Schetter v. Prudential-Bache Securities Inc., Civ. No. S-85-0539-RAR.

• Decision Date: 12 September 1988
• Docket Number: Civ. No. S-85-0539-RAR.
• Citation: 695 F. Supp. 1077
• Parties: Howard SCHETTER, et al., Plaintiffs, v. PRUDENTIAL-BACHE SECURITIES INC., et al., Defendants.
• Court: U.S. District Court — Eastern District of California

695 F. Supp. 1077

Howard SCHETTER, et al., Plaintiffs, v. PRUDENTIAL-BACHE SECURITIES INC., et al., Defendants.

Civ. No. S-85-0539-RAR.

United States District Court, E.D. California.

April 19, 1988.

On Motion September 12, 1988.

Geoffrey Burroughs, Jennifer H. Crabb, Weintraub, Genshlea, Hardy, Erich & Brown, Sacramento, Cal., for plaintiffs.

Peter R. Boutin, Robert D. DeLong, Keesal, Young & Logan, San Francisco, Cal., for defendants.

On Defendants' Motion for Attorneys' Fees September 12, 1988.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

SAMUEL P. KING, Senior District Judge.

This matter came on for trial before the Honorable Samuel P. King on March 1—9, 1988. Plaintiffs Howard Schetter, Frank E. Schetter and Nanci Johnston, as Trustees of the Schetter Electric Inc. Defined Benefit Plan and Trust ("Schetter Electric Plan"), filed this action against defendants Prudential-Bache Securities Inc. ("Prudential-Bache") and Jamie R. Gittins seeking approximately $200,000.00 in general damages and $5 million in punitive damages arising from the alleged mishandling of a brokerage account. Count I of the Complaint for the alleged violation of Rule 10b-5 promulgated pursuant to the Securities Exchange Act of 1934 was tried to a jury. On March 9, 1988, the jury returned a verdict in favor of defendants Prudential-Bache and Jamie R. Gittins on the Rule 10b-5 claim.

Counts II and III of the Complaint alleged violations of the Employee Retirement Income Security Act, 29 U.S.C. §§ 1001, et seq. ("ERISA") and were tried by the Court. All other counts of the Complaint were either voluntarily dismissed by plaintiffs or were previously dismissed by the Court.

The Court, having heard the testimony of the witnesses and having considered the evidence and the arguments of counsel, makes the following Findings of Fact and Conclusions of Law.

FINDINGS OF FACT

1. Plaintiff Howard Schetter is a retired electrical contractor who was, until January 1983, President of Schetter Electric Company ("Schetter Electric"). Howard Schetter is an experienced investor and he was and is a Trustee of the Schetter Electric Plan.

2. Plaintiff Frank Schetter, the son of Howard, has been employed by Schetter Electric since the 1970s and has been the President of Schetter Electric since January, 1983. Frank Schetter also was and is a Trustee of the Schetter Electric Plan, and was and is a Trustee of a health and welfare plan for a Sacramento area electricians' union.

3. Plaintiff Nanci Johnston, the office manager of Schetter Electric, also was a trustee of the Schetter Electric Plan beginning in approximately 1981.

4. Prior to opening the Schetter Electric Plan account at Prudential-Bache, Howard Schetter maintained a personal brokerage account at Paine Webber. While maintaining the account at Paine Webber, Howard Schetter purchased stock in a company called McKeon. Although Howard Schetter knew that McKeon stock had previously traded at a price as high as $39.00 per share, he purchased McKeon at approximately $1.00 per share and subsequently sold the stock at $3.00 per share. Howard Schetter was extremely pleased at having "tripled his money" on McKeon.

5. In or about 1977, the Schetter Electric Plan was created. At the inception of the Plan, funds were deposited in the Keystone B-4 Fund ("Keystone B-4 Fund"), a mutual fund composed of bonds. In 1978, the Schetter Electric Plan was earning a return of about 5% per year in connection with the Keystone B-4 Fund and Howard Schetter was unhappy with the return. In addition, Howard Schetter wished to have control over the investments made on behalf of the Schetter Electric Plan. For these reasons, Howard Schetter decided to seek an alternative to the Keystone B-4 Fund.

6. In December, 1978, Howard Schetter spoke with Mr. Gittins, who was then employed as a broker and assistant branch manager of Prudential-Bache's Sacramento branch office.

7. In December, 1978, Mr. Gittins met with Howard Schetter regarding the possibility of transferring the Schetter Electric Plan account from the Keystone B-4 Fund to Prudential-Bache. Howard Schetter advised Mr. Gittins that he wished to earn a substantially greater return on the Plan assets. Indeed, although the Plan then had assets of less than $50,000.00, Howard Schetter advised Mr. Gittins that he wanted the value of the plan to be $500,000.00 to $600,000.00 by the time he retired in 1983.

8. Later that month, Mr. Gittins met with Howard Schetter, Frank Schetter and Schetter Electric employee James Maines to again discuss the possibility of transferring the Plan assets from the Keystone B-4 Fund to Prudential-Bache. During the course of the meeting, Mr. Gittins presented a number of ideas for a possible portfolio to Howard Schetter, Frank Schetter and James Maines including stock in American Hoist and Derrick ("American Hoist"), APL Corporation, and Norfolk and Western Railroad. Mr. Gittins also advised the Trustees that a possible portfolio might include bonds issued by the following companies: Pacific Telephone, PG & E, Prime and Itel. The Trustees subsequently decided to purchase APL and American Hoist stock and place the remainder of the Plan's funds in Prudential-Bache's money market account. The Trustees decided not to purchase at that time any of the other stocks and bonds mentioned by Mr. Gittins.

9. From early 1979 through late 1982, Mr. Gittins met with the Trustees of the Schetter Electric Plan at Schetter Electric's offices in Sacramento approximately once every four to six weeks, and sometimes more frequently. During these meetings, Mr. Gittins would discuss, among other things, the status of the Schetter Electric Plan account, whether individual stocks and bonds in the account were increasing or decreasing in value, and possible additional investments. In connection with prospective new investments, Mr. Gittins usually would present the Trustees with Standard & Poors sheets containing information on the individual companies being considered. The information contained on the Standard & Poors sheets included, but was not limited to, the recent price of the stock or bond, the price range of the stock during the last year, dividends paid, the annual yield, the stock's ranking, recent developments involving the company, earnings during the last several years and related matters. One or more of the Trustees ordinarily would read the Standard & Poors sheets and, after one or more discussions with Mr. Gittins, a decision would be made by the Trustees regarding whether or not to purchase the subject stocks or bonds. On some occasions, the Trustees would "watch" the stock or bond for a while prior to making a decision as to whether to make a purchase. The Trustees, at various times, both accepted and rejected stocks and bonds presented to them by Mr. Gittens.

10. Following each and every transaction in the Prudential-Bache account, the Trustees received confirmation slips reflecting the transaction, the price at which the stock or bond was purchased or sold, the commission, if any, paid and the cost of, or proceeds from, the transaction. Ms. Johnston frequently would make a notation on individual confirmation slips of the net profit on transactions.

11. The Trustees received monthly statements every month reflecting the transactions in the Schetter Electric Plan account. In addition, the monthly statements contained a portfolio summary summarizing the stocks then held in the account, their then market value and the net worth of the Plan account. Howard Schetter and Ms. Johnston ordinarily closely reviewed the monthly statements on a monthly basis.

12. During the time the Schetter Electric Plan account was maintained at Prudential-Bache, Howard Schetter regularly read the Wall Street Journal, Money Magazine, and other financial publications. Mr. Schetter followed the prices of the various Schetter Electric Plan investments as reported in the Wall Street Journal and the Sacramento Bee. When Howard Schetter retired in early 1983, Frank Schetter and Ms. Johnston bought him a subscription to the Wall Street Journal.

13. For a period of time, Ms. Johnston attempted to track the Prudential-Bache account by inputting information regarding the stocks in the Schetter Electric Plan account into a company computer. After approximately one or two months, she ceased this computer monitoring of the account because the computer was not well adapted to the task.

14. Ms. Johnston and Howard Schetter frequently called the Prudential-Bache office to obtain up-to-the-minute quotes on the prices of the stocks in the Schetter Electric Plan account. In addition, both Howard Schetter and Ms. Johnston visited the Prudential-Bache offices on a number of occasions between 1982 and 1984, and they would frequently inquire about the status of the Schetter Electric Plan account.

15. The Trustees advised Mr. Gittins that their investment objective was "long term growth." In addition, Howard Schetter, whom Mr. Gittins understood to have an 80% to 90% interest in the Schetter Electric Plan, repeatedly advised Mr. Gittins that he wanted to have 15-20% of the account invested in "little ones (stocks) like McKeon." In response to these and similar comments, Mr. Gittins presented to the Trustees certain more aggressive transactions for their consideration.

16. The Trustees purchased several stocks which were "new issues" or secondary offerings. In connection with such transactions, defendants always provided the Trustees with a prospectus which described the proposed investment. On one occasion, Howard Schetter requested that the purchase of a stock (Rusty Pelican) be cancelled after reading the prospectus.

17. During the time the Schetter Electric Plan account was maintained at Prudential-Bache, the Trustees purchased both stocks and bonds. The account was well diversified and included issues in retailing, publishing, drugs, oil and gas, manufacturing, medicine, utilities,...