Arst v. Stifel, Nicolaus & Co., Inc.

954 F.Supp. 1483

Rodger M. ARST, Plaintiff, v. STIFEL, NICOLAUS & COMPANY, INC.; and Odis E. Shoaf, Jr., Defendants.

No. 93-1299-JTM.

United States District Court, D. Kansas.

January 17, 1997.

Joe Rebein and Joseph G. Matye, of Shook, Hardy & Bacon, L.L.P., Kansas City, MO, Scott C. Nehrbass, of Shook, Hardy & Bacon, L.L.P., Overland Park, KS, for Plaintiff.

Reggie C. Giffin, of Morrison & Hecker, L.L.P., Kansas City, MO, John C. Nettels, Jr., of Morrison & Hecker, L.L.P., Wichita, KS, James A. Walker, of Triplett, Woolf & Garretson, L.L.P., Wichita, KS, for Defendants.

MEMORANDUM AND ORDER

MARTEN, District Judge.

The present litigation arises from plaintiff Roger Arst's sale of a substantial number of Physician Corporation of America stock shares in 1992. PCA was then a private corporation, and the sale was accomplished through the brokerage firm of Stifel, Nicolaus & Co. and its officer, Odis Shoaf. Shoaf found independent buyers for some of Arst's stock, but without telling Arst, he also purchased a large number of shares himself and for his family. Subsequently, PCA announced plans to go public and the stock split. There is some evidence that Shoaf had heard rumors PCA would go public, but no evidence he had inside information.

By April of 1993, the stock had tripled in market value, and Arst wrote to Shoaf and Stifel asking for the names of the individuals who had bought his stock. Shoaf and Stifel refused, notwithstanding Securities Exchange Commission ("SEC") Rule 10b10(a)(7)(i), 17 C.F.R. § 240.10b10(a)(7)(i), which requires a broker to provide the names of purchasers upon written request. Arst then filed an action in state court, which the defendants removed here. Only then did the defendants reveal Shoaf's purchase of the stock.

Arst advanced claims for violation of disclosure rule 10b-10(a)(7)(i), breach of fiduciary duty to disclose self-dealing, breach of fiduciary duty to give fiduciary advice, and violations of SEC Rule 10b-5 and K.S.A. 17-1253. The district court granted summary judgment in favor of Stifel and Shoaf on all issues. Arst v. Stifel, 871 F.Supp. 1370 (D.Kan.1994). On appeal, the Tenth Circuit affirmed in part and reversed in part. 86 F.3d 973 (10th Cir.1996). The court agreed Arst had no claim under Rule 10b-10(a)(7)(i), holding that since the written request for identity of the buyers occurred only after the sale of the stock, "there is no such causal relationship between the alleged deception by the Defendants and any harm incurred from the sale of Arst's shares." Id. at 977. The court of appeals also agreed that under the circumstances of the case, Arst had failed to demonstrate that Shoaf and Stifel had assumed any duty to give investment advice with regard to the PCA stock. Id. at 979-80.

However, the Tenth Circuit also ruled Shoaf had a duty to disclose his self-dealing, and the duty was breached. The court therefore reversed the award of summary judgment on that claim. The court also found the Rule 10b-5 and K.S.A. 17-1253 claims could survive, to the extent they were grounded on a failure to disclose the self-dealing. The court noted that by itself, the violation of the duty to disclose would not establish a violation of Rule 10b-5, since "the remaining elements for liability under Rule 10b-5—including scienter, materiality, and causation—present genuine issues of material fact for a jury." Id. at 981.

Following remand, the case was given its present assignment, and the matter is currently before the court on Arst's motion for partial summary judgment on the breach of fiduciary duty claim. Arst contends that while a trial on causation and breach is necessary on the 10b-5 and 17-1253 claims, no issues remain with regard to the breach of fiduciary duty claim and judgment may be awarded on the claim for the profits received by Shoaf.

Summary judgment is proper where the pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, show there is no genuine issue as to any material fact, and that the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). In considering a motion for summary judgment, the court must examine all evidence in a light most favorable to the opposing party. McKenzie v. Mercy Hospital, 854 F.2d 365, 367 (10th Cir.1988). The party moving for summary judgment must demonstrate its entitlement to summary judgment beyond a reasonable doubt. Ellis v. El Paso Natural Gas Co., 754 F.2d 884, 885 (10th Cir.1985). The moving party need not disprove plaintiff's claim; it need only establish that the factual allegations have no legal significance. Dayton Hudson Corp. v. Macerich Real Estate Co., 812 F.2d 1319, 1323 (10th Cir.1987).

In resisting a motion for summary judgment, the opposing party may not rely upon mere allegations or denials contained in its pleadings or briefs. Rather, the nonmoving party must come forward with specific facts showing the presence of a genuine issue of material fact for trial and significant probative evidence supporting the allegation. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256, 106 S.Ct. 2505, 2514, 91 L.Ed.2d 202 (1986). Once the moving party has carried its burden under Rule 56(c), the party opposing summary judgment must do more than simply show there is some metaphysical doubt as to the material facts. "In the language of the Rule, the nonmoving party must come forward with `specific facts showing that there is a genuine issue for trial.'" Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986) (quoting Fed.R.Civ.P. 56(e)) (emphasis in Matsushita). One of the principal purposes of the summary judgment rule is to isolate and dispose of factually unsupported claims or defenses, and the rule should be interpreted in a way that allows it to accomplish this purpose. Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).

The facts relating to Arst's current motion take up only a short section in the original brief in support thereof and can be summarized very briefly. The response brief by Shoaf and Stifel, on the other hand, contains a lengthy discussion of the circumstances of the case, and is generally designed to support their claim that any failure to disclose Shoaf's self-dealing was not material to Arst's decision to sell the PCA stock.

Physician Corporation of America was incorporated under the laws of the State of Kansas in 1985. On June 4, 1987, PCA made an initial public offering of its stock for $2.00 per share.

Roger Arst purchased 37,500 shares of PCA stock during the 1980s. It is not clear exactly when the purchase occurred. Arst testified he acquired the shares in 1985. The defendants cite to evidence indicating the purchase occurred in 1987. The matter does not appear to be material.

In 1990, PCA engaged defendant Stifel, Nicolaus & Co. to act as an accommodating broker for its shares. Stifel was to put together buyers and sellers of PCA stock on an unsolicited basis, charging both parties a commission. PCA advised its shareholders by mail that it had made arrangements with Stifel to accommodate the purchase and sale, and that shareholders should contact Odis Shoaf, a senior vice president of Stifel, if they wanted to buy or sell shares.

On August 18, 1992, Arst authorized Shoaf to sell all of his 37,500 PCA shares at $4.625 per share. The next day, Shoaf sold 27,390 of the Arst PCA shares to third parties, and, unknown to Arst, bought the other 10,110 shares for himself and his family. Shoaf purchased 7,010 shares for himself, 1,050 for the Shoaf trust, 1,050 for the Shoaf family trust, and 1,000 for his daughter, Susan Shoaf.

Shoaf, on behalf of Stifel, was Arst's agent for the sale and a fiduciary with respect to the matters within the scope of the agency. As a fiduciary, Shoaf owed Arst the duty to carry out the ordered sale with due care and loyalty and not to make unauthorized sales. His duty of loyalty included a duty to disclose his purchases of the PCA shares.

In response to this statement in Arst's brief, the defendants deny the existence of the duty to disclose. The denial occurs without explanation and without citation to any authority. The denial directly contravenes the finding of the court of appeals in Arst, 86 F.3d at 979, that such a duty existed and was breached. Even though the matter was previously presented as a motion for summary judgment by Shoaf and Stifel (with all inferences being read in favor of Arst), while the current motion is brought by Arst (with all inferences being read against him), the defendants have failed utterly to present any facts which would support a finding either of no duty or no breach.

Before buying Arst's shares for his personal account, Shoaf had previously bought 9,990 shares of PCA stock from various sources. Shoaf paid a total of $39,026.00 for the stock, as reflected in the following table.

Date                Total      Shares     Price    Total
of                  Shares     Bought     Per      Amount
Sale                 Sold     by Shoaf    Share     Paid
November 7, 1990     6,000      3,000     $2.75    $ 8,300
May 7, 1991         37,400      2,500      4.00     10,052
April 21, 1992      15,000      2,490      4.50     11,332
June 25, 1992       10,000      2,000      4.625     9,342

With the purchase of Arst's shares, Shoaf had acquired 17,000 shares of PCA stock in his personal account. Shoaf has not subsequently purchased any additional PCA stock. On one occasion before the Arst purchase, Shoaf had bought PCA stock for Susan Shoaf, paying $4.50 per share for 500 shares on April 21, 1992.

In November of 1992, PCA announced its plans to go public. On December 4, 1992, PCA stock split four for three. On March 30, 1993, PCA made a public offering at $15.25 per share. On September 16, 1993, PCA stock split 2 for 1.

Shoaf has disposed of PCA stock as shown in the...