Messer v. E.F. Hutton & Co.

• Decision Date: 07 December 1987
• Docket Number: No. 86-3602,86-3602
• Parties: Blue Sky L. Rep. P 72,676, Fed. Sec. L. Rep. P 93,545 W. Floyd MESSER, Sr., individually, Plaintiff-Appellant, v. E.F. HUTTON & CO., a Delaware corporation, Raphael M. Kelly, individually, Henry Herschaft, individually, Defendants-Appellees.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 909

833 F.2d 909

Blue Sky L. Rep. P 72,676, Fed. Sec. L. Rep. P 93,545

W. Floyd MESSER, Sr., individually, Plaintiff-Appellant, v. E.F. HUTTON & CO., a Delaware corporation, Raphael M. Kelly, individually, Henry Herschaft, individually,

Defendants-Appellees.

No. 86-3602.

United States Court of Appeals, Eleventh Circuit.

Dec. 7, 1987.

A. August Quesada, Jr., Wildt, Quesada & Walker, Jacksonville, Fla., for plaintiff-appellant.

Nicholas V. Pulignana, Jr., Mattox S. Hair, Delbridge L. Gibbs, Mary C. Wood, Marks, Gray, Conroy & Gibbs, Jacksonville, Fla., for defendants-appellees.

Appeal from the United States District Court for the Middle District of Florida.

Before JOHNSON and CLARK, Circuit Judges, and MORGAN, Senior Circuit Judge.

JOHNSON, Circuit Judge:

This is an appeal from a district court order granting defendant-appellee E.F. Hutton's motion for a judgment notwithstanding the verdict. The order set aside a large part of the jury's award of both compensatory and punitive damages resulting from two unauthorized trades in plaintiff-appellant Floyd Messer's brokerage account. Messer contests the district court's determinations on both liability and damages and its denial of attorneys' fees, costs and prejudgment interest. We affirm.

I. FACTS AND PRIOR PROCEEDINGS

In August 1980 appellant Messer opened a brokerage account at E.F. Hutton's Jacksonville office. Shortly afterwards he began trading United States Treasury Bond ("T-bond") futures. Believing that the bonds would increase in value in the future with a change in interest rates, he assumed a "long" position in T-bond futures by entering into fifty-five contracts to purchase T-bonds scheduled to come due later that year. ¹

In April 1981 the market began to turn against Messer's long position in T-bond futures. On April 22, 1981, E.F. Hutton traded on Messer's account and assumed a short position on several T-bond futures contracts to balance Messer's long position and thereby protect the account. The next day, April 23, Hutton repurchased the T-bond futures, placing Messer back in his original long position, but not before the account incurred a loss of $35,733.25. ² It is undisputed that E.F. Hutton made these trades without Messer's authorization.

The value of Messer's long position in T-bond futures continued to drop precipitously. By April 29, 1981, Messer faced a margin call of $80,000 and projected losses in excess of his credit limit at E.F. Hutton. Desiring to avoid further losses in Messer's account, E.F. Hutton placed a straddle on his account on April 29, selling short fifty-five T-bond futures to offset the declining value of the fifty-five T-bond futures Messer held in a long position. ³ E.F. Hutton was unable to obtain Messer's prior authorization because Messer was away on business.

Messer telephoned his account representative at E.F. Hutton the next day and was told that Hutton had placed a straddle on his account. A "couple of days" later the account representative contacted Messer and told him that E.F. Hutton would waive its commission and remove the straddle if Messer would make the margin call. Messer refused to accept E.F. Hutton's offer and did not trade on the account at all until May 4, 1981.

Messer subsequently brought suit to recover the damages resulting from the April 22 and April 29 unauthorized trades, naming three defendants: 1) E.F. Hutton; 2) Raphael Kelly, the manager of Hutton's Jacksonville office; and 3) Henry Herschaft, the commodities director of the Jacksonville office. The complaint stated federal causes of action under the Securities Exchange Act and the Commodity Exchange Act, as well as pendant state law claims of breach of contract, breach of fiduciary duty, fraud, civil conversion, and violation of the Florida Securities Act. As relief, Messer requested an award of lost profits and punitive damages.

The jury found E.F. Hutton liable on all counts and awarded Messer $401,014.50 in compensatory damages and $500,000 in punitive damages. The jury did not find either Kelly or Herschaft liable on any of the counts.

Hutton then filed a motion for a new trial, for remittitur, and for judgment n.o.v. The district court granted the judgment n.o.v. on all of the counts except the breach of contract claim, holding that Messer had failed to establish a claim under any of the other causes of action in the complaint. As for the breach of contract claim, the court found that Messer's failure to mitigate his damages barred any recovery for the April 29 straddle and, in the alternative, that his proof of damages was speculative. The court also set aside the award of punitive damages. With the court's rulings on compensatory damages for the April 29 transaction and the punitive damage award, Messer was left with only compensatory damages resulting from the April 22 transaction. Accordingly, the court entered judgment in favor of Messer for $35,733.25, the amount representing the damages resulting from the April 22 transaction. ⁴ This timely appeal followed.

II. DISCUSSION

Our task in considering whether a judgment notwithstanding the verdict was appropriately entered in this case is to determine whether all of the evidence and inferences point so strongly and overwhelmingly in favor of the defendant on the claims at issue that reasonable men could not arrive at a verdict for the plaintiff. Keiser v. Coliseum Properties, Inc., 764 F.2d 783, 785 (11th Cir.1985); Boeing Co. v. Shipman, 411 F.2d 365, 374 (5th Cir.1969). Entry of judgment notwithstanding the verdict is inappropriate where there is substantial evidence opposed to the motion--that is, evidence of such quality and weight that reasonable and fair minded men might reach different conclusions. Keiser, supra, 764 F.2d at 785. A mere scintilla of evidence in opposition to the motion is insufficient to withstand a judgment n.o.v. Boeing, supra, 411 F.2d at 374. Applying this standard to the evidence presented at trial in this case, we proceed to examine seriatum each aspect of the district court's judgment n.o.v. challenged by Messer in this appeal.

A. SECURITIES EXCHANGE ACT OF 1934

Section 10(b) of the Securities Exchange Act of 1934 makes it unlawful to "use or employ, in connection with the purchase or sale of any security ... any manipulative or deceptive device or contrivance." 15 U.S.C.A. Sec. 78j(b); see Sante Fe Industries v. Green, 430 U.S. 462, 97 S.Ct. 1292, 51 L.Ed.2d 480 (1977). Rule 10b-5, promulgated by the Securities Exchange Commission under Section 10(b), prohibits any "artifice to defraud" or any act which "operates or would operate as a fraud or deceit." 17 C.F.R. Sec. 240.10b-5. Messer contends that E.F. Hutton's representation to him when he opened his account that it would execute transactions in his account only upon his direction was a material misrepresentation actionable under Section 10(b) and Rule 10b-5. The jury agreed, finding in favor of Messer on this claim.

The district court set aside the jury verdict on the Securities Act claim on the grounds that under Florida law, the promise of future action standing alone does not constitute actionable fraud. Although we agree with the result reached by the district court, we disagree with its method of reaching that result. While the district court correctly noted that the promise of future action alone does not constitute fraud under Florida law, see, e.g., Cavic v. Grand Bahama Development Co., 701 F.2d 879, 883 (11th Cir.1983) (applying Florida law), activities can be actionable under the Securities Exchange Act's antifraud provisions even though they are not " 'precisely and technically sufficient to sustain a common law action for fraud and deceit.' " Woodward v. Metro Bank of Dallas, 522 F.2d 84, 93 n. 20 (5th Cir.1975) (quoting Herpich v. Wallace, 430 F.2d 792, 802 (5th Cir.1970)). Liability under the Act does not depend on whether the activity in question would support a common law fraud action, but upon whether the activity constitutes "a misleading or deceptive practice" in the "special Rule 10b-5 sense of the word [fraud]." Woodward, supra, 522 F.2d at 93. Contrary to the district court's determination, a false promise to perform an act in the future can constitute a "misleading and deceptive practice" under the Act if the promise is part of the consideration for the sale of securities. Pross v. Katz, 784 F.2d 455, 457-58 (2d Cir.1986); McGrath v. Zenith Radio Corp., 651 F.2d 458, 466 (7th Cir.), cert. denied, 454 U.S. 835, 102 S.Ct. 136, 70 L.Ed.2d 114 (1981).

This determination alone does not, however, resolve the question of whether a judgment n.o.v. was properly entered on Messer's Securities Act claim. Given that a fraudulent promise to perform future acts can be the basis of a claim under the Act, Messer's theory of liability under Section 10(b) and Rule 10b-5 presents two possible predicates for liability: 1) the opening of the account itself; and 2) the unauthorized trades. Because we conclude that neither of these predicates can support a verdict in favor of Messer on his Securities Act claim, we affirm the district court's entry of a judgment n.o.v.

The first possible predicate for liability--misrepresentations in connection with the opening of the account itself--does not support a verdict in favor of Messer under Section 10(b) and Rule 10b-5 because the account itself does not constitute a security within the meaning of the Act. Section 10(b) and Rule 10b-5 only extend to misleading or deceptive practices in connection with the purchase or sale of a security. 15 U.S.C.A. Sec. 78j(b); see Woodward v. Metro Bank of Dallas, 522 F.2d 84, 91 (5th Cir.1975). A trading account is a "security" within the meaning of the securities laws if it constitutes an "investment contract": i.e., investment of money in a common venture premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others. United...