## Facts

- Milton W. Garnatz, an unsophisticated investor of limited education and modest means, attended brokerage-sponsored investment seminars in November 1972.
- After seminars and two personal meetings with Kingsley O. Wright (a vice president of Stifel, Nicolaus & Co.), Garnatz entered a “special bond margin account program” represented as maximizing income while preserving capital.
- Garnatz was told, among other things, that: purchases were board-approved; margin use involved no risk to his capital; the bonds would not drop more than 1% in value; margin interest would never exceed 8%; and recommended purchases would be without risk.
- Despite Garnatz’s expressed desire to avoid speculation, the account purchased largely low- or non-rated bonds that were highly speculative and declined in value.
- Garnatz sued Stifel and Wright alleging federal securities fraud (including § 10(b) and Rule 10b-5) and pendent common-law fraud; a jury awarded $45,000 plus interest and costs.
- Defendants appealed, contesting the damages measure, sufficiency of the evidence, and timeliness under the statute of limitations.

## Issues

1. Whether damages for a Rule 10b-5 securities fraud claim must be limited to a strict out-of-pocket measure tied to value at purchase, or may reflect the loss caused by fraudulently inducing entry into an unsuitable, risky program.
2. Whether the evidence supported the jury’s findings on liability elements (including material misrepresentation, reliance, and causation) and on damages.
3. Whether the action was time-barred under the borrowed state limitations period, considering discovery and fraudulent concealment principles.

## Decision

- The court affirmed the judgment for Garnatz.
- It upheld a compensatory damages approach not confined to a mechanical out-of-pocket formula where the fraud induced participation in the program and the award reasonably reflected the loss proximately caused by that fraud.
- It held the record contained sufficient evidence for the jury to find material misrepresentations, reliance by an unsophisticated investor, and causation supporting liability and damages.
- It concluded the action was timely under the applicable borrowed limitations period as measured by when Garnatz discovered, or reasonably should have discovered, the fraud, including the effect of defendants’ conduct delaying discovery.

## Legal Principles

- Rule 10b-5 damages are compensatory and must be reasonably related to the loss proximately caused by the fraud; a rigid out-of-pocket measure is not mandatory when it would undercompensate the injury from a fraud-induced transaction.
- When misrepresentations induce an investor to enter an unsuitable investment arrangement, damages may consider the overall economic harm caused by being drawn into that arrangement, so long as the award avoids a windfall.
- In § 10(b)/Rule 10b-5 actions, courts borrow the most analogous state statute of limitations and apply discovery-based accrual principles, including equitable effects of fraudulent concealment.
- Evidence that false, material assurances were made to an unsophisticated investor and that the investor relied on them may support findings of transaction causation and loss causation.

## Conclusion

The Eighth Circuit upheld a jury verdict finding securities and common-law fraud where a brokerage induced an unsophisticated investor to enter a margin bond program through false assurances of safety, approved a flexible compensatory damages measure tied to the fraud’s actual economic impact, and held the claims timely under discovery-based limitations rules.


Garnatz v. Stifel, Nicolaus & Co., 559 F.2d 1357 (8th Cir. 1977)