Burns v. Prudential Securities, Inc., 9-03-49.

Citation167 Ohio App.3d 809,857 N.E.2d 621,2006 Ohio 3550
Decision Date11 July 2006
Docket NumberNo. 9-03-49.,9-03-49.
PartiesBURNS et al., Appellees, v. PRUDENTIAL SECURITIES, INC. et al., Appellants.
CourtUnited States Court of Appeals (Ohio)

Michael N. Ungar, Cleveland, David D. Geagley, and Suzanne E. Duddy, for appellant Jeff Pickett.

Patrick F. McCartan, Cleveland, Todd S. Swatsler, and Chad A. Readler, Columbus, for appellant Prudential Securities, Inc.

David P. Meyer, Cincinnati; Scott L. Starr; Thomas A. Hargett; David J. Young, Columbus; and Michael A. Rumer, for appellees.

CUPP, Judge.

{¶ 1} Defendants-appellants, Prudential Securities, Inc. ("PSI") and Jeffrey Pickett, appeal the judgment of the Marion County Court of Common Pleas finding appellants liable for breach of contract, breach of fiduciary duty, and negligent supervision and awarding compensatory damages of approximately $16 million and punitive damages of $250 million to the class of plaintiffs-appellees.

{¶ 2} This appeal arises from a class action brought by approximately 300 retirees from Marion County, Ohio who maintained nondiscretionary securities accounts or annuities with PSI. Pickett, who worked as a "Senior Vice President Retirement Planning Consultant" in PSI's Marion, Ohio office, serviced these accounts. The written account and program agreements entered into by each of the class members stated that the plaintiffs would make investment decisions with regard to their accounts and that PSI could not sell, purchase, or otherwise trade account assets without the plaintiffs' consent.

{¶ 3} On or about October 7 or 8, 1998, Pickett believed that the stock market was going to suffer a severe and prolonged downturn and was fearful that the plaintiffs would lose their retirement assets in the event that downturn occurred. Therefore, Pickett, with the help of other PSI employees, reallocated the plaintiffs' investments in the Prudential ProChoice and Target programs1 by selling all of the investments in their existing accounts and purchasing investments for them in the Invesco Total Return Fund and a United States Treasury money market fund.2 Pickett's actions resulted in approximately 2,600 trades and the sale of over $40 million in investments over a two-day period. Neither PSI nor Pickett charged a commission on the reallocations, nor did PSI or Pickett earn any compensation based on the reallocations. It is undisputed, however, that the plaintiffs did not authorize the reallocations in advance.

{¶ 4} Within three days of the reallocations, PSI sent each plaintiff a standard confirmation slip, which informed them of the purchases and sales that had occurred in their accounts. Additionally, Pickett and his staff spoke with a number of the plaintiffs on the telephone, advising them of the reallocations and explaining that the reallocations were based on Pickett's prediction of an impending stock market crash.

{¶ 5} In the first week of November 1998, PSI sent each plaintiff a regular monthly statement that contained information about all of the activity in his or her accounts for that month, including the reallocations made on October 7 and 8. On November 12, 1998, Pickett held a seminar at the Marion Country Club, which many of the plaintiffs attended. At the seminar, Pickett explained his views of the stock market and why he felt it was too risky to be invested in the market at that time. Following Pickett's presentation, the attendees were given an opportunity to ask questions regarding the reallocations and the reasons for them.

{¶ 6} In February 1999, on the basis of an investigation that had commenced in October 1998, shortly after the reallocations were made without authorization, PSI terminated Pickett's employment. In March 1999, the PSI agents who assumed service of the accounts that had been assigned to Pickett began to contact the plaintiffs to explain the unauthorized trades and to advise the plaintiffs to reinvest in the stock market.

{¶ 7} On September 10, 1999, the plaintiffs filed a putative class action against PSI and Pickett in the Marion County Court of Common Pleas, alleging breach of contract, conversion, breach of fiduciary duty, and negligent supervision. The plaintiffs asserted that Pickett's reallocations to "safe" investments had caused them to miss out on a dramatic rise in the stock market that occurred after October 1998.

{¶ 8} On October 12, 1999, Pickett and PSI removed the case to federal court, claiming that the plaintiffs' claims were preempted by federal law regarding securities fraud and, thus, the state court lacked jurisdiction to hear the case. On May 8, 2000, the United States District Court for the Northern District of Ohio dismissed the case and remanded it to the trial court.

{¶ 9} In the two years following remand, the case proceeded unremarkably and with significant motion practice and discovery by each party. During this time, the class of plaintiffs was certified pursuant to Civ.R. 23. An appeal of that certification was taken to this court, wherein we affirmed. Burns v. Prudential Securities, Inc. (2001), 145 Ohio App.3d 424, 763 N.E.2d 234.

{¶ 10} On July 8, 2002, the trial court granted a motion for partial summary judgment previously filed by the plaintiffs. The trial court found that both Pickett and PSI were liable for breach of contract, conversion, and breach of fiduciary duty and that PSI was vicariously liable for the tortious actions of Pickett committed within the scope of his employment by virtue of respondeat superior. Trial on the remaining issues, negligent supervision and the calculation of damages, was scheduled to begin September 9, 2002.

{¶ 11} On September 6, 2002, the parties were once again before the trial court. The trial court ruled that the plaintiffs could present an extension of their claim of breach of fiduciary duty at trial by offering evidence that PSI "had and breached a continuing fiduciary duty during a period of months after the unauthorized sales at issue by, among other things, omitting to state material facts or concealing material information relevant to plaintiffs' determinations or choices of action in response to the subject transactions." The trial court allowed the claim over the appellants' objections on the basis that discovery, pretrial motions, negotiations, and even mediation had included assertions of the continuing nature of the duty, sufficient to deem it part of the complaint. The trial court also allowed the plaintiffs to present evidence to substantiate an award of punitive damages from PSI as a result of the alleged breach.

{¶ 12} On September 9, 2002, the morning that trial was set to begin, the appellants once again removed the case to federal court, alleging that the remaining claims were governed by federal securities fraud law. The following day, the federal district court concluded, for the second time, that there was no federal court jurisdiction for the claims and remanded the matter to state court.

{¶ 13} Trial commenced on September 11, 2002. On October 11, 2002, the jury returned verdicts against Pickett and PSI, finding the appellants liable for breach of fiduciary duty and negligent supervision, and apportioned compensatory damages in the sum of $5,905,598 as a proximate result of these torts. The jury also awarded the class $11,740,994 in compensatory damages with respect to the breach-of-contract claim that had been previously decided by summary judgment.3 In addition, the jury awarded punitive damages against PSI in the amount of $250,000,000. The trial court entered final judgment on the verdicts on April 21, 2003. In total, the plaintiffs were awarded $12.3 million in compensatory damages,4 approximately $4 million in prejudgment interest, $2.8 million in attorney fees and expenses, and $250 million in punitive damages.

{¶ 14} Pickett and PSI filed motions for judgment notwithstanding the verdict and for a new trial. The trial court denied these motions in their entirety on July 24, 2003.

{¶ 15} Pickett and PSI subsequently appealed to this court. Pickett set forth six assignments of error, and PSI set forth 12 assignments of error for our review. While this appeal was pending, on March 31, 2006, Picket and PSI removed this action to federal court for a third time. Picket and PSI relied on the United States Supreme Court's recent pronouncement in Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit (2006), ___ U.S. ___, 126 S.Ct. 1503, 164 L.Ed.2d 179, to argue, again, that federal securities fraud law barred the plaintiffs' action. But, on July 10, 2006, the federal district court determined that federal law did not bar the plaintiffs' action and remanded the matter to this court.

{¶ 16} On remand, we now consider Pickett's six assignments of error and PSI's 12 assignments of error. For clarity of analysis, we have addressed the assignments of error in a different order than they were presented to us. In addition, assignments of error that involve similar issues have been combined for determination.5

PICKETT ASSIGNMENT OF ERROR NO. I

The Court of Common Pleas committed prejudicial error in refusing to grant a directed verdict or a judgment notwithstanding the verdict to defendants based on their ratification defense.

PRUDENTIAL ASSIGNMENT OF ERROR NO. I

The trial court erred by failing to hold that as a matter of law plaintiffs ratified the unauthorized trades.

{¶ 17} In their first assignments of error, Pickett and PSI contend that the trial court erred by failing to conclude, as a matter of law, that the plaintiffs had ratified Pickett's action of reallocating their investments following the unauthorized trades. All parties agree that Pickett's conduct breached his clients' written account agreements. Pickett himself admitted at trial...

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