Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-86-01370/USCOURTS-ca10-86-01370-0/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 

---

.. FI LED 

United States Court of Appeals 

Tenth Cir:ui~ 

UNITED STATES COURT OF APPEALS 

TENTH CIRCUIT OCT 3 1989 

GREAT WENDEE CORPORATION, a 

Colorado corporation, 

v. 

Plaintiff-Appellee/ 

Cross-Appellant, 

PEAVEY COMPANY, a Minnesota 

corporation, and w. ROSS C. 

CORACE, 

Defendants-Appellants/ 

Cross-Appellees. 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

ROBERT L. HOECKER 

Clerk 

Nos. 86-1370 & 86-1458 

(D.C. No. 83-K-612) 

(District of Colorado) 

ORDER AND JUDGMENT* 

Before McKAY, MCWILLIAMS, and TACHA, Circuit Judges. 

Great Wendee Corporation brought this diversity action 

alleging that Peavey Company and its employee, broker Ross Corace, 

engaged in unauthorized transfers from Great Wendee's segregated 

T-Bill account and unauthorized trading and churning on its 

commodities futures account. Peavey and Mr. Corace appeal the 

jury verdict against them on the merits. Mr. Corace also appeals 

the exemplary damages verdict against him. Great Wendee crossappeals from the trial court's directed verdict in favor of Peavey 

on the exemplary damages claim. 

*This order and judgment has no precedential value and shall not 

be cited, or used by any court within the Tenth Circuit, except 

for purposes of establishing the doctrines of the law of the case, 

res judicata, or collateral estoppel. 10th Cir. R. 36.3. 

Appellate Case: 86-1370 Document: 01019974049 Date Filed: 10/03/1989 Page: 1 
Defendants Peavey Company and Mr. Corace argue that the trial 

court erred in failing to direct a verdict in their behalf on the 

issues of unauthorized trading and churning. Alternatively, 

defendants argue that Great Wendee ratified the transactions as a 

matter of law. 

In Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52 

(1986), the Supreme Court made clear that in determining whether a 

directed verdict should have been granted, the inquiry is the same 

as in a summary judgment case: "Whether the evidence presents a 

sufficient disagreement to require submission to a jury or whether 

it is so one-sided that one party must prevail as a matter of 

law." Moreover, with directed verdicts, as with summary judgment, 

the court must examine the evidence presented in light of the 

substantive evidentiary burden, id. at 254-55, drawing all 

inferences in favor of the nonmoving party. 

A. Churning and Unauthorized Trading 

On the issues of churning and unauthorized trading presented 

in this case, the applicable evidentiary burden is the 

preponderance of the evidence standard. Thus, before it denied 

defendant's motion for directed motion on these issues, the trial 

court had to conclude that a reasonable jury applying a 

preponderance of the evidence standard could not find for 

defendants. Our review of the evidence leads us to conclude that 

the trial court did not err in its determination. 

-2-

Appellate Case: 86-1370 Document: 01019974049 Date Filed: 10/03/1989 Page: 2 
In establishing its prima facie case of churning and 

unauthorized trading, Great Wendee's evidence indicated that: 

(1) Mr. Corace, a broker and manager of Peavey's Denver 

North office, was the only person at Peavey who 

supervised the trading in the Great Wendee account; 

(2) Mr. Corace received no salary while working at 

Peavey--his income was solely dependent on the 

commissions he generated through trading activity in 

customer accounts; 

(3) At the time he was handling the Great Wendee account, 

Mr. Corace received sixty percent of the commissions 

generated in customer accounts, and Peavey retained 

forty percent; 

(4) More than half of Mr. Corace's personal income 

(excluding the income contributed by his wife) for the 

year 1980 was generated in approximately four months 

(March-June, 1980) of trading in the Great Wendee 

account; 

(5) The Great Wendee account was Mr. Corace's largest 

customer account in terms of the equity in the account 

and was, by Mr. Corace's own admission, his most 

actively traded account; 

(6) Although Mr. Corace initially began trading in the 

account under the direction of Mr. Sam Wing, Great 

Wendee's president and sole shareholder, Mr. Wing 

quickly grew to rely completely on Mr. Corace's judgment 

-3-

Appellate Case: 86-1370 Document: 01019974049 Date Filed: 10/03/1989 Page: 3 
• 

with respect to the management of the account; 1 

(7) Mr. Wing gave Mr. Corace complete control of the Great 

Wendee account in February, 1980; 

(8) At that time, there was $39,591 in the account and 

$100,000 in a segregated Treasury bill ("T-Bill") 

account created from profits derived through prior 

trading in the Great Wendee account; 

(9) Mr. Wing instructed Mr. Corace that the money in the 

segregated account was not to be used to meet margin 

calls for the Great Wendee commodity futures account; 

(10) Mr. Wing informed Mr. Corace that Great Wendee had notes 

outstanding which would come due in June or July, 1980; 

(11) Toward the end of April, 1980, Mr. Wing learned that 

there had been a transfer of $19,000 from the T-Bill 

account to the commodity futures account. He confronted 

Mr. Corace and was led to believe that the transfer was 

an error. Mr. Wing testified that he instructed 

Mr. Corace to wire him the proceeds from the T-Bill 

account, and Peavey's Chicago office was notified that 

the transfer was not authorized; 

(12) In May, 1980, Mr. Wing, while awaiting the wire transfer 

from the T-Bill account, discovered another T-Bill 

liquidation and transfer into the commodity futures 

1 Mr. Sam Wing was a securities lawyer with prior experience 

the commodities market. Although he was an admittedly 

sophisticated trader, Mr. Corace testified that he--Corace--had 

superior expertise in the commodities market. According to 

in 

Mr. Corace's testimony, Mr. Wing put his full faith, confidence 

and trust in Mr. Corace. 

-4-

Appellate Case: 86-1370 Document: 01019974049 Date Filed: 10/03/1989 Page: 4 
account; 

(13) Mr. Wing confronted Mr. Corace, but was persuaded by his 

explanations into foregoing immediate action2 with the 

representation that ''things would work out"; 

(14) Mr. Wing's secretary contacted Peavey's Chicago office 

concerning the whereabouts of the expected wire transfer 

and was told that Peavey knew nothing about such a 

transfer; 

(15) In the latter part of May Mr. Corace became virtually 

unreachable. In early June the commodities futures 

account appeared to trade frenetically. Mr. Wing 

finally reached Mr. Corace and demanded that things be 

brought to a close; 

(16) Finally, on June 24, 1980, at Mr. Wing's insistence, the 

Great Wendee commodities futures account was closed. 

Approximately $12,000 dollars remaining in the account 

was wired to Great Wendee. The T-Bill account had been 

completely consumed by the trading activity in the 

commodity futures account. 3 

2 Mr. Corace represented that there was more money in the 

account than was reflected on the purchase and sale statements 

(also known as confirmations) because of the equities and winning 

positions which had resulted from the trading. 

3 The T-Bills had been liquidated and the proceeds transferred 

to the commodities futures account to meet margin calls on that 

account. 

-5-

Appellate Case: 86-1370 Document: 01019974049 Date Filed: 10/03/1989 Page: 5 
Plaintiff's expert testified that, in his opinion, 

plaintiff's account had been churned. He also testified that 

between April 3 and June 24, 1980, the commission-to-equity 

ration, taking the average equity in the account and including the 

T-Bills as they were transferred into the trading account, was 147 

percent per month. In other words, plaintiff's account would have 

to make a profit of 147 percent per month (7 percent per day} just 

to cover the commission costs. This is key evidence of churning. 

Bowley v. Stotler & Co., 751 F.2d 641, 644 (3d Cir. 1985). 

After reviewing Peavey's equity runs, plaintiff's expert 

testified that during that same period (April 3-June 24), 41 

percent of the contracts traded in plaintiff's account were day 

trades and another 8 percent were 24-hour trades. During this 

period of active trading, the account was on margin deficiency 

virtually every day. 

Mr. Corace's testimony was that, prior to June 23, he had not 

been instructed by Mr. Wing to wire out the funds from the T-Bill 

account. Additionally, Mr. Corace insisted that he had no part in 

the liquidation of the T-Bills and the transfer into the trading 

account. Rather, that was automatically handled by Peavey's 

Chicago office in response to trading account deficiencies. 4 

4 However, Peavey representatives testified that it was the 

normal practice for the margin department to notify the broker of 

the account deficiencies, so that the broker could in turn relay 

the message to the customer. Brokers were expected to give the 

customer the choice of how to meet the margin call--whether by 

-6-

Appellate Case: 86-1370 Document: 01019974049 Date Filed: 10/03/1989 Page: 6 
Resolving all doubts in favor of the nonmoving party (great 

Wendee), this review of the evidence satisfies us that a directed 

verdict for defendants was properly denied. 

B. Ratification 

As a full defense to the charges of churning and unauthorized 

trading, defendants argue that Great Wendee (through Mr. Wing), 

ratified the transactions as a matter of law. Consequently, they 

argue, the court erred in failing to direct a verdict on the issue 

of ratification. 

Colorado law governs the substantive issue of ratification in 

this diversity case. Under Colorado law, full knowledge of all 

material facts is necessary before a party can be held to have 

ratified the acts of his or her agent. Adams v. Paine Webber, 686 

P.2d 797, 801 (Colo. App. 1983), aff'd en bane 718 P.2d 507 

(1986). Our mind-set in reviewing this issue is the same as 

previously: taking the evidence as a whole, was the evidence, and 

the reasonable inferences which could be drawn in favor of the 

nonmoving party, sufficient that a reasonable jury could find that 

plaintiff lacked the material knowledge necessary to ratify Peavey 

and Mr. Corace's actions. We conclude that the evidence was not 

so clear-cut that the court erred in submitting the issue to the 

jury. 

depositing additional funds in the account or agreeing to 

liquidate other assets in deposit with Peavey. 

-7-

Appellate Case: 86-1370 Document: 01019974049 Date Filed: 10/03/1989 Page: 7 
The evidence indicated that Mr. Wing, on behalf of Great 

Wendee, objected to the liquidation of the T-Bills and the 

transfer of cash therefrom into the trading account, and Peavey's 

director of compliance was initially unable to explain why these 

transactions took place. 5 Additionally, Mr. Wing testified that 

when Mr. Corace took control of Great Wendee's trading account, 

Peavey's practice of sending red margin notices when the account 

was underfunded ceased. 6 

While there is a dispute about the effect of language in the 

customer account form and whether it could be orally modified, we 

are satisfied that the supporting evidence on that issue was 

sufficient to submit the question to the jury. 

c. Damages 

Peavey and Mr. Corace argue that the jury award of damages 

was improper. Under Colorado fiduciary duty law, plaintiff is 

entitled to recover lost profits as part of its compensatory 

5 It is only when he reviewed the equity runs maintained 

internally by Peavey that this witness was able to explain what 

had occurred. 

6 Prior to Mr. Corace's complete control of the Great Wendee 

account, Mr. Wing had been involved in actively trading in the 

silver futures market during the Hunt Brothers' attempt to corner 

the world silver market. As a result of Great Wendee's trading 

position at the time it lost a considerable amount of money during 

what came to be known as the "silver debacle." In that period, 

the Great Wendee account received a number of red margin notices 

from Peavey, which it met by paying approximately $170,000 into 

the account. No margin notices were sent to Great Wendee 

following Mr. Corace's control. 

-8-

Appellate Case: 86-1370 Document: 01019974049 Date Filed: 10/03/1989 Page: 8 
damages. Adams v. Paine Webber, 686 P.2d 797, 801 (Colo. App. 

1983), aff'd en bane, 718 P.2d 508 (1986). Also, a proper measure 

of damages when there has been churning and unauthorized trading 

is recovery of defendants' commissions and plaintiff's trading 

losses. Lehman v. Madda Trading Co., Comm. Fut. L. Rep., 1984-

1986 Transfer Binder, CCH § 22,417, p. 29,870 (CFTC 1984). 

The evidence before the court and jury was that approximately 

$40,000 in commissions was received by Mr. Corace for trading 

during the period of March-June, 1980. Additionally, there was a 

$27,000 loss resulting from the difference in the value of the 

Great Wendee trading account between April 3 and June 24. There 

was a loss of $96,284.17, representing the purchase price of the 

T-Bills which were liquidated, and $174,570.91 representing the 

lost value of those T-Bills. The judgment is well within the 

evidence under applicable measures of damages at law. 

Appellants complain about the rate of interest assessed 

against them. They argue for a statutory rather than a T-Bill 

rate of interest. They make no citation to the record as to where 

they made their objection to the district court, and our search of 

the record reveals none. Accordingly, we need not reach this 

issue. However, even if we ignore this default, we find no basis 

for reversal. On its face, the trial court's order establishes a 

fixed, not variable, interest rate of 7.85 percent. Contrary to 

appellants' assertions, nothing in the record demonstrates that 

the 7.85 percent fixed rate of interest imposed by the court was 

-9-

Appellate Case: 86-1370 Document: 01019974049 Date Filed: 10/03/1989 Page: 9 
taken from the T-Bill rate of interest. In view of the fact that 

the judge assessed a fixed rate of 7.85 percent per annum against 

them, we find appellants' argument, that the trial court should 

have entered a statutory rate of 8 percent against them, puzzling. 

We are likewise not persuaded by the argument that interest was 

assessed on the wrong principal amount. 

D. Punitive Damages 

In order to find a party liable for punitive damages under 

Colorado law, the plaintiff must show that "the injury complained 

of is attended by circumstances of fraud, malice, or willful and 

wanton conduct." C.R.S. § 13-25-127(2) (1987). Moreover, 

"[e]xemplary damages against the party whom the claim is asserted 

shall only be awarded in a civil action when the party asserting 

the claim proves beyond a reasonable doubt the commission of a 

wrong." Id. 

The trial court allowed the issue of punitive damages against 

Mr. Corace to go to the jury. Mr. Corace directly handled and 

managed the plaintiff's account. Based on the evidence summarized 

above, we are of the view that there was sufficient evidence that 

a reasonable jury could find beyond a reasonable doubt that 

Mr. Corace acted in a willful and wanton manner. Therefore, we 

affirm the jury award of exemplary damages against Mr. Corace. 

The plaintiff argues that it presented evidence on the issue 

of punitive damages against Peavey, and the trial court erred in 

-10-

Appellate Case: 86-1370 Document: 01019974049 Date Filed: 10/03/1989 Page: 10 
• 

directing a verdict for Peavey. The evidence indicated that prior 

to hiring Mr. Corace, Peavey contacted the Chicago Board of Trade 

and the Chicago Mercantile Exchange to determine Mr. Corace's 

reputation in the market. Additionally, they conducted their own 

substantial investigation of Mr. Corace. Peavey's inquiries 

turned up nothing that would indicate that Mr. Corace would not be 

a responsible trader. While there was some evidence which could 

support a finding of negligent supervision of Mr. Corace, in our 

judgment there was not enough evidence that a reasonable juror 

could find beyond a reasonable doubt that Peavey acted willfully 

or wantonly in relation to the Great Wendee trading account or in 

its hiring of Mr. Corace. Because a reasonable jury could not 

conclude that Peavey had the requisite intent beyond a reasonable 

doubt, the district court properly directed a verdict for 

defendants. 

We AFFIRM the trial court on all issues raised in both the 

appeal and cross-appeal. 

-11-

Entered for the Court 

Monroe G. McKay 

Circuit Judge 

Appellate Case: 86-1370 Document: 01019974049 Date Filed: 10/03/1989 Page: 11