Carr v. Warner, Civ. A. No. 52-884.

• Decision Date: 30 December 1955
• Docket Number: Civ. A. No. 52-884.
• Citation: 137 F. Supp. 611
• Parties: Annette G. CARR v. James Arthur WARNER et al.
• Court: U.S. District Court — District of Massachusetts

137 F. Supp. 611

Annette G. CARR v. James Arthur WARNER et al.

Civ. A. No. 52-884.

United States District Court D. Massachusetts.

December 30, 1955.

Brickley, Sears & Cole, Howard W. Cole, John L. Lyman, Boston, Mass., for plaintiff.

Spencer Pinkham, New York City, Joseph J. Gottlieb, Edward F. McLaughlin, Jr., Boston, Mass., for defendant.

WYZANSKI, District Judge.

1. This is an action, filed August 5, 1952, alleged to be based upon § 17 of the Securities Act of 1933, 15 U.S.C.A. § 77q; §§ 10(b) and 15(c) of the Securities Exchange Act of 1934, 15 U.S.C.A. §§ 78j(b), 78o(c) and rules and regulations of the Securities and Exchange Commission adopted thereunder. Jurisdiction to hear this controversy is asserted to rest upon 15 U.S.C.A. § 78aa.

2. August 5, 1952 plaintiff, a citizen of Massachusetts, filed in this Court against three defendants a complaint in four counts. The first named defendant, James Arthur Warner, whose residence (not citizenship) was alleged to be California, is the sole surviving partner of a partnership which until May 31, 1946 was engaged in business as a broker and dealer in securities under the firm name of J. Arthur Warner & Co. Defendant, J. Arthur Warner & Co., Inc., is a New York corporation which on May 31, 1946 succeeded to the business of the aforesaid partnership. Defendant Donald F. Thayer until about May 31, 1946 was an employee of the partnership, and thereafter was an employee of the successor corporation; in both employments his duties were those of a salesman and solicitor of business and accounts.

3. In the first count of the complaint the plaintiff relying upon § 17 of the Securities Act of 1933, §§ 10(b) and 15 (c) of the Securities Exchange Act of 1934 and rules and regulations thereunder, asserts that the defendants, by use of the mails and of interstate commerce, employed manipulative, deceptive, and fraudulent devices from July 1943 to August 1945 by which plaintiff was damaged. The gist of this count is the allegation that defendants induced the plaintiff to believe that they would act in her best interests in investing her money, and that she could trust their recommendations; that she did rely on these representations, turned money and securities over to the defendants, and they for their gain and contrary to her interest, and without her knowledge, "churned" her accounts. The term "churned" is defined in the complaint to mean "engaged in transactions of purchase and sale of securities which were excessive in size and frequency in view of the financial resources and character of the plaintiff's accounts." After referring to the amounts which the plaintiff says she turned over, and the profits she says the defendants realized, the plaintiff says that she did not discover the aforesaid fraudulent practices until May 1952 about three months before she filed her complaint.

4. Plaintiff's second cause of action refers to the same statutory sections and to some additional implementing regulations. In particular reliance is placed on Rule X-15C1-4 rather than to Rule X-15C1-7(a) of the regulations adopted by the SEC under the 1934 Act. In this count the particular wrongful conduct with which the defendants are charged is that in connection with the same account of the plaintiff they "purchased securities on the plaintiff's behalf and charged the plaintiff prices well in excess of the current market for such securities and prices not reasonably related to the current market for said securities, and retained for themselves excessive commissions and `mark-ups'", and failed to disclose to * * * the plaintiff that said sales had been so made. Again the allegations are that plaintiff sustained losses as a result of these asserted wrongs.

5. The third cause of action does not name Thayer as a defendant, but is confined to James Arthur Warner and J. Arthur Warner & Co., Inc. In this count the allegation is that the defendants agreed that they would invest the plaintiff's money, and they would comply with all of the provisions of and regulations issued under the Securities Act of 1933 and of the Securities and Exchange Act of 1934; that the defendants Warner individually and the corporation broke this agreement, and by this breach damaged the plaintiff.

6. The fourth cause of action, again limited to defendants Warner and J. Arthur Warner & Co., Inc., asserts that there were breaches of a relation of trust between plaintiff and those defendants which damaged the plaintiff.

7. Upon the trial it appeared that before any of the transactions which were involved took place defendant J. Arthur Warner and one Joseph H. Young, now deceased, had become equal co-partners doing business under the firm name of J. Arthur Warner & Co. The partnership was a duly registered broker-dealer in securities. It ceased to do business May 31, 1946, and shortly thereafter was dissolved.

On June 1, 1946 there was registered as a broker-dealer in securities a New York corporation, J. Arthur Warner & Co., Inc. of which the principal stockholders were Warner and his wife.

8. Shortly before May 31, 1946 the partnership sent a communication to each of its customers, including the plaintiff, advising them it was going out of business as a dealer-broker, and that the corporation was going into such business, and enclosing a printed communication instructing the partnership to transfer such customer's account to the corporation as such account stood upon the books of the partnership, together with a further communication directing and authorizing the corporation to receive the customer's account as it stood upon the books of the partnership, and confirming that all contractual arrangements between the customer and the partnership in respect of such account would remain in effect and inure to the benefit of the corporation. Both of such communications were duly executed by plaintiff.

9. Except as indicated in the preceding paragraph, there was no agreement under which the corporation assumed obligations of the partnership. Both the partnership and the corporation were members of the National Association of Securities Dealers, Inc., but neither of them was ever a member of a national securities exchange. Whenever a firm which is not a member of a national exchange buys or sells a security on such exchange, for its own account or that of a customer, it must do so through a member firm, and pay to such member firm the full stock exchange commission.

10. Defendant Thayer, though he filed an answer, did not appear at the trial. He was a salesman, first for the partnership, and then for the corporation. Both the partnership and the corporation had specifically instructed Thayer that he was not to receive or accept any discretionary power from any customer. Like instructions had been given to all other salesmen.

11. Plaintiff at the time of this action was a housewife. She and her husband were married in 1939. She is a high school graduate who after graduating worked in a bank in Evanston, Illinois for nine months, and then for twelve years for the Atlantic National Bank of Boston, and its successor, the First National Bank of Boston. Her husband was an accountant employed by the Comptroller of the Commonwealth of Massachusetts. Thayer was a friend and neighbor of the plaintiff, visiting her almost daily beginning in 1943.

12. On July 8, 1943 Thayer told the plaintiff that the partnership was a reputable concern, doing business in several large cities throughout the country, and that...