Rolf v. Blyth, Eastman Dillon & Co., Inc.

• Decision Date: 01 December 1980
• Docket Number: D,Nos. 9,133,s. 9
• Citation: 637 F.2d 77
• Parties: Fed. Sec. L. Rep. P 97,711 David E. ROLF, Plaintiff-Appellant-Cross-Appellee, v. BLYTH, EASTMAN DILLON & CO., INC., and Michael Stott, Defendants-Appellees-Cross-Appellants. ockets 80-7130, 80-7164.
• Court: U.S. Court of Appeals — Second Circuit

Page 77

637 F.2d 77

Fed. Sec. L. Rep. P 97,711

David E. ROLF, Plaintiff-Appellant-Cross-Appellee, v. BLYTH, EASTMAN DILLON & CO., INC., and Michael Stott Defendants-Appellees-Cross-Appellants.

Nos. 9, 133, Dockets 80-7130, 80-7164.

United States Court of Appeals Second Circuit.

Argued Sept. 8, 1980.

Decided Dec. 1, 1980.

Sidney B. Silverman, New York City (Joan T. Harnes, Martin H. Olesh, Silverman & Harnes, New York City, on the brief), for plaintiff-appellant-cross-appellee.

Thomas W. Kelly, New York City (Robert R. Elliott, III, Breed, Abbott & Morgan, New York City, on the brief), for defendants-appellees-cross-appellants.

Before FEINBERG, Chief Judge, and FRIENDLY and OAKES, Circuit Judges.

OAKES, Circuit Judge:

This appeal is another chapter in the litigation initiated by appellant David E. Rolf, an investor in the stock market, to recover damages for losses suffered in connection with the handling of his portfolio by appellants Blyth, Eastman Dillon & Co., Inc. (BEDCO), a brokerage firm, and Michael Stott, one of the firm's registered representatives. When this case was previously before us, we upheld the judgment of the United States District Court for the Southern District of New York, Lawrence W. Pierce, Judge, as to appellees' liability for aiding and abetting the securities fraud perpetrated by Akiyoshi Yamada, Rolf's investment advisor. We remanded, however, for an assessment of damages in accordance with guidelines that we set forth. Rolf v. Blyth, Eastman Dillon & Co., 570 F.2d 38 (2d Cir.), cert. denied, 439 U.S. 1039, 99 S.Ct. 642, 58 L.Ed.2d 698 (1978) (Rolf II ). All parties now appeal the two subsequent lower court decisions on the damage issue, see Rolf v. Blyth, Eastman Dillon & Co. No. 73 Civ. 2967 (S.D.N.Y. Jan. 8, 1980) (Rolf IV ); Rolf v. Blyth, Eastman Dillon & Co., (1979 Transfer Binder) Fed.Sec.L.Rep. (CCH) P 96,919 (S.D.N.Y.1979) (Rolf III ).

Rolf, the plaintiff below, claims error in the district court's holding that Stott's aiding and abetting activities did not commence until January 31, 1970. Rolf contends that if the court below had applied the correct legal standard to the facts, it would have found that aiding and abetting began at the latest at the time of the purchase of Delanair, a restricted stock. Rolf authorized payment for the Delanair stock on July 31, 1969, see generally Rolf v. Blyth, Eastman Dillon & Co., 424 F.Supp. 1021, 1031 (S.D.N.Y.1977) (Rolf I ). Rolf further claims that the court below erroneously computed his damages when it reduced them by $175,000, the amount of cash that he received in settlement of his claims against certain Delanair-related defendants, but failed to take into account the value of the Delanair stock which he surrendered in the settlement. Finally, Rolf asserts that the trial court erred in again denying him prejudgment interest, a matter we had asked the district court to reconsider, Rolf II, 570 F.2d at 50.

BEDCO and Stott, in addition to disputing each of Rolf's points, appeal on the ground that the court below erroneously declined to grant them credit for net withdrawals of cash and securities by Rolf during the aiding and abetting period. BEDCO and Stott also suggest, though they recognize that the law of the case is to the contrary, that the dissenting opinion in the earlier appeal was correct and, accordingly, that they should be relieved of liability.

We agree with each of Rolf's conclusions, though by no means with all of his reasoning. We disagree with the arguments made by BEDCO and Stott, but we recognize that our previous opinion did not correctly set forth the proper method for ascertaining damages and that this was to their detriment. We therefore remand for further proceedings in accordance with this opinion.

I. BACKGROUND

A. Our Previous Opinion

In our previous opinion we found Stott liable under section 10(b) of the Securities Exchange Act of 1934 (1934 Act), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, for aiding and abetting by a reckless fiduciary. ¹ We held that the following factual and legal conclusions established an aiding and abetting violation by Stott: (1) Yamada, the primary party, committed a securities law violation by his overall fraudulent mismanagement of Rolf's account, Rolf II, 570 F.2d at 47; (2) Stott's reckless conduct, as exemplified by his constant reassurances to Rolf "without investigation and with utter disregard for whether there was a basis for the assertions," satisfied the requirement of scienter, id. at 47-48; and (3) Stott rendered substantial assistance to Yamada in the fraudulent mismanagement of Rolf's portfolio by, among other things, engaging in a "hand-holding operation" to prevent Rolf from discovering Yamada's fraud, id. at 48.

We should point out, however, that on petition for rehearing we amended our opinion by adding footnote 16A. This footnote was entered by order dated May 22, 1978 and, although it does not appear in the Federal Reporter, it is printed in the CCH Federal Securities Law Reporter. The added footnote reads as follows:

This decision does not impose liability on a broker-dealer who merely executes orders for "unsuitable" securities made by an investment advisor vested with sole discretionary authority to control the account. In the present case, the broker-dealer, although charged with supervisory authority over the advisor and aware that the advisor was purchasing "junk," actively lulled the investor by expressing confidence in the advisor without bothering to investigate whether these assurances were well-founded.

(1978 Transfer Binder) Fed.Sec.L.Rep. (CCH) P 96,525, at 94,069 (2d Cir. May 22, 1978).

After affirming the finding of aiding and abetting liability, we remanded for ascertainment of damages. We instructed the district court, first, to determine as near as possible the time when Stott began to aid and abet Yamada's fraud and compute the market value of Rolf's portfolio on that date, and second, to subtract from this market value figure the value of the portfolio when Stott's participation ceased, thereby ascertaining Rolf's "gross economic loss" during the aiding and abetting period. Rolf II, 570 F.2d at 49 & n.21. We then indicated that the district court should reduce Rolf's gross economic loss by a "well recognized index of value, or combination of indices," so as to take into account the overall decline in the stock market during the period of aiding and abetting. ² Id. at 49. It should be noted that we left it up to the district court to "select a more appropriate gauge" in the event that "a broad-based index would not be representative" of the stocks in Rolf's portfolio at the commencement of the aiding and abetting period, id. at 49 n.22.

We went on to refer specifically to the loss on the Delanair stock and stated that in the event that losses occurred during the aiding and abetting period, Rolf's damages "must be reduced by $175,000, the amount for which he settled his claims against several Delanair-related defendants." Id. at 49-50. We also held that Rolf was entitled to a return of commissions paid to BEDCO and Stott for transactions during the aiding and abetting period. And we requested the district court to reconsider its decision on the question of prejudgment interest "in view of our obvious conclusion that Rolf was deprived of a principal sum." Id. at 50.

B. The Trial Court Decisions on Remand

On remand Judge Pierce first determined the date on which Stott began to aid and abet Yamada's fraud. Even though Yamada sold a substantial portion of Rolf's original portfolio during the summer of 1969, Judge Pierce rejected June or July 1969 as beginning dates for Stott's aiding and abetting liability because it was reasonable for a new investment advisor to start with a clean slate and because the judge "(was) not persuaded that prior to September 1969 Stott actually knew of Yamada's fraudulent intentions toward Rolf's account or that his conduct prior to that date was so reckless as to constitute the requisite scienter...." Rolf III, (1979 Transfer Binder) Fed.Sec.L.Rep. (CCH) P 96,919, at 95,855. This latter statement suggests that Stott's conduct did become sufficiently reckless to satisfy the scienter requirement by September 1969, but the judge ultimately determined that Stott's liability began on January 31, 1970, when "the fraud was so obvious that Stott should have been aware of it and any failure to obtain more specific knowledge constituted 'reckless disregard,' " id. at 95,856. As for the date on which Stott's aiding and abetting ceased, all parties agreed that this occurred on January 21, 1971, when the account was shifted from Stott to another BEDCO broker, id. at 95,855.

After further submissions by the parties, Judge Pierce then went on to find that the market value of Rolf's portfolio, based on closing "bid" prices on January 30, 1970, and exclusive of Delanair securities, was $357,140.99. Rolf IV, No. 73 Civ. 2967, at 3. He ruled that the January 30, 1970 bid price of $3 per share for the Delanair stock (100,000 shares of which were originally purchased in the summer of 1969 at a price of $337,500) should be reduced by 20% because of the restricted nature of the stock. This left the value of the Delanair securities at $240,000 and gave Rolf's portfolio a total market value of $597,140.99 on January 31 1970. ³ Id. at 4-5. Next, Judge Pierce calculated the value of the portfolio as of January 21, 1971 to be $211,129.98, ⁴ producing a gross economic loss of $386,011.01, of which $170,000 was attributable to the decline in the value of Delanair. Id. at 5-6.

In accordance with instructions in our opinion, ⁵ Judge Pierce reduced Rolf's gross economic loss by the percentage decline in an appropriate price index. He chose to apply Standard & Poor's Low Priced Common Stocks index (Low Priced index) because in only four instances did the price of the shares in...