Jaksich v. Thomson McKinnon Securities, Inc.

Decision Date10 February 1984
Docket NumberNo. 81 Civ. 7675 (IBC).,81 Civ. 7675 (IBC).
Citation582 F. Supp. 485
PartiesMary Louise JAKSICH, Plaintiff, v. THOMSON McKINNON SECURITIES, INC., and Lester Kuznetz, Defendants.
CourtU.S. District Court — Southern District of New York

COPYRIGHT MATERIAL OMITTED

Gruen, Muskin & Thau, New York City, for plaintiff; Victor Muskin, New York City, of counsel.

Hall, McNicol, Hamilton, Clark & Murray, New York City, for defendants; Edward J. Boyle, Ronald S. Herzog, New York City, of counsel.

OPINION

IRVING BEN COOPER, District Judge.

The plaintiff in this action is a medical marketing researcher who began investing money in the stock market in 1979 or 1980. Defendant Thomson McKinnon Securities, Inc. ("Thomson") is a securities firm and broker-dealer registered with the Securities and Exchange Commission and is a member of the New York and American Stock Exchanges, the National Association of Securities Dealers ("NASD") and other broker-dealer organizations. Plaintiff had maintained a margin account1 with the Nanuet, New York office of Thomson from August 1980 until February 1981 when her account was liquidated. The particular broker with whom she dealt was defendant Lester Kuznetz, an employed, registered representative of Thomson at all relevant times.

Plaintiff commenced this action for damages in December 1981 alleging that the manner in which her account had been handled by Kuznetz and Thomson violated section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b) ("SEA"); Rules 10b-5 and 10b-16 promulgated under section 10(b); Regulation T, 12 C.F.R. § 220; Rule 405 of the New York Stock Exchange ("NYSE"); Article III, section 2 of the NASD Rules of Fair Practice; and the common law. Defendants counter-claimed for the unsecured debit balance in plaintiff's account when it was liquidated.

The trial to the Court was bifurcated, the issue of liability to be determined first; damages reserved pending our instant determination. Upon all the evidence adduced before us, we adopt plaintiff's findings of fact in their entirety and reject all conflicting findings of fact proposed by defendants.

Findings of Fact

After inheriting some stocks upon her mother's death, plaintiff opened a brokerage account with Haas Securities ("Haas") in 1979 or 1980, a discount brokerage house in New York City. Through that account, plaintiff purchased a total of six stocks at different times. She maintained a cash account and a margin account at Haas although she did not fully understand how the latter operated. (Tr. 122)2

Haas Securities bought and sold stocks but did not offer investment advice. In July of 1980, plaintiff concluded she needed guidance on her investments since, as she testified, "I had suffered some losses from a divorce and I wanted guidance to try and reestablish those legal fees, and ... my fiance and I were contemplating buying a house, and ... the money would eventually be needed for closing of that residence." (Tr. 17)

Defendant Kuznetz was recommended to plaintiff and her then fiance (now husband), William Durkin, by a friend of Durkin's named Tom Piconi. On July 2, 1980, Durkin met with Kuznetz and Piconi to discuss the possibility of transferring plaintiff's account to Thomson. Durkin related plaintiff's dissatisfaction with the limited scope of business activities, especially the total absence of investment advice, at Haas and the reasons why plaintiff wanted expert guidance in the purchase and sale of securities. He expressed the belief that the stocks in plaintiff's portfolio were worth $7,000 to $7,500 cash value and gave Kuznetz a copy of plaintiff's latest Haas account statement. Durkin knew that Thomson usually required a minimum of $25,000 to open an account. (Tr. 186)3.

Kuznetz informed Durkin during the meeting that at that time there was no particular stock he could suggest because of the small size of plaintiff's portfolio; that he would give the matter thought and call plaintiff. (Tr. 186-87) Kuznetz gave Durkin two agreements for plaintiff to sign and return: a customer's agreement (Ex. D) and a transfer account agreement (Ex. A). Kuznetz also gave Durkin a "stack" of other papers, the subject matter of which plaintiff was unable to recollect at trial. (Tr. 122-23) Durkin was impressed with Kuznetz and so advised plaintiff. Without apprising Kuznetz, she then signed the agreements and forwarded them to him. (Tr. 191-92)

The next day, July 3, Kuznetz telephoned her. She reiterated to Kuznetz her need and desire for investment guidance as well as her financial goals and told him she was "virtually ignorant as to what was happening." Plaintiff testified that Kuznetz repeated that "he really didn't know of anything that he could put me into," and advised plaintiff "that he would handle the transfer of the account by virtue of the instruments that she signed." (Tr. 17) What neither plaintiff nor Durkin knew was that on the afternoon of July 2, after Kuznetz's meeting with Durkin and a day before his telephone call to plaintiff, Kuznetz had purchased 1,000 shares of Health-Chem stock for plaintiff.

Within a few days, Kuznetz called plaintiff again and recommended selling the 100 shares of Homestake stock which were in her portfolio from Haas since "gold stocks were not going to go anywhere." (Tr. 19) After talking to the specialist who Kuznetz said had given him this advice, plaintiff told Kuznetz she did not wish to sell the Homestake shares. Kuznetz proceeded to have a subsequent conversation with the specialist, still believed the stock should be sold, and did in fact sell it on July 7. (Tr. 25) Upon learning this, plaintiff expressed to Kuznetz her dissatisfaction with the sale of Homestake stock. Kuznetz responded "that it was the best move she could make," to which plaintiff said "okay." (Tr. 28)

About the same time that Kuznetz sold the Homestake stock, he advocated the purchase of Health-Chem stock in which he believed there was "a great deal of opportunity." (Tr. 20) When plaintiff asked how the Health-Chem could be bought without Thomson having received her securities from Haas, Kuznetz assured her "he was going to take care of it." (Tr. 30) Kuznetz then spoke with Durkin about Health-Chem stating that an article had been written regarding Health-Chem products; Durkin said he would read it, then consider purchasing the stock for plaintiff's account. (Tr. 198) It must be borne in mind that at the time Kuznetz had these conversations with plaintiff and Durkin, he did not reveal he had actually purchased the Health-Chem stocks on July 2.

Approximately at the close of July or beginning of August, 1980, Kuznetz called plaintiff and told her the Health-Chem stock "wasn't reacting well;" that he had spoken with Durkin who agreed it should be sold, and he was going to sell it. Kuznetz answered affirmatively plaintiff's query concerning whether they had given Health-Chem enough time to appreciate in value. (Tr. 31)

Soon after this conversation with plaintiff, Kuznetz told her and Durkin about a stock called Reserve Oil: "that many of his customers had been put into it, that he felt very, very strongly about the stock, it was a stock that with pending legislation he thought was going to be a real winner and he would like to put plaintiff and Durkin into it. And that he would cover it again." (Tr. 33)

Durkin requested financial figures on Reserve Oil, but Kuznetz stated he did not have that information, whereupon Durkin looked up the company in Moody's OTC Industrial Manual and ordered a 10K form and an annual report. (Tr. 203) He assessed the stock as being a poor risk and called Kuznetz to express that opinion and to tell him that "I thought he was crazy." (Tr. 205) Kuznetz answered that his opinion was fortified by favorable information from a specialist. Soon after, in early August 1980, Kuznetz called Durkin and notified him that Kuznetz would be putting some Reserve Oil stocks into plaintiff's account. In response to Durkin's expression that it was not "right," Kuznetz said, "Don't worry." (Tr. 205-06) There were also two conversations about purchasing the Reserve Oil stock between plaintiff and Kuznetz prior to the latter's total purchase of 1500 shares of Reserve Oil for plaintiff made in three separate purchases of 500 shares each between August 5-8, 1980 at a total cost of about $49,000-$50,000. (Ex. 4)

The regulation promulgated under the SEA which governs the extension of credit by brokers and dealers provides that brokers may loan no more than 50% of the current market value of a security to each customer. Regulation T, 12 C.F.R. § 220.8. At the time Kuznetz purchased the Reserve Oil, most of plaintiff's money was tied up in margin accounts. The Health-Chem stock had been sold for $13,145.98; since it was a margin account, one half of that amount, $6,572.99, was left to invest in other stocks. The Wometco margin stock which plaintiff had purchased while she was a customer at Haas was sold on August 4, 1980 for $2,142.99; 50% of the market value was $1,071.50. Kuznetz believed that 600 shares of the Threshold Technology was still in plaintiff's margin account, but this was tied up in the stock — not available as a liquid asset. In actuality, 300 shares had been sold for $2,735.69 (Ex. B) of which one-half, $1,367.85, belonged to Haas. (The proceeds of the sale were used to reduce plaintiff's margin debt.) (Tr. 172) Thus, the money in plaintiff's account which was available for other investments at the time that Kuznetz purchased the Reserve Oil was $6,572.99 plus $1,071.50 plus $1,367.85 — a total of $9,012.34 plus some possible leftover proceeds in cash from the Threshhold Technology sale. Even if Kuznetz additionally calculated into this sum the other 300 shares of Threshhold Technology and the 100 shares of Texaco which then sold at about $40 per share, Kuznetz certainly should have been aware that after dividing all this by one-half, plaintiff's account would still be worth only...

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