930 F. 2d 29 - Quick Reilly Inc v. Walker E H Eh

MEMORANDUM*

Irene Walker appeals directed verdicts on fraud and contract claims arising out of a dispute with her securities broker, Quick & Reilly, over money lost when the stock market declined precipitously in October 1987. We affirm.

In October 1983, Irene Walker opened an account with Quick & Reilly, a discount brokerage firm, to trade in stock options. She had traded in options successfully for a number of years through at least two other brokerage firms and several brokers, and was at least generally aware of the risks involved.

The first Quick & Reilly executive who handled Walker's account limited her trades to keep the level of risk relatively low. Walker's account was transferred to defendant Yannarella, Quick & Reilly's branch manager. Yannarella did not limit Walker's trades. The number of "naked" option puts in Walker's account increased from 421 to 645 in the next five months. In August 1987 nearly all Walker's puts in the account were "rolled-up," increasing her risk by at least $350,000.

In October 1987 the stock market declined precipitously over 500 points in a single day, over 700 points in three days--resulting in substantial losses in Walker's account. Quick & Reilly issued margin calls which Walker failed to meet. Quick & Reilly liquidated her account.

Quick & Reilly sued Walker to recover the difference ($166,639) between the amount required to liquidate all of Walker's positions and the amount in Walker's account. Walker counterclaimed. She alleged Quick & Reilly's handling of her account was both negligent and fraudulent. She further alleged the liquidation of her account violated the margin and option agreements between Walker and Quick & Reilly and was barred by estoppel.

The fraud and contract claims were disposed of by directed verdict, but the related negligence and estoppel claims went to the jury. The jury found both Quick & Reilly and Walker negligent in handling the account resulting in a loss of $350,000, 55% of which was attributable to Quick & Reilly's negligence and 45% to Walker's negligence. The jury found Quick & Reilly was not estopped from liquidating Walker's account and hence was entitled to the debit balance of $166,639. Walker realized a net recovery of $25,861.07, plus pre-judgment interest calculated at 7%.

Quick & Reilly does not appeal the negligence verdict against it. Walker appeals the jury's determination that she was 45% negligent, the court's failure to grant a directed verdict in her favor on the estoppel claim, and the rate of interest allowed by the district court on the judgment. Quick & Reilly cross-appeals, alleging improper jury instructions. Walker also appeals the directed verdicts for Quick & Reilly on the fraud claims (because a judgment on these claims would not be offset by Walker's comparative negligence and might have allowed punitive damages) and the contract claim (because a jury verdict in her favor would allow her to collect attorneys' fees).

We review a directed verdict under the standard applied by the district court: such a verdict is proper if, considered in the light most favorable to the non-moving party, the evidence permits only one reasonable conclusion. Peterson v. Kennedy, 771 F.2d 1244, 1256 (9th Cir.1985). To benefit from favorable inferences, the party opposing the directed verdict "must present 'substantial evidence' in support of its claims." Feldman v. Simkins Industries, 679 F.2d 1299, 1303 (9th Cir.1982).

Walker contends that by not limiting her trades and by allowing her to maintain an ever riskier portfolio while telling her the account was "in good shape," Quick & Reilly committed fraud and violated both Rule 10b-5 and California securities laws. As we have noted, the trial court judge directed a verdict on the fraud claims but allowed Walker's negligence claim, based on essentially the same conduct, to go to the jury. The court regarded Walker's evidence as sufficient to establish a lack of due care, but as not sufficient to establish either misrepresentation or other misconduct, or negligence so egregious as to constitute recklessness. While the line between negligence and recklessness amounting to fraud is indistinct, we believe the district court's rulings allowed the factual issues to go to the jury on an appropriate basis.

Walker argues that evidence that she had earlier been assured Quick & Reilly would not let her "get into jeopardy," that Yannarella subsequently did not limit the number of Walker's trades, that the number of stock option puts in Walker's account doubled after Yannarella took over, and that Yannarella did not warn Walker of the extent to which her risk had increased, was sufficient to require submission of the recklessness issue to the jury. But there was evidence that Walker was an experienced investor, that she had engaged in the sale of stock option puts for more than six years, that she selected the options she would sell and controlled her own account in all other respects, and that Quick & Reilly made no recommendations to her because she wanted none and had selected Quick & Reilly as her broker specifically because they gave none. Although Yannarella may have encouraged Walker, it is uncontradicted that he neither initiated nor directed her investment activity. On this evidence the district court properly concluded a reasonable jury could find Quick & Reilly's failure to advise Walker of the extent of her exposure to loss to be negligent, but could not reasonably find it to be reckless.1

Walker points to the fact that almost all the stock options in her account were rolled-up to a higher price during August 1987, a tactic she had not employed before. Walker argues Yannarella instigated this strategy, but the portions of the record Walker cites do not support her assertion, and Yannarella testified to the contrary. There was also uncontradicted evidence that the market peaked during August, that the roll-ups made business sense given the bull market, and that the amount of roll-up was consistent with prior dealings undertaken by Walker on her own initiative. The mere fact that the number of roll-ups increased, and the roll-up strategy ultimately proved mistaken, is not evidence of recklessness.

Walker also argues Yannarella's statements that her account was "in good shape" and "not in jeopardy" amounted to recklessness. Quick & Reilly argues it is a discount brokerage house and does not purport to give advice, and that Yannarella's comments were mere expressions of assent without weight as recommendations. Walker spent several hours at a time on the phone with Yannarella, giving rise to an inference that at least some discussion of her trades took place. However, Walker admits Yannarella made no recommendations to her with respect to either strategy or particular transactions. While failure to warn Walker of the magnitude of the risk to which she was exposing herself and making favorable general comments to Walker regarding particular transactions or the condition of her account were properly considered by the jury in reaching its negligence verdict, we cannot say they were sufficient in view of the relationship between the broker and the investor in this case to evidence recklessness or fraud. The same is true of Quick & Reilly's asserted failure to formally ascertain Walker's investment objectives, since her objectives were as easily adduced from her previous lengthy trading history as from a standardized form.

Walker argues Quick & Reilly's failure to adhere to the NASD and NYSE "suitability" and "know your customer" rules raises an inference of recklessness. The district court found, and the parties agreed during the trial, that if these rules were applicable at all,2 they were relevant only to establish the standard of care to which a reasonable broker must adhere. Evidence of Quick & Reilly's asserted failure to adhere to these rules was before the jury and presumably fully considered by the jury in reaching its negligence verdict.3

Walker argues that her expression of dissatisfaction with the way in which her account was being handled should have alerted Quick and Reilly to the fact that she did not understand the status of her account, and that Quick & Reilly should have responded by explaining to her the extent of the risk to which she was exposed, but instead confined its efforts to convincing her to retain her account with the firm. The substance of Walker's complaint to Quick & Reilly was that she was not receiving interest on $200,000 she mistakenly thought was equity in her account. Her expressions of dissatisfaction did not link her concerns to the risks involved in her stock puts strategy or suggest she was unaware of those risks. Again, while Quick & Reilly's inaction may have been sufficient to support a finding of negligence, we see no basis for disturbing the trial court's determination it was insufficient to justify submission to the jury of the issue of recklessness equivalent to fraud.

Walker's contract and estoppel claims rested on the timing of the liquidation of her account by Quick & Reilly. Walker contended Quick & Reilly breached the written option and margin agreements under which Walker was entitled to a reasonable time to meet margin calls; and, because of oral and written statements to Walker upon which she relied, Quick and Reilly was estopped from denying that Walker had a contractual right to such an opportunity.

As noted, the district court directed a verdict for Quick & Reilly on the contractual claim, and submitted the estoppel claim to the jury, which found no estoppel. Walker contends the district court erred in directing a verdict for Quick & Reilly on the contract claim and declining to direct such a verdict for Walker on the estoppel claim.

Quick & Reilly contends the contract claim was included in the estoppel claim as submitted to the jury. The district court apparently was of the same view. Assuming it was not, however, we are satisfied it was properly withheld from the jury, because the evidence permitted only one reasonable conclusion on the contract claim considered independently.

Walker contends that by the terms of her Option Agreement, her account could only be liquidated without notice if, as a condition precedent, she failed to comply with Quick & Reilly's margin calls.4

Accepting Walker's reading of the Option Agreement, nothing in the agreement fixed the time allowed for compliance with margin calls. In response to the plunging market, Quick & Reilly on October 20 insisted upon immediate compliance, thus rescinding the three day period given to meet the margin call issued October 19. Nothing in the contract precluded Quick & Reilly from taking this action. Walker brought in no money in response to the call.

Walker relies upon the provision in the Margin Agreement that "[a]ll transactions for my account shall be subject to the constitution, rules, regulations, customs and usages of the exchange or market ... where executed." Walker argues this provision bound Quick & Reilly contractually to comply with NASD and NYSE "suitability" and "know your customer" rules. The intent of this contractual provision is to incorporate the rules regarding options and margin, not the entire code of securities rules and regulations. In any case, as indicated earlier, asserted violations of the "suitability" or "know your customer" rules were before the jury in determining negligence; Walker's claim that they also may have constituted contractual violations adds nothing.

Walker also points to a Federal Reserve System Board of Governors regulation, incorporated into NYSE Rules, providing that a broker "can" allow a customer up to seven days to meet a margin call. Regulation T, 12 C.F.R. Sec. 220.4(3), refers to a maximum rather than a minimum time within which a margin call may be met. Moreover, it is permissive only. Article 9 of the Option Agreement provides that if its provisions conflict with those of the Margin Agreement, the Option Agreement controls, and the Option Agreement allows no set time to meet a call. The district court did not err in directing a verdict on Walker's contract claim.

Walker argues that the district court should have granted Walker's motion for directed verdict on the ground Quick & Reilly was estopped, as a matter of law, from liquidating her account when it did. Denial of a directed verdict or JNOV is reversed only when the evidence cannot reasonably support judgment in favor of the opposing party. See Transgo, Inc. v. Ajac Transmission Parts Corp., 768 F.2d 1001, 1014 (9th Cir.1985).

There was enough evidence to support a finding for either party on the estoppel claim. The disputed factual question was whether Quick & Reilly, by its course of conduct in giving Walker a few days to meet prior margin calls and sending a telegram allowing Walker three days to comply with the October 19 margin call, either made a promise to allow Walker a short period to meet the October 20th call or engaged in conduct reflecting such a commitment on which Walker justifiably and foreseeably relied to her detriment. Subsidiary factual issues included whether the mailgrams Walker received were written margin calls in themselves or only memorializations of earlier oral margin calls, whether Quick & Reilly orally advised Walker of a final $500,000 margin call on October 20 which absorbed and superceded the October 19 margin call, and whether Yannarella told Walker she could not bring in the money to meet the margin call after she offered to do so. There was conflicting evidence on each of these questions, and the jury could have reasonably answered them either way. It was therefore proper for the district court to deny Walker's motion for a directed verdict on the estoppel issue.

Walker maintains the jury's finding that she was 45% negligent was not supported by substantial evidence. But there was evidence that Walker selected the investment vehicles herself, that she embarked on an investment strategy that became riskier over time, and that Quick & Reilly made no recommendations to Walker. The jury's finding that Walker was negligent is supported rather than undercut by her claim that although she was aware of each individual transaction, she "did not realize that the number of uncovered puts had nearly doubled," or appreciate the extent of the risk involved.

Walker contends the district court's award of prejudgment interest at 7%, rather than 10%, was error. None of the statutes Walker cites supports her position. Section 3288 of the California Civil Code simply gives the jury discretion to award interest as damages in actions other than contract. Section 3291 refers only to settlement offers. Section 3289 refers to contract claims, and is inapplicable because Walker did not prevail on her contract claim. Although the court in the exercise of its discretion might have applied a 10% rate by analogy to Section 3289, Walker has not demonstrated the court's decision to award 7% was an abuse of discretion.

We need not reach the issues raised on Quick & Reilly's cross-appeal.

Affirmed.