Hayden, Stone Inc. v. Brown, 1155

• Decision Date: 14 January 1969
• Docket Number: No. 1155,1155
• Citation: 218 So.2d 230
• Parties: HAYDEN, STONE INCORPORATED and Robert D. Bowen, Appellants, v. Robert L. BROWN, Appellee.
• Court: Florida District Court of Appeals

Page 230

218 So.2d 230

32 A.L.R.3d 623

HAYDEN, STONE INCORPORATED and Robert D. Bowen, Appellants, v. Robert L. BROWN, Appellee.

No. 1155.

District Court of Appeal of Florida, Fourth District.

Jan. 14, 1969.

Rehearing Denied Feb. 21, 1969.

Cromwell A. Anderson of Smathers & Thompson, Miami, for appellants.

H. J. Frazier, of Patterson, Maloney & Frazier, Fort Lauderdale, for appellee.

OWEN, Judge.

Appellants are a stock brokerage firm and its registered representative. Appellee Brown, plaintiff below, was a customer of appellants and sought to recover damages for the alleged improper handling of his account. Although the amended complaint was in five counts, we are concerned only with COUNT II, alleging that Bowen, while in the course and scope of his employment on behalf of the brokerage firm, wrongfully engaged the account in excessive trading in volatile and speculative securities, and COUNT III, alleging that Bowen improperly placed an order to purchase certain securities known as Salem-Brosius. The case was tried before the court without a jury resulting in the court finding in favor of appellee, determining his damages under COUNT II to be the sum of $22,825.78, and his damages under COUNT III to be the sum of $33,818.42, and awarding judgment against the defendants jointly and severally for the total sum of $56,644.20.

There were conflicts in the testimony on many matters, but the essential facts are set forth most favorably to the appellee (with one exception which is expressly noted and explained in footnotes). Appellee Brown was a 47-year old college graduate with no dependents. He had been successfully engaged in various business enterprises and at the time he met appellant Bowen, had just completed constructing a cooperative apartment. Bowen had rented one of Brown's apartments following which they had met socially. At that time Bowen was a registered representative of Hayden, Stone Incorporated, and although he had limited experience in the stock market, he held himself out to the plaintiff as a competent, qualified stock broker. Brown, who had no prior experience in the stock market, became interested in Bowen's business and asked Bowen for his impression of stocks which Brown had inherited from his mother and which had a value of approximately $12,000.00. These securities consisted of stock in utilities, insurance companies and banks, yielding approximately 2 or 3% Annual dividends. Bowen was unenthusiastic about these stocks, but spoke very enthusiastically about other stocks which he thought were 'going up' and which would yield Brown a much better return. Bowen thereupon convinced Brown to open a trading account with Hayden, Stone Incorporated.

Bowen made a limited inquiry as to appellee's financial resources, investment requirements and objectives. He ascertained that Brown's net worth was approximately $100,000.00, of which the inherited stocks and approximately $30,000.00 in cash were available for placing in the account, and that Brown wanted to earn approximately 10% Return on his money and at the same time keep the funds as liquid as possible in anticipation of starting another cooperative apartment building. Although Brown was inexperienced in the stock market, he understood that his expectations of making a return at such a rate would be accomplished through active trading in the account rather than through expectation of dividends or long-term appreciation.

The account was opened as a cash account in May, 1963, and certain securities purchased on the recommendation of Bowen. In approximately one month a portion of these securities were sold at a loss of a few hundred dollars and on the recommendation of Bowen other securities were purchased. Thereafter Bowen made more recommendations and more stock was purchased and sold shortly thereafter. Brown placed with Hayden, Stone the stock which he had inherited. It was sold, the proceeds placed in his account upon the recommendation of Bowen, and the account changed to a margin account. From that time on the transactions in the account became increasingly more frequent, with most of the transactions being reversed within a period of one month and many within a matter of a day or two. Although Brown's maximum cash invested at any one time was $35,000.00, there was one day when the transactions in the account were in excess of $165,000.00. Up to the time of the Salem-Brosius transaction in October, 1964, there were nine separate occasions when a single purchase of securities was in excess of $35,000.00. Nearly all of the securities involved in the transactions were considered speculative or volatile stocks and some of the transactions involved day trading in such. Brown traded in volatile stocks with the intent of selling as soon as he could do so at a profit. When Hayden, Stone ceased trading one such stock because it was too volatile, Bowen arranged for Brown to continue trading in such stock with Walston & Co., (through which firm Brown lost approximately $9,000.00). Although nearly all of the transactions in the account were made on the recommendation of Bowen, no transaction was made without the approval of Brown. Sometimes Brown rejected Bowen's recommendations and toward the last Brown solicited the advice of others employed in the office. During the eighteen months up to the fateful day of the Salem-Brosius transaction, there was a total of 335 transactions in the account (exclusive of 26 transactions made by Bowen for his own purposes) involving purchases and sales in an aggregate amount in excess of $3,000,000.00. On these transactions appellants earned $22,898.05 in commission.

Brown received the customary confirmation slips on each transaction and received monthly statements of his account from Hayden, Stone Incorporated. These confirmation slips and monthly statements accurately set forth the complete details of Joseph F. McDermott, Asst. Public Defender, of commission charged on each transaction. At no time did Brown ever make known any objection to the size or frequency of the transactions, or to the commissions being charged by the appellants. As his account became more and more active, Brown spent more and more of his time in the firm's office watching the reported activities of the stock market. Although Brown appeared to grasp the terminology of the market, he continued to repose complete trust and confidence in Bowen and to rely almost entirely on his recommendations, suggestions and advice concerning the type of stock to purchase, the amount to purchase and the time and price at which to sell. For approximately 18 months this arrangement continued blithely along with no apparent dissatisfaction on the part of Brown. During this time there was a lack of supervision or reasonable inquiry into the account on the part of any of Bowen's superiors.

The catastrophic effects of the Salem-Brosius transaction abruptly shattered what was apparently a satisfactory arrangement to all concerned. On Friday, October 9, 1964, some rather violent activity was observed in Salem-Brosius and Brown attempted to purchase 500 shares but the market closed before the transaction could be made. At that time the stock was trading at approximately 6 and there were indications that it would open substantially higher the following Monday and Brown anticipated that its momentum would carry it up several points thereafter. Contemplating the matter over the weekend, Brown decided to place an order for 5,000 shares at 10 1/4 when the market opened on Monday, October 12, 1964. He did place the order with Bowen the first thing Monday morning. The stock did not open at the regularly scheduled time and prior to the opening, announcements were made which stated that the stock would open at a price higher than 10 1/4. Brown, realizing that he would not get the stock on the basis of his earlier order, entered an order to purchase 5,000 shares 'at the market'. The market on Salem-Brosius opened at 11 3/8 at which time his order of 5,000 shares 'at the market' was executed. Shortly after opening the stock fell, and when it reached 10 1/4 Brown's earlier order for 5,000 shares at that price was also executed. Brown insisted that he had placed the order for 5,000 shares at 10 1/4 'on the opening' which entered postjudgment order fixing amount required automatic cancellation of the order when the stock opened at a higher price. Bowen testified that the order for 5,000 shares at 10 1/4 had not been restricted in such manner, and that Brown had actually wanted a total of 10,000 shares; that Bowen had tried to dissuade him from purchasing this much since it involved a purchase in excess of Brown's ability to pay; and that he ultimately obtained Brown's approval to cancel the order at 10 1/4 but the cancellation went in too late. After the market opened on that day and Brown was aware that his order of 5,000 shares 'at the market' had been executed at 11 3/8, he placed an order to sell in lots of 1,000 shares beginning at 12 5/8 and staggered upward in fractional increases. Neither on the day in question nor at any time thereafter did the stock ever reach 12 5/8. Shortly before the market closed on the day in question Brown became aware of the fact that 10,000 shares had been purchased for his account, concerning which he testified as follows:

'Q All right.

'Approximately what time in the afternoon do you believe that you were the owner of 10,000 shares?

'A That was very late in the afternoon. That is late in the trading time. It was just prior to the close. Now, that might have been a half hour or it might have been an hour before the close of the market for that day.

'Q All right.

'Now, did you have any discussion when you at least believed you had 10,000 shares with Mr. Bowen?

'A Yes. Mr. Bowen was as upset as I was about that. And we tried to find out why I got 10,000 shares instead of 5,000 shares. I think he sent wires or something back, trying to...