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Alen v. Dominick & Dominick Inc.

decided: August 15, 1977.

CANDACE VAN ALEN, PLAINTIFF-APPELLANT-CROSS-APPELLEE,
v.
DOMINICK & DOMINICK, INC., AND PAUL DEGIVE, DEFENDANTS-APPELLEES-CROSS-APPELLANTS



Appeals from orders of the United States District Court for the Southern District of New York, Lawrence W. Pierce, Judge, holding that plaintiff had not established securities-law and common-law-fraud violations and that defendants were not entitled to attorneys' fees. Affirmed on both appeal and cross-appeal.

Smith and Oakes, Circuit Judges, and Bryan, District Judge.*fn*

Author: Oakes

OAKES, Circuit Judge:

"Churning" by a securities broker consists of causing excessive turnover in a customer's account for the purpose of increasing the broker's commissions.*fn1 Appellant's basic claim below was that her broker engaged in churning during the bear market of 1969-70, causing her trading losses of just under $600,000. Her complaint alleged violations of Securities and Exchange Commission Rule 10b-5 and of New York Stock Exchange (NYSE) rules and further alleged common law fraud. The United States District Court for the Southern District of New York, Lawrence W. Pierce, Judge, however, credited the testimony of the broker, deGive, to the effect that he, as a "chartist," was in good faith following a "technical system" in the handling of appellant's account - as he had done with her evident approval and to her considerable profit over the preceding 16 years. The court held that (1) there was no violation of Rule 10b-5 in that (a) the turnover in appellant's accounts was not excessive, (b) appellant was estopped by her acceptance of past benefits from the broker's "system," (c) no scheme or artifice to defraud was shown, and (d) there was no scienter; (2) no common law fraud was established, since the essential elements of material misrepresentation, scienter, reliance, and causation were missing; and (3) no claim for relief for violation of the NYSE rules requiring, inter alia, due diligence on the part of brokers and supervision by the brokerage firm had been stated, because (a) such a claim must be based on fraud, not proven here, in order to be actionable, or (b) even if fraud need not be proved, no causal connection had been established between the alleged NYSE rules violations and the losses sustained.

On this appeal appellant argues that the court below erred in making certain material findings of fact, in refusing to allow cross-examination of appellee deGive on several "diary entries," and in dismissing before trial the count of the complaint alleging violations of NYSE rules. Appellees have filed a cross-appeal from the district court's denial of their application for attorneys' fees. We affirm on both the appeal and the cross-appeal.

Facts

Appellant Van Alen, a college graduate married to a well-to-do investor, first gave appellee deGive, a market analyst and newsletter-writer associated with appellee Dominick & Dominick (Dominick), discretionary control over a $125,000 bank custody account in 1953, indicating that she was interested in growth as well as security. Appellant also asked deGive to treat the account as if it belonged to a member of his own family. An account at Dominick was opened for appellant, and it was understood that the bank and Dominick accounts would be run in accordance with NYSE rules and regulations.

deGive ran these accounts, as appellant knew, by following his technical system, calculating buying and selling pressures with graphs based on a series of "moving averages" covering 7, 10, 12, 18 and 30 day cycles. The graphs were drawn from the price action and volume of certain individual stocks, the Dow Jones Industrial Average, and other averages. By dividing the number of issues advancing by those traded (in the particular average), he would obtain a "buying" indicator; doing the same thing with the issues declining would give him a "selling" indicator. The percentage ratios calculated each day for each cycle would be added to previous ratios and the total divided by the number of days in the cycle. All of this was plotted on graphs or charts and from these deGive would derive overall "buy" or "sell" signals, the concurrence of a certain percentage indicating "major moves."

The system, based primarily on market psychology rather than individual company performance, was highly successful over a period of time. Appellant from time to time took out bank loans to purchase additional stock, and, at the start of the period in question in this case, February 1, 1969, her accounts stood at over $1.6 million, having increased in excess of $550,000 in 1967 alone. The court credited testimony below that deGive's investment policies in respect to appellant's accounts were consistent with and parallel to the advice that he gave in his market newsletter and the investments that he made for his wife's account.

Between February 11 and 14, 1969, deGive bought for appellant's accounts 27 stocks valued at $700,889, and between February 18 and 20 he sold almost all of them, each at a loss. Again between April 30 and May 5 he bought 40 stocks valued in excess of $1.3 million and sold them all on May 26 and 27. Despite these rapid turnarounds, appellant in October, 1969, borrowed $200,000 from a bank to invest with deGive, and that month the broker purchased 58 stocks valued in excess of $1.4 million. These were all sold on January 28-29, 1970, on appellant's express instructions following a recommendation to sell from deGive. On March 2-3, 1970, deGive purchased for appellant 29 stocks valued at $480,874. Appellant revoked deGive's trading authority on April 3, 1970. The net losses for the 285 trades involved on the seven "major moves" in question totaled $599,046 - during the same period the Dow Jones Industrial Average had declined nearly 150 points - with commissions to Dominick of $73,480.75, of which deGive retained one-third. In 1968, before the period of time here in question, deGive had made $14,000 from commissions on appellant's account, in 1969 he made $18,000, and in 1970 about $6,000, his total income in both 1968 and 1969 equalling about $100,000 per year.

Alleged "Clearly Erroneous" Findings

Appellant argues that several of the trial court's findings in this bench trial were "clearly erroneous." Fed. R. Civ. P. 52(a). The principal findings under attack are that there was a "system" which deGive followed during the period in question; that proof of his good faith was shown by his following his own public market letters and by parallel trading in his wife's account; and that deGive's credibility was greater than appellant's. In reviewing these findings, we may not substitute our judgment on facts for that of the trial judge, who was in a superior position to appraise the evidence, and we may not reverse his findings unless, on the entire record, we are "'left with the definite and firm conviction that a mistake has been committed.'" Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 123, 23 L. Ed. 2d 129, 89 S. Ct. 1562 (1969); quoting United States v. United States Gypsum Co., 333 U.S. 364, 395, 92 L. Ed. 746, 68 S. Ct. 525 (1948). We are not left with any such conviction here.

The argument that deGive did not have a "system," or at least did not use it consistently, is based on four elements of alleged proof. The first, that his testimony was inconsistent as to the number of buy and sell indicators he used, appears answered by the fact that at one point he testified as to indicators for the market as a whole, whereas at another point he testified as to indicators on seven specific charts for 1969, four of which charts were used for the selection of particular stocks after signals for the market as a whole had been derived from the other three.*fn2 The second element of "proof," that deGive could not consistently state whether he would buy (or sell) if 50% of his "indicators" pointed in that direction, is answered by his own response to counsel's questioning, to the effect that the 50% level was a minimum and that he required more than a 50% confirmation from his indicators before he would act on appellant's accounts. Appellee deGive's effort to be extra cautious in handling appellant's accounts is certainly not "proof" that he lacked a system. The third element, that deGive made virtually no major moves in 1967 and 1968, yet made only major moves in 1969, thus not operating the system in the same way, is countered by the fact that he had made a "major" move in November, 1966, when he bought almost $1.2 million of stock in 11 days, thereby committing most of appellant's funds during the long bull market of 1966-67 when the system continued to emanate buy signals. The fourth, that he had no system because he had no account of his own, is readily answered by the fact that he had several children in college and no funds of his own; his wife did have an account, on which the system was used. We cannot say that the trial court's findings as to the existence of a system and deGive's good faith belief in it are clearly erroneous.

deGive's investments for appellant closely followed the recommendations of his newsletter and his investments for his wife. Recommending in his newsletter on May 26, 1969, that "weak holdings" should be eliminated, for example, he sold out appellant's and Mrs. deGive's purchases of earlier that month; the Dow Jones Industrial Average dropped over 100 points in the next six weeks.*fn3 deGive's trading for his wife's account and that of appellant was closely parallel, with the two going in or out of the market on roughly the same scale at the same ...


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