Jacobi v. Bache & Co., Inc.

• Decision Date: 03 June 1974
• Docket Number: No. 70 Civ. 3152.,70 Civ. 3152.
• Parties: L. John JACOBI and Eugene Geisz, Individually, on behalf of the members of the American Association of Securities Representatives, and on behalf of all other securities representatives similarly situated, Plaintiffs, v. BACHE & CO., INC., et al., Defendants.
• Court: U.S. District Court — Southern District of New York

377 F. Supp. 86

L. John JACOBI and Eugene Geisz, Individually, on behalf of the members of the American Association of Securities Representatives, and on behalf of all other securities representatives similarly situated, Plaintiffs, v. BACHE & CO., INC., et al., Defendants.

No. 70 Civ. 3152.

United States District Court, S. D. New York.

June 3, 1974.

Abraham E. Freedman, New York City, for plaintiffs; Charles Sovel, Edward M. Katz, New York City, of counsel.

Milbank, Tweed, Hadley & McCloy, New York City, for defendant New York Stock Exchange, Inc.; William E. Jackson, Russell E. Brooks, Mark L. Davidson, New York City, of counsel.

Sullivan & Cromwell, New York City, for defendants Bache & Co., Inc., Kidder, Peabody & Co., Inc., Dean Witter & Co., Inc., Smith Barney & Co., Inc., Dominick Int'l. Corp.; Marvin Schwartz, James H. Carter, Jr., Richard J. Urowsky, New York City, of counsel.

Seward & Kissel, New York City, for defendant Rauscher Pierce Securities Corp.; Anthony R. Mansfield, Kenneth J. Kelly, New York City, of counsel.

Simpson, Thacher & Bartlett, New York City, for defendants Lehman Bros., Tucker, Anthony & R. L. Day; Lindsay A. Lovejoy, Jr., New York City, of counsel.

Winthrop, Stimson, Putnam & Roberts, New York City, for defendants Bear, Stearns & Co., R. W. Pressprich & Co., Inc.; Stephen A. Wiener, Theodore M. Weitz, New York City, of counsel.

A. George Saks, New York City, for defendant Newburger, Loeb & Co.

Gifford, Woody, Carter & Hays, New York City, for defendant Harris, Upham & Co., Inc.; L. Mifflin Hayes, Louis R. Proyect, New York City, of counsel.

E. Michael Growney, Jr., New York City, for defendant Spencer Trask & Co.

Shearman & Sterling, New York City, for defendant W. E. Hutton; Lansing R. Palmer, George J. Wade, New York City, of counsel.

Hall, McNicol, Marrett & Hamilton, New York City, for defendant Thomson & McKinnon Auchincloss, Inc.; William C. Bieluch, Jr., New York City, of counsel.

Breed Abbott & Morgan, New York City, for defendant Walston & Co., Inc.; Joseph P. Dailey, New York City, of counsel.

Nathan Leventon, New York City, for defendant Steiner Rouse & Co., Inc.

Moses & Singer, New York City, for defendant L. F. Rothschild & Co.; Joseph L. Fishman, New York City, of counsel.

Spear & Hill, New York City, for defendant Reynolds & Co.; Eliot H. Lumbard, Laurence M. Grosberg, New York City, of counsel.

Bressler, Meislin, Tauber & Lipsitz, New York City, for defendant Pressman, Frohlich & Frost, Inc.; Steven H. Lipsitz, New York City, of counsel.

Beekman & Bogue, New York City, for defendants Hornblower-Weeks, Hemphill, Noyes, Paine, Webber, Jackson & Curtis; Milton Weiss, New York City, of counsel.

Brown, Wood, Fuller, Caldwell & Ivey, New York City, for defendant Goodbody & Co.; Roger J. Hawke, Thomas J. Mullaney, New York City, of counsel.

Cahill, Gordon & Reindel, New York City, for defendant Loeb, Rhoades & Co.; David R. Hyde, George Wailand, New York City, of counsel.

Fried, Frank, Harris, Shriver & Jacobson, New York City, for defendant Halle & Stieglitz, Inc.; Leslie A. Blau, New York City, of counsel.

Finley, Kumble, Heine, Underberg & Grutman, New York City, for defendant Newburger, Loeb & Co.; Herbert F. Roth, New York City, of counsel.

Guggenheimer & Untermyer, New York City, for defendant Oppenheimer & Co.; Marvin E. Pollock, New York City, of counsel.

OPINION

ROBERT L. WARD, District Judge.

This is an antitrust action brought by two former registered representatives of member organizations of the New York Stock Exchange, Inc. ("the Exchange") against the Exchange and twenty-seven of its member brokerage firms ("the firms"). Plaintiffs claim to represent the class of all registered representatives employed by the firms from April 2, 1970 through July 25, 1971 who were compensated at least in part by commissions on securities transactions which they effected on the Exchange. This was the period of time during which the Exchange required that a "service charge" of $15 or not more than 50% of the commission be added to the commission charged customers for securities transactions involving under 1,000 shares. Exchange policy, reflected in its Constitution and Rules and in its communications to the firms, required the firms to exclude the service charge from the basis upon which they calculated compensation of the registered representatives. Plaintiffs claim that the firms' concurrence with the Exchange in this policy constituted an agreement in restraint of trade in violation of § 1 of the Sherman Antitrust Act, 15 U.S.C. § 1. They seek treble damages under § 4 of the Clayton Act, 15 U.S.C. § 15, based upon the difference between their actual compensation during that time period and the amount they would have received had the service charge been included in the basis upon which their commissions were calculated.

For the most part the factual background of this suit is undisputed. During the aforementioned period, member organizations of the Exchange charged commissions for transactions in securities at minimum rates set forth in Article XV of the Exchange Constitution. In turn, they compensated the registered representatives who actually negotiated the transactions, primarily in the form of commissions which were a percentage of the commissions which the firms charged customers. The firms also customarily compensated their registered representatives by salary, bonuses and incentive payments. The precise systems of compensation varied from firm to firm; the percentages applied for the several types of transactions executed, reliance upon a base salary to be supplemented by commission, and incentive or bonus payments were all variable. Direct comparison of the compensation of registered representatives from firm to firm is thus difficult, but the parties do not dispute that competition was in fact intense.

During late 1969 and early 1970 the firms were experiencing a serious financial crisis, operating at increasing losses, particularly in low volume securities transactions. The minimum commission rate had last been increased in 1958, while costs to the industry had risen by some 60%. The Exchange had retained National Economic Research Associates ("NERA") to conduct studies and to assist in the development of a new commission rate structure, and in February of 1970 presented to the Securities and Exchance Commission ("the Commission") NERA's analysis together with its recommendation for a new rate structure. The Commission's response indicated certain unresolved issues and the need for additional data before approval of the new rates; it appeared that approval of a comprehensive new rate structure would require some time. In the meantime, the increasingly acute financial difficulties of some member firms threatened their continued operation. Advised by NERA, the Exchange recommended that the Commission approve an immediate interim charge, to be called a service charge, in the amount of $15 per transaction but not more than 50% of the commission, to be applied to transactions of under 1,000 shares. According to the Exchange Constitution the Board of Governors could impose such a charge immediately by rule; to levy an equivalent charge by changing the commission rate required an amendment to the Exchange Constitution, which would take six to eight weeks to effect. The Commission, the Exchange, and the firms recognized that this was to be an interim measure, pending the more comprehensive adjustment in the commission rate structure. In mid-March of 1970 the Board of Governors approved in principle the imposition of such a service charge and submitted the proposal to the Commission. On April 2, 1970, the Commission approved the service charge for a period of 90 days, subject to review at the end of that time, and upon the conditions that services to small investors not be curtailed, that the income be used wisely for the improvement of the financial position of the member firms, and that the revenue accrue to the firm effecting the transactions. Accordingly, the Exchange did not include the service charge in the basis upon which it calculated its own charge to the firms, amounting at that time to 1% of the commissions each firm collected.

In addition, in a memorandum to the member firms announcing the imposition of the service charge, the Board of Governors of the Exchange called their attention to Article XV of the Exchange Constitution and to Rule 347(a). It stated that the service charge was not to be passed along directly to the registered representatives as part of their commission. It added, however, that the firms remained free, as always, to compensate their registered representatives according to their own individual policies. Thus, while the service charge could not be passed along directly, in effect the increased revenue could be used at least in part to compensate registered representatives if the firms so chose.

Article XV, § 1 of the Exchange Constitution provided:

No bonus or percentage or portion of a commission, whether such commission be at or above the rates herein established, or any portion of a profit except as may be specifically permitted by the Constitution or a rule adopted by the Board of Governors, shall be given, paid or allowed, directly or indirectly, or as a salary or portion of a salary, to a clerk or person for business sought or procured for any member or allied member of the Exchange or member firm or member corporation.

Article XV, § 9, which provided for service charges, contained similar language requiring that they be free of any rebate or commission unless expressly permitted by rule of the Board of Governors.

Rule 347(a) of the Rules of the Board of Governors authorized compensation to registered representatives, in the form of salary, commission, percentage of the profit of the office, or bonus. It contained no provision for compensation directly based on service charges. Thus, unless...