## Facts

- Sheldon Leib, an accountant and tax consultant with prior securities experience, opened a non-discretionary margin account at Merrill Lynch in 1972 through broker John Kulhavi.
- The account was expressly non-discretionary: Leib authorized each trade, and Kulhavi lacked formal authority to trade without approval.
- Kulhavi regularly discussed and recommended securities, including price movements, issuers, and potential profits; Leib and Kulhavi communicated frequently.
- The account was actively traded on margin; over time, nearly $300,000 in securities were purchased and about $8,300 in commissions were paid.
- The account’s equity ultimately fell to nearly zero as losses mounted and securities were sold to meet margin calls.
- The account was later placed in trust with Joel Leib as trustee, but the parties understood Sheldon Leib would continue to direct trading decisions.
- Plaintiffs sued alleging (1) churning under § 10(b) and Rule 10b-5 and (2) breach of fiduciary duty/common-law negligence based on permitting and encouraging heavy trading without adequate warnings about risks and costs.

## Issues

1. Whether defendants churned the account in violation of § 10(b) and Rule 10b-5 by exercising control and causing excessive trading to generate commissions.
2. What duties a broker owes in a non-discretionary account, and whether those duties were breached by permitting or encouraging heavy trading without adequate risk-and-cost disclosure.
3. Whether the brokerage firm could be held liable for the broker’s conduct under agency and related doctrines.

## Decision

- The court entered judgment for defendants after a bench trial.
- No churning was proven because the broker did not exercise the requisite control over trading; the customer retained decision-making authority.
- No § 10(b)/Rule 10b-5 violation was shown because plaintiffs failed to establish fraudulent intent or reckless misconduct tied to excessive trading for commissions.
- The broker did not breach a fiduciary duty on these facts because the account was non-discretionary and the customer was experienced, informed, and actively directing trading.
- Merrill Lynch was not liable because no actionable wrongdoing was found by its representative.

## Legal Principles

- A churning claim generally requires proof of: (1) broker control (formal or de facto) over trading, (2) excessive trading in light of the account’s character and the customer’s objectives, and (3) scienter (at least recklessness), commonly reflected in trading designed to generate commissions.
- In a non-discretionary account, frequent recommendations and communications do not alone establish broker control; the inquiry centers on who actually determined the volume and frequency of trading.
- Indicia such as turnover and commission-to-equity ratios may support an inference of excessiveness, but heavy trading, high commissions, or large losses are not dispositive when the customer understands and directs an aggressive strategy.
- Broker duties differ by account type: a discretionary account entails broader fiduciary management duties, while a non-discretionary account generally limits duties to honest and prompt execution, avoidance of material misstatements/omissions, suitable recommendations on a transaction basis, and providing accurate, complete, non-misleading information about recommended transactions.

## Conclusion

The court held that churning and related fraud-based liability require broker control, excessive trading, and scienter, and it rejected liability where a sophisticated customer retained actual control of a non-discretionary margin account and the evidence did not show deceptive conduct or a breach of the broker’s limited advisory and execution duties.


Leib v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 461 F. Supp. 951 (E.D. Mich. 1978)