Gianukos v. Loeb Rhoades & Co., Inc., 86-1203

• Decision Date: 02 June 1987
• Docket Number: No. 86-1203,86-1203
• Citation: 822 F.2d 648
• Parties: Fed. Sec. L. Rep. P 93,274 James GIANUKOS and Pota Gianukos, Plaintiffs-Appellants, v. LOEB RHOADES & CO., INC., a Maryland corporation, and Loeb Rhoades & Co., a partnership, Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 648

822 F.2d 648

Fed. Sec. L. Rep. P 93,274

James GIANUKOS and Pota Gianukos, Plaintiffs-Appellants, v. LOEB RHOADES & CO., INC., a Maryland corporation, and Loeb Rhoades & Co., a partnership, Defendants-Appellees.

No. 86-1203.

United States Court of Appeals Seventh Circuit.

Argued Jan. 6, 1987.

Decided June 2, 1987.

Steven J. Rotunno, Joyce & Kubasiak, P.C., Chicago, Ill., for plaintiffs-appellants.

H. Nicholas Berberian, Neal, Gerber & Eisenberg, Chicago, Ill., for defendants-appellees.

Before WOOD, CUDAHY and RIPPLE, Circuit Judges.

HARLINGTON WOOD, Jr., Circuit Judge.

Plaintiffs, James Gianukos and his mother, Pota Gianukos, were members of a class certified by the district court in a securities fraud case based on the fraud-on-the-market theory, against defendants Loeb Rhoades & Company, Inc. (a corporation) and Loeb Rhoades & Company (a partnership). Following class certification and some discovery, but before trial, the certified class and Loeb Rhoades entered into a settlement agreement. The agreement provided that Loeb Rhoades would pay eligible class members 65% of their net losses, up to an aggregate of $3,000,000. The agreement also provided, however, that Loeb Rhoades could take discovery and assert defenses against any class claimant asserting a loss greater than $50,000. One defense specifically mentioned in the agreement was the defense that the class claimant had primarily relied upon factors other than the integrity of the market in making his stock purchases.

The Gianukoses filed a claim against Loeb Rhoades in excess of $50,000. Loeb Rhoades contested the claim on the defense that the Gianukoses primarily relied upon factors other than the integrity of the market in making their stock purchases. The district judge agreed with Loeb Rhoades and denied the Gianukoses' claim in its entirety. The Gianukoses appeal the district court's denial of their claim against Loeb Rhoades. We affirm.

I. FACTUAL BACKGROUND

In 1982 Wayne Healy filed a securities fraud suit against Loeb Rhoades, a registered securities broker. Healy claimed, for himself and on behalf of a class of other stock purchasers, that Jack Bernhardt, a registered representative of Loeb Rhoades working out of the Chicago office, engaged in a fraudulent scheme to artificially inflate and maintain the price and trading volume of the stock of Olympia Brewing Company from June 1975 to April 1977. Healy alleged that Bernhardt accomplished this fraud in two ways. First, Bernhardt allegedly traded Olympia's stock among customers' accounts at Loeb Rhoades, creating an illusion of market activity in Olympia's stock. And second, Bernhardt allegedly misrepresented to Loeb Rhoades's customers that Olympia was the target of an attempted takeover by a foreign company.

James Gianukos and his mother Pota Gianukos purchased Olympia's stock during the relevant time frame. According to them, they followed their typical pattern of buying stocks based on market information when they purchased Olympia's stock. According to Loeb Rhoades, however, the Gianukoses' purchases of Olympia's stock were atypical--Loeb Rhoades contends the purchases were primarily motivated by the receipt of "inside information" released by Bernhardt, a factor other than the integrity of the market.

A. The Gianukoses' Story

James Gianukos was a lawyer, but he did not practice much law. Instead, he managed his family's restaurant business and made investments for himself and his mother, Pota Gianukos. For many years Mr. Gianukos had purchased and sold securities. He typically learned of potential investments by reading the financial press. Once he identified a potential investment, Mr. Gianukos would follow the price of the stock for a period of time and further investigate the investment by reading other financial publications. If he was favorably impressed, Mr. Gianukos would discuss the potential investment with his mother. Mrs. Gianukos sometimes accepted and sometimes rejected her son's investment recommendations.

Mr. Gianukos contends he followed this pattern of investigation before buying Olympia's stock. In late November or early December of 1976, Mr. Gianukos testified, he read about Olympia's acquisition of Lone Star Brewing Company. After becoming interested in Olympia's stock, Mr. Gianukos followed Olympia's price and trading volume, both of which were rising. He also testified he reviewed financial literature on Olympia, which opined that Olympia was a strong company with good future prospects.

On January 5, 1977, Mr. Gianukos purchased 1000 shares of Olympia through one broker and 1000 shares through another. Olympia's price rose slightly and two days later Mr. Gianukos bought 1300 additional shares of Olympia and his mother bought 700 shares. Olympia's price continued to rise and Mr. Gianukos made additional purchases of Olympia in January and again in March. On March 7th or 8th, however, Olympia's price dropped sharply. Mr. Gianukos sold 1000 shares of Olympia on March 8th. Later that day, however, Olympia's price rebounded to some degree and Mr. Gianukos repurchased the 1000 shares he had sold, plus an additional 100 shares. The following day, March 9th, Mr. Gianukos bought another 1000 shares. The Gianukoses' total investment in Olympia at this point amounted to $500,000, the largest single investment the Gianukoses had ever made.

But then Olympia's price dropped again. By the time the market in Olympia's stock stabilized, the Gianukoses had lost $238,000 of their original $500,000 investment. They contend this loss was caused by their reliance on the market, which unbeknownst to them had been manipulated by Bernhardt.

B. Loeb Rhoades's Story

Loeb Rhoades, on the other hand, paints a very different picture of the Gianukoses' investments in Olympia's stock. This is a group portrait, Loeb Rhoades argues, of the Gianukoses' long-standing church acquaintances, business associates, and relatives passing Bernhardt's "inside information" about a potential takeover to make a killing in the market.

The Gianukoses were members of the St. Andrews Greek Orthodox Church in Chicago. Through St. Andrews, they had been acquainted for thirty to thirty-five years with the Papas family. Francis Papas was the mother of the family and a friend of Pota Gianukos's. Her three sons, Andrew, John, and Patrick, and her uncle, William Valos, and her son Andrew's father-in-law, A.T. Tsoumas, were the other members of the Papas family. Patrick Papas, like Mr. Gianukos, was engaged in the restaurant business.

Mr. Gianukos's law partner during this time was Peter Karas. Another one of Mr. Gianukos's acquaintances, Dr. Michael Jerva, had known Mr. Gianukos for ten or fifteen years.

Mr. Gianukos's brother-in-law, James Spirrison, was a neighbor of Bernhardt's and had known the Papas brothers for more than twenty years. Mr. Spirrison was also a neighbor of John Marks in the early 1970s. John Marks was acquainted with the Gianukoses through St. Andrews and had known them for thirty to thirty-five years.

On December 30, 1976, Bernhardt, the Loeb Rhoades representative, called Andrew Papas. Bernhardt told Papas that "big things" were happening with Olympia and that he would call Papas later when he returned from a trip to Germany.

Four days later, on January 3, 1977, Bernhardt called Papas again and told him the trip to Germany had been successful. Bernhardt asked Papas if he could raise "megabucks." The following day, January 4th, Bernhardt and Papas met at a restaurant. Bernhardt told Papas that a German company would take a substantial position in Olympia's stock within two weeks. Papas and Bernhardt met at the restaurant again the next day, January 5th. Papas gave Bernhardt two checks totalling over $560,000 in partial payment for 107,000 shares of Olympia's stock. Papas then went to see his father-in-law, A.T. Tsoumas, to discuss the impending takeover. Papas also called his mother's uncle, William Valos, to relay the same information about the takeover.

That same day, the Gianukoses made their initial purchase of 2000 shares of Olympia's stock. Half of this purchase was made through Mr. Gianukos's brother-in-law, James Spirrison. Peter Karas, Mr. Gianukos's law partner, also made his initial purchase of Olympia's stock on this day.

The following day, January 6th, various members of the Papas family infused a Papas family partnership with cash to finance the acquisition of Olympia's stock. Two members of the family, Patrick Papas and A.T. Tsoumas, met with Bernhardt at a restaurant. Bernhardt repeated to them his story of a German company's interest in acquiring Olympia.

The next day, January 7th, Andrew Papas met again with Bernhardt to deliver four checks totalling $1.9 million to cover the Papas's family purchases of Olympia's stock. That same day the Gianukoses bought 2000 more shares of Olympia and Mr. Gianukos's law partner, Peter Karas, bought another 500 shares.

The day following, January 8th, Andrew Papas discussed with other acquaintances, at the residence of his mother's uncle, William Valos, a potential takeover of Olympia. Two days later, Andrew Papas, his brother Patrick, his mother's uncle William Valos, Bernhardt, and others met to discuss a takeover of Olympia by Oetker, a German brewing company.

The next day, January 11th, after having a conversation with John Papas about the takeover, John Marks bought 500 shares of Olympia. Between this day and January 14th, four days total, the Gianukoses bought another 3000 shares of Olympia through Spirrison.

At some point during this time, Dr. Michael Jerva, a friend of Mr. Gianukos's for ten to fifteen years, bought Olympia's stock on Mr. Gianukos's recommendation. Dr. Jerva did not recall whether Mr. Gianukos mentioned the takeover. But when Dr. Jerva bought Olympia's stock on Mr. Gianukos's advice, he had to open a brokerage account with Mr. Gianukos's brother-in-law, James Spirrison, because Dr....