Mihara v. Dean Witter & Co., Inc.

• Citation: 619 F.2d 814
• Decision Date: 23 May 1980
• Docket Number: Nos. 78-2022,78-2729,s. 78-2022
• Parties: Fed. Sec. L. Rep. P 97,508 Samuel MIHARA, Plaintiff-Appellee, v. DEAN WITTER & CO., INC. and George Gracis, Defendants-Appellants.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

Page 814

619 F.2d 814

Fed. Sec. L. Rep. P 97,508

Samuel MIHARA, Plaintiff-Appellee, v. DEAN WITTER & CO., INC. and George Gracis, Defendants-Appellants.

Nos. 78-2022, 78-2729.

United States Court of Appeals,

Ninth Circuit.

May 23, 1980.

Eugene W. Bell, Los Angeles, Cal., argued for defendants-appellants; John F. Busetti, Jones, Bell & Simpson, Los Angeles, Cal., on brief.

Allen L. Neelley, Gregory A. Wedner, Smaltz & Neelley, Los Angeles, Cal., for plaintiff-appellee.

Appeal from the United States District Court for the Central District of California.

Before CHAMBERS and TANG, Circuit Judges, and CAMPBELL, ^* Senior District Judge.

WILLIAM J. CAMPBELL, Senior District Judge:

On April 26, 1974, Samuel Mihara filed this action in United States District Court for the Central District of California. He alleged both federal statutory and California common law fiduciary duty claims arising from the handling of Mihara's securities accounts by defendants. Specifically, plaintiff alleges that the defendants, Dean Witter & Company and its account executive, George Gracis, engaged in excessive trading or "churning" in plaintiff's securities account, and purchased "unsuitable" securities which did not conform to Mihara's stated investment objectives. Plaintiff sought relief under Section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78a et seq.) and Rule 10b-5 promulgated thereunder, as well as for breach of fiduciary duties. Plaintiff sought both compensatory and punitive damages, and demanded a jury trial.

On February 2, 1978, after a jury trial, a verdict was entered for Mihara and against the defendants on both the Rule 10b-5 claim and the State breach of fiduciary duty claim. Compensatory damages in the amount of $24,600 were awarded to Mihara, a punitive damages award of $66,666 was assessed against Dean Witter & Company, and a $2,000 punitive damage award was assessed against defendant Gracis. Defendants subsequently filed motions for new trial and judgment notwithstanding the verdict, having moved for a directed verdict at trial, which motions were denied. Dean Witter & Company and Gracis (hereinafter appellants) appeal from the denial of those motions, and the plaintiff Mihara appeals from an order disallowing recovery of $1,800 in costs.

On January 6, 1971, plaintiff Mihara opened a joint securities account with the Santa Monica office of Dean Witter. At that time Mihara was employed by the McDonnell-Douglas Corporation as a supervisory engineer. He was 38 years old and possessed a Bachelor of Science and Master's Degree in Engineering. He and his wife were the parents of two daughters. Mihara's assets at the time consisted of approximately $30,000 in savings, an employee's savings account at McDonnell-Douglas of approximately $16,000, an equity in his home for approximately fifteen to seventeen thousand dollars. He also held shares of McDonnell-Douglas stock obtained through an employee payroll deduction plan.

Prior to opening his account with Dean Witter, Mihara had invested in securities for approximately ten years. He had dealt with several other firms during that period, but apparently felt that his account had not received adequate attention, and was looking for a new investment firm. Mihara opened his account with Dean Witter in January of 1971 by telephoning Stuart Cypherd, the office manager for Dean Witter's Santa Monica office, and asking to be assigned an account executive. Cypherd, in turn, instructed defendant Gracis to phone Mihara to set up an appointment.

The evidence as to the content of the initial meeting between Mihara and Gracis is conflicting. Mihara testified that as an engineer he lacked a finance and economics background and was looking for someone with expertise on which he could rely. He also stated that he was concerned about possible cutbacks at McDonnell-Douglas, noting that layoffs were common in that industry. He indicated that he was concerned about the education of his two daughters, and their financial security.

Gracis' testimony with regard to their initial meeting, and specifically relating to Mihara's investment objectives, differs substantially. Gracis testified that Mihara was not concerned about a possible layoff, that he was primarily interested in growth, and that he was knowledgeable about margin accounts and broker call rates.

Mihara invested $30,000 with Dean Witter. This money was to be invested according to Gracis' recommendations but subject to Mihara's approval.

The history of Mihara's investment account with Dean Witter & Company reflects speculative investments, numerous purchases and sales, and substantial reliance on the recommendations of Gracis. The initial recommendations of Gracis were that Mihara purchase shares of companies engaged in the double-knit fabric industry. These stocks included Venice Industries, Devon Apparel, Edmos, Fab Industries, D H. J. Industries, Leslie Fay, Graniteville, Duplan, and United Piece and Dye. From 1971 to 1973, Mihara's account lost considerable sums of money. Since many of the purchases were on margin, Mihara would often have to come up with additional funds as the equity in his account declined. The final trading losses in the account totaled $46,464. This loss occurred during the period of January 1971 to May 1973.

Mihara first began to complain of the handling of his account when it showed a loss in April 1971. At that time he complained to Gracis because his account was losing money, then about $3,000. Throughout 1971, as Mihara's account lost money, he continued to complain to Gracis. In October of 1971, Mihara went to Mr. Cypherd, the office manager for the Santa Monica office of Dean Witter. Mihara complained to Cypherd about the handling of the account by Gracis. He did not, however, close out the account. As the value of Mihara's securities account continued to dwindle, he visited Cypherd on several occasions to complain further about Gracis. While Cypherd told Mihara he was "on top" of the account, the performance and handling of the account did not improve.

At about the same time that Mihara first contacted him, Cypherd was also made aware of substantial trading in the account by means of a Dean Witter Monthly Account Activity Analysis. This analysis was initiated by the Dean Witter computer whenever an account showed 15 or more trades in one month or commissions of $1,000 or more. Because Mihara's account reflected 16 trades for the month of April 1971, Cypherd was alerted to the problem at that time. In May of 1971, the Dean Witter computer generated another monthly account activity analysis as the result of 21 trades during that month in Mihara's account. Mihara's account in March of 1971 reflected 33 transactions, however, the computer did not generate an account analysis.

In November 1973, Mihara went to the San Francisco office of Dean Witter and complained to Paul Dubow, the National Compliance Director for Dean Witter, Inc. At that point Mihara's account had suffered considerable losses. Apparently not satisfied with the results of that meeting, Mihara filed this suit in April 1974.

The case experienced several delays in getting to trial. The trial was initially set for September 27, 1977. On May 2, 1977, plaintiff's counsel advised defense counsel that he intended to obtain another expert witness to testify at trial. On August 17, 1977, defendants moved for a continuance of the upcoming trial, or in the alternative, to exclude plaintiff's new expert, who at that time had not been designated. Immediately thereafter, plaintiff's counsel informed defendants that the additional expert witness was Mr. Robert McCuen, made him available for deposition, and the parties stipulated that the trial should be continued until November 15, 1977. Defense counsel was apparently unable to depose McCuen, and obtained a continuance of the trial until January 17, 1978.

On November 18, 1977, plaintiff disclosed the identity of a second expert witness, a Mr. Dennis White. Thereafter, defendants moved again for a continuance of the trial, which motion was set for hearing on January 9, 1978. On the day of the hearing, Mr. White was made available for deposition. At that time Mr. White, an attorney, requested that he be paid for his deposition time. At the hearing on January 9, 1978, defendants argued that they were being prejudiced due to the insufficiency of time to rebut Mr. White's testimony and sought a further continuance. The Court denied the motion for continuance, Mr. White's deposition was not taken by defendants, and the trial commenced on January 17, 1978.

At the hearing just prior to trial, defense counsel objected to a trial by jury. Plaintiff had made a demand for jury trial in his complaint. The pretrial order, however, made no mention of a jury trial. The Court held that the request for a jury trial had not been withdrawn.

At trial plaintiff gave his recollection of the initial meeting with Gracis. He testified that Gracis recommended securities which did not appear to conform to those objectives. He also related the dismal record of the account, and how attempts to remedy the situation through meetings with Gracis' superiors proved fruitless. Plaintiff also introduced the Dean Witter Account Executive Manual (Plaintiff's Exhibit 1) which stated that Dean Witter account executives had a "sacred trust to protect" their customers, that Dean Witter customers have confidence in the firm, and "under no circumstances should we violate this confidence."

Mr. Paul Dubow, the National Compliance Director for Dean Witter from November 1971 through July 1974, testified as to his company's compliance duties, internal monitoring systems, and the responsibilities of supervisory personnel in monitoring clients' accounts. Mr. Dubow was also questioned by plaintiff's counsel regarding various New York Stock exchange (NYSE) and National Association of Security Dealers (NASD) rules and...