The opinion of the court was delivered by: SAND
LEONARD B. SAND, U.S.D.J.
Plaintiff, Dennis Herman, was an investor in commodities with defendant, T. & S. Commodities, Inc. ("T&S"), a futures commission merchant and member of the Commodity Exchange, Inc. or "Comex." Co-Defendant Robert Sherman formerly worked for T&S as Vice-President in charge of operations. In June of 1982, plaintiff, assisted by Sherman, established a commodities trading account at T&S. Shortly thereafter, Sherman executed various trades for this account, a number of which were concededly unauthorized. Plaintiff now seeks damages under Section 4(b) of the Commodity Exchange Act, 7 U.S.C. § 6b, for allegedly material misrepresentations, omissions, and unauthorized and unratified trading made by defendants in plaintiff's account. Plaintiff also asserts these claims under a common law fraud theory, seeking compensatory and punitive damages. Defendant T&S seeks recovery of the $90,110. debit balance remaining in plaintiff's account. By memorandum endorsement, on December 3, 1982, we denied defendants' motion to strike plaintiff's claim for lost profits under the Commodity Exchange Act; and on September 15, 1983, we denied defendants' motion for summary judgment. The pleadings were amended by the parties' joint pretrial order of April 5, 1984 and a bench trial was held on April 6, April 20, April 23, and 24, 1984. Post-trial briefs were submitted on May 11 and May 24, 1984. The following constitutes the Court's findings of fact and conclusions of law under F.R.Civ.P. 52.
Plaintiff is 38 years old and is president of American Federal Group, Ltd., a broker, underwriter, and agent for various insurance companies. Plaintiff attended college for two years and then went to insurance school to get a property and casualty license. Since that time, plaintiff has enjoyed a successful career in the insurance industry. He worked at John Hancock Mutual Life Insurance Company until 1972, attaining the position of Vice-President of Marketing and Sales.He then left John Hancock to form his own firm, Executive Brokerage Associates, which was merged with another company in 1978-79 to become American Federal Group. Plaintiff's business has grown appreciably since 1978. He has a net worth of over one million dollars, and had nearly one million dollars invested in stocks, bonds, and commodities before he met Robert Sherman.
Herman's Investment Experience
Plaintiff's investment history prior to June 1982, is well documented and set forth in the joint pretrial order of April 5, 1984. Since January 1978, plaintiff maintained an account at A.G. Becker, Inc. in which he bought and sold primarily publicly traded securities. The market value of this account has averaged in excess of $200,000 since January 1980.
Plaintiff also had an account at Bache, Halsey, Stuart, Shields, Inc., established in October 1978, through which plaintiff bought and sold primarily tax exempt municipal bonds. Since September 1981, the market value of such bonds in plaintiff's account at Bache averaged in excess of $350,000.
Plaintiff's brokers at both A.G. Becker and Bache testified during the trial. Jeffrey Nash, plaintiff's high school friend, handled plaintiff's account at A. G. Becker. According to Mr. Nash, "Mr. Herman's objectives were to go for capital gains, certainly in excess of anything that we could earn in interest bearing or very secure interest bearing type securities and to do it, if possible, in a long term fashion." Trial Transcript ("Tr.") p. 323. Nash had no discretionary authority with respect to plaintiff's account. The vast majority of plaintiff's stock positions, however, were purchased at Nash's recommendation.But plaintiff sometimes made his own stock selections and on a number of occasions rejected Nash's recommendations. Turnover in plaintiff's account at A. G. Becker was relatively light, involving in the twelve months ending May 28, 1982, approximately three sales of securities. On May 28, 1982, plaintiff's account at A. G. Becker revealed 14 securities positions.
Paul Sheldon was plaintiff's broker at Bache. According to Mr. Sheldon, all of Mr. Herman's municipal bond purchases in 1980 and 1981 and 6 of 9 stock purchases were made at Sheldon's recommendation.
In the latter part of 1981, plaintiff expressed an interest in the commodities market to Jeffrey Nash. Nash, concerned that neither he nor plaintiff posessed the requisite time or knowledge to manage a commodities account, recommended that plaintiff secure the services of Ken Hanger, a professional commodities manager at Becker, to run the account. In October 1981, plaintiff invested $50,000 in a commodities pool known as the Hanger fund. Plaintiff had no discretion over the fund's activities; as plaintiff explained "you commit that $50,000 for a one-year period and you have nothing to say about it, nor can you make recommendations -- nor could I even get in touch with Mr. Hanger." Tr. p.45.
In contrast to this experience at Becker was plaintiff's experience as a commodities investor with Bache. In November 1981, plaintiff began a series of significant commodities investments in the Bache account which were made, for the most part, without the counsel of investment advisors.
In that month, plaintiff purchased 15,000 ounces of physical silver at $8.15 an ounce. Plaintiff purchased an additional 15,000 ounces of silver in January 1982 at a price of $8.18 per ounce. According to plaintiff, he placed initial orders without the benefits of price consultation with brokers. See Tr. pp.211-12. Mr. Sheldon testified that plaintiff "thought the price of silver was going to go up, and he wished to take advantage of the upward price move that he thought was coming in silver." Tr. p.348. It is apparent that plaintiff initiated the silver purchases on the basis of his belief that silver was underpriced at the time of the investments and would appreciate. Tr. p.44, 349-50.
In March 1982, plaintiff invested in commodity futures contracts for the first time by purchasing 10 September 1982 silver "lots" at a price of $8.48 per ounce.
The silver positions effected through plaintiff's account at Bache were liquidated at substantial losses in June of 1982. See infra.
Through his experiences in the commodities market, plaintiff became familiar with margin requirements and margin calls. For his futures position at Bache, plaintiff posted margin of $2,500 per contract. Because of significant losses in this account, additional monies required for margin were transferred, with plaintiff's knowledge and consent, from plaintiff's other account at Bache to plaintiff's commodities account. Tr. p.188. No additional monies were required to sustain plaintiff's investment in the "Hanger" fund. See Tr. at 189 (discussing appreciation of Hanger investment).
Plaintiff's personal background and investment history as revealed through stipulations, testimony and exhibits received at trial, indicate that plaintiff was a relatively experienced, if not sophisticated, investor at the time he met defendant Sherman. Though he was losing money in commodities, he was conversant with the market, with its risks and potential rewards. His understanding is well summarized in the following exchange with defendants' counsel.
Q I think last time you testified that you had seen a risk disclosure statement prior to June 7 of 1982, isn't that correct?
Q You had seen one of those in connection with either your account at Bache or the Hanger Group, isn't that correct?
Q As of June 7 you were aware, were you not, that you could lose money in the commodities market, is that right?
Q You had some idea, did you not, as to how much you could lose in the commodities market, didn't you?
A I had recently sustained a large loss. I knew that I could lose money in the commodities market, yes.
Q The large loss of which you are speaking is approximately $200,000, is that correct?
Q And you were aware as of June 7, 1982, that if the market went against you, there might be a need for additional margin to be put up, isn't that correct?
Q You also understood by June 7 of 1982 that an investment in commodities futures transaction was a form of leverage, isn't that correct?
A To a certain extent, yes.
Q That was one of the reasons you had purchased futures contracts at Bache, wasn't it?
To say that plaintiff was relatively experienced is not to say that plaintiff was an intelligent investor -- though it became much easier to pass such judgments in hindsight. We believe simply that plaintiff would not be an "easy mark" for an unscrupulous broker. Successful in his own business, which shares important features with the commodities industry,
familiar with discretion and non-discretionary accounts and the mechanics of commodities trading, plaintiff possessed the requisite ability to succeed in commodities. Plaintiff closely monitored his investments by reading his account statements, speaking to his brokers and bringing errors to their attention. Plaintiff was thus resourceful and vigilant, two qualities which bear directly on our resolution of this controversy.
During the period in question, defendant Robert Sherman was employed by defendant T&S as Vice President in charge of operations and was a one-percent shareholder in the company. He received a salary and bonuses, but was not compensated by commissions. By March of 1982, Sherman had sustained a loss of $67,000 speculating for his own account in commodities. This sum was significantly larger than Sherman's base salary. T&S loaned Sherman money to cover the loss, and permitted Sherman to engage in limited "day trading"
to pay back the loan.
Sherman met plaintiff at a party given by plaintiff's employee and the wife of Sherman's first cousin, Brenda Giugliano, in April 1982. Though plaintiff suggests otherwise (claiming inter alia that Sherman wore a jacket emblazoned "T&S Commodities"), we find little to support an allegation that the meeting was prearranged for business purposes. Nor do we find, as plaintiff contends, that Sherman somehow "lured" plaintiff to trade at T&S with unethical promises of inside information.Indeed, plaintiff, by phoning Sherman some weeks after the party, was probably the prime mover in starting the business relationship. There is little indicia of active solicitation, let alone sharp dealing, on the part of Sherman, even according to plaintiff's own account of the initial meeting:
Q [D]id you discuss the status of your commodities account at Bache?
A We started talking about commodities on a general basis and I advised -- I spoke with Bob and we started talking on a general basis about commodities, about where they felt they would go, what he did, ...