Hecht v. Harris, Upham & Co.

• Decision Date: 04 September 1970
• Docket Number: 23017.,No. 22971,22971
• Parties: Bertha HECHT, Plaintiff, Appellee and Appellant, v. HARRIS, UPHAM & CO., a partnership, Harris, Upham & Co., Inc., a corporation, Defendants, Appellants and Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

430 F.2d 1202 (1970)

Bertha HECHT, Plaintiff, Appellee and Appellant, v. HARRIS, UPHAM & CO., a partnership, Harris, Upham & Co., Inc., a corporation, Defendants, Appellants and Appellees.

Nos. 22971, 23017.

United States Court of Appeals, Ninth Circuit.

June 8, 1970.

As Modified on Denial of Rehearing September 4, 1970.

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Emanuel Becker (argued), New York City, Thomas A. H. Hartwell, of Cooley, Crowley, Gaither, Godward, Castro & Huddleson, San Francisco, Cal., E. C. Mahoney, Burlingame, Cal., for appellant.

Donald F. X. Finn (argued), New York City, Reed H. Bement, Morris Lowenthal of Lowenthal & Lowenthal, San Francisco, Cal., for appellees.

Before MERRILL and DUNIWAY, Circuit Judges, and POWELL, District Judge.^*

POWELL,^** District Judge.

The cross appeals by Harris, Upham & Co., Harris, Upham & Co. Inc. (appellants), and Mrs. Bertha Hecht (appellee) are from a judgment of the District Court awarding appellee $504,391.02. The opinion of the District Court is reported at 283 F.Supp. 417 (1968). The basic facts of the case are set forth there.

In January 1955 Mr. Hecht died leaving an estate of securities to his wife, the appellee, of a net value of $508,532.00. Shortly after Mr. Hecht's death, but before distribution of the estate, a close business and social relationship was formed between Mrs. Hecht and an investment broker, Mr. Asa Wilder (co-defendant below). Mrs. Hecht transferred her separate securities account (net value $42,000) from Walston & Co. to Hooker & Fay, with whom Wilder was then employed. When her husband's estate was distributed to Mrs. Hecht it was likewise placed with Hooker & Fay. In May 1957 Wilder left Hooker & Fay to become a Representative and Commodities Manager of Harris, Upham & Co. at their San Francisco office. The Hecht account, valued at about $533,161.00, was then transferred to appellants.

The account remained with Harris, Upham & Co. until March 1964 when Mrs. Hecht's tax consultants advised her that the account was substantially depleted. At that time the account had a net value of about $251,308.00. Suit was later commenced in District Court against Wilder and Harris, Upham & Co. and others for alleged violations of Section 17(a) of the Securities Act of 1933 (15 U.S.C. § 77q(a); Section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78j(b); Rule 10b-5 promulgated by the Commissions; (17 C.F.R. 240.10b-5); and the Commodity Exchange Act of 1936 (7 U.S.C. § 1 et seq.). Appellee also alleged violations of the Rules of the National Association of Securities Dealers and the common law of the State of California. Liability of Harris, Upham & Co. was alleged under Section 20(a) of the Securities Exchange Act (15 U.S.C. § 78t(a)).

Appellee advanced three theories for recovery, (1) the account was fraudulently converted from a blue chip investment account to a low grade speculative securities and commodity trading account, (2) Wilder excessively traded the account for the purpose of generating commissions, and (3) Wilder defrauded appellee by self-dealing in two securities transactions designated as Colonial and Itek. Damages were alleged to be in excess of $1,109,000.

The District Court ruled that Mrs. Hecht was guilty of laches, had waived certain of her rights and was estopped from asserting the wrongful conversion of her account. On the issue of excessive trading, referred to as account churning, the District Court held appellee was entitled to recover all commissions deducted from her account during the period it was with Harris, Upham & Co. and all interest charged to her. Appellee was also awarded damages for the alleged fraud in the Colonial and Itek transactions. A summary of damages awarded is set forth in the District Court's opinion, 283 F.Supp. at p. 444.

JURISDICTION

A District Court has jurisdiction of a private civil action for damages based upon violations of Section 10(b) and Rule 10b-5. Ellis v. Carter, 291 F.2d 270 (9th Cir. 1961); Matheson v. Armbrust, 284 F.2d 670, 673 (9th Cir. 1960); Fratt v. Robinson, 203 F.2d 627, 632 (9th Cir. 1953).

The District Court held that churning¹ was a violation of Section 10(b) and Rule 10b-5. One of the principal Congressional purposes of the Securities Exchange Act is to protect the investor in a highly sophisticated field. With knowledge of this objective "* * it is the duty of the courts to be alert to provide such remedies as are necessary to make effective the congressional purpose." J. I. Case Co. v. Borak, 377 U.S. 426, 433 and 435, 84 S.Ct. 1555, 1560, 12 L.Ed.2d 423 (1964); Deckert v. Independence Shares Corporation, 311 U.S. 282, 288, 61 S.Ct. 229, 85 L.Ed. 189 (1940).

Section 10(b) of the Securities Exchange Act of 1934 and Commission Rule 10b-5 make unlawful the use of any manipulative or deceptive device or contrivance by any person in connection with the sale and purchase of any security upon a national securities exchange or otherwise. Specifically, Rule 10b-5 promulgated by the Commission in 1942 provides in pertinent part that "it shall be unlawful for any person, directly or indirectly, * * * (a) to employ any device, scheme, or artifice to defraud, * * * or (c) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person * *." 17 C.F.R. Sec. 240.10b-5. Abuse of the confidence of the customer for personal gain by a broker by frequent and numerous transactions disproportionate to the size and nature of the account, has been held a violation of Rule 10b-5. Lorenz v. Watson, 258 F.Supp. 724 (E.D.Pa. 1966) extensive trading and churning of a discretionary investment account disproportionate to its size and character; Newkirk v. Hayden, Stone & Co., CCH Fed.Sec.L.Rep. para. 91,621 (S.D. Cal.1965) (churning of a discretionary trading account with an equity of $8,439.65 by a broker who earned $2,722.55 in commissions during a three month period). cf. Carr v. Warner, 137 F.Supp. 611 (D.Mass.1955) and its companion case Nash v. J. Arthur Warner & Co., 137 F.Supp. 615 (D.Mass.1955) (purchase and sale of securities excessive in size and frequency in view of the financial resources and character of the investors' accounts). On occasion this court has sustained the Commission's finding of churning. Irish v. SEC, 367 F.2d 637 (9th Cir. 1966) (broker advancing his own interests to the detriment of his customers by making excessive trades in their accounts). See also, Stevens v. Abbott, Proctor & Paine, 288 F.Supp. 836 (E.D.Virginia 1968) (excessive trading of an account by a broker to derive profits for himself without regard for the interests of his customer); Moscarelli v. Stamm, 288 F.Supp. 453, 457-458 (E.D.N.Y.1968) (alleged unauthorized excessive trading of securities account through broker misrepresentation).

We conclude that the issue of account churning was correctly before the District Court under Section 10(b) and Rule 10b-5.

WAIVER, LACHES AND ESTOPPEL

This Court held in Royal Air Properties, Inc. v. Smith, 312 F.2d 210 (9th Cir. 1962) that since civil liability was judicially implied from violations of Section 10(b), estoppel, waiver and laches should be applicable. It was there stated that "the purpose of the Securities Exchange Act is to protect the innocent investor, not one who loses his innocence and then waits to see how his investment turns out before he decides to invoke the provisions of the Act." 312 F.2d 213-214.

The District Court in the instant case found that:

"All during the course of the account, plaintiff regularly received from Harris, Upham the customary confirmation slips showing each security or commodity transaction as made and requesting immediate notice of any error. She also received from Harris, Upham the customary monthly statements of her account.

It was the practice of Wilder to be in contact with plaintiff by telephone concerning her account almost every morning of the business week, and also to visit her at her home at least weekly and sometimes several times a week. Also, plaintiff would often telephone Wilder at his office during the day.

It was the practice of plaintiff to put her confirmation slips on a table in her home, `separating the buys from the sells\', in order to discuss them with Wilder. After the discussions Wilder would gather up the confirmation slips and statements and take them to his home — although he had duplicates for his own use at the office.

During the period of the account plaintiff had her own income tax accountants with whom she consulted concerning her personal tax deductions. Wilder supplied schedules to these income tax accountants, which indicated plaintiff\'s capital gains and losses arising out of her securities transactions. Plaintiff was also represented on occasion by attorneys — including representation by able and reputable counsel, recommended by Wilder in connection with the distribution of her husband\'s estate." 283 F.Supp. at p. 426.

With these facts in mind the court later concluded:

"Having, with this knowledge and understanding, permitted Wilder and his firm to continue handling the account on this basis in reliance upon her apparent acquiescence for nearly seven years, the Court finds that plaintiff\'s conduct is such that she is barred by estoppel, laches and waiver (within the meaning of the second appeal in Royal Air Properties, Inc. v. Smith, 9 Cir., 333 F.2d 568 (1964)) from suddenly taking the position that such trading of the account in securities and commodities was unsuitable for her needs and objectives, contrary to her instructions and should never have occurred." 283 F.Supp. at pp. 429-430.

The requirements of estoppel are set out in Hampton v. Paramount Pictures Corp., 9 Cir., 279 F.2d 100, 104 (1960):

"Four elements must be present to establish the defense of estoppel: (1) The party to be estopped must know the facts; (2) he must intend that his conduct shall be

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