Flickinger v. Harold C. Brown & Co., Inc.

• Decision Date: 16 October 1991
• Docket Number: D,No. 145,145
• Citation: 947 F.2d 595
• Court: U.S. Court of Appeals — Second Circuit
• Parties: Fed. Sec. L. Rep. P 96,288 William S. FLICKINGER, Plaintiff-Appellant, v. HAROLD C. BROWN & CO., INC. and Bradford Broker Settlement, Inc., n/k/a Fidata Corporation, Defendants-Appellees. ocket 91-7401.

Page 595

947 F.2d 595

Fed. Sec. L. Rep. P 96,288

William S. FLICKINGER, Plaintiff-Appellant, v. HAROLD C. BROWN & CO., INC. and Bradford Broker Settlement, Inc., n/k/a Fidata Corporation, Defendants-Appellees.

No. 145, Docket 91-7401.

United States Court of Appeals, Second Circuit.

Argued Aug. 29, 1991.

Decided Oct. 16, 1991.

Brian P. Crosby, Buffalo, N.Y. (Martin J. Zuffranieri, Gibson, McAskill & Crosby, of counsel), for plaintiff-appellant.

Victor T. Fuzak, Hodgson, Russ, Andrews, Woods & Goodyear, Buffalo, N.Y., of counsel, for defendant-appellee Harold C. Brown & Co., Inc. Kathryn Dalli, New York City (Louis J. Maione, Salon, Marrow & Dyckman, of counsel), for defendant-appellee Bradford Broker Settlement, Inc., n/k/a Fidata Corp.

Before OAKES, Chief Judge, FEINBERG and CARDAMONE, Circuit Judges.

OAKES, Chief Judge:

William S. Flickinger appeals from a judgment of the United States District Court for the Western District of New York, William M. Skretny, Judge, rejecting his claims against Harold C. Brown & Co. ("Brown") and Bradford Broker Settlement, Inc., n/k/a Fidata Brokerage, Inc. ("BBSI"), for securities fraud, common law fraud, breach of contract, and breach of fiduciary duty. For the reasons set forth below, we affirm in part, reverse in part, and remand.

BACKGROUND

Plaintiff William S. Flickinger, for over twenty years, was a client of defendant Brown, a registered securities broker and dealer engaged in the business of providing investment securities advice and services. Starting in 1982, BBSI executed and cleared securities transactions for Brown's clients, pursuant to an agreement between Brown and BBSI. In some cases, BBSI kept custody of Brown's clients' funds and securities. Brown instructed BBSI that Flickinger's account, however, was "register and ship." That designation required BBSI to register the securities in the client's name and to ship the securities to the client. Although BBSI sent periodic activity statements to Flickinger, Flickinger never dealt directly with BBSI.

On or about June 1, 1983, Flickinger or his brother Thomas Flickinger, who was authorized to manage Flickinger's portfolio, instructed Brown to purchase 1500 shares of common stock of Lubrizol Corporation for William's account. Brown so instructed BBSI to purchase the stock. BBSI purchased 1500 shares of Lubrizol common stock for William Flickinger's account, and the purchase was reflected on an activity statement sent to Flickinger and to Brown. Flickinger paid $34,125.00 for the Lubrizol shares, plus $873.14 in commission.

As of August 26, 1983, the 1500 shares of Lubrizol stock were still listed on an activity statement as "BOUGHT RECEIVED OR LONG," indicating that BBSI still had possession of the securities or owed the securities to Flickinger. On or about September 13, 1983, Brown wired BBSI that Brown's records indicated that the Lubrizol shares were still in BBSI's custody, contrary to the "register and ship" designation of Flickinger's account. Brown therefore requested that BBSI send the securities to Flickinger. An activity statement for Flickinger's account reflects that 1500 shares of Lubrizol stock were delivered to Flickinger on September 19, 1983. Flickinger, however, never received the stock.

In late September 1983, BBSI began the process of selling its clearing operations to the Pershing Division of Donaldson, Lufkin & Jenrette ("Pershing"). This involved transferring to Pershing any cash and securities positions that were long in BBSI's accounts.

On October 24, 1983, BBSI delivered a stock certificate representing 1500 shares of Lubrizol common stock, registered in the name of William S. Flickinger, to National City Bank in Cleveland, BBSI's transfer agent for the sale to Pershing. This stock certificate was subsequently cancelled by means of a BBSI Irrevocable Stock or Bond Power purportedly bearing Flickinger's signature--a signature that was guaranteed by BBSI. The signature was not, in fact, plaintiff's signature. BBSI had signed Flickinger's name to the guaranteed stock power, although it had no authority to do so. The Lubrizol shares were thereafter registered in the nominee name of Cede & Co. and deposited in BBSI's account at the Depository Trust Company. Flickinger was not credited with the proceeds of this transfer.

Flickinger subsequently commenced this action against Brown and BBSI, alleging that each defendant was liable for (1) violation As to the securities fraud claim, the court found that Flickinger failed to prove that the alleged fraud was committed "in connection with the purchase or sale of any security." 15 U.S.C. § 78j(b) (1988). The court rejected the common law fraud claim against Brown on the ground that plaintiff failed to establish that Brown made any misrepresentation, and rejected the common law fraud claim against BBSI on the ground that plaintiff failed to prove that BBSI's misrepresentations were made with the intent to deceive him. Turning to the breach of contract claim, the district court found that no contract, express or implied, existed between Flickinger and either Brown or BBSI. Finally, the court rejected the breach of fiduciary duty claim because BBSI did not owe Flickinger any fiduciary duty, and Flickinger did not prove that Brown acted with "deceitful intent." Flickinger now appeals.

                of section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b) (1988), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5 (1991), (2) common law fraud, (3) breach of contract, and (4) breach of fiduciary duty.   Following a bench trial, the district court entered a judgment in favor of defendants on all of plaintiff's claims.  759 F.Supp. 992
                

DISCUSSION

The district court rejected all of Flickinger's claims; Flickinger argues that all of his claims should have succeeded. We agree with the district court's conclusion that Flickinger failed to prove a securities law violation, common law fraud, or breach of fiduciary duty. We believe, however, that the district court erred in rejecting Flickinger's contract claim.

1. Securities Fraud

To prevail on his federal securities law claims, Flickinger needed to prove that in connection with his purchase or sale of a security, defendants, with scienter, employed a device, scheme or artifice to defraud or engaged in a fraudulent act, practice or course of business, and that Flickinger was damaged thereby. Bloor v. Carro, Spanbock, Londin, Rodman & Fass, 754 F.2d 57, 61 (2d Cir.1985); 15 U.S.C. § 78j(b) (1988); 17 C.F.R. § 240.10b-5 (1991). As the district court noted, the fraud alleged by Flickinger was not committed "in connection with the purchase or sale of any security" within the meaning of section 10(b).

We have held that the "in connection with" language requires proof that the defendant's alleged fraud was "integral to the purchase and sale of the security in question." Pross v. Katz, 784 F.2d 455, 459 (2d Cir.1986). The securities law does not reach every conversion or theft of a security. Id. Section 10(b) is not violated by a fraudulent scheme that, some time after a purchase of securities, divests the purchaser of ownership. Id.; Bochicchio v. Smith Barney, Harris Upham & Co., 647 F.Supp. 1426, 1430 (S.D.N.Y.1986); Bosio v. Norbay Securities, Inc., 599 F.Supp. 1563, 1566-67 (E.D.N.Y.1985); see also Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975). Rather, the fraud must have been integral to the plaintiff's purchase or sale of the security.

Flickinger paid for 1500 shares of Lubrizol stock in June 1983, and the shares remained in his account for several months. The alleged fraud did not occur until September 19, when a BBSI activity statement falsely showed that the shares had been delivered to Flickinger, or late October, when BBSI caused Flickinger's certificate to be cancelled. Because Flickinger's purchase of the securities was completed before the alleged fraud occurred, he could not establish that the fraud was committed in connection with the purchase. The claim was nevertheless a colorable one since it pertained to an aspect of Flickinger's purchase, i.e., delivery of the stock purchased. Thus the claim is sufficient for jurisdictional purposes, Van Gemert v. Boeing Co., 520 F.2d 1373, 1380 (2d Cir.), cert. denied, 423 U.S. 947, 96 S.Ct. 364, 46 L.Ed.2d 282 (1975), so that the state law claims may be considered.

2. Common Law Fraud

Under New York Law, a common law fraud claim requires proof that plaintiff justifiably relied on a false representation of material fact made by defendant with intent to deceive, and that plaintiff was damaged thereby. Katara v. D.E. Jones Commodities, Inc., 835 F.2d 966, 970-71 (2d Cir.1987); Jo Ann Homes at Bellmore, Inc. v. Dworetz, 25 N.Y.2d 112, 119, 250 N.E.2d 214, 217, 302 N.Y.S.2d 799, 803 (1969). The district court properly rejected Flickinger's common law fraud claims against both Brown and BBSI. Brown made no false representation. BBSI made false representations, but plaintiff did not prove that BBSI intended to defraud Flickinger.

We note first that we accept the district court's findings of fact unless those findings are clearly erroneous. Anderson v. Bessemer City, 470 U.S. 564, 573-75, 105 S.Ct. 1504, 1511-12, 84 L.Ed.2d 518 (1985); Fed.R.Civ.P. 52(a). The district court found that Brown did not make any false representation, and we see no reason to disturb that factual finding. Therefore the court properly rejected Flickinger's common law fraud claim against Brown.

BBSI, on the other hand, made two false representations. First, Flickinger's BBSI activity statement for August 27, 1983 through September 30, 1983 falsely reflects that the Lubrizol shares were delivered to Flickinger on September 19, 1983. Second, the district court found that someone at BBSI signed Flickinger's name to the stock power, and BBSI guaranteed that false signature as Flickinger's own. We turn...