Jackson v. Bache & Co., Inc.

• Decision Date: 11 June 1974
• Docket Number: No. C-70-2254-OJC.,C-70-2254-OJC.
• Citation: 381 F. Supp. 71
• Court: U.S. District Court — Northern District of California
• Parties: Helene J. JACKSON et al., Plaintiffs, v. BACHE & CO., INC., et al., Defendants.

381 F. Supp. 71

Helene J. JACKSON et al., Plaintiffs, v. BACHE & CO., INC., et al., Defendants.

No. C-70-2254-OJC.

United States District Court, N. D. California.

June 11, 1974.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

John J. Ford, III, Carl D. Cammarata, John B. Vlahos, San Francisco, Cal., for plaintiffs.

Douglas M. Schwab, Heller, Ehrman, White & McAuliffe, San Francisco, Ephraim Margolin, Donald S. Zinn, Pillsbury, Madison & Sutro, David L. Cunningham, San Francisco, Cal., for defendants.

MEMORANDUM FOR JUDGMENT

OLIVER J. CARTER, Chief Judge.

Plaintiffs have brought an action against the defendants wherein they allege violation of the Securities Exchange Act of 1934, fraud, violation of rules promulgated by the New York Stock Exchange and National Association of Securities Dealers, negligence, and breach of fiduciary duties.

Jurisdiction is conferred upon the Court by 15 U.S.C. § 78aa and by the Court's pendant jurisdiction over the state claims.

Stipulated judgments¹ were entered as to defendants Diamond Management, Inc., Donald L. Mitchell, Medical Logistics Inc., Donald P. Reddick and Robert J. Nolan. Kenneth Palmer was not represented at the trial and plaintiffs presented no evidence directly relating to the issue of his liability. Since Palmer played a role significantly different from those of Bache and Burnham, Palmer will be discussed in a separate memorandum. Thus the only defendants actively involved in the trial and affected by this memorandum are Bache & Co., Inc. (Bache) and Burnham & Co., Inc. (Burnham).

FINDINGS OF FACT

As will be discussed in some detail infra, the key issue in resolving the questions presented in this case involves a detailed analysis of the relationships between the various parties connected with the action. Each of the seventeen plaintiffs occupies a unique position in the factual setting of the case and must therefore be treated upon an individual basis; generalizations as to the plaintiffs' conduct vis à vis the defendants can be discussed only after individual characteristics have been isolated. Accordingly, each plaintiff will be treated separately.

It should be noted at this point that there are four "key" plaintiffs — Jackson, Smith, David Peyton, and the Maioranas. These plaintiffs are key in the sense that they typify a particular group of plaintiffs and were active in their involvement with Medical Logistics. The other plaintiffs are sometimes referred to as "peripheral", not to minimize their economic involvement with Medical Logistics, but due primarily to their dependence upon one of the key plaintiffs.

Helene J. Jackson

Helene Jackson is a widow and retired secretary who, at the time of her investments in Medical Logistics, was the beneficiary of a trust that was to terminate upon the death of an elderly aunt. She was thus living upon a fixed, limited income.

Jackson had been involved in the stock market for a number of years and had been associated with several brokerage firms. Jackson's relationship with these brokerage houses could hardly be considered passive; she received various stock market periodicals, was generally aware of market conditions, and possessed a considerable amount of knowledge about the investment field. This knowledge was not lost upon her various registered representatives; Jackson discussed recommendations with them, offered her own suggestions, and played an active part in the development of her portfolio.

Jackson's knowledge of the stock market was accentuated by an intelligent and thorough mind — she was careful to review all the papers and documents connected with her stock purchases. She frequently investigated the background of the companies in which she was investing and quite often brought to the attention of her brokers companies that she had discovered.

Jackson began her association with Donald Mitchell in February of 1967 when she transferred her account to Bache from Dean Witter. Jackson had been dissatisfied with her registered representative at Dean Witter and went specifically to Mitchell upon the recommendation of a friend.

Later in 1967 Jackson became dissatisfied with the advice Mitchell was providing and transferred her account from Bache to Burnham. In May of 1968, however, Jackson returned to Mitchell and Bache; she stated that she "still trusted the guy" and thought that the previous trouble had been simply a misunderstanding. Additionally, Jackson had not been pleased with her registered representative at Burnham. When Mitchell left Bache to accept a position with Burnham, Jackson followed Mitchell and reactivated her previous Burnham account.

Jackson testified that when she originally consulted Mitchell she outlined her objectives to him; she stated that she was seeking stability and conservative investments that would protect the money she was receiving from the trust. Jackson's actual background in the stock market (at least since 1963), however, indicates a willingness to invest in stocks that were highly speculative. Jackson had lost some money on stocks she knew to be characterized as "flyers" and had a good idea of the risks she was taking. Mr. Sisson, Jackson's post-Mitchell registered representative, characterized his client as an "aggressive" investor.

In 1968, prior to the introduction of Medical Logistics by Mitchell to Jackson, Mitchell described Dayton and Rosegold stocks to Jackson. These were stocks that Mitchell stated were "his own deal" and Jackson invested money in the companies. The stocks were unregistered low price securities (i. e., less than five dollars) and the transactions did not go through Bache or Burnham — Jackson made out the checks to another brokerage house as per Mitchell's instructions. Jackson was aware that Mitchell was, or purported to be, an officer of Dayton and that he had sold some of the stock to his family and owned some himself. Jackson additionally was aware that Bache and Burnham did not deal in such stocks.

Jackson testified that she dealt with Mitchell as she had dealt with all her other brokers; she visited him at his office at Bache approximately once a week and called him regularly on the telephone. It was during one of her regular meetings with Mitchell that Jackson first learned of Medical Logistics. Early in 1969 Jackson, while at Mitchell's desk in the Bache offices, overheard Mitchell discussing Medical Logistics on the telephone. Jackson queried Mitchell about the company and he indicated that it was a corporation that dealt with medical equipment and supplies. Subsequent to this initial introduction Mitchell provided to Jackson brochures and promotional material containing information about Medical Logistics. This information was given to Jackson at Mitchell's desk in the Bache office.

Jackson was interested in Medical Logistics because she believed the medical field to be a good one — she had been employed as a secretary in a hospital and medical environments — and had some knowledge about the field. When she discovered that Dr. David Smith was the medical consultant to Medical Logistics she was very impressed because she had heard of Dr. Smith and his credentials. Mitchell told Jackson that Medical Logistics looked good and Jackson decided to consider the investment further. In July of 1969 Jackson attended a meeting at the Medical Logistics offices. Present at this meeting were Reddick, the president of the corporation, Palmer, the secretary-treasurer, and Mitchell. The purpose of the meeting was to acquaint potential investors with the principals and the company in general. Reddick did most of the talking and Jackson stated that she was "thoroughly impressed with those people at Medical Logistics otherwise I would not have invested."

On July 15, 1969 Jackson invested $20,000 in Medical Logistics. In return for this investment she received a note signed by Reddick. This note² indicated that the money was a loan and that stock would be issued to repay the loan as soon as the California Commissioner of Corporations gave Medical Logistics permission to issue stock to the general public. Although many of the plaintiffs claimed to be confused by the note and its terms, the note is not ambiguous; none of the plaintiffs were actually receiving stock; the note was in the form of a loan, with stock to be issued at the appropriate time. Jackson understood the terms of the note and the explanations supplied to her by Reddick and Mitchell.

When she invested the money in Medical Logistics, Jackson, as instructed by Mitchell, sent a check directly to Reddick at the Medical Logistics office. The check was made payable to Medical Logistics and made no mention of either Bache or Burnham.

Jackson testified that she based her decision to invest in Medical Logistics upon the brochures that were supplied to her by Mitchell, a list of contracts supposedly held by Medical Logistics, her confidence in the medical field, and her faith in Mitchell as a broker.

Mitchell, while employed at Burnham, told Jackson that he was seeking an underwriting for Medical Logistics. Jackson suggested some names and Mitchell told her that Bache would not underwrite Medical Logistics because it was too small, but Burnham might if someone would match funds.

After investing for the first time in Medical Logistics, Jackson went to an old and trusted friend, a Mr. Dodge, who knew quite a bit about the securities field and asked his advice. Dodge's advice was simple and unequivocal: "Don't touch it." However, Jackson made two subsequent investments in Medical Logistics, a $5000 investment on October 27, 1969 and a $10,000 investment on March 5, 1970. At least a part of the latter investments appear to be motivated by a desire to pull Medical Logistics out of the deep financial trouble Jackson knew it to be in. She was convinced by the people running the company (i. e., Reddick and Palmer) that the only way to save her original investment was to...