McAnally v. Gildersleeve

• Decision Date: 07 April 1994
• Docket Number: No. 92-3825,92-3825
• Citation: 16 F.3d 1493
• Parties: Robert McANALLY; Delbert Whorton, Appellants, v. John GILDERSLEEVE, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 1493

16 F.3d 1493

62 USLW 2564

Robert McANALLY; Delbert Whorton, Appellants, v. John GILDERSLEEVE, Appellee.

No. 92-3825.

United States Court of Appeals,

Eighth Circuit.

Submitted Sept. 16, 1993.

Decided Feb. 25, 1994.

Rehearing and Suggestion for Rehearing

En Banc Denied April 7, 1994.

Counsel who presented argument on behalf of the appellants was James S. Dunham of Russellville, AR.

Counsel who presented argument on behalf of the appellee was Elizabeth J. Robben of Little Rock, AR.

Before MAGILL, Circuit Judge, LAY, Senior Circuit Judge, and HANSEN, Circuit Judge.

MAGILL, Circuit Judge.

This case involves a determination of whether a jury could have reasonably concluded, based on the evidence presented, that John Gildersleeve (Gildersleeve) defrauded plaintiffs based on Arkansas common law fraud and violations of the Commodity Exchange Act (CEA), 7 U.S.C. Sec. 6b (1988). Robert McAnally and Delbert Whorton (collectively, the plaintiffs) appeal the district court's ¹ grant of judgment as a matter of law and, in the alternative, the district court's judgment for a new trial. Because we hold that a jury could not have concluded reasonably that plaintiffs justifiably relied on Gildersleeve's alleged misrepresentations, we affirm the judgment of the district court.

I. BACKGROUND

McAnally responded to a cut-out coupon advertisement for Multivest, a corporation that provided brokerage services. Soon after responding, Gildersleeve, an account executive for Multivest, called McAnally as a follow-up to the information requested. Gildersleeve introduced McAnally, and then later Whorton, to the risky world of commodity futures options.

A commodity futures option is a right to buy a certain quantity of a commodity, such as soybeans or corn, at a specified price, at a specified time in the future. The cost of purchasing this right is the option price. The buyer of a commodity option "bets" that the value of his right to buy a specified quantity of a commodity, at a specified price, at a specified time, will become more valuable over time. By way of example, on June 1, 1987, a hypothetical investor purchases an option to buy (known as a "call option") two "contracts" (each contract represents 5000 bushels) of corn at $3.20 per bushel (the "strike price") on December 1, 1987 (the expiration date). The hypothetical investor pays $0.12 per bushel, plus any commission charged by the brokerage firm, for this right. ² The investor has purchased the right, but not the obligation, to buy 10,000 bushels of corn at $3.20 per bushel on December 1, 1987. In effect, the investor is betting that the market price of corn and the value of his option will rise between the time he buys the option and the time at which the option expires.

If the value of the option rises more than the cost of the brokerage firm's commission, the investor will sustain a profit if he trades or exercises the option. If, however, the value of the option decreases, the investor will lose money. One attractive aspect of commodity futures options is that the investor's potential loss is limited to the price of the option plus the commission. Although commodity futures options may result in the loss of an investor's entire investment, they attract investors because they can result in substantial profits in a short period of time. For example, both McAnally and Whorton earned 75% profit on an investment in heating oil options that they held for only six days.

McAnally bought commodity futures options through Gildersleeve from June 15, 1988 through November 21, 1988. Whorton bought commodity futures options through Gildersleeve from June 24, 1988 through August 12, 1988. Specifically, plaintiffs bought corn options relying on Gildersleeve's statements that there was a severe drought affecting the corn farmers in the Midwest. Public reports of drought conditions and crop predictions corroborated Gildersleeve's statements. Plaintiffs' expert also indicated that Gildersleeve's prediction that corn prices would rise in the summer of 1988 was "one of those once-a-decade consensus trades" where 95% of the people believed that the price of corn would rise. The value of their corn options, however, did not rise as predicted. In fact, all of the corn options became worthless, resulting in a $22,496 loss to McAnally and a $12,500 loss to Whorton.

McAnally and Whorton also traded commodity options with A.G. Edwards & Sons, Inc. (A.G. Edwards), another brokerage firm that charged a lower commission than Multivest. Plaintiffs admitted during trial that they were aware of the risks involved in commodity futures options trading when they began trading with A.G. Edwards on July 21, 1988. At A.G. Edwards, McAnally traded corn, beans, silver, and heating oil options. McAnally also traded cattle, corn, and treasury bond futures, which, unlike options, have a potential for loss greater than the initial investment. Whorton's investments at A.G. Edwards, prior to his trading with Gildersleeve, included stock in Wal-Mart and Tyson that had appreciated dramatically.

McAnally and Whorton sued Gildersleeve under Arkansas common law fraud and for violation of Sec. 4b of the CEA (codified at 7 U.S.C. Sec. 6b). ³ At the close of plaintiffs' evidence the district court denied Gildersleeve's motion for a directed verdict. After Gildersleeve presented his defense, the jury returned a verdict in favor of plaintiffs for compensatory and punitive damages. The district court, however, granted Gildersleeve's motion for judgment as a matter of law. McAnally and Whorton timely appealed.

II. DISCUSSION

McAnally and Whorton argue that the trial court's grant of judgment as a matter of law was improper because there was sufficient evidence of fraud to support the jury's verdict. Because McAnally and Whorton pleaded fraud, they are limited to the specific allegations pleaded in their complaint. See Fed.R.Civ.P. 9(b); Greenwood v. Dittmer, 776 F.2d 785, 789 (8th Cir.1985). Their complaint alleged, and the trial court noted, four separate bases for a finding of fraud: (1) Gildersleeve told plaintiffs that he had several other clients who had earned large profits through commodity futures options (Allegation One); (2) Gildersleeve guaranteed that plaintiffs were "virtually certain" to make a great deal of money (Allegation Two); (3) Gildersleeve stated that the risk disclosure statement given to plaintiffs was "a mere formality" and that it "greatly overemphasized" the risks involved (Allegation Three); and (4) Gildersleeve misrepresented the level of risk involved in this type of investment (Allegation Four). Appellants' Br. at 23. McAnally and Gildersleeve argue that they presented sufficient evidence for a reasonable jury to find fraud.

We must decide whether a jury could have reasonably concluded that Gildersleeve defrauded plaintiffs. We hold that a jury could not have reasonably concluded that plaintiffs relied on the alleged misrepresentations, i.e., that a jury could not have reasonably concluded that Gildersleeve's misrepresentations were the proximate cause of plaintiffs' loss. Therefore, we affirm the judgment of the district court.

A. Standard of Review

In reviewing a judgment as a matter of law, this court reviews the trial court's decision de novo and applies the same strict standard as the district court. Morgan v. Arkansas Gazette, 897 F.2d 945, 948 (8th Cir.1990) (citing Cleverly v. Western Elec. Co., 594 F.2d 638, 641 (8th Cir.1979) (per curiam)). This standard requires the appellate court to

"consider the evidence in the light most favorable to the [plaintiffs], assume that the jury resolved all conflicts of evidence in favor of [the plaintiffs], assume as true all facts which the [plaintiffs'] evidence tended to prove, give the [plaintiffs] the benefit of all favorable inferences which may reasonably be drawn from the facts, and [reverse the judgment as a matter of law], if in light of the foregoing, reasonable jurors could differ as to the conclusion that could be drawn from the evidence."

Minneapolis Community Dev. Agency v. Lake Calhoun Assocs., 928 F.2d 299, 301 (8th Cir.1991) (quoting Atlas Pile Driving Co. v. DiCon Fin. Co., 886 F.2d 986, 989 (8th Cir.1989)). Therefore, this court must reverse the district court if reasonable jurors could have found that Gildersleeve defrauded the plaintiffs. See Western Am., Inc. v. Aetna Casualty & Sur. Co., 915 F.2d 1181, 1183 (8th Cir.1990). Normally, this court only can consider evidence favoring the nonmoving party in reviewing a grant of a judgment as a matter of law. Dace v. ACF Indus., Inc., 722 F.2d 374, 376 (8th Cir.1983). In Dace, however, the court left open instances in which a reviewing court can consider the moving party's evidence. ⁴ We interpret Dace to allow us to review the plaintiffs' uncontradicted cross-examination testimonies. See id. at 377 n. 6. ⁵

B. Elements of Fraud

Both parties correctly acknowledge that fraud under "section [4b] of the CEA is substantially the same" claim as Arkansas common law fraud. Greenwood, 776 F.2d at 789; Appellants' Br. at 24; Appellee's Br. at 22; see also Horn v. Ray E. Friedman Co., 776 F.2d 777, 780 (8th Cir.1985). To recover under common law fraud, the plaintiff must prove "a false representation of a material fact with knowledge or belief on the part of the defendant that the representation is false. The false representation must be made with the intent to induce the other party to rely upon that representation." Greenwood, 776 F.2d at 789; see also Storthz v. Commercial Nat'l Bank, 276 Ark. 10, 631 S.W.2d 613, 616 (1982). Specifically, this circuit requires a finding of scienter, i.e., the plaintiff must demonstrate that the defendant knew that the misrepresentation was false when made. McIlroy v. Dittmer, 732 F.2d 98, 101-02 (8th Cir.1984); see Greenwood, 776 F.2d at 789. The plaintiff also must demonstrate that any damage "resulted from his justifiable...