Securities & Exch. Com'n v. Aberdeen Securities Co., Inc.
| Decision Date | 28 June 1973 |
| Docket Number | No. 72-1708.,72-1708. |
| Parties | SECURITIES AND EXCHANGE COMMISSION v. ABERDEEN SECURITIES CO., INC., et al. Appeal of Sherwin SELIGSOHN et al. |
| Court | U.S. Court of Appeals — Third Circuit |
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Theodore H. Focht, Gen. Counsel, Washington, D. C., SIPC, for appellees. Wilfred R. Caron, Asst. Gen. Counsel, Washington, D. C., for SIPC, of counsel.
John Biggs, III, Wilmington, Del., for Claude P. Hudston, Trustee.
Jerry E. Bogutz, Warren L. Soffian, David S. Rasner, Philadelphia, Pa., for appellants.
Before HUNTER and WEIS, Circuit Judges, and NEWCOMER, District Judge.
We are confronted in this case by the intricacies of the Securities Investor Protection Act of 19701 which seeks to provide assistance to those investors unfortunate enough to have selected a stockbroker, who perhaps is able to give sound financial advice to others but is unable to stay solvent himself. The intent of Congress to protect customers of financially distressed security dealers is clear, but the specifics of precise resolution of individual situations are clouded by the provisions of a statute which range far from the clarity of blue sky one might expect in this area of the law.
While the Securities and Exchange Commission has been given authority to enact appropriate regulations, it has not done so, and we therefore are left with the task of filling in rather large interstices in the Act resulting in part from engraftment of insurance provisions upon the preexisting Section 60(e) bankruptcy provisions applicable to stockbrokers, 11 U.S.C. § 96(e).
The Securities Investor Protection Act was passed by Congress in 1970 in response to demands that it provide some assurance to investors that they would not suffer financial loss as a consequence of bankruptcy of their stockbrokers. While the theory of the statute was that it was to provide a type of protection for security purchasers somewhat similar to that enjoyed by bank depositors under the FDIC, the complexities of the securities market obviously required some major differentiations.
In broad outline the legislation contemplates the appointment of a Receiver in the event of the insolvency of a broker who is covered by the terms of the statute. A liquidation, rather than a reorganization, is to be conducted and the claims of the debtor's customers are to be paid promptly. To the extent that the insolvent broker's assets are insufficient to satisfy obligations to his clientele, the Securities Investor Protection Corporation (SIPC), an entity established by the Act, will advance funds to pay claims up to $50,000 per customer, of which no more than $20,000 represents reimbursement of cash.
The account of a customer is to be valued as of the day when proceedings are instituted against the broker—the "filing date"—in order to determine his "net equity". A computation is made to arrive at the dollar amount of the customer's account by excluding from it, specifically identifiable property which is returned to him; by deducting indebtedness and other obligations, if any, to the insolvent broker; and by giving effect to certain open contractual commitments.
All property held by the debtor for the account of his patrons, other than that specifically identifiable, forms a single and separate fund in which all customers are entitled to share pro rata.
The Trustee may satisfy customer claims from the single and separate fund or from the monies advanced by SIPC or by a combination from the two sources. To the extent that a claim is satisfied by advances from SIPC, it is subrogated to the customer's rights to a pro rata share of the single and separate fund.
We must deal with two distinct types of claims in this case which require more detailed analysis of specific portions of the Act and in the interest of clarity, we will treat each claim separately.
One Sherman Seligsohn placed an order with his broker, Aberdeen Securities Company, Inc., on July 28, 1971 for 400 units2 of Oratronics Corporation and remitted the full price of $2,000. He received a notice from Aberdeen advising that "as agent for the underwriter we have sold to you" 400 Oratronics and acknowledging receipt of payment. Seligsohn never received the certificates from Aberdeen or any indication that they were being held for his account by the broker.
On September 15, 1971 an application was made to the United States District Court for the District of Delaware for the issuance of a temporary restraining order against Aberdeen to enjoin violations of the Securities Act. Later a Trustee was appointed under the provisions of the Securities Investor Protection Act.
The Trustee found that Aberdeen had in its possession only 100 units of Oratronics and that three other customers had claims for 900 units in addition to Seligsohn's 400. In due course the Trustee submitted to the Court a proposal to pay Seligsohn $1,245.38 in cash plus 31 units of Oratronics which was his pro rata share of the securities which had been found in the debtor's office.
Seligsohn protested this method of satisfying his claim and since the securities had risen in value, understandably demanded that the Trustee provide him with 400 units instead.3 Additionally, Seligsohn asked permission to appear in a class action as a representative of those similarly situated.
After hearing, the District Court approved the Trustee's proposed disposition of Seligsohn's claim and rejected the motion to treat the proceeding as a class action.
Section 6(g) of the Act4 requires the Trustee to discharge promptly:
Section 6(c)(2)(A)(iv)5 defines the "net equity" of a customer's account as:
"the dollar amount thereof determined by giving effect to open contractual commitments completed as provided in subsection (d) of this section, by excluding any specifically identifiable property reclaimable by the customer, and by subtracting the indebtedness, if any, of the customer to the debtor from the sum which would have been owing by the debtor to the customer had the debtor liquidated, by sale or purchase on the filing date, all other securities and contractual commitments of the customer . . ."
The Trustee claimed that his action complied with these provisions of the Act. However, the claimant asserts that the duty of Aberdeen to deliver the certificates is an "open contractual commitment" as contemplated by subsection (d), which should be completed by the Trustee through the purchase of Oratronics units in the open market and delivery to Seligsohn.
Section 6(d)6 reads in part:
The District Court ruled that undertakings involving only the debtor and his customers are not the contractual commitments contemplated by subsection (d), and therefore the Trustee could not be forced to satisfy this claim in kind. We agree with the conclusion of the learned Court below.
Our review of the legislative history of the Act7 and the testimony by various witnesses before committees of both the Senate and the House convinces us that the open contractual commitments covered by § 6(d) are those between the debtor and another broker-dealer.
The securities industry was concerned with the "domino effect" of the financial difficulties of one broker extending to others with whom he dealt and wished to isolate problems to the one who was insolvent if at all possible. However, there was considerable sentiment in Congress to limit the protection of the Act to customers and not to extend it to transactions between brokers. The compromise ultimately agreed upon was to provide for completion of interbroker or interdealer transactions only when the interest of a customer on either side was involved. However, discretion was granted to the SEC to promulgate rules which would allow completion of transactions in which customers did not have an interest if this was determined to be in the public interest.8
Only by limiting § 6(d) to open interdealer contractual agreements is it possible to arrive at a harmonious relationship with other portions of the Act, such as the definition of "net equity," § 6(c)(2)(A)(iv), and a special provision for advancement of funds by the SIPC in addition to customers' claims provided by § 6(f)(2).9
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