Puckett v. Rufenacht, Bromagen & Hertz, Inc.
| Decision Date | 18 September 1991 |
| Docket Number | No. 90-FC-1321,90-FC-1321 |
| Citation | 587 So.2d 273 |
| Parties | Thomas F. PUCKETT and Mildred M. Puckett v. RUFENACHT, BROMAGEN & HERTZ, INC. |
| Court | Mississippi Supreme Court |
Fred Krutz, Alan W. Perry, Forman, Perry, Watkins & Krutz Firm, Jackson, for appellants.
William J. Nissen, Sidley & Austin, Chicago, Ill., Carey R. Varnado, Easterling & Varnado, Hattiesburg, for appellee.
Joseph P. Wise, Wise Carter Child & Caraway, Jackson, for amicus curiae.
En Banc.
Under the provisions of Rule 20 of the Mississippi Supreme Court Rules, the United States Court of Appeals, Fifth Circuit, has by certificate of November 14, 1990, certified questions of law to this Court following its decision in Puckett v. Rufenacht, Bromagen & Hertz, Inc., 903 F.2d 1014 (1990).
From these we take extended excerpts.
This case arose out of the commodity futures trading tragedy of Dr. Thomas F. and Mrs. Mildred Puckett. The United States District Court for the Southern District of Mississippi granted summary judgment in favor of Rufenacht, Bromagen & Hertz, Inc. (RB & H), the broker, on all counts below. The Court of Appeals affirmed the summary judgment dismissing the Pucketts' claims that RB & H committed common law fraud or violated Sec. 4b of the Commodity Exchange Act (CEA), 7 U.S.C. Sec. 6b. However, it certified the state law questions of negligence and breach of fiduciary duty to the Supreme Court of Mississippi.
Read in the light most favorable to the Pucketts, RB & H, a Chicago-based commodity brokerage firm, operates a branch office in Hattiesburg, where the Pucketts reside. Dr. Puckett is a retired pathologist who successfully ran his own pathology lab in Hattiesburg, with gross revenues of $8,000,000 per year.
Dr. Puckett had continuously traded some form of securities from 1955-56 to 1984. He had previously traded commodities on two occasions. He traded with Merrill Lynch in the late 1950's or early 1960's and lost about $40,000. He also traded for a couple of weeks with Paine Webber in mid-1984 and lost about $1,000.
The Pucketts learned of RB & H in July, 1984, at a dinner party. Roger Parker, the manager of the Hattiesburg branch of RB & H, made a presentation about trading commodities in order to acquire customers. Both of the Pucketts opened accounts. They filled out applications on which they stated the amount of risk capital available for commodities trading as $25,000 (for Dr. Puckett) and $15,000 (for Mrs. Puckett). Both Dr. and Mrs. Puckett signed Risk Disclosure Statements before they traded. Both Pucketts acknowledged by signing that they "examined this document and underst[ood] fully the advice contained therein."
These statements informed the Pucketts of the substantial risk in futures tradings, containing the following language:
The risk of loss in trading commodity futures contracts can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. In considering whether to trade, you should be aware of the following:
(1) You may sustain a total loss of the initial margin funds and any additional funds that you deposit with your broker to establish or maintain a position in the commodity futures market. If the market moves against your position, you may be called upon by your broker to deposit a substantial amount of additional margin funds, on short notice, in order to maintain your position. If you do not provide the required funds within the prescribed time, your position may be liquidated at a loss, and you will be liable for any resulting deficit in your account.
(2) Under certain market conditions, you may find it difficult or impossible to liquidate a position. This can occur, for example, when the market makes a "limit move."
(3) Placing contingent orders, such as a "stop-loss" or "stop-limit" order, will not necessarily limit your losses to the intended amounts, since market conditions may make it impossible to execute such orders.
(4) A "spread" position may not be less risky than a simple "long" or "short" position.
(5) The high degree of leverage that is often obtainable in futures trading because of the small margin requirements can work against you as well as for you. The use of leverage can lead to large losses as well as gains.
This brief statement cannot, of course, disclose all the risks and other significant aspects of the commodity markets. You should therefore carefully study futures trading before you trade.
The Pucketts' accounts were non-discretionary. In other words, they made all the trading decisions themselves 1--RB & H could not make unauthorized trades on their behalf. Dr. Puckett spent several days each week at RB & H's offices where he used a quote machine and a news service provided on a screen. He also received comments from the floor of the Chicago Mercantile Exchange. Dr. Puckett regularly received statements (confirmation slips and monthly account statement) which he reviewed.
According to his own deposition testimony and affidavits, Dr. Puckett understood the risks of trading commodity futures contracts. (R. 223-5) Dr. Puckett knew that a risk accompanied every trade and that he had to incur this potential risk in order to reap the potential rewards of large gains. (R. 211-12) Dr. Puckett understood that while some contracts had daily price limits (i.e. limits on how far up or down they could move in a single day), others had no limits and the risk of loss each day on such contracts was unlimited. (R. 221-23) He knew that the potential loss on the Standard & Poors 500 Stock Index Contract (S & P Index) was unlimited. (R. 222-23) Initially, Dr. Puckett was unaware of how quickly the S & P 500 Index could move in a day, but he became aware of this risk when he lost $65,000 trading this contract in one day. (R. 223-24) He continued to trade this contract after learning of this risk. Id.
Dr. Puckett had both successful and unsuccessful trades throughout the thirty-eight months he traded with RB & H. Parker testified that he never tried to influence Puckett in his choice of trades. Dr. Puckett agreed and testified that the initial idea for each of his trades was his own. Parker always properly carried out Dr. Puckett's orders. Puckett could not identify any statements made or information provided by Parker which was untrue. (R. 203) Dr. Puckett believed that any advice which Parker gave about trades was in good faith, even if it didn't pan out. (R. 204) A sampling of Dr. Puckett's deposition reads:
Q. Now, when you did incur losses in your account at RB & H, you were aware of those losses on the day they occurred; is that correct?
A. Yes.
Q. And it was your decision to continue to trade each day after that; is that right?
A. Yes.
Q. And you understood, didn't you, the risk that went along with each particular trade you did?
MR. KRUTZ:
Object to the form of the question. You can answer it, though.
A. Yes.
Q. And you also understood with each trade there was a potential profit that could be made on that trade; is that right?
A. Yes.
* * * * * *
Q. It's true isn't it, that when you made a trade, you knew there was both a potential risk and a potential reward to that trade?
A. Yes.
Q. So, in order to obtain the potential reward, you knew you had to incur that potential risk; is that right?
A. That's right.
The initial risk figures of $25,000 and $15,000 which the Pucketts listed in their customer applications became unimportant to Dr. Puckett once he began trading and he decided to risk more money as time went on. (R. 212, 236) As noted, Dr. Puckett knew his losses on the day they were incurred. (R. 210-211) He generally covered those losses with a check that afternoon or the next morning. (R. 206) Dr. Puckett occasionally liquidated securities at another firm to cover his losses. On those occasions, RB & H always waited the five days it took the security transaction to clear before cashing his check. Eventually, Dr. Puckett began liquidating his pension plan to cover his commodity trading losses. The checks did not indicate the source of funds and Dr. Puckett never informed Parker that he was funding his losses by liquidating his pension fund. (R. 225, 235-38, 629-54)
Dr. Puckett knew that RB & H received a commission for each trade he made. His monthly account statements showed those amounts. (R. 202)
Dr. Puckett quit trading in September, 1987, on the advice of his son. His accountant had informed his son of the state of Dr. Puckett's finances. Dr. Puckett's son told him to stop. By this time, Dr. Puckett had lost over $2,000,000. (R. 229-30) Dr. Puckett told Parker he was quitting because he had lost enough. He made no complaints about the way his account was handled and promptly paid his last loss. (R. 204-05, 214)
Thereafter, the Pucketts brought suit to recover trading losses, punitive damages and attorneys' fees. Their complaint was based on the following counts and allegations:
(vi) breach of good faith and fair dealing and the just and equitable principles of trade, and
(vii) overreaching that was tantamount to fraud.
In response to RB & H's motion for summary judgment, the Pucketts submitted (by affidavit and deposition) the testimony of three expert witnesses (Jordan, Cullen and Giacona) expressing their opinion that Dr. Puckett traded too many different commodities, that he was not adequately informed and experienced to trade S & P futures contracts, that his trading volumes were so high as to be irrational, that he had no trading plan, and there was an extremely high probability that he would lose all he had if he was allowed to...
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