Vogel v. A.G. Edwards & Sons, Inc., 57461

• Decision Date: 31 December 1990
• Docket Number: No. 57461,57461
• Citation: 801 S.W.2d 746
• Court: Missouri Court of Appeals
• Parties: Fed. Sec. L. Rep. P 95,768 Donald E. VOGEL, et al., Plaintiffs-Respondents, v. A.G. EDWARDS & SONS, INC., Defendant-Appellant.

Page 746

801 S.W.2d 746

Fed. Sec. L. Rep. P 95,768

Donald E. VOGEL, et al., Plaintiffs-Respondents, v. A.G. EDWARDS & SONS, INC., Defendant-Appellant.

No. 57461.

Missouri Court of Appeals,

Eastern District,

Division Three.

Dec. 31, 1990.

Jeffrey Joseph Kalinowski, William S. Port, St. Louis, for defendant-appellant.

Francis Eugene Pennington, III, Todd H. Iveson, St. Louis, for plaintiffs-respondents.

SATZ, Presiding Judge.

In this case, plaintiffs, Donald Vogel (Vogel) and John Hefele (Hefele), sued defendant, A.G. Edwards & Sons, Inc., alleging, among other things, that Fred Prewitt, a commodities and stock broker employed by defendant, breached a fiduciary duty Prewitt owed to plaintiffs. ¹ Defendant appeals from a jury verdict in favor of plaintiffs in the amount of $125,000.00. We reverse and remand.

Vogel is a certified public accountant. Hefele is also a CPA and has a MBA. Vogel and Hefele were partners in several real estate ventures and owned apartment buildings financed in part by variable rate mortgages.

In November 1980, Vogel and Hefele each opened individual accounts with defendant. Hefele, however, gave Vogel a power of attorney authorizing him to purchase securities and commodities in Hefele's account. Some two months later, in January 1981, Vogel and Hefele opened a third account in the name of their real estate partnership, Dejon Investment.

According to plaintiffs, these accounts were opened for the purpose of trading in interest rate futures contracts as a hedge against their variable rate mortgages. ² Prewitt was the broker responsible for handling the accounts. Vogel testified he gave Prewitt discretionary authority to trade in these accounts. He did not tell him when to trade, did not direct him to obtain plaintiffs' approval prior to any trade, and they followed all his recommendations.

In the first two weeks of trading in the partnership account, Prewitt, the broker, lost $169,000.00. Most of this loss was recouped in the following months, but then the account lost another $70,000.00 which was not recovered.

From the record, it appears there were daily trades in the accounts. According to plaintiffs, there were 1,482 trades, involving 5,320 futures contracts, from November, 1980 through October, 1981.

In October, 1981, Vogel became an employee of Edwards. He admits responsibility for the trading in the accounts after that time.

In February, 1986, Vogel and Hefele filed their petition against Prewitt and defendant A.G. Edwards & Sons, Inc. Prewitt died in April, 1986. Vogel and Hefele amended their petition, proceeding to trial against defendant A.G. Edwards & Sons, Inc. as the sole defendant, apparently, on the theory of respondeat superior. ³ This appeal followed.

State Court Jurisdiction

Plaintiffs contend that Prewitt owed them a common law fiduciary duty to trade in their accounts for their benefit. He breached his fiduciary duty, they contend, by trading excessively in their accounts to earn commissions for himself rather than trading for their benefit. Plaintiffs characterize Prewitt's trading as a "churning" of their accounts.

Defendant contends the trades were trades in "securities" rather than "commodities", and, therefore, defendant argues plaintiffs' churning claim can only be based upon violation of Rule 10b-5 of the Securities and Exchange Commission (SEC). The federal courts, defendant argues, have exclusive jurisdiction over this claim. Defendant's contention is based primarily on § 27 of the Securities and Exchange Act of 1934 Act which provides: "The district courts of the United States ... shall have exclusive jurisdiction ... of all suits in equity and actions at law brought to enforce any liability or duty created by this chapter...." 15 U.S.C.A. § 78aa.

Whether trades in interest rate futures contracts are securities or commodities and whether these trades are governed by the Securities Act of 1933, § 17(a), 15 U.S.C.A. § 77q(a) and the Securities Exchange Act of 1934, §§ 10(b) and 15(c), 15 U.S.C.A. §§ 78j(b), 78o (c) and the SEC, or by the Commodity Exchange Act, 7 U.S.C.A. §§ 1-24 and the Commodity Future Trading Commission (CFTC) is not controlling here. Prohibition against a broker's churning of accounts is both expressed and implied in the provisions of both the Securities and the Commodity Acts and the rules of their respective regulatory Commissions. See, e.g., Roche v. E.F. Hutton & Co., Inc., 603 F.Supp. 1411, 1414-1415 (M.D.Pa.1984); Yancoski v. E.F. Hutton & Co., Inc., 581 F.Supp. 88, 90-92 (E.D.Pa.1983). And, churning in either security or commodity accounts, a violation of these federal prohibitions, gives rise to an implied private claim or cause of action. See, e.g., Hecht v. Harris, Upham & Co., 430 F.2d 1202, 1206-07 (9th Cir.1970); Roche and Yancoski, supra. But, both federal and state courts have long recognized that the elements of a private churning claim based upon federally created rights may also give rise to a concurrent state common law claim based upon breach of fiduciary duty. See, e.g., Miley v. Oppenheimer & Co., Inc., 637 F.2d 318, 325 n. 6 (5th Cir.1981); Twomey v. Mitchum, Jones & Templeton, Inc., 262 Cal.App.2d 690, 69 Cal.Rptr. 222 (1968).

We, in Missouri, have not previously been called upon to recognize a concurrent state claim based upon churning, nor, in turn, called upon to open our courts to process the claim when an adequate private right and remedy exist in the federal courts.

The parties have not addressed these latter issues. However, for the reasons which follow, we recognize a concurrent state claim, and we have a constitutional mandate to keep our courts open to every person. Art. 1, § 14, Mo. Const. 1945.

Defendant raises several other issues on appeal. At least one has merit. We address that issue first and, then, address those issues which may arise again on retrial.

Plaintiffs' Verdict Directing Instruction

Defendant argues that plaintiffs' verdict directing instruction did not submit all the essential elements of the churning claim to the jury. We agree.

Churning, as used by the parties here, is a term of art used to describe trading practices prohibited by the federal Securities and Commodity Acts and by their respective regulatory Commissions. Thus, to state the obvious, this term is given meaning only by the provisions of those Acts, the rules of those Commissions and the courts' interpretations of those provisions and rules. These sources are relevant to us only to the extent they define the elements of the private claim of churning in the federal courts and, in turn, to the extent we find it reasonable to use some or all of these elements to define a parallel private common law claim cognizable in the courts of our State.

In its simplest terms, churning is "excessive trading of a customer's account ... too much trading by the broker." 3 Johnson and Hazen, Commodities Regulation § 5.45, p. 128 (2d ed.1989). In most cases and commentary, churning is more specifically defined in the context of trading in shares of stock. See, e.g. Costello v. Oppenheimer & Co., 711 F.2d 1361, 1368 (7th Cir.1983); Mihara v. Dean Witter & Co., 619 F.2d 814, 820-21 (9th Cir.1980) (violation of the general antifraud provisions of § 10(b), Securities Exchange Act of 1934, 15 U.S.C.A. § 78j(b), and Rule 10b-5 of SEC, 17 C.F.R. § 240.10b-5); Hecht, 430 F.2d at 1206; Landry v. Hemphill, Noyes & Co., 473 F.2d 365, 368 (1st Cir.1973), cert. den. 414 U.S. 1002, 94 S.Ct. 356, 38 L.Ed.2d 237 (1973); reh. den. 415 U.S. 960, 94 S.Ct. 1492, 39 L.Ed.2d 576 (1974) (violation of broker's standard of conduct in § 15(c), Securities and Exchange Act of 1934, 15 U.S.C.A. § 78o (c)(1), and Rule 15c 1-7 of SEC, 17 C.F.R. § 240.15c 1-7). However, churning is also a violation of the Commodity Exchange Act, 7 U.S.C.A. § 6b. Griswold v. E.F. Hutton & Co., Inc., 622 F.Supp. 1397, 1407 (N.D.Ill.1985); Johnson v. Arthur Espey, Shearson, Hammill & Co., 341 F.Supp. 764, 766 (S.D.N.Y.1972).

It is consistently stated that churning has three elements: (1) "control" of the account by the broker; (2) "excessive" trading in the account in light of the customer's investment objectives; and (3) the broker acted with the intent to "defraud" or with the wilful and reckless disregard for the interests of his customer. See, e.g. Miley, 637 F.2d at 324; Mihara, 619 F.2d at 820-21.

Plaintiffs attempted to parallel these three required elements in the context of our State's fiduciary law. Their verdict directing instruction required the jury to find

First, Frederick Prewitt was acting within the scope and course of his employment with defendant; and

Second, a fiduciary relationship existed between Mr. Prewitt and plaintiffs; and

Third, Mr. Prewitt had control of the trading in the plaintiffs' accounts; and

Fourth, Mr. Prewitt engaged in excessive trading for the primary purpose of generating commissions while disregarding the best interests of plaintiffs; and

Fifth, as a direct result thereof, plaintiffs were damaged.

Defendant contends the jury should have been instructed to determine whether the trading was excessive "in view of the investment objectives" of plaintiffs' account and the failure to do so was prejudicial. See, para Fourth, supra.

To be sure, excessive trading gives the churning offense its name. The excessive amount of trades creates an inference the broker has disregarded his customer's interests in order to generate commissions for himself. But, whether the number of trades in an account is excessive and, thus, whether there is churning in the account depends upon the investment objectives of the investor. Griswold, 622 F.Supp. at 1407; Miley, 637 F.2d at 334. An amount of trading which would constitute churning "in an account of an investor whose objectives are income and long-term growth may not be churning in an account of an investor who is looking for short-term trading profits." Poser, Options Account Fraud:...