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4.3 Securities Act - Rule 10b-5(c) 17 C.F.R. § 240.10b-5(c) Fraudulent Practice Or Course Of Dealing Stockbroker “Churning” (Including Violation Of Blue Sky Law And Breach Of Fiduciary Duty As Pendent State Claims) The Plaintiff’s first claim in this case is asserted under the Securities Exchange Act. The Securities Exchange Act is a federal statute that, among other things, allows the Securities Exchange Commission to promulgate, in the public interest or for the protection of investors, rules and regulations prohibiting certain conduct in the purchase or sale of securities. Among such regulations is Rule 10b-5(c) which makes it unlawful for anyone to engage in any practice or course of dealing which would operate as a fraud in connection with the purchase or sale of any security. A “security” is commonly defined as a stock, bond, note, convertible debenture, warrant or other document representing a share in a company or a debt owed by a company. In order to prevail on the claim under Rule 10b-5(c) the Plaintiff must prove each of the following facts by a preponderance of the evidence:First: That the Defendant used an “instrumentality of interstate commerce” [a facility of a national securities exchange] in connection with the securities transaction involved in the case;Second: That the Defendant’s conduct in connection with such transactions violated Rule 10b-5(a) as hereafter explained;Third: That the Defendant acted “knowingly,” as that term is defined in these instructions; Fourth: That the Plaintiff “justifiably relied” upon the Defendant’ s conduct as that term is defined in these instructions; andFifth: That the Plaintiff suffered damages as a result of the Defendant’s wrongful conduct.[In the verdict form that I will explain in a moment, you will be asked to answer a series of questions concerning each of these factual issues.]With regard to the first of these facts - - that an “instrumentality of interstate commerce” was used in some phase of the transaction - - the term “instrumentality of interstate commerce” means, for example, the use of the mails or the telephone or some other form of electronic communication [or a facility of a national securities exchange]. The second fact the Plaintiff must establish is that the Defendant engaged in conduct that violated Rule 10b-5(c). Included in the list of prohibited acts in Rule 10b-5(c) is any act, practice or course of business dealing that operates as a fraud or deceit upon any person in connection with the purchase or sale of any security. In this instance the alleged violation of Rule 10b-5(c), as asserted by the Plaintiff, is the practice of “churning.” “Churning” is a term used in the securities industry and denotes excessive buying and selling contrary to the best interest of the client or customer. The practice of churning, if established by a preponderance of the evidence, is a deceptive practice within the meaning of Rule 10b- 5(c). Churning occurs when a broker, exercising control over the volume and frequency of trades, abuses the customer’s confidence for the broker’s own personal gain by initiating transactions that are excessive in view of the character of the account and the customer’s objectives as expressed to the broker. In order to find that churning occurred, it must be shown that the broker exercised control over the account, that is, that the broker made purchases and sales for the customer’s account on the broker’s own initiative without request or approval by the client, and that the purchase and sale transactions were excessive in light of the customer’s investment goals as known to the broker. Churning is frequently characterized by disproportionately high turnovers in the account, frequent in-and-out trading, and large brokerage commissions in relation to the amount invested. However, the mere fact that a large number of trades occurred is not, in and of itself, sufficient evidence to find that an account was churned. The third fact the Plaintiff must prove under Rule 10b-5(c) is that the Defendant acted "knowingly." It is not enough to show that the Defendant acted accidentally or merely made a mistake in judgment or even that the Defendant was negligent. Rather, it must be shown that the Defendant acted with a mental intent to deceive, manipulate or defraud. The fourth essential part of the Plaintiff's claim under Rule 10b-5(c) is the requirement of proof that the Plaintiff "relied" upon the conduct of the Defendant and was "justified" in doing so. In other words, if you find that the Plaintiff would have engaged in the disputed transactions anyway, and that the Defendant's conduct, standing alone, had no adverse affect upon the Plaintiff's position, then there was no reliance, and there can be no recovery. Further, the Plaintiff must prove that reliance upon the Defendant was justified - -that the Plaintiff did not intentionally ignore suspicious circumstances and refuse to investigate them in disregard of a risk that was either known to the Plaintiff or so obvious that the Plaintiff should have been aware of it, and so great as to make it highly probable that harm would follow. The fifth and last essential part of the Plaintiff's claim under Rule 10b-5(c) is the requirement that the Plaintiff prove injury or damage to the Plaintiff as a proximate result of the Defendant's conduct. For damage to be the proximate result of an act or course of dealing it need not be shown that the act or course of dealing was the sole or exclusive cause of the injury or damage, but it must be proved that such act or course of dealing played a substantial part in causing or bringing about the damage, so that, except for such conduct, the damage would not have occurred. [The Plaintiff's second claim is based upon a statute enacted by the State of. Insofar as this case is concerned, the wording of that statute is substantially identical to Rule 10b-5(c), which was promulgated by the Securities and Exchange Commission - - the federal Law previously explained to you. Accordi ngly, in order to prevail on the claim under the state statute, the Plaintiff must prove each of those facts previously explained to you as being necessary to establish a claim under Rule 10b-5(c) except for the first item, which requires the use of an "instrumentality of interstate commerce."] [Also, with regard to the requirement of proof that the Defendant acted "knowingly" (the third essential part of the claim under Rule 10b-5(c)), the governing rule under state law differs from the federal law. As stated previously, under Rule 10b-5(c), it must be established that the Defendant acted with a mental state embracing an intent to deceive, manipulate or defraud. Under the state statute, it must be shown that the Defendant acted "knowingly," that is, that the Defendant acted voluntarily and purposely, and not because of mistake or accident; and it must also be established that the Defendant's acts or conduct operated as a fraud or deceit upon the Plaintiff; but it is not necessary to prove that in so acting the Defendant specifically intended to defraud or deceive the Plaintiff.] [The third separate claim alleged by the Plaintiff against the Defendant is that the Defendant violated a "fiduciary" obligation owed to the Plaintiff. A fiduciary obligation exists whenever one person - - the client - - places special trust and confidence in another person - - the fiduciary - - and relies upon the fiduciary to exercise discretion or expertise in acting for the client; and the fiduciary knowingly accepts that trust and confidence and thereafter undertakes to act on behalf of the client by exercising the fiduciary's own discretion and expertise. Of course, the mere fact that a business relationship comes into being between two persons does not mean that either owes a fiduciary obligation to the other. If one person engages or employs another and thereafter directs or supervises or approves the other's actions, the person so employed is not a fiduciary. Rather, as previously stated, it is only when one party reposes, and the other accepts, a special trust and confidence involving the exercise of professional expertise and discretion, that a fiduciary relationship comes into being. When one person does undertake to act for another in a fiduciary relationship, the law forbids the fiduciary from acting in any manner adverse or contrary to the interests of the client, or from acting for one's own benefit in relation to the subject matter. The client is entitled to the best efforts of the fiduciary on the client's behalf, and the fiduciary must exercise skill, care and diligence when acting on behalf of the client. A person acting in a fiduciary capacity is required to make truthful and complete disclosures to those to whom a fiduciary obligation is owed, and the fiduciary is forbidden to obtain an unreasonable advantage at the client's expense. Thus, in order to recover on the claim that the Defendant breached a fiduciary obligation owed to the Plaintiff, the Plaintiff must establish each of the following facts by a preponderance of the evidence:First: That a "fiduciary" relationship existed between the parties (as that term has been defined in these instructions);Second: That the Defendant violated that fiduciary obligation by "churning" the Plaintiff's accounts or by otherwise dealing in the Plaintiff's accounts for the Defendant's own interest thereby defrauding the Plaintiff; andThird: That the Plaintiff suffered damages as a proximate result of that violation of the fiduciary obligation. As stated previously with regard to the other claims, in order to show fraud, the Plaintiff must prove that the Plaintiff did not deliberately ignore and refuse to investigate a known risk that was so great as to make it highly probable that harm would follow.] Also, for damage to be the proximate result of an act or course of dealing, it must be shown that such act or course of dealing played a substantial part in causing or bringing about the damage, and that, except for such conduct, the damage would not have occurred. If you find for the Plaintiff on any of the Plaintiff's claims, you will then consider the issue of the amount of money damages to be awarded to the Plaintiff. In considering the issue of the Plaintiff’s damages, you are instructed that you should assess the amount you find to be justified by a preponderance of the evidence as full, just and reasonable compensation for all of the Plaintiff’s damages, no more and no less. Compensatory damages are not allowed as punishment and must not be imposed or increased to penalize the Defendant. Also, compensatory damages must not be based on speculation or guesswork because it is only actual damages that are recoverable. You should consider the following elements of damage, to the extent you find them proved by a preponderance of the evidence, and no others:(a) [Describe Plaintiff’s theory of recoverable compensatory or economic damages](b) Punitive damages, if any (as explained in the Court’s instructions) [The Plaintiff also claims that the acts of the Defendant were done willfully, intentionally or with callous and reckless indifference to the Plaintiff’s rights so as to entitle the Plaintiff to an award of punitive damages in addition to compensatory damages. If you find for the Plaintiff, and if you further find that the Defendant did act with malice, willfulness or callous and reckless indifference to the rights of others, the law would allow you, in your discretion, to assess punitive damages against the Defendant as punishment and as a deterrent to others. If you find that punitive damages should be assessed against the Defendant, you may consider the financial resources of the Defendant in fixing the amount of such damages [and you may assess punitive damages against one or more of the Defendants, and not others, or against more than one Defendant in different amounts].] 4.3 Securities Act - Rule 10b-5(c) 17 C.F.R. § 240.10b-5(c) Fraudulent Practice Or Course Of Dealing Stockbroker “Churning” (Including Violation Of Blue Sky Law And Breach Of Fiduciary Duty As Pendent State Claims) SPECIAL INTERROGATORIES TO THE JURY Do you find from a preponderance of the evidence:1. That the Defendant used an “instrumentality of interstate commerce” in connection with the securities transactions involved in this case?Answer Yes or No2. That the Defendant’s conduct in connection with such transactions violated Rule 10b-5 (as explained in the Court’ s instructions)?Answer Yes or No3. That the Defendant acted “knowingly” (as that term is defined in the Court’s instructions)?Answer Yes or No4. That the Plaintiff “justifiably relied” upon the Defendant’s conduct (as that term is defined in the Court’s instructions)?Answer Yes or No5. That the Plaintiff suffered damages as a result of the Defendant’s wrongful conduct?Answer Yes or No6. That “fiduciary” relationship existed between the parties (as that term is defined in the Court’s instructions)?Answer Yes or No7. That the Defendant violated [his] [her] fiduciary obligation by “churning” the Plaintiff’s accounts or by otherwise dealing in the Plaintiff’s accounts for the Defendant’s own interest thereby defrauding the Plaintiff?Answer Yes or No 8. That the Plaintiff suffered damages as the proximate result of that violation of the fiduciary obligation?Answer Yes or No9. That the Plaintiff should be awarded $ in compensatory damages. 10. That the Plaintiff should be awarded $ as punitive damages.SO SAY WE ALL.ForepersonDATED:ANNOTATIONS AND COMMENTSSee Arceneaux v. Merrill Lynch, 767 F.2d 1498 (11th Cir. 1985).