Piscitelli v. Friedenberg
|California Court of Appeals
|87 Cal.App.4th 953,105 Cal.Rptr.2d 88
|14 March 2001
|Michael PISCITELLI, Plaintiff and Appellant, v. Robert FRIEDENBERG, Defendant and Appellant.
Robert Friedenberg appeals a judgment and orders denying his motion for judgment notwithstanding the verdict (JNOV) and partially granting a new trial following a jury verdict finding Friedenberg committed negligence in connection with his legal representation of Michael Piscitelli. Piscitelli retained Friedenberg's law firm to pursue claims against his employer, Prudential Securities, Inc. (Prudential), based in part on allegations that Prudential misrepresented to its brokers the safety, operation and yields of certain limited partnership investments, causing the brokers to sell the investments to customers unsuited for their actual risk. Piscitelli sued Friedenberg for malpractice after Friedenberg failed to opt Piscitelli out of a separate class action lawsuit against Prudential brought by limited partnership investors, which resulted in the release of Piscitelli's claims that would have been presented to a panel of New York Stock Exchange (N.Y.SE) arbitrators. The jury awarded Piscitelli $223,824,560 in damages, including $221,389,400 representing the punitive damages the arbitrators in the underlying proceeding would have awarded based on the jury's finding that Prudential acted with oppression, malice or fraud. The court denied Friedenberg's motion for JNOV, but granted a new trial on damages if Piscitelli did not consent to a remittitur of $221,389,400.
Friedenberg contends the court erred in denying his motion for JNOV because he had no legal duty to opt Piscitelli out of the Prudential class
Inaction, and Piscitelli failed to present substantial evidence he would have prevailed in his underlying case against Prudential. Alternatively, Friedenberg contends he is entitled to a new trial on both liability and damages because the court erred in conducting the "trial-within-a-trial" format of his action by (1) allowing a jury to decide whether a securities arbitration panel would have ruled in Piscitelli's favor; (2) allowing experts to testify about the ultimate result of the underlying arbitration; (3) admitting into evidence settlement agreements between Prudential and the SEC and other government entities; (4) refusing to admit evidence of client complaints filed against Piscitelli; and (5) refusing to give jury instructions setting forth certain securities arbitration rules. Finally, Friedenberg asserts that if he is entitled to a new trial on damages, Piscitelli may not seek damages for lost commissions on managed accounts and lost punitive damages because lost commissions are speculative as a matter of law and encompassed within the exclusive remedy of workers' compensation, and lost punitive damages are not recoverable as a matter of law and public policy.
Piscitelli appeals the court's order granting a partial new trial, contending the court abused its discretion by ordering a new trial on both compensatory and lost
punitive damages when it determined only that the punitive damages component was unsupported by the evidence and the result of passion and prejudice. Piscitelli asserts the court's order should be modified to reinstate the compensatory damage award and grant a new trial on the punitive damages component alone.
We conclude the court misperceived the jury's role in this "arbitration-within-a-trial" and that its error in permitting Piscitelli's expert to testify about the ultimate result of the arbitration, combined with inadequate and incomplete jury instructions, prejudicially affected the outcome of the trial. We further conclude that, in legal malpractice actions, permitting a jury to impose punitive damages on a negligent defendant by restyling them as compensatory "lost punitive damages" is unjust and contrary to public policy. Accordingly, we reverse.
We recite the facts most favorable to the judgment. (GHK Associates v. Mayer Group, Inc. (1990) 224 Cal.App.3d 856, 872, 274 Cal.Rptr. 168.) In October 1986, Prudential successfully recruited Piscitelli as a broker by promoting attractive incentives for selling limited partnership investments Prudential offered to investors. Prudential offered its brokers an opportunity to obtain a generous commission when the partnerships were eventually
sold. Piscitelli was motivated by the possibility of making approximately $1.5 million in profits from his sales after 12 years.
Piscitelli eventually made selling the limited partnerships a large part of his business. He relied on Prudential's marketing materials to familiarize himself with the limited partnership investments as he was told to do, believing that Prudential had conducted its own due diligence before putting its name on the investment products. He also read the accompanying prospectuses to the best of his ability. Piscitelli's practice was to provide all of his clients with any investment's prospectus, advise them that it included a "risk factors" section, suggest they might have a lawyer or accountant review it and tell them to call him back if they had any questions. Yet Piscitelli himself was discouraged from reading the prospectuses. Piscitelli was also told, and information provided to brokers from Prudential's cogeneral partner represented, that Prudential could not borrow money for the partnerships and they purchased all investment properties for cash. Nevertheless, Piscitelli conducted his own due diligence into the investments by attending meetings where wholesalers discussed the programs, touring properties purchased by some of the partnerships, and meeting with persons in the particular group at Prudential that handled the limited partnerships.
From late 1986 to about early to mid-1989, Piscitelli sold $6.8 million in the limited partnerships to his friends and clients who had previously held conservative investments in triple-A bonds, certificates of deposits (CD's), tax exempt securities and mutual funds. Piscitelli himself invested in some of the partnerships.
Prudential had misrepresented many aspects, including safety and potential yields, of the limited partnership investments. Prudential represented to brokers in promotional materials that the limited partnerships were comparable to long term certificates of deposits (CD's), safe investments suitable for conservative investors; that they were income-producing and backed by a "letter of credit"; and that investors could expect anticipated returns or yields in the range of 15 to 20 percent annually. In fact, the limited partnerships were high-risk investments without a reliable secondary market, and they were losing money. Contrary to Prudential's representations, the limited partnerships did not have proven "track records" of regular profit distributions. Prudential did not disclose that past or projected distributions from the limited partnerships included-return
of investor capital and in some cases distribution of borrowed funds. For example, in 1985 Prudential had taken out a loan in order to make distributions to investors in oil and gas partnerships that were not from the partnership earnings. The loan was camouflaged; it was not disclosed on the prospectus and neither a client nor a broker could have seen
that distributions were handled in this manner. Piscitelli was never told that Prudential or its co-general partner were borrowing money from the partnerships to pay returns to investors, and he could not have learned such information from the prospectuses even had he reviewed them. Prudential gave its brokers information representing that its limited partnerships were making money and the brokers relied upon that information to continue to sell customers interests in additional limited partnerships formed by Prudential and its co-general partner.
In mid-1989, Piscitelli started to suspect there were problems with the limited partnership investments, and distributions "just went away." He began getting telephone calls from concerned clients. After unsuccessfully attempting to obtain information from Prudential's co-general partner and Prudential personnel at a due diligence meeting, Piscitelli stopped selling the partnerships and began to focus on a new Prudential program (known as "money-under-management") in which he arranged for a professional money manager to manage the stocks, bonds and other investments of his clients.
Between 1992 and 1996, numerous complaints were made against Piscitelli by his clients in connection with their limited partnership investments. Prudential paid for Piscitelli's defense and settled the lawsuits, but as it was required to do it listed the client complaints on Piscitelli's permanent broker record, a publicly available listing of information concerning the background and complaints made against brokers.1 In 1993, Piscitelli took disability leave from Prudential due to severe depression. Another broker handled Piscitelli's largest money management account until the client representative, dissatisfied with its handling and aware of Prudential's bad publicity, moved the account to another firm. At the time of trial, that account was being managed by an independent broker who earned approximately $280,000 in handling fees from the account. Piscitelli unsuccessfully sought positions with...
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