Mihara v. Dean Witter & Co.

Samuel Mihara (plaintiff) opened an investment account with Dean Witter & Company (defendant). George Gracis (defendant) was the investment adviser assigned to Mihara’s account, and, although Gracis did not make trades without Mihara’s consent, Mihara routinely followed Gracis’s advice. Gracis engaged in a risky investment strategy despite numerous complaints from Mihara, and the account lost money over approximately three years. The holding periods for Mihara’s account were short in the beginning and became longer over time. For example, in the first year, 76 percent of the securities were held for 60 days or less, and by the third year, around 82 percent of the securities were held for 180 days or less. Similarly, the turnover rate—which is the total dollar amount of stock purchases divided by the average monthly investment in the account—started at about 14 in the first year and dropped to around three by the third year. These holding periods and turnover rates were commensurate with those that the Ninth Circuit had previously held to constitute excessive trading—also called churning. Mihara filed suit in the United States District Court for the Central District of California and alleged that Gracis and Dean Witter had engaged in excessive trading in disregard of Mihara’s investment objectives in violation of § 10(b) of the Securities Act of 1934 and related Rule 10b-5. Mihara argued that the holding periods and turnover rate on his account demonstrated a pattern of excessive trading. Gracis argued, in part, that because Mihara could not show that Gracis intended to defraud with respect to each specific trade, Mihara could not establish the requisite intent to satisfy the scienter element of a § 10(b) violation. Although Mihara did not, in fact, establish Gracis’s intent to defraud with regard to each specific trade, a jury found in Mihara’s favor. Gracis and Dean Witter appealed.