First Union Discount Brokerage Services, Inc. v. Milos
| Decision Date | 09 August 1993 |
| Docket Number | No. 91-5818,91-5818 |
| Parties | , Fed. Sec. L. Rep. P 97,703 FIRST UNION DISCOUNT BROKERAGE SERVICES, INC., Plaintiff-Appellee, Counter-Defendant, v. Nick P. MILOS, Catherine P. Milos, Defendants-Appellants, Counter-Plaintiffs. |
| Court | U.S. Court of Appeals — Eleventh Circuit |
Robert Wayne Pearce, Yueh-Mei Kim Nutter, Ft. Lauderdale, FL, for appellants.
Nancy A. Copperthwaite, Keith Olin, Miami, FL, for appellee.
Appeal from the United States District Court for the Southern District of Florida.
Before TJOFLAT, Chief Judge, EDMONDSON, Circuit Judge, and DYER, Senior Circuit Judge.
The stock market crash of October 1987 signaled the beginning of the end of the booming 1980s. It shattered dreams, ruined investors, and precipitated this litigation. A discount broker sued one of its customers to recover the post-liquidation debit balance in the customer's account following substantial losses sustained during the crash. The customer refused to pay and answered the broker's suit with a seven-count counterclaim. The district court dismissed one count and later granted summary judgment in favor of the discount broker on the broker's complaint and the customer's remaining counts. We affirm.
Nick Milos began investing in the securities market around 1945. On February 27, 1984, Mr. Milos and his wife, Catherine, opened a nondiscretionary securities account with Dis-Com Securities, Inc., which First Union Discount Brokerage Services, Inc. (First Union) acquired later that year. First Union is a discount broker and, as such, charges its customers lower commissions than those charged by full service brokers. First Union accepts orders from customers for the purchase and sale of securities, but, unlike its full service counterparts, does not provide such amenities as research and investment advice.
Though not itself a member of the securities exchanges, First Union is able to execute its customers' orders by contracting with a member firm--a clearing broker. During the summer and early autumn of 1987, Cowen & Co. (Cowen) served as First Union's clearing broker; it executed transactions, prepared and mailed trade confirmations, settled transactions in options and securities, handled margin accounts, and maintained records of the transactions that it executed. During late September and early October 1987, Pershing & Co., Inc. (Pershing) transitionally succeeded Cowen as First Union's clearing broker.
The Miloses concentrated heavily on "writing" put options--a risky strategy that tends to be profitable when the price of the underlying security increases, but can be disastrous when the price declines. A put option is a contract that entitles the buyer of the put to sell a specified number of shares of a particular security to the writer of the put at a specified "strike" price at or within a specified time. 1 If the market price of the underlying security decreases below the strike price and the owner of the put exercises the option to sell the underlying security (and the difference between the strike price and the market price of the underlying security exceeds the writer's premium from the original sale of the option), the writer will lose money. When buyers of puts exercise their options, the put writer's clearing broker will purchase the shares from the buyer of the put at the strike price, and post either a loss or gain to the put writer's account depending on the difference between the underlying security's price on the open market and the strike price.
A writer of put options must either trade on "margin" or maintain a minimum account balance equal to the aggregate exercise prices of all the outstanding puts that the writer has written. The Miloses chose to trade a large number of their put options on margin. By trading on margin, the Miloses deposited in their First Union account only a portion of the funds necessary to cover all of the options they had written, and "borrowed" 2 the remainder from Cowen and then Pershing. 3
As the price of the underlying security drops, the put option writer's potential losses mount. If the put writer sells on margin, the broker's "loaned" funds are also at risk. As the potential losses escalate, so too does the risk that the writer will not have sufficient funds to pay off margin obligations to the lending broker. To protect themselves, brokers issue margin calls 4 requiring investors to deposit more funds or other collateral into their margin accounts when their balances drop below a certain equity percentage. If investors fail to meet margin calls in their accounts, their brokers, pursuant to contract, may liquidate their positions to satisfy the margin calls.
As clearing brokers, Cowen and then Pershing monitored the daily margin requirements in the Miloses' account, and generated comprehensive customer account printouts reflecting their securities positions and account information. Cowen and then Pershing sent these printouts to First Union which, in turn, provided them to Mr. Milos, upon his request. 5
In May or June 1987, and in recognition of the extremely high commissions that the Miloses' trading generated, First Union provided Mr. Milos with a semi-private office, a Quotron machine, and, upon his request, comprehensive account information printouts. With over 100 active securities positions, Mr. Milos relied on these printouts to track the investments and account equity.
As September 1987 neared, Mr. Milos became concerned about his ability to follow his securities positions because of his impending September 28 through October 14, 1987 vacation to Russia with Mrs. Milos. On September 15, 1987, Barry Parillo, a First Union branch manager, told Mr. Milos that he would have thirty days from his return, until November 15, 1987, to cure any margin problems that may arise in his account. 6 The clearing broker was having difficulty supplying timely and accurate account information and it was hard to determine the precise financial condition of the Miloses' account.
On September 22, 1987, the Miloses signed a Margin Agreement and an Option Agreement, both of which expressly granted First Union and Pershing (which was replacing Cowen as First Union's clearing broker) full discretion to protect themselves by liquidating the Miloses' securities positions at any time without notice. 7 Paragraph six of the Margin Agreement obligated the Miloses to pay off any deficiency balance that might exist following such a liquidation. 8 Two days after the Miloses signed these agreements, Mr. Milos reminded Parillo of the margin call extension to November 15, and Parillo "acknowledged" it. On September 28, the Miloses left for Russia.
As the stock market declined between October 8 and 14, Pershing issued but did not enforce house maintenance calls on the Miloses' account. 9 Mr. Milos went to the First Union office on Friday, October 16, a day after returning to Florida. Parillo informed Mr. Milos of, but did not enforce, the house maintenance calls in his account. The customer account information printout generated by Pershing indicated that the Miloses had an equity percentage of 76%, a comfortable and perfectly acceptable number. 10 Accordingly, Parillo told Mr. Milos that he thought that the maintenance calls were mistaken, he would verify the account information, and he would get back to Mr. Milos later that day. Neither Parillo nor any other First Union employee confirmed with Mr. Milos later that day that the calls were correct, and no First Union employee requested that the Miloses deposit additional funds or collateral into their account. The Miloses later determined that the October 16 printout overstated their account equity by more than $600,000, and that the account actually had an equity percentage under 70% on that day. 11 The Miloses now claim that if they had known that they had to meet the margin call and that First Union would not grant them the November 15 extension, then they would have liquidated some or all of their positions to meet the calls that day.
On Monday, October 19, the stock market collapsed; the Dow Jones Industrial Average dropped an unprecedented 508 points in a single day. The stock market crash did not bode well for the Miloses' short put option positions, and the New York Stock Exchange (NYSE) generated a $1.2 million margin call in the Miloses' account. Later that day, Parillo informed Mr. Milos that Robert Flowers, the president of First Union, wanted to meet with him.
At their meeting the next day, Flowers notified Mr. Milos of the margin call, advised him that the call must be satisfied immediately, and, in the alternative, offered him the opportunity to direct the manner of the account's liquidation. Mr. Milos told Flowers that Parillo had assured him of an extension until November 15 to meet any margin calls. Flowers, in response, told Mr. Milos that Parillo lacked the authority to grant such an extension. Mr. Milos, however, refused to meet the call. The next day, First Union began liquidating the Miloses' account. At the end of the week when First Union had completely liquidated the Miloses' account, the account had a deficiency of $265,500.49. After the Miloses refused to satisfy this deficiency, First Union paid Pershing the debit balance.
First Union's October 1987 statement to the Miloses reflects the $265,500.49 debit balance. On the back of the statement, and in bold print, First Union informed the Miloses that, unless they objected in writing within 10 days, the statement would be deemed an "account stated," an agreement between the parties as to an existing obligation. The Miloses never objected in writing.
On December 16, 1987, First Union brought this action against the Miloses to recover $265,500.49. First Union's complaint alleged three counts: (1) an account stated, (2) an open account, and (3) breach of the Margin and Option Agreements. The Miloses...
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