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Richardson Greenshields Securities Inc. v. Lau
Citations: 809 F. Supp. 249; 1992 U.S. Dist. LEXIS 19395; 1992 WL 381427Docket: Nos. 84 Civ. 6134 (CBM), 88 Civ. 2284 (CBM)
Court: District Court, S.D. New York; December 16, 1992; Federal District Court
A breach of contract suit was initiated by Richardson Greenshields Securities, Inc., a commodities brokerage, against four account holders who incurred deficit balances totaling approximately $167,000 during commodity trading from January 1983 to August 1984. Defendants, known as "the Laus," filed counterclaims focused on alleged fraudulent actions by their broker, Lavinia Wu, and Richardson itself. They claimed Wu fraudulently induced them to open accounts, gave her discretionary control over trades, and misled them regarding margin calls, while Richardson's supervisors allegedly facilitated this fraud by ignoring industry regulations. Defendants' counterclaims include fraud, civil RICO violations, breach of fiduciary duty, conversion, negligence, and constructive trust. After extensive pre-trial proceedings, the case was transferred to Judge Motley in March 1992 and was tried from March 31 to April 24, concluding with closing arguments on April 29, 1992. A directory of the involved parties is provided, detailing the Lau family members and their backgrounds, including Daniel Lau's professional qualifications and past felony conviction, as well as Richardson Greenshields' status as a commodities brokerage and its relationship with its Canadian parent company. Lavinia Wu began her career at Prudential Bache in December 1979, quickly becoming a licensed commodities broker before joining Richardson as an account executive in December 1982, where her broker's licenses were transferred. She held multiple roles, including salesperson and broker. Angelo DaBiero was hired in late 1982 as the branch manager of Richardson’s New York office, responsible for ensuring compliance with rules and policies, and was later transferred to Florida in 1983. Richard DiGiacomo served as vice-president in charge of commodity operations at Richardson from 1979 to 1985, supervising Wu during his interim role as branch manager at the New York office. Alexander McNair worked for Richardson from 1971 to 1983, holding positions such as senior vice-president and compliance officer, with duties that included oversight of branch operations and reviewing trading activities. Kenneth Fuller, who joined Richardson in 1971, served as president until 1983. Anthony Ishmael, employed since 1976, advanced to senior vice-president, overseeing commodity operations after transferring from Chicago to New York in 1983. William Lewis, who joined Richardson in 1982 as executive vice-president, supervised DaBiero and Hirai and was knowledgeable about Wu's hiring. George T. Hirai was branch manager of the New York office from March 1984 to March 1985. Responsibilities included overseeing Wu’s sales activities and compliance. Hirai and his superior, Lewis, reviewed new customer account forms. K. Henry C.V. Lindh worked at Richardson from 1980-1985, hired by Fuller despite lacking commodities experience. Six to eight months after being hired, Lindh became CFO and later, in 1983, the compliance officer, initially working with McNair, although he had no prior compliance experience. Fuller was aware of Lindh's inexperience. L. Robert DiSarro has served as the sole floor manager for Richardson on the New York exchange since November 1982 and is currently a vice-president. He is a member of multiple exchanges and supervised all clerks at Richardson’s exchange floor, except those in platinum booths, during 1983-84. The Commodity Exchange Center (CEC) acted as an agent for COMEX, providing security services and issuing identification to ensure only authorized personnel accessed the exchange floor. Louis Burke, Richardson’s expert witness, is familiar with COMEX rules and procedures, while Linda Frazier served as the defendants’ expert witness. Several customers of Wu testified at trial, including Herbert Zschiegner, who ran a precious metals refining business; Brendan Patrick O’Sullivan, a business consultant with degrees in mathematics and accounting; Show Jang Mou, who had no commodities experience prior to trading; and Chien Pin Li, who, with limited English proficiency, opened a commodities account with family backing. The case began in 1981 when the Lau family contacted Wu at Bache, leading to the opening of four accounts in the names of family members, with Mui-Hin Lau's funds used for a joint account. Wu informed her customers about the risks associated with commodity trading when their accounts were opened. Michael Lau corroborated that Wu warned him and his father about the potential for substantial financial losses. Mui-Hin Lau initiated the initial trades at Bache, but thereafter, trading decisions were made primarily through discussions between Michael Lau and Wu. Michael Lau rarely communicated with his father or aunt regarding trades and did not send them trade confirmations, claiming he never informed them about the trades he authorized. Michael Lau spent approximately fifteen months at Bache, where he engaged closely with Wu, absorbing knowledge about commodities trading, monitoring price changes, and discussing trading strategies. During his absences, Wu communicated trade suggestions to Daniel Lau, who generally agreed with her recommendations. Margin calls occurred on the Lau accounts, and Michael Lau covered these payments from his bank account, although he claimed uncertainty about the source of the funds for these payments. In December 1982, Wu was hired by Richardson as an account executive, partly due to her existing client base. She expressed confidence in transferring her clients from Bache to Richardson and successfully brought twelve accounts with her, becoming one of the most profitable account executives for Richardson. During this period, Richardson was expanding its New York branch for commodities trading. Following the Lau brothers' decision to transfer their accounts from Bache to Richardson, Wu assisted them in withdrawing funds and securities from Bache to establish new accounts at Richardson. Mui-Hin Lau, Ho Sih Fong, and Kau-Ying Lau assert that they did not authorize the opening of accounts at Richardson and first learned of these accounts during a meeting on August 9, 1984, when informed by Richardson employees about a debt owed. They all denied giving anyone, including Daniel and Michael Lau, permission to use their names for account opening documents. Wai Yau Chi also stated she never signed any documents for an account at Richardson. The defendants argue that Wu should have recognized the forgery of the elder Laus' signatures based on the timeline and their summer visits to New York. However, evidence supporting this claim is lacking, and Daniel Lau testified he concealed the forgery from Wu. Although it is confirmed that Wu never contacted the elder Laus to verify account changes, the court concluded that Wu could assume their consent based on the signed documents. From December 1982 to summer 1984, Wu executed numerous trades in the Lau accounts, resulting in approximately $2,000,000 in losses, which Daniel Lau allegedly withdrew from his uncle's account without permission. The key legal question is whether these trades were authorized. The trial indicates that Michael Lau had actual authority to trade from his account, making him liable to Richardson, while the existence of authority for the other accounts remains uncertain. Prior rulings have assumed the trades were authorized, but this court will independently assess the evidence to determine actual authority. The legitimacy of several powers of attorney related to accounts held by the Laus at Richardson is in dispute. Richardson asserts the powers were validly executed, while the Laus argue they were not, claiming forgery by Michael and Daniel Lau. The record shows that powers of attorney were executed for accounts at Bache by Min-Hui, Ho Sih Fong, and Kau-Ying Lau. However, doubts arise regarding the authority of Wu to trade at Richardson due to the late submission of powers of attorney for three out of four Lau accounts, which were provided four to five months after account openings. Richardson could not produce a power of attorney for Ho Sih Fong’s account, except for one dated May 1983, despite providing account opening documents to the Laus that lacked these powers. Richardson's policy is to halt trading when powers of attorney are missing, yet it did not do so for the Lau accounts. The defendants contend that Wu opened Ho Sih Fong’s account without using Daniel Lau’s address, and the associated power of attorney was dated after the account opening. Testimonies reveal that the elder Laus were unaware of account activities and did not sign the opening documents. Wu allegedly recognized that account openings for Mui-Hin Lau and Ho Sih Fong required signatures from Daniel or Michael Lau, given their travel schedule. Additionally, it was argued that Richardson failed to supervise Wu in compliance with trading regulations when she managed the account openings. Despite the accounts being assigned New York addresses, the Laus' foreign addresses were also noted. Defendants further assert that when Daniel Lau opened Ho Sih Fong's account, he believed Wu would take control, and they claim Richardson was aware that Mui-Hin Lau and others did not know about the accounts, with Wai Yau Chi having no control over trading in a joint account with Michael Lau. Richardson allegedly did not provide written evidence of losses to Michael Lau and Wai Yau Chi, or to Mui-Hin Lau, Ho Sih Fong, or Kau-Ying Lau as a request for payment, and the monthly statements were not considered accounts stated. Richardson is claimed to have deliberately avoided contacting Mui-Hin, Ho Sih, and Kau-Ying at their residence and failed to send customary communication regarding their accounts, which had discretionary control assigned to a third party. Prior to attempts to collect in August 1984, Mui-Hin, Ho Sih, and Kau-Ying reported never receiving any correspondence from Richardson. When confronted about outstanding deficits on August 9, 1984, both Fong and Mui-Hin denied ever opening accounts with Richardson or owing any debt. Consequently, the court found a lack of actual authority concerning these accounts. However, it determined that Michael Lau was liable for deficits in his account because he could not avoid responsibility by claiming ignorance from his wife. For the other accounts, even without actual authority, the court recognized the existence of apparent authority or ratification of trading, making the other Laus liable as well. Under the doctrine of apparent authority, a customer may be held accountable for trades in their account despite lacking actual authority, provided that the broker can demonstrate justifiable reliance on the apparent authority, supported by instances of misleading conduct. At Bache, Michael Lau had power of attorney over his father’s and aunt’s accounts, while Daniel Lau had authority over his mother’s account. The elder Laus had executed trading authorizations for the Lau brothers, enabling Michael and Daniel Lau to trade on their behalf. A consistent trading pattern emerged, with trades being discussed and approved by Michael Lau before execution, further establishing the apparent authority for the trades conducted in the Lau accounts. Michael Lau generally accepted Wu's trading recommendations, aware he could reject them. The Lau brothers managed their four accounts as a single family account, with Michael making most trading decisions alongside Wu. Daniel Lau approved of Michael and Wu making decisions for their mother’s account. The Lau family's Bache account statements were sent to Michael’s home, which he regularly reviewed without objection. Michael and Daniel endorsed checks for their parents, believing their actions were not wrong. On December 30, 1982, the Lau brothers opened accounts at Richardson, intending to replicate the Bache account structure. However, they forged their parents’ signatures on account forms and checks without their consent. Daniel signed his mother’s name on various documents and did not inform Wu of the unauthorized closure of the Bache account. He assumed his mother’s approval for the transfer. Following an initial mistake, he listed himself as the account trader instead of Wu, who did not clarify the forms. Both Lau brothers completed account forms for various family accounts at Richardson and endorsed checks from Bache for deposits, believing their actions were permissible. Their conduct led Richardson to assume they had the authority to trade across all family accounts, making them liable for account deficits under the doctrine of apparent authority. Additionally, the entire Lau family was aware of and authorized the trading activities at Richardson during 1983 and 1984. The Laus contend that they believed the authority to trade their family commodity accounts was limited to transactions with Wu at Bache, excluding those at Richardson. Despite this claim, they were aware that Michael and Daniel Lau were actively trading with Wu as their broker, having learned of this during a visit to the COMEX floor. The court determined that both Michael and Daniel Lau possessed apparent authority to trade the Lau family accounts, making the Laus liable for any deficits incurred. The older Laus had granted complete authority and discretion to the younger Laus without intervening in the Richardson accounts, which legally conferred apparent authority. Additionally, the court concluded that even if such authority were absent, the trades were ratified by the Laus, thus making them responsible for the deficits. Ratification occurs when a customer adopts unauthorized trades as their own, provided there is clear intent to approve those trades. The younger Laus sought independence from their father through successful trading, which facilitated the transfer of accounts to Richardson. The burden of proof for ratification lies with the broker; however, the customer must demonstrate that their knowledge of unauthorized trades did not equate to ratification. Failure to timely object to unauthorized trading suggests acquiescence, and a customer is obligated to notify the broker of any unauthorized transactions promptly. If the customer does not act, they may bear the losses from subsequent liquidation of those trades. In Sherwood v. Madda Trading Co., the court addressed the responsibilities of merchants in rectifying disputed trades to prevent customers from exploiting mistakes made by brokers. The Lau brothers, Daniel and Michael, opened trading accounts intending to profit independently of their father. They admitted to forging signatures, claiming this act exculpated them, despite their full awareness of the transactions. The elder Laus had authorized Michael and Daniel to trade on their behalf, and by not contesting the trades, they ratified the actions taken in their names. The account-opening process involved a warning from Wu, a broker, about potential issues arising from their unauthorized account setup, which they only sought to rectify after significant losses occurred. The court noted that the Laus, while not experts in trading, had sufficient knowledge to engage in commodity trading. Regular contact between the Laus and Wu provided them ample opportunity to understand the trading risks, thus justifying Richardson’s reliance on their suitability as customers. The extensive interaction, including daily discussions about trading strategies, emphasized their active participation in managing the accounts, countering any claims of ignorance regarding the trades conducted. The court finds the Laus' claims of ignorance regarding their commodity trading implausible, given that Michael Lau spent over a year observing and consulting with Wu at Bache about trades, indicating a clear intent to learn trading. Both Michael and Daniel Lau demonstrated an understanding of trading mechanics, including margin deposits and profit/loss generation. They received timely information regarding their Richardson accounts and regularly paid margin calls without objection. The total net deposits made by the Lau brothers amounted to $1,970,471.04, with no returns, while they incurred losses totaling $2,146,953.02, leading to a deficit claim of approximately $167,212.00 by Richardson. The Laus allege that Wu executed unauthorized trades without consulting Michael Lau, who was the only authorized trader, despite admitting to regular communication with Wu. The Laus also argue that Richardson's investigation into their complaints was biased because it was conducted by its President, Mr. Lewis; however, the court does not find this sufficient to invalidate the investigation. Regarding equitable estoppel, the court notes that a principal may be barred from denying unauthorized trades if they lead the broker to believe the agent had authority. The Lau brothers' claim of estoppel is supported by allegations of forgery and improper use of funds under their control to settle prior deficits in their accounts. Ishmael met with Daniel and Michael Lau in summer 1984 regarding a deficit in the Lau family accounts. On August 9, 1984, a meeting at Michael Lau's home revealed that neither Mui-Hin Lau nor Hoh Sih Fong authorized the opening of accounts at Richardson, and unauthorized accounts were opened in their names. Mui-Hin Lau provided identification to demonstrate he did not sign the account opening forms. The Lau brothers ratified trades in the family accounts by failing to protest or inquire about them, having met with Wu and visited the COMEX floor while trades occurred. The court determined that the elder Laus cannot disavow trades due to their prior knowledge and lack of action. The Laus’ claims of fraud were deemed unconvincing, as they willingly accepted the risks of commodities trading and had opportunities to address concerns in the past. Additionally, the Laus are equitably estopped from pursuing counterclaims because the funds lost belonged to their uncle, Wing Sang Lau, who was unaware his $2,000,000 certificate of deposit was used to secure loans for margin calls. As the funds effectively belonged to Wing Sang Lau, who is not a party to this case, the Lau brothers lack standing to seek recovery, and Richardson is not liable for their losses stemming from market fluctuations. The funds from Wing Sang's certificate were not merely borrowed by the Laus but were improperly converted for the defendants' use. Daniel Lau believed he would temporarily use his uncle's money, intending to repay it after market recovery, and did not inform his uncle of this misappropriation. Michael Lau claimed ignorance regarding the source of funds for margin payments, but the court found no evidence supporting the defendants' assertion that the money was a loan. The Laus' counterclaims were dismissed due to their failure to prove any fraudulent actions by Wu and Richardson, which were central to their allegations. Even assuming Wu's actions constituted fraud, the Laus did not demonstrate that their losses were causally linked to such fraud. The court noted the Laus failed to show that Wu traded detrimentally to them or that her presence on the COMEX was fraudulent. Additionally, there was no evidence of inadequate supervision by Richardson affecting the Laus' losses, nor any proof of harm from third-party defendants. The Laus' claim regarding Richardson's document accounting was deemed unconvincing, as they did not establish that any withheld documents were relevant to their claims. Overall, the court concluded that the Laus alleged much but provided little substantiation for their claims. The Laus failed to meet their burden of proof for fraud counterclaims, which require clear and convincing evidence. Their assertion that they would have altered their trading behavior if aware of alleged fraudulent actions was not substantiated; they did not prove that knowledge of potential losses would have changed their decisions. The court emphasized that market participants must provide more than evidence of loss to support fraud claims, and the Laus' unsupported allegations fell short. Consequently, their RICO claim was also dismissed. Post-trial, the Laus sought dismissal of the plaintiff’s case and sanctions under Rule 11 and F.R.Civ.P. 26(g) for alleged document destruction and discovery violations. These motions were deemed largely meritless, primarily rearguing the case from the Laus' perspective. The court found no basis for sanctions against Richardson, noting that the Laus’ differing interpretation of evidence does not establish their position as correct. The court criticized the Laus for waiting eight years to bring these motions, suggesting such delay could invoke the doctrine of laches. Ultimately, the judgment favored the plaintiff, negating the Laus' motions, including the Rule 11 motion. Judge Kram's previous ruling in Richardson Greenshields Sec. v. Lau indicated that the plaintiff’s case was sufficiently strong to warrant asset attachment, which undermines the Laus' current motion. The court emphasizes that it will not penalize a party for actions deemed meritorious by a federal judge. The Laus' attempt to dismiss the case after nearly eight years of litigation is considered inappropriate, especially since they argued the case lacked merit from the beginning but failed to act sooner. In assessing sanctions under Rule 11, the court notes the importance of evaluating whether the injury to the defending party was avoidable or self-inflicted. Additionally, the defendants' motion for discovery sanctions under F.R.Civ. P. 26(g) is denied as it is overly delayed and should have been raised during the discovery phase, not after the trial. The doctrine of laches further prevents the defendants from asserting any alleged rights violated during discovery, a claim that is already questionable. Lastly, it was confirmed during trial that Richardson intended to dismiss the complaint against Wai Yau Chi.