Court Opinion

ID: 8955769
Source: CourtListenerOpinion
Date Created: 2022-11-27 09:13:56.130767+00
Date Added: 2024-06-11T17:10:04.845316
License: Public Domain

CLARK, Circuit Judge,
specially concurring:
Although I agree with the result reached in this case, I write separately because I believe that the majority through dicta promulgates a number of legal principles that are unnecessary to resolution of the issues.
Near the end of its opinion, the majority concludes that by placing the April 29 straddle on Messer’s account, E.F. Hutton saved Messer money. It also concludes that Messer’s failure to remove the straddle prior to May 4 prevents him from recovering any damages for losses which occurred between April 29 and May 4. With these two conclusions I agree. Given this state of affairs, Messer could have presented no facts entitling him to relief based on the theories of his lawsuit. The majority, however, has taken a different approach.
Under the law of this circuit, a Rule 10b-5 plaintiff must prove causation. Part of the causation analysis, sometimes referred to as “transaction causation,” is related to the reliance element necessary to a Rule 10b-5 cause of action. Courts sometimes refer to the second component of the Rule 10b-5 causation analysis as “loss causation.” See Huddleston v. Herman & MacLean, 640 F.2d 534, n. 24 (5th Cir. Unit A Mar. 1981). Thus, a plaintiff must show that the defendant’s misrepresentation or omission was in some way responsible for his losses. The alleged misrepresentation in this case, that Messer’s account was to be nondiscretionary, in no way “touche[d] upon the reasons for [his] investment’s decline in value.” Id. at 549. Even if Messer did show that his investment decision was induced by material misstatements by Hutton, his inability to prove that these misstatements were the proximate cause of his pecuniary loss made it impossible for him to recover under rule 10b-5. It is therefore unnecessary that the court decide whether a nondiscretionary account such as Messer’s can be “converted” into a discretionary account, so as to render that account an “investment contract” and hence a “security” for the purpose of the federal securities laws. The court cites no real authority for this proposition. S.E.C. v. Glenn W. Turner Enterprises, Inc., 474 F.2d 476 (9th Cir.), cert. denied, 414 U.S. 821, 94 S.Ct. 117, 38 L.Ed.2d 53 (1973), which involved a pyramid marketing scheme, in no way touches upon this question.
The court’s analysis of the second predicate for liability under Rule 10b-5 is equally problematic where it concludes that Mes-ser did not prove scienter or recklessness. While I agree that Messer did not show that Hutton acted with a reckless disregard for his best interests, I disagree with the majority's analysis because it suggests that unauthorized trading cannot be reckless where a broker believes he is acting to protect his client. The majority also concludes that Hutton “wanted to protect the account.” In my view, this was a jury question. Again, I would affirm the district court's granting of judgment notwithstanding the verdict because Messer could not prove that Hutton’s acts caused his losses.
In its analysis of Messer’s Commodity Exchange Act claim, the court concludes that a cause of action under the Act’s anti-fraud provision, 7 U.S.C. § 6o (1), includes a scienter element. Instead of reaching this unsettled question of law, which unnecessarily puts the court at odds with a sister circuit, see Commodities Future Trading Commission v. Savage, 611 F.2d 270 (9th Cir.1979), I would hold that Messer was not entitled to relief because he could not prove loss causation.
I agree with the remainder of the court’s opinion, except for that portion of Section 11(C) which concludes that Messer’s trading account was not a security. My disagreement on this point is limited to the reasons expressed above; the court need not reach this question.