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VAN ALEN v. DOMINICK & DOMINICK

December 22, 1976

Candace VAN ALEN, Plaintiff,
v.
DOMINICK & DOMINICK, INC. and Paul deGive, Defendants



The opinion of the court was delivered by: PIERCE

OPINION AND ORDER

 PIERCE, District Judge.

 This is an action brought by plaintiff Candace Van Alen against her broker of seventeen years, Paul deGive, and deGive's employer, Dominick & Dominick, Incorporated ("Dominick"). The third amended complaint charges defendants with violations of Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, violations of the rules of the New York Stock Exchange ("NYSE") and common-law fraud in the handling of plaintiff's discretionary account at Dominick during the period February 1969 through April 1970, as well as in the handling of plaintiff's discretionary custodial account controlled by deGive at The Bank of New York and later at the First National City Bank. Count One alleges churning of the accounts, for which alleged violation plaintiff seeks damages in the amount of $559,046.00, the net trading losses claimed. Count Two charges common law fraud, alleging inter alia, that the defendants falsely represented to the plaintiff that they would comply with the securities laws and the NYSE rules, and that they had developed and "perfected a system insuring profits in the purchase and sale of securities," which system would result in profits to the plaintiff. Count Three alleges excessive trading and unsuitability of securities in the Dominick account, and Count Four makes similar charges with respect to the plaintiff's custody account at The Bank of New York. Count Five was dismissed by order of this Court dated July 16, 1975. Having heard all the evidence and having considered the matter, the Court now concludes that the plaintiff's case is without merit, and dismisses the complaint in its entirety. The following shall constitute the Court's findings of fact and conclusions of law pursuant to Rule 52(a) Fed.R.Civ.P.

 Findings of Fact

 Candace Van Alen, prior to and during the time in question, was a woman of substantial financial position, married to a millionaire and a millionaire in her own right. Plaintiff graduated from Vassar College in 1933, having taken at least two courses in elementary economics. She testified that during her college days, she was aware of the turmoil in the securities industry, but that she did not follow the market. She was aware that many persons had experienced great losses in the securities market. Following her graduation from Vassar, plaintiff did graduate work in literary studies at Radcliffe and undertook further schooling at the Sorbonne. While Mrs. Van Alen cannot be described as a career woman, she did at one time hold the position of assistant editor at Vogue magazine, and she was a contributing editor to the New York Herald Tribune.

 In 1948, plaintiff married James Van Alen, a wealthy individual who had been active in the stock market since 1940. James Van Alen was, and is the beneficiary of certain substantial family trust funds; however, the plaintiff knew that he had a lifetime beneficial interest and that no interest in these family trusts would pass to her. Accordingly, in 1948 James Van Alen gave the plaintiff, his second wife, the sum of $200,000 to be invested in the securities market; the funds were placed in a custody account at the Empire Trust Co. In the same year, James Van Alen introduced the plaintiff to defendant Paul deGive, a market analyst who was soon to join the firm of Dominick & Dominick.

 In 1953, Mrs. Van Alen and her husband met with deGive to discuss the investment of plaintiff's funds. At that time the worth of the plaintiff's holdings had decreased to approximately $125,000.00. As far as Mrs. Van Alen was concerned, deGive in 1953 was one of the "guiding lights" of the Dominick firm; her husband had informed her that deGive was a very good broker. In the autumn of that year, the Van Alens and deGive met at the Van Alens' home in Millbrook, New York. The three decided that deGive should be given discretionary control over plaintiff's securities and that he should undertake to "nurture the account and make it grow". On this initial question of plaintiff's investment intent, the testimony of the adverse parties generally is consistent as to what was said in 1953. The parties discussed the fact that the fund was the extent of plaintiff's holdings, and that the plaintiff did not stand to benefit from her husband's trust interests after his death. It is clear that plaintiff asked deGive to treat the account as if it belonged to a member of his own family. Mrs. Van Alen testified that she also told deGive that she needed the money "for her old age"; however, deGive denied that such a statement was made. In any event, it is clear that Mrs. Van Alen was interested in growth as well as security. She asked deGive not only to "look after" the account, but indicated that she hoped he would "build it up."

 Plaintiff testified that she wished deGive to take full control over the account since she didn't know "anything" about the stock market and since she and her husband traveled extensively, spending many months each year away from their residence in upstate New York, Long Island, and Newport, Rhode Island. On April 29, 1953, deGive was given trading authority over the Empire Trust custody account, and in July, 1953 an account was opened for the plaintiff at the Dominick firm, which at all relevant times was a brokerage and investment banking house and a member of the New York Stock Exchange. The two separate accounts were established at plaintiff's express direction.

 Plaintiff testified that during their initial discussion in 1953, deGive stated that the accounts would be handled in accordance with the regulations of the securities laws and pursuant to the rules of the Exchange. While plaintiff did not have a specific understanding of the provisions of the applicable rules, she testified that it was her understanding that the rules were designed for the protection of investors. deGive testified that although he had no recollection of any discussion concerning rules and regulations, the fact that the account would be run in accordance with the applicable regulations was a fact that he believed was understood by the plaintiff.

 Defendant deGive testified that he was aware of the financial position of the Van Alens, and that he was aware of the growth of their wealth during the years between 1953 and 1969. deGive knew that the net worth of James Van Alen approached one million dollars, and that he had substantial income from securities owned outright. deGive was aware of the Vanderbilt family trusts which inured to the benefit of James Van Alen, and he knew of the fact that the Van Alens maintained a shooting preserve at Millbrook, New York, an apartment at Fifth Avenue and 72nd Street in Manhattan, ten acres of land opposite the C.W. Post College on Long Island, and a principal residence on an estate overlooking the Atlantic Ocean in Newport, Rhode Island. deGive testified that he took these factors into account in his handling of plaintiff's securities accounts.

 The key to the method by which deGive managed the Van Alen account, and the key to the plaintiff's claims herein, is deGive's "Technical System" which he had developed in an attempt to predict movement in the stock market on the basis, inter alia, of the amount of capital flowing in or out of the market. deGive, a chartist, employed an elaborate system of graphs to assist in the management of a number of discretionary accounts, as well as for the basis of a weekly market letter entitled "Technical Comments" (see Def. Ex. 116).

 The exact operation of the technical system was described in great detail by deGive during his examination on plaintiff's direct case. The essence of the concept involved the calculation of a series of seven, ten, twelve, eighteen, and thirty-day "moving averages" employed to determine buying and selling pressures in the market as a whole. A sixty-day moving average was computed from information provided to deGive by another chartist, Lowry's Services, Inc. The information which made up these moving averages was drawn from the price action and volume of certain individual stocks, the Dow Jones Industrial, Utility and Railroad averages, and all NYSE listed stocks taken as a whole. To calculate each moving average, deGive would take the total number of issues which advanced (for a "buying" indicator) or declined (for a "selling" indicator) each day and divide that figure by the total number of issues traded. The resulting percentage ratio would be added to similar ratios for each of the days in the particular cycle, whether it was seven, ten, or thirty, and then that figure would be divided by the total number of days in the moving average. The result for each of the many moving averages was calculated each day, and the information plotted on a series of flat charts as well as on a huge scroll-type chart; this larger chart also contained certain information on market movements calculated on an hourly basis (see Plf. Ex. 35). The resultant series of lines would move up or down in cycles as market conditions changed. deGive called these lines "impulses", "thrusts" or "oscillators".

 As the various moving averages produced cycles equal in length to the number of days for which they were calculated, deGive would compare the highs and the lows of the cycles to highs and lows in previous months or years. If there was concurrence among a certain number of indicators that the market was moving up or down as a whole, deGive testified that he would derive a "buy" or a "sell" signal. On the basis of these signals, deGive would write his market letter and would buy or sell securities for his discretionary accounts, including those of the plaintiff.

 Since the technical system was an attempt to predict the movement of the market as a whole, deGive invested in stocks which together would reflect a cross-section of the market. deGive would purchase securities in each of three categories: those which had in the past performed behind the market, those which had moved ahead of the market.

 The evidence for the years prior to and including 1970 strongly supports the conclusion, and the Court specifically finds, that the nature of deGive's system was such that in order to function as a basis for investment decisions, the system, as deGive understood it, indicated "major moves" in buying or selling when a certain number of indicators produced an appropriate signal. deGive testified that the 1969-70 transactions at issue in this lawsuit were "major moves" in the plaintiff's accounts, and Dominick's compliance officer Thomas Mitchell testified that deGive always made purchases or sales in all his accounts at the same time. Indeed, in 1966 and 1967, deGive made massive profits for plaintiff through such "major moves." (See Plf. Ex. 66, Def. Ex. 98(f)).

 deGive employed the system as a basis for all his investment decisions and recommendations. The evidence in the case supports the conclusion that the "moves" made by deGive in the plaintiff's accounts corresponded with the recommendations made in his market letter, which was circulated to several hundred subscribers, and with the "moves" deGive made in trading for his wife's account.

 While neither party presented any expert testimony with respect to the wisdom or the efficacy of the system described at trial, it is clear that for many years the system was highly successful. There is no dispute that from the beginning of his handling of the Van Alen account until the end of 1968, deGive acted in accordance with the signals given him by his system, and there can be no dispute that during this fifteen year period deGive produced substantial growth in plaintiff's account and significant profits in many years. Further, having reviewed the exhibits and heard the testimony of the defendant deGive and assessed his demeanor, the Court finds that deGive had a strong good faith belief in the efficacy of his technical material. This finding is supported by the fact that the same recommendations were made to several hundred persons, and by the fact that deGive made parallel moves in his wife's account when he moved in plaintiff's account.

 Further, it cannot be disputed that the securities purchased for the plaintiff were of reputable quality (see Def. Ex. 244). Every stock was listed on the New York Stock Exchange (Id.). Both plaintiff and deGive testified that once when Mrs. Van Alen asked about a certain "hot" stock, deGive refused to purchase it since it was not a listed security and since he was not familiar with the company.

 From 1953 through 1966, plaintiff maintained the above-mentioned two accounts at Dominick and at the Empire Trust Co. In 1966, the Empire Trust merged into The Bank of New York, which held plaintiff's custodial account until October, 1969, when she transferred this custodial account to First National City Bank ("FNCB") upon The Bank of New York's refusal to loan money to plaintiff which she sought in order to purchase securities.

 While the evidence on the issue of plaintiff's direct participation in the management of her securities accounts is mixed, the Court must conclude that the plaintiff has failed to substantiate her claim that she was ignorant of developments in her account. This finding of fact is based upon the Court's assessment of the plaintiff's own testimony at trial, and upon a comparison of that testimony with the other evidence in the case.

 First, there is no dispute that from 1953 until 1970, monthly statements and confirmation slips of all trades executed in each of plaintiff's accounts were transmitted to plaintiff's home in Newport, Rhode Island, where they were reviewed by the plaintiff or by her personal secretary, Mary Grace Watson. The statements and slips were also transmitted to various attorneys who acted as tax consultants for the plaintiff. These transmittals were made pursuant to specific instructions placed upon plaintiff's account card at Dominick (Plf. Ex. 28).

 Second, there is no dispute that during the period between 1962 and 1969, plaintiff obtained a series of loans, totalling hundreds of thousands of dollars in order to invest further in the market pursuant to deGive's system. While plaintiff testified that a $200,000 loan obtained from the First National City Bank in October 1969 was sought pursuant to deGive's urgings, Mrs. Van Alen offered no similar explanation concerning the several other loans of $100,000 or more obtained during the period 1962-1968. In this connection, the Court further notes that in 1963, the plaintiff converted her account at Dominick into a margin account, making possible even greater purchases of securities by deGive pursuant to plaintiff's grant of discretionary authority to him. During this same period, there was considerable correspondence between The Bank of New York, deGive, and Ms. Watson, plaintiff's secretary. In some instances over the years there was written correspondence between the plaintiff and deGive which indicated an interest by the plaintiff in her various financial undertakings.

 For example, on June 7, 1962, the plaintiff wrote to deGive concerning the market's "perigrinations" (Def. Ex. 40). On October 10, 1968, plaintiff's secretary, Ms. Watson, wrote to The Bank of New York "at the request of Mrs. Candace Van Alen" to inquire about the current interest rate on one of the loans (Def. Ex. 60). On October 14, 1968, Mrs. Van Alen herself wrote to an officer at The Bank of New York concerning the tardy transmission of a letter of transmittal in connection with a tender offer which had attracted plaintiff's attention. (Def. Ex. 46). In November, 1968, Ms. Watson wrote to deGive concerning interest charged on a loan which was to be repaid through the sale of securities -- this letter specifically referred to "checking up" on the October confirmation slips. (Def. Ex. 100). While Mrs. Van Alen stated on cross-examination that she had no recollection of these letters and others, the Court is compelled to conclude that the plaintiff, either directly or through her employee Ms. Watson, was keeping watch over her accounts and over the related loans.

 Finally, although the record is far from clear on the extent to which the plaintiff was in direct communication with deGive prior to and during the complaint period, it is apparent that there were discussions concerning market conditions, the advisability of loans to purchase more securities, the merits of some particular stock issues, and the indicators being generated by deGive's system. It is further clear that the majority of these conversations concerning the plaintiff's account took place between James Van Alen, the plaintiff, and deGive. Although the plaintiff testified that she did little more than listen during these conversations, her seeming familiarity with certain of the technical terms used by deGive, combined with the undisputed fact that James Van Alen listed his own occupation as "investor" (see Def. Ex. 65, 66, 67), lead to the reasonable inference, from all the evidence, that during the period preceding and during the complaint transactions there were significant contacts between the parties with respect to the market and with respect to plaintiff's securities accounts. Further, in light of all the evidence, including the plaintiff's frequent use at trial of the term "we" in referring to actions or decisions made by her with respect to her accounts, the Court declines to accept plaintiff's testimony to the effect that she did not consult with her husband about what was transpiring in her accounts. Rather, the Court finds that James Van Alen was frequently consulted. Indeed, plaintiff had good reason to be interested in the progress of her accounts, as the following summary indicates: Dominick Empire/BNY Year Profit (Loss) Profit (Loss) 1964 ($1,799) $4,078 1965 $6,110 $7,076 1966 $63,875 $203,244 1967 $203,126 $352,994 1968 ($89,950) ($95,072)

 (Source: Def. Ex. 98(c) and 98(d))

 There is no claim that during these years deGive failed to follow this system. Further, it is uncontroverted that the plaintiff never complained about the handling of the account until the beginning of 1970. As plaintiff testified on cross-examination, "I never objected to anything that he did, good or bad."

 The evidence establishes that during these years, and during the period of the complaint, deGive handled plaintiff's account without any significant intervention or supervision by other members of the Dominick firm. It appears that the only surveillance of deGive's activities was made by Thomas Mitchell, Dominick's compliance officer, who with his staff reviewed each day all confirmation slips of all trades of the preceding day effected by Dominick representatives. This review also included a daily IBM printout which listed all trades made, broker by broker. Mitchell testified that this IBM run would identify the accounts involved by symbol, but that there was no way for his office to identify trades made by deGive for Mrs. Van Alen at the bank custody accounts or to separate those trades out from other trades made by the same bank for other persons through the Dominick firm. Further, it is clear from the evidence that the trades made by deGive were not initialed or approved in advance by any other member or allied member in the Dominick firm. Nor is it at all clear whether or not discretionary trades were identified as such at key control points in the Dominick operation. It is quite apparent that the officers of Dominick made no attempt to supervise the transactions occurring in the plaintiff's custodial accounts at the different banks. However, officers of Dominick who testified stated, and the Court finds the testimony credible, that they believed that during the time in question the firm was operating within the guidelines ...


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