Western Capital and Securities, Inc. v. Knudsvig, 880198-CA

• Decision Date: 07 February 1989
• Docket Number: No. 880198-CA,880198-CA
• Citation: 768 P.2d 989
• Parties: Fed. Sec. L. Rep. P 94,337 WESTERN CAPITAL AND SECURITIES, INC., Plaintiff and Appellant, v. Helen KNUDSVIG, Defendant and Respondent.
• Court: Utah Court of Appeals

Page 989

768 P.2d 989

Fed. Sec. L. Rep. P 94,337

WESTERN CAPITAL AND SECURITIES, INC., Plaintiff and Appellant, v. Helen KNUDSVIG, Defendant and Respondent.

No. 880198-CA.

Court of Appeals of Utah.

Feb. 7, 1989.

Craig F. McCullough, Salt Lake City, for plaintiff and appellant.

Gerald S. Wight, Ogden, for defendant and respondent.

OPINION

Before BILLINGS, GARFF and JACKSON, JJ.

GARFF, Judge:

Plaintiff and appellant, Western Capital and Securities, Inc. (Western), filed an action to recover $5,402.20 damages incurred when defendant and respondent, Helen Knudsvig, failed or refused to deliver a stock certificate after she allegedly requested Western to sell stock for her. Knudsvig counterclaimed, alleging that Western had violated Rules 10b-5 and 10b-10 promulgated under § 10(b) of the Securities and Exchange Act of 1934, and various rules of the National Association of Securities Dealers (NASD). We affirm in part and reverse in part.

Western is a broker-dealer registered with the United States Securities and Exchange Commission and the Utah Securities Division. Knudsvig is a sixty-one-year-old customer who occasionally purchased penny stocks through Western and other brokerage firms. The trial court found that she was not a sophisticated investor and only traded a few hundred dollars worth of stock per year.

The conditions in the brokers' contract between Western and Knudsvig required settlement of all transactions five days after a sale or purchase. The relevant provisions read 4. All transactions shall be settled by the fifth full business day following the sale or purchase ... and at your option, if you shall not have received cash for the securities purchased for my account or delivery of the securities sold for my account, appropriately endorsed and in proper negotiable form, on the fifth full business day following the purchase or sale, as the case may be, you shall have the right, either with or without demand upon or notice to me, such demand or notice being expressly waived, to close my account, or any trade or transaction included herein on any such exchange or market, at public or private sale, or by public or private purchase, with or without advertising such sale or purchase, such advertising being hereby expressly waived, and such sale or purchase may be made in one or a series of sales or purchases as you may elect.

5. You are authorized to accept from me oral or telephonic orders for the purchase or sale of securities and in consideration of your acceptance of this agreement, I hereby waive any defense that I may have because any such order was not in writing or evidenced by a memorandum in writing as required by the Statute of Frauds, or other statute.

9. Communications of every kind referring in any way to my account may be sent to me at my address given hereon ... and all communications so sent, whether by mail, telegraph, messenger or otherwise, shall be deemed given to me personally whether actually received by me or not.

Kim Johnson, secretary/treasurer of Western, testified that this language meant that, on the fifth business day following the sale or purchase, Western had the option (1) to close the transaction by buying in, or (2) to allow the contract to remain open.

In about June 1983, Knudsvig purchased 20,000 shares of Venture Consolidated, Inc. (Venture) for $200 through Western. This offering was a new issue of penny stock for which Western was a market maker. Knudsvig claimed that she never received a stock certificate, but had attempted to obtain a duplicate certificate in August or September of 1983 and also in November of 1984.

In July 1984, Venture shareholders approved an acquisition and merger with several Big O Tire franchises. They changed the name of the corporation to Tires, Inc. and approved a 20 to 1 reverse stock split. On September 14, 1984, Louis Babcock, Western's Ogden representative, who was acquainted with Knudsvig through past dealings, notified Knudsvig that her Venture shares had increased in value from $.01 to $.17 per share, and asked her if she wanted to sell. Knudsvig declined. Later, excited about the rise in value of her stock, she unsuccessfully attempted to contact Babcock. She then contacted Western's office in Salt Lake City and spoke to Richard Davis. After a lengthy discussion, Davis concluded that Knudsvig wanted to sell her stock and wished to credit the sales commission to Babcock. While Knudsvig was still on the telephone, Davis contacted Richard C. Parker, Western's executive vice president, for instructions on how to consummate the transaction, which was complicated by Knudsvig's confusion, the lack of a stock certificate, and having to credit the commission to Babcock. Parker, in spite of these difficulties, immediately approved the purchase from Knudsvig for $.16114 per share through Western's market making account. Davis returned to the phone, informed Knudsvig of the sale and selling price, and told her that she had to mail in the stock certificate. He informed her that it was possible for a trade to take place without possession of the certificate since she had ten [sic] days after the trade to bring in the certificate. Parker stated that the sale was handled in this manner because Knudsvig was an established, sophisticated customer who had paid for and delivered stock in a timely manner over a long period of time.

Knudsvig disputes Davis's statements, although her testimony is somewhat unclear. Initially, she denied that this phone call ever took place, but then admitted to making the call. She denied that she ever requested the sale of her stock. She further testified that she had no intention of making a sale, thought that Western could not sell her stock without possession of the certificate, and in 1983, Western had cancelled a similar sale because she could not find her stock certificate. The trial court found that she had assumed there could be no final sale until she was able to get a stock certificate.

Knudsvig stated that, at this point, she was unaware that her stock had been sold because she never received a written confirmation of the sale. Western, however, stated that, within the five day period following the sale, it had sent a written confirmation to Knudsvig's address. Western did not close Knudsvig's account for seventy-five days after the purported sale, at which time the value of the stock had risen to $8.00 per share. ¹ Johnson testified that Western had waited for this unusually long period of time to cover Knudsvig's short position because she was a good customer, she had indicated that she was replacing the certificate, and Johnson thought that he was acting in Knudsvig's best interest. Western's eventual buy-in resulted in a $5,402.20 deficit in Knudsvig's account, which is the basis for Western's complaint.

In its memorandum decision, entered on October 23, 1986, the trial court found that Knudsvig continued to be the owner of the stock, that the alleged sale never occurred, and that Western's activity was unconscionable. The trial court dismissed Western's complaint and awarded punitive damages to Knudsvig in the amount of $10,000.

Appellant asserts that the trial court erred: (1) in finding that Knudsvig did not authorize the sale of her stock; (2) in finding that Western violated Rules 10b-5 and 10b-10 of the Securities Exchange Act of 1934; (3) in finding that Western violated various National Association of Securities Dealers (NASD) rules, and in finding that there is a private right of action for violation of NASD rules; and (4) in awarding punitive damages.

The trial court's findings of fact will not be disturbed on appeal unless they "are against the clear weight of the evidence, or if the appellate court otherwise reaches a definite and firm conviction that a mistake has been made." State v. Walker, 743 P.2d 191, 193 (Utah 1987); see also Cove View Excavating & Const. Co. v. Flynn, 758 P.2d 474, 477 (Utah Ct.App.1988). Factual findings are given considerable deference because of the trial court's ability to assess the witnesses's credibility. Utah R.Civ.P. 52(a); Power Systems & Controls, Inc. v. Keith's Elect. Constr. Co. Systems Inc., 765 P.2d 5, 9 (Utah App.1988); Southland Corp. v. Potter, 760 P.2d 320, 321 (Utah Ct.App.1988). Findings of fact are clearly erroneous if the appellant can show that they are without adequate evidentiary foundation or if they are induced by an erroneous view of the law. State v. Walker, 743 P.2d 191, 193 (Utah 1987).

In carefully examining the record, we note that there is much conflicting evidence and inconsistent testimony, especially regarding Knudsvig's telephone call to Western, in which Knudsvig purportedly authorized the sale of her stock, and regarding whether or not Knudsvig received written confirmation of the alleged sale from Western. The trial court found that Knudsvig had no intention of selling her stock, that she was the rightful owner of the 20,000 shares of Venture stock, and that Western failed to establish, by a preponderance of the evidence, that written notice of the transaction was mailed to Knudsvig.

In essence, Western argues that the trial court should have believed its evidence rather than Knudsvig's. However, the clear weight of the evidence supports the trial court's findings that the sale was not authorized and did not take place, and we defer to the trial court's advantaged position in evaluating the witnesses's demeanor and credibility. We find no error in the court's rulings on this issue. ²

JURISDICTION

Western asserts that the trial court erred in finding that it violated Rules 10b-5 and 10b-10 of the Securities Exchange Act of 1934 and various NASD rules. Before we examine the merits of this argument, however, we raise sua sponte the issue of subject matter jurisdiction over this claim. As stated in Carreathers v. Carreathers, 654 P.2d 871 (Colo.Ct.App.1982),

[t]he parties have not raised the issue of ......