Kamen & Co. v. Paul H. Aschkar & Company

• Citation: 382 F.2d 689
• Decision Date: 07 July 1967
• Docket Number: No. 19922.,19922.
• Parties: KAMEN & CO., a limited partnership, and Edward F. Liebert and Abraham Kamen, general partners, Appellants and Cross-Appellees, v. PAUL H. ASCHKAR & COMPANY, a limited partnership, Appellee and Cross-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

382 F.2d 689 (1967)

KAMEN & CO., a limited partnership, and Edward F. Liebert and Abraham Kamen, general partners, Appellants and Cross-Appellees, v. PAUL H. ASCHKAR & COMPANY, a limited partnership, Appellee and Cross-Appellant.

No. 19922.

United States Court of Appeals Ninth Circuit.

July 7, 1967.

Bertram Fields, Shearer & Fields, Los Angeles, Cal., for appellants.

Gary Schlessinger, Rosenfeld, Meyer & Susman, Beverly Hills, Cal., for appellee.

Before BARNES and DUNIWAY, Circuit Judges, and McNICHOLS, District Judge.

McNICHOLS, District Judge.

This is an appeal and cross-appeal from a final judgment of the District Court in favor of the appellee, plaintiff below, for the amount paid for certain worthless stock alleged to have been purchased because of fraudulent conduct of certain agents of the appellants.

Jurisdiction of the District Court was invoked pursuant to 15 U.S.C. § 77v, Securities Act of 1933, 15 U.S.C. § 78aa, Securities Exchange Act of 1934, and 28 U.S.C. § 1332, the diversity statute. Jurisdiction here exists by reason of 28 U.S.C. § 1291.

The parties on appeal are: Paul H. Aschkar and Company (hereinafter Aschkar) appellee and cross-appellant; Kamen & Company, Kamen's partners, Abraham Kamen and Edward F. Liebert, appellants and cross-appellees (hereinafter collectively referred to as Kamen).

The following facts, not seriously disputed by the parties, gave rise to the litigation.

Aschkar, a limited partnership, is an over-the-counter broker-dealer in the business of buying and selling securities not listed on any national exchange, either for customers or for its own account. Its sole place of business is Los Angeles, California, and all of its partners are either natural or corporate citizens of the State of California. Aschkar was registered with the Securities and Exchange Commission and was a member of the National Association of Security Dealers.

During the period involved, i. e., January 1, 1963 to July 31, 1963, Kamen, a limited partnership dealing in securities, maintained its sole place of business at New York City, and was a member of the New York Stock Exchange and the American Stock Exchange. Abraham Kamen was Kamen's managing partner.

Early in 1963 Kamen, through its managing partner, hired Laurence H. Ross and Jerome M. Grossinger as registered representatives.¹ Their employment by Kamen was based upon representations that the firm's commission business could be greatly increased by obtaining the "listed business"² of broker-dealers throughout the country who were not members of the New York or American Stock Exchanges.

Ross and Grossinger represented to Kamen that if it would offer certain special services³ to such broker-dealers, they in turn would give Kamen their listed business. Ross and Grossinger claimed to have conducted a traveling survey of small broker-dealers around the country who were not members of any national exchange and had found that these services were the kind such brokers were in need of and for which they would in return give Kamen their listed business. Prior to this time Kamen had not dealt with broker-dealers for their listed business.

Kamen established a broker-dealer division within the firm and placed Ross and Grossinger in charge thereof. They were given the authority to do all things necessary and proper in carrying out the duties of the office including authority to place over-the-counter orders with broker-dealers.

Ross was authorized by Kamen to have printed a business card which described him as the "Manager" of the Broker-Dealer Division of Kamen & Co. One such authorized card was sent to and received by Aschkar. A WATS type telephone system was installed to facilitate the new services to be offered.

As predicted by Ross and Grossinger, Kamen enjoyed a substantial volume of listed business during the first half of 1963. However, it developed that the marked increase in volume of listed business was not due solely to the special services which Kamen offered to broker-dealers as an inducement. Unknown to Kamen, the new Manager of the Broker-Dealer Division had perfected a fraudulent scheme calculated both to increase legitimate commissions through listed business and also to create a market for a quantity of worthless non-listed stock.

Ross and Grossinger used the offices and facilities of Kamen to carry forward their fraudulent activities. Pursuant thereto, they would telephone various over-the-counter broker-dealers around the country advising that they were employed by Kamen, a member of the New York Stock Exchange. The contacted broker-dealers were requested to purchase or sell securities listed on the New York and American Exchanges through Kamen and were promised that, in return, Kamen would channel certain business in non-listed securities to such broker-dealers.

To carry out the scheme, they would call a first broker-dealer and request him to purchase a specific number of the valueless shares of Jerome Richards & Co., Inc. stock⁴ (hereinafter Jerome) from a second broker-dealer at a specific price and sell said shares to a third broker-dealer at a price slightly higher than the first broker-dealer's purchase price. At about the same time and unknown to the first broker-dealer, the third broker-dealer would be called by Ross, Grossinger or others and be induced to purchase the shares from the first broker-dealer and sell them to a fourth broker-dealer at still a slightly higher price. The fourth broker-dealer would be called by Ross, Grossinger or others and induced to purchase said shares and sell them to a fifth broker-dealer at yet an even higher price, and so on in a long chain.

It was implied to the contacted broker-dealers that the orders placed by Ross and Grossinger were bona-fide orders received by Kamen. However, Kamen had not in fact received such orders. No market existed for Jerome stock except the artificial one created by the dealings of Ross, Grossinger and others. In addition, a representation was made by Ross and Grossinger to some of the broker-dealers, including Aschkar, that Kamen guaranteed both seller and purchaser would perform as promised. In other words, both a seller and purchaser were provided, with a guaranteed profit to the broker-dealer.

Aschkar became involved in the foregoing fraudulent scheme on or about July 10, 1963 when he was initially contacted by phone by Ross or Grossinger soliciting Aschkar's listed business in return for which Kamen would give Aschkar its over-the-counter business. During this same phone conversation, Aschkar was induced to purchase 700 shares of Jerome stock from Frederick Cirlin & Associates, Inc., a broker-dealer located in New York for $19.25 per share and simultaneously sell for $19.375 per share to McNeel & Co., a broker-dealer located in Atlanta, Georgia. McNeel confirmed the purchase but refused delivery of the stock when it was subsequently tendered.

On July 17, 1963, Aschkar was called by Ross and offered another transaction whereby Aschkar was to purchase 1,000 shares of Jerome stock from Frederick Cirlin & Associates, Inc., for $19.25 per share and sell such shares to Handley Investment Company, a broker-dealer located in Tulsa, Oklahoma, for $19.50 per share. This transaction was confirmed by the parties but never executed.

On the same date, July 17, 1963, and approximately eight minutes after the above described transaction, Ross again called Aschkar and offered him a transaction whereby he would purchase 600 shares of Jerome stock from Gus and Stead Company, a broker-dealer located in Salt Lake City, Utah, for $19.00 per share and sell the same 600 shares to Frederick Cirlin & Associates, Inc., for $19.25 per share. Aschkar purchased this stock but it was not accepted when tendered.

As of July 23, 1963, Aschkar had purchased 1300 shares of Jerome stock for $24,875.00. On July 24, 1963, the fraudulent scheme of Ross and Grossinger came to light in the securities industry and the Jerome stock was valueless. Aschkar has been unable to dispose of the stock, as the promised purchasers, alerted to fraud, refused to pay.

Plaintiff brought suit to recover the said sum of $24,875.00 from the defendants. Statutory liability, predicated on alleged violations of certain provisions of the Securities Act of 1933⁵ and of the Securities and Exchange Act of 1934⁶ was claimed. Additionally, plaintiff alleged common law liability based on the law of agency.

By way of answer, defendants denied liability generally. Defendants' affirmative defense (a) alleged that the agents, Ross and Grossinger, acted without authority and (b) that the transactions involved were illegal and in violation of Stock Exchange rules which facts were known to the plaintiff and that plaintiff knew or should have known that the agents were not authorized to offer the transactions, so that plaintiff was not justified in relying on any ostensible agency. Further, defendant advanced the theory that plaintiff was obliged to reduce or eliminate any damage by first seeking to force the so-called "promised purchasers" to pay for the worthless stock.⁷

The trial court, sitting without a jury, found no liability under the theory of violations of the statutory provisions of the Securities Acts. However, judgment, founded on the fraudulent acts of defendants' agents was entered in the sum of $24,875.00 plus interest from the date of purchase of the stocks by plaintiff in July, 1963.

Appellant relies on two grounds for reversal, i. e., that the Court erred in finding that there was ostensible authority for the acts of Ross and Grossinger and hence liability on the part of the defendants for the damages arising out of the agents' fraudulent acts and that it was error to hold the defendants liable for the full price paid by the plaintiff for the stocks where plaintiff had an existing right of action aginst the third party firm which had agreed to purchase from the plaintiff.

Aschkar presents...