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Erlich v. First National Bank of Princeton

Decided: December 12, 1984.


Lasser, P.J.T.C. (temporarily assigned).


[208 NJSuper Page 274] This is an action seeking damages for the claimed mismanagement of a custodian management account. It alleges negligence, malpractice, breach of fiduciary duty and breach of contract by the First National Bank of Princeton (Bank) and the manager of plaintiff's account, W. Jeffrey Maiden (Maiden). Plaintiff's principal contention concerns the concentration of his account in the stock of International Systems and Controls Corp. (ISC), an engineering, manufacturing and financial company engaged in providing services and products for the development of energy, agriculture and forestry resources. The following chart, prepared from the Bank's periodic reviews of plaintiff's portfolio, shows the concentration of the account in ISC stock.



10/15/71 31 $109,358 100 $6,200

01/15/72 33 178,179 900 56,700

04/15/72 17 268,233 2,000 228,000

10/15/72 6 363,502 2,300 333,500

12/29/72 6 319,678 2,220 297,480

04/06/73 6 218,295*fn* 4,840 198,440

09/28/73 6 216,611 4,010 195,988

12/31/73 6 200,953 3,910 184,747

03/29/74 5 167,986 3,910 149,557

09/30/74 5 80,971 3,810 73,342

03/31/75 6 108,594 4,170 92,261

09/30/75 5 143,703 4,070 123,626

12/31/75 5 144,752 4,070 124,135

03/31/76 5 146,100 4,070 121,063

09/24/76 4 139,991 4,070 119,556

12/31/76 4 97,430 4,070 75,295

03/31/77 4 135,807 4,070 108,872

09/30/77 4 80,820 4,070 52,910

12/30/77 4 84,320 4,070 52,910

03/31/78 4 110,821 4,070 74,786

09/29/78 4 157,650 4,070 109,890

12/29/78 4 77,365 4,070 36,630




10/15/71 $62 5.66%

01/15/72 63 31.82

04/15/72 114 85.00

10/15/72 77.8 91.76

12/29/72 76.98 93.05

04/06/73*fn* 41.45 90.90

09/28/73 43.91 90.47

12/31/73 47.25 91.93

03/29/74 44.29 89.02

09/30/74 19.25 90.57

03/31/75 22.125 84.95

09/30/75 30.375 86.02

12/31/75 30.50 85.75

03/31/76 29.75 82.86

09/24/76 29.375 85.40

12/31/76 18 77.28

03/31/77 26.75 80.16

09/30/77 13 65.46

12/30/77 13 62.74

03/31/78 18.375 67.48

09/29/78 27 69.70

12/29/78 9 47.34


On May 12, 1971 plaintiff, a psychiatrist practicing in Princeton, New Jersey, opened a Custodian Management Account (CMA) with defendant Bank. The agreement entered into by plaintiff and the Bank provided for a nondiscretionary account, with the Bank periodically examining securities held in the CMA and recommending sales and purchases that, in the Bank's opinion, were in plaintiff's best interest. The agreement provided that no transaction could be executed without plaintiff's written authorization. Except for proxies, plaintiff would be sent all material received by the Bank from corporations in which the CMA was invested. In addition, the agreement exculpated the Bank from liability resulting either from its good faith recommendations or its failure to make recommendations. The daily management of the CMA was entrusted to defendant Maiden, a trust investment officer of the Bank. The CMA was reviewed at least semi-annually by the Bank's trust committee.

Plaintiff subscribed to and read various publications relating to the investment world, including Forbes, Business Week, Value Line, Barron's and Investor's Digest. In addition, he read the financial section of the New York Times daily, including the stock quotations. Plaintiff maintained a detailed record of all of his investments in a small brown ledger. He was a member and had been president of the Princeton Prospectors, an investment club.

Plaintiff had invested in stocks and bonds for approximately 15 years prior to opening his CMA with the Bank. During this period, he invested as much as $230,000 in a portfolio of 40 different securities purchased through several brokerage firms, and incurred $110,000 in losses, half of which had been recovered by 1971. Two years prior to opening his CMA, plaintiff borrowed $75,000 from the Bank to purchase stock. Plaintiff testified to the relative degree of risk of each security he owned

at the time his CMA was opened, opining that greater than half were of the high risk variety.

Plaintiff was dissatisfied with the results of his own investment decisions and was concerned about the burden his investing had imposed on his psychiatric practice, so he sought professional investment advice from the Bank, where he maintained his checking account. The Bank also held the mortgage on his home and was a fiduciary named in his will. Plaintiff discussed retention of the Bank for investment advice with an officer of its trust department. Plaintiff selected a custodian management account because he wanted the Bank's investment advice but wanted to retain control of the actual investment decisions. At the time he opened his CMA, plaintiff brought to the Bank a portfolio of securities worth approximately $140,000 -- $180,000, which was substantially all of his assets except for the house in which he lived.

Plaintiff's objectives in opening his CMA are in dispute. He contends that he sought conservative management and growth, but not growth at the expense of conservative management. Defendants claim that plaintiff sought above-average growth in a desire to outperform the market. The statement of "Account Objectives" on the Bank's New Account Information Sheet for plaintiff simply says "growth."

After opening his CMA, plaintiff made some trades through his other brokerage accounts outside the Bank between May and August 1971. Each of these transactions involved at least 100 shares, several were short sales,*fn1 and many were carried out without Maiden's advice or recommendation.

In August 1971 Maiden recommended ISC common stock to plaintiff as a possible investment. He provided plaintiff with a

report on ISC prepared by Hornblower Weeks, Inc., as well as other related materials. On August 26, 1971 plaintiff purchased 100 shares of ISC and followed Maiden's advice in funding the purchase with the sale of 200 shares of Compuscamp, Inc., 300 shares of GAF, Inc. and 100 shares of Great Lakes Dredge and Dock Co.

In late October 1971, ISC stock began to be purchased in significant quantities for plaintiff's CMA. Maiden discussed each purchase with plaintiff before obtaining his written authorization for the purchase. These purchases of ISC resulted in part from plaintiff's and Maiden's attendance at an August 1971 meeting at the Nassau Club in Princeton. The primary speaker at this meeting was Larry Lau, ISC financial vice-president in charge of public relations. Lau described the virtues of ISC as an investment, characterizing ISC as an emerging growth company. He forecast earnings of $10 per share in five years and $25 per share in ten years. Subsequent to the meeting, an additional 700 shares of ISC were purchased for plaintiff's CMA, and plaintiff purchased 100 shares for his wife through her account at Merrill Lynch. On November 3, 1971 an additional 200 shares of ISC were purchased for plaintiff's CMA, financed by a loan from the Bank. On November 17, 1971 the Princeton Prospectors Club, a private investors' stock club, commenced its purchase of ISC, partly because of plaintiff's influence as club president.

It is important to note that from May 1971 until February 1973, when plaintiff suffered a heart attack, hardly a business day went by that plaintiff and Maiden were not in communication regarding plaintiff's investments, either in person or by telephone, although plaintiff and Maiden disagree as to which of them initiated most of the telephone calls. Plaintiff often visited Maiden at the Bank to discuss his investments. Maiden would suggest securities from lists of recommended stocks prepared by the Bank. There were occasions when discussion of stock purchases was initiated by Maiden and occasions when it was initiated by plaintiff. Plaintiff and Maiden would discuss

the trading price of the suggested stock, the corporation's activities, products or services, and the prognosis of the long or short-term profitability of the corporation. After plaintiff's heart attack, communications between plaintiff and Maiden were less frequent, although occurring several times a week.

No stock was ever purchased or sold without plaintiff's written authorization. The Bank sent plaintiff confirmation slips and periodic investment review statements that plaintiff read and, by his own admission, understood.

On January 25, 1972 ISC was awarded a major contract, which resulted in a price rise in its stock. An additional 700 shares of ISC were then purchased for plaintiff's CMA, financed by the sale of plaintiff's New Jersey Turnpike Authority bonds. Between February 2 and 10, 1972, 400 shares of ISC were purchased through the Bank at plaintiff's request, with Maiden's approval. By this time the per share market price of the stock had risen $30 above plaintiff's initial investment price of $60 per share.

At about this time, Maiden began investing in ISC for his own account.

On May 22, 1972 the Bank's trust committee reviewed accounts at the Bank that contained holdings in ISC. After lengthy debate as to the appropriateness of ISC as an investment, the ...

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