Henricksen v. Henricksen

• Decision Date: 06 February 1981
• Docket Number: 80-1584,Nos. 80-1488,s. 80-1488
• Citation: 640 F.2d 880
• Parties: Fed. Sec. L. Rep. P 97,859 Wendee HENRICKSEN, Plaintiff-Appellant, v. George HENRICKSEN and Smith Barney, Harris, Upham & Co., Inc., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 880

640 F.2d 880

Fed. Sec. L. Rep. P 97,859

Wendee HENRICKSEN, Plaintiff-Appellant, v. George HENRICKSEN and Smith Barney, Harris, Upham & Co Inc., Defendants-Appellees.

Nos. 80-1488, 80-1584.

United States Court of Appeals Seventh Circuit.

Argued Nov. 7, 1980.

Decided Feb. 6, 1981.

Bruce C. O'Neill, Milwaukee, Wis., for plaintiff-appellant.

W. Stuart Parsons, Quarles & Brady, Milwaukee, Wis., for defendants-appellees.

Before CUMMINGS and WOOD, Circuit Judges, and CAMPBELL, Senior District Judge. ^*

CUMMINGS, Circuit Judge.

Plaintiff Wendee Henricksen (Wendee) brought this securities fraud action against her former husband, George Henricksen (George), a registered stockbroker, and his former employer, the investment firm of Smith Barney, Harris, Upham & Co., Inc. (Smith Barney). After a bench trial, the district court found George liable to Wendee in the amount of $88,921.22 plus interest and costs for conversion and fraudulent mismanagement of Wendee's account at Smith Barney. The court further found George and Smith Barney jointly and severally liable in the amount of $21,754.65 plus interest for commissions and margin expenses generated during George's mismanagement of the account. Wendee appeals from that portion of the judgment denying recovery against Smith Barney for the $88,921.22 plus interest and costs she lost through George's unlawful conduct. Smith Barney cross-appeals from the $21,754.65 judgment against it. We conclude that the district court erred in not finding Smith Barney liable for the total damages Wendee suffered and therefore reverse in part and affirm in part.

I

George and Wendee were married in August 1969. In 1970, the couple moved to Milwaukee, Wisconsin, where George went to work as a stockbroker at Smith Barney. ¹ Wendee was employed as a third grade schoolteacher, but left teaching in 1973 when the couple's daughter was born.

At George's request, Wendee opened three discretionary accounts at Smith Barney a regular account, an option account and a margin account in June 1972, November 1975 and January 1976 respectively. A discretionary account is one in which the broker in this case, the client's husband is given discretion to conduct transactions without the client's prior approval. Accordingly, Wendee executed two powers of attorney, in June 1972 and November 1975 respectively, giving George complete discretion over the management of her Smith Barney accounts. According to the testimony at trial, Wendee had no interest in the details of her financial matters, did not understand the nature of option or margin trading, and never read any of the documents George gave her to sign in connection with the accounts.

A new account form filled out in June 1972 in accordance with the New York Stock Exchange "Know Your Customer" Rule listed Wendee's investment objective as "long-term growth of capital income secondary," the second most conservative investment objective listed on the form. ² As required by Smith Barney's internal rules, an option client information sheet and an option client approval sheet were prepared in connection with the opening of Wendee's option account. The option client information sheet, prepared and signed by George, indicated that Wendee's investment objective was "growth" as opposed to "income" or "speculation" and that the only type of option transaction anticipated was "covered writing." ³ The option client approval sheet, signed by the branch manager of Smith Barney's Milwaukee office, a registered options principal, and a member of Smith Barney's New York compliance section, stated that Wendee's was a discretionary account and that it was "Approved for covered writing transactions only" (Tr. 284). The option client information sheet prepared by George also indicated that Wendee's option account was a single, not a joint, account; that the client was a 28-year-old housewife with an annual income of $5,000 or less, a net worth of "100,000-250,000" and net assets of $123,000; and that her husband's annual income was $30,000.

The Smith Barney Compliance Manual provided that each order in a discretionary account had to be approved by the branch manager prior to the entry of the order, that the New York compliance section had to make a daily and monthly review of all discretionary account transactions, and that such approvals and reviews were to be made in light of the client's investment objectives. The Compliance Manual also provided that option transactions were to be approved only for clients having at least a $20,000 annual income and $20,000 of investment assets and then only for the categories of option trading approved on the option client approval sheet.

With the exception of one transaction not relevant here, Wendee's accounts were inactive until January 1976. In that month, Wendee received a distribution from a family trust and deposited it in her regular account at Smith Barney. The distribution consisted of 822 non-saleable voting certificate shares in Badger Meter Company, "blue-chip" securities with a market value of $97,814, and $8,000 in cash, which was immediately used to purchase another "blue-chip" stock. The value of Wendee's portfolio in January 1976, including some stock already in the account and not including the Badger Meter voting certificates, was $105,814. Wendee had an express agreement with George that her capital was to be preserved and ultimately used for the education and life needs of the couple's daughter.

In February 1976, George arranged to have the address on Wendee's accounts changed from the couple's home to Smith Barney. Thereafter, all monthly statements, confirmation slips and checks issued out of the account were received by George at his office. Smith Barney's Compliance Manual required that a client's change of address should be "carefully reviewed" and that a letter confirming the requested change of address should be mailed to the client at the old address. Although Smith Barney had no record of a written change of address request on the accounts, Milwaukee Branch Manager Richard Vermillion testified that it was his belief that George had filed such a written change of address request. No letter confirming the requested change was ever sent by Smith Barney to Wendee at her home address.

In October 1976, George and Wendee separated because of marital problems due apparently in part to George's involvement with a group of friends who engaged in gambling and heavy drinking. Although the couple initially hoped to reconcile, Wendee filed a divorce action in the spring of 1977. They were divorced in 1978.

Despite George's problems and their marital difficulties, Wendee left her investment arrangement unchanged because she retained "100% faith" in George as her broker; because the account was supervised by other Smith Barney personnel, including Branch Manager Richard Vermillion, a personal friend of Wendee's parents; and because she believed that having her investments at Smith Barney was "like having money in a bank." Vermillion and his successor Leonard Walsh, testified that they were aware of George's marital problems and of his gambling activities. ⁴ Vermillion on several occasions in 1976 spoke with George about his gambling and told him to stop it. Vermillion also testified that he knew Wendee relied totally on George to manage her accounts. Both Vermillion and Walsh knew that Wendee was not receiving any written information on the accounts from Smith Barney after January 1976.

Starting in February 1976, after the change of address on the account and before their separation, George began to sell off Wendee's "blue-chip" securities. Between then and October 1977, George ordered 17 Smith Barney checks totalling $54,798.57, derived from the sales and payable to Wendee, to be drawn on Wendee's Smith Barney account but delivered to him. Another Smith Barney check for $558.40 was issued on January 20, 1976, before the address on the account was changed, bringing the total to $55,356.91. Wendee never knew of the sales transactions nor saw any of the checks, although a facsimile of her signature appeared on each of them. Checks totalling $43,825.57 were deposited in the couple's joint savings account and within a few days of each deposit an amount approximately equal to the deposit was withdrawn by George. The remaining converted $11,531.34 did not pass through the savings account. Wendee testified that she did not know that the joint savings account was still in existence.

Smith Barney's internal rules prohibit any stockbroker from receiving a check for delivery to a client unless the branch manager approves the delivery and makes a written record of the circumstances requiring delivery to the stockbroker. No such written records were produced at trial, but Vermillion and Walsh testified that between them they had approved all 17 checks delivered to George. Vermillion testified that George had told him that he was liquidating Wendee's securities because he did not like the market and that it was more convenient for him to receive the checks at the office as they were to be deposited in a bank in the same building as the Smith Barney office. Walsh testified that he never asked, and George never told him, why George was withdrawing the cash.

During the same period of time, George activated Wendee's option and margin accounts. Between July 1976 and February 1977, the outstanding loan balance in the margin account ranged from a high of $71,180 in August of 1976 to a low of $45,480 in October 1976, and in February 1977 stood at $60,280. In that month, George began purchasing calls, a form of option trading which the district court found was inconsistent with the option client approval sheet on Wendee's account and unsuitable in terms of Wendee's recorded investment objectives. How these transactions were approved by Smith Barney's branch manager and the New York compliance section will be...