Garnatz V Stifel, Nicolaus & Co.

559 F.2d 1357 (8th Cir. 1977)

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Nature of the Case

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Facts

P is a man of limited education and modest means. P is not a sophisticated trader. P attended a series of investment seminars sponsored by D. On the basis of representations made at those seminars and at two personal meetings with Kingsley Wright, P agreed to participate in a special bond margin account program which was purportedly designed to maximize his income while preserving his capital. P attended a series of investment seminars sponsored by D. On the basis of representations made at those seminars and at two personal meetings with Kingsley Wright, P agreed to participate in a special bond margin account program which was purportedly designed to maximize his income while preserving his capital. The representations were: (1) that all purchases had to be approved by the board of directors of D; (2) that the use of a margin account entailed no risk to P's capital; (3) that the bonds purchased would not decrease more than one percent in value; (4) that the interest rate on the margin account would never exceed eight percent; and (5) that Ds' recommended purchases would be without risk. Most of the bonds purchased for P were either low-rated or non-rated by Standard & Poors. These bonds were highly speculative when P clearly indicated he wanted to avoid speculation. No bond purchase was ever approved by the board of directors of D. Within 5 months of entering the program the market value of his account declined by more than one percent. P no longer got any kind of income as he had to pay increased margin calls. D. Wright repeatedly reassured D that the drop was only temporary and strongly recommended that P stay with the program, which he did. In August of 1974, the margin interest rate went from eight percent to thirteen percent, as permitted by a change in Missouri's usury law. P does not dispute the fact that by that time he was, or should have been, on notice of the fraud. P sued D and got the verdict. Ds appealed contending damages should have been calculated based on the out-of-pocket rule.