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LICHTENSTEIN v. KIDDER

December 17, 1993

JODIE B. LICHTENSTEIN, an individual, Plaintiff,
v.
KIDDER, PEABODY & CO. INCORPORATED, a Delaware corporation, Defendant, v. ALAN I. LICHTENSTEIN, Third-Party Defendant.



The opinion of the court was delivered by: MAURICE B. COHILL, JR.

 COHILL, District Judge.

 Plaintiff Jodie B. Lichtenstein, a Pennsylvania resident and a former client of defendant Kidder, Peabody & Co., Incorporated ("Kidder Peabody"), a Delaware corporation, alleges that she lost substantial amounts of money as a result of unauthorized transactions in her account and the payment of funds from her account over her forged signature on Visa checks. Third-party defendant, Alan I. Lichtenstein, who is plaintiff's ex-husband, admits that he forged her signature, but argues that Kidder Peabody is strictly liable for his misdeeds. Mrs. Lichtenstein charges Kidder Peabody with conversion, negligence, breach of fiduciary duty, and breach of express and implied contract for its involvement in these transactions. This court has jurisdiction pursuant to 28 U.S.C. § 1332 due to the diversity of citizenship of the parties.

 We held a three-day bench trial on this case. Pursuant to Fed. R. Civ. P. 52(a), we make the following findings of fact and conclusions of law.

 Plaintiff Jodie Lichtenstein was married to Alan Lichtenstein in 1973. The marriage produced two children and ended in divorce in 1988.

 Mrs. Lichtenstein has virtually no experience in investments or money management. She graduated from Monticello Junior College, briefly attended the University of Miami and has never taken any courses in business, accounting or financial management. Her employment history comprises mainly of retail display work and retail sales. Mr. Lichtenstein, on the other hand, has had substantial experience in investments and money management.

 During their marriage, Mr. Lichtenstein exercised nearly unilateral control over all financial affairs of the couple. Mrs. Lichtenstein never held an individual savings account or an individual checking account. Rather, she and her husband had a joint checking account and a joint savings account, over which Mr. Lichtenstein exercised exclusive authority. Mr. Lichtenstein had his own separate checking account as well.

 Mr. Lichtenstein entered the marriage with substantial amounts of family money. He engaged a Paine Webber broker, Charles Chewning, Jr., on numerous occasions beginning in the early 1980s to handle various investments and securities transactions. Mr. Chewning began his employment with defendant Kidder Peabody in late 1982 as a registered representative/stock broker. Mr. Lichtenstein kept his accounts with Mr. Chewning when Mr. Chewning became employed by Kidder Peabody. At all relevant times herein, Mr. Chewning was acting within the scope of his employment at Kidder Peabody. He was compensated on a commission basis.

 A. OPENING THE ACCOUNT

 In March 1985, Mrs. Lichtenstein, upon advice of her family, considered selling her 3,000 shares of stock in Glosser Brothers, Inc. because the stock price was increasing. This stock had been given to her by her parents. Upon her husband's recommendation, Mrs. Lichtenstein spoke with Mr. Chewning over the phone regarding the stock price fluctuation. He sold the stock for her, which yielded $ 59,996.19. Pl.'s Ex. 28. Mrs. Lichtenstein did not sign any papers or stock certificates to complete the transaction.

 When the Glosser Brothers stock was sold, the proceeds were deposited initially into the Lichtenstein's joint Premium Account ("the joint account") at Kidder Peabody, which is not the subject of this lawsuit. Mrs. Lichtenstein was unaware of the existence of the joint account, which had been opened by Mr. Chewning with the authorization of Mr. Lichtenstein. Mr. Lichtenstein forged Mrs. Lichtenstein's signature on the new account documentation for this joint account. Pl.'s Exs. 6 and 7. The joint account documentation fails to include Mrs. Lichtenstein's social security number, address and phone number. The joint account was, in effect, treated by Kidder Peabody as an individual account held by Mr. Lichtenstein. This is evidenced by the answers to the account request form, Ex. 30, which emphasizes Mr. Chewning's dealings in options and only lists Mr. Lichtenstein as the customer. Mr. Chewning considered Mr. Lichtenstein an "active customer."

 On April 8, 1985, Mrs. Lichtenstein met with Mr. Chewning for the first time to open her own Premium Account ("the account") with Kidder Peabody. Her initial deposit was in excess of $ 200,000, comprised of her life savings and proceeds from the Glosser Brothers stock sale in the amount of $ 48,966.19. Months later, on September 17, 1985, $ 209,567.25 was deposited into plaintiff's account, from the proceeds of another Glosser Brothers stock sale.

 Premium Accounts require an initial deposit of over $ 25,000. The accounts customarily feature a securities margin account and a no-load money market mutual fund. They are central asset management accounts which allow the customer to deposit cash and securities and, through a program administered by Kidder Peabody in connection with Bank One of Columbus, N.S., to draft checks against these assets or to charge expenses to a Visa card. Premium Accounts also have speedy re-investment, or "sweep" feature. This is in contrast to standard accounts, in which Kidder Peabody merely buys and sells securities with dividend payments to the customer.

 When Mrs. Lichtenstein opened her account, Mr. Chewning advised her that she had to contract for either the checking or the Visa card option; she opted for the checking account. She expressed her intention to Mr. Chewning that the principal amount would be available for investment purposes and that it would remain untouched by any of her checking account withdrawals. On advice of her parents, she also expressed her desire that the account be diversified so as to ensure a secure portfolio. She trusted Kidder Peabody's guidance in making the investments based on their outstanding reputation in the investment community.

 The initial meeting between Mrs. Lichtenstein and Charles Chewning lasted less than an hour. She signed and executed the following agreements: Client Information Form (Pl.'s Ex. 2); the Premium Account Agreement (Pl.'s Ex. 3); the Securities Account Agreement (Pl.'s Ex. 4); and the Visa Account Application and Agreement -- Bank One (Pl.'s Ex. 5). She testified that she was never told of the risk or dangers in opening a premium account.

 Boyd S. Murray, Vice President of Kidder Peabody and Branch Manager of the Pittsburgh office since 1988, explained that fraud and forgery are always risks with such accounts, a fact which is reflected in the Kidder Peabody Manual, Pl.'s Ex. 24. The registered representative must advise customers of the Premium Account that the check writing feature creates a risk of fraud. Mr. Murray, incidentally, was not the branch manager during the time the events described here occurred. The late Thomas C. Ryan, Sr. was.

 Kidder Peabody requires that their registered representative, in this case Mr. Chewning, fill out a New Account Request Form, Pl.'s Ex. 1, which must be approved by the branch manager. A number is assigned to the account when the manager approves the opening of the account. Most notable about Mrs. Lichtenstein's New Account Request Form are the following facts: (1) it lacks her residential address, (2) it indicates Mr. Lichtenstein's age, not hers; (3) it states that Mr. Chewning knew Mrs. Lichtenstein for seven years, which is actually the length of time Mr. Chewning knew Mr. Lichtenstein; (4) it cross-references to Mr. Lichtenstein's other accounts for the appropriate phone numbers; and (5) it indicates that Mrs. Lichtenstein has three dependents, when she only had two (her husband had three). Pl.'s Exs. 1, 29. Mr. Murray testified that cross references are not unusual when there is a familial tie between clients. It is also noteworthy that Pl.'s Ex. 1 was dated April 2, 1985, six days before Mrs. Lichtenstein met with Mr. Chewning to open her account. Mrs. Lichtenstein never saw this document until the inception of this litigation.

 What is known in the securities brokerage business as the "know your customer rule" requires that a registered representative have knowledge of a client's objectives, needs and circumstances, or must be prepared to say that the client refused to say what those preferences are. Kidder Peabody agreed in its Premium Account Agreement with Mrs. Lichtenstein that it would maintain all accounts pursuant to the rules and regulations of the New York Stock Exchange. Pl.'s Ex. 3. Under these rules, a brokerage house must:

 
Use due diligence to learn the essential facts relative to every customer, every order, every cash or margin account accepted or carried by such organization and every person holding power of attorney over any account accepted or carried by such organization.
 
Supervise diligently all accounts handled by registered representatives of the organization.
 
[Not] exercise any discretionary power in any customer's account or accept orders for an account from a person other than the customer without first obtaining written authorization from the customer.

 Rule 405(1), (2) and Rule 408. See Pl.'s Ex. 33.

 The section on plaintiff's New Account Request Form, which was set aside for this purpose was signed by Mr. Chewning's secretary. Pl.'s Ex. 1 section 22A. Mr. Murray testified that it is appropriate for a secretary of a registered representative at Kidder Peabody to sign the New Account Request Form, and that he would have approved such a form.

 The Kidder Peabody Client Information form for Mrs. Lichtenstein's account (Pl.'s Ex. 2) also has some questionable omissions, including the date, type of account, phone numbers, account source, and amount of funds in the account. It was signed by Mr. Chewning's secretary rather than by Mr. Chewning, as is normally required, in order to verify its accuracy and the financial soundness of opening the new account.

 B. MONTHLY STATEMENTS

 The Lichtensteins originally formed a company named Fashion II, in the East Liberty section of Pittsburgh. At some point Mrs. Lichtenstein transferred her ownership interest in Fashion II to her husband, but worked there occasionally as a buyer and retail sales assistant.

 On her application form for the Premium Account, Mrs. Lichtenstein requested that the monthly statements be sent to the Fashion II address, at 6111 Penn Avenue, Pittsburgh. She testified that she did this at the suggestion of her husband and Mr. Chewning. The monthly statements included information on securities transactions in the Premium Account.

 The agreements which Mrs. Lichtenstein signed stated that: "I understand that I should carefully review the monthly statements promptly after receipt and notify KP [sic] of any errors" (P.'s Ex.3); "all communications . . . sent, whether by mail, telegraph, messenger or otherwise, shall be deemed given to me personally, whether actually received or not." (P.'s Ex. 4).

 Mrs. Lichtenstein testified that she only saw the first two or three monthly statements, which she could not comprehend at the time and certainly did not understand while on the witness stand at trial. When she read the portion of the monthly statement printout entitled "line of credit," she assumed that this was the interest available for check writing purposes and that the principle was left untouched, per her instructions, as a "safety net" for her family. She could not have been further from the truth.

 After glancing over the first few statements, she let her husband receive them in the mail at Fashion II. She never looked at one again. She trusted that her husband was keeping track of the progress of her investments. She admitted that if she had she read the "Checking Statement Activity" portion of the monthly statement, Def.'s Ex. F, she would have been able to tell to whom the checks were written and for what amounts. But she testified that she had no reason to look at the statement because Mr. Lichtenstein had her unwavering trust. We accept this statement as true.

 C. FORGED CHECKS AND OTHER TINKERING

 Mrs. Lichtenstein wrote a handful of checks while she had the check book in her possession, early in the history of her account. After a few weeks or so, just as she had done with her monthly statements, she handed over the blank checks and checking account ledger to her husband, because she "did not want to be tempted" to spend any money. Thereafter, if she needed to write a check on the account, she asked her husband for a blank check. She expected that she could spend roughly $ 13,000 per year while maintaining the principal balance, although she admits that in the first five months of her account she wrote checks in excess of $ 50,000. She assumed that Kidder Peabody would notify her if she exceeded the available credit limit, i.e. above and beyond the principle.

 Indeed, some checks debited to her account were legitimately signed by Mrs. Lichtenstein. Pl.'s Ex. 8. These checks were numbered 102, 103, 104, 106, 109, 113 and 124. She didn't notice or question the sequential gap in the check numbers. She testified that some of these legitimate checks were written for household and personal purposes and a total of $ 50,800 worth were payable to Fashion II. Fashion II had been having cash flow problems, and Mrs. Lichtenstein considered these payments as loans to the business -- and, as such, expected that she would be reimbursed with interest once Fashion II got back on its feet. The store, after all, was a family business and she had an interest in keeping it profitable for the livelihood of her family.

 Mrs. Lichtenstein admitted that she wrote and signed check number 124 dated August 15, 1985 and made payable to Fashion II, even though the imprinted check number had been crossed out and the number "107" was written in her husband's handwriting before she signed the check. When she questioned the numbering, her husband said that he had to void the original check numbered 107 and that he had just pulled out a check from the back of the checking booklet to replace it. Still, she didn't question this incident, nor did she ask to see the checkbook or statement for her account. In reality, check number 107 was one of the checks which had been forged by her husband in the amount of $ 5,000.

 There were also two checks numbered 113. She was not aware of a duplicate checkbook with the same numbers, and she never noticed that two separate checks had been written using one number.

 The majority of checks written against her Premium Account, however, were forged by Mr. Lichtenstein without Mrs. Lichtenstein's knowledge or authorization. Pl.'s Ex. 9. Mr. Lichtenstein admitted to this while on the witness stand. His testimony was credible.

 D. OTHER EVIDENCE THAT CHEWNING AND KIDDER PEABODY KNEW

 Mr. Lichtenstein had frequent contact with Mr. Chewning regarding plaintiff's account. Mr. Lichtenstein testified that he talked to Mr. Chewning regularly because he was trading regularly within his own Kidder Peabody account. Mr. Lichtenstein knew that from 1986 through ...


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