Miley v. Oppenheimer & Co., Inc.

Citation637 F.2d 318
Decision Date17 February 1981
Docket NumberNo. 79-2099,79-2099
PartiesFed. Sec. L. Rep. P 97,872 Lila A. MILEY, Plaintiff-Appellee, v. OPPENHEIMER & COMPANY, INC., Anthony L. Geller and John W. Hamilton, Defendants-Appellants. . Unit A
CourtUnited States Courts of Appeals. United States Court of Appeals (5th Circuit)

William D. Sims, Jr., William M. Parrish, Dallas, Tex., for defendants-appellants.

Daniel L. Penner, Fort Worth, Tex., for plaintiff-appellee.

Appeal from the United States District Court for the Northern District of Texas.

Before GOLDBERG, POLITZ and SAM D. JOHNSON, Circuit Judges.

GOLDBERG, Circuit Judge:

For as long as investment brokers have been remunerated on a commission basis, the potential has existed for brokers to excessively trade accounts in an effort to generate fees. Not surprisingly, for almost as long a period of time, 1 civil suits alleging excessive trading or "churning" in violation of the broker's common law fiduciary duty and the federal securities law have dotted the federal docket.

Despite the fact that judges have been composing churning law for over a decade among the outdoor vendors and the pigeons that line Foley Square, New York (the seat of the Second Circuit) and over the rumbling of nearby cable cars in San Francisco (the base of the Ninth Circuit), the Fifth Circuit's only churning composition has been a deafening silence, rivaling the notorious work of John Cage. 2 No panel in this circuit has ever reached the merits of a churning case. 3 Moreover, while the works of our brethren composers on other circuits have been helpful, they have not been so comprehensive in analysis as to answer many of the complex issues in the area of churning.

In the present case, therefore, Judge Mahon was faced with several difficult questions concerning churning, amidst the pervasive silence of the Fifth Circuit and with but random tunes of intimation and adumbration from other courts. In contesting the jury verdict for the plaintiff Lila Miley, defendants Oppenheimer & Co. and two of its registered representatives, Anthony Geller and John Hamilton, (hereinafter "defendant" or "Oppenheimer") contend that in his attempts to fill such judicial silence, Judge Mahon repeatedly struck errant cords. We have reviewed Judge Mahon's work most carefully and have found it to be well-orchestrated and harmonious. Although Oppenheimer's suggested orchestration of the law governing churning is not without appeal, we have chosen Judge Mahon's work as the superior composition and affirm the decision of the district court.

I. The Ingredients of a Churning Case: Skimmed Versus Evaporated Milk

Churning occurs when a securities broker enters into transactions and manages a client's account for the purpose of generating commissions and in disregard of his client's interests. McNeal v. Paine, Webber, Jackson & Curtis, Inc., supra, 598 F.2d at 890 n.1 (5th Cir. 1979); Mihara v. Dean Witter & Co., Inc., 619 F.2d 814, 820 (9th Cir. 1980). Once an investor proves that: (1) the trading in his account was excessive in light of his investment objectives; (2) the broker in question exercised control over the trading in the account; and (3) the broker acted with the intent to defraud or with willful and reckless disregard for the investor's interests, Mihara v. Dean Witter & Co., Inc., supra, 619 F.2d at 821; Rolf v. Blyth, Eastman, Dillon & Company, Inc., 424 F.Supp. 1021, 1039-1040 (S.D.N.Y.,1977) aff'd in part and rev'd in part, 570 F.2d 38 (2nd Cir.), cert. denied, 439 U.S. 1039, 99 S.Ct. 642, 58 L.Ed.2d 698 (1978), the broker may be held liable for a violation of the federal securities laws under section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and S.E.C. Rule 10b-5. 4 McNeal v. Paine, Webber, Jackson & Curtis, Inc., supra, 598 F.2d at 890 n.1. See Mihara v. Dean Witter & Co., Inc., supra, 619 F.2d at 820; Hecht v. Harris, Upham & Co., 430 F.2d 1202, 1206-07 (9th Cir. 1970); Newburger, Loeb & Co. v. Gross, 563 F.2d 1057, 1069 (2nd Cir. 1977), cert. denied, 434 U.S. 1035, 98 S.Ct. 769, 54 L.Ed.2d 782 (1978); Carras v. Burns, 516 F.2d 251, 288 (4th Cir. 1975); Landry v. Hemphill, Noyes & Co., 473 F.2d 365, 368 n.1 (1st Cir.), cert. denied, 414 U.S. 1002, 94 S.Ct. 356, 38 L.Ed.2d 237 (1973). Additionally, upon proving the three requisite elements of a federal securities law churning violation, the investor will, in most or perhaps all cases, be entitled to hold the broker liable under a pendent state claim for breach of fiduciary duty.

The stories presented at trial by the two parties in this case were similar to the contentions of the opposing parties in most churning cases. 5 Miley, like most churning plaintiffs, argued that she was an unsophisticated investor and that Oppenheimer and its brokerage representatives were aware of this fact. Miley contended further that she carefully informed Oppenheimer that the investment in question represented substantially all of her assets and, thus, that her investment objectives were merely conservative income and growth, in order to insure the safety of her principal. As in most churning cases, Miley then had an expert testify that in light of these conservative investment objectives, the transactions in the account were excessive in size and frequency.

Not surprisingly, Oppenheimer presented a very different picture of the broker-client relationship at issue. Like most churning defendants, Oppenheimer argued that their client was a person with substantial income and assets who desired to greatly increase her wealth by risking downside losses. Oppenheimer contended further that Miley stressed her desire for a high rate of return through the clever and aggressive handling of her discretionary account. Again paralleling most churning cases, Oppenheimer then had their experts testify that the transactions in the account were quite reasonable in light of these speculative objectives.

This jury in this case, as in previous similar churning suits, was faced with the difficult task of choosing between these two scenarios. Moreover, it is indeed possible and, perhaps, probable that the truth lay somewhere in between the two conflicting stories. Miley may, in fact, have been somewhat disgruntled at having lost at what was clearly a gambler's game, while Oppenheimer may, in fact, have tended to err on the side of entering into, rather than of passing up, a somewhat risky investment in order to earn the related commissions. Despite the wide disparity in the stories presented by the opposing parties and the resulting difficulty of the jury's task or, more precisely, because of such disparity and difficulty the appellate court review of the jury's factual conclusions is quite limited. We may only insure that there is sufficient evidence in the record to support the existence of each of the three requisite elements of a federal securities churning violation (and, in turn, the elements of a breach of fiduciary duty claim).

The jury in this case concluded that defendant Oppenheimer had churned plaintiff Miley's account in violation of both the federal securities law and the Texas common law fiduciary duty of investment brokers. 6 Although Oppenheimer strongly protests the jury's finding of liability in this case, we feel that there is sufficient evidence in the record to support finding each of the three requisite elements of a federal securities law churning violation and to support a finding that Oppenheimer breached its Texas common law fiduciary duty.

In addition to contesting the sufficiency of the evidence supporting the finding of liability, defendant Oppenheimer has raised several difficult questions of law concerning the compensatory and punitive damages award, the charge to the jury, and the refusal to order arbitration of the pendent state claims in this case. It is to these challenges that we now turn.

II. Compensatory Damages: Crying Over Spilt Milk

In instructing the jury on the elements of the actual damages in this case and by awarding over $54,000 in such damages, Judge Mahon allowed Miley to recover for both the commission and interest paid as a result of the excessive trading and for the decline in the value of her portfolio in excess of the average decline in the stock market during the time in which Oppenheimer handled her account. Oppenheimer argues that allowing recovery for both excess commissions and excess portfolio decline constitutes double recovery and sets an improper floor on damages for breach of fiduciary duty.

Once the gravamen of the churning complaint is clearly identified, the argument that awarding both excess commissions and excess portfolio decline constitutes double recovery appears to be without merit. The willful misconduct at the core of a churning complaint is the broker's excessive trading of an account in an effort to amass commissions. While excessive commissions represent the sole source of gain to the broker from his misconduct, there are in fact two distinct harms which may be proximately caused by the broker's churning of an account. It is necessary to remedy both harms in order to fully compensate the victimized investor.

First, and perhaps foremost, the investor is harmed by having had to pay the excessive commissions to the broker the "skimmed milk" of the churning violation. The broker's wrongful collection of commissions generated by the intentional, excessive trading of the account constitutes a compensable violation of both the federal securities laws and the broker's common law fiduciary duty, regardless of whether the investor's portfolio increased or decreased in value as a result of such trading. Second, the investor is harmed by the decline in the value of his portfolio the "spilt milk" of the churning violation as a result of the broker's having intentionally and deceptively concluded transactions, aimed at generating fees, which were unsuitable for the investor. The intentional and deceptive mismanagement of a client's account,...

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