Pusateri v. E. F. Hutton & Co.

• Decision Date: 24 April 1986
• Citation: 180 Cal.App.3d 247,225 Cal.Rptr. 526
• Court: California Court of Appeals Court of Appeals
• Parties: Francis PUSATERI and Jenny Pusateri, Plaintiffs and Respondents, v. E.F. HUTTON & CO., INC. et al., Defendants and Appellants. A028856.

Page 526

225 Cal.Rptr. 526

180 Cal.App.3d 247

Francis PUSATERI and Jenny Pusateri, Plaintiffs and Respondents, v. E.F. HUTTON & CO., INC. et al., Defendants and Appellants.

A028856.

Court of Appeal, First District, Division 1, California.

April 24, 1986.

Bruce W. Belding, Peter W. Colby, Dinkelspiel & Dinkelspiel, San Francisco, for defendants and appellants.

Frank L. Crist, Jr., Patricia J. Van Horn, Crist, Griffith, Bryant, et al., Palo Alto, for plaintiffs and respondents.

RACANELLI, Presiding Justice.

This appeal presents the single issue whether sufficient evidence was present for a jury to assess punitive damages against a stock brokerage firm. Our review of the record impels an affirmative conclusion.

Plaintiffs and respondents Francis and Jenny Pusateri were awarded $45,000 in compensatory damages in a tort action against defendant E.F. Hutton & Co., Inc. (E.F. Hutton) and its account executive, Gilbert J. Johnson, due to Johnson's "churning" of plaintiffs' account and engaging in a variety of unauthorized purchasing and trading transactions resulting in losses to plaintiffs of approximately $120,000. The jury also awarded punitive damages of $160,000 against E.F. Hutton alone. Thereafter, the trial court denied E.F. Hutton's motions for a new trial and for judgment notwithstanding the verdict (nov). E.F. Hutton appeals only from the judgment awarding punitive damages and the order denying judgment nov. We will conclude that the evidence adequately supports the award of punitive damages.

Standard of Review

"The scope of appellate review of a trial court's denial of a motion for judgment notwithstanding the verdict is to determine whether there is any substantial evidence, contradicted or uncontradicted, supporting the jury's conclusion and where so found to uphold the trial court's denial of the motion. (Gordon v. Strawther Enterprises, Inc. (1969) 273 Cal.App.2d 504, 511 [78 Cal.Rptr. 417, 39 A.L.R.3d 809]; Stevens v. Roman Catholic Bishop of Fresno, supra, 49 Cal.App.3d at p. 889 .)" (Hobbs v. Eichler (1985) 164 Cal.App.3d 174, 192, 210 Cal.Rptr. 387.)

"When a finding of fact is attacked on the ground that there is no substantial evidence to sustain it, the power of an appellate court begins and ends with the determination as to whether there is any substantial evidence, contradicted or uncontradicted, which will support the finding of fact. [Citations.] [p] When two or more inferences can reasonably be deduced from the facts, a reviewing court is without power to substitute its deductions for those of the trial court. [Citations.]" (Green Trees Enterprises, Inc. v. Palm Springs Alpine Estates, Inc. (1967) 66 Cal.2d 782, 784-785, 59 Cal.Rptr. 141, 427 P.2d 805.)

E.F. Hutton argues, in essence, that there is no evidence that it acted in conscious disregard of plaintiffs' rights or that it authorized or ratified the acts of its agent, Johnson. (See generally Civ. Code, § 3294, subd. (b).) We disagree.

Our highest court has stated the governing rule in the following manner: " ' "... California follows the rule laid down in Restatement of Torts, section 909, which provides punitive damages can properly be awarded against a principal because of an act by an agent if, but only if '(a) the principal authorized the doing and the manner of the act, or (b) the agent was unfit and the principal was reckless in employing him, or (c) the agent was employed in a managerial capacity and was acting in the scope of employment, or (d) the employer or a manager of the employer ratified or approved the act." ' [ ] (Hale v. Farmers Ins. Exch. [1974] 42 Cal.App.3d 681, 690-691 .)' [See also Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, 822 (169 Cal.Rptr. 691, 620 P.2d 141).]" (Agarwal v. Johnson (1979) 25 Cal.3d 932, 950, 160 Cal.Rptr. 141, 603 P.2d 58.)

Discussion

Viewing the evidence in a light favorable to the plaintiffs and respondents, the following appears: Plaintiff Francis Pusateri had acquired some 21,000 shares of stock in Apple Computer, Inc., through exercise of employee stock-option plans during his employment. Pusateri had suffered a heart attack in 1972, and concern for his health eventually resulted in his retirement from Apple. In 1981, Apple made arrangements for present and former employees to sell shares of Apple stock without a broker. Pusateri sold about 6,000 shares for approximately $188,000 which he intended to invest to assure an income for his wife in the event of his disability. (Pusateri, then in his fifties, worked as a consultant without fixed employment or any retirement benefits.) At the suggestion of Apple's finance officer, Pusateri made an appointment with a local E.F. Hutton broker. However, prior to that appointment, plaintiffs met Johnson at a social event and decided, instead to discuss their investment plans with him.

At their very first meeting, plaintiffs told Johnson they wished to invest in tax-free bonds and money market accounts to obtain a monthly income of $2,000 to $2,500; they expressly informed him that they did not want to purchase stock because of a prior bad experience. Johnson assured them that their targeted income was easily attainable and filled out E.F. Hutton's standard new-client card. The investment objective marked on the card included "tax-free income, moderate growth and long term growth." Johnson did not check the boxes for businessman's risk, fixed income, appreciation, trading, short-term, commodities or option trading. Johnson conceded that plaintiffs desired a conservative approach, which would not include margin trading, "in-and-out" trading (quick purchase and sales transactions) or purchase of highly volatile brokerage stocks. Johnson also agreed that the plaintiffs' investment objectives were never changed during the time he acted as their broker.

In the following weeks, Johnson purchased stock in a volatile cellular communications company. Upon receiving the confirmation slip, Pusateri protested but ultimately relied on Johnson's recommendation to retain the stock. By the end of June, Johnson had purchased over $11,000 in stock on margin without Pusateri's knowledge or written consent. On July 1, 1981, Johnson brought a margin loan agreement to plaintiffs' home, explaining only that it was another "form" to establish the account. Plaintiffs signed the document without reading it by virtue of their trust in Johnson. Plaintiffs did not know they were buying stock on credit and were not told what a margin account was.

Johnson's churning activities multiplied (approximately 130 transactions) over the next several months. In September, he presented them with an option account form, again without explanation, which they compliantly signed.

By December, the margin loan had increased to $190,000. The average interest rate charged by E.F. Hutton was 17 to 18 percent. During the same period, the average yield on tax-free bonds was approximately 10 percent and the money market account interest rate was between 17 and 18 percent. Johnson engaged in option trading and "in-and-out" trading from October through December. Inquiries from Pusateri to Johnson regarding the account resulted in the latter's assurances that they were "making money."

In February 1982 Johnson left E.F. Hutton's employment, and the account was thereafter reassigned to Mr. Clarke, another E.F. Hutton broker. However, it was not until March 1982, upon receiving their tax returns prepared by an accountant, that plaintiffs first learned that they owed E.F. Hutton $3,600 in interest on the margin account and lacked sufficient funds in their account to pay their taxes. The value of their original investment of $196,000 had shrunk to $96,880 in the space of just over one year.

In November 1981, David Nee, vice-president and branch manager of E.F. Hutton's Palo Alto office, received his regular monthly report of plaintiffs' account. E.F. Hutton's normal management practice required special supervisorial attention to any account generating more than $2,000 in commissions and reflecting over 10 trades a month. Consequently, Nee reviewed the account with Johnson and told him he would be calling Pusateri to discuss his account. Nee admitted that the call was triggered by the indicated "excessive activity" but failed to tell Pusateri anything about the status of the account, merely inquiring whether he got along well with Johnson. Though responsible for review of the new client card specifying the Pusateris' investment objectives, Nee neglected to check their file and review their stated objectives. Despite his knowledge of the apparent churning activities and the fact that plaintiffs' account had lost money and borrowed heavily from E.F. Hutton, Nee mentioned none of these factors during this phone conversation. Johnson later advised Pusateri that the call was merely "routine."

None of the monthly statements received by plaintiffs from E.F. Hutton indicated the amount of commissions paid to...