Vucinich v. Paine, Webber, Jackson & Curtis, Inc.

• Decision Date: 23 October 1986
• Docket Number: No. 85-5631,85-5631
• Citation: 803 F.2d 454
• Parties: Fed. Sec. L. Rep. P 92,994, 21 Fed. R. Evid. Serv. 1248 Jennie VUCINICH, Plaintiff/Appellant, v. PAINE, WEBBER, JACKSON & CURTIS, INC., a Delaware Corporation, and Philip F. Moore, Defendants/Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 454

803 F.2d 454

Fed. Sec. L. Rep. P 92,994, 21 Fed. R. Evid. Serv. 1248

Jennie VUCINICH, Plaintiff/Appellant, v. PAINE, WEBBER, JACKSON & CURTIS, INC., a Delaware

Corporation, and Philip F. Moore, Defendants/Appellees.

No. 85-5631.

United States Court of Appeals,

Ninth Circuit.

Argued and Submitted July 10, 1986.

Decided Oct. 23, 1986.

Allen J. Capeloto, Richard L. Rubin, Capeloto & Rubin, San Francisco, Cal., for plaintiff/appellant.

George M. Garvey, Munger, Tolles & Olson, Los Angeles, Cal., for defendants/appellees.

Appeal from the United States District Court for the Central District of California.

Before CANBY, REINHARDT, and JOHN T. NOONAN, Circuit Judges.

NOONAN, Circuit Judge.

Jennie Vucinich brought this action against Paine, Webber, Jackson, and Curtis, Inc. (Paine, Webber) and Philip F. Moore, alleging violation of sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b) and 78t(a), common law fraud, breach of fiduciary duties by a broker, professional negligence, and negligent supervision of a broker. The district court directed a verdict for the defendants. We reverse and remand for trial.

Events. On January 11, 1977 Jennie Vucinich consulted Philip F. Moore, a broker with Paine, Webber about possible investments. Vucinich was a forty-five year old housewife, the mother of four children, married to the self-employed operator of a gas station. She had had a high school education plus three semesters at Marshall College, West Virginia, where she majored in home economics. The annual income of the Vuciniches at the time was $30,000, although the family income had varied widely and Mr. Vucinich's salary was twice what it had fairly recently been. The family lived in Cathedral City, California in the desert area. In 1975 or 1976 Jennie Vucinich had inherited from her parents $40,000 in common stocks, and, becoming a client of Paine, Webber in November 1976, she had undertaken to see what should be done about them. In addition, she had $20,000 in cash recently received from the sale of her parents' house.

Vucinich told Moore that she was not interested in gambling as one gambles in Las Vegas. She was expressly interested in capital gains. She was least interested in speculation, defined by Moore as "short-term, high-risk investments." According to Moore's own testimony, he told her that he too had a low opinion of gambling and that he did have advice for her. She should put the $20,000 into "a safe, no risk investment," which he identified as a tax-deferred annuity. She should take the "$40,000 that was already at risk in the stock market" and "keep that money in a stock market type risk situation." Specifically, he advised her to sell the inherited portfolio and to go into selling short. Vucinich accepted the advice.

Selling short was a new concept to Vucinich. Moore told her that it meant selling something before you bought it. He also told her that a short seller must "put up collateral as good faith." At least these are the only impressions she retained of his instructions. She knew that she was betting against the market. She realized from what he said that if the market went up and the stocks she had sold went up, she would lose. Moore did not tell her that short sales were speculative. He did not differentiate either in his speaking to her or in his testimony at the trial between the risks run by a purchaser of common stock and the risks run by a short seller.

Specifically, Moore did not inform Vucinich that at the heart of a short sale was a credit transaction and that the sale was only possible because Paine, Webber or some unidentified third party would lend her the stock she sold. The use of the term "collateral" did not alert her to her role as debtor; she misunderstood collateral to be a token of good faith. Nor did Moore enlighten her on margin calls or on the 50 percent margin requirements then in effect. He recommended that she make $40,000 of short sales and use the $40,000 from the sale of her portfolio as collateral. The effect of this recommendation, which she followed, was that she was insulated from a margin call until she had lost $20,000. She was uninformed about this insulation.

Moore was supervised at the Palm Desert office of Paine, Webber by Richard Kite, branch manager of the office and a vice president of Paine, Webber. His duties included assuring compliance by the brokers with the securities laws, and he had six to eight brokers under his supervision. Every quarter he reviewed the ledgers kept for their clients, and his approval was necessary for every short sale made through the office. Attached to each ledger was a "client profile," indicating the investment objectives of the client. According to Kite, it was "very important" for him as a supervisor to be sure that what was transacted for a client fitted the client's needs and investment objectives. According to Moore, Kite never discussed with him the suitability of short selling by Vucinich.

As Moore further testified, he promised Vucinich to "monitor" her account, and, again according to him, he kept this promise. He did not explain to her what "monitoring" an account meant. Although Vucinich did not rubber stamp all his suggestions, he chose the stocks she should sell short, and she followed his advice as to what to sell short and when to sell short. Vucinich was unable to interpret the statements she received from Paine, Webber and, according to Vucinich, was unable to determine the changing value of her new portfolio from the statements. She has testified that when she asked Moore for the value of the account, he put her off with the observation that the statements were always out of date.

By 1978 Vucinich knew that, contrary to Moore's prediction, the stock market had not gone down. According to Moore's own testimony, he visited her family socially in the summer of 1978, and her husband asked, "Well, dummy, are we still losing money?" and Moore replied, "Well, yeah, the market's gone against us, but, you know, the indicators are that the market will fall and I don't think it's anything to worry about."

In July 1979 there was a margin call and Moore recommended closing out two positions, keeping all others. Vucinich followed this advice. In November 1979 she wanted to close out completely, but Moore advised staying in. There was another margin call in January 1980. Again Vucinich wanted to close out completely and Moore advised her not to do so. She again accepted his recommendation and in February 1980 put up $2,500 more as collateral. Finally, in September 1980 on his advice, she closed out. When at that time she asked Moore, "Why did you give me so many wrong answers?" her testimony is that he replied: "if he knew how to make money in the stock market that he would not be working as a broker." She received a total of $8,273.93 from her Paine, Webber account. She filed the present suit on June 11, 1982.

The defendants were granted summary judgment on May 9, 1983. On appeal to this court that judgment was reversed. Vucinich v. Paine, Webber, Jackson & Curtis, Inc. (Vucinich I), 739 F.2d 1434 (9th Cir.1984). A puzzling feature of the court's opinion is the statement in paragraph one, "We affirm in part and reverse in part." Nothing appears in fact to be affirmed. The opinion concluded: "Reversed and remanded." The court noted that Vucinich's deposition stated that "she was not experienced in the market, was unaware of the risks of the short sell investment and relied extensively on the advice of her broker." The court also took note of Vucinich's argument that the defendants were reckless as a matter of law in the recommendation to sell short, in failing to tell her that the strategy was speculative, and in failing to take into account her stated desire to have capital gains and to avoid speculation. The court held that the facts before the court, presented by depositions, "were sufficient to raise factual questions as to defendant's state of mind and the factors determinative of duty to the plaintiff." Summary judgment was therefore inappropriate.

The court in Vucinich I also ruled on the defendants' contention that the federal securities and common law fraud claims were barred by a three year statute of limitations, Cal.Civ.Proc.Code, Sec. 338(4) (West Supp.1984), Briskin v. Ernst & Ernst, 589 F.2d 1363, 1365 (9th Cir.1978), and that the negligence and breach of fiduciary duty claims were barred by a two-year statute of limitations. Cal.Civ.Proc.Code Sec. 339(1) (West Supp.1984). The defendants pointed to the fact that suit had been commenced more than three years after Vucinich "had become aware that the market was running against her." The court itself observed that by June 1980 she had received "several margin calls." On the other hand, the court noted Vucinich's contention that she could not decipher the statements she got from Paine, Webber and "that she relied on Moore's continuing reassurance that a longer time was needed to realize gains from his strategy." The court concluded: "Whether the events existing as of June 1979 and June 1980 were sufficient to put Vucinich on notice and whether the reassuring statements of defendants reasonably affected that notice is a disputed question of fact requiring determination by the district court." 739 F.2d at 1437.

The case was accordingly remanded for trial. The district judge quashed a subpoena served on Paine, Webber and excluded a substantial part of the expert testimony offered by Vucinich as well as the plaintiff's offered testimony of a similar complaint against the Paine, Webber office in question. At the conclusion of the plaintiff's case, the district judge directed a verdict for the defendants on all counts. This appeal followed.

Issues: Was it error for the district court to direct a verdict?

Were the district judge's rulings on evidence and on the subpoena correct?

Analysis. 1. This case has...