Thompson v. Smith Barney, Harris Upham

• Decision Date: 01 April 1982
• Docket Number: Civ. A. No. C79-334.
• Citation: 539 F. Supp. 859
• Parties: John E. THOMPSON v. SMITH BARNEY, HARRIS UPHAM & CO., INC.
• Court: U.S. District Court — Northern District of Georgia

539 F. Supp. 859

John E. THOMPSON v. SMITH BARNEY, HARRIS UPHAM & CO., INC.

Civ. A. No. C79-334.

United States District Court, N. D. Georgia, Atlanta Division.

April 1, 1982.

J. D. Humphries, III, Varner, Stephens, Wingfield, McIntyre & Humphries, Atlanta, Ga., for plaintiff.

Paul W. Stivers, Rogers & Hardin, Atlanta, Ga., for defendant.

ORDER

ORINDA D. EVANS, District Judge.

Plaintiff John Thompson alleges that Defendant, a brokerage firm, violated the federal securities laws and committed common law fraud in connection with transactions effected on his behalf between January and July of 1978. He seeks compensatory and punitive damages. For the reasons given below, the Court concludes Plaintiff is unable to recover on any of these grounds.

FINDINGS OF FACT

Plaintiff initially met Bruce Brookshire in the summer of 1977 "around the pool" at the apartment complex where both lived. Plaintiff had observed him there, working on various office files while sunbathing. In the course of their conversation, Plaintiff learned Brookshire was a stock broker and that the materials he was reviewing pertained to investments he was researching. Plaintiff was impressed with Brookshire's apparent knowledge of the market and also with his apparent diligence. Casual mention was made of the possibility of Brookshire handling some investments for Plaintiff.

Plaintiff Thompson is a businessman and former mayoral candidate in Atlanta. At the time of the transactions in question here, he was a salaried middle management employee of a paper company and also ran a part-time sales business of his own. He had some limited experience with stock market transactions, and had invested in speculative real estate. The Court finds Plaintiff is an experienced businessman with the general ability to recognize and capitalize on favorable investment opportunities.

At the time of the transactions at issue, Bruce Brookshire was a relatively inexperienced stockbroker, having been out of college for less than two years. The Court further finds that Mr. Brookshire was in fact diligent and hard working, and quite committed to success in his chosen career. The Court further finds that Mr. Brookshire had unlimited confidence in his ability to predict future turns of the market.

In September 1977, Plaintiff opened an account with Defendant. Brookshire, Defendant's employee, was the salesman handling the account. During the period from September through December, 1977, Brookshire handled Plaintiff's investment account on a cash basis. Initially, Brookshire's role was that of order taker, however, he began to suggest investments for Plaintiff. During this three-month interval, the two would discuss proposed investments in detail; Plaintiff would provide the funds and Brookshire would place the order. During this time Plaintiff began to feel a fair amount of confidence in Brookshire's judgment. Ultimately, Brookshire convinced him he could make a great deal more money if he would convert the account to a margin account so as to permit purchases on a leveraged basis.

In December, 1977 Plaintiff converted the account to a margin account. However, it remained a nondiscretionary account—i.e., one in which the broker does not have the right to make investment decisions for the customer.

On December 8, 1977, Plaintiff signed an "Option Account Agreement" which he then returned to Defendant. Plaintiff and Brookshire had never specifically discussed opening an option account, though they had mutually decided to seek more aggressive forms of investments for Plaintiff.

Paragraph 1 of the "Option Account Agreement" states in part that the undersigned has read the current prospectus of the Options Clearing Corporation (OCC), is aware that options are "inherently highly speculative," and agrees that options trading is not "an unsuitable activity" for him. Paragraph 6 of that agreement further provides:

in order to induce Defendant to effect transactions in Options for my account as I may request from time to time and in order to provide Defendant with reasonable grounds for believing that such transactions for my account are not unsuitable for me in light of my experience and knowledge and my investment objectives, financial situation and needs, I have furnished to Defendant accurate information concerning my experience and knowledge and my investment objectives, financial situation and needs...

Defendant's Exhibit No. 1. The court nevertheless finds that the OCC prospectus cited in the agreement was in fact not received by Plaintiff prior to the transactions at issue here. The Court also finds Plaintiff did not read the Option Account Agreement before he signed it.

During the entire time of Brookshire's association with Plaintiff, there was never any discussion between the two as to the extent of Plaintiff's financial resources or his prior dealings in the market. Brookshire never asked, nor did Plaintiff volunteer, any information concerning Plaintiff's salary, other income, net worth or experience in stock dealings. Brookshire inferred from Plaintiff's manner of dress, demeanor, and the fact that he had run for mayor, that Plaintiff had a better than average income and above-average business acumen.

In January 1978, Brookshire filled out an "Option Information Sheet" containing estimates of Plaintiff's net worth and annual income, which he set at $150,000 and $75,000, respectively. Defendant's internal rules required that such information be obtained as a prerequisite for opening an option account. Brookshire did not contact Thompson before filling out the sheet and made no effort to obtain any reliable information. Rather, he selected the referenced figures because they were adequate to satisfy Defendant's requirements.

The evidence at the trial showed that Plaintiff's net worth and income were dramatically less than the figures selected by Brookshire.

Beginning in January 1978, Brookshire took the initiative in recommending investments to Plaintiff. From time to time he would call Plaintiff and suggest that a particular stock be sold and another purchased. None of the securities purchased for Plaintiff's account were held for any considerable period of time. A review of Plaintiff's account from January through July, 1978 indicates a consistent pattern of purchases and quick sales. It is obvious Plaintiff was "playing the market."

In January 1978, Brookshire recommended to Plaintiff that he purchase 20 IBM July 240 puts.

Testimony at the trial showed that a put is a form of option. More specifically, a "put" is a security representing the right to sell a certain number of shares of stock at a stated price up to a certain date. For example, one "IBM 240 July put" (referred to in the preceding paragraph) represented the right to sell 100 shares of IBM stock at $240 each up to a certain date in July, 1978. The value of a put increases as the price of the underlying stock decreases. The holder of a put is betting that the underlying security will decline in value. Changes in the value of the underlying security have a dramatic impact on the price of a put. Virtually overnight, a put may double in value or become worthless. Also, as the expiration date of the put approaches, its value decreases; after the expiration date, it is worthless.

Particularly at the time in question here, puts were not a well known or well-understood form of investment to the average investor. Brookshire was aware of this.

Brookshire and Plaintiff discussed the proposed purchase of 20 IBM July 240 puts. At the trial, neither was able to offer much specific testimony as to the substance of that conversation, from which the Court deduces it must have been brief and rather general in nature. The Court finds Brookshire did not specifically warn Thompson that puts are an unusually risky form of investment. It is clear that Thompson was unsure following the conversation what a "put" was. He thought he was purchasing something in the nature of a warrant, or an option with properties similar to a real estate option.

The Court has pondered at length the question of whether or not Brookshire realized Thompson did not know what a put is. Brookshire impressed the Court as being highly intelligent. As mentioned previously, he was quite self-confident. Thus, could it be he did know or suspect that Thompson did not understand the transaction, but nonetheless chose to proceed with it, in the belief that it would turn out well? After some hesitation, the Court elects not to draw such a conclusion. The reason is simply that the evidence on this point is not clear enough; the evidence does not preponderate in Plaintiff's favor. Plaintiff himself gave no specific testimony from which the Court could conclude that Brookshire realized Thompson's confusion. Moreover, Plaintiff's demeanor as observed by the Court is bold and assertive. He did not appear to be one likely to dwell on or readily admit his uncertainties. Taking the evidence as a whole, the Court is unable to conclude that Brookshire knew Thompson did not understand the put transaction.

In any event, the IBM puts were purchased and held for a period of three days, when they were sold at a 23% profit. The success of this transaction, as well as other unusually profitable transactions¹ handled by Brookshire for Plaintiff in the spring of 1978, caused Plaintiff to have a growing sense of Brookshire's infallibility. Although they still discussed most purchases before Brookshire made them for Plaintiff's account, Plaintiff's tendency by the spring of 1978 was to defer almost totally to Brookshire's judgment.

In July of 1978, Brookshire recommended to Plaintiff that he purchase 50 IBM October 260 puts. Brookshire told Plaintiff this would require $20,000, which at that time was equal to about 35% of the value of Plaintiff's portfolio. At the time Brookshire made this suggestion, Plaintiff still did not know what a put was. He did know...