Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Boeck

• Citation: 127 Wis.2d 127,377 N.W.2d 605
• Decision Date: 11 December 1985
• Docket Number: No. 83-675,83-675
• Parties: , 55 A.L.R.4th 371 MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., Plaintiff-Respondent, v. George V. BOECK, Defendant-Appellant-Petitioner.
• Court: United States State Supreme Court of Wisconsin

Page 605

377 N.W.2d 605

127 Wis.2d 127, 55 A.L.R.4th 371

MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., Plaintiff-Respondent, v. George V. BOECK, Defendant-Appellant-Petitioner.

No. 83-675.

Supreme Court of Wisconsin.

Argued Sept. 6, 1985.

Decided Dec. 11, 1985.

Richard S. Florsheim, Milwaukee (argued), for defendant-appellant-petitioner; Brian W. McGrath and Foley & Lardner, on brief.

Paul R. Erickson, Milwaukee (argued), for plaintiff-respondent; James G. Howard, and Zirbel, Howard & Malone, S.C., on brief.

STEINMETZ, Justice.

The issues decided in this case are:

(1) Does a commodities broker who undertakes to provide investment information and counsel to a customer with a nondiscretionary account, and who later learns that previously given information has been changed or was incorrect, have a fiduciary duty to disclose the latest information before the customer invests through the same broker in reliance on the original disclosure?

(2) Under what circumstances can a commodities broker be held strictly responsible for misrepresentation concerning investment advice?

(3) Based on the jury instructions on fiduciary duty and negligent misrepresentation, is a new trial necessary in the interest of justice for failure to try the real issue?

The circuit court for Dane county, William F. Eich, judge, ruled as a matter of law that Merrill Lynch owed no fiduciary duty to George V. Boeck in granting a judgment notwithstanding the verdict. The court ruled as a matter of law that strict responsibility for misrepresentation was not appropriate. The court of appeals affirmed the trial court judgment in Merrill Lynch v. Boeck, 120 Wis.2d 591, 357 N.W.2d 287 (Ct.App.1984).

Merrill Lynch commenced this action to recover $21,712 that Boeck owed on his investment account for soybean futures transactions made during May, 1978. Boeck denied liability and counterclaimed for the losses he sustained on the transactions.

Boeck was an experienced commodities investor who had dealt with two other brokerage houses before opening a commodities account with Merrill Lynch in February 1977. Before he began trading with Merrill Lynch, Boeck subscribed to several publications and services concerned with commodities investments. Boeck signed a commodities account agreement that set forth the risky and speculative nature of investing in commodities futures contracts and that warned of the possibility of significant losses. Merrill Lynch had no authority to decide what trades to make in Boeck's account.

Boeck was drawn to Merrill Lynch by an advertisement placed by Merrill Lynch in the Wall Street Journal. He stated that he opened the account at Merrill Lynch because the company had a good reputation for financial services and a strong research program in the commodities field.

Douglas Terrill, Boeck's broker at Merrill Lynch, testified that during March, April and May of 1978, Boeck regularly asked what information Merrill Lynch's research department had about particular commodities. Boeck claims that he based his commodities investment decisions on the information and advice given to him by Merrill Lynch.

The critical time period in the relationship between Boeck and Merrill Lynch was May 15, 1978, through June 1, 1978. On May 15, Boeck claims Terrill told him that Merrill Lynch's soybean expert, David Bartholemew, had just returned from a trip to Brazil and that he had sharply reduced his estimate of the size of the Brazilian soybean crop. Bartholemew was reputed to be a world-renowned expert in the soybean industry and Terrill advised Boeck of that fact. Terrill allegedly told Boeck that news of Bartholemew's trip and Bartholemew's estimate of Brazil's crop had not been made public and that based on this news, Merrill Lynch's research department soon would make a very strong recommendation to buy, among other things, bull spreads in soybeans and soybean meal. ¹

It is undisputed that the size of the Brazilian soybean crop was a significant, material factor affecting the price of soybean futures. During the two weeks between May 15 and 31, Boeck purchased $1 million worth of soybean and soybean meal futures. He alleges that he based these purchases on Terrill's representations.

Terrill denied telling Boeck about a visit by Bartholemew to Brazil or that Bartholemew had sharply reduced his estimate of the Brazilian soybean crop. Bartholemew also testified that he never lowered his estimate of the 1978 Brazilian soybean crop below the April estimate and that the crop, in fact, was higher than the April estimate. He denied traveling to Brazil during 1978. However, Merrill Lynch never denied telling Boeck the crop estimate was going down.

On May 17, 1978, Boeck claims that Terrill learned that the Brazilian government had increased, not decreased, its soybean crop estimate. Terrill never told Boeck about this information even though Terrill handled numerous soybean and soybean meal trades for Boeck between May 17 and 30. Over 98 percent of Boeck's losses were sustained as a result of investments he made after May 17. Terrill, however, argues that the May 17 information did not indicate a change in Merrill Lynch's estimate, and, in fact, the reports were not consistent or conclusive. Nonetheless, Merrill Lynch's estimate of Brazil's soybean crop was higher than Terrill's alleged representation of Bartholemew's estimate.

Boeck requested that the case be submitted to the jury on four alternative theories: intentional misrepresentation, negligent misrepresentation, strict responsibility for misrepresentation and breach of fiduciary duty. The trial court refused to give an instruction or submit a verdict question on the strict responsibility theory of misrepresentation. Over the objections of Merrill Lynch, the trial court submitted the breach of fiduciary duty issue to the jury.

The jury found that there had been no intentional or negligent misrepresentation. The jury did find, however, that Merrill Lynch undertook to provide Boeck with investment advice and counsel concerning soybean futures between May 1 and June 1, and that Merrill Lynch failed to provide Boeck with material information in its possession, thereby causing Boeck to lose money. The basis of this finding was evidence of Terrill's silence regarding the May 17 information. This finding constituted a breach of fiduciary duty, if such duty existed. The circuit court then granted judgment notwithstanding the verdict based on the court's conclusion that no fiduciary duty existed.

BROKER'S FIDUCIARY DUTY

The court of appeals held as a matter of law that a broker who provides advice and counsel to a customer with a nondiscretionary account does not have a fiduciary duty to that customer. We agree. The broker, however, does owe the customer a duty of ordinary care.

Both parties rely on Schweiger v. Loewi & Co., Incorporated, 65 Wis.2d 56, 221 N.W.2d 882 (1974), to support their respective claims concerning a broker's fiduciary duty. In that case, this court held that a broker who is "handling" a customer's financial investments owes that customer a fiduciary duty. Id. at 64, 221 N.W.2d 882. Boeck argues that this holding imposes a fiduciary duty in broker-customer relationships, such as the one in the present case. Merrill Lynch contends that Schweiger only imposes a fiduciary duty in the case of discretionary accounts. We agree that a broker does not have a fiduciary duty to a customer with a nondiscretionary account absent an express contract placing a greater obligation on the broker or other special circumstances.

We are persuaded by the decisions from other jurisdictions refusing to impose a fiduciary duty in the case of nondiscretionary accounts. In Robinson v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 337 F.Supp. 107 (N.D.Ala.1971), aff'd. 453 F.2d 417 (5th Cir.1972), that court held that a fiduciary duty did not arise to require the transmission of all extrinsic facts or opinions related to the market in question unless there was an express contract or special circumstances which required defendant to transmit to plaintiff such information.

"To make this defendant or any other broker the guardian of a customer such as the plaintiff would destroy an important part of the marketplace. In every case a trader could recover damages from his broker merely by proving non-transmission of some fact which, he could testify with the wisdom of hindsight, would have affected his judgment had he learned of it." Id. at 113.

In the instant case, there is no indication of any express agreement or special circumstances between Merrill Lynch and Boeck for the provision of investment decision services.

In Leib v. Merrill Lynch, Pierce, Fenner & Smith, 461 F.Supp. 951, 952-53 (E.D.Mich.1978), the customer had a nondiscretionary account with his broker, i.e., an account in which the customer rather than the broker determines which purchases and sales to make. Under those facts, that court held: "Unlike the broker who handles a non-discretionary account, the broker handling a discretionary account becomes the fiduciary of his customer in a broad sense." Id. at 953. A discretionary account is one where the broker makes all the investment decisions.

Shearson Hayden Stone, Inc. v. Leach, 583 F.2d 367 (7th Cir.1978), also adopted the Robinson rationale in the context of a nondiscretionary account. Similar to Boeck, the investor in Leach made all the investment decisions. Caravan Mobile Home Sales v. Lehman Bros. Kuhn Loeb, 769 F.2d 561 (9th Cir.1985), applied the same reasoning to reject the argument that a broker breached a fiduciary duty to a customer. That case also involved a nondiscretionary account.

Our decision in Gries v. First Nat. Bank of Milwaukee, 82 Wis.2d 774, 264 N.W.2d 254 (1978), does not change our interpretation of Schweiger. Gries at 778, 264 N.W.2d 254 states: "[I]n Schweiger, ... [t]his court recognized that persons offering financial investment...