Hatrock v. Edward D. Jones & Co.

• Decision Date: 28 December 1984
• Docket Number: 83-4190 and 83-4233,Nos. 83-4182,s. 83-4182
• Citation: 750 F.2d 767
• Parties: Blue Sky L. Rep. P 72,170, Fed. Sec. L. Rep. P 91,920 John H. HATROCK, Jr. and Beverly J. Hatrock, husband and wife, Plaintiffs/Appellees/Cross-Appellants, v. EDWARD D. JONES & CO., and Jack Daugherty, Defendants/Appellants/Cross- Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 767

750 F.2d 767

Blue Sky L. Rep. P 72,170, Fed. Sec. L. Rep. P 91,920

John H. HATROCK, Jr. and Beverly J. Hatrock, husband and wife, Plaintiffs/Appellees/Cross-Appellants, v. EDWARD D. JONES & CO., and Jack Daugherty Defendants/Appellants/Cross- Appellees.

Nos. 83-4182, 83-4190 and 83-4233.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Oct. 3, 1984.

Decided Dec. 28, 1984.

Scott W. Reed, Coeur d'Alene, Idaho, for plaintiffs, appellees, cross-appellants.

Richard A. Riley, Eberle, Berlin, Kading, Turnbow & Gillespie, Kaye Riordan, Elam, Burke, Evans, Boyd & Koontz, Boise, Idaho, for defendants, appellants, cross-appellees.

Appeal from the United States District Court for the District of Idaho.

Before CHOY, TANG and SCHROEDER, Circuit Judges.

CHOY, Circuit Judge:

The district court entered judgment upon a jury verdict for the plaintiffs for violating federal securities law and state securities law and common law, and allowed attorneys' fees against one of the defendants. We affirm.

I. BACKGROUND

John and Beverly Hatrock were a young couple with little prior experience in the stock market. Edward D. Jones & Company ("Jones") was a midwest brokerage firm located in Maryland Heights, Missouri. The company identified itself as a "country broker" with a conservative philosophy. It had 530 offices in 32 states, most of which were operated by a single broker. In 1977, Jack Daugherty took over one of those single-broker offices in Coeur d'Alene, Idaho.

Around July 1978, the Hatrocks began talking to Daugherty about the purchase of stocks. On February 2, 1979, the Hatrocks opened an account with Jones. During 1979, the Hatrocks purchased and sold various securities, but got out of the market completely when they "got real nervous" about price fluctuations.

On August 14, 1980, Daugherty told John Hatrock that Daugherty's "good friend" had advised him that El Paso Company, selling at $21 per share at the time, would be taken over within a month for $32 per share. Daugherty indicated that "the papers were all signed" and that his source invested in the company. On August 15, 1984, Daugherty placed the Hatrocks' order for 4,000 shares of El Paso at $21 per share. The Hatrocks paid cash for 2,000 shares and purchased another 2,000 on margin. To finance the purchase, the Hatrocks obtained a 120-day loan for $42,499.

On August 26, 1980, Daugherty told the Hatrocks that his source had informed him that Hoover Company, selling for $17 per share at the time, was going to be taken over at $26 per share. The Hatrocks purchased 600 shares of Hoover stock on margin for $10,350. Daugherty later advised the Hatrocks to sell Hoover and buy more El Paso. The Hatrocks sold their 600 shares of Hoover and purchased another 600 shares of El Paso, investing an additional $1,888.

On October 22, 1980, Daugherty told John Hatrock that, according to his source, the pending presidential election had stalled the El Paso buyout, and advised Hatrock to sell the El Paso stock. After the Hatrocks sold their 4,600 shares of El Paso, they had about $113,000 in their account.

A few days after the election, Daugherty told John Hatrock that the El Paso takeover would be back on track with the Reagan Administration coming in. On November 6, 1980, the Hatrocks purchased 4,500 shares of El Paso stock at $24 1/4 per share.

On November 11, 1980, Daugherty informed the Hatrocks that the Hoover takeover had been finalized and was going to be announced after the close of business on Friday, November 14. John Hatrock authorized the sale of the 4,500 shares of El Paso at a $4,700 loss, and the purchase of 6,500 shares of Hoover at $16 3/4 per share. A few days later, Daugherty told the Hatrocks that the takeover had not occurred because one of the Hoover family members had objected to the price. As the price of Hoover stock slid downward, Daugherty gave the Hatrocks further assurances of a takeover. In December 1980 the Hatrocks had to refinance their loan at 14 1/2%.

Jones sent out margin calls, and as a result sold 1,300 shares of the Hatrocks' Hoover stock, leaving them with 5,200 shares with a gross value of $65,972.

The Hatrocks filed this action in the United States District Court for the District of Idaho to recover damages under federal and state securities laws, and under the Idaho common law of fraud and misrepresentation. A jury returned a verdict for the Hatrocks against Daugherty and Jones for $36,880 compensatory damages, together with punitive damages of $50,000 against Daugherty and $200,000 against Jones. The district court entered judgment upon the verdict and allowed $12,293.33 attorneys' fees under the state securities laws against Daugherty, but not against Jones. The district court denied the defendants' motions for judgment notwithstanding the verdict and for a new trial.

II. DISCUSSION

A. Jones' Appeal.

1. Punitive Damages.

Jones challenges the jury's finding in Special Verdict No. 7 that the Hatrocks met their burden of proof "[i]n regard to Defendant Edward D. Jones & Co.'s liability for punitive or exemplary damages under plaintiffs' third claim based upon fraudulent misrepresentations."

a. Substantial Evidence to Support Punitive Damages.

Jones first argues that "the record contains no substantial evidence supporting an award of punitive damages against Jones, as principal, for the acts of Daugherty, its agent."

The Hatrocks may not recover punitive damages for Jones' violation of the Securities Exchange Act of 1934, see Byrnes v. Faulkner, Dawkins & Sullivan, 550 F.2d 1303, 1313 (2d Cir.1977), or for its violation of the Securities Act of 1933. See Hill York Corp. v. American International Franchises, Inc., 448 F.2d 680, 697 (5th Cir.1971). Under Idaho common law, however, a principal may be liable for punitive damages for the acts of its agent upon "a clear showing that the agent had managerial status or that the principal ordered or ratified the acts in question." Hatfield v. Max Rouse & Sons Northwest, 100 Idaho 840, 853, 606 P.2d 944, 957 (1980) (citations omitted); see Barlow v. International Harvester Co., 95 Idaho 881, 897-98, 522 P.2d 1102, 1118-19 (1974); Openshaw v. Oregon Automobile Insurance Co., 94 Idaho 335, 338, 487 P.2d 929, 932 (1971). The burden of making the showing rests on the plaintiff. Hatfield, 100 Idaho at 854, 606 P.2d at 958. Idaho courts allow punitive damage awards "to deter owners and managing officers from tolerating misconduct by employees." Boise Dodge, Inc. v. Clark, 92 Idaho 902, 906, 453 P.2d 551, 555 (1969) (quoting Note, Exemplary Damages in the Law of Torts, 70 Harv.L.Rev. 517, 526 (1957)).

The district court modeled its punitive damages instruction after the Restatement (Second) of Torts Sec. 909 (1977). Section 909 states:

Punitive damages can properly be awarded against a master or other principal because of an act by an agent if, but only if, (a) the principal or a managerial agent authorized the doing and the manner of the act, or (b) the agent was unfit and the principal or a managerial agent was reckless in employing or retaining him, or (c) the agent was employed in a managerial capacity and was acting in the scope of employment, or (d) the principal or a managerial agent of the principal ratified or approved the act.

The Supreme Court of Idaho has cited this section with approval. See Hatfield, 100 Idaho at 854, 606 P.2d at 958; Barlow, 95 Idaho at 898, 522 P.2d at 1119; Openshaw, 94 Idaho at 338, 487 P.2d at 932.

Following these rules and Restatement principles, the district court properly instructed the jury that:

Punitive damages can properly be awarded against Defendant Edward D. Jones & Co. as principal because of an act or acts of Defendant Daugherty as made known to plaintiff if, and only if:

1. Edward D. Jones & Co. authorized the doing and the manner of the act; or

2. Defendant Daugherty was unfit and Defendant Edward D. Jones was reckless in employing him; or

3. Defendant Daugherty was employed in a managerial capacity and was acting in the scope of his employment; or

4. Edward D. Jones & Co., or a managerial agent of Edward D. Jones & Co., ratified or approved the act.

We affirm the jury's award of punitive damages because there was substantial evidence that Jones employed Daugherty in a managerial capacity and that Daugherty acted in the scope of his employment. ¹ Although Daugherty was only a limited partner in Jones and was not licensed as a branch manager, Daugherty had management authority. Jones identified Daugherty as a branch manager. With the knowledge and approval of Jones Daugherty held himself out to the public as a manager.

Moreover, in practice, Jones required Daugherty to take a management role. Jones had more than 500 field offices typically operated by a single broker. Jones gave each broker occupying these offices complete authority to act in a managerial capacity in all matters relating to dealings with customers.

Jones, therefore, in effect authorized Daugherty to conduct business as branch manager. The jury properly assessed punitive damages against Jones for the fraudulent misrepresentations of its de facto manager, Daugherty. See Barlow v. International Harvester Co., 95 Idaho 881, 898, 522 P.2d 1102, 1119 (1974). The punitive damages will deter Jones and those similarly situated from placing unqualified individuals in management positions, and would encourage closer control over employees. See Boise Dodge, 92 Idaho at 906, 453 P.2d at 555; Restatement (Second) of Torts Sec. 909, comment b. (1977).

b. Jones' Good Faith Defense.

Jones argues that as a matter of Idaho law, good faith precludes any punitive damage award against it based on inadequate supervision. It argues that the Idaho "controlling person" statute permits a good faith defense, and that the jury's Special Verdict No. 3 necessarily includes a finding that Jones acted in good faith.

The district court properly rejected this...