Franklin National Bank v. LB Meadows & Co.

• Decision Date: 25 June 1970
• Docket Number: No. 69-C-160.,69-C-160.
• Parties: FRANKLIN NATIONAL BANK, Plaintiff, v. L. B. MEADOWS & CO., Inc., Alessandrini & Co., Inc., Wellington Hunter Associates and Philip S. Budin & Co., Inc., Defendants, L. B. MEADOWS & CO., Inc., Third-Party Plaintiff, v. ALESSANDRINI & CO., Inc., Cross-Defendant, and Morton Kantrowitz and Ray I. Weiss, Third-Party Defendants.
• Court: U.S. District Court — Eastern District of New York

318 F. Supp. 1339

FRANKLIN NATIONAL BANK, Plaintiff, v. L. B. MEADOWS & CO., Inc., Alessandrini & Co., Inc., Wellington Hunter Associates and Philip S. Budin & Co., Inc., Defendants, L. B. MEADOWS & CO., Inc., Third-Party Plaintiff, v. ALESSANDRINI & CO., Inc., Cross-Defendant, and Morton Kantrowitz and Ray I. Weiss, Third-Party Defendants.

No. 69-C-160.

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

June 25, 1970.

Bergerman & Hourwich, New York City, for Philip S. Budin; Joseph Calderon, New York City, of counsel.

Kaplan, Kilsheimer & Foley, New York City, for L. B. Meadows & Co. Inc.; Dermot G. Foley, New York City, of counsel.

Robert W. Taylor, New York City, for defendants, cross-defendant and third-party defendant.

Seymour P. Schulman, New York City, for Morton Kantrowitz.

Sahn, Shapiro & Epstein, New York City, for plaintiff; Morris Shapiro, Alan R. Katz, New York City, of counsel.

MEMORANDUM AND ORDER

WEINSTEIN, District Judge.

Plaintiff, the Franklin National Bank, seeks damages arising from defendants' alleged violation of § 15(c) (2) of the Securities Act of 1934. 15 U.S.C. § 78o (c) (2). The four defendants, each a broker-dealer involved in over-the-counter transactions, allegedly participated in the creation of a false market for the stock of American Continental Industries, Inc. by submitting fictitious quotations to the National Quotation Bureau for listing in its "pink sheets". Answering by denials, defendants also maintain that a violation of section 15(c) does not create a private right of action for damages.

All the defendants have moved for summary judgment against the plaintiff in motions joined by one of the third party defendants. Since there is a claim for relief based on a breach of the 1934 Securities Act and there are material issues of fact, these motions must be denied.

I.

On February 15, 1968 Robert L. Taylor was introduced to one of plaintiff's loan officers by another customer of the bank and proceeded to negotiate a loan of $30,000 which was to be secured by 10,000 shares of American Continental Industries, Inc. stock. Before approving the loan, the bank officer contacted a broker with whom the Bank dealt and inquired as to the "pink sheet" quotations concerning this stock. He was advised that several firms were listing it and that the quotations were either Bid 10, Asked 12, or Bid 9, Asked 11. On the basis of this information the loan officer approved the loan and Mr. Taylor left the Bank that same day with $30,000.

The stock was, in fact, worthless. The borrower defaulted. The Bank seeks the $30,000 from the broker-dealers who listed the "pink sheet" quotations.

"Pink sheets" are published daily by National Quotation Bureau, Inc.; they are formally known as the National Daily Quotation Service. Subscribers include broker-dealers as well as various banks. The former, known as listing subscribers, place bid (will buy at) and ask (will sell at) quotations in the "pink sheets" for various over-the-counter securities. These are offers and do not reflect completed transactions. When doing this for one stock over a period of time, the broker-dealer is said to be "making a market" in that security. See L. Loll and J. Buckley, The Over-The-Counter Securities Markets 146 (2d ed. 1967). Each quotation in the "pink sheets" obligates the broker-dealer to a one-hundred share transaction at the stated price. Any larger sale is a matter for negotiation. See generally L. Loss, Securities Regulation 3318-27 (2d ed. 1961); Burns, Over-The-Counter Market Quotations: Pink, Yellow, Green and White Sheets—A Gray Area in the Law of Evidence, 52 Cornell L.Q. 262 (1967).

II.

On oral argument plaintiff abandoned the common law fraud theory in the pleadings and placed full reliance on an implied private right of action under 15 U.S.C. § 78o(c) (2). That section prohibits brokers from inducing purchases of securities by the use of fictitious quotations. In relevant part it provides:

"No broker or dealer shall make use of the mails or of any means or instrumentality of interstate commerce to effect any transaction in, or to induce or attempt to induce the purchase or sale of any security * * * otherwise than on a national securities exchange, in connection with which such broker or dealer * * * makes any fictitious quotation. * * *"

Regulations developed under this section define a "fictitious quotation" as one made pursuant to an arrangement between brokers, "including a joint account, guarantee against loss, commission, markup, markdown, indication of interest and accommodation arrangement," without revealing the fact of and the participants in the arrangement to the "inter-dealer-quotation system"; to avoid violation of the regulations the quotation service must "make it a practice" to note this information along with the quotation. 17 C.F.R. 240.15c2-7. The defendants' first contention, that these provisions do not create a private right of action, is rejected.

Only few sections of the various Securities Acts provide explicitly for private actions. See, e. g., 15 U.S.C. §§ 77k, 77l, 77o (1933 Act); 15 U.S.C. §§ 78i(e), 78p(b), 78r, 78t (1934 Act); 15 U.S.C. § 77www (1939 Trust Indenture Act); cf. 15 U.S.C. §§ 78cc (1934 Act); 15 U.S.C. §§ 80a-46, 80b-15 (1940 Investment Company Act) (makes contracts in violation of various provisions voidable). Nevertheless, courts have implied the existence of private remedies for violation of other provisions. J. I. Case Company v. Borak, 377 U.S. 426, 84 S.Ct. 1555, 12 L.Ed.2d 423 (1964) (15 U. S.C. § 78n(a)); Jordan Building Corp. v. Doyle, O'Connor & Co., 401 F.2d 47 (7th Cir. 1968) (15 U.S.C. § 78j(b) and rule 10b-5); Mutual Shares Corp. v. Genesco, Inc., 385 F.2d 540, 543 (2d Cir. 1967) (same); Fischman v. Raytheon Mfg. Co., 188 F.2d 783, 787 (2d Cir. 1951) (same); Kardon v. National Gypsum Co., 69 F.Supp. 512, 513 (E.D.Pa.1946) (same); Taussig v. Wellington Fund, Inc., 313 F.2d 472, 475-476 (3d Cir. 1963), cert. denied, 374 U.S. 806, 83 S. Ct. 1693, 10 L.Ed.2d 1031 (1963) (15 U.S.C. § 80a-34(d)); Baird v. Franklin, 141 F.2d 238, 244-245 (2d Cir.), cert. denied, 323 U.S. 737, 65 S.Ct. 38, 89 L. Ed. 591 (1944) (15 U.S.C. § 78f(b)), cited with approval in Goldstein v. Groesbeck, 142 F.2d 422, 427 (2d Cir.), cert. denied, 323 U.S. 737, 65 S.Ct. 36, 89 L. Ed. 590 (1944); Goodman v. H. Hentz & Co., 265 F.Supp. 440, 445 (N.D.Ill. 1967) (15 U.S.C. § 78o(b) (5) (E)); Brown v. Bullock, 194 F.Supp. 207, 223-230 (S.D.N.Y.1961), aff'd, 294 F.2d 415 (2d Cir. 1961) (15 U.S.C. § 80a-36); Osborne v. Mallory, 86 F.Supp. 869, 879 (S.D.N.Y.1949) (15 U.S.C. § 77g); Remar v. Clayton Securities Corp., 81 F. Supp. 1014, 1017 (D.Mass.) (15 U.S.C. § 78g). See also Maher v. J. R. Williston & Beane, Inc., 280 F.Supp. 133, 137 (S.D.N.Y.1967) (15 U.S.C. § 78o(c) (1) based action barred by statute of limitations, but court assumes existence of cause of action); Opper v. Hancock Securities Corp., 250 F.Supp. 668, 673-674 (S.D.N.Y.), aff'd 367 F.2d 157 (2d Cir. 1966) (assuming validity of cause of action based on 15 U.S.C. § 78o(c) (1)); Geismar v. Bond & Goodwin, Inc., 40 F. Supp. 876 (S.D.N.Y.1941) (implying a money damages remedy under 15 U.S.C. § 78cc(b), which makes contracts violative of 15 U.S.C. § 78o(c) (1) voidable). Once a private remedy is implied, jurisdiction is based upon § 27 of the 1934 Securities Act. 15 U.S.C. § 78aa.

The existence of these private remedies and the implication of one under 15 U.S.C. § 78o(c) (2) is supported by the statutory tort theory which implies "a private right of action for violation of a statutory duty or a liability." Greater Iowa Corporation v. McLendon, 378 F. 2d 783, 789-791 (8th Cir. 1967). See Fischman v. Raytheon Mfg. Co., 188 F. 2d 783, 787 (2d Cir. 1951); Kardon v. National Gypsum Co., 69 F.Supp. 512, 513 (E.D.Pa.1946) ("disregard of the command of a statute is a wrongful act and a tort."). Both the Restatement and the Restatement, Second of Torts (§ 286) (Tent.Draft.No.4, 1959) recognize this principle and support relief for a plaintiff within the class the statute is intended to protect. While it is true that these provisions relate primarily to negligence theory (see Note, Private Rights from Federal Statutes: Toward A Rational Use of Borak, 63 N.W.L.Rev. 454, 456-7, nn. 20, 23 (1968)), they have been used to support imposition of civil liability under various federal statutes in a nonnegligence context. See, e. g., Fitzgerald v. Pan American World Airways, 229 F.2d 499, 501 (2d Cir. 1956) (49 U.S.C. § 484(b), discrimination by airlines); Reitmeister v. Reitmeister, 162 F.2d 691, 694 (2d Cir. 1947) (47 U.S.C. § 605, "publishing" a telephone message); see generally L. Loss, Securities Regulation 934-42 (2d ed. 1961) ("The statutory tort doctrine, more or less as expounded in the Restatement, is now an accepted part of American law." Id. at 942).

The most compelling reason for implying a private remedy for violation of a particular section of the securities laws is to make the prohibitions of that section more effective. J. I. Case Company v. Borak, 377 U.S. 426, 432, 84 S. Ct. 1555, 1560 (1964) ("Private enforcement of the proxy rules provides a necessary supplement to commission action. * * * It is the duty of the courts to be alert to provide such remedies as are necessary to make effective the congressional purpose."); cf. Note, Prospects For Rule X-10B-5: An Emerging Remedy for Defrauded Creditors, 59 Yale L.J. 1120, 1134 (1950) (addition of statute of limitations in 1938 for 15 U.S.C. § 78cc(b) indicates Congress presumed existence of private right of action). If the defrauded victim is left without any remedies in these cases "the avowed purpose of `reasonably complete and effective' protection would indeed be a snare and a delusion." Baird v. Franklin, 141 F.2d 238, 245 (2d Cir. 1944). Some cases have even indicated that absent a specific congressional limitation such civil remedies must be implied. See ...