Kravitz v. Pressman, Frohlich & Frost, Inc.

• Decision Date: 15 February 1978
• Docket Number: Civ. A. No. 74-5222-T.
• Citation: 447 F. Supp. 203
• Parties: Judy KRAVITZ v. PRESSMAN, FROHLICH & FROST, INC., et al.
• Court: U.S. District Court — District of Massachusetts

447 F. Supp. 203

Judy KRAVITZ v. PRESSMAN, FROHLICH & FROST, INC., et al.

Civ. A. No. 74-5222-T.

United States District Court, D. Massachusetts.

February 15, 1978.

COPYRIGHT MATERIAL OMITTED

Choate, Hall & Stewart, Weld S. Henshaw, Owen S. Walker, Boston, Mass., for plaintiff.

George R. Desmond, Framingham, Mass., for Ronald Contrado.

Robert Sullivan, Herrick, Smith, Donald, Farley & Ketchum, Gerald F. Rath, Boston, Mass., for Bache & Co., Inc.

William M. Prifti, Herbert S. Cohen, Boston, Mass., for Pressman, Frohlich & Frost.

MEMORANDUM

TAURO, District Judge.

Plaintiff relies on the Securities Act of 1933 and the Securities and Exchange Act of 1934¹ to recover money invested with the defendant brokerage firm (Pressman), as well as commissions paid by her to that firm. Plaintiff's theory is that she was defrauded by Ronald Contrado while he was employed as a stockbroker by Pressman.²

I.

After a bench trial, the court makes the following findings of fact, based on its evaluation of the testimony and the documentary evidence.³

In June, 1971, shortly after the death of her father, plaintiff Judy Kravitz moved to Boston from her home in Cleveland, Ohio. She was 24 years old, single, and a graduate of Ohio State University with a B.S. degree in elementary education. She had no investment experience. Her sole assets were $18,000 and a car.

During the summer of 1971, she was introduced to Contrado by a mutual friend, and saw him once or twice a week until November, 1971. They became close friends. Further, plaintiff decided, on the recommendations of mutual friends, to let Contrado handle her personal affairs.

At the time, Contrado was employed as a registered representative with Bache. On or about December 10, 1971, Contrado opened a securities brokerage account at Bache in plaintiff's name with $300 received from her. She was then employed at an annual salary of $7500 as a school teacher in Brockton, where she had been hired in September 1971. Prior to the account being opened, plaintiff discussed her investment purposes with Contrado, and told him that she wanted to do something safe so that her money would last a long time.⁴ Because plaintiff was extremely anxious about preserving her savings, Contrado had guaranteed that he would reimburse her if she suffered any losses. She testified that she would not have opened the account had she not been reasonably certain she would not lose anything.

Between January 1, 1972 and November 30, 1972, plaintiff deposited in her Bache account additional sums totaling approximately $18,000, representing substantially all her assets. Thereafter, plaintiff relied entirely on Contrado's investment judgment and experience, and allowed him to make all investment decisions with respect to her Bache account. She remained unfamiliar with operation of the stock market, such as brokerage accounts, margin trading, day trading, short sales, and puts and calls.

Plaintiff received by mail at her home confirmation slips reflecting each transaction of purchase and sale in her account and a statement from Bache summarizing the monthly trading activity. Those that she opened she did not understand. Eventually she ceased opening such mail.

Whenever she asked questions of Contrado concerning her account, he would tell her that it was fine. If she pressed him for information, he would display anger and tell her that he was acting in her best interests.

During the eleven months plaintiff's account was at Bache, Contrado, acting in his sole discretion, engaged in a substantial volume of trading on her behalf.⁵ The trading consisted of purchases and sales, including short sales of speculative securities, as well as puts and calls. A high volume of commissions was generated, unrelated to the profitability of plaintiff's account. Plaintiff was unable to keep up with or understand the activity in her account, as reflected by mailings from Bache. As a result, she ceased reading such mail.

At some time after opening plaintiff's Bache account, Contrado transferred into it funds acquired by him from his father. These deposits amounted to $32,530.

When plaintiff questioned this practice, Contrado said that putting his father's money in her account would have the effect of offsetting any decrease in her account's value.

There was no understanding between plaintiff and Contrado that they were operating her account as a partnership or joint venture, or that they would split profits and losses equally. Rather, the agreement between plaintiff and Contrado was that he would cause money to be contributed to her account, thereby providing a cushion against any decrease in its value. Plaintiff was to receive profits only on the basis of her $18,000. She was to be reimbursed for any decrease in the value of her $18,000 investment. Contrado was to receive any profits from investment of any funds in excess of $18,000, as well as all commissions generated by the account.

Sometime in early May 1972, plaintiff received a letter from a Bache branch manager calling to her attention that the trading activity in her account was substantial, and had generated commissions of $8,100, even though there had been no substantial profit or loss to her. The branch manager's letter to plaintiff was consistent with sound practice in the brokerage business. The letter concerned plaintiff. She visited Contrado at the Bache office and told him of her concern. Contrado appeared angered by plaintiff's inquiry and told her that he was acting in her best interests. Contrado then told plaintiff that she should tell the branch manager that she understood what was going on in her account, and that she understood the contents of the monthly statements she received. Plaintiff was then presented to the branch manager and told him what Contrado had instructed her to say. She did so because she trusted Contrado and felt he knew more than she did about financial matters. Later, plaintiff signed a letter typed by a Bache secretary, indicating that she understood the risks of the trading in her account, as well as her intention to reduce the volume of her trading.

Thereafter, trading in plaintiff's account did fall off. The branch manager continued to correspond with plaintiff offering advice and assistance. No trades occurred in plaintiff's account after September 1972, and there were no losses in the account when it was closed during December 1972.

In December 1972, Contrado became employed as a registered representative at the Boston office of defendant Pressman. Shortly thereafter, plaintiff's account at Bache was transferred to defendant Pressman's Boston office where it was handled by Contrado. Plaintiff's investment objectives remained the same as they had been at Bache. The same arrangement between plaintiff and Contrado existed as when the account had been at Bache. As of February 1973, the net equity in the account was approximately $21,500.

After the transfer from Bache to Pressman, plaintiff's account again reflected a pattern of frequent trading.⁶

Contrado traded securities on margin for plaintiff's account, often buying and selling the same security within periods of a week or less, despite little or no change in market price. Total sales during 1973 aggregated $615,890. Purchases totaled $572,835. Brokerage commissions resulting from these transactions were approximately $21,000.

Plaintiff's expert witness, John Spooner,⁷ testified that the number of transactions in plaintiff's account at Pressman during 1973 was unreasonable and excessive in light of her financial resources and experience, and her investment needs and objectives.⁸

The pattern of trading in plaintiff's account should have been detected by Pressman's regulatory or management staff much sooner than it was. The Pressman branch manager should have reviewed the trading in plaintiff's account, and should have been alerted to the low profits and losses and high commissions. Given such a trading pattern, Pressman's branch manager should have questioned Contrado and contacted plaintiff directly. The fact that plaintiff had once been warned by Bache concerning a similar trading pattern did not relieve Pressman from this responsibility.

Plaintiff continued to receive by mail at her home confirmation slips reflecting each purchase and sale, as well as monthly statements from the clearing broker for Pressman. Much of the mail was left unopened.

Plaintiff did realize, however, that there were a great number of trades, and she again asked Contrado about them. Contrado's response was to demonstrate anger at being questioned, and to say that he was acting in her best interests. She accepted his explanation and continued to trust him.

Contrado continued to make all decisions about plaintiff's account. Money was deposited into plaintiff's Pressman account, without her knowledge, that came from Contrado's parents, and from his own funds. Plaintiff also gave Contrado signed blank checks to use in making deposits to her account at Pressman. They made this arrangement because her working schedule made it difficult for her to come into the Pressman office during the day.

Pressman relied on Contrado for substantially all essential information as to plaintiff's financial resources, investment experience and objectives. The new account form, the primary source of information about plaintiff, was not signed by her. At no time did a Pressman representative, other than Contrado, interview plaintiff to obtain background information.

Evidence about supervisory procedures at Pressman was introduced primarily through the testimony of Edward Bond, who was employed by Pressman from March 1971 through December 1973 in various positions ranging from Chief Operating Officer and President to Corporate Secretary. During the time that plaintiff had her account with Pressman, Bond was the "titular head of compliance." Bond testified that management or compliance personnel...