Karlen v. Ray E. Friedman & Co. Commodities

Citation688 F.2d 1193
Decision Date15 September 1982
Docket NumberNos. 81-1373,81-1375 and 81-1422,s. 81-1373
PartiesMerrill KARLEN, Appellee, v. RAY E. FRIEDMAN & COMPANY COMMODITIES, Appellant. Rosemary KARLEN, Trustee for the Karlen Boys' Trust and Karlen Girls' Trust, Appellee, v. RAY E. FRIEDMAN & COMPANY COMMODITIES, Appellant. Merrill KARLEN, Appellant, v. RAY E. FRIEDMAN & COMPANY COMMODITIES, Appellee.
CourtUnited States Courts of Appeals. United States Court of Appeals (8th Circuit)

Page 1193

688 F.2d 1193
Merrill KARLEN, Appellee,
Rosemary KARLEN, Trustee for the Karlen Boys' Trust and
Karlen Girls' Trust, Appellee,
Merrill KARLEN, Appellant,
Nos. 81-1373, 81-1375 and 81-1422.
United States Court of Appeals,
Eighth Circuit.
Submitted Oct. 15, 1981.
Decided Sept. 15, 1982.

Page 1195

Wally Eklund, Johnson, Johnson & Eklund, Gregory, S.D., for appellees/cross appellants.

Jack J. Esses, Marcus, Esses & Associates, Ltd., Chicago, Ill., for appellant/cross appellee.

Before HEANEY and STEPHENSON, * Circuit Judges, and DAVIES, ** Senior District Judge.

HEANEY, Circuit Judge.

This matter arises from a series of commodities transactions in 1974 and 1975. Ray E. Friedman & Company Commodities appeals from the district court's 1 order entering judgment on the jury verdicts for

Page 1196

Rosemary Karlen on her unauthorized trading action and for Merrill Karlen on his unauthorized trading and churning claims. Merrill Karlen cross-appeals from the district court order granting defendant's motion for judgment notwithstanding the verdict (j.n.o.v.) on his negligence claim. We affirm the district court's decision.

Plaintiffs Merrill and Rosemary Karlen own and operate a cattle ranch near Reliance, South Dakota. Defendant Ray E. Friedman & Company Commodities (Friedman) is a Chicago brokerage firm with several branch offices, including one in Sioux Falls, South Dakota. Friedman is a member of the Chicago Mercantile Exchange, one of the nation's major commodity exchanges. From March, 1971, through November, 1975, the defendant employed Donald Margulies as an account executive 2 and manager of the Sioux Falls branch. Margulies was a registered representative with the Chicago Mercantile Exchange and was approved by it to manage Friedman's Sioux Falls branch.

In May, 1974, the plaintiffs opened two accounts with the defendant through Margulies. One account was for Merrill Karlen individually; the other was for Rosemary Karlen, as trustee for two trusts that the plaintiffs had established for their children. Merrill Karlen had authority to, and did in fact, deposit money and execute trades for both accounts. Rosemary Karlen did not direct any trades. Both accounts were non-discretionary accounts; thus, Margulies was required to obtain Merrill Karlen's approval prior to executing trades. Karlen initially deposited $72,000 in his individual account between May 22, 1974, and July 16, 1974. He deposited $10,000 in the trust account on July 23, 1974. Thereafter, he made various additional deposits to the accounts which totaled $155,050. The plaintiffs ultimately invested $237,050 with Friedman.

Sometime after June 24, 1974, Karlen began to complain to Margulies that he was engaging in unauthorized trading with the two accounts. The plaintiff also complained that he could not understand whether he was making or losing money, even though he was receiving trade confirmation slips and monthly activity statements from Friedman. Karlen, however, did not immediately close the accounts or directly contact officials for the defendant. At trial, Karlen explained that he failed to take these actions because Margulies "would talk me out of it. Everything is hunky-dory. He was going to work it out."

In August, 1975, the plaintiffs closed their accounts. Friedman returned $11,965.77 to Merrill Karlen from the $82,650 he had deposited in his account. Rosemary Karlen received $2,525.50 out of the $115,000 she had deposited. Thereafter, another Friedman account executive informed Karlen that the defendant had dismissed Margulies because he had failed a National Association of Securities Dealers' proficiency exam.

The plaintiffs then commenced separate lawsuits against Friedman. Rosemary Karlen alleged that all trades Margulies executed for her account after July 24, 1974, were unauthorized. Merrill Karlen alleged that Margulies (1) traded without authorization for all transactions in his individual account after July 24, 1974, (2) excessively traded or "churned" his account, and (3) negligently handled his account after January 1, 1975. The claims of both plaintiffs were based on South Dakota common law. Their separate actions were consolidated for trial.

The jury found in favor of the plaintiffs on all counts. The district court entered judgment in favor of both plaintiffs on their unauthorized trading claims, and in favor of Merrill Karlen on his churning claim. It, however, entered a j.n.o.v. on Merrill Karlen's negligence claim. Friedman appeals from the judgments entered against it. Merrill Karlen cross-appeals

Page 1197

from the district court's j.n.o.v. on his negligence claim.



The jury found the defendant liable for unauthorized trading of both accounts, and awarded $92,474.50 to Rosemary Karlen and $25,000 to Merrill Karlen. 3 The district court denied the defendant's motion for j.n.o.v., or alternatively for a new trial, on these claims. The defendant contends that this denial constitutes reversible error on three major grounds. First, the trades in question were authorized by the plaintiffs. Second, even if the trades were not authorized prior to execution, the plaintiffs subsequently ratified them, or they waived or are estopped from asserting their claim that they did not authorize the trades. Third, the damages awarded by the jury were improper.

An appellate court, as well as a trial court, may set aside a jury verdict only when there is no evidence of substance upon which reasonable persons could differ. E.g., McCamley v. Schockey, 636 F.2d 256, 258 (8th Cir. 1981). In reviewing the district court's denial of defendant's motion for j.n.o.v. or a new trial, we are not free to weigh the evidence, to pass on the credibility of witnesses, or to substitute our judgment for that of the jury. E.g., Farner v. Paccar, Inc., 562 F.2d 518, 522 (8th Cir. 1977). Instead, we must view the evidence in the light most favorable to the plaintiffs and give them the benefit of all reasonable inferences to be drawn from the record. Id. With these standards of review in mind, we turn to Friedman's contentions.

A. Authorization.

The defendant first argues that the evidence establishes, as a matter of law, that Merrill Karlen authorized all of the trades in question. There is no merit to this claim. Margulies testified that he obtained authorization for the trades that he made. The plaintiffs testified that no trades after July 24, 1974, were authorized. This issue is simply a factual dispute which depends on the witnesses' credibility. We have no basis on this record for holding that, as a matter of law, the jury could not reasonably find that the trades were unauthorized.

B. Ratification, Waiver and Estoppel.

The defendant next contends that even if the trades were unauthorized, the plaintiffs' actions are barred by the doctrines of ratification, waiver and estoppel. Although these doctrines are distinct, 4 the

Page 1198

defendant-by relying on the same underlying facts-has essentially treated them as one defense. Its theory is, in essence, that the Karlens' claims must fail as a matter of law because even if the plaintiffs did not authorize the trades, they knowingly and voluntarily assented to them after they occurred. Friedman bases its defense primarily on (1) Merrill Karlen's (hereafter Karlen) testimony that when he called Margulies to object to unauthorized trades, Margulies would convince him that everything was in order; (2) Karlen's admission that the plaintiffs received confirmation slips from the defendant for all trades and monthly activity statements; and (3) the fact that the plaintiffs continued to invest substantial funds into their accounts even though Margulies allegedly was disobeying their directions, and they were suffering significant losses. 5

We reject the defendant's arguments. The question is not simply whether Karlen assented to the trades; rather it is whether his apparent assent was given voluntarily and intelligently with full knowledge of the facts. This question, as a factual issue, was properly submitted to the jury, and there was sufficient evidence in the record to support its finding in favor of the plaintiffs.

Several factors support the jury's finding that the plaintiffs did not knowledgeably and voluntarily consent to the trades. First, we must consider the factual setting in which this controversy arose. Commodities futures trading is an arcane and complicated field in which specialized knowledge is generally required to participate intelligently and successfully. See, e.g., Everyone Encounters Commodities Regulation Sooner or Later * * *, 35 Bus. Law. 1 et seq. (1980); Regulation of Commodities Futures Trading, 27 Emory L.J. 847 et seq. (1979). The plaintiffs lacked sophistication and experience as commodities futures traders. Merrill Karlen has spent his adult life as a rancher, not an investor. He entered the commodities market on only one occasion prior to engaging Margulies' services. In that instance, he directed a local

Page 1199

broker to execute one purchase and one sale of some contracts for either "feeder" or "fat" cattle. Karlen lost.$19,000. Rosemary Karlen had no experience at all with commodities. In contrast, Friedman is a clearing member with the Chicago Mercantile Exchange, 6 and has substantial experience in commodities futures trading. Karlen testified that Margulies told him in their initial conversations that

Ray Friedman had an advisory service that was right in touch with the market and could assist me in advisory service, knew what to trade in, because they was well experienced in that, * * * (Margulies) assured me he had advisory service and was in constant touch with the market and knew just what was going on.

Moreover, Friedman, by placing Margulies as...

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