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

901 F.2d 1124, 284 U.S. App. D.C. 72 (1990)

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

United States Court of Appeals for the District of Columbia Circuit

901 F.2d 1124, 284 U.S. App. D.C. 72 (1990)

Facts

Rolando and Anita Ong Cheng (plaintiffs) purchased IBM options through Merrill Lynch stockbroker William Grace (defendants). Rolando was an experienced investor, so the account was nondiscretionary. The Chengs’ initial $34,000 investment grew to $300,000 in a year. Rolando requested that Grace purchase more IBM options only if the account could afford it. A computer problem showed that the account had sufficient funds, so Grace purchased the options. The purchase led to a $119,000 loss. Grace informed Rolando that Rolando could sell the options at a loss or send more money to cover the loss. Grace did not inform Rolando that Rolando had a right to reject the unauthorized purchase. Rolando instructed Grace to sell the options and sent $40,000 to cover the loss. The account was still short $28,614, plus interest. Merrill Lynch sued to recover the debt. The Chengs filed a counterclaim against Merrill Lynch and a third-party claim against Grace, alleging breach of fiduciary duty. The trial court ruled for the Chengs. Merrill Lynch and Grace appealed.

Rule of Law

Issue

Holding and Reasoning (Timbers, J.)

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