Richard I. CLARK, as Executor of the Estate of Bernice C. Grupe, Plaintiff-Appellee, v. JOHN LAMULA INVESTORS, INC. and John J. Lamula, Defendants-Appellants
No. 32, Docket 77-7098
United States Court of Appeals, Second Circuit
Decided Aug. 24, 1978
583 F.2d 594
Before GURFEIN and VAN GRAAFEILAND, Circuit Judges, and COFFRIN, District Judge.
Argued Sept. 15, 1977.
In effect, appellants ask that a federal court superintend, for an indefinite period, a Brookhaven program fоr low income housing. Since such programs generally require the cooperation of the federal government and of the private sector, the court would be required to assess on an ongoing basis whether the Town‘s degree of participation was adequate. So formidable a task and so diffuse a supervisory function is scarcely within the accepted reach of a court of equity.
The judgment of the District Court is affirmed.
Robert M. Blum, New York City (Silberfield, Danziger & Bangser, New York City, for plaintiff-appellee.
This is an appeal from a judgment order entered by Judge Goettel, Southern District of New York, on November 29, 1976 in favor of plaintiff Bernice C. Grupe,1 against defendants-appellants John Lamula Investors, Inc. (JLI) and John J. Lamula. The judgment resulted from a special verdict in the form of special written findings of the jury made pursuant to
I
When the pertinent transactions occurred in 1974, appellee was a retired school teacher in her late fifties working on the staff of the New York State Senate Majority Leader. She had received a lump-sum divorce settlement from her second husband of $138,000, approximately $100,000 of which she desired to invest for a yield of $1,000 per month. Appellant JLI was a corporation engaged in the business of buying and selling securities. Appellant Lamula was president and director of JLI and the owner of a majority of its stock. Both appellants were registered with the National Association of Securities Deаlers, Inc. (NASD).
In March, 1974 appellee was introduced to Lamula by a mutual friend to obtain help in formulating an investment plan. Appellee and Lamula met several times over the course of the next three months, and in late May, 1974, JLI purchased convertible debentures for $94,360 which it sold to appellee for $105,250. Thus appellants made a profit of $10,890, or greater than 11 percent, on the transaction with Mrs. Grupe.
According to the jury‘s answers to interrogatories, which are set out in the margin,2
Had he informed her of these matters, she would not have purchased the securities. Although Lamula made no untrue statements about the debentures on which Mrs. Grupe relied, and did not conceal frоm her that he was selling them to her for his own account and as a market maker, he did purchase the securities with the specific purpose of selling them to her and charged her an excessive price for them. The jury found that Lamula acted with intent to deceive when he failed to inform her of other investment opportunities and charged her an excessive price for the securities.
Subsequent to the purchase, appellee made inquires concerning her investments
Appellee subsequently brought this action against appellants for violations of
II
Appellants make several arguments on appeal, their first being that a violation of the NASD Rules does not constitute аn actionable wrong under federal securities laws. Because we find that the jury‘s findings support a judgment of violation of
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national seсurities exchange,
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,
in connection with the purchase or sale of any security.
The case was presented to the jury on two theories of liability: (1) knowingly recommending unsuitable securities and (2) taking excessive mark-ups on securities purchased for and sold to a client. Because we hold the specific findings of the jury support a judgment for plaintiff on the
In order to recover on a private cause of action under Rule 10b-5, a plaintiff must show two things: first, that the rule has been violated, and second, that it was violated with scienter, that is, with intent to deceive, manipulate or defraud. Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976).7
It is clear from the jury‘s answers to the interrogatories, that appellants violated Rule 10b-5. The jury specifically found that the debentures were unsuited to appellee‘s needs, that appellant Lamula knew or reasonably believed they were unsuitable, but that he recommended them to her anyway. In addition, the jury found that Lamula failed to inform her (1) hоw the leading rating services rated the debentures, (2) that she could not expect to acquire $12,000 annual income from her investments unless she bought speculative securities involving great financial risk, and (3) the extent of the risks involved in purchasing the securities. The jury found further that had appellant Lamula informed her of these matters, including other investment opportunities, she would not have purchased the securities. Thus, there can be no doubt but that appellant Lamula engaged in an act, practice or course of business which operated as a fraud or deceit upon Mrs. Grupe and omitted to state facts material to an informed purchase by her.
Further, the jury‘s answers to interrogatories, taken in light of the trial judge‘s charge, support a finding that appellants violated the scienter rule. In addition to finding that appellant intended to deceive Mrs. Grupe when he failed to inform her of other investment opportunities, the jury also found by clear and convincing evidence that appellants purchased the securities with the specific purpose of selling them to Mrs. Grupe, charged her an excessive price for them, and did so with intent to deceive her.
Although perhaps the judge‘s charge might have been clearer because it is open to the interpretation that either a sale of unsuitable securities or a violation of an NASD Rule is a per se violation of Rule 10b-5, there is no question that looking at the charge as a whole, the jury was adequately instructed on the requirement of scienter and that appellants, who made no objection to the charge before the jury retired, are not now entitled to a reversal under the plain error doctrine.
The judge‘s charge on unsuitable securities and NASD Rules was as follows:
In dealing with suitability you must determine whether Mr. Lamula understood or reasonably should have understood Mrs. Grupe‘s investment objectives, and then you must determine whether the debentures which Mr. Lamula sold to her were suitable in light of such objectives, as the defendants сlaim, or whether they were, as plaintiff claims, vastly unsuited to her needs.
Article II, Section 2, of the National Association of Securities Dealers Fair Practice Rules prohibits the sale to a customer by a broker or dealer of unsuitable securities. The rule which I believe was read to you several times in court is as follows:
“In recommending to a customer the purchase, sale or exchange of any security, a member shall have reasonable grounds for believing that the recommen-
dation is suitable for such customer upon the basis of the facts, if any, disclosed by such sustomer [sic] as to his other security holdings and as to his financial situation and needs.” Mr. Lamula, therеfore, was required to have reasonable grounds for believing that the securities sold were suitable for Mrs. Grupe.
Tr. 1138-39. The trial judge also charged the jury:
The rules of fair practice of the National Association of Securities Dealers may be considered by you as an expression of the security industry itself concerning what constitutes proper conduct, and the violation of those rules under certain circumstances amounts to fraud under the federal securities laws and under the New York State law as well.
Tr. 1139-40.
It would have been better for the judge to have outlined at that point in his charge what was meant by “certain circumstances.” The charge also was susceptible at that point to an interpretation by the jury that defendant could be liable if, because of mere negligence or simple ignorance, he did not have reasonable grounds to believe the securities were suitable for Mrs. Grupe. Nevertheless, we find that the judge did emphasize the requirement of scienter sufficiently to negate any fleeting belief by the jury that a violation of the NASD Rules or the mere sale of unsuitable securities is a per se violation of Rule 10b-5. For example, shortly after giving the above portions of the charge, the judge told the jury:
In the case before you Mrs. Grupe has charged that Mr. Lamula omitted to inform her about . . . the current market price of the securities, the fact that his firm was a market maker, the nature of his own market position in the debentures, the ratings of the debentures, and other facts relating to the suitability of these as investments for her.
As to any of these, if you have found that Mr. Lamula deliberately with intent to defraud, omitted to provide such information to Mrs. Grupe in order to mislead her, then as to these matters reliance need not be shown in determining whether defendants committed fraud.
I have previously told you that one of the elements necessary to be proven by the plaintiff in showing that fraud was practiced upon her is that Mr. Lamula intended to deceive her. Therefore, if you found either that Mr. Lamula told Mrs. Grupe things which were not true or that he omitted to tell her one or more facts material to her investment decision, then you must consider whether such conduct was engaged in by Mr. Lamula with the intent of deceiving Mrs. Grupe.
Tr. 1142-43. The court then went on to discuss in detail the factors the jury could consider in determining whether appellants acted with intent to deceive appellee. In addition, in discussing the interrogatories, the court explained that if the jury found that Mr. Lamula did not tell appellee any of the matters enumerated in interrogatory 6, then they would have to determine “whether this was done with an intent to deceive and, if so, which ones.” Tr. 1148.
After the jury had returned the interrogatories, the judge reviewed thеir answers with counsel. Tr. 1194-98. During the course of that discussion, the judge stated that “[t]hey [the jury] found against [Lamula] on suitability, clearly and completely. They also found against him on omissions. He is stuck on the statutory-fraud verdict as well as the company.” Tr. 1198. Defense counsel did not disagree with this explanation of the jury‘s findings. Id.
Given the repetition of the scienter requirement throughout the judge‘s charge together with the jury‘s explicit answer that appellant Lamula intended to deceive appellee when he recommended that she purchase unsuitable securities, and bolstered with their finding that he acted with intent to deceive when he charged her an excessive price for seсurities, we find that the evidence supports a holding both that appellants violated Rule 10b-5, and that the required scienter was present. Consequently appellee may recover damages in a private action under Rule 10b-5 and
Appellants also claim that the jury‘s findings are based on clearly prejudicial, erroneously admitted evidence. However, appellants point to nothing to support this bald assertion, and this court need not search the record to discover whethеr such error indeed exists.
Appellants also claim that the jury‘s findings are against the weight of the evidence. We need not discuss this contention, however, because Judge Goettel specifically found that the findings of the jury were supported by the evidence in all respects and that there were no grounds for setting aside the jury‘s verdict, Endorsement Order Denying Post-Trial Motions, filed Jan. 20, 1977, and appellants have not indicated in what way his finding is erroneous.
Appellants further contend that the district court committed reversible error in using the term “junk bonds” before the jury, in making other “gratuitous and erroneous” remarks, in delivering a “misleading and inadequate” charge to the jury, and in prohibiting evidence оn the subsequent history of the debentures purchased by appellee. There is no merit to any of those contentions.
“Junk bonds” is used in the securities industry to refer to low-grade bonds generally with a BAA rating or lower. When the term was first used at trial, defense counsel objected only on the grounds that counsel‘s use of the term in opening argument was “summation” and therefore improper. Judge Goettel overruled the objection because plaintiff‘s counsel was merely stating what he intended to prove during the course of the trial. Even when the term was used later in the trial, defense counsel did not object on the grounds that it was prejudicial; in fact, he used the term himself during examination and in his summation. E. g., Tr. 351, 1078-79. In addition, defendant had ample notice and opportunity to object to the use of the term before the jury because in her complaint the plaintiff referred to the debentures she purchased as “junk bonds.” Under these circumstances, we cannot find that the use of the term “junk bonds,” even if undesirable, was plain error affecting substantial rights requiring notice under
When read in context, none of the other remarks made by Judge Goettel were in any way prejudicial. Furthermore, defense counsel did not object to the judge‘s remarks or questions, or to the remarks of plaintiff‘s counsel during summation at the time those remarks were made.
Defendants assert, but do not discuss, thе inadequacy of the instructions given to the jury. Because defense counsel failed to object to the instructions before the jury retired, the instructions are not open to review.
Appellants also allege the trial judge erroneously foreclosed defendants from tracing the subsequent history of the debentures. First, we agree with Judge Goettel that exclusion of subsequent history under the facts of this case was proper, and consequently no substantial right of a party would have been affected by its exclusion.
In conclusion, we hold that no evidence was improperly before the jury, there is no reason to question the jury‘s findings in the interrogatories, and those findings adequately support a judgment that appellants are liable to appellee for statutory fraud under Rule 10b-5 and
III
Appellants claim that the district court erred in its method of calculating damages. The lower court‘s method of calculation was essentially a finding of law, and, as such, is subject to appellate review. In re Joseph Kanner Hat Co., 482 F.2d 937, 939 (2d Cir. 1973); 5A Moore‘s Federal Practice ¶ 52.03[2], at 2663 (2d ed. 1977).
Two theories of damages for defrauded buyers have been used in this circuit: out-of-pocket losses and the difference between purchase price and subsequent resale price. Gordon v. Burr, 366 F. Supp. 156, 170 n.13 (S.D.N.Y. 1973). Essentially the latter method was used in this case, and we hold that it was proper.
In Chasins v. Smith, Barney & Co., 438 F.2d 1167 (2d Cir. 1970), this court allowed the plaintiff to recover the difference between his purchase price and the amount he received when he subsequently sold the securities. The fact that the plaintiff in Chasins sold before learning of the Rule 10b-5 violation does not distinguish that case from the onе before us because in neither one was plaintiff‘s knowledge of the 10b-5 violation controlling. The court in Chasins held that the measure of damages for the defendant‘s violation was justified where “the evil is not the price at which [the plaintiff] bought but the fact of being induced to buy” without the disclosure required by the Securities and Exchange Act. Id. at 1173; cf. Reeder v. Mastercraft Elecs. Corp., 363 F. Supp. 574, 582 (S.D.N.Y. 1973) (damages for artificially inflated market in securities are the difference between purchase price and sales price for plaintiffs who have sold, and are the purchase price for plaintiffs who have not sold).
Appellants make two alternative arguments for a different calculation of damages. First, they argue appellee‘s damages should have been decreased to reflect the effects of a bear market on the price at which she sold the securities. Alternatively, they argue appellee‘s damages should have been only the benefit received by appellants. Neither case cited by appellants in support of those arguments is persuasive. In Cutner v. Fried, 373 F. Supp. 4 (S.D.N.Y. 1974), the question of damages was not before the court. That case involved wrongful suspension of trading in stock and the court only mentioned damages in the course of its discussion of class certification. In Rolf v. Blyth, Eastman Dillon & Co., 424 F. Supp. 1021 (S.D.N.Y. 1977), the district court ordered defendants to pay plaintiff only the commissions earned and interest paid; the court refused to award the plaintiff net trading losses and held that it would be “highly inappropriate” for plaintiff to recover all losses because some arose “as a result of poor investment decisions and as a result of a bear stock market.” Id. at 1045. Aside from the fact that Rolf is distinguishable from the case before us,8 it
The appellate opinion in Rolf gives us some general thoughts on the appropriate calculation of damages. There the court held the plaintiff was entitled to his net economic loss, which was calculated by determining gross economic loss and subtracting an appropriate offset dictated by the particular facts of the case. As the Rolf court pointed out, “gross economic loss” is often referred to as rescission damages. Id. at 49 n.21. Applying the general principles of Rolf to the case before us, appellee‘s total rescission damages are the difference between the price she paid and the price she received for the debentures, see Gordon v. Burr, 366 F. Supp. 156 (S.D.N.Y. 1973), plus such accrued interest as she may have been required to pay at the time of purchase, less such interest as she may have received during the period she held the securities.
Although the facts of Rolf required the gross economic loss to be offset by an amount which reflected the effects of a bear market, no such offset is appropriate here. The damages in Rolf were for fraudulent mismanagement and there was evidence in the case that even properly managed securities would have declined in value because of market conditions. In this case, damages were awarded because appellants fraudulently induced appellee to buy unsuitable securities. Appellants will not be permitted to avoid making appellee whole merely because upon discovery of the fraud she happened to sell the sеcurities on a declining market. Similarly, they cannot be heard to complain when making appellee whole requires them to pay out more than they received from their dealings with her. Because Judge Goettel used the measure of damages set out above, the award was entirely proper.9
For the foregoing reasons we affirm the plaintiff‘s verdict and award of damages entered below.
VAN GRAAFEILAND, Judge, concurring:
Although I concur in Judge Coffrin‘s well-reasoned opinion, I must express my concern over the attempts being made, as in this case, to fit the square peg of the “suitability” rules into the round hole of section 10(b),
Article III, section 2 of the NASD Rules of Fair Practice and Commission rule 15b10-3,
I concur in the holding herein only because the district court charged the requirement of scienter and appellant took no exception to the court‘s instructions concerning the NASD suitability rule.