Radiology Center, S.C. v. Stifel, Nicolaus & Co.

• Citation: 919 F.2d 1216
• Decision Date: 29 November 1990
• Docket Number: No. 89-3047,89-3047
• Parties: , Fed. Sec. L. Rep. P 95,733, 13 Employee Benefits Ca 1145 The RADIOLOGY CENTER, S.C. and Enrique Schwarz, M.D., Plaintiffs-Appellants, v. STIFEL, NICOLAUS & COMPANY and Robert F. Shields, Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

Page 1216

919 F.2d 1216

59 USLW 2366, Fed. Sec. L. Rep. P 95,733,

13 Employee Benefits Ca 1145

The RADIOLOGY CENTER, S.C. and Enrique Schwarz, M.D. Plaintiffs-Appellants, v. STIFEL, NICOLAUS & COMPANY and Robert F. Shields Defendants-Appellees.

No. 89-3047.

United States Court of Appeals Seventh Circuit.

Argued Sept. 28, 1990.

Decided Nov. 29, 1990.

William P. Caputo, Lionel G. Gross, Altheimer & Gray, Chicago, Ill., for plaintiffs-appellants.

Joan M. Fencik, James A. Christman, Wildman, Harrold, Allen & Dixon, David W. Gleicher, Chicago, Ill., Thomas E. Douglass, Ellen E. Bonacorsi, Charles Wayne Primm, Coburn, Croft & Putzell, St. Louis, Mo., for defendants-appellees.

Before POSNER and FLAUM, Circuit Judges, and FAIRCHILD, Senior Circuit Judge.

FLAUM, Circuit Judge.

Plaintiffs Enrique Schwarz and Radiology Center brought suit against their stockbroker, defendant Robert Shields, and his employer, defendant Stifel, Nicolaus & Company. In their suit, Schwarz and Radiology Center allege a variety of federal and state securities violations, breach of fiduciary duties owed under ERISA and state law, and breach of contract. On defendants' motion for summary judgment, the district court held the federal securities and ERISA claims to be barred by the applicable statutory limitations periods, and dismissed the pendent state law claims for lack of subject matter jurisdiction. Because we disagree with the district court's interpretation of the accrual principles applicable to the ERISA statute of limitations, we reverse its grant of summary judgment to defendants on the ERISA claims. We also vacate the district court's grant of summary judgment to defendants on the Sec. 10(b) claim and remand for reconsideration in light of a recent Seventh Circuit decision on the statute of limitations to be applied in Sec. 10(b) actions.

I. FACTS AND PRIOR PROCEEDINGS

Enrique Schwarz is a radiologist who practices in the Chicago area and is president of Radiology Center. In May, 1981, Radiology Center entered into a brokerage agreement with Robert Shields ("Shields"), a stockbroker and vice-president of defendant Stifel, Nicolaus & Company ("Stifel"), a securities brokerage house. Under the agreement, Shields agreed to direct the investment of the funds in Radiology Center's Profit-Sharing Plan. In December, 1981, Schwarz and Shields entered into a second agreement, this one providing for Shields' management of Schwarz's Keogh Plan. Schwarz asked Shields to invest the funds in both plans in low-risk securities. Aside from this instruction, however, Shields' choice of securities or his decisions to buy or sell individual securities was largely unrestricted.

Shields began to purchase and sell securities, mainly common stock, on behalf of both accounts. He sent Schwarz confirmation slips after each trade, showing the security traded, the number of shares purchased or sold, and the price per share. For trades executed on behalf of his Keogh Plan, Schwarz returned signed copies of the confirmation slips to Stifel. In addition to the confirmation slips, Shields received monthly account statements that summarized activity for the preceding month, showing securities purchased or sold, the number of shares of each issuer that were purchased or sold, and the amount charged or credited to the relevant account because of each purchase or sale. Schwarz also received annual statements in July of 1982 and 1983 summarizing account activity in the preceding twelve-month period ending on June 30. These annual summaries showed the value of funds remaining in each account at the end of the fiscal year.

The 1981-82 annual report showed that the accounts had been profitable. The 1982-83 report, however, showed substantial losses. In September, 1983, Schwarz for the first time directed that Shields purchase particular securities, Erickson and Atcor common stock. Two weeks after Shields purchased Atcor, he sold it. Schwarz discovered that Shields had sold Atcor about two weeks after the sale. He later admitted that the Atcor sale changed his opinion of Shields' management of the accounts. All trading in both accounts ceased after September, 1983 except for one purchase of government securities in early 1984 which plaintiffs do not contest. In July, 1984, Schwarz directed Shields to sell all securities held in the Profit Sharing Plan account. In September of that year, Schwarz directed Shields to transfer the Keogh account to another brokerage.

In December, 1986, more than three years after Shields' last disputed trade on behalf on the two accounts, Schwarz and Radiology Center brought suit in the district court. They alleged that Shields and Stifel had violated Sec. 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j(b), and Securities and Exchange Commission Rule 10b-5 by (1) misrepresenting the type of securities that Shields would purchase for the accounts; (2) executing unauthorized trades; and (3) churning both accounts. They also alleged that these activities constituted a breach of the fiduciary duty imposed on employee-benefits plan managers under Sec. 409(a) of the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. Sec. 1109(a). In addition, they alleged that defendants violated Sec. 17(a) of the Securities Act of 1933, Sec. 15 U.S.C. Sec. 77q. ¹ Plaintiffs also alleged three state law claims: violations of Illinois securities law, breach of contract, and intentional misrepresentation.

Following discovery, defendants moved for summary judgment on the ground that both the ERISA and Sec. 10(b) claims were barred by the applicable statutes of limitations. According to defendants, plaintiffs had actual or constructive knowledge of defendants' alleged securities fraud no later than September, 1983, more than three years before plaintiffs filed suit. Consistent with the law in this Circuit at the time, the district court applied the three-year limitations period provided for under Illinois state securities law, Ill.Ann.Stat. ch. 121 1/2, p 137.13(D) (Smith-Hurd 1960 & Supp.1990). Defendants also contended that, because in their view plaintiffs had actual knowledge of the facts giving rise to their ERISA claim by September, 1983, this claim was governed--and barred--by the three-year statute of limitations provided for in ERISA Sec. 413, 29 U.S.C. Sec. 1113.

Plaintiffs responded that Schwarz was an unsophisticated investor who trusted Shields and thought that Shields would respect his wishes concerning the kinds of securities to be purchased with funds from the accounts. Furthermore, plaintiffs asserted that Shields misled Schwarz concerning the reason for the losses in the accounts and delayed Schwarz's discovery that he might have securities claims by lulling him into inaction with the promise of better times ahead. Plaintiffs fix the time at which Schwarz learned of the wrongs Shields committed in June, 1984, when Schwarz had a different broker review the trades Shields had entered into on Schwarz's behalf.

The district court granted summary judgment on both the Sec. 10(b) claims and the ERISA claim. As to the Sec. 10(b) claims, the district court defined the point at which the statute of limitations begins to run as the moment when "a plaintiff either has actual knowledge of the violation or notice of facts which, in the exercise of reasonable diligence, would lead to actual knowledge." Memorandum Opinion ("Mem. Op.") at 5. Furthermore, the district judge determined that the inquiry into when a plaintiff could, in the exercise of reasonable diligence, have discovered the facts that would lead to actual knowledge is an objective one. Mem. Op. at 6 (citing Norris v. Wirtz, 818 F.2d 1329, 1334 (7th Cir.), cert. denied, 484 U.S. 943, 108 S.Ct. 329, 98 L.Ed.2d 356 (1987)).

Applying this standard to the facts, the district court concluded that Schwarz had at least constructive knowledge of Shields' unauthorized trading by September, 1983, the time of the last disputed trade. The district court based this conclusion on the facts that: (1) Schwarz received confirmation slips following each trade; (2) he acknowledged receipt of these slips, some of which--those related to the Keogh account--he returned to Stifel with his signature; and (3) he admitted reviewing the monthly statements Stifel provided, statements that contained recapitulations of monthly trading activity.

As to Schwarz's allegation that Shields disobeyed his instruction to invest funds from the accounts only in good quality stocks, the district court again found that Schwarz had knowledge of the facts supporting this violation of securities laws by September, 1983. The basis the district court identified for this conclusion was Schwarz's admission that he was unfamiliar with the names of the issuers that he saw listed in the monthly statements and could not find these issuers listed in newspaper stock tables. According to the district court, the fact that Schwarz "could not find the name of any stock traded in the accounts would put a reasonable person on notice that the stocks purchased might not be low risk securities...." Mem. Op. at 9. The district court supported this conclusion by noting that Schwarz admitted that his review of the 1982-83 annual statement led him to suspect that the securities Shields was purchasing on his behalf were not secure investments.

With respect to the churning allegation, here, too, the district court found that Schwarz had knowledge of Shields' frequent trades in September, 1983 at the latest. The basis for this finding was Schwarz's admission that he detected evidence of churning in late September, 1983, when Shields sold the Atcor shares Schwarz had selected. Concluding that "the undisputed facts demonstrate that, no later than September, 1983, plaintiffs were aware of the manner in which the trades were made, the trading pattern, and the quality of the securities purchased," Mem. Op. at 12, the...