896 F.2d 750 (3rd Cir. 1990), 89-5250, McAdam v. Dean Witter Reynolds, Inc.
|Docket Nº:||Appeal of DEAN WITTER REYNOLDS, INC., in No. 89-5250.|
|Citation:||896 F.2d 750|
|Party Name:||Thomas J. McADAM, Jr., McAdam Electric Company, Inc., a New Jersey Corporation, McAdam Pension Plan, and McAdam Electric Profit Sharing Plan v. DEAN WITTER REYNOLDS, INC. and Clifford B. Murray v. Harold TYSON and Midlantic National Bank, Martin S. Wilson, Philadelphia Life Insurance Company, Professional Benefit Consultants, Inc., McAdam Electric|
|Case Date:||February 13, 1990|
|Court:||United States Courts of Appeals, Court of Appeals for the Third Circuit|
Argued Sept. 6, 1989.
Rehearing and Rehearing In Banc Denied March 16, 1990.
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Jonathan L. Goldstein (argued), Richard K. Coplon, Jeffrey Speiser, and Jerrald J. Hochman Hellring, Lindeman, Goldstein, Siegal, Stern & Greenberg, Newark, N.J., for appellant, Dean Witter Reynolds, Inc.
Charles H. Hoens, Jr. (argued) and Helen E. Hoens, Lum, Hoens, Conant & Danzis, Roseland, N.J., for appellant, Midlantic Nat. Bank/South.
Peter S. Greenberg (argued), Jeffrey W. Golan, and Margaret Chon, Schnader, Harrison, Segal & Lewis, Philadelphia, Pa., for appellees, Thomas J. McAdam, Jr., McAdam Elec. Co., Inc., McAdam Pension Plan, and McAdam Elec. Profit Sharing Plan.
William John Kearns, Jr. (argued), Kearns & Kearns, Willingboro, N.J., for appellee, Morgan Guar. Trust Co. of New York.
Before BECKER and COWEN, Circuit Judges, and WEIS, Senior Circuit Judge.
COWEN, Circuit Judge.
This appeal arises out of a long and complex jury trial. The appellants, Dean Witter Reynolds, Inc. ("Dean Witter") and Midlantic National Bank/South ("Midlantic"), appeal the district court's entry of a judgment against them and in favor of the appellees, Thomas J. McAdam, Jr., McAdam Electric Company, McAdam Pension Plan, and McAdam Electric Profit Sharing Plan ("McAdam"). Midlantic also appeals the district court's entry of a judgment against it and in favor of appellee Morgan Guaranty Trust Company of New York ("Morgan"). Morgan was a defendant below, but was successful in its cross-claim against Midlantic.
The appellants raise numerous issues on appeal relating to their liability, and the award of compensatory damages, punitive damages and prejudgment interest against them. In addition, Midlantic objects to the award of attorneys' fees to Morgan on its successful cross-claim. Because we find no reversible error in the decisions of the district court involving liability, prejudgment interest, compensatory or punitive damages, we will affirm the judgments in favor of McAdam and against Dean Witter and Midlantic. However, because we find that the district court erred in awarding attorneys' fees to Morgan on its cross-claim against Midlantic we will vacate that portion of the judgment in favor of Morgan.
In 1980, McAdam opened several nondiscretionary investment accounts with Clifford B. Murray ("Murray"), an account executive with the brokerage firm of Dean Witter. These accounts were opened in the name of McAdam, his company, and the company's pension and profit-sharing plans. All of the funds were invested in safe, liquid investments. McAdam received monthly statements from Dean Witter reflecting the transactions made in these accounts.
In the latter part of 1980, Murray informed McAdam of a "special" investment opportunity that Murray said Dean Witter offered only to its preferred customers. Murray represented to McAdam that this "special" investment opportunity offered both a low risk and a high return. Murray also told McAdam that this account would not show up on his monthly Dean Witter statements, but that Murray would personally advise him of its status. Except for an assurance that drug money was not involved, McAdam was never informed of how this "special" account operated nor of its underlying securities. Nevertheless, McAdam testified that over the next few years he wrote out numerous checks to Murray for investment in the "special" account on behalf of himself, his company, and his company's pension and profit sharing plans. These checks were always made
payable to Murray and, according to McAdam, totalled approximately $460,000.00.
The "special" account was later revealed to be an elaborate and fraudulent scheme set up by Murray, but not before numerous Dean Witter investors had already transferred sizable funds to Murray based on similar representations. 1 The sheer size of this scheme eventually forced Murray to make unauthorized raids on the nondiscretionary Dean Witter accounts of his regular customers, including McAdam. As the "special" account investors became increasingly impatient with the lack of the anticipated return on their investment, Murray began surreptitiously selling off securities in nondiscretionary accounts he managed and causing checks, payable to the account's owner, to be drawn by Dean Witter reflecting the balance from these sales. Murray would then forge his customers' endorsements on the checks and cash them at Midlantic. 2 With the proceeds from the forged checks, Murray attempted to mollify impatient "special" account investors by returning what he told them was "principal" on their investment. Incredibly, this financial juggling continued undetected for four years.
Thus, as he did with other "special" account investors, Murray periodically discussed the status of the "special" account with McAdam, always stressing that the account was doing fine and occasionally returning some of McAdam's investment "principal." The amount of the funds returned by Murray is contested by the parties. On direct examination, McAdam testified that Murray returned $162,000. However, the appellants developed evidence from which a jury could have found that a much higher figure had been returned. 3
It is clear that both Dean Witter and Midlantic helped facilitate Murray's scheme by failing to follow their own internal policies and procedures. For example, the jury heard evidence that Dean Witter failed to enforce its own policy both that all correspondence between a customer and an account executive must be reviewed by a supervisor and that all account executives must keep a daily diary from which a supervisor is supposed to review an account executive's activities. Furthermore, it was Dean Witter's written policy that any time a check was made payable to a customer and was subsequently handled by an account executive, that account executive must fill out a check receipt form, a supervisor must authorize the transaction, and the account executive must later obtain the customer's signature on the form acknowledging receipt of the check. This procedure was also not followed with regard to Murray and the forged checks.
Likewise, the jury heard testimony that Midlantic's supervisors deliberately broke
or disregarded the bank's established rules and regulations concerning check cashing policy whenever a Dean Witter employee was involved in a transaction. Specifically, employees of the bank routinely cashed third-party checks for Murray, even though the checks were not drawn on Midlantic. Most of these third-party checks were quite large, including one for $475,000 payable to a Dean Witter customer's pension plan which, according to Murray, required the use of a suitcase to carry the cash out of the bank. Indeed, there was evidence showing that Murray cashed at least 120 third-party checks at Midlantic over a period of two years, totalling somewhere between $3-4 million. Employees of Midlantic also cashed checks payable to business entities, such as McAdam Electric Company, and pension and profit sharing plans, all in violation of the bank's policies. Such disregard for policy continued even after bank supervisors were warned of Murray's profligate check cashing. All of the forged checks were eventually presented by Midlantic to Morgan for payment. 4 The forged checks that belonged to McAdam, but which were cashed by Midlantic and paid by Morgan, totalled $466,992.71.
Evidence was also presented to the jury that once the scheme was uncovered in 1984, the lack of funds in McAdam's Dean Witter corporate accounts led to a dramatic effect on his company's profit picture. Both McAdam and his usual bonding agent, Richard H. Shepherd, testified that once word got out that McAdam and his company had suffered sizable losses due to a fraudulent scheme, it became extremely difficult for McAdam to secure the necessary bonding required for the large contracting projects his company had worked on prior to 1984. McAdam testified that this lack of bonding led to sizable lost business profits because contracting jobs which require no bonding are less profitable and highly competitive.
Thereafter, McAdam brought suit in state court against Murray and Dean Witter. The case was later removed to federal district court and consolidated for trial with another action brought by McAdam against Murray, Dean Witter, Midlantic and Morgan. McAdam's complaint alleged that Murray had committed fraud, breach of contract, breach of fiduciary duty and failed to pay McAdam for checks drawn on McAdam's investment accounts and made payable to him, in violation of N.J.Stat.Ann. Sec. 12A:3-804 (West 1962). The complaint...
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