Romano v. Merrill Lynch, Pierce, Fenner & Smith
| Decision Date | 29 December 1987 |
| Docket Number | No. 87-3069,87-3069 |
| Citation | 834 F.2d 523 |
| Parties | Fed. Sec. L. Rep. P 93,693, 9 Fed.R.Serv.3d 1318, RICO Bus.Disp.Guide 6891 Joseph A. ROMANO, Plaintiff-Appellant, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, et al., Defendants-Appellees. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Stephen J. Caire, Covington, La., for plaintiff-appellant.
Robin Rosenbluth, Whitney Adams, Marshall F. Hanbury, Washington, D.C., for Amicus-Commodity Futures Trading Com'n.
William R. Forrester, Jr., Dirk van Ausdall, Lemle, Kelleher, Kohlmeyer, Hunley, Moss & Frilot, New Orleans, La., for defendants-appellees.
Appeal from the United States District Court for the Eastern District of Louisiana.
Before RANDALL and DAVIS, Circuit Judges and FELDMAN *, District Judge.
This appeal is taken from the district court's dismissal of various securities and commodities violations claims and denial of class certification. We affirm the district court.
Joseph A. Romano brought this action on behalf of himself and other "involuntary" Merrill Lynch Ready Assets Trust customers alleging violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 of the Securities and Exchange Commission. In connection with his claims of commodities churning 1 and impermissible trading on margin, Romano sued a host of Merrill Lynch & Co. affiliates: Merrill Lynch, Pierce, Fenner & Smith is a wholly- owned brokerage subsidiary; Merrill Lynch Ready Assets Trust is a "no-load" money market mutual fund which invests primarily in short-term money market securities; 2 Merrill Lynch Assets Management, Inc. is the investment manager for the unincorporated trust and other Merrill Lynch mutual funds. Mr. Romano also named two wholly-owned subsidiaries, Merrill Lynch Commodities, Inc. 3 and Merrill Lynch Futures, Inc. Thereafter, he amended his complaint to add violations of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. 1961 et seq.
Although appellant's arguments here are as elusive as were his assertions of misconduct before the district court, certain facts emerge.
Romano opened a commodities trading account with Merrill Lynch, Pierce, Fenner & Smith (MLPF & S) on March 12, 1981 with a deposit of $10,000. He claims MLPF & S then placed his $10,000 in an interest-bearing money market account, Merrill Lynch Ready Assets Trust (MLRAT), but did so without authorization from him. What followed was a series of deposits and withdrawals from the Ready Assets account for investment in the silver futures market on appellant's behalf. Both types of transactions, the silver commodities trading and the associated deposits and withdrawals from MLRAT 4, occurred between March 1981 and April 1983. Apparently dissatisfied with the results of his trading, appellant ordered the liquidation of his account and brought this suit. In addition to the 10b-5, RICO and churning 5 violations, appellant alleged that MLPF & S breached its fiduciary duty by failing to disclose its own market activity in silver futures contracts. Furthermore, appellant claimed that MLPF & S account executives made unauthorized commodity sales and purchases, failed to properly execute appellant's orders, and failed to disclose a complete listing of activity in appellant's account.
Several rulings followed in motion practice.
Defendants Merrill Lynch Ready Assets Trust and Merrill Lynch Assets Management moved for summary judgment pursuant to Federal Rule of Civil Procedure 56. On December 6, 1985, the district court granted summary judgment in favor of MLRAT and MLAM because Romano could show no loss from the Ready Assets transactions, and failed to state a basis for liability for the commodities losses alleged. At the same time, the court granted partial summary judgment in favor of MLPF & S, Merrill Lynch Futures, and Merrill Lynch Commodities as to certain of the 10b-5 claims which were prescribed on the face of the complaint. 6 In addition, the trial court denied class certification of this action. On July 1, 1986, after ample time for discovery, the district court dismissed the prescribed 10b-5 and RICO claims for failure to show fraudulent concealment 7 638 F.Supp. 269. Dismissal of the RICO claims was further appropriate because appellant failed to allege predicate acts upon which a pattern of racketeering activity could be based. 8 On September 12, 1986, the district court dismissed those commodities churning claims which had prescribed due to Romano's failure to show lack of notice of the commodities violations. But the court purposely declined to specify which claims had prescribed in order to give Romano still one more opportunity to develop proof at trial. After trial on the merits, the court found that Romano had failed to prove either his commodities churning claim or his breach of fiduciary duty claim. The district court then granted defendants' motion to dismiss based on Federal Rule of Civil Procedure 41(b). This appeal followed.
Romano raises the following issues on appeal: (1) Whether the dismissal of Merrill Lynch Ready Assets Trust and Merrill Lynch Assets Management was appropriate; (2) Whether the district court erred in applying the statute of limitations to appellant's churning claims; (3) Whether the evidence supported the district court's finding that no churning violation occurred; (4) Whether the district court erred in finding that defendants had not breached any fiduciary duty owed to Romano; and (5) whether denial of class certification was proper.
The granting of summary judgment pursuant to Rule 56 9 of the Federal Rules of Civil Procedure is appropriate when, viewed in the light most favorable to the opposing party, no genuine issue of material fact exists and the movant is entitled to judgment as a matter of law. Phillips Oil Company v. OKC Corporation, 812 F.2d 265, 272 (5th Cir.1987). On review, this Court applies the same legal standard in determining whether summary judgment was proper. Id. The Supreme Court instructs that the inquiry involved in ruling on a motion for summary judgment "necessarily implicates the substantive evidentiary burden of proof that would apply at the trial on the merits." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 2512, 91 L.Ed.2d 202 (1986). Therefore, "the judge must view the evidence presented through the prism of the substantive evidentiary burden" that the parties would bear at trial. Id., 106 S.Ct. at 2513.
After careful review of the record before us, we conclude that the evidence presented, even viewed in the light most favorable to appellant, is not "such that a [factfinder] ... could reasonably find" for Mr. Romano. 106 S.Ct. at 2514. Given the uncontroverted description of each Merrill Lynch entity's role in the transactions which form the subject of the complaint, it is clear that neither the Ready Assets Trust nor the Assets Management division could be liable for the losses at issue. It is uncontested that MLPF & S maintained two accounts on appellant's behalf: (1) account number 594-18328, the Ready Assets account into which appellant's funds were deposited pending investment in the commodities market, and (2) account number 594-18456, the commodities account. Romano did not, and in fact could not, identify any loss resulting from the purchase or redemption of Ready Assets shares. 10 Instead, he could only allege and prove losses flowing from the commodities transactions. The record is clear that neither MLRAT nor MLAM was in any way even remotely involved in Mr. Romano's silver futures trades. Mr. Romano's investment activity in the commodities market was handled exclusively by account executives for MLPF & S, Merrill Lynch Futures, and Merrill Lynch Commodities. Given the absence of "evidence favoring the nonmoving party [sufficient] for a [factfinder] to return a verdict for that party," summary judgment was clearly appropriate. 106 S.Ct. at 2511.
On defendants' motion for summary judgment, the district court dismissed as prescribed that portion of the commodities churning claim based on transactions that occurred prior to March 1983. 11
This Court, like the district court, acknowledges that the statute of limitations does not begin to run until "the aggrieved party has either actual knowledge of the violation or notice of facts which, in the exercise of due diligence, would have led to actual knowledge thereof." First Federal Savings & Loan Association of Miami v. Mortgage Corporation, 650 F.2d 1376, 1378 (5th Cir.1981). A churning cause of action may be particularly difficult to detect if the customer is an unsophisticated investor:
... because churning is conduct which is not common to the experience of the ordinary individual, it is consequently not easily recognizable to unsophisticated investors.
Dzenits v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 494 F.2d 168, 172 (10th Cir.1974).
Because of the character of the offense, churning is not limited to a single transaction. As we have stated before:
Churning is a unified offense: there is no single transaction, or limited, identifiable group of trades, which can be said to constitute churning. Rather, a finding of churning, by the very nature of the offense, can only be based on a hindsight analysis of the entire history of a broker's management of an account and of his pattern of trading that portfolio, in comparison to the needs and desires of an investor.
Miley v. Oppenheimer & Company, 637 F.2d 318, 327 (5th Cir.1981).
Therefore, it is apparent that in applying the limitations period to a churning cause of action, one must consider the entirety of the transactions in question and the degree of investor sophistication. Our review of the record reveals no evidence that Romano lacked notice of his churning claims so as to toll the prescriptive period....
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