Ebrahimi v. E.F. Hutton & Co., Inc.

• Decision Date: 02 August 1988
• Docket Number: 85-2832,Nos. 85-2795,s. 85-2795
• Parties: Blue Sky L. Rep. P 72,732 Farhad F. EBRAHIMI and Mary Patricia Ebrahimi, individually, and Farhad F. Ebrahimi as Assignee for Farroch and Hannelore Ebrahimi, Rokhsareh Zia Ebrahimi, and Reza G. Tourzani, Plaintiffs-Appellees and Cross-Appellants, v. E.F. HUTTON & CO., INC. and John Baker, Defendants-Appellants and Cross- Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 516

852 F.2d 516

Blue Sky L. Rep. P 72,732

Farhad F. EBRAHIMI and Mary Patricia Ebrahimi, individually,

and Farhad F. Ebrahimi as Assignee for Farroch and Hannelore

Ebrahimi, Rokhsareh Zia Ebrahimi, and Reza G. Tourzani, Plaintiffs-Appellees and Cross-Appellants, v. E.F. HUTTON & CO., INC. and John Baker,

Defendants-Appellants and Cross- Appellees.

Nos. 85-2795, 85-2832.

United States Court of Appeals,

Tenth Circuit.

Aug. 2, 1988.

Charles F. Brega (David W. Stark, Penny Rodeen Bertelsen, and William L. Johnson with him on the brief), of Roath & Brega, Denver, Colo., for plaintiffs-appellees and cross-appellants.

Philip A. Harley of Sterling & Miller, P.C., Denver, Colo., for defendants-appellants and cross-appellees.

Before LOGAN and BALDOCK, Circuit Judges, and PHILLIPS ^*, District Judge.

BALDOCK, Circuit Judge.

This action was brought by plaintiffs-appellees Farhad F. Ebrahimi (Ebrahimi) and Mary Patricia Ebrahimi (wife), individually, and Farhad F. Ebrahimi as assignee for Farroch and Hannelore Ebrahimi (brother and sister-in-law), Rokhsareh Zia Ebrahimi (mother), and Reza G. Tourzani (friend) pursuant to the Commodity Exchange Act (CEA), 7 U.S.C. Sec. 6b, ¹ for excessive trading, unauthorized trading, and trade misappropriation by defendant-appellant John Baker (Baker) in connection with the handling of plaintiffs' commodities investment accounts. Baker was a broker at defendant-appellant E.F. Hutton & Co., Inc. (Hutton) at the time of the transactions at issue.

In September 1978, Ebrahimi and his wife opened an account with Hutton valued at approximately $200,000, and his mother opened an account with Hutton valued at approximately $600,000. The mother executed a power of attorney giving Ebrahimi trading authority over her accounts. Baker served as the account executive on both accounts. In that same month, the brother and the sister-in-law opened stock and commodities accounts at Hutton, with Baker as the account executive, and granted Ebrahimi power of attorney over trading in these accounts, which were valued at approximately $60,000. In October 1979, the friend opened an account with Baker at Hutton for approximately $200,000 and executed a power of attorney giving Ebrahimi trading authority over this account.

Pursuant to his powers of attorney between 1978 and 1979, Ebrahimi received all confirmation slips for trades and monthly statements reflecting activity in his commodity accounts, the mother's accounts, the brother's accounts, and the friend's accounts. The friend also had monthly account statements sent to his own home. During this period, the Shah of Iran was deposed, and Ebrahimi became worried about his relatives living in Iran who were members of a religious minority not aligned with the emerging Khomeini faction.

By May 1979, nearly all assets in all four accounts were invested in financial futures commodities. It is unclear whether the transactions were approved by Ebrahimi. In the second week of July 1979, the accounts of Ebrahimi, the mother, and the friend incurred large losses. Hutton made a margin call on Ebrahimi during the second week of July 1979 which Ebrahimi did not meet. On July 13, 1979, Ebrahimi decided to liquidate the accounts to bring the accounts into compliance with the margin requirements. That same day, Ebrahimi instructed Baker as to which accounts to liquidate. The accounts of Ebrahimi and the mother were not liquidated until two or three days later. The brother's account was not liquidated for over two weeks, and the friend's account was not liquidated until September 1979, when the friend himself directed Baker to liquidate the account. After the liquidation, the mother's account had a deficiency balance of approximately $250,000, Ebrahimi's account had a deficiency balance of approximately $75,570, the brother's account had a gain of approximately $40,751, and the friend's commodity account had a deficiency balance of $239,874.

Because all of the accounts had been cross-collateralized and each person had guaranteed the accounts of the others, Ebrahimi used the funds in the brother's account to repay some of the deficiency in the mother's account. Hutton demanded payment of the remaining deficiency in the mother's account. To do so, Ebrahimi executed a note and a deed of trust on his home.

The complaint was filed on February 16, 1984, basically alleging churning of the accounts. Both parties agree that the time period between the transactions at issue and the filing of the complaint exceeds three years. In a motion for partial summary judgment, the defendants-appellants asserted that the Sec. 6b claim was barred by the statute of limitations. Ebrahimi countered that the statute of limitations had not run, but rather was tolled due to his mental illness during the period that he was receiving the financial statements from Hutton regarding the accounts. He asserted that the activities of Ayatollah Khomeini in Iran threatened the safety of his relatives living there, which caused him to become mentally ill and unable to discover the fraud perpetrated by the defendants.

At trial, the jury found for the plaintiffs-appellees only on the theory of unauthorized trading. Based on jury instructions proposed by Hutton and Baker, the court instructed the jury on the suspension of the statute of limitations, ² equitable estoppel and laches. After the trial, Hutton and Baker filed a motion for judgment notwithstanding the verdict and a motion to amend the verdict. Both were denied.

Hutton and Baker appeal the jury verdict on several grounds. First, they contend that the plaintiffs' claims were barred by the statute of limitations because Ebrahimi failed to exercise due diligence which would have led to his discovery of the alleged fraud within the three-year statute of limitations period. Second, they assert that the trial court erred in admitting testimony and instructing the jury on Ebrahimi's mental state because mental incapacity could not delay running of the limitations period under the federal equitable tolling doctrine. Third, they maintain that there is insufficient evidence to support the verdict against Hutton and Baker on the unauthorized trading claim. Fourth, they propose that the trial court improperly allowed double recovery for the plaintiffs, contrary to the court's jury instructions, by entering separate judgments against Baker and Hutton. Finally, they claim that there was insufficient evidence to support the judgment in favor of Ebrahimi as assignee of the brother and the sister-in-law.

In the cross-appeal, Ebrahimi asserts that the trial court erred (1) as a matter of law in precluding plaintiffs' claim for punitive damages, (2) in denying plaintiffs' request for prejudgment interest, and (3) in giving a jury instruction regarding the defense of laches. Due to our disposition, we address only the first two issues raised by the defendants on appeal dealing with the statute of limitations.

The threshold issue in this case is whether Ebrahimi is precluded from asserting his claims due to the statute of limitations. To determine whether the statute of limitations has run, we first must determine whether federal or state law supplies the limitations period in a CEA case. To do so, the court must examine the federal statute that forms the basis of the cause of action. Where the federal statute upon which the claim is based does not specify a limitations period, the court looks to the analogous state statute of limitations unless it is inconsistent with federal law or with the policy which the federal law seeks to implement. See Wilson v. Garcia, 471 U.S. 261, 266-67, 105 S.Ct. 1938, 1941-42, 85 L.Ed.2d 254 (1985); Board of Regents of the Univ. of the State of New York v. Tomanio, 446 U.S. 478, 484, 100 S.Ct. 1790, 1795, 64 L.Ed.2d 440 (1980); Pike v. City of Mission, Kansas, 731 F.2d 655, 658 (10th Cir.1984).

In this case, application of the Colorado statute of limitations does not contravene the congressional policy underlying the CEA. The CEA does not specify a statute of limitations for a violation of Sec. 6b, the antifraud provision of the Act. Nor does the case law discuss the statute of limitations period applicable to a Sec. 6b action. The federal law most closely analogous to the antifraud provision of the CEA is Sec. 10(b) of the Securities Exchange Act of 1934. See Leist v. Simplot, 638 F.2d 283, 298 n. 14 (2d Cir.1980), aff'd sub nom. Merrill Lynch, Pierce, Fenner, & Smith Inc. v. Curran, 456 U.S. 353, 102 S.Ct. 1825, 72 L.Ed.2d 182 (1982). Like Sec. 4b of the CEA, Sec. 10(b) does not have a specific period of limitations. See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 210 n. 29, 96 S.Ct. 1375, 1389 n. 29, 47 L.Ed.2d 668 (1976). Consequently, we must examine the most closely analogous Colorado statute of limitations to determine the applicable statute of limitations. See id.; Sentry Corp. v. Harris, 802 F.2d 229, 233 (7th Cir.1986), cert. denied, --- U.S. ----, 107 S.Ct. 1624, 94 L.Ed.2d 199 (1987) (noting that state law is applied only when there is no valid federal law directly governing the issue); Aldrich v. McCulloch Properties, Inc., 627 F.2d 1036, 1041 (10th Cir.1980).

When borrowing a state statute of limitations, a court should look to the statute which most clearly addresses the same or similar policy considerations as those underlying the federal right. O'Hara v. Kovens, 625 F.2d 15, 18 (4th Cir.1980), cert. denied, 449 U.S. 1124, 101 S.Ct. 939, 67 L.Ed.2d 109 (1981). The state statute need not operate in the same fashion as the federal statute nor need the state statute describe a cause of action identical to the federal cause at issue. Id. "There simply must be a commonality of purpose between the federal right and the state statutory scheme so that it is reasonable to subject the federal implied right to the statute of limitations provided by state law." Id.

Colorado has not enacted state commodities legis...