Clark v. Merrill Lynch, Pierce, Fenner & Smith, Inc.

• Citation: 924 F.2d 550
• Decision Date: 26 February 1991
• Docket Number: No. 90-2039,90-2039
• Parties: Fed. Sec. L. Rep. P 95,778, Fed. Sec. L. Rep. P 95,796 Donald E. CLARK, Plaintiff-Appellee, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INCORPORATED, a New Jersey corporation; Wendell C. Hoover, Defendants-Appellants.
• Court: United States Courts of Appeals. United States Court of Appeals (4th Circuit)

Page 550

924 F.2d 550

Fed. Sec. L. Rep. P 95,778, Fed. Sec. L. Rep. P 95,796

Donald E. CLARK, Plaintiff-Appellee, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INCORPORATED, a New Jersey corporation; Wendell C. Hoover Defendants-Appellants.

No. 90-2039.

United States Court of Appeals Fourth Circuit.

Argued Oct. 31, 1990.

Decided Jan. 31, 1991.

As Amended Feb. 26, 1991.

Richard H. Sinkfield, argued, Rogers & Hardin, Atlanta, Ga. (Paul W. Stivers, James W. Beverage, Rogers & Hardin, Atlanta, Ga., on the brief), for defendants-appellants.

E. Glenn Robinson, argued, Robinson & McElwee, Charleston, W.Va. (David K. Higgins, Robinson & McElwee, Charleston, W.Va., on the brief), for plaintiff-appellee.

Before MURNAGHAN and NIEMEYER, Circuit Judges, and YOUNG, Senior United States District Judge for the District of Maryland, sitting by designation.

MURNAGHAN, Circuit Judge:

Appellee Donald Clark is a successful businessman who, since 1981, had traded in securities markets through appellant Merrill Lynch, Pierce, Fenner & Smith and its employee-broker, appellant Wendell Hoover. In January of 1985, Clark decided he needed a new investment strategy to meet cash flow requirements and told Hoover that he was thinking of investing in municipal bonds. Hoover and Merrill Lynch options specialist Richard Gordon convinced Clark instead to produce income through a combination of premiums from covered options, dividends, interest, and gains from sales of stock, assuring Clark that such a strategy would meet Clark's monthly cash flow requirements.

The strategy did not perform as expected. By December of 1985, despite repeated assurances by Hoover and Gordon that his monthly income requirements were being met, Clark liquidated his positions and invested in municipal and corporate bonds.

Clark then brought suit in the United States District Court for the Southern District of West Virginia, Charleston Division, alleging state and federal securities fraud claims. The district court (Staker, J.) referred all of the claims to arbitration except the claim brought under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j(b), and Rule 10b-5, 17 C.F.R. Sec. 240.10b-5, thereunder. Merrill Lynch filed a motion to compel arbitration of that claim, and the motion was denied.

After a trial on the Section 10(b) claim, the jury returned a verdict in favor of Clark, awarding $1,683,170 in lost income, the increased cost of purchasing the bond portfolio, and prejudgment interest. Merrill Lynch and Hoover appeal, claiming that (1) the district court erred in refusing to compel arbitration of Clark's Section 10(b) claim; (2) Clark failed to prove actionable fraud or fraud in connection with the purchase or sale of a security under Section 10(b); (3) Clark failed to prove damages; (4) the damages awarded constituted a double recovery and were speculative; (5) the district court submitted erroneous jury instructions on scienter, damages, reliance, and defenses to fraud; and (6) the district court abused its discretion in denying Merrill Lynch's and Hoover's motion for a new trial. The paramount question confronting us is whether the motion to compel arbitration of the Section 10(b) claim was improperly denied.

I.

Donald Clark lived in Buckhannon, West Virginia, from 1963 until 1983; he started his own company there in 1963. The company provided services to the oil and gas industry, and Clark sold it to NL Industries, Inc. ("NL") in April 1979. Clark received over $9 million on the sale, including 300,000 shares of NL stock valued at $20 per share.

In 1981, Clark opened a brokerage account with Smith Barney, Harris, Upham & Company. Hoover was his broker there, and when Hoover moved to Merrill Lynch shortly thereafter, Clark transferred his account. The account became known as the "02" account.

Hoover also introduced Clark to Richard Gordon, manager of Merrill Lynch's Managed Options Service in New York. Gordon specialized in options, specifically covered call writing. Clark opened a second account with Merrill Lynch in New York in February 1982 which Gordon managed and which became known as the "01" account.

The covered call writing continued through 1981, 1982, and 1983. During that time and into 1984, Clark's income fell by roughly $500,000, and he became pressed for income to pay his expenses. After examining his accounts' performance and concluding that the 02 account was not providing him with a sufficient return, Clark told Hoover in September 1984 to stop trading in options.

On January 16, 1985, Clark, Hoover, and Clark's accountant, Don Nestor, met in Buckhannon. Clark was considering investing in tax-free municipal bonds to produce the income that he felt he needed and told Hoover so. Hoover told Clark that he should consider another course, and recommended income production through a combination of premiums from covered options, dividends, interest, and gains from sales of stock. Hoover emphasized that he believed such a program could exceed the return on municipal bonds. After discussions with Hoover, and after a subsequent telephone conference call with Hoover and Gordon in which Gordon said that he believed that Clark's needs could be met through the recommended strategy, Clark decided not to invest in municipal bonds and to follow Hoover's recommendation to restructure the portfolio.

Clark kept the 01 account in New York with Gordon and the 02 account in Huntington with Hoover and opened a new "03" account in Huntington with proceeds from the sale of his NL stock. Clark's income goals or objectives were $5,500 per month from the 01 account, $15,000 per month from the 02 account, and $25,000 per month from the 03 account, representing an annual return of approximately 12.7%.

As early as February or March 1985, the accounts were failing to meet their objectives. In April or May 1985, Clark spoke with Hoover several times about Clark's inability to conclude from his account statements that his investment objectives were being met. According to Hoover, Clark's objectives were being met and he so informed Clark although that fact was not reflected in the monthly account statements. To address Clark's concerns, Hoover recommended transferring the 02 and 03 accounts from Huntington to New York. The accounts were transferred in June 1985. Hoover continued to be in contact with Clark about his accounts, although investment decisions thereafter were made through Gordon in New York.

Clark, Nestor, Hoover and Gordon met on August 15, 1985, to review the accounts. At the meeting, Hoover again assured Clark that his accounts were performing as they should. By late October, however, Clark was again pointing out to Hoover and Gordon that he was unable to see where his accounts had earned more in income than he could see in his monthly statements, and arranged a meeting in New York with Gordon and with Nestor, accountant for Clark. Clark and Gordon compared summaries of the accounts at the October 31, 1985, meeting, and Clark, not satisfied with the amounts he had been receiving, stopped any new trading in the accounts. On November 21, 1985, he directed Gordon to close the accounts and liquidate the investments. By December 3, 1985, the liquidation was complete.

Clark brought the present action in August 1986, alleging that Merrill Lynch and Hoover had violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. He also alleged that Merrill Lynch and Hoover had violated the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. Secs. 1962 & 1964, and were liable under a number of state law claims. The district court referred all of the state law claims to arbitration ¹ but did not act to refer with respect to the Section 10(b) and RICO claims.

Merrill Lynch and Hoover moved to compel arbitration of the federal claims; the motion was granted as to the RICO claim and denied as to the Section 10(b) claim. After trial, the jury returned a verdict in favor of Clark, awarding $1,683,170 in lost income, the increased cost of purchasing the bond portfolio, and prejudgment interest. Merrill Lynch and Hoover filed a timely notice of appeal.

II.

At the threshold we are confronted with two issues arising from a dispute between the parties as to whether they contractually agreed to submit any claim, including a Section 10(b) claim, to arbitration.

By memorandum opinion and order dated February 9, 1988, the district court ruled that Clark's federal securities law claim could be litigated and denied Merrill Lynch's motion to compel arbitration and to stay further court proceedings relating to that claim. A subsequent motion by Merrill Lynch for reconsideration was denied on May 27, 1988. Merrill Lynch now appeals the denial of the motion for reconsideration.

A. Effect of Waiving Interlocutory Appeal on Availability of Appeal from Final Judgment

While conceding that the denial of Merrill Lynch's motion was subject to interlocutory appeal under 28 U.S.C. Sec. 1292(a)(1), Clark contends that this court now lacks jurisdiction to review the district court's ruling on the issue, simply because the time within which to bring the interlocutory appeal has long since expired and that, in failing to bring an interlocutory appeal, Merrill Lynch somehow waived its right to raise the issue on appeal after final judgment. To rule otherwise, continues Clark, would afford Merrill Lynch "a second bite at the apple." In support of his novel argument, Clark cites Browder v. Director, Dept. of Corrections, 434 U.S. 257, 98 S.Ct. 556, 54 L.Ed.2d 521 (1978); Washington v. Bumgarner, 882 F.2d 899 (4th Cir.1989); and Shah v. Hutto, 722 F.2d 1167 (4th Cir.1983) (en banc ).

The argument is utterly without merit. Shah and the other cases Clark cites have nothing to do with the instant case; they involve tardy appeals from final orders and final judgments. Rather, 16 Wright, Miller, Cooper & Gressman,...