Unpublished Disposition, 852 F.2d 1290 (9th Cir. 1986)

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US Court of Appeals for the Ninth Circuit - 852 F.2d 1290 (9th Cir. 1986)

Nos. 87-3705, 87-3733 and 87-3807.

United States Court of Appeals, Ninth Circuit.

Before TANG and CANBY, Circuit Judges and TAKASUGI*  District Judge.


Plaintiffs sued their former stockbrokers, defendants Wedbush, Noble, Cook, Inc. (WNC), alleging that the firm used their trading accounts to acquire large blocks of certain steel stocks in violation of federal and state securities laws, RICO, and Washington's Consumer Protection Act. A jury returned a verdict in favor of plaintiffs.1  The district court granted defendants' motion for judgment notwithstanding the verdict (JNOV) on the securities claims and reduced the damages awarded to plaintiffs.2  The district court also dismissed the plaintiffs' RICO and consequential damages claims. We reverse in part and affirm in part.

The district court granted defendants' motion for JNOV with respect to the securities claims because the jury applied a rescissional rather than an out-of-pocket measure of damages. As the district court correctly instructed the jury, however, either an out-of-pocket or a rescissional measure of damages may be applied to federal securities fraud claims. See Burgess v. Premier Corp., 727 F.2d 826, 837 (9th Cir. 1984); Blackie v. Barrack, 524 F.2d 891, 909 (9th Cir. 1975), cert. denied, 429 U.S. 816 (1976). The decision to apply a particular measure of damages turns on the nature of the fraud. The out-of-pocket measure is generally applied in cases where a defrauded plaintiff has purchased or sold securities at an artificial price. See Volk v. D.A. Davidson & Co., 816 F.2d 1406, 1413 (9th Cir. 1987). In contrast, the rescissional measure is most commonly applied in securities fraud cases where a plaintiff has been fraudulently induced to purchase a security. See Green v. Occidental Petroleum Corp., 541 F.2d 1335, 1342 (9th Cir. 1976) (Sneed, J., concurring). In applying a rescissional measure of damages in this case, the jury determined that WNC fraudulently induced plaintiffs to purchase certain steel stocks in furtherance of the firm's steel stock concentration strategy.

JNOV is appropriate when the jury verdict is not supported by substantial evidence. William Inglis & Sons Baking Co. v. ITT Continental Baking Co., Inc., 668 F.2d 1014, 1026 (9th Cir. 1981), cert. denied, 459 U.S. 825 (1982). The district court made no such finding in this case. Nor does our review of the record demonstrate that the evidence, when viewed in the light most favorable to the plaintiffs, permitted only one reasonable conclusion with respect to the verdict. Locricchio v. Legal Services Corp., 833 F.2d 1352, 1356 (9th Cir. 1987). Because there was sufficient evidence before the jury on the federal securities claim, and the instructions of law on the measure of damages were correct, we reverse the partial JNOV and reinstate the jury's verdict on the securities claims. See Transgo Inc. v. Ajac Transmission Parts Corp., 768 F.2d 1001, 1014 (9th Cir. 1985), cert. denied, 474 U.S. 1059 (1986).

The district court also dismissed plaintiffs' RICO claims on the ground that their proof of a single plan or strategy was insufficient to establish a pattern of racketeering under section 1962(a). While a pattern of racketeering activity consists of at least two predicate acts, it is not necessary to show more than one fraudulent scheme or criminal episode to establish a pattern of racketeering. See Cal. Arch. Bldg. Prod., Inc. v. Franciscan Ceramics, Inc., 818 F.2d 1466, 1469 (9th Cir. 1987), cert. denied, 108 S. Ct. 698 (1988); Sun Sav. and Loan Ass'n v. Dierdorff, 825 F.2d 187, 193 (9th Cir. 1987) (RICO's pattern requirement is satisfied if a defendant commits two or more predicate acts that are not isolated events, are separate in time, and in furtherance of a single criminal scheme). Plaintiffs presented evidence proved that WNC used their accounts to enhance the firm's investment banking opportunities and to increase margin interest profits. Moreover, defendants regularly approved margin purchases of steel stocks on behalf of plaintiffs' accounts in furtherance of their strategy. The district court erred in dismissing plaintiffs' section 1962(a) claim for failure to establish a pattern of racketeering.

The district court also erred in ruling that plaintiffs failed to present sufficient evidence of an enterprise separate from a culpable person. " [W]here a corporation engages in racketeering activities and is the direct or indirect beneficiary of the pattern of racketeering, it can be both the "person" and the "enterprise" under section 1962(a)." Schreiber Distrib. Co. v. Serv-Well Furniture Co., Inc., 806 F.2d 1393, 1398 (9th Cir. 1986). In addition, the district court erroneously concluded that plaintiffs were required to prove that defendants acted with a specific intent to deceive or defraud to establish a section 1962(a) claim. To the contrary, plaintiffs needed only to prove that the defendants (1) engaged in the predicate acts of racketeering; (2) received income from the pattern of racketeering; and (3) used that income in their operations to establish a claim under 18 U.S.C. § 1962(a). Id. Plaintiffs presented sufficient evidence of each of the three essential elements to permit the RICO claim to go to the jury. The district court's order dismissing plaintiffs' RICO claim is reversed and the matter is remanded for further appropriate proceedings.

Plaintiffs further contend that the district court incorrectly ruled that plaintiffs were not entitled to consequential damages both for the amount of margin interest paid to WNC, and for the profits they would have reaped had their accounts been properly managed. We disagree. Consequential damages may not be awarded where plaintiffs failed to mitigate their damages. Foster v. Financial Technology, Inc., 517 F.2d 1068, 1072 (9th Cir. 1975). Whether or not the plaintiffs were fraudulently induced to make certain steel stock purchases, the record indicates that they knowingly and repeatedly engaged in margin purchase transactions, even after sustaining losses. Plaintiffs approved such a risky strategy in order to maximize their investment return. It would be inappropriate to permit plaintiffs to recover for the profits they would have enjoyed had they maintained essentially risk free investments.

The partial JNOV is REVERSED. The jury verdict is reinstated with post-judgment interest to run from the date of the verdict, December 22, 1986. The order dismissing the section 1962(a) claim is REVERSED and that claim is REMANDED for further proceedings. The district court's denial of consequential damages is AFFIRMED. Plaintiffs will be entitled to their regular costs in the district court upon entry of a new judgment. Plaintiffs are also entitled to their costs in this court on this appeal.


The Honorable Robert M. Takasugi, United States District Judge for the Central District of California, sitting by designation


This disposition is not appropriate for publication and may not be cited to or by the courts of this circuit except as provided by Ninth Cir.R. 36-3


The jury awarded damages in the following amounts: Hermann and Mary Lou Sommer, $68,578; Whittaker and Shirley Hemion, $140,436; Thomas and Ann Barwick, $233,652; Ray and Frances Buswell, $63,578; Donald Yakesh, $85,415; Barton Porter, $95


The order granting JNOV eliminated the jury awards to plaintiffs Hemion, Barwick, and Porter. The other awards were reduced as follows: Hermann and Mary Lou Sommer, $30,581; Ray and Frances Buswell, $30,131; Donald Yakesh, $7,409