Golob v. Nauman Vandervoort, Inc., Civ. No. C-71-15.

Citation353 F. Supp. 1264
Decision Date28 July 1972
Docket NumberCiv. No. C-71-15.
PartiesJack GOLOB et al., Plaintiffs, v. NAUMAN VANDERVOORT, INC., Defendant.
CourtUnited States District Courts. 6th Circuit. United States District Court of Northern District of Ohio

Norman Rubinoff, Spengler, Nathanson, Heyman McCarthy & Durfee, Toledo, Ohio, for plaintiffs.

E. Thomas Maguire, Robison, Curphey & O'Connell, Toledo, Ohio, for defendant.

MEMORANDUM

DON J. YOUNG, District Judge:

This cause came to be heard on motion of the defendant for summary judgment, pursuant to Rule 56(b) of the Federal Rules of Civil Procedure. Defendant has filed a memorandum and reply memorandum in support thereof, although it did not seek leave of this Court to file the latter. Plaintiffs have filed a memorandum in opposition to the motion for summary judgment.

It is axiomatic that in a motion for summary judgment the Court must ascertain whether there is a genuine issue as to a material fact after viewing the record in a light most favorable to the party being moved against. If there is, as a matter of law, this Court cannot enter summary judgment on the issue in question. With that in mind, the Court will examine plaintiffs' three theories of recovery.

Firstly, plaintiffs contend that the defendant has violated one or more of the rules of the various stock exchanges. The law is clear that such violation does not give rise to implied federal civil liability on the facts herein. Colonial Realty Corp. v. Bache & Co., 358 F.2d 178 (2d Cir.) cert. denied, 385 U.S. 817, 87 S.Ct. 40, 17 L.Ed.2d 56 (1960). Judge Friendly, writing for a unanimous court in that landmark case, held that although the rules of security exchanges impose a duty upon the members not to engage in activities which are in contravention of its rules, for which the exchange or association can impose disciplinary sanctions, violation thereof by a member does not give rise to implied federal civil liability. See also, Hecht v. Harris, Upham & Co., 430 F.2d 1202, 1209 (9th Cir. 1970); Buttrey v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 410 F.2d 135 (7th Cir. 1969); Mercury Investment Co. v. A. G. Edwards & Sons, 295 F.Supp. 1160 (S. D. Texas 1969); Irving Weis & Co. v. Offenberger, 31 Misc.2d 628, 220 N.Y.S. 2d 1001 (1961).

Secondly, plaintiffs contend they are entitled to damages on the basis of a Rule 10b-5 violation of the Securities Exchange Act. 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5. That contention is not well founded, as there is no indication that the defendant was motivated by a fraudulent intent or scienter in not enforcing the margin maintenance requirements. Shemtob v. Shearson, 448 F.2d 442 (2d Cir. 1971); Matheson v. White Weld & Co., 53 F.R.D. 450 (S.D. N.Y.1971). It is insufficient to allege mere negligence. Globus v. Law Research Service, Inc., 418 F.2d 1276, 1290-1291 (2d Cir. 1969); SEC v. Texas Gulf Sulphur, 401 F.2d 833, 867-68 (2d Cir. 1968); Colonial Realty Corp. v. Bache & Co., supra.

Thirdly, plaintiffs contend that the defendant has violated a provision of the Securities Exchange Act. For the plaintiffs to be successful on that theory, the following two issues must be resolved in the affirmative:

(1) Whether the defendant has violated Title 15 Section 78g(c) of the Securities Exchange Act and the regulations promulgated thereunder by the Federal Reserve System; and
(2) Whether said violation gives rise to implied federal civil liability.

The landmark case of Colonial has been cited as standing for the proposition that notwithstanding there being a violation of the Securities Exchange Act with regard to a securities broker not complying with the margin requirements, the customer is not entitled to relief, as there is no implied federal civil liability. That proposition is purportedly based upon the premise that Congress knows how to create civil liability on behalf of the person aggrieved when it wants to—see e. g. Economic Stabilization Act, Pub.L.No. 92-210 § 210 (December 22, 1971); Equal Employment Opportunities Act, 42 U.S.C. § 2000e-5; Labor Management Reporting and Disclosure Act, 29 U.S.C. § 412 — but did not expressly create it in this instance, and thus there is an implication that Congress determined that affording persons who are aggrieved civil liability is not necessary for executing the statutory purpose. The aforementioned conclusion is incorrect on the basis of prior implication of federal civil liability under the very Act in question. See Rule 10b-5 and the case law construction thereof. Barnett v. Anaconda Co., 238 F.Supp. 766 (S.D.N.Y.1965); J. I. Case Co. v. Borak, 377 U.S. 426, 433, 84 S.Ct. 1555, 12 L.Ed.2d 423 (1964); Moscarelli v. A. L. Stamm, 288 F.Supp. 453 (E.D. N.Y.1968); Deckert v. Independence Shares, 311 U.S. 282, 288, 61 S.Ct. 229, 85 L.Ed. 189 (1940). Furthermore, and most importantly, a reading of Colonial does not support the proposition that there cannot be implied federal civil liability when a customer sues a securities broker for alleged violations of the Securities Exchange Act, as there was not a violation of the Securities Exchange Act in that case.

Plaintiff's alleged cause of action in Colonial arose when the securities broker sold the securities in plaintiff's margin account during a stock market dip. Plaintiff did not contend that the securities broker should have sold the securities earlier and was required to do so by the margin requirements established under the Securities Exchange Act. Rather, plaintiff's theory of recovery was based upon the allegation that it suffered losses as a result of defendant's selling the securities in its margin account in EXCESS of the minimum requirements of the New York Stock Exchange, when defendant entered into an oral agreement that it would not require a margin in excess of the minimum requirements of the New York Stock Exchange, notwithstanding the carte blanche provisions of the standard margin agreement entered into between the parties, according to which they agree to "maintain such margins as you securities broker may from time to time require, upon my accounts, and promptly meet all margin calls."

Since the first issue in Colonial— whether there was a violation of a provision of the Securities Exchange Act— was resolved in the negative, there was no need to go on to the second issue— whether a violation of the Securities Exchange Act gives rise to implied federal civil liability. Thus, the cases citing Colonial as barring a federal civil liability action against a securities broker for a violation of the margin requirement of the Securities Exchange Act are wrong in relying upon Colonial for that proposition. See e. g. Irving Weis & Co. v. Offenberger, supra. At best, they are relying upon dictum.

In the present posture of the case at bar, plaintiffs have demonstrated a violation of the Securities Exchange Act, 15 U.S.C. § 78g(c). In resolving the question of whether plaintiffs have an implied federal civil liability action against the security brokerage firm in question, Colonial is not authority to the contrary.1 The Second Circuit, with Judge Friendly dissenting, in Pearlstein v. Scudder & German, 429 F.2d 1136 (2d Cir. 1970), cert. denied, 401 U.S. 1013, 91 S.Ct. 1250, 28 L.Ed.2d 550 (1971), with Justices Black, Douglas and Blackmun dissenting, held that a customer who purchases securities through a broker who does not comply with the margin requirements of the Securities Exchange Act has an implied federal civil action for damages. The Pearlstein Court stated that the fact that the federal margin requirements prohibit a broker from extending undue credit, and do not prohibit customers from accepting such credit, indicates that Congress placed the responsibility for observing margins upon the broker.

Although the main purpose of the margin requirement provision of the Securities Exchange Act was to protect the overall economy from excessive speculation by reducing the amount of credit resources which could be directed by speculation into the stock market, an incidental purpose was the protection of the individual investor. Pearlstein v. Scudder & German, supra at 1140. The House Report noted that "protection of the small speculator by making it impossible for him to spread himself too thinly . . . will be achieved as a by-product of the main purpose." H.R. Rep.No. 1383, 73d Cong., 2d Sess. 8 (1934). The report of the Senate Banking and Currency Committee includes as one of the intended effects of the margin provisions the protection of the margin purchaser by making it impossible for him to buy securities on too thin a margin. S.Rep.No. 1455, 73d Cong., 2d Sess. 11 (1934). See also Zatz v. Hertz, Neumark & Warner, 262 F.Supp. 928 (S.D.N.Y.1966); Remar v. Clayton Securities Corp., 81 F.Supp. 1014 (D. Mass.1949); Surgil v. Kidder, Peabody & Co., 63 Misc.2d 473, 311 N.Y.S.2d 157 (1970); Myer v. Shields & Co., 25 A.D. 2d 126, 267 N.Y.S.2d 872 (1966).

There are numerous cases, which constitute the weight of authority, that recognize private actions by investors as a highly effective means of protecting the economy as a whole from margin violations by security brokers. Pearlstein v. Scudder & German, supra; Junger v. Hertz, Neumark & Warner, 426 F.2d 805 (2d Cir. 1970); Smith v. Bear, 237 F.2d 79, 87-88 (2d Cir. 1956); Goldman v. Bank of Commonwealth, 332 F.Supp. 699 (E.D.Mich.1971); Serzyzko v. Chase Manhattan Bank, 290 F.Supp. 74 (S.D. N.Y.1968), aff'd, 409 F.2d 1360 (2d Cir.), cert. denied, 396 U.S. 904, 90 S.Ct. 218, 24 L.Ed.2d 180 (1969); Moscarelli v. A. L. Stamm, supra; Hecht v. Harris, Upham & Co., supra; Glickman v. Schweickart & Co., 242 F.Supp. 670 (S. D.N.Y.1965); Cooper v. North Jersey Trust Co., 226 F.Supp. 972 (S.D.N.Y. 1964); Warshow v. H. Hentz & Co., 199 F.Supp. 581 (S.D.N.Y.1961); Reader v. Hirsch & Co., 197 F.Supp. 111 (S.D.N. Y.1961); Appel v. Levine, 85 F.Supp. 240 (S.D.N.Y.1948); Remar v. Clayton Securities Corp., supra; Surgil v. Kidder, Peabody & Co., supra; ...

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