denies that such a conversation ever took place and testified that he was unaware of the massive sell-out in his account until he received his monthly statement along with "a bunch of confirmations and a bunch of sellout orders on November 7."

The sellout orders resulted from a margin call in excess of $1,700,000 on Conway's account. The call was made on October 26 or October 27. On October 27, Cowen directed Icahn to liquidate securities in the account to meet the call, and Mr. Ferrari prepared tickets and caused the sales to occur on that day and on the following day. The sales produced proceeds of 3.7 million dollars, which ultimately increased the equity in the account to 35.54%. Although a 1.7 million dollar margin call requires new cash in that amount, the sale of securities to meet such a call requires a liquidation of securities in at least twice that amount because the proceeds must be applied to the...