Louros v. Kreicas

• Decision Date: 25 April 2005
• Docket Number: No. 03 Civ. 1514(LAK).,03 Civ. 1514(LAK).
• Citation: 367 F.Supp.2d 572
• Parties: Steven LOUROS, Plaintiff, v. Leonard KREICAS, Defendant.
• Court: U.S. District Court — Southern District of New York

367 F.Supp.2d 572

Steven LOUROS, Plaintiff, v. Leonard KREICAS, Defendant.

No. 03 Civ. 1514(LAK).

United States District Court, S.D. New York.

April 25, 2005.

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Bruce A. Schoenberg, Schrader & Schoenberg, LLP, for Plaintiff.

Neal Brickman, Nicole Van Gendt, Law Offices of Neal Brickman, New York City, for Defendant.

MEMORANDUM OPINION

KAPLAN, District Judge.

This is a cautionary tale about do-it-yourself investing. Leonard Kreicas and his attorney, Steven Louros, were amateur investors. Louros gave Kreicas authority to trade options in brokerage accounts containing what Louros says were his life's savings and promised Kreicas a share of the profits. In July 2002, Louros realized losses of hundreds of thousands of dollars. Louros then sued Kreicas for securities fraud, common law fraud, breach of fiduciary duty, breach of contract, and negligence. Kreicas moves for summary judgment dismissing the complaint and for sanctions.

Facts

A. The Parties

Louros is a 55-year-old attorney.¹ His solo practice consists of approximately 75 percent plaintiffs' personal injury work, 15 percent real estate transactional work, and 10 percent "miscellaneous breach of contract and debt collection work."² Since 1988, he has brought, on behalf of clients, two cases alleging fraud in connection with the sale of securities, but in neither case asserted claims under Rule 10b-5 or Section 10(b) of the 1934 Act.³ In addition to his law degree, he holds a masters degree in business administration and a bachelor's degree in economics, both from New York University.⁴ He has invested in the stock market since the early 1990s.⁵

Kreicas, born in 1945,⁶ is a retired industrial chemist⁷ with a lively amateur interest in investing,⁸ which could help explain why he repeatedly misrepresented the extent of his and his wife's investing experience on applications to open brokerage accounts.⁹ Louros met Kreicas in 1992 or 1993 through Louros' sister, who worked for a real estate company owned by Kreicas and his wife, Kathy.¹⁰ Louros subsequently represented Kreicas and his wife in connection with a number of legal matters¹¹ — Kreicas described him as "our family lawyer"¹² — and Louros' sister gave Kreicas a power of attorney over her brokerage account, which he used to trade options in exchange for a fee from her.¹³

B. The First Arrangement

In late 2000 or early 2001, Louros entered into an arrangement with Kreicas under which Kreicas would make trades in Louros' stock accounts in exchange for 10 percent of the profits (the "First Arrangement").¹⁴ The parties dispute the circumstances in which Louros agreed to this arrangement.

The plaintiff alleges that on a number of occasions in 2000, including meetings with Kreicas on October 4 and December 21, Kreicas and his wife urged Louros to allow Kreicas to manage his money. In the plaintiff's telling, Kreicas and his wife told Louros that Kreicas was a "licensed investment advisor" and that he was "going into" managing other people's money "in a big way."¹⁵ Louros testified that Kreicas led him to believe that he had completed a course and taken a test to receive a license from the State of New York to give investment advice to clients.¹⁶

At the October 4 and December 21 meetings, according to the plaintiff, Kreicas "assured [Louros] that [Kreicas] utilized a `very conservative strategy' of using offsetting puts and calls, and that [Louros'] principal would be `fully protected.' "¹⁷ The plaintiff maintains that he told Kreicas that he was a conservative investor, was not interested in speculating, and could not afford to lose money in the stock market.¹⁸ According to the plaintiff, he entered into the First Arrangement on the basis of these reassurances.¹⁹

Kreicas disputes that he made these representations.²⁰ His version is that it was Louros who expressed an interest to Kathy Kreicas in having Kreicas manage his money.²¹ In Kreicas' telling, he was open with Louros about the potential risks and returns from trading options:

"I did tell him that he should ... buy a house and put his money in bonds. And his response was that he was not happy with the rate of returns from the bonds, and he wanted something with a higher rate of return.... And so I said that generally, I try to get one to one-and-a-half percent a month, but there were no guarantees...."²²

Kathy Kreicas testified that she never suggested to any friends that they allow her husband to manage their accounts and that she never said to anyone that he was a licensed investment advisor.²³ She did, however, acknowledge having said that her husband "dealt in options,"²⁴ and Kreicas acknowledged telling Louros that he was interested in starting a hedge fund and managing money for other people.²⁵

After the First Arrangement was in place, Louros opened a series of accounts. Although Louros seeks to hold Kreicas liable only for losses resulting from certain trades conducted in 2002 in an account with Charles Schwab & Co. ("Schwab"), the earlier events place the later ones in context.

In September 2000, Louros established a traditional individual retirement account ("IRA") with PaineWebber Incorporated (the "PaineWebber IRA").²⁶ He indicated on the account application that his "return objective" was "capital appreciation" (the other choices were "current income" and "current income and capital appreciation") and that his risk profile was "moderate" (the other choices being "conservative" and "aggressive/speculative").²⁷ Initially, all of the approximately $230,000 in the account was invested in the "PW Retirement Money Fund," but in December 2000, Louros took approximately $75,000 out of that fund and invested it in a Nasdaq index fund.²⁸

Around January 2001, Louros, following Kreicas' advice,²⁹ filled out forms to gain the ability to trade options in the PaineWebber IRA³⁰ and to give Kreicas a power of attorney and limited trading authority. Louros continued to indicate that his investment objective was capital appreciation and that his risk profile was "moderate."³¹ By signing, Louros agreed that he had "received, read and underst[oo]d the Characteristics and Risks of Standardized Options booklet."³² He indicated that his options activity would be limited to selling covered options³³ only, and that is the only type of option transaction for which he received approval.³⁴ The account statements reflect that several thousand dollars worth of call options on Johnson & Johnson stock (one of Kreicas' favorites³⁵) were sold from the account on February 2 and covered by the purchase of $95,000 worth of Johnson & Johnson stock.³⁶

Around this time, Louros, again acting on Kreicas' advice,³⁷ began transferring the assets in the PaineWebber IRA into a new IRA with Fidelity Brokerage Services LLC (the "Fidelity IRA").³⁸ On the application for the new IRA, Louros indicated that his investment objective was "growth" (the other choices were "preservation of capital," "income," "aggressive income," and "speculation"). Once again, Louros signed forms to gain the ability to trade options and to give Kreicas the authority to trade in his account.³⁹ The section on "Investment Information and Experience" — which Kreicas, not Louros, filled out⁴⁰ — indicated that Louros' investment objective was "speculation" ("income," the only other choice, was not checked) and that Louros had extensive experience trading equity options.⁴¹

Six weeks later, Louros, once again prompted by Kreicas, closed the Fidelity IRA, transferred the assets into an IRA account (the "SSB IRA") at Salomon Smith Barney Inc. ("SSB"),⁴² and again gave Kreicas authority to trade in that account.⁴³ This time Louros indicated that his risk tolerance was "aggressive" (the other choices were "moderate" and "conservative"), that his primary and secondary investment objectives were growth and current income, respectively, that his investment objectives did not allow for speculation, that he had not previously traded equity options, that he was aware of the risks of equity options, and that his anticipated activity was selling covered calls.⁴⁴ His signature indicated receipt of the pamphlet Characteristics and Risks of Standardized Options.⁴⁵

The parties dispute what Louros wrote on the form in which he granted Kreicas discretionary authority over the SSB IRA. A version of the form produced from Louros' files and not completed by Kreicas indicated "conservative" risk tolerance and that his investment objectives did not allow for speculation, but granted discretion for "securities," "sales of covered calls," "sales of straddles, puts and uncovered calls," and "debt options."⁴⁶ The version produced by SSB, however, indicated "aggressive" risk tolerance and that investment objectives did allow for speculation, but granted discretion only for "securities" and "sales of covered calls." SSB's version appears to have been whited out in the areas marked on Louros' version.⁴⁷ It is not clear whether these changes were made by Louros or with his consent or, instead, by Kreicas without Louros' knowledge.

In any event, Kreicas conducted options trades in the SSB IRA until September 2001, when Louros withdrew Kreicas' authorization because the stock market was declining and Louros was concerned about investing in equities.⁴⁸ At least partly at the suggestion of an SSB broker, the assets in the SSB IRA subsequently were invested in low-risk funds.⁴⁹ Nevertheless, around this time Louros invested on his own in options. The January statement for another Louros SSB account (the "SSB Taxable Account") reflects eleven option trades from October to December 31, 2001.⁵⁰ Louros testified that he did not understand what he was buying but simply repeated to his broker instructions from a newsletter that included investment recommendations along with verbatim instructions for brokers.⁵¹

C. The Second Arrangement

In January 2002, Louros decided to invest larger...