Robinson v. Merrill Lynch, Pierce, Fenner & Smith, Inc.

• Decision Date: 15 April 1971
• Docket Number: Civ. A. No. 69-600.
• Citation: 337 F. Supp. 107
• Court: U.S. District Court — Northern District of Alabama
• Parties: Carl R. ROBINSON, Plaintiff, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., Defendant.

337 F. Supp. 107

Carl R. ROBINSON, Plaintiff, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., Defendant.

Civ. A. No. 69-600.

United States District Court, N. D. Alabama, S. D.

April 15, 1971.

Roscoe B. Hogan, Hogan, Roach & Smith, George S. Brown, Birmingham, Ala., for plaintiff.

N. Lee Cooper, Cabaniss, Johnston, Gardner & Clark, Birmingham, Ala., for defendant.

MEMORANDUM OPINION

McFADDEN, District Judge.

Plaintiff, a practicing physician and attorney, seeks to recover $48,000.00 from his broker for losses incurred in trading commodity future contracts of pork bellies and hogs, which it is contended resulted from defendant's negligent failure to advise him of material market information. Specifically, plaintiff claims that while he was the owner of fourteen short contracts in pork bellies and four short contracts in hogs, purchased through defendant, a report of the United States Department of Agriculture indicating a shortage in these commodities came into defendant's hands, and defendant negligently failed to so advise plaintiff, who continued to hold his short contracts with the consequent loss of invested money, lost profits, commissions and interest on invested money. Defendant counterclaims for the sum of $912.00 for balance due upon liquidation of plaintiff's account with defendant.

Plaintiff opened a commodity account with the defendant in December of 1957 and traded commodities with defendant until September 30, 1969. Plaintiff speculated in various commodity future contracts of beans, cocoa, cotton, sugar, rubber, copper, potatoes, cottonseed oil, eggs, cattle and broilers and was in daily contact with the market through his broker and otherwise.

From June 2, 1969, through August 20, 1969, plaintiff closed 74 separate commodity positions in cattle, eggs, broilers, cocoa, pork bellies and hogs through defendant's Birmingham office resulting in a total net profit of $8,208.25. On August 20, 1969, plaintiff maintained a short position in four contracts of February pork bellies and in four contracts of December hogs.

Short positions in four more February pork belly contracts on August 27, and two additional February pork belly contracts on August 28, August 29, September 3 and September 17, respectively, resulted ultimately in short positions on sixteen commodity future contracts of February pork bellies. Plaintiff also shorted two more December hog contracts on September 17, and six additional December hog contracts on September 22, resulting in a total short position of twelve December hogs commodity future contracts.

On September 11, 1969, at 10:48 a. m. (Birmingham time), the Birmingham office of Merrill received the following wire from Merrill's commodity headquarters in New York:

"TO ALL OFFICES September 11, 1969 NOT TO BE DISTRIBUTED TO CUSTOMERS Time 10:48 A.M.

Opinion Change — No. 66 Pork Bellies

Would buy February contract in the 3800-3835 range only — see footnote.

1. While longer term outlook is for expanded supplies expect smaller slaughter from now until the end of the year to result in light storings against the February contract.

2. Expect September 19, 10 state pig report to confirm this lighter slaughter perhaps not to the same extent as the June report which indicated a possible reduction of 8 percent, but to be still bullish.

3. Storage holdings of pork items, bellies, hams and loins are at low levels even for this normally low time of year.

4. Keep positions modest as this could be just a trading turn and the 9/19 pig report will be critical.

Footnote — All opinions are day orders unless specified otherwise

OBJ 300-500 pts risk 75-125 pts 1 pt equals $3 margins $1000/700"

This wire recommends the purchase of February pork belly contracts at certain prices and gives some indication of what eventually happened. The wire states that the September 19 ten-state pig report is the "critical" factor affecting the price of February pork belly contracts and further predicts that the September 19 report will be "bullish", which in trade parlance means the report will cause the price of February pork belly contracts to rise. The report anticipated the cold storage report which was to be released on September 17 by the statements that the storage holdings were at "low levels even for this normally low time of year," and "expect smaller slaughter from now until the end of the year to result in light storings against the February contract." The recommendation to buy and the other data were contrary to plaintiff's short position in the market.

Plaintiff testified that he could not specifically recall whether he read the September 11 wire, but did not deny seeing it. He was in defendant's Birmingham office during the morning of September 11, and did read a commodity wire from defendant's commodity headquarters in New York. Two of defendant's Birmingham account executives testified that they were present when the September 11 wire was handed to plaintiff and that he read it. The same witnesses stated that this was the only wire concerning pork bellies received by defendant's Birmingham office on September 11, 1969.

Plaintiff entered a price-limiting order on September 11, 1969, to close or cover his then outstanding short position of fourteen February pork belly contracts at a price of 38.40 or lower (Defendant's Exhibit 5). However, the lowest trade in pork bellies on September 11 was at a price of 38.42 (Plaintiff's Exhibit 21), and therefore plaintiff's order was not executed due to the price limit.

Plaintiff made no additional attempts to cover or close his short position in pork bellies until September 23, but conversely increased his short position by shorting two additional February pork belly contracts on September 17.

The United States Department of Agriculture (USDA) released a monthly cold storage report after the close of the commodity market on September 17, 1969. These reports are released on a monthly basis by USDA and estimate the amount of pork bellies in storage as of the first day of each month, or in this case September 1, 1969. The September 17 cold storage report estimated that with the exception of 1966 the September 1 storings were the smallest for the previous six years. Plaintiff bases his case on the alleged negligent failure of defendant to inform him of the information in this report and testified that he would have closed his short position if this had been done.

There is a conflict in the testimony as to when plaintiff received this information, plaintiff contending it was September 23, and defendant's witnesses asserting that the information was communicated to plaintiff by telephone on September 17, 1969.

This issue becomes immaterial in light of the uncontradicted evidence that the September 17 cold storage report had little, if any, effect on the price of pork bellies, and no effect on the price of hogs.

The average market price of pork bellies (Plaintiff's Exhibit 21) and hogs (Plaintiff's Exhibit 20) dropped slightly on September 18, 1969, the first trading day after the release of the cold storage report, which indicates that if the cold storage report did exert any market influence it was favorable to the plaintiff's short positions.

The quarterly ten-state pig report was released by the United States Department of Agriculture after the close of the market on Friday, September 19, 1969. The following Monday, September 22, the market in commodity contracts of both hogs and pork bellies was up the permissible limit, preventing anyone from covering or closing outstanding short positions. All commodity future contracts have maximum daily price fluctuations imposed by the commodity exchange and if the price of the commodity contract goes up to the maximum permitted limit, outstanding short positions are unable to buy commodity contracts to cover or close the short positions. Due to the maximum daily price fluctuation, plaintiff was unable to cover his outstanding short position in pork bellies until Tuesday, September 23.

Plaintiff received the pig report information on September 23, but continued to maintain his short position in December hogs until September 30, 1969.

Plaintiff's account was liquidated on or about September 30, 1969, to cover margin demands and upon final liquidation there was a balance owing defendant of $912.00 (Defendant's Exhibit 2).

Plaintiff contends that defendant as a commodities broker was under a duty to communicate to him information which would affect his position in the market and must answer in damages for a failure to do so.

When a broker serves as a customer's agent, he has certain duties, just as in any principal-agent relationship. Under an agency relationship the principal owes a duty to communicate certain information to his agent. This duty is outlined in the Restatement of Agency, 2d at § 381:

Unless otherwise agreed, an agent is subject to a duty to use reasonable efforts to give his principal information which is relevant to affairs entrusted to him and which, as the agent has notice, the principal would desire to have and which can be communicated without violating a superior duty to a third person.

Agency is a consensual relationship, and the agency or broker-customer relationship in a cash transaction does not come into existence until the order has been placed and the broker has consented to execute it. Le Marchant v. Moore, 150 N.Y. 209, 44 N.E. 770 (1896).

The agency relationship did not arise until the plaintiff placed an order, since defendant did not have discretionary or managerial power over plaintiff's account and therefore had no authority to act for the plaintiff without express direction. Little & Hays Inv. Co. v. Pigg, 29 Ky.Law Rep. 809, 96 S.W. 455 (1906); Hopkins v. Clark, 158 N.Y. 299, 53 N.E. 27 (1899).

A broker's office, without special circumstances not present here, is simply to buy and sell. The office commences when the order is placed and ends when the...