## Facts

- Samuel Mihara opened a joint securities account with Dean Witter’s Santa Monica office in January 1971 and was assigned account executive George Gracis.
- Although the account was nominally non-discretionary, Mihara relied heavily on Gracis’s recommendations and routinely followed them.
- Mihara alleged defendants engaged in excessive trading (churning) and purchased securities unsuitable for his investment objectives, causing substantial losses over about three years.
- Trading reflected short holding periods and high turnover, including a first-year turnover rate of roughly 14 and many positions held 60 days or less.
- Mihara complained about performance but continued to follow broker recommendations.
- A jury found liability under § 10(b) and Rule 10b-5 and for breach of fiduciary duty under California law, awarding $24,600 compensatory damages and punitive damages against both defendants.

## Issues

1. Whether the evidence supported a finding of churning in violation of § 10(b) and Rule 10b-5, including proof of broker control, excessive trading, scienter, and causation.
2. Whether the evidence supported liability for breach of fiduciary duty under California law.
3. Whether punitive damages and the challenged jury instructions, evidentiary rulings, and other trial-management decisions required judgment as a matter of law or a new trial.

## Decision

- The Ninth Circuit affirmed the judgment for Mihara.
- The court held the evidence was sufficient for the jury to find churning under § 10(b) and Rule 10b-5.
- The court accepted that a broker can exercise de facto control over a non-discretionary account when the customer habitually follows the broker’s advice.
- The court held scienter could be inferred from a sustained pattern of excessive trading and reckless disregard of the customer’s objectives; it need not be proved trade-by-trade for a churning course of conduct.
- The court affirmed the breach-of-fiduciary-duty verdict under California law and rejected defenses such as waiver and estoppel based on continued trading and consent.
- The court found no reversible instructional or evidentiary error and upheld the compensatory and punitive damages as supported by the record and not excessive.

## Legal Principles

- A churning claim under § 10(b) and Rule 10b-5 requires proof that: (1) the broker controlled the account (including de facto control), (2) trading was excessive in light of the customer’s objectives and circumstances, and (3) the broker acted with scienter (intent to defraud or reckless disregard).
- Control may be shown even without formal discretion when the customer routinely accepts the broker’s recommendations, effectively yielding control over trading decisions.
- Excessiveness may be proved through quantitative and qualitative indicators such as turnover rate, holding periods, and whether the pattern appears commission-driven rather than aligned with the customer’s objectives.
- In churning cases, scienter may be inferred from the overall course of conduct and does not require separate proof of intent for each individual transaction.
- A broker-customer relationship may create fiduciary duties under state law where the customer places trust and confidence in the broker; excessive and unsuitable trading inconsistent with the customer’s objectives can breach those duties and support punitive damages where permitted.

## Conclusion

The Ninth Circuit upheld jury findings that a broker and firm committed securities fraud by churning a customer’s account and breached state-law fiduciary duties, emphasizing that de facto control and scienter can be established from the customer’s reliance and a sustained pattern of excessive, objective-mismatched trading.


Mihara v. Dean Witter & Co., 619 F.2d 814 (9th Cir. 1980)