Stephens, Inc. v. Geldermann, Inc.

• Decision Date: 24 April 1992
• Docket Number: Nos. 91-2204,91-2232,s. 91-2204
• Citation: 962 F.2d 808
• Parties: RICO Bus.Disp.Guide 7997, 35 Fed. R. Evid. Serv. 768 STEPHENS, INC., Appellee/Cross-Appellant, v. GELDERMANN, INC., Appellant/Cross-Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 808

962 F.2d 808

RICO Bus.Disp.Guide 7997, 35 Fed. R. Evid. Serv. 768

STEPHENS, INC., Appellee/Cross-Appellant, v. GELDERMANN, INC., Appellant/Cross-Appellee.

Nos. 91-2204, 91-2232.

United States Court of Appeals Eighth Circuit.

Submitted Jan. 8, 1992.

Decided April 24, 1992.

Otis Henry Story, III, Little Rock, Ark., argued (Lawrence J. Brady, on brief), for appellant/cross-appellee.

Jerry C. Jones, Little Rock, Ark., argued (Kenneth R. Shemin and Amy L. Stewart, on brief), for appellee/cross-appellant.

Before BEAM, Circuit Judge, BRIGHT, Senior Circuit Judge, and VAN SICKLE, ^* Senior District Judge.

BEAM, Circuit Judge.

Stephens, Inc., an Arkansas corporation, brought an action in federal district court against Geldermann, Inc., a Chicago based commodity futures merchant, for losses allegedly sustained through a house account Stephens maintained at Geldermann. Stephens raised a variety of claims based on state and federal law, seeking punitive as well as compensatory damages. The district court, through summary judgment or directed verdict, dismissed several of these claims, including one based on the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1961-1968. Stephens' claims alleging violations of the Commodity Exchange Act, fraud, conspiracy to defraud, and breach of contract went to a jury, which returned a verdict in favor of Stephens for $1,381,000 in compensatory damages and $1,000,000 in punitive damages. Although the jury did not specify the basis of Geldermann's liability, the verdict form required that punitive damages be premised on a finding of either fraud or conspiracy. After trial, Geldermann requested, and received, a $600,000 set-off against the verdict for funds which Stephens had voluntarily ceded to another party involved in the litigation. Geldermann appeals claiming that (1) the district court improperly admitted prejudicial hearsay; (2) Stephens failed to prove proximate cause for certain damages and, regardless, such damages were speculative; and (3) the district court erred in permitting the jury to consider punitive damages and in failing to adequately review the award. Stephens cross-appeals, arguing that the district court erred (1) in dismissing its RICO claim and (2) in granting Geldermann's motion for a set-off. We affirm on all issues.

I. BACKGROUND

In May 1982, Stephens opened a commodity trading account at Geldermann, number 15233, in order to trade with Stephens' own funds (Stephens Account). A senior officer of Stephens, John Markle, had discretion and control over the account. About the same time, unbeknownst to Stephens, Markle opened another account at Geldermann, number 15245, in the name of his mother, Mercedes McCambridge (McCambridge Account). McCambridge alleged that she gave Markle approximately $1,000,000 to $1,100,000 to invest in certificates of deposit and other conservative investments. According to McCambridge, Markle assured her that he was following her investment directions.

Markle traded both accounts through Geldermann. A dedicated phone line ran from Markle's office at Stephens in Little Rock, Arkansas, to Geldermann's desk at the Chicago Board of Trade. Markle simply would pick up the phone in his office and direct a Geldermann employee in Chicago to buy or sell specific commodity futures. When Markle placed his orders, he never told the Geldermann employee the number of the account being traded. Under Commodity Futures Trading Commission (CFTC) regulations, however, a broker must ask a trader for the number of the account traded and write that number on the order ticket. 17 C.F.R. § 1.35(a-1)(1). In direct violation of the CFTC regulations, Geldermann employees permitted Markle to assign his trades to either the Stephens or the McCambridge Account at the end of the day, after he knew which trades had been profitable. Internal Geldermann memoranda dated from May to July 1984, supported an inference that Geldermann suspected trading improprieties involving the McCambridge Account, but actively concealed the Account's existence from Stephens to avoid losing Markle's business.

Between 1982 and 1987, the Stephens Account suffered trading losses of $5,267,638.74 and Stephens paid Geldermann commissions and fees of $959,597.53 for a total loss of $6,227,236.27. The McCambridge Account, however, performed unusually well (92% of the account's trades were profitable) and realized a total profit of $854,444.58 with commissions and fees of $167,608.92. On October 6, 1987, Geldermann finally informed Stephens about the McCambridge Account and its unusual pattern of profitability. According to Stephens, Geldermann did so only because Stephens had learned a day earlier that Markle had been operating another account in Mercedes McCambridge's name at the Elders Commodity Firm in Chicago.

Stephens began to investigate Markle's trading activities and confronted him on October 7, 1987. According to the testimony of two Stephens officers, Markle initially denied any wrongdoing, but, at several later meetings, admitted to defrauding Stephens. Markle also indicated that he had received help and, on at least one occasion, specifically stated that "Geldermann" had helped him. During the later meetings, Markle also attempted to negotiate a settlement with Stephens. Near the end of the discussions, for example, Markle offered Stephens $600,000 to be paid after Mercedes McCambridge's death. Stephens rejected the offer on November 13, 1987, demanding at least $1,000,000 within the next few weeks. Markle responded that he would need a month to work something out. At the same meeting, Warren Stephens, the president and chief executive officer of Stephens, promised Markle that Stephens would not sue him, but instead planned to sue Geldermann. Markle appeared relieved and again stated that he had been given help with his scheme. This meeting proved to be the last one between Markle and Stephens because shortly thereafter, Markle killed himself.

At the time Markle's scheme was uncovered, the McCambridge Account contained approximately $1,200,000. Geldermann transferred the funds to an account at Stephens in McCambridge's name. When McCambridge declared an intention to withdraw the funds, Stephens brought an action in state court to recover them as the proceeds of Markle's scheme to defraud Stephens. Stephens and McCambridge eventually reached a settlement whereby each received $600,000 from the McCambridge Account. Stephens further agreed to indemnify McCambridge for any liability to Geldermann and, in return, McCambridge assigned any claim she had against Geldermann to Stephens.

At the end of the trial, the jury was asked to determine whether Geldermann was liable to either Stephens or McCambridge for the losses they each alleged to have suffered. The jury had previously learned that both Stephens and McCambridge had received $600,000 from the McCambridge Account and the court instructed the jury in separate instructions to offset any damages awarded to either Stephens or McCambridge by any monies either had already received. ¹ The jury returned a verdict in favor of Stephens against Geldermann and awarded Stephens $1,381,000 in compensatory damages and $1,000,000 in punitive damages. As to McCambridge's claims, however, the jury found in favor of Geldermann.

After trial, Geldermann requested the district court to offset the verdict in Stephens' favor by the $600,000 that McCambridge had received in the settlement. Geldermann argued that the jury's verdict against McCambridge demonstrated that Stephens' claim to the funds in the McCambridge Account as proceeds of Markle's fraud was superior to McCambridge's claim. The funds, therefore, always belonged to Stephens and the $600,000 McCambridge received was a voluntary transfer from Stephens. Geldermann thus asserted that a set-off was necessary to prevent double recovery by Stephens. The district court agreed, and granted Geldermann's motion. ²

II. DISCUSSION

A. Hearsay

Geldermann contends that the district court improperly admitted prejudicial hearsay statements. The court permitted the two Stephens officers who had confronted Markle, Phillip Shellabarger and Warren Stephens, to testify about the statements Markle had made to them during their various conversations with him. Although Geldermann conceded that Markle's confession to defrauding Stephens was admissible, it objected to the portions of Markle's statements indicating that he had help. Relying on our decision in Smith v. Updegraff, 744 F.2d 1354, 1366 n. 7 (8th Cir.1984), the district court admitted the disputed hearsay as statements against interest made by an unavailable declarant, see Fed.R.Evid. 804(b)(3). Although we agree with Geldermann that the district court erred in admitting the disputed portions of Markle's statements, we believe that this error was harmless.

Stephens urges us to follow Smith, but our opinion in that case provides little guidance here. In Smith, we commented in a footnote that certain statements made by a deceased declarant to the effect that he had acted in concert with others to wrongfully discharge an employee were admissible under Rule 804(b)(3) as statements against interest. See Smith, 744 F.2d at 1366 & n. 7. The parties in Smith, however, did not challenge the admissibility of the statements as ones against interest, and we did not elaborate the basis for our holding. The Smith footnote, therefore, is dictum.

Other cases, however, are more helpful in determining whether Markle's statements were admissible under Rule 804(b)(3). In United States v. Lilley, 581 F.2d 182 (8th Cir.1978), for example, we explained that only those portions of a statement that are truly against the declarant's interest are admissible under Rule 804(b)(3). Any portion of a statement not against interest must be edited out or the whole statement is inadmissible. Id. at 188. The court should examine the...