## Facts

- Virginia H. Nesbit, individually and as trustee of the W. Wallace Nesbit Trust, held a conservative securities portfolio after her husband’s death.
- In 1974, she opened personal and trust brokerage accounts at Black & Company, Inc., handled by broker Steve McNeil; combined equity was about $211,640.
- Over roughly eleven years, McNeil executed about 1,000 trades with an aggregate transaction value of about $4.4 million and generated about $250,000 in commissions.
- The combined accounts increased in value to about $400,000 during the relationship.
- Nesbit closed the accounts and sued, alleging “churning,” i.e., excessive trading primarily to generate commissions rather than to meet her investment objectives.

## Issues

1. Whether substantial evidence supported liability for churning under § 10(b) and SEC Rule 10b-5.
2. Whether portfolio trading gains may be offset against damages measured by excess commissions attributable to churning.
3. Whether defendants must disgorge the full amount of excess commissions or only their net profit from those commissions.
4. Whether the federal securities claims were time-barred in whole or in part.
5. Whether the Oregon securities claim should have gone to the jury to permit recovery of attorney’s fees even if state-law damages were duplicative.

## Decision

- Affirmed the jury verdict for plaintiffs on the Rule 10b-5 churning claim and the district court’s denial of JNOV.
- Held the evidence was sufficient to support findings of excessive trading and broker control in accounts of a relatively unsophisticated investor who relied on the broker.
- Rejected defendants’ damages theory; trading gains in the account do not reduce or eliminate damages measured by excess commissions.
- Approved requiring defendants to disgorge the full amount of excess commissions attributable to churning, not merely net profit.
- Held the claims were not barred by the statute of limitations.
- Affirmed the directed verdict against plaintiffs on the Oregon securities-law claim, including denial of attorney’s fees under that statute.

## Legal Principles

- A Rule 10b-5 churning claim may be established by proof of excessive trading in an account controlled by the broker, undertaken with fraudulent intent to generate commissions.
- Trading gains or overall portfolio appreciation do not offset damages based on excess commissions caused by churning, because gains may be unrelated to the broker’s misconduct.
- Full disgorgement of excess commissions attributable to churning is an available and proper remedy; it is not limited to the broker’s net profit from those commissions.
- Statute-of-limitations defenses in churning cases turn on timely filing under the applicable accrual standard; where supported by the record, a timeliness determination will be upheld.
- A plaintiff cannot maintain a parallel state securities claim solely to obtain attorney’s fees where the state claim fails as a matter of law on the proof presented.

## Conclusion

The Ninth Circuit upheld liability and a damages award measured by excess commissions for churning, holding that account appreciation does not offset those commissions and that full disgorgement is appropriate, while also affirming rejection of the related Oregon securities claim and the limitations defense.


Nesbit v. McNeil, 896 F.2d 380 (9th Cir. 1990)