Twomey v. Mitchum, Jones & Templeton, Inc.

Decision Date05 June 1968
CourtCalifornia Court of Appeals Court of Appeals
PartiesElinor TWOMEY, Plaintiff and Respondent, v. MITCHUM, JONES & TEMPLETON, INCORPORATED, and Sheldon Nankin, Defendants and Appellants. Civ. 24020.

Schoichet & Rifkind, Nathan L. Schoichet and Howard D. Sterling, Beverly Hills, for appellants.

M. F. Hallmark, Edward G. Brown, Oakland, for respondent.

SIMS, Associate Justice.

Defendant corporation, which succeeded to the investment banking and stock brokerage business of a partnership of similar name, and the individual defendant, the manager of a local office of the firm, have appealed from a judgment in favor of a customer which is predicated upon the alleged misfeasance of the defendants and the predecessor partnership.

In thirteen points they have voiced objections which may be conveniently grouped as follows: (1) Resort to federal law and to regulations promulgated pursuant to the authority of federal law converted the case to one of exclusive federal jurisdiction, or, alternatively, rendered the judgment erroneous because of an alleged conflict with federal law; (2) the findings exceed the scope of the issues raised by the pleadings and pretrial order; (3) the findings are not sustained by the evidence; (4) the findings are conflicting and incomplete; (5) the action is barred by the applicable statutes of limitation, and the plaintiff's ratification and laches; and (6) the court erred in the computation of damages.

A review of the record and pertinent legal principles reveals that there is no merit in defendants' contentions.

General findings

The following findings (for reference numbered as prepared by the trial court) reveal the salient facts of the case. The remaining findings and the evidence are discussed where pertinent.

'4. That in the first part of January 1961 defendant Nankin and the partnership orally agreed with plaintiff to consult with her and to advise her in connection with her investments. That from said date the partnership and the defendants continued to consult with and advise plaintiff in connection with her until plaintiff closed her account with the defendants in July of 1964.

'5. That in the first part of January 1961 plaintiff turned over to defendant Nankin and the partnership securities and cash realized from the sale of investment trust certificates owned by plaintiff in the total value of $52,668.00.

'6. That plaintiff's certificates in the investment trusts were sold by plaintiff and the cash from the proceeds of said sales turned over to the partnership at the direction of the defendant Nankin.

'7. That from the first part of January 1961 to July 1964 the partnership and the defendants were acting as investment advisers to plaintiff and plaintiff placed great trust and confidence in the defendants and in the partnership and relied upon them. That during said period the partnership and the defendants were acting in a confidential and fiduciary capacity towards plaintiff and the plaintiff relied upon them. That the partnership and the defendants breached said duty to the plaintiff and the plaintiff as a direct and proximate result thereof suffered damages as hereinafter set forth.

'8. That the defendants and the partnership in handling some of the transactions for plaintiff received commissions on sales made to the plaintiff and on sales made for the plaintiff. That in addition to said commissions the partnership and defendants made profits on sales where the partnership and the defendant corporation sold securities to plaintiff and purchased securities from plaintiff where the defendant corporation and the partnership acted as a principal in said transactions.

'9. That from early in January 1961 through July 1964 the partnership and the defendants were carelessly and negligently handling plaintiff's account and as a direct and proximate result thereof plaintiff was damaged in the amounts included in Paragraph 11 of these Findings of Fact. That the defendants and the partnership were acting in a confidential and fiduciary capacity towards plaintiff and that each of them breached said duty towards plaintiff and as a direct and proximate result thereof plaintiff sustained damages thereby in the amounts included in Paragraph 11.

'10. That from early in January 1961 to July 1964 the partnership and the defendants were guilty of fraud and misrepresentation in handling plaintiff's account in the particulars hereinafter set forth. That the partnership and the defendant corporation acted as a principal in selling securities to plaintiff and in purchasing securities from plaintiff and the defendants and the partnership did not advise plaintiff that the partnership and the defendant corporation were acting as a principal in said transactions. That the plaintiff did not know or understand the principal relationship in connection with the purchase and sale of stocks. That plaintiff believed that the partnership and the defendants were acting as a broker on her behalf in handling said transactions and she did not know that the partnership and that the defendant corporation were acting as a principal in said transactions. That the partnership and the defendants manipulated plaintiff's account by having the plaintiff engage in a series of transactions where there was excessive trading in view of the plaintiff's financial position and in view of the size of plaintiff's account. That the partnership and the defendants recommended and sold to plaintiff securities which were of a highly speculated (sic) nature with little prospect of income when they knew that the plaintiff was a widow and needed income and they knew that said securities were not adapted to her needs. That the partnership and the defendant Nankin told the plaintiff that monthly funds they sent to her for a period of time were profits from their handling of her account whereas in truth only a portion of said funds were realized from profits made in the handling of her account and the rest of the money was realized from the sale of plaintiff's assets. That a number of the stocks purchased and sold by the partnership and the defendants in handling the plaintiff's account were not listed on the New York Stock Exchange or the American Stock Exchange.'

The court awarded the plaintiff $32,356.71, representing the difference between the value of the securities and cash turned over by plaintiff, plus the assumed earnings on the securities she surrendered, and the sums received from the stockbroker plus the value of the securities returned.

Alleged conflict with federal jurisdiction and law

In the course of establishing her case plaintiff introduced into evidence rules 10b--3, 10b--5, 15c1--1, 15c1--2 and 15c1--7 of the General Rules and Regulations under the Securities Exchange Act of 1934 (17 C.F.R. 240.10b--3, etc.), rules 405 and 435(1) of the Rules of the New York Stock Exchange (2 C.C.H. New York Stock Exchange Guide, pars. 2405 and 2435), and sections 2 and 3 of article III, Rules of Fair Practice, N.A.S.D. (National Association of Security Dealers, Manual, p. D--5). Defendants, in turn introduced sections 1, 2, 3, 4, 5 and 6 of article III, Rules of Fair Practice, N.A.S.D. and a 'Review of N.A.S.D. Mark-Up Policy' interpreting sections 1 and 4 (id., pp. D--5, D--6 and G--1 to G--6).

In opening argument plaintiff asserted, '* * * under the regulations of the S.E.C., the New York Stock Exchange and the National Association of Security Dealers, * * * there is a violation of those regulations, to show fraud.' She proceeded to refer to a 'so-called Suitability Rule,' and made reference to 'over-trading.'

On this appeal plaintiff acknowledges that she relies upon defendants' violations of the foregoing rules in establishing the defendants' fraud and negligence. She contends that she was misled into a course of buying and selling securities of a highly speculative nature in violation of the provisions of rule 15c1--2 of General Rules and Regulations Under the Securities Exchange Act of 1934, 1 and the provisions of sections 1 and 2 of article III, Rules of Fair Practice of the N.A.S.D.; 2 that her account was excessively traded or 'churned' in violation of the last-mentioned provisions and the provision of paragraph 2 of rule 435 of the Rules of the New York Stock Exchange; 3 and that her account was not properly supervised as required by the provisions of rule 405 of the New York Stock Exchange. 4

It further appears the findings with respect to the broker acting as principal in selling to and buying from the customer is the subject of rule 15c1--4 of the Securities and Exchange Commission; 5 and that the compensation to the broker where he acts as principal is the subject of section 4 of article III of Rules of Fair Practice of the N.A.S.D., and the remainder of the exhibit introduced by defendants. At the trial reference was also made to rules of the National Association of Securities Dealers and to rules of the New York Stock Exchange which were designed to prevent sale of mutual funds which had only been held for a short period.

Under the provisions of the Securities Exchange Act of 1934 (June 6, 1934, c. 404, 48 Stat. 881, 15 U.S.C.A. § 78a et seq.) the Securities and Exchange Commission is vested with 'power to make such rules and regulations as may be necessary for the execution of the functions vested in' it by the Act. (Id., § 23, 15 U.S.C.A. § 78w; and see §§ 10(b) and 15(c), 15 U.S.C.A. § 78j(b) and 78o(c).) Through the registration of national securities exchanges the Commission is given supervisory power of the rules of the registering exchange to the end that such rules shall 'include provision for the expulsion, suspension or disciplining of a member for conduct or proceeding inconsistent with just and equitable principles of trade.' (Id., § 6(b), 15 U.S.C.A. § 78f(b...

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