Unpublished Disposition, 872 F.2d 427 (9th Cir. 1989)

Annotate this Case
U.S. Court of Appeals for the Ninth Circuit - 872 F.2d 427 (9th Cir. 1989)

Stanley Jerry HOFFMAN, Plaintiff-Appellant,v.A.G. BECKER, INC., Kennedy, Cabot & Co., Inc., Defendants-Appellees.

No. 88-5907.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Feb. 9, 1989.Decided March 16, 1989.

Before FLETCHER, PREGERSON, and LEAVY, Circuit Judges.


In 1981 appellant Stanley Hoffman opened a margin account with appellee Kennedy, Cabot & Co. ("KCC"), a discount brokerage firm which had a correspondent clearing agreement with appellee A.G. Becker, Inc. ("AGB"). In 1983 Hoffman purchased 7,000 shares of Coleco stock on margin. Without Hoffman's knowledge, KCC switched Hoffman's Coopervision stock from his cash account into his margin account to satisfy the Federal Reserve Board's Regulation T. At the time of the purchase a KCC broker assured Hoffman that he could write call options on a margined stock.

When the price of Coleco declined, Hoffman attempted to meet a margin maintenance call by writing call options on the margined stock. Hoffman was told for the first time that KCC did not allow its customers to write call options while a margin call is pending. Terry Dunn, head of KCC's margin department, then mistakenly informed Hoffman that if he sold his Coopervision stock, one hundred percent of the proceeds could be used to meet the margin call. As it turned out, Hoffman's Coopervision stock was also margined and would therefore have to be sold at a very unfavorable liquidation ratio if used to meet a margin call. Relying on Dunn's representations, Hoffman instructed KCC to sell his Coopervision shares and then left for a European vacation. Upon his return, he learned that AGB had liquidated all of his Coopervision stock and over half of his Coleco stock in order to meet the margin call. The price of Coleco continued to decline and Hoffman eventually sold the rest of his Coleco shares at a substantial loss.

Hoffman brought suit against KCC and AGB in federal district court, alleging violations of federal securities laws, state securities laws, and RICO as well as breach of contract and negligence. He now appeals the district court's dismissal of his RICO claim and its judgment against him on his federal securities law claims. We affirm.


Rule 10b-16 requires a broker to disclose the terms upon which credit is extended to a customer buying stock on margin at the time the customer opens an account. 17 C.F.R. Sec. 240.10b-5. Where a broker fails to disclose or misrepresents material credit information, a cause of action arises under Rule 10b-16 or under the broader securities anti-fraud regulation, Rule 10b-5. Robertson v. Dean Witter Reynolds, Inc., 749 F.2d 530, 539 (9th Cir. 1984) (private right of action under 10b-16); Arrington v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 651 F.2d 615, 619 (9th Cir. 1981) (fraud in connection with the method of purchasing securities may constitute a violation of Rule 10b-5). Under either rule, a plaintiff who alleges fraudulent misrepresentation or omission must prove (1) materiality; (2) scienter; and (3) reliance. See e.g., Kennedy v. Josephthal & Co., Inc., 814 F.2d 798, 804 (1st Cir. 1987).

"Questions of materiality, scienter, and reliance are mixed questions of law and fact, but ones involving assessments peculiarly within the province of the trier of fact. They are therefore reviewed under the 'clearly erroneous' standard." Arrington, 651 F.2d at 619 (citations omitted). "A finding is clearly erroneous only when, although there is evidence to support it, the reviewing court on the entire evidence is left with a definite and firm conviction that a mistake has been committed." Id.

A. KCC's Failure to Disclose its House Rule Prohibiting a Customer from Writing a Call Option when a Margin Maintenance Call is Pending

The district court found that KCC's failure to disclose its prohibition on call options during a pending margin call was not material, lacked scienter, and was not relied upon by Hoffman. Because we agree with the district court that Hoffman did not rely on KCC's allegedly fraudulent conduct, we need not reach the issues of materiality and scienter.

Reliance is presumed when the alleged fraudulent conduct consists of material omissions. Affiliated Ute Citizens v. United States, 406 U.S. 128, 153-54 (1972). However, the presumption is rebuttable. Kramas v. Security Gas & Oil, Inc., 672 F.2d 766, 771 n. 5 (9th Cir.), cert. denied, 459 U.S. 1035 (1982). The presumption may be rebutted by a showing that the victim of the fraud knew the truth or "would not have attached significance to the omitted facts, and therefore would have acted as he did if he had known the truth." Kiernan v. Homeland, Inc., 611 F.2d 785, 789 (9th Cir. 1980).

The district court found that KCC had rebutted the presumption of reliance because Hoffman's "strategy, attitude, and behavior, both before and after the events which form the basis of this lawsuit, provide strong evidence that plaintiff would have purchased the stock on margin even if KCC had disclosed its rule against writing call options when a margin maintenance call is pending." Thus, the district court rested its finding of no reliance on what it referred to as Hoffman's "bullishness." Because Hoffman does not point to any evidence in the record that would rebut the district court's finding, we are not convinced that a mistake has been made.

B. KKC's Failure to Disclose the Multiplier Effect

Hoffman contends that KCC and AGB violated Rules 10b-5 and 10b-16 by not disclosing the liquidation ratio involved in a forced sale of margined stock to meet a margin call (i.e., the "multiplier effect"). The district court found, however, that KCC "adequately disclosed the liquidation ratio" because the Disclosure Statement that Hoffman received from AGB indicated that a margin call would go out if Hoffman's equity fell below thirty percent. The court deemed "self-evident" the fact that Hoffman would receive less than one-third of the proceeds of the sale of stock in which he had an equity interest of less than thirty percent.1  We agree. Using basic mathematical reasoning, a person can easily deduce the multiplier effect from KCC's thirty percent equity rule. Accordingly, we find that KCC had no obligation to specifically explain to Hoffman the multiplier effect.

C. AGB's Failure to Disclose its House Rules Regarding Notice to Meet a Margin Call

Hoffman contends that AGB violated Rules 10b-5 and 10b-16 by not disclosing its policy of allowing customers five days to meet a maintenance margin call when their equity drops below thirty percent and two days if their equity drops below twenty-five percent. The district court found materiality and scienter but not reliance in regard to AGB's nondisclosure. Again, the district court based its finding of lack of reliance on Hoffman's "bullishness." In addition, the district court noted that AGB's nondisclosure of the two-day and five-day policies could not have affected Hoffman's decision to buy Coleco stock because previously AGB had disclosed to Hoffman its right to liquidate securities "without notice" in order to satisfy margin calls. The court reasoned that a policy giving customers more time to meet margin calls would certainly not have discouraged Hoffman from buying the stock. Such a policy would in all likelihood have made Hoffman "more secure about his investment." This reasoning is sound. The district court did not clearly err in ruling in favor of AGB.

Hoffman contends that KCC breached a fiduciary duty and committed negligence when its margin account broker, Terry Dunn, told Hoffman that he had one hundred percent equity in his Coopervision stock and could therefore sell the stock and use the proceeds on a "dollar for dollar" basis to pay off the October 1983 margin call.

The district court found that even assuming that Dunn's misinforming of Hoffman constituted a breach of duty, Hoffman failed to prove that the breach was the proximate cause of any loss Hoffman suffered. The court found, moreover, that even if the breach did cause Hoffman to forego a course of conduct that might have prevented or lessened Hoffman's loss, Hoffman was contributorily negligent in relying on Dunn's representations.

Negligence is a mixed question of law and fact reviewed for clear error " [b]ecause ... the trial court's findings of fact effectively determine [the appellate court's] legal conclusions." United States v. McConney, 728 F.2d 1195, 1204 (9th Cir.), cert. denied, 469 U.S. 824 (1984).

On appeal, Hoffman contends that the district court erred in finding that due to Hoffman's bullishness, he would not have acted differently even if provided with accurate information. The district court also based its proximate cause finding on the fact that Hoffman made no effort to close his account and thereby cut his losses even after he learned that Dunn had misinformed him. Hoffman does not provide any evidence beyond his own testimony to support his contention that the district court's proximate cause finding was clearly erroneous. Accordingly, we affirm the district court's ruling against Hoffman on his negligence claim.

Hoffman contends that oral representations by two of KCC's employees, acting as agents of AGB, effected modifications of the Margin Agreement between Hoffman and AGB and that AGB breached the contract as modified. He alleges that the first modification occurred when, upon opening his margin account, John Barnaba of KCC told him that he could write call options on margined stock. As a result, contends Hoffman, AGB should have allowed him to write call options during the October 1983 margin call. Hoffman alleges that the second modification occurred when Terry Dunn told him that he would be able to sell his Coopervision stock on a one-to-one basis. According to Hoffman, this representation required that AGB permit Hoffman to sell Coopervision on a one-to-one basis.

The district court rejected both of Hoffman's breach of contract claims. The interpretation of a contract is a mixed question of law and fact. If the district court focuses on extrinsic evidence of what the parties said and did, however, then the court's conclusions will not be reversed unless clearly erroneous. Miller v. Safeco Title Ins. Co., 758 F.2d 364, 367 (9th Cir. 1985).

The district court found that Barnaba's statement of AGB's general policy allowing customers to write call options on margined stock would not have led a reasonable person to understand that AGB allowed customers to write call options during a pending margin call. The court also found that Hoffman's oral modification claim based on Barnaba's representations failed for lack of consideration. Finally, the court's third ground for ruling against Hoffman was that KCC was not an agent for AGB.

Hoffman contends on appeal that Barnaba's representation of AGB's general policy would lead a reasonable person to believe that AGB placed no restrictions on writing call options. He argues that Reg. T. calls are similar to margin maintenance calls and AGB allows its customers to write call options to meet Reg. T calls (as Hoffman had done in the past). But Hoffman's argument is not persuasive. He fails to show clear error by the district court.

The district court found that Dunn's misrepresentation of Hoffman's equity in the Coopervision stock did not effect a modification of Hoffman's contract with AGB because there was no bargained for exchange. Alternatively, the court rejected a promissory estoppel theory because any reliance by Hoffman upon Dunn's representations was unreasonable. Finally, the court found that even if Hoffman had shown consideration or detrimental reliance, he failed to establish that Dunn acted as an agent of AGB.

Hoffman argues on appeal that the consideration for the alleged modification effected by Dunn's representations was Hoffman's decision not to consider selling his stock. But this argument is unpersuasive given the district court's assessment of Hoffman as "bullish" and the fact that Hoffman did not sell out even after he had returned from his vacation and had learned of Dunn's misrepresentations. Hoffman also contends that he reasonably relied on Dunn's statement and that such reliance is a legal substitute for consideration. He does not, however, point to anything in the record to support this contention. Accordingly, there is no basis for concluding that the district court erred in ruling against Hoffman on his contract claims.

Hoffman contends that KCC and AGB violated the Racketeering Influenced and Corrupt Organizations Act, 18 U.S.C. § 1962(c). As the predicate acts for his RICO claim, Hoffman alleges that KCC and AGB sent him mailgrams containing margin calls in violation of the federal mail fraud statute, 18 U.S.C. § 1341.

The district court granted KCC and AGB's motion for partial summary judgment on Hoffman's RICO claim prior to the start of trial. "This court reviews de novo a grant of summary judgment and will affirm if the pleadings and supporting materials show the absence of a genuine issue of material fact and that the moving party is entitled to judgment as a matter of law." Medallion Television Ent., Inc. v. SelecTV of California, Inc., 833 F.2d 1360, 1362 (9th Cir. 1987) (citation omitted).

The basis for the district court's grant of summary judgment is not clear from the record. Nevertheless, Hoffman's RICO claim cannot be sustained because there is insufficient evidence of fraudulent behavior by the appellees. In other words, Hoffman has not shown any "racketeering activity" by KCC or AGB. As noted above, the record does not support Hoffman's allegations that he was defrauded of his investment by KCC or AGB. For this reason, we must affirm the district court's dismissal of Hoffman's RICO claim. See Smith v. Block, 784 F.2d 993, 996 n. 4 (9th Cir. 1986) (the court of appeals may affirm a district court's decision on any ground finding support in the record).

Finally, because we affirm the district court's ruling against Hoffman, Hoffman's request for attorney's fees is denied.



This disposition is not appropriate for publication and may not be cited to or by the courts of this circuit except as provided by 9th Cir.R. 36-3


The district court also found that even if Hoffman could prove materiality and scienter in regard to this failure to disclose, Hoffman "was so bullish about his investment in Coleco stock that he would have purchased the stock even if KCC expressly disclosed its liquidation ratio."