Rupert v. Clayton Brokerage Co. of St. Louis, Inc.

• Decision Date: 08 June 1987
• Docket Number: No. 85SC179,85SC179
• Citation: 737 P.2d 1106
• Parties: Patrick A. RUPERT, Petitioner, v. CLAYTON BROKERAGE COMPANY OF ST. LOUIS, INC. Respondent.
• Court: Colorado Supreme Court

Page 1106

737 P.2d 1106

Patrick A. RUPERT, Petitioner, v. CLAYTON BROKERAGE COMPANY OF ST. LOUIS, INC. Respondent.

No. 85SC179.

Supreme Court of

Colorado En Banc.

June 8, 1987.

Keene & Munsinger, Stephen M. Munsinger, Denver, for petitioner.

Kelly, Haglund, Garnsey & Kahn, Edwin S. Kahn, Denver, for respondent.

ERICKSON, Justice.

We granted certiorari to review Rupert v. Clayton Brokerage Co. of St. Louis, 705 P.2d 988 (Colo.App.1985). The court of appeals reversed a judgment in favor of Patrick A. Rupert (Rupert) and against Clayton Brokerage Co. of St. Louis, Inc. (Clayton) for breach of a fiduciary duty in opening and maintaining a discretionary commodities trading account. The court of appeals remanded to the district court with directions to reassess the damages suffered by Rupert. Two issues are before us on appeal: (1) the extent of the fiduciary duty Clayton owed to Rupert and (2) the amount of damages that resulted, if any, from a breach of that fiduciary duty. We reverse and remand to the court of appeals with directions to reinstate the judgment entered by the district court.

I.

The petitioner, Patrick Rupert, is a carpenter residing in Fraser, Colorado. In 1977, Rupert obtained a $20,000 settlement for injuries he suffered in an automobile collision. At the time of the settlement, Rupert did not own a home, and his annual income was less than $10,000. His personal assets, including an automobile and trade tools, were worth less than $10,000. The settlement proceeds represented a substantial portion of his net worth.

In September 1978, Rupert met with Robert Hunt, a college acquaintance, who was a stockbroker with E.F. Hutton & Co., Inc. (Hutton). Hunt told Rupert that he was involved in a stock option index program that utilized a computer forecast and that the program was a viable vehicle to make investment profits. Rupert subsequently met with Hunt and two of his colleagues, David Forward and Gary McAdam, at Hutton's Denver office to discuss the program. Forward and Hunt told Rupert that the program had been successful in the past, but advised him that the investment was risk-oriented. Rupert decided to invest in the program, and gave Hunt $19,500 of the funds he received from his personal injury settlement. He had no prior experience with financial investments other than life insurance.

Rupert maintained the account at Hutton for three months. Hunt, Forward, or McAdam made the investment decisions at Hutton without Rupert's prior approval. Rupert received monthly statements detailing the activity in his account, and written confirmations of trades shortly after they were executed. Trading was limited initially to stock options, but soon began in commodities futures contracts, which are complicated and high risk investments requiring specialized knowledge and experience to participate successfully. See Karlen v. Ray E. Friedman & Co. Commodities, 688 F.2d 1193, 1198 (8th Cir.1982). Once commodities trading began, Rupert signed a Risk Disclosure Statement outlining the substantial risks of futures trading.

By December 1978, Rupert had lost $5,226.67 in the Hutton account. At that time, Hunt approached Rupert and told him that Forward, McAdam, and he were leaving Hutton and affiliating themselves with Clayton. On Hunt's advice, Rupert terminated his account at Hutton and transferred the remaining $13,273.37 to Clayton, to be placed in a discretionary trading account similar to the one maintained at Hutton. To accomplish the transfer, Hunt directed Rupert to sign various documents, including a contact sheet, an account contract, an authorization for discretionary trading, and another risk disclosure statement. The contact sheet and the trading authorization contained information blanks concerning Rupert's income, net worth, and other financial matters, and these blanks were filled in with grossly inflated figures by an agent of Clayton after Rupert signed the forms. The trading authorization granted Forward the authority as attorney in fact to buy, sell, and trade in commodities or commodities futures contracts in the name and on behalf of Rupert without his prior approval.

Shortly after Rupert executed the account forms, he received a letter from Claude Bielmann, Clayton's Secretary and Treasurer, advising him that Forward had been granted discretionary authority to trade on his behalf. The letter explained that Rupert could terminate Forward's authority upon delivery of a written revocation, and that Rupert should keep abreast of market information. The letter also advised Rupert that futures investments carried a high risk.

Over the next four months, Rupert's account balance declined steadily under Forward's management. As with Hutton, Clayton provided Rupert with monthly statements of his account and written confirmations of trades soon after they occurred. As the trading losses mounted, Rupert instructed Hunt to close the discretionary account, and Forward's trading authorization was cancelled on February 14, 1979. The money was transferred to a "standard" account, where Rupert ostensibly controlled the trading decisions. However, Rupert continued to allow trades to be made by Hunt, in consultation with Forward.

After the revocation of Forward's trading authority, Rupert's account continued to decline until May 7, 1979, when Rupert returned from a vacation to discover that his account balance had dropped to $588.63. At that time, he called Clayton and asked to speak to Hunt, but was advised that Hunt was no longer with the company. Rupert requested that his account be closed and that the remaining balance be forwarded to him.

On February 18, 1981, Rupert brought suit against Hutton, Clayton, Hunt, Forward, and McAdam. The complaint alleged claims for breach of fiduciary duty, extreme and outrageous conduct, exemplary damages, excessive trading, and fraud. Hutton and MacAdam settled for $5,226.67 and $750, respectively, and Rupert elected to release Hunt. The claims against Clayton and Forward were tried to the court.

At trial, Rupert established that when he opened the account, Clayton had in effect a compliance manual containing rules pertaining to commodities accounts and discretionary trading authority. These rules required, inter alia: (1) that each discretionary account maintain a balance of $15,000; (2) that each account executive handling a discretionary account have a minimum of three-years experience in commodities trading and two-years experience with Clayton; (3) that account executives ascertain before opening a commodities account the investor's occupation, source of income, net worth, investment experience, and amount of risk capital; (4) that the office manager confirm that the investor can risk at least two times the amount of capital committed to commodities trading; (5) that all account forms signed by the investor not be altered once they have been signed; (6) that once an investor's account balance in a discretionary account drops below $7,500, the investor must be notified that he either must liquidate the account, revoke discretionary trading authority, or deposit additional funds; and (7) that once an investor's account balance in a discretionary account drops below $6,500, the investor's account must be liquidated.

Based upon Clayton's violations of the foregoing rules, the trial court found that Clayton negligently handled Rupert's account, and that its negligence breached the fiduciary duty it owed to Rupert. The court stated that Clayton's violation of its own procedures did not establish liability per se, but held that the requirements set forth in the compliance manual were indicative of the standard of care that must be followed in dealing with other people's money. The court concluded that the totality of the evidence established that Clayton breached the standard of care, and that the breach resulted in damage to the plaintiff in the amount of $11,881, representing the full loss in Rupert's account. ¹ The court dismissed the case against Forward and the remaining claims against Clayton. Clayton appealed.

The court of appeals reversed, and held that Clayton's decision to accept the discretionary account in violation of its own rules did not breach a fiduciary duty owed to Rupert because Clayton owed no duty to him before the account was opened. The court of appeals concluded, however, that Clayton was responsible for any losses occurring in the account between the time the account balance fell below $7,500 and the time discretionary trading authority was revoked, and remanded the case to the trial court for a determination of that amount. We disagree with the court of appeals analysis of the issues of liability and damages, and now reverse.

II.

Where a customer relinquishes practical control over his brokerage account to a stockbroker, the broker owes wide-ranging fiduciary duties to the customer to manage the account in accordance with the customer's needs and objectives. Paine, Webber, Jackson & Curtis, Inc. v. Adams, 718 P.2d 508, 515 (Colo.1986); Henricksen v. Henricksen, 640 F.2d 880 (7th Cir.1981). A broker who becomes a fiduciary of his client must act with utmost good faith, reasonable care, and loyalty concerning the customer's account, and owes a duty to keep informed regarding changes in the market which affect his customer's interests, to act responsibility to protect those interests, to keep the customer informed as to each completed transaction, and to explain forthrightly the practical impact and potential risks of the course of dealing in which the broker is engaged. Thropp v. Bache Halsey Stuart Shields, Inc., 650 F.2d 817, 819-20 (6th Cir.1981); Leib v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 461 F.Supp. 951, 953 (E.D.Mich.1978). The existence and breach of a fiduciary duty in the context of a stockbroker/customer relationship is a question of fact to be determined by the jury or by the court sitting as the trier of...