Puckett v. Rufenacht, Bromagen & Hertz, Inc.

• Decision Date: 05 June 1990
• Docket Number: No. 89-4504,89-4504
• Parties: Thomas F. PUCKETT and Mildred M. Puckett, Plaintiffs-Appellants, v. RUFENACHT, BROMAGEN & HERTZ, INC., Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1014

903 F.2d 1014

Thomas F. PUCKETT and Mildred M. Puckett, Plaintiffs-Appellants, v. RUFENACHT, BROMAGEN & HERTZ, INC., Defendant-Appellee.

No. 89-4504.

United States Court of Appeals Fifth Circuit.

June 5, 1990.

Rehearing Denied June 25, 1990.

Allen W. Perry, Fred Krutz, III, and Ronald D. Collins, Forman, Perry, Watkins, Krutz & McNamara, Jackson, Miss., for plaintiffs-appellants.

William J. Nissen, Sidley & Austin, Chicago, Ill., and Carey Varnado, Easterling & Varnardo, Hattiesburg, Miss., for defendant-appellee.

Appeal from the United States District Court for the Southern District of Mississippi.

Before BROWN, WILLIAMS and JONES, Circuit Judges.

JOHN R. BROWN, Circuit Judge:

This case arose out of the commodity futures trading tragedy of Dr. and Mildred Puckett. The trial court granted summary judgment in favor of Rufenacht, Bromagen & Hertz, Inc. (RB & H), the broker, on all counts below. We affirm the summary judgment dismissing the Pucketts' claims that RB & H committed common law fraud or violated Sec. 4b of the Commodities Exchange Act (CEA), 7 U.S.C. Sec. 6b. However, we certify the state law questions of negligence and breach of fiduciary duty to the Supreme Court of Mississippi.

Standard of Review

Our review of a grant of summary judgment is de novo. ¹ The standard for the grant or denial of a summary judgment is the absence or presence (respectively) of an actual dispute as to a material fact. All facts and inferences are viewed in the light most favorable to the non-moving party and all reasonable doubts are resolved in that party's favor. If factual issues or conflicting inferences exist, the court is not to resolve them; rather, summary judgment must be denied. In making its determination, the court may look at "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any." F.R.Civ.P. 56(c).

From Pork Bellies to Standard & Poors

Read in the light most favorable to the Pucketts, the facts are as follows. RB & H, a commodity brokerage firm, operates a branch office in Hattiesburg, Mississippi, where the Pucketts reside. Dr. Puckett is a retired pathologist who successfully ran his own pathology lab, with gross revenues of $8,000,000 per year, in Hattiesburg.

Dr. Puckett has continuously traded some form of securities from 1955-56 to the present. 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. (R. 248. 253). Both Pucketts acknowledged by signing that they "examined this document and underst[ood] fully the advice contained therein."

The Pucketts' accounts were non-discretionary. In other words, they made all the trading decisions themselves ²--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 statements) which he reviewed.

According to his own deposition testimony and affidavits, Dr. Puckett understood the risks of trading commodity futures contracts. (R. 223-25). 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 believes that any advice which Parker gave about trades was in good faith even if it didn't pan out. (R. 204).

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). Dr. Puckett knew his losses on the day they were incurred. (R. 210-11). He generally covered those losses with a check that afternoon or the next morning. (R. 206). Dr. Puckett occassionally liquidated securities at another firm to cover his losses. On those occassions, 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: (i) an alleged violation of Sec. 4b of the CEA, 7 U.S.C. Sec. 6b, (ii) breach of fiduciary duty, (iii) fraudulent inducement, fraudulent concealment, and actual fraud, (iv) constructive fraud, (v) negligence, (vi) breach of good faith and fair dealing and the just and equitable principles of trade, and (vi) overreaching that was tantamount to fraud. The trial judge held for RB & H on each of these counts and dismissed the Pucketts' suit with prejudice.

On appeal, the Pucketts argue that genuine issues of material fact remain to be resolved. The three issues they raise are: (i) fraud and a violation of CEA Sec. 4b, (ii) breach of fiduciary duty, and (iii) negligence. This opinion affirms the trial court's disposition on the fraud issues and certifies the questions of state law to the Mississippi Supreme Court.

Risking it All

The Commodity Exchange Act (CEA), 7 U.S.C. Sec. 1, et seq., makes it unlawful for any person, "in or in connection with any order to make, or the making of, any contract of sale of any commodity in interstate commerce, made, or to be made, on or subject to the rules of any contract market, for or on behalf of any other person, ..."

(A) to cheat or defraud or attempt to cheat or defraud such other person;

(B) willfully to make or cause to be made to such other person any false report or statement thereof, or willfully to enter or cause to be entered for such person any false record thereof;

(C) willfully to deceive or attempt to deceive such other person by any means whatsoever in regard to any such order or contract or the disposition or execution of any such order or contract, or in regard to any act of agency performed with respect to such order or contract for such person; ....

7 U.S.C. Sec. 6b (West Supp.1990) (CEA Sec. 4b).

The Pucketts allege that this provision was violated in three ways: (i) RB & H misrepresented material facts, (ii) RB & H failed to disclose the risks of commodities trading, and (iii) RB & H had a duty to determine that Dr. Puckett was not suitable to trade commodities and to prevent him from doing so.

The elements of a fraud action under Sec. 4b are derived from the common law action for fraud. Greenwood v. Dittmer, 776 F.2d 785, 789 n. 4 (8th Cir.1985); Horn v. Ray E. Friedman & Co., 776 F.2d 777, 780 (8th Cir.1985). ³ Several circuits have defined fraud in the CEA context.

The Eighth Circuit has held that the test for culpable fraud is the making of a false representation of material fact with the knowledge or belief on the maker's part that the representation is false. Horn, 776 F.2d at 780. The misrepresentation must be made with the intent to induce reliance and the plaintiff must show damages resulting from justifiable reliance. Id. The Second and Tenth Circuits have joined the Eighth in requiring a "degree of intent beyond carelessness or negligence." Hill v. Bache Halsey Stuart Shields Inc., 790 F.2d 817, 822 (10th Cir.1986) (and cases cited therein); Haltmier v. CFTC, 554 F.2d 556, 562 (2d Cir.1977). The Ninth Circuit likewise requires "an intentional act or careless disregard for the statutory requirement."...