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

• Citation: 609 F. Supp. 1055
• Decision Date: 02 April 1985
• Docket Number: Civ. A. No. M-84-3118.
• Parties: Manuel E. NUNES and Dr. Leroy D. Kane v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC. and Philip C. Poston and Nancy M. Beckwith.
• Court: U.S. District Court — District of Maryland

609 F. Supp. 1055

Manuel E. NUNES and Dr. Leroy D. Kane v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC. and Philip C. Poston and Nancy M. Beckwith.

Civ. A. No. M-84-3118.

United States District Court, D. Maryland.

April 2, 1985.

COPYRIGHT MATERIAL OMITTED

Charles Bagley, IV and Council, Baradel, Kosmerl & Nolan, P.A., Annapolis, Md., for plaintiffs.

David F. Albright, G. Randall Whitten-berger and Semmes, Bowen and Semmes, Baltimore, Md., for defendants.

MEMORANDUM AND ORDER

JAMES R. MILLER, Jr., District Judge.

Plaintiffs sue defendants in this civil action alleging various causes of action arising out of defendants' handling of plaintiffs' securities accounts (Paper No. 1). Plaintiffs allege violations of § 17(a) of the Securities Act of 1933, as amended, 15 U.S.C. § 77q(a); and §§ 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, 15 U.S.C. §§ 78j(b) and 78t, and Rule 10b-5 promulgated thereunder, 17 CFR 240.10b-5; violations of the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1961 et seq.; violations of the Maryland Securities Act, Md. Corp. and Assn. Code Ann. § 11-703; and common law claims of fraud, breach of fiduciary duty, negligence, and breach of contract.

Defendants have filed a motion pursuant to Rules 12 and 56 (Paper No. 3). Plaintiffs have filed an opposition (Paper No. 5), to which defendants have filed a reply (Paper No. 6). In addition, defendants have filed a supplemental memorandum (Paper No. 7), to which plaintiffs have filed an opposing memorandum (Paper No. 8). After reviewing the memoranda submitted by the parties, the court concludes that no hearing is necessary to decide the motion. Local Rule 6(E).

I. Background

Manuel E. Nunes alleges that in 1981 he opened a cash management account with Merrill Lynch, Pierce, Fenner & Smith (Merrill Lynch) (Paper No. 1, ¶ 13). He alleges that he became concerned with the poor condition of his account in June 1982, and turned to defendant Philip C. Poston, then an employee of Merrill Lynch, who in turn sent Nunes to defendant Nancy M. Beckwith, also a Merrill Lynch employee (id., ¶¶ 14-15). Nunes alleges that Poston and Beckwith represented that they would look after his account and make sure that he did not make any unwise trades (id., ¶ 15). Nevertheless, Nunes alleges, he continued to be faced with recurring maintenance margin calls which required him either to deposit additional funds or to transact additional securities option trades to prevent his account from being closed (id., ¶ 16). Nunes, allegedly relying on Poston's advice, continued to authorize Poston to sell options on securities in order to generate cash to meet margin calls (id.). Nunes further alleges that at no time did Poston ever discourage Nunes from making a particular trade (id.).

Nunes alleges that during this time period the defendants induced transactions in securities and securities options in his account which were excessive and which generated $51,724.00 in commission expense and incurred $17,371.00 in margin expense for Nunes (id., ¶ 17). Nunes alleges that the defendants, without authority, assumed de facto control over his account and engaged in excessive and unwarranted trading in and churning of his account for the purpose of generating commissions and fees for themselves, in total disregard of the needs and objectives of Nunes (id., ¶ 19).

Kane alleges that he opened up a cash account with Merrill Lynch on or about September 25, 1982, which remained open until June 1983 (id., ¶ 56). Kane alleges that, due to his close relationship with Nunes, he executed a power of attorney to Nunes under which Nunes had authority to make transactions in Kane's account (id., ¶ 57), and that Kane's account was therefore subjected to the same problems as Nunes' (id.).

Kane further alleges that sometime between October 30, 1982 and November 26, 1982, his account was changed from a cash account to a margin account without his prior knowledge or permission, and that in January 1983, it was changed to a cash management account, at which time he began receiving increased requests for monies from Poston to meet maintenance costs (id., ¶¶ 58, 59). Kane alleges that during the time when he had an account with Merrill Lynch, defendants, having assumed de facto control over his account, induced excessive transactions which generated $8,222.00 in commission expense and incurred $1,439.00 in margin expense (id., ¶ 62). Kane alleges that, as a result of defendants' actions, he has suffered a diminution in the value of his total investment account of approximately $16,000.00 (id., ¶ 66).

Nunes seeks compensatory damages of $69,000.00, consisting of commissions paid, margin expense, and other fees, while Kane requests compensatory damages of $16,000.00, consisting of the diminution in total value of his investment account. Both plaintiffs also request prejudgment interest, punitive damages of $1,000,000.00 each, and treble damages for all damages awarded to them under their RICO claims, pursuant to 18 U.S.C. § 1964(c).

II. Punitive Damages¹

A. Section 28(a) of the Securities Exchange Act

Defendants assert that neither federal nor state law permits recovery of punitive damages on the facts alleged in the complaint. First, defendants claim that § 28(a) of the Securities Exchange Act, 15 U.S.C. § 78bb(a)², limits the damages available in this case, on both the federal and the pendent claims, to the actual damages suffered by the plaintiffs.

Punitive damages are not recoverable on the federal securities claims.³ See, e.g., Carras v. Burns, 516 F.2d 251, 259 (4th Cir.1975); Baumel v. Rosen, 412 F.2d 571, 576 (4th Cir.1969).

The issue of the availability of punitive damages on pendent claims attached to federal securities claims was raised in this district in Goodman v. Poland, 395 F.Supp. 660 (D.Md.1975), where Judge Northrop stated:

"Thus, the general rule today appears to be that while punitive damages are not recoverable in an action solely under Rule 10b-5, see deHaas v. Empire Petroleum Co., 435 F.2d 1223, 1229-32 (10th Cir.1970), Baumel v. Rosen, supra, 412 F.2d at 576 (dictum,) Green v. Wolf Corp., 406 F.2d 291, 302-03 (2nd Cir. 1968), cert. denied, 395 U.S. 977, 89 S.Ct. 2131, 23 L.Ed.2d 766 (1969), they may be awarded, if allowable under state law, when a state law violation is joined with the Rule 10b-5 claim. Flaks v. Koegel, 504 F.2d 702, 706-07 (2nd Cir.1974); Coffee v. Permian Corp., 474 F.2d 1040, 1044 45 (5th Cir.), cert. denied, 412 U.S. 920, 93 S.Ct. 2736, 37 L.Ed.2d 146 (1973); Young v. Taylor, 466 F.2d 1329, 1337-38 (10th Cir.1972); Burkhart v. Allson Realty Trust, supra, 363 F.Supp. 1286 at 1290-92 N.D.Ill.(1973); In re Caesars Palace Securities Litigation, 360 F.Supp. 366, 393-94 (S.D.N.Y.1973); Gann v. Bernzomatic Corp., 262 F.Supp. 301, 304 (S.D.N.Y.1966)."

395 F.Supp. at 686. Defendants assert, however, that the holding in Goodman should be reassessed, stating:

"The problems with Goodman are that (1) it fails to follow the spirit of the Fourth Circuit decisions, Carras and Baumel, which limit a plaintiff's recovery to actual damages in securities cases, (2) it fails to follow the explicit language of § 28(a), and (3) its rationale, based on `the general rule today,' in 1975 could not possibly have forseen the great impact the many yet to be written Supreme Court cases would have on the course of statutory construction of the securities laws."

(Paper No. 6 at 4-5).

Judge Northrop in Goodman did acknowledge the decisions in both Carras and Baumel, but apparently determined, correctly in this court's view, that neither of those cases was controlling on the issue. In Baumel, although the plaintiff had also pleaded common law fraud and deceit, the Fourth Circuit panel did not address that claim because no decision was made on it below. 412 F.2d at 572. Similarly, in Carras, the court intentionally left this issue open, stating that it was unnecessary for the court to decide it since the jury in that case had found that the defendants lacked the intent to defraud necessary to support a claim for punitive damages under the applicable state law. 516 F.2d at 260.

There is no merit to defendants' claim that the holding in Goodman fails to follow the explicit language of § 28(a). Defendants have cited no authority supporting its assertion that the explicit language of § 28(a) prohibits recovery of punitive damages under pendent claims, and this court is aware of none. Courts have generally found that the statute and its legislative history are capable of alternate interpretations. See, e.g., deHaas v. Empire Petroleum Co., 435 F.2d 1223, 1230 (10th Cir. 1970); Gilbert v. Bagley, 492 F.Supp. 714, 742-43 (M.D.N.C.1980). This court is in agreement.

While § 28(a) states that "no person permitted to maintain a suit for damages under the provisions of this chapter shall recover, through satisfaction of judgment in one or more actions, a total amount in excess of his actual damages on account of the act complained of," it also provides that its rights and remedies are "in addition to any and all other remedies that may exist at law or in equity...." This section is capable of being interpreted as defendants request, i.e., that anyone permitted to maintain an action under the Securities Exchange Act is limited to recovery of actual damages on either securities or pendent claims. It is more likely, however, that Congress intended, in reserving common law remedies, to reserve the common law measure of damages as well and to limit recovery to actual damages only with regard to claims under the securities laws. In Goodman, Judge Northrop found this latter position to be the general rule, and subsequent decisions have agreed. See, e.g., Miley v. Oppenheimer & Co., 637 F.2d 318, 329-31 (5th Cir.1981); Nye v. Blyth Eastman Dillon & Co., 588 F.2d 1189, 1200 (8th Cir.1978); Faller Group, Inc. v. Jaffe, 564 F.Supp. 1177, 1185-86 (S.D...