Fryling v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 77-3088

• Decision Date: 27 February 1979
• Docket Number: No. 77-3088,77-3088
• Citation: 593 F.2d 736
• Parties: Fed. Sec. L. Rep. P 96,786 Edgar C. FRYLING and Onie Fryling, Plaintiffs-Appellants, v. MERRILL LYNCH, PIERCE, FENNER & SMITH INC. and William Roebuck, Defendants- Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 736

593 F.2d 736

Fed. Sec. L. Rep. P 96,786

Edgar C. FRYLING and Onie Fryling, Plaintiffs-Appellants, v. MERRILL LYNCH, PIERCE, FENNER & SMITH INC. and William

Roebuck, Defendants- Appellees.

No. 77-3088.

United States Court of Appeals, Sixth Circuit.

Argued Oct. 10, 1978.

Decided Feb. 27, 1979.

Frederick F. Stannard, Scottsdale, Ariz., for plaintiffs-appellants.

David J. Young, Dunbar, Kienzle & Murphey, Columbus, Ohio, for defendants-appellees.

Before LIVELY and ENGEL, Circuit Judges, and PHILLIPS, Senior Circuit Judge.

HARRY PHILLIPS, Senior Circuit Judge.

This appeal involves an effort to invoke federal securities laws to protect an investor from his own unorthodox and high-risk investment philosophy and practices.

Appellants Edgar C. Fryling and Onie Fryling, husband and wife, filed suit against appellees Merrill Lynch, Pierce, Fenner & Smith, Inc. and William Roebuck, an account executive with Merrill Lynch (hereinafter sometimes jointly referred to as Merrill Lynch). The Frylings charged Merrill Lynch and Roebuck with violation of: (1) § 10(b) of the Securities Exchange Act of 1934 (hereinafter the 1934 Act), 15 U.S.C. § 78j(b) and Securities Exchange Commission Rule 10b-5, 17 C.F.R. § 240. 10b-5; (2) § 7 of the 1934 Act, 15 U.S.C. § 78g and Federal Reserve Regulation T, 12 C.F.R. § 220 Et seq.; (3) Art. III, § 2, of the Rules of Fair Practice of the National Association of Securities Dealers (hereinafter NASD); and (4) Rules 402, 431 and 432 of the Board of Governors of the New York Stock Exchange (hereinafter NYSE). The Frylings further alleged a common law breach of fiduciary duty.

Edgar Fryling (hereinafter Fryling) maintained several accounts with Merrill Lynch. The trading activity in an account bearing the name of Onie Fryling, but under her husband's control, is the subject of this suit. Trading volume in the Onie Fryling account was stipulated between the parties and is detailed in the appendix, Infra.

The complaint details three specific acts of appellees that Fryling alleges give rise to liability. In count one, Fryling alleges that he was given inaccurate and incomplete information by appellee Roebuck, his account representative, in response to a question from Fryling regarding the margin requirements for "short" trading in securities. In count two, Fryling alleges he was permitted by appellees to continue "short" trading when there was insufficient equity in his margin account to do so. Fryling's count three allegation is that appellees failed to maintain current and accurate information on his account, failed to provide him with up-to-date account information, and failed to issue promptly a margin maintenance call.

At the close of Fryling's case, the defense moved for a directed verdict. District Judge Joseph P. Kinneary granted the motion as to count one of the complaint. Count two, under Fed.R.Civ.P. 15(b), was bifurcated into two causes of action, one alleging violation of Regulation T, and the other alleging violation of Rule 431 of the NYSE, which was appended to count three. Judge Kinneary thereupon directed a verdict with respect to count two. As to count three, the district judge initially denied the motion for a directed verdict.

Thereafter, Merrill Lynch proceeded with its defense. At the conclusion of all the evidence, and at the invitation of Judge Kinneary, Merrill Lynch renewed its motion for a directed verdict with respect to count three. The district judge granted the motion, holding:

This Court has carefully reconsidered its earlier decision, rendered at the close of the plaintiffs' evidence, denying a directed verdict on count 3 of the complaint. The Court has concluded that its original decision was erroneous. Count 3 does not, as originally determined, state a claim for breach of a fiduciary duty under state law, but rather states a federal claim for breach of Article III, Section 2 of the Rules of Fair Practice of the National Association of Security Dealers and of rule 402, 431 and 432 of the Board of Governors of the New York Stock Exchange.

WHEREUPON, this Court finds that there is no basis for a claim in count 3 of plaintiffs' complaint. Defendants' motion for a directed verdict is meritorious and is accordingly GRANTED. Since this is dispositive of all of the remaining issues in this lawsuit, judgment is hereby rendered in favor of the defendants.

We affirm.

I

Fryling is a successful real estate broker residing in Waverly, Ohio. Beginning with a small investment of $3,000 in 1952, Fryling acquired real estate holdings valued in excess of three quarters of a million dollars. Fryling also is an independent securities investor whose investment acumen is largely self-taught. He began playing the market in 1969 with an initial investment of $5,000. At the time of the trial in the present case, he had accumulated a securities portfolio worth between $150,000 and $200,000.

Fryling established a brokerage relationship with Merrill Lynch in 1970, with Roebuck serving as his account executive. Because of Fryling's independent nature, he used Roebuck mainly as an "order taker." Fryling characterized Roebuck's function accordingly:

A. Mr. Roebuck functioned in two capacities primarily. One was to take orders and the other was to supply fundamental, what I call housekeeping information. I did not rely upon Mr. Roebuck for information as to how big of a commitment I should make or what to commit, what securities to work with.

Mr. Roebuck primarily was an order taker and delighted in taking orders, so he should not object to having been given a large number. (Emphasis added.)

Fryling neither requested nor relied upon investment advice from Roebuck or Merrill Lynch. Rather, he made his own investment decisions. On cross-examination Fryling testified:

Q. With respect to the selection of stocks and commodities, you were looking to those services rather than Merrill Lynch or Mr. Roebuck; weren't you?

A. I did not look to Mr. Roebuck for selection of stocks.

Q. Neither did you look to Mr. Roebuck for a determination of when you should buy stocks; did you?

A. We had discussions on occasions.

Q. But you didn't seek his advice as to when to start a program; did you?

A. No.

Q. You didn't seek his advice as to how much money you should put in the market; did you?

A. No.

The record reflects that Fryling was unorthodox. Appellee's brief describes him as "a maverick who refused to run with the crowd," pursuing a "bizarre and perhaps 'one-of-a-kind' securities investment program." This investment program involved low-cost, high-risk speculative securities which Fryling felt offered him potential for a high rate of return. In a letter to Roebuck dated July 9, 1970, Fryling set forth his investment philosophy:

So like houses. I am interested in going in deeply into stocks. Thirteen years ago I was buying houses right on in this market when EVERYONE WAS LEAVING! They all thought that Fryling had gone CRAZY. Now even some of my most critical detractors are buying. And so, with the market DROPPING like a rock, again I am buying! Of course my fingers were burned HARD by getting in too quick and out at the wrong time. This time I hope my nerves and good fortune HOLD UP. (Emphasis original.)

During 1974, Fryling was trading actively on the "long side" ¹ of the market. The major portion of his investments were high risk, speculative securities. In late 1974, Fryling suffered severe "paper losses" when the stock market turned downward. By the end of that year, however, the market had reversed itself and Fryling's losses became gains, roughly $60,000 in a period of six months ending April 1975.

Concluding the market was about to turn downward, Fryling decided to liquidate his portfolio, take his profits and embark on a different trading program. Initially he turned to commodities, but soon rejected that field, settling instead on a "short selling" ² program. In both his "long side" and "short side" trading Fryling operated on margin. ³

Sometime in April 1975, Fryling telephoned Roebuck to ask him about margin requirements for short trading. While the substance of that conversation is a matter of dispute, Fryling asked a general question regarding the difference in margin rules between short and long trading. Roebuck answered they were the same. Of this telephone conversation, Fryling recalled:

A. The one thing that I was primarily concerned with was there any difference between the long margin program and the short margin program.

Q. As a part of that interest, how did you contact Mr. Roebuck, and when did you contact him?

A. He was contacted by telephone. When? It would have been in a period of April 28th or immediately prior to that.

Q. Specifically what question do you recall did you put to Mr. Roebuck?

A. Is there any difference between long margin and short margin?

Q. Did you explain to him at that time why you were asking that question?

A. No, sir, I didn't feel there was need of any explanation. We had sold short at one time before. We were dealing in various phases in the market, and we were at that time still selling long, the long, we were dealing with commodities, and it was an area in which Mr. Roebuck dealt in quite frequently, so asking the question would not have been anything unusual.

Q. What was his reply to that question?

A. No.

Q. Just no?

A. No, there is no difference between the two.

Roebuck's recollection of the telephone conversation differed from that of Fryling:

Q. In my previous question, in the context of it I used what I understand to be Mr. Fryling's question. I ask you now, what was the question, if you can recall, that Mr. Fryling asked you concerning this subject of difference between long and short margin rules? Do you recall what question he asked you?

A. Fairly clearly, yes. He asked me if the margin for selling short was the same as for buying long, and my response was, yes, generally they are the same.

Q. Was your response, "Yes, the...