The opinion of the court was delivered by: Motley, District Judge.
FINDING OF FACT AND CONCLUSIONS OF LAW
This case originated as a breach of contract suit brought by plaintiff Richardson Greenshields Securities, Inc., a commodities brokerage firm, against four of its account holders who had lost large sums of money trading commodities from January 1983 to August 1984, in the process amassing deficit balances of approximately $167,000. Subject matter jurisdiction in this action is based on diversity of citizenship pursuant to 28 U.S.C. § 1332. After lengthy discovery, defendants/third party plaintiffs (hereinafter "defendants" or "the Laus") filed several counterclaims which have become in great measure the focus of this dispute. In short, defendants allege that third party defendant Lavinia Wu, defendants' broker at Richardson, and Richardson, itself, schemed to defraud defendants' and some of Wu's other customers by fraudulently inducing them to: (1) open accounts at Richardson, (2) give de facto discretionary control to Wu, (3) approve trades and keep open their accounts, and (4) erroneously make deposits responding to margin calls. Defendants further allege that Wu stole from her customers, including defendants, and argue that Richardson supervisors aided and abetted the scheme by disregarding industry rules which would have controlled Wu's abuses and by concealing the fraud. Thus, defendants' counterclaims allege violations of the Commodities Exchange Act, common law fraud under New York law, civil violations of RICO, breach of contract, breach of fiduciary duty, conversion, money had and received, and negligence and gross negligence.
After a long pre-trial history before other Judges and Magistrate–Judges of this court, this case was transferred to Judge Motley on March 27, 1992. After a conference on March 30, 1992, it was tried before the court from March 31, 1992 to April 24, 1992. Closing arguments were held on April 29, 1992. By direction of the court, the parties submitted proposed findings of fact and conclusions of law keyed to the record on or about May 15, 1992.
The Background of the Case
I. Parties and Personnel.
Because of the complexity of this case, a directory of the protagonists will prove helpful.
Defendant Mui–Hin Lau ("MHL") and his wife, defendant Ho Sih Fong ("HSF"), live in Hong Kong. His sister, defendant Kau–Ying Lau ("KYL"), lives in Canada. These three defendants are sometimes referred to as the "elder Laus."
Mui–Hin Lau and Ho Sih Fong have two sons, defendant Ying Lup Lau, also known as Michael Lau ("ML") and third party plaintiff Ying Tak Lau, also known as Daniel Lau ("DL"). Michael Lau is married to defendant Wai Yau Chi ("WYC").
At the time of the events relevant to this case, Daniel Lau worked at United Orient Bank in New York City. (DL, Tr. 5). The Lau family owned a 25% interest in the bank. (DL, Tr. 6). In January 1983, he became vice-president, director and chief lending officer. (DL, Tr. 6–7). In that capacity he supervised all of the bank's lending activities both personal and commercial. (DL, Tr. 6–7). Previously, Daniel Lau had earned a degree in chemistry from Oregon State University and a Masters in business administration from Portland State University with a concentration in finance. (DL, Tr. 4). He also had been an accountant for a major corporation for three to four years and a management trainee for a national bank. (DL, Tr. 5). Daniel Lau had been convicted in the Southern District of New York of a felony count of conspiracy to defraud an agency of the United States, the Internal Revenue Service, under 18 U.S.C. § 371 (1948). (DL, Tr. 127–29).
At the time of the events in this case, Michael Lau was the supervisor of a building renovation project in lower Manhattan, a part of New York City. (ML, Tr. 2814). He was also a shareholder of United Orient Bank and the manager of his father's real estate interests in New York. (ML, Tr. 136, 146). He became a director of United Orient Bank on December 20, 1983. (ML, Tr. 136).
B. Richardson Greenshields Securities, Inc.
Plaintiff, Richardson Greenshields Securities, Inc. is a wholly owned subsidiary of Richardson Greenshields Securities of Canada, the largest commodities brokerage firm in Canada. (Lindh, Tr. 2748, 2756). Richardson, which presently and at all relevant times has been a registered futures commission merchant ("FCM") ( see, Frazier, Tr. 1345), is a relatively small operation in the United States. (Lindh, Tr. 2755–56).
Third Party defendant Lavinia Wu ("Wu") began working at Prudential Bache ("Bache") in December 1979 and shortly became a fully-licensed commodities broker. (Wu, Tr. 681). She was hired by Richardson in December 1982 as an account executive and her broker's licenses were transferred from Bache to Richardson. (Wu, Tr. 699–700). Her titles at Richardson also included salesperson, registered representative, broker and associated person. (Wu, Tr. 681, 698).
Third Party defendant Angelo DaBiero was hired in the fall of 1982 as the branch manager of Richardson's New York retail sales office located at 100 Church Street. (DaBiero 1986 Dep., Ex. JJJ JJJ–1 at 5–6). His responsibilities included insuring that the Account Executives in his office followed all applicable rules, policies and procedures. (DaBiero 1986 Dep., Ex. JJJ JJJ–1 at 27–28). In the fall of 1983, Richardson transferred DaBiero to its Florida office. (DaBiero 1986 Dep., Ex. JJJ JJJ–1 at 9).
Third Party defendant Richard DiGiacomo was Richardson's vice-president in charge of commodity operations from 1979 to 1985. (DiGiacomo, Tr. 600, 608). DiGiacomo had approximately 26 years of experience in the commodities business. (Tr. 599 DiGiacomo). He was an interim branch manager of the 100 Church Street office during which time he was directly responsible for supervising Wu. (DiGiacomo, Tr. 610).
Alexander McNair worked for Richardson's parent in Canada from 1952 until 1971 when he moved to the United States and worked for Richardson until September, 1983. When Wu was hired, McNair's titles were senior vice-president, director and secretary. He also acted as a compliance officer for all branch offices. (McNair Dep., Ex. JJJ JJJ–1 at 6–7, 10, 14–17, 37). McNair's compliance responsibilities included regular visits to the branch offices, daily review of equity runs to check for irregular trading and constant review of account opening documents to ensure those documents were complete, adequate and properly filled out. (McNair Dep., Ex. JJJ JJJ–1 at 37–38).
Kenneth Fuller began working for Richardson's Canadian parent on June 1, 1948 and moved to New York in 1971 to work for Richardson. Approximately one year later, he became president of Richardson and held that position until 1983. (Fuller Dep., Ex. JJJ JJJ–1 at 17, 37).
Anthony Ishmael has worked for Richardson since 1976 and is currently Richardson's senior vice-president. (Ishmael, Tr. 1185, 1219). In or about October, 1983, Ishmael was transferred from his position of operations manager for Richardson's Chicago office to New York where he became the vice president of administration. (Ishmael, Tr. 1185). In May, 1984, he became the vice-president in charge of commodity operations. (Ishmael, Tr. 1185, 1195). At that time, his duties included overseeing the operations of the commodity exchange floor in New York for Richardson. (Ishmael, Tr. 1195).
William Lewis moved to New York and worked for Richardson in the middle of 1982 as executive vice-president. (Lewis Dep., Ex. JJJ JJJ–1 at 10–11). He took responsibility for production as the number two officer in Richardson. (Fuller 1991 Dep., Ex. JJJ JJJ–1 at 102–03). Lewis was the supervisor of both DaBiero, Richardson's branch manager, and Hirai, during their respective tenures as the managers of the 100 Church Street office. (DaBiero 1986 Dep., Ex. JJJ JJJ–1 at 28; Hirai 1988 Dep., Ex. JJJ JJJ–1 at 17). Fuller testified that Lewis would be the person most knowledgeable about the hiring of Wu along with DaBiero and DiGiacomo. (Fuller Dep., Ex. JJJ JJJ–2 at 194–96, 198). Lindh, Richardson's compliance officer, testified that Lewis had taken over the duties of president by the time the Laus' accounts were liquidated in July, 1984. (Lindh, Tr. 2966, 2977). As of December, 1991, Lewis worked for Richardson's parent in Canada.
Third Party defendant George T. Hirai was branch manager of the 100 Church Street office from March 1984 until March 1985. (Hirai 1988 Dep., Ex. JJJ JJJ–1 at 4, 6). His responsibilities included overseeing Wu's sales activity and compliance. Hirai and his superior, Lewis, reviewed, among other things, new customer account forms. (Hirai 1988 Dep., Ex. JJJ JJJ–1 at 16–17).
Henry C.V. Lindh worked for Richardson from 1980 to 1985 and was hired by Fuller. (Lindh, Tr. 2735, 2744). Prior to joining Richardson, Lindh had no experience of any nature relating to commodities. (Lindh, Tr. 2741, 2743). Six to eight months after he joined Richardson, Lindh became Richardson's chief financial officer and a senior vice-president. (Lindh, Tr. 2745). In 1983, Lindh became the compliance officer working at first with McNair. (Lindh, Tr. 2745–46). Previously, Lindh had no experience in compliance. (Lindh, Tr. 2748–53). Fuller was aware of Lindh's lack of experience in commodities compliance. (Lindh, Tr. 2776).
Robert DiSarro has been the sole floor manager for Richardson on the New York exchange floor since November 1982 and is currently a vice-president. (DiSarro, Tr. 2547–48). He has been a member of the Commodities Exchange, Inc. ("COMEX") and the Coffee, Sugar and Cocoa Exchanges since the summer of 1983 and is also a member of the New York Mercantile and Cotton and Orange Juice Exchanges. (DiSarro, Tr. 2548–49). He holds these memberships through Richardson. (DiSarro, Tr. 2549). In 1983–84, he was responsible for supervising all of the clerks employed by Richardson on the exchange floor, except the clerks working at Richardson's platinum booths. (DiSarro, Tr. 2551, 2553).
M. Commodity Exchange Center.
The Commodity Exchange Center ("CEC") acted as an agent for the COMEX and the other exchanges on the New York commodities exchange floor, providing security services, among other things. (Burke, Tr. 325). The CEC provided exchange members and their employees with badges and identification cards to ensure that only people with proper identification had access to the exchange floor. (Burke, Tr. 325). Telephone clerks in 1983–84 were registered with and by COMEX through the CEC. (DiSarro, Tr. 2559; Frazier, Tr. 1465).
Louis Burke was Richardson's expert witness at trial. He has a close working familiarity with COMEX operating rules and floor procedures, having served as house counsel for the COMEX and having been present on the COMEX floor well over a thousand times. (Burke, Tr. 229, 231–32, 309–10).
Linda Frazier was defendants' expert witness at trial.
P. Some of Wu's other customers who testified at trial for the Laus:
1. Herbert Zschiegner had studied economics. He also ran a precious metals refining business, specializing in precious gold, silver and platinum. (Zschiegner, Tr. 1509–10).
2. Brendan Patrick O'Sullivan had two undergraduate degrees, in mathematics and accounting, and worked as a business consultant for Ernst & Whinney. He opened a commodities trading account with Wu at Bache in 1981 or 1982. (O'Sullivan, Tr. 1389–90, 1426–27).
3. Show Jang Mou worked in a restaurant's kitchen, had attended classes in small business management and owned a small apartment building. Prior to trading at Richardson, he had no previous experience in commodities futures trading. (Mou, Tr. 1933–35, 1939–40, 1953).
4. Chien Pin Li worked in his father's restaurant. He spoke little English and his reading and writing of it was poor. He opened his commodities account in his name but with his family's backing. Prior to trading at Richardson, he had no previous experience in commodities futures trading. (Li, Tr. 1780–82).
The story of this case begins in 1981 when the Lau family initiated contact with Wu while she was employed as a broker at Bache. (Wu, Tr. 682; ML, Tr. 137–38). Mui–Hin Lau was interested in buying precious metals. (ML, Tr. 138).
Four accounts were opened for the Lau family at Bache in 1981. Three were in the names of the elder Laus and the fourth was a joint account in the names of Michael Lau and his wife, Wai Yau Chi. (DL, Tr. 10). Mui–Hin Lau's money was used to open the joint account. (ML, Tr. 2819–20).
When the accounts were opened, Wu explained the risks of commodity trading to each of her customers. (Wu, Tr. 687–88). Michael Lau testified that Wu told him and his father that they would be at risk of losing a lot of money in commodities trading. (ML, Tr. 147, 2818).
Mui–Hin Lau initiated the first few trades at Bache. (ML, Tr. 147). After that, trading decisions were made in discussions between Michael Lau and Wu. (ML, Tr. 148). From that point on, Michael Lau rarely contacted his father or aunt about trades and never sent trade confirmations to the elder Laus; indeed, he testified that he never told his father or aunt of the trades he authorized in their accounts. (ML, Tr. 148, 152–53).
Michael Lau sat with Wu at her desk at Bache all day every day for approximately fifteen months, learning about commodities trading. (ML, Tr. 149–50). During that time, Michael Lau listened to the Bache loudspeaker announcements, watched price changes on a monitor and discussed commodities with Wu, among other things. (ML, Tr. 150–51, 2822–23, 2840–41; Wu, Tr. 692). He spent at least half the time talking with Wu and following price changes on the monitor. (ML, Tr. 2837). Frequently, he and Wu discussed trading in the Lau Accounts. (ML, Tr. 2822–23; DL, Tr. 12). In those discussions, Michael Lau made an effort to learn how world events influenced market prices for commodities. (ML, Tr. 2842–43).
When Michael Lau was away, Wu called suggestions in to Daniel Lau about all four accounts and he concurred in trade recommendations. (DL, Tr. 13, 17, 2636–37). For instance, when Michael Lau was in Hong Kong from December 1981 to March 1982, Daniel Lau discussed with Wu trading the four Bache accounts. (ML, Tr. 2859–60; DL, Tr. 13). Michael Lau had no complaint about that. (ML, Tr. 2860–61). Daniel Lau agreed with most of Wu's recommendations. (DL, Tr. 17–18).
From time to time, margin calls were made on one or more of the Lau accounts. (ML, Tr. 159). In such instances, Michael Lau paid the margin payments out of his bank account. (ML, Tr. 159–60). Michael Lau claims he does not know where the money came from to back those checks. (ML, Tr. 159–61).
III. The Move to Richardson.
In December 1982, Richardson hired Wu as an account executive. (Wu, Tr. 920). It appears that one reason Richardson hired Wu was her client base. During DaBiero's interview of Wu, DaBiero asked Wu about her customers at Bache. (DaBiero 1986, Ex. JJJ JJJ–2 at 82). Wu represented that she believed she would be able to bring clients to Richardson. (DaBiero 1986, Ex. JJJ JJJ–2 at 82). Wu had shown Richardson an equity list from Bache and stated that she believed most of her customers would come with her to Richardson. (DiGiacomo, Tr. 630). In fact, Wu brought twelve accounts to Richardson. (Ex. KKKK–1 to –8, 33b, 33c, 33d, 33e). Wu, initially, was DiGiacomo's most profitable account executive. (DiGiacomo, Tr. 672).
At that time, Richardson was expanding its New York branch office for commodities trading. (McNair Dep., Ex. JJJ JJJ–3 at 133). Richardson first opened a retail office in New York in the early 1980's (Ishmael, Tr. 1219; Lindh, Tr. 2761, 2735). Lewis frequently discussed the opening and expansion of the 100 Church Street office with Fuller for a period of time in 1982. (Fuller 1991 Dep., Ex. JJJ JJJ–1 at 104–05). During DaBiero's tenure as manager of the 100 Church Street office, the number of account executives employed by Richardson grew from approximately eight to approximately twenty-two. (DaBiero 1986 Dep., Ex. JJJ JJJ–3 at 65). At the time the New York office was closed in November of 1984, only six account executives were employed. (Lindh, Tr. 2762; Ex. ZZZ).
B. Accounts openings at Richardson.
After the Lau brothers decided to move the Lau family accounts from Bache to Richardson, Wu assisted the Lau brothers in withdrawing the money and securities in the Bache accounts for the purpose of depositing them in new accounts at Richardson. (Ex. GG, GG–1, GG–2, GG–3; DL, Tr. 2638–39; ML, Tr. 2862).
Mui–Hin Lau, Ho Sih Fong and Kau–Ying Lau deny that they signed any documents to open an account at Richardson. (MHL, Tr. 1628–29; HSF, Tr. 1648; KYL, Tr. 1652; See Ex. 33c, 33b, 33e). They testified that they first learned that accounts were opened in their names at Richardson at a meeting on August 9, 1984 when Richardson employees informed them that they owed Richardson money. (MHL, Tr. 1629; HSF, Tr. 1649; KYL, Tr. 1652). The elder Laus immediately denied any liability to Richardson. (MHL, Tr. 1629–30; Lindh, Tr. 2969–70, 2974).
Ho Sih Fong testified that she did not give Daniel Lau the authority to place her name on account opening documents at Richardson (HSF, Tr. 1649–50); Mui–Hin Lau and Kau Ying Lau also testified that they did not give Michael Lau the authority to place their names on account opening documents at Richardson (MHL, Tr. 1629, 1631; KYL, Tr. 1652–1653). Wai Yau Chi never signed any documents to open an account at Richardson and no such documents were ever signed in her name. (ML, Tr. 2856; Ex. 33d).*fn1
Defendants ask the court to find that Wu knew that Michael Lau and Daniel Lau forged the names of the elder Laus on the account opening documents at Richardson. Defendants argue that Wu should have inferred the forgery based on the dates the forms were delivered and completed, the "practice" of the elder Laus to visit New York every summer—not winter, when the forms were completed—and their "practice" to visit Wu on such visits. However, the evidence for such and other inferences is lacking in the record and contradicted by Daniel Lau who testified that he hid the forgery from Wu. (DL, Tr. 2725–26). Thus, although defendants ask the court to find that Wu never contacted Mui–Hin Lau, Ho Sih Fong, Kau Ying Lau or Wai Yau Chi to confirm that they wished to close their accounts at Bache or to open new accounts at Richardson, ...