Arst v. Stifel Nicolaus & Co., Inc.

• Decision Date: 02 December 1994
• Docket Number: No. 93-1299-PFK.,93-1299-PFK.
• Citation: 871 F. Supp. 1370
• Parties: Rodger M. ARST, Plaintiff, v. STIFEL NICOLAUS & COMPANY, INC.; and Odis E. Shoaf, Jr., Defendants.
• Court: U.S. District Court — District of Kansas

871 F. Supp. 1370

Rodger M. ARST, Plaintiff, v. STIFEL NICOLAUS & COMPANY, INC.; and Odis E. Shoaf, Jr., Defendants.

No. 93-1299-PFK.

United States District Court, D. Kansas.

December 2, 1994.

Roger Sherwood and Kurt A. Harper, Sherwood & Harper, David G. Arst, Arst & Loyd, Wichita, KS, for plaintiff.

Reggie C. Giffin, Morrison & Hecker, Kansas City, MO, and John C. Nettels, Jr., Morrison & Hecker, Wichita, KS, for defendants Stifel, Nicolaus & Co. and Odis Shoaf.

James A. Walker, Triplett, Woolf & Garretson, Wichita, KS, for defendant Odis Shoaf.

MEMORANDUM AND ORDER

PATRICK F. KELLY, Chief Judge.

This matter comes before the court on the motion for summary judgment by the defendants, Stifel, Nicolaus & Co., Inc. (Stifel) and Odis E. Shoaf, Jr. A hearing was held on October 17, 1994, and the court now is ready to rule upon the motion.

The plaintiff, Rodger M. Arst, purchased 37,500 shares of Physician Corporation of America (PCA) stock for $2.00 per share in the 1980s. One of the reasons Arst invested in PCA stock was because he earlier had profited from buying and selling Health Care Plus (HCP) stock, and because Dr. E. Stanley Kardatzke, who previously had been involved with HCP, was associated with PCA. Prior to the PCA investment, Arst had invested in oil and gas leases, commercial office space, and rental housing. He also had invested, on at least one occasion, in "start up companies" or public offerings of companies. As of August 1992, Robert Wilkins of Prudential Securities (Prudential) had been Arst's broker for approximately 15 years. The average amount of Arst's account with Prudential was $15,000.00 to $20,000.00. Arst and Wilkins had frequent discussions about stocks and other investments and occasional discussions about nonPrudential products. Wilkins believed Arst understood these discussions and described as average Arst's ability to discuss and evaluate the risks and rewards. Wilkins and Arst never discussed whether Arst should sell his PCA stock; the broker was not aware Arst owned PCA stock until after it was sold.

In its October 13, 1989 prospectus, PCA offered to repurchase shareholders' stock at $1.00 per share and stated, "`Management of the company intends to create a trading market for the company's shares at some future point if the Company's profitability and growth permits. However, there can be no assurances that such a trading market will be established.'" (Defs.' Motion, Fact Nos. 9, 11; Pltf.'s Response, at 3.) Arst received a copy of the prospectus, but did not sell his shares at that time.

PCA management intended to have its stock traded on a public exchange as soon as feasible. To assist PCA in accessing public markets, management hired as general counsel John Hageman, who had experience in securities law. Prior to 1990, PCA's legal department handled all transactions involving PCA stock.

In 1990, Hageman, on behalf of PCA, asked Stifel to act as a market maker. Although there had been contact between PCA and Stifel/Shoaf prior to 1990, no formal relationship had been established. The duties of a market maker include:

(1) to carry an inventory of the stock; (2) to buy the stock at the quoted "bid" price; (3) to sell the stock at the quoted "ask" price; (4) to do a certain amount of due diligence investigation on the company; (5) to have met with senior management; (6) to follow the industry and the company; and (7) to disclose on the confirmation that it was acting as a principal not an agent.

(Defs.' Motion, Fact. No. 23 & Sept. 23, 1994 Letter of Correction; Pltf.'s Response, at 6.) Stifel declined to serve as a market maker for PCA stock, but agreed to "act as an accommodating broker on an agency basis." (Defs.' Motion, Fact No. 23; Pltf.'s Response, at 6.) An accommodating broker handles transactions only on an unsolicited basis; makes no recommendations on whether to hold, sell, or buy stock; and does "not make a market in the stock." (Defs.' Motion, Fact. No. 24; Pltf.'s Response, at 6-7.)

PCA notified its stockholders in a mailing, which Arst received, stating that PCA had "made arrangements for Stifel Nicolaus & Company to accommodate the purchase/sale of the Company's stock between individual shareholders" and that if shareholders were interested in buying or selling, they should contact Shoaf at Stifel. (Defs.' Motion, Fact. No. 25; Pltf.'s Response, at 7-8.) Arst also received mailings from PCA discussing the company's financial condition and performance as well as the company's projected future performance.

Shoaf received the mailings sent to shareholders. There is no evidence Shoaf or Stifel had access to PCA personnel or to nonpublic information not available to shareholders.

After Stifel agreed to act as an accommodating broker, Shoaf kept a list of PCA stockholders who communicated their interests in either selling or buying. At his initial contact with a stockholder, Shoaf routinely would explain that Stifel was acting as an accommodating broker, not a market maker; that he would put PCA shareholders who wanted to sell in contact with shareholders who wanted to buy; that he would inform stockholders of the price of the latest trade; and that if the buyer and seller agreed upon a price and a trade resulted, both would pay a commission to Stifel. If asked, Shoaf would share the most recent financial information PCA had sent. Stifel instructed Shoaf never to say anything shareholders could construe as a recommendation, inducement, or solicitation to sell, hold, or buy PCA stock. Because Stifel was serving as an agent for both buyer and seller, Stifel wanted Shoaf to remain neutral and to provide only public information to the shareholders. The defendants agreed Shoaf should never mention the fact Shoaf and his family were purchasing PCA stock because stockholders might construe that as a recommendation to hold or to buy PCA stock.

Between October 1990 and September 1992, Stifel handled 20-plus transactions involving the exchange of over 250,000 PCA shares. In five of those transactions, Shoaf purchased part of the shares offered for sale. He bought a total of 10,843 shares. Shoaf bought PCA stock because he thought the health care industry was a good investment and was aware of Kardatzke's successful track record with HCP. On one occasion, Shoaf's three children purchased a combined total of 1,221 shares. Shoaf maintains that he and his family members paid the same price as the other buyers and that he purchased remaining shares other buyers did not buy.¹ There were instances in which Shoaf did not purchase PCA shares because other buyers purchased the shares for sale. According to Shoaf and Thomas Sanders, who was in charge of Stifel's Over-the-Counter-Trading Department, Shoaf verbally notified Sanders in advance of Shoaf buying PCA shares for his personal or family accounts and Sanders approved each transaction.

Sometime between June 2, 1992, the date Arst and his wife entered into a contract to purchase a $365,000.00 house, and August 17, 1992, the date Arst contacted Shoaf, Arst asked his wife to contact Shoaf concerning the current selling price of PCA stock. Shoaf informed Arst's wife that $4.625 was the selling price of the most recent trade. Arst's wife agreed Shoaf simply shared factual information with her and did not encourage her to sell or to hold the PCA shares. Her deposition testimony is not clear whether Arst told her he decided to sell the shares prior to contacting Shoaf on August 17, 1992.² Arst said he did not decide to sell his shares until his second telephone conversation with Shoaf on August 18, 1992. Arst, however, also testified he contacted Shoaf on August 17 to sell his shares. Shoaf never contacted Arst prior to and after August 17, 1992, asking or recommending that Arst sell his PCA shares.

Arst contacted Shoaf on August 17, 1992, to discuss the plaintiff's PCA shares. As of that date, Arst had never employed Stifel as his brokerage firm or Shoaf as his broker. Arst only knew Shoaf casually through various civic and service organizations.

During a subsequent conversation, either on August 17 or 18, Shoaf said he believed Arst could sell his shares at $4.625 per share, but Shoaf added he had never handled a transaction involving that number of shares before and could not promise all 37,500 shares would sell. Arst authorized Shoaf to sell all his shares at that price. As of August 19, 1992, Arst and his wife had not sold their current house or closed on the purchase of their new house, the purchase of which was not contingent upon the sale of their current home.

At the time Arst commissioned Shoaf to sell the plaintiff's shares, Shoaf testified he did not know if he or his family would purchase any shares. Shoaf did not discuss purchasing PCA stock with his wife until after he contacted other buyers. By August 19, 1992, Shoaf found buyers to purchase 19,900 of Arst's 37,500 shares. Shoaf and his family then decided to buy 10,110 shares, although he believed it was a risky investment. Shoaf was able to locate buyers to purchase the remaining shares. Arst earned a profit of $94,685.50 from the sale of his PCA stock.

Shoaf did not purchase any shares when another shareholder contacted him in September 1992 to sell 2,500 PCA shares. As was his practice, Shoaf contacted shareholders who had expressed an interest in buying. These shareholders purchased the shares being offered.

Prior to closing the transaction, Arst signed a nonsolicitation letter, which all buyers and sellers signed, that stated:

The undersigned hereby certifies that the above transaction for the purchase/sale of these securities was not solicited directly or indirectly by Odis E. Shoaf or anyone else representing Stifel, Nicolaus, nor was the transaction solicited or procured by the means of any communications, inducements or advertisement published or sent by your company.

It is further understood by the undersigned that the only

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