Magnum Corp. v. Lehman Bros. Kuhn Loeb, Inc., 85-2511

• Decision Date: 14 July 1986
• Docket Number: No. 85-2511,85-2511
• Citation: 794 F.2d 198
• Parties: MAGNUM CORPORATION, William Rice, and David F. Ferrell, Plaintiffs-Appellees Cross-Appellants, v. LEHMAN BROTHERS KUHN LOEB, INC., Defendant-Appellant Cross-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 198

794 F.2d 198

55 USLW 2124

MAGNUM CORPORATION, William Rice, and David F. Ferrell Plaintiffs-Appellees Cross-Appellants, v. LEHMAN BROTHERS KUHN LOEB, INC., Defendant-Appellant Cross-Appellee.

No. 85-2511.

United States Court of Appeals Fifth Circuit.

July 14, 1986.

Will Montgomery, William D. Sims, Jr., Dallas, Tex., for defendant-appellant, cross-appellee.

John M. Smith, George Piazza, Longview, Tex., for plaintiffs-appellees, cross-appellants.

Appeals from the United States District Court for the Eastern District of Texas.

Before BROWN, REAVLEY and JONES, Circuit Judges.

REAVLEY, Circuit Judge:

A stockbroker took orders from plaintiffs to buy stock at a time when it was trading in the over the counter market at $13.375. ¹ The conditions of the market affecting price changed significantly after the time when the first order was placed, but the plaintiffs were not informed of those new conditions. Seven days after the first orders were made, all of plaintiffs' orders were filled at a price of $15.75. Plaintiffs sued for the difference in those two prices, and the district court awarded damages on that basis. We affirm.

Richard Stoyeck was a broker employed by Lehman Brothers Kuhn Loeb, Inc. (Lehman) in the New York headquarters office. In 1979 Stoyeck made a successful cold call to one of the plaintiffs in East Texas. Thereafter numerous transactions were conducted through telephone conversations between Stoyeck and the plaintiffs. On October 9, 1980 Stoyeck called one of the plaintiffs to recommend purchases of stock in RPM, Inc. (RPM). Orders were placed and filled on that date at a price of $14.50 a share and, again, on the following day at $13.25. Stoyeck called to seek further orders of the RPM stock on Friday, October 17, and plaintiffs were then persuaded to place purchase orders for 12,000 shares. The following Monday, October 20, plaintiffs ordered an additional 20,000 shares. These were all market orders, that is, orders to buy a stated amount of the security at the most advantageous price obtainable. No price or time limitation was placed on the orders. The closing market reports for both days, October 17 and 20, showed RPM at $13.50 asked and $13.25 bid. On October 17, 57,500 shares of RPM stock were traded nationally, of which Lehman purchased 30,000 shares. On October 20 only 20,500 shares were traded nationally of which approximately half was purchased by Lehman. Lehman had accumulated, however, on the 17th a large backlog of purchase orders. Stoyeck himself was successful in obtaining orders for 82,900 shares, and he has estimated that in the following week he obtained orders for as much as an additional 42,000 shares.

At the outset of business on Monday the 20th, Stoyeck was informed by his superiors that on the following day Lehman would become a "market maker" in RPM stock; that is, Lehman would buy and sell the stock for its own account. This decision is explained as the preferable method of handling the imbalance between buy and sell orders in an over the counter market of limited volume. To seek sellers at once for the quantity of stock desired would have meant a large escalation of the prevailing market price before those orders could have been filled. Lehman explains that its decision to make a market in the RPM stock meant better executions for its customers. However, its managing director, William Welsh, testified that under Lehman rules it is necessary to inform the customer whether Lehman is acting as agent or as a market maker, and that the broker cannot become a principal in a transaction until after it has completed whatever agency orders it has in hand. He explained that it is the responsibility of the trader, the employee in Stoyeck's position, to inform the customer in this respect. The head of the over the counter department at Lehman, Arthur Weigner, likewise testified that it is not permissible to act as agent and principal at the same time for the same customer. Nevertheless, nothing of the change in Lehman's position was disclosed to the plaintiffs, even though it was known to Stoyeck when the order for 20,000 shares was placed with him on Monday, the 20th.

Plaintiffs received no word from Lehman, after placing their orders, until the confirmation forms arrived in the mail revealing that the orders had been filled at a price of $15.75 on Friday, October 24.

On Tuesday, October 21, Lehman performed both as an agent (buying for its customers 5400 shares at $14.25) and as a market maker (buying for its own account 3500 shares at $14.00 and 20,000 shares at $14.25). The volume of RPM shares traded that day rose to 109,300. On Wednesday Lehman performed agency transactions for some of its customers (buying 9200 shares at prices ranging from $15.00 to $15.75), and Lehman accumulated more shares for its own account (14,500 at $15.25; 5000 at $15.50; 19,400 at $15.75). The total volume of RPM stock traded on Wednesday was 125,700 shares. On Thursday Lehman made no purchases of RPM stock, following the usual procedure of allowing the market to find its level. The nationwide volume slowed to 79,500 shares.

On Friday the 24th, Lehman bought for its own account another 26,750 shares at prices ranging from $15.00 to $15.25, thereby bringing its inventory to over 89,000 shares. It then sold 88,900 shares to customers, including the plaintiffs, for $15.75 per share. It had accumulated this stock at a weighted average price of approximately $15.10 per share.

During the following week, when plaintiffs received their confirmation slips, RPM closed no higher than $13.75 per share. Because they were being charged a price for the stock which amounted to over $2.00 per share above what they had expected to pay, the plaintiffs complained to Lehman, but without success.

This action was originally brought in state court but was removed by Lehman to the federal district court....