Canizaro v. Kohlmeyer & Company

• Decision Date: 06 February 1974
• Docket Number: Civ. A. No. 72-995.
• Citation: 370 F. Supp. 282
• Court: U.S. District Court — Eastern District of Louisiana
• Parties: Joseph C. CANIZARO v. KOHLMEYER & COMPANY.

370 F. Supp. 282

Joseph C. CANIZARO v. KOHLMEYER & COMPANY.

Civ. A. No. 72-995.

United States District Court, E. D. Louisiana.

February 6, 1974.

Paul E. Hurley, Hurley & Stassi, Peter J. Butler, Steeg, Butler & O'Connor, New Orleans, La., for plaintiff.

Charles Kohlmeyer, Jr., Lemle, Kelleher, Kohlmeyer & Matthews, New Orleans, La., for defendant.

HEEBE, Chief Judge:

Plaintiff in this action seeks to recover damages for violations of Section 12(2) of the Securities Act of 1933, (15 U.S.C. § 77l(2)), and 17 C.F.R. § 240.10b-5 promulgated pursuant to Section 10 of the Securities Exchange Act of 1934, (15 U.S.C. § 78j), in the purchase or sale of securities. We find in favor of the defendant on all counts and make the following findings of fact and conclusions of law.

FINDINGS OF FACT

1. Kohlmeyer & Company, the defendant herein, is a registered broker-dealer, engaged in the brokerage and sale of securities.

2. Joseph C. Canizaro, the plaintiff, is an experienced businessman and financier and may be considered to be a sophisticated investor. By his own admission, Mr. Canizaro has tended to specialize in speculative acquisitions, with a view toward making quick profits by quickly reselling the purchased securities.

3. On the morning of May 20, 1970, the plaintiff received a telephone call from Murray Peavey, an employee of J. B. Williams & Company, a stock brokerage firm located in Nashville, Tennessee, during which Mr. Peavey offered to arrange a sale to the plaintiff of 18,000 shares of the common stock of Home of Country Furniture, Inc. (hereinafter referred to as HCF) at $7.50 per share.

4. Since the plaintiff had never heard of HCF before this time, he asked Peavey several questions about the stock, principally about its marketability, the identity of the seller and the reasons for the seller wanting to sell. He was told by Peavey that the company was in the furniture business in New York, was given some figures with regard to current earnings, and was advised that the seller was under financial pressure and had to sell the securities immediately in order to raise money. He was further advised that there was a current trading market for the stock which was approximately $13.00 to $15.00 per share, and that the seller's willingness to sell at substantially less than the current market value was dictated by financial pressure to raise money immediately. The offer was stated to be good for twenty-four hours only.

5. Immediately following his conversation with Peavey, plaintiff called an acquaintance, one Hutchins, who was also employed by J. B. Williams & Company, and received assurances from Hutchins that the deal offered was a "good deal." Hutchins was known to plaintiff to have a bad reputation and plaintiff was wary of the proposal because he did not trust either Hutchins or J. B. Williams & Company.

6. Following his conversations with Peavey and Hutchins, Mr. Canizaro called Robert E. Wilkins, a registered representative at Kohlmeyer & Company with whom he had an account and with whom he had done business over the past several years. He informed Wilkins about the proposed stock offer without indicating to him his doubts concerning Hutchins and J. B. Williams & Company. Wilkins was then asked whether he could handle the transaction and was requested to "check out" the deal and to ascertain the answers to the following questions. 1) Who was the seller of the stock? 2) Was the seller an officer or director of HCF? 3) Were there any SEC restrictions pertaining to the stock in question? 4) What were the current earnings per share of HCF stock? 5) What was the breadth of the market for HCF stock? 6) What bid and asked prices were reflected in the "pink sheets" published by the National Quotation Bureau for the stock?

7. In view of the testimony adduced at trial and the fact that Canizaro informed Wilkins that this stock offer was good for only twenty-four hours, we find that Canizaro neither requested nor expected any in-depth analysis of HCF or the stock nor did he request or expect any investment opinion concerning the advisability of the stock offer.

8. After this conversation, Wilkins undertook to ascertain the requested information. He contacted Peavey and learned that the seller, Edward Cohen, was neither an officer nor a director of HCF. He further learned that there were no restrictions on the trading of HCF stock. He contacted the president of HCF and obtained from him information pertaining to the earnings of the company. He consulted the "pink sheets" and found that there were five brokerage firms listed as market-makers of HCF stock. Wilkins telephoned Canizaro on the afternoon of May 20 and relayed all of this information to him.

9. On the following morning, May 21, Wilkins telephoned plaintiff again to report that he had determined that a public offering of 100,000 shares of HCF stock had been publicly made in late 1969 at $3.00 per share. He also reported that the oldest market information readily available was April 1, 1970, and from that date to the present the stock had been bid at $9.00 a share or more and was currently quoted at $11.00 bid — $13.00 asked. Wilkins did not consult the "pink sheets" for early March which showed the bid and asked prices for HCF to be 3½ and 4½, respectively.

10. Wilkins then told Canizaro that based upon the information he had obtained, he could see no reason why Canizaro should not make the purchase.

11. Canizaro asked Wilkins to check with one of the partners of Kohlmeyer & Company to determine whether Kohlmeyer & Company could handle the transaction with J. B. Williams & Company, and further instructed Wilkins to offer $7.00 per share for the stock.

12. Wilkins consulted with Herman Kohlmeyer, Jr., a senior partner in the firm, who, in turn, asked Mort Seymour who was in charge of Kohlmeyer's over-the-counter department to "check out" J. B. Williams & Company to see whether Kohlmeyer & Company could handle the transaction. In addition, Herman Kohlmeyer, Jr., and Wilkins determined that a commission of 25¢ per share would be appropriate. This amount is about 3½% of the purchase price, which is below the 5% maximum suggested by the National Association of Securities Dealers whose rules governed this over-the-counter transaction.

13. Seymour learned that J. B. Williams & Company had ceased doing business with the public, possibly at the request of the SEC, but was still transacting business with other brokerage houses. He, therefore, concluded that Kohlmeyer & Company could handle the transaction.

14. Wilkins contacted Canizaro and told him that his $7.00 per share offer had been accepted by the seller of the stock and that Kohlmeyer & Company would handle the transaction at a net price to plaintiff of $7.25 per share. Canizaro instructed Wilkins to confirm the purchase.

15. In view of the fact that J. B. Williams & Company had ceased dealing with the public, Seymour and Herman Kohlmeyer, Jr., decided to insert the following legend on plaintiff's confirmation slip: "THIS IS NOT A BONA FIDE TRD. UNTIL SELLER DEL." This was rarely done but on this occasion Kohlmeyer and Seymour had sufficient doubts about J. B. Williams & Company to merit an extra degree of caution; the legend was designed to insure only that the securities were properly delivered and in negotiable form.

16. At no time prior to the consummation of the transaction was Canizaro told that J. B. Williams & Company had ceased dealing with the public or that Seymour had placed the special legend on the confirmation slip.

17. The transaction was billed out on confirmations which showed the defendant to be acquiring from J. B. Williams & Company as principal and to be selling to the plaintiff as principal. This was done solely because the defendant's accounting records are kept on computer which is programmed to register commissions at the New York Stock Exchange rate on each transaction. Whenever a higher rate is charged, as was the case here, the transaction is simply confirmed on a principal basis and the data is manually fed into the computer although it is clear that the broker has "bought" the stock for the account of its customer.

18. Kohlmeyer & Company had never before dealt in HCF stock nor had any member of the firm even heard of the company before the transaction in question.

19. On May 22, the stock certificates were hand carried by J. B. Williams & Company to New Orleans and were delivered to and paid for by plaintiff.

20. Following plaintiff's acquisition of the securities, orders were placed by plaintiff to sell but those orders were always placed at a price above the then market price and no sale order was executed. Immediately following plaintiff's purchase, the stock was quoted at $16.00-$17.50 but from that high, the stock dropped abruptly to the range of $3.00-$4.00, and eventually the market disappeared altogether. This sudden decline in market value was attributed to the fact that the stock's principal market maker, First William Street Securities, Inc., located in New York, was forced by either the SEC or the NASD to stop making a market due to violations of the rules pertaining to margin requirements.

21. On or about December 29, 1972, plaintiff sold all the stock to a trust established for his children at 9¢ a share, thereby sustaining a loss of approximately $125,000.00.

22. At no time prior to the consummation of this transaction did Wilkins or any other employee of Kohlmeyer & Company consult HCF's offering circular which had been issued in December 1969 in conjunction with the company's public stock offering. This circular showed that of the 300,000 shares authorized to be issued by HCF, 200,000 were owned by the president of the company. The 100,000 shares offered in 1969 were exempt from registration pursuant to Regulation A, Title 17, C.F.R. § 230.251, et seq., and were offered on a "best efforts only" basis. Although Kohlmeyer & Company did...