Stevens v. Abbott, Proctor & Paine
| Decision Date | 06 August 1968 |
| Docket Number | Civ. A. No. 5346. |
| Citation | 288 F. Supp. 836 |
| Court | U.S. District Court — Eastern District of Virginia |
| Parties | Adeline H. STEVENS v. ABBOTT, PROCTOR & PAINE v. Alfred S. WINSTON, Jr. |
COPYRIGHT MATERIAL OMITTED
George R. Humrickhouse, R. Colston Christian and John O. Peters, Williams, Mullen & Christian, Richmond, Va., for defendants.
The plaintiff herein, a housewife with no business training, married to a portrait artist, is a high school graduate and attended a girls' finishing school. Her husband has a limited education and the record is devoid of any particular business acumen on his part. The plaintiff has never been gainfully employed and the Court finds that she is utterly naive and unsophisticated in reference to financial transactions. To adequately describe plaintiff's lack of sophistication in financial matters would be a herculean task. Suffice it to say, on being questioned as to the difference between a stock and a bond, answered in effect "stocks have names and bonds don't."
In 1956, the plaintiff inherited from her mother a portfolio of securities which up until 1960 had been handled by the Trust Department of the First and Merchants National Bank of Richmond, Virginia, the bank acting as Trustee in a managing agency account. During the years between her mother's demise and October of 1960, plaintiff's needs for funds from her securities account were met from dividends and interest generated by the securities, and there was to all intents and purposes no active trading of securities in the account as handled by the bank.
The individual defendant, Winston, a man who is now 70 years of age and described by one witness as a person who has not been in good health for over thirty years, is a registered representative who has been in the employ of the defendant, Abbott, Proctor and Paine, and its predecessor, in excess of forty years. Winston had previously acted as a registered representative in handling the plaintiff's mother's account prior to her demise and had been a person in whom plaintiff's mother placed a great deal of faith, and who has been known to the plaintiff since her childhood, he Winston, having been a patient of plaintiff's father, a physician, now deceased.
Up until the time of the death of plaintiff's mother, plaintiff had relied to a great extent upon her mother's advice and had had a small account, through the defendant, Winston, with the defendant firm, Abbott, Proctor and Paine, some twenty-five years prior to the instant case. The Court finds that at the time the plaintiff initiated her original account with Abbott, Proctor and Paine, in 1940, an account card was compiled which showed "Account not likely to be active."
In October of 1960 plaintiff contacted Winston and advised him that she wished him to handle her account and likewise advised him that she had been receiving from the bank from her investments the sum of $500.00 per month and wished to continue to receive that. Winston readily accepted the account, although no new account card was prepared, nor were any amendments made to the account card of 1940, to the end that anyone who might perchance examine the account card would find thereon the notation "Account not likely to be active."
The Court finds that as a result of the plaintiff's contact with Winston in October of 1960, the stock portfolio was transferred to the management of Abbott, Proctor and Paine through the defendant, Alfred S. Winston, Jr. The plaintiff, in effect, turned over the handling of her financial affairs, insofar as the stock portfolio was concerned, in toto to Winston.
Contacts between Winston and the plaintiff were fairly infrequent and Winston prepared the necessary documents in order to have the stock transferred so as to be carried in a "street name,"1 to the end that her signature was not required in the selling of securities in order to effectively transfer same. All papers necessary to secure the stock portfolio from the bank were prepared by Winston and executed by the plaintiff, and the Court is satisfied the plaintiff had no intelligible understanding that by so executing the documents, the stock was being removed from her name to "street name", but executed the documents with the understanding that such execution was necessary in order to permit defendant, Winston, to handle her transactions.
The Court finds that contra to the claim of Winston that he received the plaintiff's approval prior to each transaction, he was given what amounted to a discretionary account,2 the plaintiff having injected herself only once when she spoke to Winston about a stock that a portrait subject of her husband had suggested.
Within a short period of time after commencing to handle plaintiff's account, Winston turned it into an active trading account.
No written authorization was ever solicited from the plaintiff by the defendants in order to deal with her account as a trading account or otherwise. The Court finds that Winston, acting as the agent for Abbott, Proctor and Paine and in the scope of his employment as a registered representative, represented to the plaintiff that he could make more money for her than she was getting from the Trust Department of the bank, and the plaintiff in her own mind had no doubt until the year 1966, and indeed, she was so led to believe by the defendant, Winston, that he was at all times working in her best interests, in the handling of an investment account.
What little contact the parties had after 1960 was usually generated by the plaintiff's calling the defendant, Winston, to make requests for additional funds. Winston was well aware that plaintiff's income from her stock portfolio was an important source of her own and her family, and her primary security. Although she had been drawing the sum of $500.00 per month from her investments while they were being handled by the bank, and in spite of the fact that Winston had suggested to her that such a draw could be increased, her drawings were to a great extent irregular for the first year or so, although in the year 1963 arrangements were made with the defendants to cause to be sent directly to the plaintiff's daughter a certain sum per month, which subsequently was increased.
Winston, the Court finds, failed to explain to the plaintiff the risks to be incurred by the active trading in which he engaged, nor did he, according to his own testimony, feel it was his duty to explain to the plaintiff that there were extra risks to be expected in any active trading. Defendant, Winston, was not familiar with many of the Securities and Exchange Commission rules as he was likewise unfamiliar with many of the rules of the New York Stock Exchange.
Until January 1966 the plaintiff was not aware of the fact that the defendant, Winston, was paid on a commission basis. Although Winston claims prior approval by plaintiff on all transactions, the record shows that during one or more periods the plaintiff was not available for any such confirmations. In one instance plaintiff was in Europe for a period of approximately six weeks. Although admitting he was not an analyst, the Court finds that if the defendant, Winston, used the Research Department available to him through Abbott, Proctor and Paine in connection with the plaintiff's account, it was done on an extremely infrequent basis. There is little in the record before the Court to show that the turnover of the plaintiff's stock by the defendant, Winston, was based upon any special analytical method, but the record indicates same was generated to a great extent on the defendant, Winston's, own opinions as to the fluctuations the market might take. There can be no doubt but that Winston was exercising his sole discretion in the buying and selling of the plaintiff's securities almost from the beginning of their relationship in 1960.
The Court finds that the plaintiff's account represented a major account responsible for much of Winston's earnings commencing with the year 1961. The record shows that in at least two years the commissions or concessions earned by the defendant, Winston, from plaintiff's account alone amounted to in excess of 40% of his yearly earnings. Between 1960 and 1965 defendant, Winston, averaged more than one transaction in the plaintiff's account every working day. Not counting the securities in the original portfolio, Winston made over 550 sales of securities of which about 85% were held less than six months, 70% ninety days or less, and 39% thirty days or less.
The Court finds that Winston continually represented to the plaintiff that his manner of handling her account was resulting in profits, when in fact an analysis of same showed that for at least three years the trading in the account caused losses, which losses were masked by virtue of the defendant's selling securities from the original portfolio representing large accrued capital gains.
The Court has no difficulty finding from the entire record that the primary and overlying purpose for Winston's establishing plaintiff's account as a trading account in contrast to an investment account was for the purpose of generating commissions, and the manner in which plaintiff's account was handled evidenced a gross indifference to the duty owed the plaintiff. See Norris & Hirshberg v. Securities & Exchange Comm., 85 U.S.App.D.C. 268, 177 F.2d 228-233 (1949).
The Court finds that the plaintiff neither directly nor indirectly acquiesced in the course of "trading" in her account as engaged in by the defendant, Winston.
The inter-office procedures of the defendant, Abbott, Proctor and Paine, required that any account which had in excess of ten transactions per month was to be given special attention. Yet no effectual effort whatsoever was made by the brokerage firm, through its managing partners, to determine the relationship between Winston and ...
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