MidAmerica Federal Sav. and Loan Ass'n v. Shearson/American Exp., Inc., 87-1247

• Decision Date: 28 September 1989
• Docket Number: No. 87-1247,87-1247
• Citation: 886 F.2d 1249
• Parties: Blue Sky L. Rep. P 73,022, Fed. Sec. L. Rep. P 94,981 MIDAMERICA FEDERAL SAVINGS AND LOAN ASSOCIATION, a federal savings and loan association, Plaintiff-Appellee, v. SHEARSON/AMERICAN EXPRESS INC., a Delaware corporation, and Don Crow, an individual, Defendants-Appellants.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1249

886 F.2d 1249

Blue Sky L. Rep. P 73,022, Fed. Sec. L. Rep. P 94,981

MIDAMERICA FEDERAL SAVINGS AND LOAN ASSOCIATION, a federal savings and loan association, Plaintiff-Appellee, v. SHEARSON/AMERICAN EXPRESS INC., a Delaware corporation, and Don Crow, an individual, Defendants-Appellants.

No. 87-1247.

United States Court of Appeals Tenth Circuit.

Sept. 28, 1989.

Lloyd S. Clareman (Harvey D. Myerson, of Finley, Kumble, Wagner, Heine, Underberg, Manley, Myerson & Casey, New York City, and Claire V. Eagan, of Hall, Estill, Hardwick, Gable, Golden & Nelson, of Tulsa, Okl., with him on the briefs), of Finley, Kumble, Wagner, Heine, Underberg, Manley, Myerson & Casey, New York City, for defendants-appellants.

Sam P. Daniel, Jr. (Richard P. Hix and Charles S. Plumb, of Doerner, Stuart, Saunders, Daniel & Anderson, with him on the brief), of Doerner, Stuart, Saunders, Daniel & Anderson, Tulsa, Oklahoma, for plaintiff-appellee.

Before MOORE, TACHA, and BALDOCK, Circuit Judges.

TACHA, Circuit Judge.

The defendants, Shearson/American Express Inc. (Shearson) and Don Crow, appeal from a judgment entered on a jury's verdict finding that the defendants breached their fiduciary duty to MidAmerica Federal Savings and Loan Association (MidAmerica), violated section 12(2) of the Securities Act of 1933, 15 U.S.C. Sec. 77l, and violated section 408(a)(2) of the Oklahoma Securities Act, Okla.Stat.Ann. tit. 71, Sec. 408(a)(2) (West Supp.1989). Only the section 408(a)(2) and fiduciary duty claims remain before this court. ¹ On appeal, the defendants allege that the district court erred in denying their motions for directed verdict and judgment notwithstanding the verdict, in instructing the jury on various issues, in failing to order a new trial on all issues due to the erroneous instructions relating to the section 12(2) claim, and in denying compelled arbitration of the claims arising under state law. We affirm.

I.

We view the evidence and all reasonable inferences drawn therefrom in the light most favorable to the jury's verdict. See Kitchens v. Bryan County Nat'l Bank, 825 F.2d 248, 251 (10th Cir.1987); Schwager v. Sun Oil Co., 591 F.2d 58, 62 (10th Cir.1979).

In December 1982 MidAmerica established a new money market fund that attracted over $74 million in new deposits by January 15, 1983. Because these deposits were attracted in part by MidAmerica's offer of a "bonus" interest rate for the initial deposit term, these deposits were deemed to be "very short term" and "[interest] rate sensitive." MidAmerica therefore desired to reinvest the funds for approximately six months in a short-term investment security yielding in excess of its 10.75% to 11.25% cost of money.

MidAmerica spoke to Shearson representative Don Crow about their investment needs. MidAmerica had a longstanding relationship with Crow, having purchased securities through him since as early as 1979. At the time of the transaction giving rise to this suit, Crow handled between two-thirds and three-quarters of MidAmerica's securities investments. Crow understood MidAmerica's investment requirements, and told MidAmerica that their goals were obtainable. He advised MidAmerica to invest in GNMA Series I Unit Investment Trusts ("GNMA unit trusts"). Crow represented to MidAmerica that the GNMA unit trusts would trade like "straight" GNMA's, securities with which MidAmerica had investment experience. He further represented that the GNMA unit trusts would be more suitable for MidAmerica's needs than the straight GNMA's.

Crow's advice was not well-founded. A GNMA unit trust is essentially a packaged version of several issues of straight GNMA's. Because straight GNMA's required a minimum investment of $25,000, small investors were effectively precluded from investing. The GNMA unit trust concept was designed to allow individuals to invest relatively small amounts in GNMA securities through pooling their funds.

Despite their apparent similarity, significant differences exist between the two GNMA investment vehicles. Crow never explained these distinctions to MidAmerica. Unlike straight GNMA's, which permit volume purchasers such as MidAmerica to obtain a discount on the purchase price, the GNMA unit trust did not offer such a discount. Further, the GNMA unit trusts carried an additional three and one-half percent sales charge that was not applicable to straight GNMA's. The sales charge reduced the effective yield of GNMA unit trusts, making them particularly unsuitable for investors such as MidAmerica who required a short term investment to provide needed liquidity. Consequently, instead of fulfilling MidAmerica's financial goal of a profitable short-term investment, the GNMA unit trust practically "locked in" a loss because, even assuming MidAmerica held the investment for two years and there was no downward movement in the security's market price, the yield would have been below MidAmerica's cost of money. ²

In reliance upon Crow's recommendation, MidAmerica's chief securities investment advisor, Steve Allen, placed an initial order with Crow on January 12, 1983, for $10 million in GNMA unit trusts hedged by 100 futures contracts. Allen then left MidAmerica for a new position.

Allen was temporarily replaced by Ron Smith, an outside consultant who had previously advised MidAmerica with regard to management issues. Smith lacked Allen's experience with securities, and Crow was aware of this fact. Smith was hired to implement the GNMA unit trust investment strategy that had been developed for the money market funds. Consistent with this strategy, he placed three more orders for GNMA unit trusts in the amounts of $15 million, $10 million, and $15 million respectively. MidAmerica hedged two of these purchases but, acting against Crow's advice and its own original investment strategy, decided not to hedge the third.

On the trade dates for each of the four orders, Shearson mailed to MidAmerica a sale confirmation and a twenty-eight page statutory prospectus. Each prospectus contained multiple references to the one-time sales charge. The prospectuses arrived after Allen's departure from MidAmerica, and no one at MidAmerica reviewed the prospectuses until March, when Allen's permanent replacement, Larry Merryman, arrived. MidAmerica relied upon Crow's representations during the interim period and therefore remained unaware of the sales charge. Further, from January 20 until early March, Crow reported to MidAmerica inflated daily quotes of the market value of their investment because he failed to take into account the initial sales charge. This caused MidAmerica to believe falsely that the investment was yielding at a higher rate.

Larry Merryman became MidAmerica's new Chief Financial Officer on March 1, 1983. He began his job by reviewing the GNMA unit trust investments and immediately became concerned about their appropriateness for MidAmerica. Merryman expressed these concerns to the president of MidAmerica, Donald Ingle, and explained the ramifications of the sales charge.

After learning of the sales charge, MidAmerica proceeded to register an objection to the transactions with Crow and other Shearson representatives. MidAmerica's attorney, Gene Howard, contacted Crow on March 7 and discussed the possibility of working out a rescission of the purchases. Howard proceeded to New York and, on March 8-9, conferenced with Shearson's general counsel and other Shearson representatives regarding rescission of the purchases. Shearson ultimately rejected MidAmerica's offer of rescission. MidAmerica subsequently sold the securities in 1984 for a substantial loss.

In January 1984, MidAmerica filed suit raising nine claims based on the defendants' alleged violations of the Securities Act of 1933, the Securities Exchange Act of 1934, the Oklahoma Securities Act, and various other pendent state claims. Eight of those claims ultimately went to trial. The jury returned verdicts in July of 1985 for the defendants on five claims but was unable to reach verdicts on the section 12(2), section 408(a)(2), and the breach of fiduciary duty claims. A new trial was set for these remaining three claims.

In October 1984, prior to the second trial on the remaining three claims, Shearson moved to compel arbitration. The district court denied this motion and the claims went to trial during April and May of 1986. The jury returned verdicts for MidAmerica on all three counts. This appeal followed.

II.

The defendants allege that the district court erred in denying their motions for summary judgment and directed verdict on the section 408(a)(2) claim. Because an issue of state law is presented here, we give some deference to the resident district judge's interpretation, but ultimately review de novo whether the district judge applied the proper legal standards. See Wilson v. Al McCord Inc., 858 F.2d 1469, 1473 (10th Cir.1988).

A.

As the Supreme Court has stated in the analogous context of interpreting federal securities statutes,

the starting point in construing a statute is the language of the statute itself. Moreover, "if the langugage of a provision of the securities laws is sufficiently clear in its context and not at odds with the legislative history, it is unnecessary 'to examine the additional considerations of "policy" ... that may have influenced the lawmakers in their formulation of the statute.' "

Randall v. Loftsgaarden, 478 U.S. 647, 656, 106 S.Ct. 3143, 3149, 92 L.Ed.2d 525 (1986) (citations omitted) (quoting Aaron v. SEC, 446 U.S. 680, 695, 100 S.Ct. 1945, 1955, 64 L.Ed.2d 611 (1980)) (reviewing damages provision of section 12(2) of the 1933 Act). We believe that the language of section 408(a)(2) is sufficiently clear "to invoke this 'plain language' canon," id.

Section 408(a)(2) of the Oklahoma Securities Act provides in relevant part:

(a) Any person who:

....

(2) offers or sells or purchases a security by means of any untrue statement of a material fact or any...