Smoky Greenhaw Cotton Co., Inc. v. Merrill Lynch, Pierce, Fenner and Smith, Inc.
| Decision Date | 28 March 1986 |
| Docket Number | No. 85-1310,85-1310 |
| Citation | 785 F.2d 1274 |
| Parties | , 54 USLW 2656, Fed. Sec. L. Rep. P 92,528, Fed. Sec. L. Rep. P 92,767, RICO Bus.Disp.Guide 6221, RICO Bus.Disp.Guide 6269 SMOKY GREENHAW COTTON CO., INC., and John C. Greenhaw, Plaintiffs-Appellants, Cross-Appellees, v. MERRILL LYNCH, PIERCE, FENNER AND SMITH, INC., et al., Defendants-Appellees, Cross-Appellants. |
| Court | U.S. Court of Appeals — Fifth Circuit |
David Greenhaw, Odessa, Tex., for plaintiffs-appellants, cross-appellees.
James P. Boldrick, Midland, Tex., for defendants-appellees, cross-appellants.
Appeals from the United States District Court for the Western District of Texas.
Before BROWN, JOHNSON, and JOLLY, Circuit Judges.
Plaintiffs and appellants Smoky Greenhaw Cotton Co., Inc. and John C. Greenhaw (Greenhaw) appeal from the District Court's judgment that, among other things, ordered arbitration of their Commodities Exchange Act and pendent state law claims after a jury had found for the plaintiffs on those claims. Defendants and cross-appellants Merrill Lynch, Pierce, Fenner & Smith, Inc. and Charles D. and Margaret Scott appeal from the judgment for the plaintiffs on their securities claims. We reverse the District Court's judgment ordering the parties to arbitrate their nonsecurities claims, and we affirm the entry of judgment on the plaintiffs' securities claims. In addition, we affirm the District Court's grant of j.n.o.v. on the plaintiffs' exemplary damages verdict, and remand for a new trial on the plaintiffs' RICO count.
Wish I was Hedging in the Land of Cotton
John C. Greenhaw, a West Texas cotton ginner, began trading commodities with Merrill Lynch, Pierce, Fenner & Smith, Inc. (Merrill Lynch) account executives Charles and Margaret Scott in 1977. He used the commodities account to hedge on the cotton market. Originally, the account was opened in the name of Lenorah Gin Company, an enterprise in which Greenhaw was a shareholder. Later, in 1979, Greenhaw opened two personal trading accounts, one to trade in commodities and the other in securities. In December 1980, Greenhaw's Smoky Greenhaw Cotton Company, Inc. (the Cotton Company), a cotton broker, also opened a commodities and securities account. When Greenhaw opened his and the Cotton Company's commodities trading accounts, he signed a standard form agreeing to submit all disputes regarding the accounts to arbitration. 1
The commodities accounts were nondiscretionary, i.e., Merrill Lynch's broker could make trades in those accounts only with Greenhaw's authorization. The securities accounts were discretionary. Their trades required no preauthorization, and the broker could buy and sell stocks for investment purposes and to meet margin requirements.
In September 1982, Greenhaw sued Charles Scott and Merrill Lynch, charging among other things that Scott had made unauthorized trades in the Cotton Company's commodities account. The complaint purported to state claims under Sec. 4b of the Commodity Exchange Act, 7 U.S.C. Sec. 6b, Sec. 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j, and various Texas statutory provisions and common law doctrines. Merrill Lynch answered and moved for a stay pending arbitration as provided by the commodities account agreement. The District Court granted the stay pending arbitration, but this Court reversed. Smoky Greenhaw Cotton Co. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 720 F.2d 1446 (5th Cir.1983) (Greenhaw I ). We held that where the issues underlying nonarbitrable securities claims 2 and otherwise arbitrable claims are necessarily "intertwined," a court " 'should deny arbitration in order to preserve its exclusive jurisdiction over the Federal Securities Act claims.' " Greenhaw I, 720 F.2d at 1448, quoting Sibley v. Tandy Corp., 543 F.2d 540, 543 (5th Cir.1976), cert. denied, 434 U.S. 824, 98 S.Ct. 71, 54 L.Ed.2d 82 (1977). Accord Sawyer v. Raymond, James & Assocs., Inc., 642 F.2d 791, 792-93 (5th Cir.1981) (). Consequently, we ordered the District Court to try all of the plaintiffs' claims together.
On remand, Greenhaw intervened personally and added Margaret Scott as a defendant. He also added a count under the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. Secs. 1961-1968.
At trial, Greenhaw and the Cotton Company 3 introduced evidence that Merrill Lynch made unauthorized trades in the commodities accounts, "churned" the accounts, 4 and left open trades that would later be assigned to the accounts of the Scotts or an unrelated, non-Greenhaw customer if profitable or to Greenhaw's accounts if unprofitable. After the evidence was presented to the jury, the District Court granted Merrill Lynch a directed verdict on the RICO claim. All other claims were submitted to the jury in the form of special interrogatories. 5
The jury specifically found that Merrill Lynch violated the Commodities Exchange Act by conducting unauthorized trades, violated the Securities Exchange Act of 1934, and willfully and wantonly breached a fiduciary duty owed to Greenhaw and his company. The jury found damages as follows:
Damages Item Amount
--------------------------------------- --------
1. Commodities violation
(i) to Greenhaw $ 36,925
(ii) to the Cotton Co. 149.602
2. Securities violations
(i) to Greenhaw 697
(ii) to the Cotton Co. 4,223
3. Breach of fiduciary duty (compensatory)
(i) to Greenhaw 36,925
(ii) to the Cotton Co. 149,602
4. Breach of fiduciary duty (exemplary)
(i) to Greenhaw 25,000
(ii) to the Cotton Co. 100,000
After the jury returned its verdict, the District Court granted a j.n.o.v. on the exemplary damages, finding no evidence to support the claim of a willful and wanton breach of a fiduciary duty.
Greenhaw submitted a proposed judgment in accordance with the jury verdict as modified, but before the District Court entered the judgment, the Supreme Court rejected the intertwining doctrine relied on by the Court in Greenhaw I. Dean Witter Reynolds, Inc. v. Byrd, --- U.S. ----, 105 S.Ct. 1238, 84 L.Ed.2d 158 (1985). The Supreme Court held that even where arbitrable claims are intertwined with nonarbitrable securities claims, the Arbitration Act, 9 U.S.C. Secs. 1-14, requires district courts to compel arbitration of the arbitrable claims. The "preeminent" rationale behind the Dean Witter Reynolds decision was that courts should enforce arbitration agreements as part of the parties' legitimate contractual expectations. --- U.S. at ----, 105 S.Ct. at 1242, 84 L.Ed.2d at 164. Consequently, when the District Court entered judgment, it entered the jury's verdict on the securities claims (items 2(i) and (ii) supra ) but it referred the commodities claims (items 1(i) and (ii)) and the breach of fiduciary duty claims (items 3 and 4) to arbitration.
Greenhaw now appeals the submission of the commodities and fiduciary claims to arbitration, the grant of j.n.o.v. on the exemplary damages claims, and the entry of a directed verdict on the RICO claims. Merrill Lynch appeals the entry of judgment on the securities claims.
The Securities Claims
We first consider Merrill Lynch's appeal from the entry of judgment against it on the securities law claims. It asserts that there was insufficient evidence to submit the securities claims to the jury. Specifically, it asserts that there was no evidence of a securities violation, no evidence with regard to damages sustained by Greenhaw, and no evidence that Merrill Lynch and the Scotts jointly violated the securities laws.
The only securities in this case were Merrill Lynch's Ready Asset Funds accounts. It was into these accounts that profits from Greenhaw's commodities accounts were transferred in order to purchase securities that would generate returns for Greenhaw; it was also from these accounts that securities were sold to generate funds to meet margin calls in Greenhaw's commodities accounts.
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.
Viewing the evidence in the light most favorable to Greenhaw, as we must with a jury verdict, it is clear that Greenhaw established the necessary elements needed to prove a Rule 10b-5 violation. There was evidence for a jury to find that Merrill Lynch engaged in a fraudulent scheme of making unauthorized commodity trades in Greenhaw's accounts. Merrill Lynch occasionally liquidated portions of the plaintiffs' Ready Asset Funds accounts to finance the unauthorized trades. Merrill Lynch used the telephone lines and the facilities of a national securities exchange to execute its scheme. Finally, in light of the broad interpretation that the courts lend to the "in connection with" requirement,...
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