358 F.2d 178 (2nd Cir. 1966), 144, Colonial Realty Corp. v. Bache & Co.

Docket Nº:144, 29868.
Citation:358 F.2d 178
Party Name:COLONIAL REALTY CORPORATION Plaintiff-Appellant, v. BACHE & CO., Defendant-Appellee.
Case Date:March 10, 1966
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit

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358 F.2d 178 (2nd Cir. 1966)



BACHE & CO., Defendant-Appellee.

Nos. 144, 29868.

United States Court of Appeals, Second Circuit.

March 10, 1966

Argued Nov. 8, 1965.

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Spencer Pinkham, New York City (Colton & Pinkham, New York City), for plaintiff-appellant.

Marvin Schwartz (Sullivan & Cromwell, New York City, Peter R. Fisher, New York City, of counsel), for defendant-appellee.

Before LUMBARD, Chief Judge, and FRIENDLY and SMITH, Circuit Judges.

FRIENDLY, Circuit Judge:

Colonial Realty Corporation, a Delaware corporation with its principal place of business in Pennsylvania, brought this action in the District Court for the Southern District of New York against Bache & Co., a limited partnership organized pursuant to the New York Partnership Law and engaged in securities brokerage in New York City. The controversy arises out of Bache's sales of securities in Colonial's margin account during the stock market dip of May and June 1962. Bache claimed it acted under authority of a clause in its standard form of margin contract in which Colonial covenanted to 'maintain such margins as you may from time to time require, upon my accounts, and promptly meet all margin calls.' Colonial relied on an alleged oral agreement that Bache would not require a margin in excess of the minimum requirements of the New York Stock Exchange and also claimed negligence on Bache's part. With respect to all securities sold to meet calls exceeding the Stock Exchange's minimum, Colonial sought to recover the losses it had suffered, running into millions of dollars, and some $100,000 in commissions which Bache had collected. 1

The complaint predicated jurisdiction of the district court on both diversity and the existence of a federal question. Most of the claims were alleged to arise in the first instance from breach of contract or negligence, and in the second from Bache's failure to conduct its dealings in

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a manner 'consistent with just and equitable principles of trade' within the meaning of§§ 6(b) and 15A(b)(7) of the Securities Exchange Act of 1934, 2 of Article XIV of the Constitution of the New York Stock Exchange (NYSE), and of Article I, § 2(a) of the By-Laws and Article III, § 1 of the Rules of Fair Practice of the National Association of Securities Dealers, Inc. (NASD). Bache moved for an order dismissing the complaint on the ground that it failed to state any federal claim and there was no diversity of citizenship, or, if that relief were denied, for an order compelling arbitration pursuant to its contract with Colonial and staying the action in the interim.

The district court dismissed the federal claims and, having found diversity, proceeded to hold a hearing to determine the applicability of the arbitration agreement. 3 After the hearing, the judge issued a second order staying the action pending arbitration under the Federal Arbitration Act, 9 U.S.C. § 4, and New York CPLR § 7503; this included a provision amending the prior order which had struck the federal claims so as to grant Colonial leave to request an interlocutory appeal pursuant to 28 U.S.C. § 1292(b). Although the stay of what would have been an action at law was appealable under 28 U.S.C. § 1292(a)(1), Shanferoke Coal & Supply Corp. v. Westchester Service Corp., 293 U.S. 449, 55 S.Ct. 313, 79 L.Ed. 583 (1935), and Colonial's appeal therefrom necessarily involved the propriety of dismissal of the federal claims, see fn. 3, we granted leave under § 1292(b) to appeal from that ruling in order to eliminate any doubt as to our ability to reach an issue of general importance under the securities laws.

Colonial's assertion that the complaint alleged a violation of federally granted rights is based upon provisions in the Securities Exchange Act dealing with registration of exchanges and dealers' associations, and upon rules adopted pursuant to the statute by the NYSE and the NASD. Section 6(b) of the Securities Exchange Act provides:

'No registration shall be granted or remain in force unless the rules of the exchange include provision for the expulsion, suspension, or disciplining of a member for conduct or proceeding inconsistent with just and equitable principles of trade, and declare that the willful violation of any provisions of this chapter or any rule or regulation thereunder shall be considered conduct or proceeding inconsistent with just and equitable principles of trade.'

Section 15A(b)(8) forbids registration of a national securities association unless:

'the rules of the association are designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to provide safeguards against unreasonable profits or unreasonable rates of commissions or other charges, and, in general, to protect investors and the public interest, * * *.'

Under the NYSE Constitution, Art. XIV, 6, disciplinary measures may be taken against a member found guilty 'of conduct or proceeding inconsistent with just and equitable principles of trade'; the NASD By-Laws, Art. I, § 2(a), and Rules of Fair Practice, Art. III, § 1, prohibit membership by persons disciplined on this account and require members to 'observe high standards of commercial honor and just and equitable principles of trade.' The complaint alleged simply that Bache's dealings were not consistent

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with such principles without elaborating how, save insofar as this can be gleaned from the charges of breach of contract and of failure to use due care to protect its customer's interests.

Colonial relies largely on Baird v. Franklin, 141 F.2d 238 (2 Cir.), cert. denied, 323 U.S. 737, 65 S.Ct. 38, 89 L.Ed. 591 (1944), in which this court recognized that culpable failure by a stock exchange to enforce rules adopted pursuant to § 6(b) of the Securities Exchange Act may give rise to a federal claim against the exchange by an investor injured thereby. See Brown v. Bullock, 294 F.2d 415, 421 (2 Cir. 1961); Silver v. New York Stock Exchange, 302 F.2d 714, 719 (2 Cir. 1962), rev'd on other grounds, 373 U.S. 341, 83 S.Ct. 1246, 10 L.Ed.2d 389 (1963). Colonial urges that the civil liability thus implied from § 6(b) cannot reasonably be limited to an exchange but must extend to a member firm whose conduct has violated rules adopted by the exchange under the statute; it says that the delinquent broker in the Baird case would also have had to be held for an implied federal liability. Although we agree that a federal claim against the member firm existed in Baird since the misconduct charged was a violation of the statute itself, see 141 F.2d at 242, this does not establish that implication of a private right of action against an exchange for culpable failure to enforce its rules necessarily calls for recognizing a similar right against an individual broker who is claimed to have violated them.

We start from the proposition that the judicial recognition and enforcement of a private remedy not expressly afforded by the Securities Exchange Act is predicated on the duty of the courts 'to make effective the congressional purpose' represented in 'the statute and the federal policy which it has adopted.' J. I. Case Co. v. Borak, 377 U.S. 426, 433, 84 S.Ct. 1555, 1560, 12 L.Ed.2d 423 (1964). Implication of a private right of action may be suggested by explicit statutory condemnation of certain conduct and a general grant of...

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