Opinion ID: 317816
Heading Depth: 1
Heading Rank: 2

Heading: The award of various elements of cost, including attorneys' fees.

Text: 13 Paragraph 5 of the complaint as originally filed alleged that prior to November, 1963, plaintiff Hetty Fey had little or no investment experience; that in that month, when she first became a client of the defendants, Robert A. Spira was so advised; that he was advised also that she would rely heavily on his advice and that as a widow her investment requirements were 'maximum security and long term growth'. 14 Elsewhere in the complaint it was alleged in substance that the defendants represented themselves as trustworthy for handling of plaintiff's securities; that in reliance upon these representations plaintiff on or about November, 1963, opened a cash account with the defendant broker which on or about December, 1963, on the advice and recommendations of the defendants was expanded to include a margin account, for the purpose of buying and selling securities as plaintiff Hetty Fey would from time to time instruct; that thereby a fiduciary relationship arose between plaintiff and the defendants; that plaintiff reposed complete trust and confidence in defendants and relied upon their advice, counseling and expertise but that her account with Walston & Co. was 'not a discretionary account'. 15 The complaint charged that in violation of their legal duties defendants purchased and sold securities on plaintiff's behalf without her authority and without her knowledge, failed to follow her instructions of purchase or sale, furnished false and misleading information, recommended purchases without disclosing the facts of such recommendations, recommended further purchases that were unsound in view of the financial condition of the companies and plaintiff's personal financial condition, without plaintiff's knowledge or authority effected repeated purchases and sales of securities on her behalf 'and otherwise churned the plaintiff's . . . account'. 16 The defendant broker, according to the complaint, failed properly to supervise Spira's conduct 'as agent and registered representative for its Chicago, Illinois office . . . failed to provide adequate internal controls (for) its Chicago, Illinois office, failed to review the activities of the Chicago, Illinois office and failed . . .' to examine the account of plaintiff to detect and prevent the violations. 5 17 The acts, practices, statements, representations and course of conduct employed by the defendants, the complaint continued, constituted a device, scheme and artifice to defraud the plaintiff through utilization of the instrumentalities of interstate commerce and particularly of the mails and the facilities of the national security exchanges, and were carried on wilfully, maliciously, knowingly and with intent to defraud and deceive the plaintiff to her actual damages in the sum of $50,000. Punitive damages in the amount of $750,000 also were demanded, together with 'costs'. 18 Defendants denied the incriminatory assertions of the complaint and specifically denied that plaintiff had no investment experience. It was admitted that plaintiff's account was not a 'discretionary account', denied that plaintiff advised Spira that she would rely heavily on his advice, and affirmatively alleged that plaintiff had stated that she was quite proud of her son's knowledge and ability and wanted him to trade for her and that some of the trades in question also were on the advice of other brokers and their salesmen. 19 Prior to the trial plaintiff filed a motion in limine seeking to bar inquiry into her prior stock dealings through other brokers by reference to her federal income tax returns. The trial court indicated that it would be 'reversible error' for him to grant the motion in view of the allegations of paragraph 5 of the complaint, already summarized, anbd suggested that the only means by which such inquiry could be rendered irrelevant would be to strike that paragraph. Plaintiff readily embraced this suggestion and her motion accordingly was granted by the court. Apparently it was then the court's view that the striking of paragraph 5 rendered the controlling issue simply one of authority or lack of authority on the part of the defendants to make the trades in question and that any previous trading experience would not be material to this issue, despite the contrary analysis of the gist of plaintiff's claim by Spira's counsel prior to the court's ruling. 6 20 The plaintiff, who was a widow, testified that she had been employed since her husband's death in 1956, having been left little or no assets. In November, 1963, she had $11,000 or $12,000 which she had accumulated in part 'through some investments'. When her counsel sought to establish what part her earned income played in this accumulation the trial court sustained an objection, saying, 'the issue here is whether or not she authorized these people to make sales.' When plaintiff later pressed a similar line of inquiry and argued that it went to the point of what would be considered 'excessively trading her account' the court commented: 21 'Then you open it up for them to come in and show her experience in the field of investing. Is that what you propose? 22 'Mr. Boyle (counsel for plaintiff): No, your Honor. 23 'The Court: That is exactly what you will do if you get into that. I will then be compelled to let them show that she had some erudition and background . . ..' 24 Plaintiff testified that her son introduced her to Spira, the salesman. She opened an account with him after he telephoned her and told her of two stocks he wished to interest her in. It was her intention that she alone was to trade in the account. Initially she testified that the salesman started buying and selling securities for her without her knowledge and authority. Later she said that the account was a 'discretionary' one and that she never objected to any of the purchases. Finally she testified that although it was not completely discretionary, the salesman had some discretion and that her practice was to telephone him after she received the confirmation if she had any question about the transaction. She testified that she relied upon the advice of Spira in reaching her decisions with specified exceptions and that she reposed in him great trust and confidence. 25 During cross-examination plaintiff stated that although she regularly received statements and confirmations, she had not objected to the trades in her account with the exception of a sale of SCM stock, but she had 'questioned' Spira concerning some of the transactions. She admitted that she or her son had initiated a number of transactions in the account, including various 'Syntex' purchases and sales, and that the salesman had not recommended Syntex stock to her. She also testified that the purchase of 700 shares of Crucible Steel stock, on which she claimed against defendants an unrealized loss as of the time she withdrew the shares from her account, was initiated by her. 26 In early February, 1964, plaintiff signed a general power of attorney in favor of her son, Barry Fey, which authorized him to trade for her. She stated that she signed the power only to permit her son to make a day trade in Syntex on her account and because the broker's office manager had requested her to do so. However, she did not terminate the power until June 3, 1964, when she wrote a letter to the broker stating, 'I wish to rescind any power of attorney that may exist for anyone but myself to trade for my account with you.' Plaintiff could not recall why she wrote this letter. 27 During cross-examination the plaintiff initially denied that she had done any other trading while she was dealing with the defendants. When shown copies of monthly statements of her account with Harris, Upham & Co., which disclosed seventeen trades during the period of her dealings with defendants, she admitted that these were her transactions and could not recollect whether she was dealing with a third broker at the time. She was shown Schedule D of her 1964 federal income tax return which disclosed stock trades in addition to those disclosed by the Walston, and the Harris, Upham monthly statements. She initially denied that prior to dealing with defendants she had bought and sold the same security on the same day but modified her testimony when shown a statement of her account with A. G. Becker & Co. 28 But even though her contemporaneous investment experience with other brokers was gone into, the court refused to permit inquiry concerning plaintiff's stock trading prior to her dealings with defendants other than for limited impeachment purposes, restricted defendants from laying foundations for such impeachment, and refused to admit into evidence brokerage statements of her other accounts either prior to her dealings with the defendants or concurrent therewith. The trial court also refused to permit defendants to develop evidence concerning plaintiff's investment objectives by questions with reference to allegations in the stricken paragraph 5 of her complaint to the effect that her investment requirements were maximum security and long term growth. 29 The general effect of plaintiff's testimony was to represent herself as a customer with some fixed ideas of her own, relying somewhat on her son and occasionally on other brokers, but otherwise generally relying upon the initiation, advice or acquiescence of the defendant Spira in view of the confidence she reposed in him. 30 The plaintiff's expert witness, Corbett, had been employed by the Securities and Exchange Commission from 1941 until 1969, the last eleven years as Chief of Investigations for the Chicago Regional Office. Before that he had been with Lamson Brothers & Co., a member of the New York Stock Exchange. In preparation for the trial he had reviewed in detail the plaintiff's account confirmations and monthly statements from Walston for the purpose of determining whether the activity in that account was 'excessive'. His analysis included the determination of 'turnover of the net investment' for the 26 month period of the account. Total purchases amounted to $165,559.58, and total sales were $139,327.36. After crediting defendant $19,046.98 for the securities that had been delivered to plaintiff, there was a trading loss of $7,185.24, and an interest expense of $885.04 which amounted to a total of $8,075.88, including a tax item of $5.60. The unrealized loss of $3,655.73, attributable to stocks held in the account at the time it was closed including the Crucible Steel stock heretofore referred to, when added to the realized loss of $8,075.88, indicated a total loss of $11,731.61, including commissions of $3,573.06, according to Corbett's testimony. To determine turnover ratio Corbett took the net average monthly investment and divided it into the total purchases. By this means turnover rate for the 26 month period was determined to be once every 2 months, or 13 times, which in Corbett's opinion was 'excessive'. The witness on cross-examination conceded that in order to determine whether there was wrongful excess trading one would have to look into the customer's motives and objectives, which the witness had not done; that before the SEC would proceed with a churning charge it would have to have more information than was shown by the confirmations and monthly statements in evidence, and that legal questions which he had not considered, as well as the factual questions which he had investigated, would enter into any decision whether there was 'churning'. 31 Other witnesses were called in support of plaintiff's case, including former and current Walston employees, but they supplied no significantly new or different information. 32 Spira testified in his own behalf and called his wife and a former secretary as additional witnesses, whose testimony was essentially consistent with his positions but again added little of significance. Spira asserted that he made no trades without orders from Mrs. Fey or from her son while the latter held her power of attorney and that he acted in good faith in endeavoring to carry out plaintiff's desires and in her interest. He was unable to remember the details of many transactions and as to why they were made. 33 Without intending any comprehensive summary of the extensive and complicated record, we believe sufficient background now has been provided to permit meaningful discussion of the asserted errors of the trial court. 34  As confused as some aspects of plaintiff's case may have been, we must hold that substantial credible evidence supported the verdict of the jury in favor of plaintiff, at least on the issue of liability, in view of our duty here to look to that evidence favorable to her and to resolve debatable inferences against the movants. Avern Trust v. Clarke, 415 F.2d 1238 (7th Cir. 1969), cert. denied, 397 U.S. 963, 90 S.Ct. 997, 25 L.Ed.2d 255 (1970); Zuckerman v. Borg Mfg. & Sales Co., 279 F.2d 904, 905 (7th Cir. 1960); Cleary v. Indiana Beach, Inc., 275 F.2d 543 (7th Cir.), cert. denied, 364 U.S. 825, 81 S.Ct. 62, 5 L.Ed.2d 53 (1960). We reject Spira's contention that a change in appellant's theory of the case rendered the record inadequate. It is to be remembered that allegations of the complaint other than the stricken paragraph 5 encompassed the claim of churning. The defendants had notice of this claim throughout the proceedings despite the confusion raised by the court's rationale in striking paragraph 5. In reality some of the assertions of that paragraph were themselves inconsistent with the theory of churning. The motion for a directed verdict and for judgment n.o.v. were properly denied, since they did not reach vulnerable aspects of the proceedings below to which we now turn.