California Court of Appeal Aug 13, 2015 No. E058163Unpublished
Filed 8/13/15 Peters v. Smith CA4/2
NOT TO BE PUBLISHED IN OFFICIAL REPORTS California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FOURTH APPELLATE DISTRICT
DIVISION TWO
MARTHA JO PETERS,
Plaintiff and Appellant, E058163
v. (Super.Ct.No. RIC10022491)
KIRK SMITH, OPINION
Defendant and Respondent.
APPEAL from the Superior Court of Riverside County. Craig J. Riemer, Judge.
Affirmed.
Martha Jo Peters, in pro. per., for Plaintiff and Appellant.
Lubrani & Brown, Michael D. Lubrani, Leanna M. Hiraoka, and Dana C.
Grinestaff for Defendant and Respondent.
I. INTRODUCTION
Plaintiff and appellant Martha Jo Peters is a retired school teacher. In 2005, she
opened a self-directed brokerage account with Scottrade, Inc. (Scottrade). She was
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allowed to buy stocks in this account on margin, i.e., with money borrowed from
Scottrade. She also had an IRA account with Scottrade. During her first year of trading
stocks, Peters enjoyed success, and her accounts increased substantially in value. Over
the next two years, however, Peters suffered large losses. In an attempt to recoup her
losses and meet margin calls, she borrowed against her house and used funds withdrawn
from her IRA. Eventually, she lost everything.
In 2009, Peters hired defendant and respondent, attorney Kirk Smith, to represent
her in litigation against Scottrade, which she believed bore some responsibility for her
losses. Smith filed an arbitration claim on Peters’s behalf and, one year later, reached a
settlement with Scottrade for $12,000. Although Peters was unhappy with the amount,
she agreed to the settlement.
In 2010, Peters sued Smith for legal malpractice. Two years later, Smith moved
for summary judgment, which the trial court granted. Peters appealed.
Based on our independent review of the record and for the reasons set forth below,
we affirm the judgment.
II. FACTUAL BACKGROUND
A. Peters’s Relationship With Scottrade
Scottrade was at all relevant times a member of the National Association of
Securities Dealers (NASD) or its successor, the Financial Industry Regulatory Authority
(FINRA). In June 2005, Peters opened a brokerage account with Scottrade. In her
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account application, Peters acknowledged that she had received and read Scottrade’s
brokerage account agreement, which included the following provisions:
“6. No Advice and No Recommendations. You acknowledge that we do not and
will not give investment, legal or tax advice or make securities recommendations. You
agree that you are a self-directed investor and all orders entered are unsolicited and based
on your own investment decisions or the investment decisions of your duly authorized
representative. You agree that neither Scottrade nor any of its employees may be your
duly authorized representative and that you will neither solicit nor rely upon Scottrade or
any of its employees for any such advice. You understand that you are solely responsible
for . . . the suitability of any trade(s), investment strategies and risks associated with each
trade, and will not hold Scottrade or any of its employees liable for those investment
decisions. You further understand that we do not and will not review the appropriateness
or suitability for you of any transactions implemented or investment strategies employed
in your Account. You hereby agree to hold Scottrade and its officers, directors,
employees, agents and affiliates harmless from any liability, financial or otherwise, or
expense (including attorneys’ and disbursements), as incurred, as a result of any losses or
damages you may suffer with respect to any such decision, instruction, transactions, or
strategies employed in your Account by you or your duly authorized representative, or as
a result of any breach by you of any of the covenants, representations, acknowledgments
or warrants therein. [¶] . . . [¶]
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“50. No Recommendation of Day Trading. By providing the means to place
trades electronically, we do not promote, recommend or endorse what is commonly
referred to as day trading – the practice of purchasing and selling the same security
within one day’s trading. Day trading involves unique risks as described in NASD Rule
2351 and as set forth in the ‘Disclosure of Day Trading Risks’ provided in our message
center. You agree to read this disclosure and to educate yourself on the risks of day
trading prior to engaging in this activity through our facilities.”
According to the agreement, controversies between the parties are subject to
binding arbitration.
One month after opening her account, Peters and Scottrade entered into a margin
agreement that allowed her to borrow money from Scottrade to purchase securities. This
agreement included the following: “Margin Loans. We may in our sole and absolute
discretion, make loans to you for the purpose of purchasing, carrying, or trading in
securities, options or other property (‘Margin Loans’)[.] Margin Loans will be made in a
Margin Account. You agree that you are solely responsible for determining whether
margin is appropriate for you in light of your financial resources, objectives, and other
relevant circumstances. You understand and agree that Scottrade will not make this
determination on your behalf.”
At some point, Peters opened a separate IRA account with Scottrade.
Peters bought and sold stocks through her Scottrade accounts from June 2005
through May 2008. In her first year of trading, the value of her accounts increased by
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$80,000 to $100,000 and, at one point, had a combined value of more than $750,000.
Thereafter, her accounts began to lose value.
In January 2007, Peters sent an e-mail to the Securities and Exchange Commission
(SEC). In the e-mail, Peters expressed concern about her financial losses, complained of
technical problems with Scottrade’s Web site, and said she suspected that her account
was being hacked because “every stock [she] bought” lost value.
In a response to the SEC regarding Peters’s complaints, a Scottrade compliance
examiner stated that Scottrade had investigated Peters’s claims and found no evidence of
unauthorized access. The SEC took no action against Scottrade with respect to Peters’s
complaint.
Peters continued to trade stocks through her Scottrade account throughout 2007.
On four occasions in September, October, and December 2007, Scottrade sent letters to
Peters informing her that she had been designated a “pattern day trader” as defined in
former NASD rule 2520.1 The letters further informed Peters that she was required to
maintain minimum equity requirements of $25,000, and that she needed to deposit
additional equity into her account by a specified date. Peters continued to use her
Scottrade account after receiving these letters.
1 Former NASD rule 2520 defined day trading as, generally, “the purchasing and selling or the selling and purchasing of the same security on the same day in a margin account . . . .” (NASD rule 2520(f)(8)(B)(i).) A “pattern day trader” is defined generally as “any customer who executes four or more day trades within five business days.” (NASD rule 2520(f)(8)(B)(ii).)
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On February 24, 2008, Peters submitted a complaint concerning Scottrade with the
Internet Crime Complaint Center (IC3). In the complaint, Peters alleged that, “for some
unexplained reason, when the market was still strong, [she] began to experience
consistent large losses, for a period of about six months.” She stated that she believed
“that someone was either hacking [her] account or manipulating the trades and trade
records” causing her losses. She further stated: “I feel that Scottrade owes me at least a
minimal degree of good faith / duty that has been violated by their silent knowledge but
inaction during my ongoing losses. I believe they did not act in good faith to me as a
client, despite the fact that I was placing my own trades.” The IC3 forwarded the
complaint to the California Department of Corporations, which took no action with
respect to the complaint.
Peters continued trading stocks in her Scottrade account until April 2008. At that
time, her account balance was approximately $8,000.
On April 9, 2008, Peters submitted a second complaint to the SEC. In addition to
expressing her suspicion that her account had been hacked, Peters alleged that “Scottrade
knew about my losses that were growing worse and worse, but neither said nor did
anything to prevent further losses. I realize that I was doing the trading . . . but it seems
that Scottrade has at least some minimal responsibility to warn or to remove margin
trading privileges when a client is losing such an extraordinary amount.” The SEC
forwarded the complaint to Scottrade and requested a response.
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On April 29, 2008, Scottrade served a response to Peters’s SEC complaint, which
stated: “As a self-directed investor, Ms. Peters was responsible for making her own
investment decisions. Scottrade does not monitor customer accounts for losses. Also,
Scottrade does not suggest that customers remove margin trading from their accounts
based on losses incurred nor can Scottrade agree to share in losses with customers.”
Scottrade further stated that it found nothing to suggest that any third parties were
misusing her accounts.
B. Smith’s Representation of Peters
In September 2008, Peters contacted Smith about representing her in litigation
against Scottrade. Smith believed that Peters did not have a strong case against Scottrade
and did not want to take her case. However, he eventually agreed to represent her. Smith
told Peters that she might be able to settle with Scottrade for $20,000.
On October 19, 2008, Peters sent Smith an e-mail. She explained that her
Scottrade accounts were once valued at approximately $754,000. After October 14,
2007, she “began to rack up devastating losses and . . . went into panic mode.” She
continued trading as her “only hope to recover the losses.” She withdrew funds from her
retirement account and obtained additional funds by refinancing her house, but “those
funds were soon lost as well.” She said she suspected “some sort of hacking or fraud,”
and complained that Scottrade never said anything to her “about removing [her] margin
trading abilities nor about the risks of the rather poor strategies [she] was using.” She
further told Smith: “I feel a strong belief that you will be able to plead my case and get a
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decent recovery. Ten percent of about $800,000 would be just $80,000. My view is that
if I could recover just 20% of what I lost I could using wiser growth strategies rebuild
and face a much more secure old age. . . . There is no doubt in my mind at all that you
will succeed in getting me some level of recovery and actually I believe probably more
than the $20,000 cost of litigation amount you mentioned. Nevertheless that would be
very much appreciated if that is to be the outcome.”
Peters and Smith signed a retainer agreement that provided for a contingency fee
of 40 percent of all sums Peters recovered. The agreement included the following
provision: “8. Negotiation and Settlement. The Firm is authorized to negotiate on
Client’s behalf regarding this matter but may not enter into settlement without Client’s
approval, which may be given orally. The firm may rely upon the oral representation of
Client to settle Client’s case, and Client agrees to be bound by such representation and to
execute such documents as necessary to memorialize the terms of the settlement. In the
event that Client breaches Client’s agreement to settle Client’s case, Client agrees to
immediately pay to the Firm all contingent fees that would be due pursuant to the
negotiated settlement, and to immediately pay all expenses of the case incurred by the
Firm, and to release the Firm from all further obligation to represent Client under this
Agreement. Client agrees that it shall not contact any other party to this matter nor
negotiate, obtain, or attempt to obtain, any settlement without the Firm’s consent.
(CLIENT AGREES TO ACCEPT ANY/ALL SETTLEMENT OFFERS.)” Following
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this provision, Peters interlineated the following: “Attorney has client trust that he will
make every effort to secure best recovery possible.”
On November 13, 2008, Smith filed a statement of claim on Peters’s behalf with
FINRA. Smith asserted claims under a variety of theories, including breach of contract
and warranties, violation of California securities laws and the California Consumer Legal
Remedies Act, intentional and negligent misrepresentations, and breach of fiduciary duty.
Smith summarized Peters’s claims as follows: “This is a case about an unsophisticated
investor and retired widow who was permitted and encouraged by the Respondents to
day-trade her account into oblivion. The amount of activity permitted by the
Respondents is shocking. For instance, in April of 2007 the account balance was only
about $25,000, yet the Respondents permitted more than $3.5 million in purchases –
earning large amounts of commissions and fees for Respondents. Through it all, the
Respondents wholly failed in their regulatory and supervisory responsibilities. Ms.
Peters even mortgaged her account and liquidated her IRA to fuel the trading accounts
margin requirements. Ms. Peters, having lost everything, is now homeless and destitute,
and unable, at age 62, to find employment in her field as a teacher. As a result of the acts
and omissions of the Respondent, Claimant sustained losses which approach $500,000,
exclusive of interest, costs and attorneys’ fees.” Smith requested damages in an amount
between $100,000 and $500,000, plus “[s]tatutory damages,” and punitive damages.
Peters told Smith she thought the pleading was “worded so beautifully.”
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In February 2009, Scottrade responded to the arbitration claim by serving a motion
for a more definite statement or, in the alternative, its answer and affirmative defenses.
Scottrade asserted that Peters was, in essence, “attempting to shift responsibility for her
own trading decisions onto Scottrade, a discount brokerage that offers absolutely no
investment advice to its customers.” It further stated that any claim by Peters that
Scottrade engaged in “churning” is deficient because Peters had a self-directed account
and a churning claim required Peters to show that trading in her account was controlled
by Scottrade.2
The papers supporting Smith’s motion for summary judgment include numerous e-
mails between Smith and Peters from July 2009 through December 2009. The primary
subject of the correspondence is settlement of Peters’s claims against Scottrade. For our
purposes, the e-mails can be fairly summarized as an effort by Smith to keep Peters’s
expectations regarding the settlement value of her case to $20,000 or less, and Peters’s
effort to encourage Smith to obtain a settlement in an amount significantly higher than
that. In early December 2009, Smith informed Peters that it “[l]ooks like $10k is the
number,” but said he would “push for a little more,” and would also waive his own fees.
When Peters asked Smith to, “at the very least double that with the same reduced fee
offer?,” Smith said, “I may be able to get 12k. That’s it. Final. (period.)” E-mails sent
2 Other than the FINRA claim and Scottrade’s response, our record does not include any papers filed or served in the arbitration proceeding; nor does it indicate what, if any, further activity took place in the proceeding.
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in mid-December reflect a deteriorating attorney-client relationship, with each side
expressing frustration with the other.
Eventually, Peters executed a settlement agreement with Scottrade that provided
her with $12,000, and included her general release and waiver of Civil Code section 1542
in favor of Scottrade. In December 2009 or January 2010, Peters received $12,000 from
Scottrade.
C. The Legal Malpractice Lawsuit and Motion for Summary Judgment
In November 2010, Peters commenced the action below by filing a complaint
against Smith for legal malpractice. In the complaint, Peters alleges that she lost over
$750,000, including retirement funds, as a result of conduct by Scottrade; Smith agreed to
represent her in an action against Scottrade; Smith prepared a pleading in which he
sought to recover from Scottrade between $100,000 and $500,000, including punitive
damages; Smith told Peters she would be fortunate to recover $20,000 and falsely
asserted that Peters agreed to accept a settlement for that amount; Smith “made no effort
to ask . . . for an amount that would have allowed [Peters] to recover”; and Smith
eventually accepted a settlement of $12,000 without consulting with Peters. She further
alleges that Smith “seemed to be acting more on Scottrade’s behalf than on [her] behalf,
and to be pursuing his own interests . . . .”
In November 2012, Smith filed a motion for summary judgment. Smith asserted
that he was entitled to summary judgment on alternative grounds: (1) he did not violate
any standard of care owed to Peters, (2) Peters was not injured by any act or omission on
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the part of Smith, and (3) Peters could not demonstrate causation or damages because she
would not have been successful in the underlying case against Scottrade. The motion
was supported by declarations from Smith and Steve Buchwalter, among other evidence.
Smith, in his declaration, stated that after he filed the FINRA claim he learned
additional facts that “further substantiated [his] initial opinion that Ms. Peters did not
have a strong case and that if she arbitrated her case she would likely lose . . . .” First, he
received Peters’s brokerage account statement, which included the provision that
Scottrade did not provide customers with advice on trading and would not review
customer’s accounts to assess the suitability of trades. Second, he received copies of the
complaints Peters made to the SEC, in which she admitted making all of the trades in her
account. Third, Scottrade had learned that Peters maintained an Internet blog in which
she referred to herself as a “Stock Market Margin Day Trader.” This blog, he believed,
could be used to show that Peters was more sophisticated than the sympathetic portrayal
he had fostered of Peters “as a widow, with little knowledge or experience in trading on
the stock market, who got in over her head and lost everything as a result of her trading
with Scottrade.”
Smith further stated that Peters never provided him with any evidence to prove
that her Scottrade account had been hacked. He explained to Peters that he would not be
asserting her hacking claim to the arbitrators because “it was too farfetched.”
Scottrade initially offered $10,000 to settle Peters’s claims. Smith said he was
able to increase the amount to $12,000, and was informed by Scottrade’s attorneys that
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this was their final offer. Smith told Peters he would waive his 40 percent contingency
fee, but not his expenses, thereby putting her in the same position as if the case had
settled for $20,000. Smith subsequently agreed to waive his costs as well.
Buchwalter is an attorney and was previously a licensed stockbroker and
commodity trading advisor. He has testified before a United States Senate subcommittee
regarding stockbroker practices with respect to the subcommittee’s investigation of
securities day trading. He has conducted several presentations on securities law at
regional and national conferences, and sits on the amicus committee at the Public
Investors Arbitration Bar Association.
Buchwalter reviewed Peters’s Scottrade account statements and other documents
pertinent to her claims against Scottrade and Smith, including her discovery responses
and the e-mails Smith and Peters exchanged. He stated that Peters “traded very heavily”
throughout 2005 and 2006, including conducting $42 million in transactions in December
2005, and $88 million in transactions in January 2006. By March 2006, Peters was day
trading,3 sometimes making hundreds of trades in a single day. By the end of 2008,
Peters had bought and sold approximately $180 million in securities, resulting in a net
loss of approximately $261,000. She continued trading heavily in 2007. When she
stopped trading in April 2008, her account had a balance of $80.4
3 “Day trading,” Buchwalter stated, “is when a particular stock is bought and sold within the same calendar day.”
4 Peters disputes the $80 figure, stating that she had $8,000 in her account when she stopped trading, then withdrew all but $80 on Smith’s advice.
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Buchwalter opined that in representing Peters, Smith never deviated from the
applicable standard of care, and that the $12,000 settlement reached with Scottrade was
reasonable. The settlement amount was reasonable, he explained, because Peters “would
not have been successful if she had arbitrated her case against Scottrade because she was
a self-directed investor and Scottrade informed [her] from the outset that Scottrade would
not make any recommendations regarding how [she] handled her account or her trading
strategy. Furthermore, there was never any evidence to support her claim that her
account had been hacked or accessed by a third party.” There was, Buchwalter believed,
“a 99% chance she would have lost, and received nothing. Furthermore, Scottrade had a
better chance of being awarded [its] costs and attorneys fees from Ms. Peters than Ms.
Peters had of being awarded a recovery from Scottrade.”
Buchwalter stated that Scottrade did not have a duty to determine the suitability of
Peters’s transactions because it did not give advice or make recommendations regarding
stocks; “Scottrade merely provided its clients with access to the stock market . . . .”
Buchwalter added: “Since Scottrade did not owe Ms. Peters any duties, it would have
been next to impossible to demonstrate to an arbitrator why Scottrade should be held
responsible for Ms. Peters’ financial losses.” Indeed, he points out that if Scottrade
prevented Peters from trading, Peters might have sued Scottrade for breach of their
agreement by denying her access to her account and the opportunity to recoup her losses.
Peters filed opposition papers, including her declaration. Peters states: Smith did
not send to her a refund from FINRA as promised; Smith’s claim that the FINRA
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arbitrators would have awarded her little or nothing is “ridiculous” because FINRA has
awarded substantial sums to retirees like herself who have lost their life savings in risky
accounts; Smith “made no efforts at any time during the representation to attain for [her]
any damages approximating the amounts stated in the pleading copy he sent her”; she
told Smith repeatedly that “she needed a larger recovery appropriate to and in proportion
to the loss she suffered”; in November and December 2009, Smith cut off communication
with her and “persisted in coercing [her] to accept a meager settlement she did not want”;
and she agreed to the settlement “in despair and under duress.”
Smith filed reply papers, including written objections to Peters’s declaration and
many of her responses to the separate statement.
Following a hearing, the court granted the motion for summary judgment. In the
written order granting the motion, the court stated: “Given the facts of the underlying
case, it was likely that Ms. Peters would not have recovered anything if she had arbitrated
her claims against Scottrade, therefore it was reasonable and within the standard of care
for . . . Smith to recommend that Ms. Peters settle her case for $12,000. Furthermore,
[Peters] cannot prove the element of causation because she cannot demonstrate that she
would have been successful in the underlying case against Scottrade because she was a
self-directed trader, Scottrade owed her no duty to prevent her from trading, and there
was no evidence that any of Ms. Peters’ financial losses stemmed from unauthorized third
party access to her account.” “Lastly, Ms. Peters cannot prove that she was damaged by
any action taken by [Smith] because she cannot demonstrate that she would have
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received a higher settlement or that she would have been awarded more th[a]n $12,000 if
her case had been arbitrated.”
III. DISCUSSION
A. Requests for Judicial Notice
Both sides have requested that we take judicial notice of certain matters. Smith
requests that we take judicial notice of (1) former NASD rule 2310; (2) NASD Notice to
Members 01-23 (Mar. 19, 2001) (see 2001 WL 278614); (3) New York Stock Exchange
(NYSE) rule 405 (see 1995 WL 17845826); and (4) FINRA rule 2090, effective July 9,
2012. Smith has provided copies of each matter. We grant the request as to items (1),
(2), and (3). (See Evid. Code, §§ 452, subd. (h), 459, subd. (a); Parr v. Superior Court
(1983) 139 Cal.App.3d 440, 446 [taking judicial notice of NASD and NYSE rules].) We
decline to take judicial notice of item (4) because it was not in effect during the period of
time Peters had her Scottrade account and Smith does not explain why it is relevant. (See
Arce v. Kaiser Foundation Health Plan, Inc. (2010) 181 Cal.App.4th 471, 482 [court may
decline to take judicial notice of matters not relevant to issues on appeal].)
In a response to Smith’s request for judicial notice, Peters requested judicial notice
of six matters. Each appears to consist of someone’s excerpts or summaries of articles or
other matter obtained from Internet Web sites. Copies of the articles are not provided.
The matter does not appear to come within any of the categories of judicially noticeable
matter set forth in Evidence Code sections 451 or 452. We therefore decline to take
judicial notice of such matters.
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In a separate document, Peters requested that we take judicial notice of four other
matters: (1) FINRA Notice to Members 07-43 (Sept. 2007); (2) documents from the
Internal Revenue Service and the California Franchise Tax Board to Peters indicating that
she owes overdue taxes; (3) an investment profile questionnaire from PFS Investment,
Inc.; and (4) a United States Department of the Treasury and Internal Revenue Service
identity theft affidavit signed by Peters. Smith objects to Peters’s request as to items (2),
(3), and (4).
We will grant Peters’s request for judicial notice of item (1). (See Evid. Code,
§§ 452, subd. (h), 459, subd. (a); Parr v. Superior Court, supra, 139 Cal.App.3d at p.
446.) We decline to take judicial notice of the remaining items because they do not come
within any category of judicially noticeable matter under Evidence Code sections 451 or
452.
B. Summary Judgment Standards
Summary judgment is properly granted when all of the papers submitted on the
motion show there are no triable issues of material fact and the moving party is entitled to
judgment as a matter of law. (Code Civ. Proc., § 437c, subd. (c).) A defendant is entitled
to summary judgment if it establishes a complete defense to each of the plaintiff’s causes
of action or shows that one or more elements of each cause of action cannot be
To establish causation and damages in a “settle and sue” legal malpractice action
such as this, the plaintiff must establish that she would have obtained a more favorable
judgment or settlement in the underlying action in the absence of the attorney’s
negligence. (Viner v. Sweet (2003) 30 Cal.4th 1232, 1241; Filbin v. Fitzgerald, supra,
211 Cal.App.4th at p. 166.) It is not enough for the plaintiff to claim “that it was possible
to obtain a better settlement or a better result at trial. The mere probability that a certain
event would have happened will not furnish the foundation for malpractice damages.
‘“Damages to be subject to a proper award must be such as follows the act complained of
as a legal certainty.”’ [Citations.]” (Barnard v. Langer (2003) 109 Cal.App.4th 1453,
1461-1462.) “In other words, the plaintiff must show that ‘[he] would certainly have
received more money . . . in settlement or at trial.’ [Citations.]” (Namikas, supra, 225
Cal.App.4th at p. 1582.)
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As one court recently explained, “‘[t]he requirement that a plaintiff need prove
damages to “a legal certainty” is difficult to meet in any case. It is particularly so in
“settle and sue” cases . . . ,’ which are inherently speculative. [Citation.] ‘[T]he amount
of a compromise is often “an educated guess of the amount that can be recovered at trial
and what the opponent was willing to pay or accept. Even skillful and experienced
negotiators do not know whether they received the maximum settlement or paid out the
minimum acceptable. Thus, the goal of a lawyer is to achieve a ‘reasonable’ settlement, a
concept that involves a wide spectrum of considerations and broad discretion. . . .”’”
(Namikas, supra, 225 Cal.App.4th at pp. 1582-1583.)
Proving a more favorable outcome in legal malpractice cases requires a “trial-
within-a-trial” of the underlying case. (See, e.g., Namikas, supra, 225 Cal.App.4th at p.
1582; Gutierrez v. Girardi (2011) 194 Cal.App.4th 925, 934; Lombardo v. Huysentruyt
(2001) 91 Cal.App.4th 656, 665.) In determining the outcome of the trial-within-a-trial,
the standard is “an objective one. The trier of facts determines what should have been,
not what the result would have been, or could have been, or might have been, had the
matter been before a particular judge or jury.” (Mattco Forge, Inc. v. Arthur Young &
Co. (1997) 52 Cal.App.4th 820, 840.)
Although causation is ordinarily a question of fact, the issue “may be decided as a
question of law if the undisputed facts permit only one reasonable conclusion.”
(Slovensky v. Friedman (2006) 142 Cal.App.4th 1518, 1528.)
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D. Analysis
In this case, the “trial-within-a-trial” is Peters’s FINRA arbitration proceeding
against Scottrade. Although a variety of legal theories were asserted against Scottrade,
an issue central to each of her claims is the nature and scope of Scottrade’s duty to Peters.
In this appeal, Peters contends, in essence, that online brokers such as Scottrade have a
duty to “monitor their ‘unsophisticated clients’ online trades to ensure that each trade is
suitable for the investor.” For the source of this duty, Peters relies on so-called
“suitability” and “know-your-customer” rules applicable to members of securities
exchanges—in particular, NASD former rule 2310(a)5 and NYSE rule 405.
NASD former rule 2310(a) provided: “In recommending to a customer the
purchase, sale or exchange of any security, a member shall have reasonable grounds for
believing that the recommendation is suitable for such customer upon the basis of the
facts, if any, disclosed by such customer as to his other security holdings and as to his
financial situation and needs.” To ensure that a member has relevant information to
determine whether a recommendation is suitable, the “know-your-customer” rule requires
NYSE members to “[u]se due diligence to learn the essential facts” regarding their
customers, orders, and accounts.6 (NYSE rule 405; see Gedicks, Suitability Claims and
5 NASD rule 2310 was superseded by FINRA rule 2111, effective July 9, 2012. (FINRA Notice 11-25 (May 18, 2011) 2011 WL 2006978.)
6 NYSE rule 405 also requires members to “[s]upervise diligently all accounts handled by registered representatives of the organization” and “[s]pecifically approve the opening of an account prior to or promptly after the completion of any transaction for the account of or with a customer . . . .” The person who approves of opening the account [footnote continued on next page]
21
Purchases of Unrecommended Securities: An Agency Theory of Broker-Dealer Liability
(2005) 37 Ariz. State Law Journal 535, 541 (Gedicks); Jason N. Slezak (N.Y.S.E.
Hearing Bd., Dec. 14, 2007, Dec. 07-156, 07-157, 07-158) 2007 WL 4749096, at p. [12]
(Slezak).)
Initially, we note that courts have generally held that the NASD and NYSE
suitability and know-your-customer rules do not create a private right of action in favor
of investors. (See, e.g., Jablon v. Dean Witter & Co. (9th Cir. 1980) 614 F.2d 677, 681
[NASD suitability rule]; Carrott v. Shearson Hayden Stone, Inc. (9th Cir. 1984) 724 F.2d
821, 823 [NYSE rule 405]; Thompson v. Smith Barney, Harris Upham & Co. (11th Cir.
rule]; see also Asplund v. Selected Investments in Financial Equities, Inc. (2000) 86
Cal.App.4th 26, 40, fn. 8 [violation of NASD and stock exchange reporting and
disclosure requirements do not support a private cause of action].) Allegations of
unsuitability by customers against their brokers are thus generally addressed in
nonjudicial arbitrations. (See 7 Bromberg & Lowenfels on Securities Fraud (2d ed.
2014) § 13:196 [“the principal forum where private actions for damages based upon
violations of the suitability doctrine have been initiated and resolved has shifted from the
courts to the arbitration tribunals of the NASD, NYSE, and American Arbitration
[footnote continued from previous page] “shall, prior to giving his approval, be personally informed as to the essential facts relative to the customer and to the nature of the proposed account . . . .”
22
Association”].) Consequently, there are few published judicial opinions interpreting or
applying these rules. Indeed, neither Peters nor Smith refer us to any.
According to the terms of the NASD suitability rule, when an NASD member
recommends a transaction to a customer, the member must have reasonable grounds for
believing the recommendation is suitable for the customer. (NASD rule 2310(a).) The
rule thus applies when the member makes a “recommendation” to the customer. That the
rule applies only when the member makes a recommendation is clear from available
District Business Conduct Committee for District No. 9 v. Euripides (National Bus.
Conduct Com., July 28, 1997) 1997 WL 1121335 [disciplinary ruling] (Euripides).7 The
two arbitration rulings provide no meaningful statements of fact, discussion of the law, or
the arbitrators’ reasons for their decisions. Significantly, the rulings do not indicate
whether the transactions that led to the investor’s losses were related to any
recommendation by the broker. The arbitration rulings, therefore, provide no guidance
for us.
The Rangen and Euripides disciplinary rulings do include factual statements and
legal reasoning, but do not support Peters’s position. In Rangen, several customers of
In her opening brief, Peters also refers to a “complaint with the New York Stock 7 Exchange” filed by Kathleen Kourie against Charles Schwab & Co., in which Kourie purportedly alleges that Charles Schwab & Co. violated suitability requirements. Peters does not provide a citation for this complaint, and we have been unable to locate any decision of any kind involving these parties.
25
Stephen Rangen, a registered representative with Shearson Lehman Brothers, Inc., made
numerous transactions based on Rangen’s specific recommendations. Although the
customers each sought “safe, income-producing investments, and did not wish to
speculate,” the transactions recommended by Rangen were “unsuitably risky.” (Rangen,
supra, 1997 WL 163991, at p. [3].) The New York Stock Exchange imposed certain
sanctions against Rangen. In affirming the NYSE’s decision, the SEC found that
“Rangen’s recommendations to these customers were unsuitable.” (Ibid.)
In Euripides, the appellant, Michael Euripides was a registered securities
representative. (Euripides, supra, 1997 WL 1121335, at p. [1].) He spoke with a
customer by telephone, then visited him at his home. At that meeting, the customer
agreed to redeem certificates of deposit in a retirement account and purchase certain
corporate bonds. Euripides later sold the bonds and purchased stock in another
corporation without the customer’s authorization. When the investments lost more than
three-quarters of their original value, the customer filed a complaint with the NASD.
Euripides was fined and suspended because he “lacked reasonable grounds to believe that
his recommendations . . . were suitable” and purchased stock without the customer’s
authorization. (Id. at p. [2].) In affirming the ruling, the NASD found that “Euripides
recommended that [the customer] purchase two speculative securities” that were
“unsuitable for an investor with [the customer’s] level of sophistication, income, savings,
and investment goals.” (Id. at p. [4].)
26
Initially, we observe that both Rangen and Euripides involved disciplinary actions
against the securities representatives, not claims for damages by the injured customers.
More importantly, in each case, the representatives made specific, unsuitable
recommendations to the customer. Indeed, it is clear from the decisions that the
determination of unsuitability was dependent upon the fact that the representative
recommended the improvident investments to the customer. Here, by contrast, there is no
evidence that any of the trades Peters made was based upon a recommendation by anyone
affiliated with Scottrade. The disciplinary rulings do not support Peters’s position.
Peters also argues that Scottrade’s approval of a margin account “was a tacit
recommendation which was unsuitable” and that Scottrade had an “ongoing duty to
ensure that margin trading was suitable for her.” The assertion is contrary to the explicit
statement in her margin agreement that she is “solely responsible for determining whether
margin is appropriate for” her. Moreover, the NASD has explained that “a transaction
will be considered to be recommended when the member or its associated person brings a
specific security to the attention of the customer . . . .” (NASD Not. to Members 96-60,
supra, 1996 NASD Lexis 76, at p. [4], italics added.) By approving a margin account,
Scottrade did not bring a “specific security” to Peters’s attention. Peters offers no
pertinent legal authority to support her “tacit recommendation” argument, and there is no
basis for us to conclude that a panel of FINRA arbitrators would have adopted it.
Peters points out that the “know-your-customer” rule, NYSE rule 405, requires
members to use due diligence to learn the “essential facts” about their customer
27
regardless of whether the member recommends particular transactions. She is correct.
(See Lowenfels & Bromberg, Suitability in Securities Transactions (1998-1999) 54 Bus.
Law. 1557, 1571.) The NYSE’s explanatory comments regarding this rule indicate that
the rule is concerned with such matters as (1) ascertaining whether a corporate customer
has the right under its charter and by-laws to engage in margin transactions; (2) ensuring
that a person entering orders on behalf of corporate customers has the authority to do so;
(3) for an agency account, identifying the principal and obtaining written evidence of the
agent’s authority; (4) obtaining counsel’s advice with respect to the documents necessary
for a trust account; and (5) ascertaining the customer’s country of citizenship.8 (NYSE
rule 405, Supp. Material [1995 WL 17845826].)
To the extent that Peters contends the know-your-customer rule implies or creates
a duty on the part of the broker to monitor a self-directed customer’s trading for
suitability, we reject the contention. To be sure, when a broker makes a recommendation
to a customer and, consequently, has a duty to determine the suitability of the
recommendation, it would need to ascertain the “essential facts” necessary to determine
suitability, such as the customer’s age, wealth, investments, financial situation,
investment experience and objectives, liquidity needs, and risk tolerance. (See Slezak,
supra, 2007 WL 4749096, at p. [12] [“the Know-Your-Customer Rule ensures that a
broker has the necessary information to conduct an appropriate suitability analysis for
8 The only one of these items that pertains to Peters is her citizenry. In her account application, Scottrade asked Peters to state whether she is a United States citizen on her brokerage account, and Peters indicated she was.
28
each transaction”].) When, however, the member is a mere order taker that makes no
recommendations to the customer, such information would not appear to be essential;
what is essential in that situation may be no more than what is necessary to take the
customer’s order and fill it. Thus, although the know-your-customer rule applies to every
customer, account, and trade regardless of whether the broker makes recommendations, it
does not follow that, as Peters suggests, every member must learn the kind of information
necessary to evaluate the suitability of each transaction and to then determine suitability.
Again, Peters has referred us to no authority that suggests such an interpretation.9
Regarding Peters’s allegations that her account had been hacked, Peters describes
“suspicious freeze-ups of [Scottrade’s] web site” and observed that when she would
begin typing a stock symbol into the order blank, another stock’s symbol would
automatically fill the space. She also indicated that Scottrade brokers told her that her
account had been accessed from “plural IP addresses,” even though she used only one
computer. Peters also pointed to her “consistent losses,” which, while not “conclusive
proof of hacking,” defied “the laws of probability.”
In support of the motion for summary judgment, Smith produced Scottrade’s
January 2007 and April 2008 responses to Peters’s complaints to the SEC regarding
9 In addition to serving the purpose of requiring broker-dealers to obtain information about their customers in order to evaluate a transaction’s suitability, the know-your-customer rule serves the additional purpose of “rooting out fraud or other criminal activity, such as money laundering or the financing of terrorism, by requiring broker-dealers to verify the identity of their customers.” (Slezak, supra, 2007 WL 4749096, at p. [12].) There is nothing about this purpose of the rule that supports Peters’s claims.
29
hacking. In the responses, Scottrade stated it had found no evidence of unauthorized
access or third party misuse of Peters’s accounts and that all of Peters’s trades are
traceable to her. Smith also proffered Buchwalter’s declaration in which he states that
evidence of Scottrade’s Web site freezing up or the use of an automatic fill feature
program is not indicative of hacking. Buchwalter also observed that hacking is generally
demonstrated by evidence of money being transferred from the client’s account to
another person’s account, yet Peters was not asserting any such activity. In light of her
hacking allegations and the evidence, Buchwalter opined that if Peters “had arbitrated her
case, she would have been held responsible for all of the trades made from her account
and therefore for all of the losses to her Scottrade account.”
In Peters’s opposing separate statement, Peters explained that her hacking
contentions are based upon her “unusual experiences [w]ith the Scottrade online trading
website,” and conceded: “I have no proof of the hacking, though it seems [v]ery likely
. . . .”
Based on the evidence submitted in favor of and in opposition to the motion for
summary judgment, we conclude that there is no triable issue of material fact as to
whether Peters would have been successful in proving her claim that her losses were
caused by someone hacking her Scottrade account.
In light of the nature of Peters’s account with Scottrade, the fact that Peters made
her own decisions regarding her account without any recommendations from Scottrade,
and the absence of any material evidence to support her hacking allegations, no
30
reasonable fact finder could conclude that Peters would have been successful if her
claims against Scottrade had proceeded to a hearing. Thus, in light of the lack of merit of
her claims against Scottrade, Peters cannot show that she would have received more
money from Scottrade, even if Smith breached any standard of care owed to her. (See
Namikas, supra, 225 Cal.App.4th at p. 1582.) She cannot, therefore, establish causation
of any damages, an essential element of her legal malpractice claim. Accordingly, the
trial court did not err in granting Smith’s motion for summary judgment.
IV. DISPOSITION
The judgment is affirmed. Smith is awarded his costs on appeal.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
KING J.
We concur:
RAMIREZ P. J.
MILLER J.
31
AI Brief
AI-generated · verify before citing
Holding. The court affirmed summary judgment in favor of the defendant attorney, holding that the plaintiff failed to establish the elements of causation and damages for legal malpractice because she could not demonstrate that she would have been successful in the underlying arbitration against her brokerage firm.
Issues
Whether the defendant attorney committed legal malpractice in his representation of the plaintiff in an arbitration claim against a brokerage firm.
Whether the plaintiff could establish the elements of causation and damages required to prevail on a legal malpractice claim.
Disposition. Affirmed.
Quotations verified verbatim against the opinion
“Given the facts of the underlying case, it was likely that Ms. Peters would not have recovered anything if she had arbitrated her claims against Scottrade, therefore it was reasonable and within the standard of care for . . . Smith to recommend”