The opinion of the court was delivered by: SIRICA
This is an action in which plaintiff, John B. Horne, Jr., brought suit against his former brokerage firm, Francis I. duPont & Co. (duPont), and his former account representative at duPont, William D. Bergquist, alleging fraud and conversion by defendants in connection with their handling of his securities investment account at duPont during the period April through November 1970. The gist of the action is that Bergquist individually and duPont, through its agents and employees, committed fraud on Horne by overtrading in his account without regard for his interests as an investor and for the purpose of generating commissions. Horne also claims that duPont converted $20,000 worth of A. T. & T. 8 3/4 percent bonds rightly belonging to him by retaining them over his objections, then selling them and keeping the proceeds along with all earned interest.
On October 1, 1969, Horne opened an investment account with duPont. At the time, Horne already had an account with E. F. Hutton & Co., a competing brokerage firm, where he conducted the bulk of his trading activity, using Bergquist, then an account representative at Hutton, as his personal broker. In 1970, Bergquist left Hutton to join duPont as an account representative and, no doubt because he and Horne had a social as well as business relationship, Horne asked that his duPont account be placed in Bergquist's care.
Throughout this period, Horne was employed by the Pepsi-Cola Bottling Company of Washington, D.C. as an executive in charge of the company's health and pension plans. Horne was also a substantial shareholder of Pepsi-Cola. Before joining this company in 1962, Horne had worked from 1945 to 1961 as chief operating officer of his family's 5000-acre farm in Georgia. Before that, he had worked as a salesman, served in the armed services and was employed on the family's farm in an unspecified position. Horne held these positions after graduating from college with a degree in Economics.
In opening his account at duPont, Horne stated that his investment objective was "capital appreciation," meaning that he intended to acquire securities in companies having a favorable financial position and growth potential over the long term. Despite his stated objective, however, Horne traded on numerous occasions in highly speculative securities. Further, when Horne opened his account at duPont, he elected to trade on a "cash" rather than a "margin" basis. Yet substantial trading took place "on margin" if not with Horne's written consent then with his knowledge and acquiescence.
Between April 21, 1970, when Bergquist began handling Horne's duPont account, and November 24, 1970, the end of the period at issue, the average equity in the account was approximately $54,000. During this period, over 120 transactions were recorded in the account. Within a few days of each transaction, Horne received a confirmation slip, reflecting the change that had taken place in the account. Of the approximately 120 trades, a scant few are claimed to have been made without authorization, yet the great majority were either initiated by Horne or approved by him after Bergquist made a suggestion. These transactions amounted to about $2,900,000 in trading volume and accounted for nearly $21,000 in commissions earned by Bergquist. This sum represented 39.5 percent of Bergquist's earnings during the subject period.
Much of the trading in Horne's account was on the "chart and point" basis. This is a mathematical system for projecting what stocks are likely to do and for determining, based on what actually occurs, when and in what quantity to trade in the stocks. Although no written agreement was entered into by Horne and duPont for using the "chart and point" system, Horne orally approved of it and acquiesced in its being used. Furthermore, as an experienced investor, Horne was intimately familiar with the operation of "chart and point" trading in his account.
In April 1970, Horne delivered A. T. & T. stock to duPont, directing that the shares be sold and the proceeds used to purchase $20,000 worth of A. T. & T. 8 3/4 percent bonds. Horne also directed that once the bonds were purchased, they should be delivered to him personally. On June 8, 1970, duPont purchased the bonds and placed them in Horne's cash account but, despite repeated requests by Horne that the bonds be turned over to him, duPont retained possession of them. On September 18, 1970, duPont transferred the bonds from Horne's cash account into a newly-created bond margin account. There, the bonds were commingled with other securities held by duPont and later they were sold, with duPont retaining the proceeds. To date, Horne has never received any of the interest paid on the bonds from the time they were purchased until the time duPont sold them. This occurred at an unspecified date in 1973.
Horne claims (A) that Bergquist and duPont committed fraud by overtrading or "churning" his account in violation of SEC rule 10(b)5 and (B) that duPont converted his A.T. & T. bonds by retaining them over his repeated objections and by later selling them and retaining the proceeds and paid interest. Based on a studied review of the evidence brought out at trial, the Court concludes that Horne has failed to prove fraud but succeeded in proving conversion. This success, however, is at best only tentative since all or part of the recovery for conversion is subject to duPont's counterclaim. And because trial on the counterclaim has yet to take place, entry of judgment in favor of Horne must be deferred. Fed. R. Civ. P. 54(b).
A. The extensive trading that took place in Horne's account does not amount to churning in ...