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Arceneaux v. Merrill Lynch, Pierce, Fenner & Smith, Inc.

United States Court of Appeals for the Eleventh Circuit
767 F.2d 1498 (11th Cir. 1985)


Facts

Phillip Arceneaux (plaintiff) obtained a B.S. degree in mechanical engineering in 1954, worked as a regional sales manager beginning in 1970, and gained some investment experience by opening a few investment accounts. In October 1980, Arceneaux opened a securities account with Merrill Lynch, Pierce, Fenner & Smith, Inc. (Merrill Lynch) (defendant), after attending a seminar hosted by Don Ribaudo, a Merrill Lynch broker. Arceneaux signed: (1) an options-information sheet at the opening of the account that stated that the objective was the trading of profits and (2) an options agreement that warned of the risks of trading options. Arceneaux’s investment account reflected numerous sales and purchases that relied on Ribaudo’s recommendations. In the first month, Arceneaux lost over $2,000, but he made a $24,000 profit in November 1980. By the next month, Arceneaux’s holdings had decreased from $77,000 to $44,000. Arceneaux continued to lose money despite trading. When Arceneaux closed his account on June 1, 1980, he was left with a net loss of $45,697, while Ribaudo made over $11,000 in commissions. In March 1983, Arceneaux sued Merrill Lynch and Ribaudo for excessive trading or churning in Arceneaux’s securities account. At trial, Arceneaux’s expert testified that Arceneaux’s account turned over eight times on an annual basis, that Arceneaux’s trading behavior changed by a wide departure after meeting Ribaudo, and that the velocity of trading made no sense other than to generate commission for Ribaudo. In May 1984, a jury in district court returned a verdict in Arceneaux’s favor for compensatory and punitive damages. Merrill Lynch appealed, stating that the verdict was not supported by substantial evidence.

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Issue

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Holding and Reasoning (Fay, J.)

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