Wilko v. Swan

• Decision Date: 23 May 1952
• Citation: 107 F. Supp. 75
• Parties: WILKO v. SWAN et al.
• Court: U.S. District Court — Southern District of New York

107 F. Supp. 75

WILKO v. SWAN et al.

United States District Court S. D. New York.

May 23, 1952.

Henry E. Mills, Washington, D. C., for plaintiff, by Richard H. Wels, New York City, of counsel.

Chadbourne, Parke, Whiteside, Wolff & Brophy, New York City, for defendants, by Leonard P. Moore, Edwin C. Hoyt, Jr., New York City, of counsel.

Roger S. Foster, Gen. Counsel, Alexander Cohen, Sp. Counsel, George H. Jaffin, Attorney, Washington, D. C. for Securities and Exchange Commission, amicus curiae.

GODDARD, District Judge.

Motion by defendants, Hayden, Stone & Co. to stay the trial of this action pursuant to Title 9 U.S.C.A. § 3, and all further proceedings herein until an arbitration has been had in accordance with the terms of the margin agreements entered into between plaintiff and defendants. Defendants, Hayden, Stone & Co. have not yet answered the complaint. The Securities and Exchange Commission has filed a brief amicus curiae opposing the stay of proceedings pending arbitration.

The suit is under the Securities Act of May 27, 1933 as amended, 15 U.S.C.A. § 77a et seq., and seeks to recover damages in the amount of $3,888.88.

The plaintiff alleges that on or about January 17, 1951, defendants sold to the plaintiff 1600 shares of the common stock of Air Associates, Inc., a New Jersey corporation, and that plaintiff paid $29,517.54 therefor; that "Said sale of securities by the defendants to the plaintiff was made by the use of the means and instrumentalities of transportation and communication in interstate commerce, to wit: the facilities of the New York Curb Exchange, a registered national securities exchange, the telephone and telegraph lines of the New York Telephone Company and the Western Union Company, and by the use of the United States mails, and said sale was made by means of communications by the defendants to the plaintiff which were and, which included untrue statements of material facts and omitted to state material facts necessary in order to make the statements made in the light of the circumstances under which they were made, not misleading." Plaintiff charges that defendants represented to the plaintiff that Air Associates, Inc. had concluded a merger with the Borg Warner Corporation which would increase the value of the stock and that banks and large financial interests were buying the stock as a result. Plaintiff asserts that these representations were in fact untrue and plaintiff did not know them to be untrue at the time of his purchase. He also charges that the defendant Haven B. Page, a director, counsel and owner of record of a large block of the stock of Air Associates, Inc. was at that time selling his stock or some of it on the New York Curb Exchange, including some or all of the stock sold to the plaintiff.

Hayden, Stone & Co. assert that the relationship between plaintiff and defendants Hayden, Stone & Co. was established by, based upon, and controlled by the terms and conditions of Margin Agreements dated May 2, 1950 and January 18, 1951, respectively, duly executed by the plaintiff.

The Margin Agreements, in small-type printed form, contain 16 separate paragraphs, and provide in part:

Introductory clause

"In consideration of your opening now or in the future or continuing an account or accounts in my name or for me for the purchase or sale of property, I agree with you and your successors as follows, all my relations and dealings with you being subject to this agreement."

Paragraph 2

"All transactions made by you or your agents for me are to be subject to the constitutions, rules, customs and practices of the exchanges or markets where executed and of their respective clearing houses and shall be subject to the provisions of the Securities Exchange Act of 1934 15 U.S.C.A. § 78a et seq. * * *."

Paragraph 8

"I expressly agree that you shall not be bound by any representation or agreement heretofore or hereafter made by any of your employees or agents which in any way purports to affect or diminish your rights under this agreement and that no representation or advice by you or your employees or agents regarding the purchase or sale by me of any property bought or sold on my order or carried or held in any manner for my account shall be the basis of any liability on your part to me."

Paragraph 16

"Any controversy arising between us under this contract shall be determined by arbitration pursuant to the Arbitration Law of the State of New York, and under the rules of either the Arbitration Committee of the Chamber of Commerce of the State of New York, or of the American Arbitration Association, or of the Arbitration Committee of the New York Stock Exchange or such other Exchange as may have jurisdiction over the matter in dispute, as I may elect. Any arbitration hereunder shall be before at least three arbitrators."

The contract for the sale of the stock was a separate agreement.

The Federal Arbitration Statute, Section 3, Title 9 U.S.C.A. § 3 reads:

"If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration." Emphasis added.

But this action is brought under the Securities Act of 1933, Title 15 U.S.C.A., and Section 77l of that Act provides that:

"Any person who — * * *

"(2) sells a security * * * by means of a prospectus or oral communication, which includes an untrue statement of a material fact * * * and who shall not sustain the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of such untruth or omission, shall be liable to the person purchasing such security from him, who may sue either at law or in equity in any court of competent jurisdiction, to recover the consideration paid for such security with interest thereon, less the amount of any income received thereon, upon the tender of such security, or for damages * * *."

Section 77n of the Securities Act of 1933 provides:

"Any condition, stipulation, or provision binding any person acquiring any security to waive compliance with any provision of this subchapter or of the rules and regulations of the Commission shall be void."

It would therefore seem that this controversy is not "referable to arbitration".

Section 77l provides a relatively simple court remedy for the aggrieved purchaser. It shifts some of the burden of proof to the seller. The purchaser is also given a choice of forum.

It is very clear that the intent of the Congress was to require that the provisions of the Securities Act should be strictly complied with so that the purchaser of securities would be protected as fully as reasonably possible. Although the Congress in 1934 enacted some alleviating amendments in respect to Section 77k, which imposes liabilities for misrepresentation in a registration statement, it made no change in Section 77l.

As the Securities and Exchange Commission suggests, many purchasers of securities would not hesitate to sign the printed form in small type which includes a provision for arbitration, thereby waiving the remedies provided by the Securities Act, particularly as few purchasers are aware of the provisions of the Securities Act. A collateral agreement of this nature would nullify the Act's basic purposes and allow the purposes of the Congress to be circumvented.

In the Senate Report on the bill it was said:

"It is now imperative that the Federal Government shall adopt measures looking to the protection of the purchasers of securities in interstate commerce." Emphasis added. Sen. Rept.No.47, 73rd Cong. 1st Sess. (1933) p. 2.

The House Committee Report stated:

"Unless responsibility is to involve merely paper liability it is necessary to throw the burden of disproving responsibility for reprehensible acts of omission or commission on those who purport to issue statements for the public's reliance. The responsibility imposed is no more than nor less than that of a trust. It is a responsibility that no honest banker and no honest business man should seek to avoid or fear. To impose a lesser responsibility would nullify the purposes of this legislation." Emphasis added. H.R.Rep.No.85, 73rd Cong. 1st Sess. (1933) pp. 9-10.

In Otis & Co. v. Securities and Exchange Commission, 6 Cir., 106 F.2d 579, at page 583 the court declared:

"This statute should be so construed as to achieve the purpose of its enactment if its language is susceptible of such a construction. The obvious purpose of the Congress in its enactment was protection of the investing public." See also Oklahoma-Texas Trust v. S.E.C., 10 Cir., 100 F.2d 888, 891.

In the light of this background of Congressional purpose, the liabilities provision of Section 77l and the antiwaiver provision of ...