Nesbit v. McNeil

Decision Date16 May 1990
Docket NumberNos. 88-4143,88-4174,s. 88-4143
Citation896 F.2d 380
PartiesBlue Sky L. Rep. P 73,218, Blue Sky L. Rep. P 73,257, 58 USLW 2501, Fed. Sec. L. Rep. P 94,931 Virginia H. NESBIT and the W. Wallace Nesbit Trust, Plaintiffs-Appellees, Cross-Appellants, v. Steve McNEIL and Black & Company, Inc., Defendants-Appellants, Cross-Appellees.
CourtU.S. Court of Appeals — Ninth Circuit

Barnes H. Ellis and Charles F. Adams, Stoel Rives Boley Jones & Grey, Portland, Or., for defendants-appellants, cross-appellees.

Jerome E. LaBarre, LaBarre & Associates, P.C., Portland, Or., for plaintiffs-appellees, cross-appellants.

Appeal from the United States District Court for the District of Oregon.

Before WRIGHT, TANG and FERNANDEZ, Circuit Judges.

FERNANDEZ, Circuit Judge:

Virginia H. Nesbit and the W. Wallace Nesbit Trust ("plaintiffs") brought this action against Steve McNeil and Black & Company, Inc. ("defendants") and alleged that the defendants had churned the plaintiffs' investment accounts. Among other things, plaintiffs sought to recover for violations of the federal securities laws [Securities and Exchange Act of 1934 Sec. 10(b), 15 U.S.C. Sec. 78j(b), and Rule 10b-5, 17 C.F.R. Sec. 240.10b-5] and under the State of Oregon securities laws [Or.Rev.Stat. Sec. 59.135 (1987) ]. The district court directed a verdict against the plaintiffs on the Oregon securities law claim, and submitted the federal securities claim to the jury. The jury brought in a verdict against defendants, and awarded damages in the amount of the excess commissions generated by the churning of the plaintiffs' accounts. The district court denied a motion for judgment notwithstanding the verdict, and entered judgment accordingly.

Defendants now appeal and claim that the district court erred because it did not permit the offset of trading gains against the excess commissions, because the evidence of churning was insufficient to support the verdict, and because the plaintiffs' claims were barred by the statute of limitations in whole or in part. Defendants also claim that they should not have been required to disgorge the full amount of excess commissions, but only their net gain on those commissions.

In their cross-appeal, plaintiffs assert that the district court should not have granted a directed verdict on the Oregon securities law claim, since plaintiffs should be able to recover attorney's fees, even if they were unable to prove any other damages under Oregon law.

We affirm the district court on each of these issues.

BACKGROUND FACTS

Virginia H. Nesbit was a retired school teacher and the widow of W. Wallace Nesbit, a businessman. Upon his death, Mr. Nesbit left a portfolio of securities that were rather conservative although not necessarily highly successful. Those, as well as other assets, were divided between Mrs. Nesbit and the W. Wallace Nesbit Trust ("the Trust"). Mrs. Nesbit was the trustee of the Trust. From then until 1974, the investments remained conservative and did not do very well. By 1974, there had been a significant loss of value. Mrs. Nesbit then opened accounts for herself and the Trust at Black & Company, Inc. They were opened through Steve McNeil, who was the son of a friend of Mrs. Nesbit. The equity in Mrs. Nesbit's account was then $167,463, and the equity in the Trust's account was $44,177. Mrs. Nesbit, who was not knowledgeable in these matters, told the defendants that her investment objectives for herself and the Trust were stability, income and growth. Defendants claim that she told them she wanted to recoup the losses that had been suffered previously.

Defendants then embarked on a course of conduct that extended over a period of eleven and one half years. By the time the accounts were closed out in October of 1985, the equity in Mrs. Nesbit's account was $301,711, and the equity in the Trust's account was $92,844. 1 There can be little dispute that this was a substantial increase in value. However, the activities of defendants during those eleven and one half years are called into question in this case.

Plaintiffs have pointed out that defendants first liquidated some of the securities in plaintiffs' portfolio. Mr. McNeil then embarked on a course of trading that involved 150 issues, one thousand trades, and an overall transaction value of $4,400,000. While the plaintiffs' account values did grow by $182,915 2 during the period in question, the defendants' commissions came to $250,000. Moreover, the investments chosen by defendants were not the kind of investments that one would purchase if one sought a stable, income-producing portfolio. Rather, they were often speculative in nature and were not income- producing. By the time the accounts terminated, many of the investments had accrued losses.

By 1984, Mrs. Nesbit became concerned about the level of activity in the accounts. She kept in closer contact with Mr. McNeil, and the level of trading decreased, but did not end entirely. She became even more concerned in 1985. At that time she discovered losses in the portfolio when calls were made upon her by lenders to whom she had pledged certain of the securities. Her concerns increased when the handling of the accounts was questioned by Ronald Linn, an analyst at Titan Capital, and were not particularly allayed when visits with Mr. McNeil brought forth an apology and an expression of embarrassment at the list of losing stocks. All of this ultimately led to the closing of the accounts in October of 1985. Over one year later, plaintiffs filed this action.

JURISDICTION AND STANDARD OF REVIEW

The district court had jurisdiction over the federal claims pursuant to 28 U.S.C. Sec. 1331, 15 U.S.C. Sec. 78aa, and 18 U.S.C. Sec. 1965, and it had pendent jurisdiction over the state claims. We have jurisdiction pursuant to 28 U.S.C. Sec. 1291.

We review questions of law de novo. United States v. McConney, 728 F.2d 1195, 1201 (9th Cir.) (en banc), cert. denied, 469 U.S. 824, 105 S.Ct. 101, 83 L.Ed.2d 46 (1984). That same standard applies to our review of jury instructions, when it is claimed that they are erroneous as a matter of law. Collins v. City of San Diego, 841 F.2d 337, 340 (9th Cir.1988). However, the trial judge has wide latitude in tailoring instructions, and we only review them to assure that they adequately covered the issues presented by the case. Los Angeles Memorial Coliseum Comm'n v. National Football League, 791 F.2d 1356, 1360 (9th Cir.1986), cert. denied, 484 U.S. 826, 108 S.Ct. 92, 98 L.Ed.2d 53 (1987).

We apply the same standard of review to rulings on motions for directed verdicts and rulings on motions for judgment notwithstanding the verdict. As we said in Los Angeles Memorial Coliseum Comm'n v. National Football League, 791 F.2d at 1360:

[O]ur inquiry is identical to that of the district court: viewing the evidence as a whole and in the light most favorable to the non-moving party ..., does substantial evidence support the jury's verdict or, on the contrary, is the only reasonable conclusion that can be drawn from the evidence that the moving party ... is entitled to judgment as a matter of law?

If reasonable minds could differ about the verdict, neither a directed verdict nor a judgment notwithstanding the verdict is proper. See Peterson v. Kennedy, 771 F.2d 1244, 1256 (9th Cir.1985), cert. denied, 475 U.S. 1122, 106 S.Ct. 1642, 90 L.Ed.2d 187 (1986).

DISCUSSION

Although the principal question before us is whether plaintiffs can recover damages for churning when they have had an increase in portfolio values that exceeds the amount of commissions they were charged, the defendants have also claimed that there was insufficient evidence to support the verdict, and that the action is barred by the statute of limitations. If defendants were to prevail on either of the latter issues, there would be no need to consider the damage issue. Therefore, we will address them first.

A. Sufficiency of the Evidence.

The detection and proof of churning is not a simple matter. Churning can only be identified when one considers the whole history of an account, and even then expert testimony is virtually essential. Shad v. Dean Witter Reynolds, Inc., 799 F.2d 525, 530 (9th Cir.1986). As we explained in Mihara v. Dean Witter & Co., Inc., 619 F.2d 814, 820-21 (9th Cir.1980):

When a securities broker engages in excessive trading in disregard of his customer's investment objectives for the purpose of generating commission business, the customer may hold the broker liable for churning in violation of Rule 10b-5.... In order to establish a claim of churning, a plaintiff must show (1) that the trading in his account was excessive in light of his investment objectives; (2) that the broker in question exercised control over the trading in the account; and (3) that the broker acted with the intent to defraud or with the wilful and reckless disregard for the interests of his client. [citations omitted]

Plaintiffs presented substantial evidence on each of these elements, as our statement of background facts has shown. This case involves a relatively unsophisticated investor, who relied upon a person in whom she had confidence--the son of a family friend--to handle her portfolio in a safe and income-generating manner. There can be little doubt that Mr. McNeil did exercise a great deal of de facto control over that account, and the mere fact that he told his client what was being done does not change that situation. This case is quite unlike Brophy v. Redivo, 725 F.2d 1218 (9th Cir.1984), where the only real claim was that certain transactions had been executed without plaintiff's permission and even against her directions. Here the gravamen of the complaint is that the defendants used their position to overtrade in the account and to do so in a way that they knew did not meet the client's true investment...

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