## Facts

- Lila A. Miley maintained a brokerage account with Oppenheimer & Co., Inc., handled by registered representatives Anthony L. Geller and John W. Hamilton.
- Miley asserted she was a relatively inexperienced, conservative investor seeking income and growth while preserving principal.
- The brokers executed frequent transactions in Miley’s account that generated substantial commissions and interest charges.
- Miley alleged the trading was excessive relative to her objectives and was conducted to generate commissions rather than to serve her interests.
- During the period of trading, Miley’s portfolio value declined more than the decline indicated by general market indices.
- Miley sued for churning under federal securities law (including Rule 10b-5) and for breach of fiduciary duty under Texas common law.
- A jury found Oppenheimer liable and awarded compensatory damages (including commissions/interest and portfolio-loss damages) and punitive damages on the state-law claims.
- Oppenheimer appealed, challenging liability proof, damages as duplicative, punitive damages, and the refusal to compel arbitration of the state-law claims.

## Issues

1. Whether sufficient evidence supported churning liability, including broker control of the account, excessiveness of trading, and the required mental state under Rule 10b-5.
2. Whether awarding both commissions/interest and portfolio decline beyond normal market movement constituted impermissible double recovery.
3. What method properly measures damages for an ongoing churning course of conduct.
4. Whether punitive damages were permissible under Texas fiduciary-duty law and whether the state-law claims should have been compelled to arbitration when intertwined with federal securities claims.

## Decision

- The court affirmed the judgment finding Oppenheimer liable for churning and breach of fiduciary duty.
- The court held the evidence permitted findings that the brokers exercised de facto control, that trading was excessive in relation to Miley’s objectives, and that the required culpable mental state was shown.
- The court rejected the double-recovery challenge, holding commissions/interest and excess portfolio decline compensate distinct injuries.
- The court approved a market-index benchmark approach to isolate the portion of portfolio decline attributable to churning rather than general market movement.
- The court upheld punitive damages under Texas law based on proof of willful or reckless misconduct.
- The court upheld denial of arbitration of the state-law claims because they were closely intertwined with the federal securities claims.

## Legal Principles

- Churning occurs when a broker controls trading in a customer’s account, trades excessively in light of the customer’s objectives, and does so to generate commissions in disregard of the customer’s interests; Rule 10b-5 liability requires scienter (intent or reckless disregard).
- “Control” may be shown without formal discretionary authority when the customer routinely follows the broker’s recommendations due to limited sophistication or independence.
- In a churning action, a customer may recover both (a) commissions and interest charges caused by excessive trading and (b) the decline in portfolio value attributable to churning beyond normal market decline; these are separate compensable harms.
- Damages for churning may be measured by comparing actual performance to a benchmark reflecting how the account would have performed absent misconduct, using relevant market indices to estimate normal market movement over the same period.
- Under Texas fiduciary-duty principles, punitive damages may be awarded where the broker’s misconduct is willful or in reckless disregard of the customer’s rights.
- When state-law claims are factually and legally intertwined with federal securities claims, a court may deny compelled arbitration of the state-law claims (as applied in this case’s time period).

## Conclusion

The court affirmed churning and fiduciary-duty liability and sustained a damages framework allowing recovery of both transaction-cost injuries (commissions and interest) and excess portfolio decline measured against market benchmarks, while also upholding punitive damages under Texas law and declining to compel arbitration of intertwined state-law claims.


Miley v. Oppenheimer & Co., 637 F.2d 318 (5th Cir. 1981)