Twin Fires v. Morgan Stanley Dean Witter

• Decision Date: 30 November 2005
• Citation: 837 N.E.2d 1121,445 Mass. 411
• Parties: TWIN FIRES INVESTMENT, LLC, & another<SMALL><SUP>1</SUP></SMALL> v. MORGAN STANLEY DEAN WITTER & CO. & another.<SMALL><SUP>2</SUP></SMALL>
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

837 N.E.2d 1121

445 Mass. 411

TWIN FIRES INVESTMENT, LLC, & another¹ v. MORGAN STANLEY DEAN WITTER

& CO. & another.²

Supreme Judicial Court of Massachusetts, Suffolk.

Argued September 7, 2005.

Decided November 30, 2005.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Robert D. Friedman, Boston (Susan E. Stenger & Andrew F. Caplan with him) for the plaintiffs.

William Pratt (Eric F. Leon & David I. Horowitz, of New York, NY, John R. Snyder & Carol E. Head with him) for the defendants.

Present: MARSHALL, C.J., GREANEY, IRELAND, SPINA, COWIN, SOSMAN, & CORDY, JJ.

MARSHALL, C.J.

The issue in this case is whether the plaintiffs, who sought to benefit from a technology company's initial public offering (IPO), are entitled to recover a claimed loss of over $12 million from a national brokerage firm because, contrary to the plaintiffs' expectations, the firm did not allocate shares of the company's stock to them on the morning of the IPO.

The plaintiff, Twin Fires Investment, LLC (Twin Fires), organized by the plaintiff Stephens W. Dunne and others for the purpose of purchasing the shares at issue, sued stockbroker Andrew Finch and his employer Morgan Stanley Dean Witter & Co. (Morgan Stanley)³ for, inter alia, breach of contract, fraudulent misrepresentation, and violation of G.L. c. 93A, § 11.⁴

The dispute concerns an IPO of common stock of webMethods, Inc. (WEBM), a Virginia-based technology company specializing in business-to-business communication. On the first day of its IPO, WEBM's shares rose from $35 per share to $212 per share, allowing initial investors who sold their shares within hours to secure an immediate profit of some six times the initial purchase price. The plaintiffs claimed that the defendants breached a contractual obligation to allocate 75,000 IPO WEBM shares to them, resulting, it is claimed, in a one-day loss of over $12 million.

Following a jury-waived trial, a judge in the Superior Court denied the contract claim, awarded the plaintiffs reliance damages for fraudulent misrepresentation in the amount of $39,650⁵ and treble damages in the amount of $118,950, together with attorney's fees and statutory costs in the amount of $1 million for violations of G.L. c. 93A, § 11. All parties appealed from the resulting judgments entered in the Superior Court. We granted the plaintiffs' application for direct appellate review. For the reasons we discuss below, we affirm the judgment in all respects.

1. Factual background. The trial took place over nine days, with thirteen witnesses, fourteen depositions, and numerous exhibits submitted in evidence. We summarize the judge's careful and detailed findings of fact, which are fully supported by the evidence.

a. The selection of Morgan Stanley as lead underwriter. In 1998, Finch, a registered financial advisor, began working as a stockbroker in the Wellesley office of Morgan Stanley.⁶ In 1999, Finch's compensation was not substantial. The judge found that a stockbroker generally receives between twenty-five and forty per cent of his annual production in compensation. Finch's annual production for 1999 was $67,453, placing him among the bottom third of the forty-five brokers in the Wellesley office.

In March, 1999, Finch learned through a friend that Phillip Merrick, WEBM's chief executive officer, was considering an initial public offering of WEBM. On his own initiative Finch contacted Merrick, and subsequently participated in discussions between Merrick and Morgan Stanley concerning a public offering of WEBM shares. When WEBM selected Morgan Stanley as its lead underwriter, Finch was declared the "originator" of the transaction under Morgan Stanley's branch originator program, an incentive structure that encouraged retail brokers to explore with their financial service clients opportunities for the firm to act as an investment banker.⁷

The judge found that Finch was anxious to secure the maximum benefit for himself as the "originator" of the WEBM relationship with Morgan Stanley. Based on Finch's discussions with other Morgan Stanley brokers and on his understanding of the opportunities open to him as an "originator," Finch came to believe that he would be eligible for an extra allocation of WEBM IPO shares for his own clients. He learned that any substantial increase in an extra allocation of shares for his own clients would, however, have to come from a special request made by Merrick on Finch's behalf. Finch thus came to believe that if he cultivated his relationship with Merrick, Merrick might procure a substantial special allocation of WEBM IPO shares for Finch.⁸ Morgan Stanley generally honored a request from an issuing company's chief executive officer (such as Merrick) for a special allocation to a person, entity, or broker the chief executive officer wished to reward. The judge found that, from conversations with his colleagues, Finch also came to believe that, if the WEBM IPO occurred, he would "probably" receive a special allocation of shares from Merrick, and that the special allocation "could" be as great as 300,000 shares. Accordingly, Finch spent the succeeding months attempting to solidify his relationship with Merrick in anticipation of the IPO. The judge found, however, that if Finch directly broached the issue of a special allocation with Merrick prior to the IPO (a point on which the testimony sharply conflicted), Merrick was probably noncommital.

During the summer and fall of 1999, Finch discussed the prospective WEBM IPO with several clients, as well as with his friends and family. As the judge found, he "boasted" to them that he was working closely with, and that he would receive a large allocation of IPO shares from, WEBM's chief executive officer. The judge found that Finch told several clients in Texas that he would have a large enough allocation of WEBM stock to sell them $325,000 worth of shares.⁹ These conversations contradicted the express terms of Morgan Stanley's securities policy, which stated that, without obtaining special permission, a retail client could not be allocated more than 1,000 shares in what the judge termed any "hot" IPO, such as WEBM.¹⁰

b. Dunne's interest in the WEBM IPO. Dunne learned of the potential WEBM IPO and Finch's role in it in December, 1999, through Dunne's brother, who was married to Finch's sister. Although not an active investor in the securities market, Dunne was the son of a stockbroker and the beneficiary of family trusts. The judge found that, having followed the trust funds' performance over the years, Dunne had some experience in the investment market.

We now summarize the judge's findings concerning the communications between Dunne and Finch that are the basis of the claims asserted in this action. There were no written documents evidencing their communications.¹¹ As to oral communications, the judge found that, on or about January 17, 2000, Dunne first telephoned Finch about the prospective WEBM IPO, and between that date and February 11, 2000, the date of the IPO, Finch and Dunne had several conversations by telephone and in person.¹² These discussions led Dunne to believe that, as a result of a large special allocation of stock that Finch would receive through Merrick, he (Dunne) would be able to purchase a large number of WEBM IPO shares. Finch asked Dunne whether he wished to "take" 75,000 of WEBM's shares, and Dunne said that he did. Finch then asked Dunne whether he could "handle" an additional 75,000 shares. Again Dunne answered in the affirmative. As found by the judge, Finch "warned" Dunne that Finch could not be sure that he would receive the "additional" shares.

Dunne told Finch that he would form a limited liability company as an investment vehicle to purchase the WEBM shares. Subsequently Dunne opened an account at Morgan Stanley for the investment vehicle, Twin Fires.¹³ Beginning on February 8, 2000, Twin Fires's investors — including Dunne's accountant and business advisor, Rick Dlugasch; the wife of an associate of Dlugasch; and Dunne's family members — sent multiple wire transfers for deposit into their account at Morgan Stanley. On February 10, 2000, the day before the IPO, Finch confirmed to Dlugasch that $1.5 million had been deposited. Dlugasch told Finch that more money was in transit, and that Twin Fires was in a position to obtain further funds quickly if an additional allocation of shares became available.

c. The public offering of WEBM shares. The judge found that, in the weeks preceding WEBM's initial public offering Finch's expectations for a large allocation of shares "had to diminish." On January 5, 2000, Finch wrote to Merrick asking that Finch be allocated up to 100,000 shares of the IPO, but weeks passed with no response from Merrick. Despite Merrick's silence, by February 10, Finch still believed that there was a "possibility" he would receive a large special allocation of the IPO shares. Finch, however, did not inform would-be investors of his waning expectations.

At approximately 6:30 P.M. on February 10, 2000, the WEBM IPO registration statement became effective, the initial offering price was set at $35 a share, and public trading was scheduled to begin the following day. Earlier that day Finch learned from his Wellesley branch manager that Finch's branch allotment of WEBM stock would be only 225 shares. That night, Finch informed Dunne that the IPO had been priced at $35 per share. Dunne asked whether Finch knew anything more about share allocation. Finch said that he did not, and that he would learn more the next day. The judge found that Dunne believed this statement of Finch's to refer to a possible allocation beyond the 75,000 shares Dunne expected he would be able to purchase.

On the morning of February 11, Dunne and other Twin Fires investors gathered to celebrate the beginning of public trading, and to execute the quick exit strategy they had devised. Copies of electronic messages...