Hawkins v. Merrill, Lynch, Pierce, Fenner & Beane

• Decision Date: 20 July 1949
• Docket Number: Civ. No. 833.
• Citation: 85 F. Supp. 104
• Parties: HAWKINS et al. v. MERRILL, LYNCH, PIERCE, FENNER & BEANE.
• Court: U.S. District Court — Western District of Arkansas

85 F. Supp. 104

HAWKINS et al. v. MERRILL, LYNCH, PIERCE, FENNER & BEANE.

Civ. No. 833.

United States District Court W. D. Arkansas, Fort Smith Division.

July 20, 1949.

COPYRIGHT MATERIAL OMITTED

Bland, Kincannon & Bethell, Fort Smith, Arkansas, for plaintiffs.

Hardin, Barton & Shaw, Fort Smith, Arkansas, for defendants.

Statement

JOHN E. MILLER, District Judge.

Plaintiffs filed their complaint on April 11, 1949, alleging that the defendants are liable to them as a result of losses occasioned in the purchase of stock through D. S. Waddy, doing business as D. S. Waddy & Company, alleged to be the agent of and under the control of the defendants.

Defendants filed their answer May 7, 1949, denying that they are liable for the losses, and denying that D. S. Waddy was their agent or under their control.

The cause was tried to the Court, without the intervention of a jury, on June 28, 29, 30 and July 1, 1949. At the conclusion of the introduction of testimony, the parties were granted time within which to file briefs in support of their contentions. Briefs have been filed and considered along with the pleadings, the ore tenus testimony and exhibits thereto and stipulations, from all of which the Court makes and files herein the following findings of fact and conclusions of law separately stated:

Findings of Fact

1. Plaintiffs' claim is based upon alleged violations of Sections 78j, and regulations thereunder, 78k(d), 78q(a), and regulations thereunder (specifically Rule X-17A-5), and 78t(a) of Title 15 U.S.C.A., The Securities Exchange Act of 1934.

The plaintiffs, R. P. Hawkins, J. K. Fraser, Rose Goodman, Raymond Allen, C. R. Sadler and C. W. Schacht, are citizens and residents of the State of Arkansas.

The defendants, Merrill, Lynch, Pierce, Fenner & Beane, are partners and are engaged in the brokerage business. They are members of the New York Stock Exchange and other principal stock and commodity exchanges throughout the United States. Their principal place of business is located at 70 Pine Street, New York, New York, but maintain branch offices at Hot Springs and Little Rock in the State of Arkansas; and at all times involved herein were transacting business in the Western District of Arkansas under the supervision and control of the Arkansas State Banking Department. Defendants, as one of the major brokerage firms in the United States, have a national organization with ninety-eight branch offices and twelve wire connections or correspondents in various cities. They perform the usual functions of a brokerage firm, including the purchase and sale of stocks, bonds, securities and commodities for their customers and the maintenance of a research department to correlate and distribute pertinent information as to the status and financial structure of corporations that have stock, bonds, and securities on the market, which information is a necessary basis for advice given to prospective investors. Their compensation is derived from commissions charged to their customers for the services performed.

2. The firm of defendants was organized and has been in existence with its present general partners since August 18, 1941. At that time defendants took over the facilities, accounts and business of the partnership of Fenner & Beane. The latter firm, or more specifically the persons comprising it, have been engaged in the brokerage business for a number of years, but it is necessary to consider D. S. Waddy's connection or status since 1932, only. Waddy, trading as D. S. Waddy & Company, first became connected with Fenner & Beane on March 1, 1932, who operated a brokerage business until June, 1933, when the business was taken over by Fenner, Beane & Ungerleider, which partnership continued until June, 1934, when the business was taken over again by Fenner & Beane, a partnership, which continued until August 18, 1941, when the partnership of defendants was formed.

3. In 1932, David S. Waddy, a citizen of Fort Smith, Arkansas, became a correspondent of Fenner & Beane and was so designated, but such designation was later changed to wire connection. As a practical matter there is no difference between a correspondent and a wire connection, and hereinafter Waddy will be referred to as a correspondent. In general, a correspondent is a dealer in stocks, bonds, securities and commodities and, because of not being a member of the stock and commodity exchanges, must have his orders executed through a broker who is a member and who, in such transactions, is referred to as the carrying broker. Subject to the rules of the exchange, the member broker is permitted to supply certain facilities to the correspondent, and in the instant case, correspondent Waddy was furnished a teletype wire connection and a cotton ticker. Also, he was supplied six chairs by Fenner & Beane as well as certain office forms necessary for the conduct of his business as a correspondent and a rubber stamp with name of defendants thereon. Waddy paid all expenses incurred in the operation of his office (exclusive of those facilities and services furnished by Fenner & Beane and successors, including defendants) including office rent, employees salaries, supplies, etc.

In order to qualify as a correspondent, or to associate himself with a member broker, it was necessary that Waddy comply with rules of the particular exchange where orders of his customers were to be executed. He executed a private wire contract with the New York Stock Exchange (defendants' exhibit No. 1 as to Fenner & Beane) pertaining to the receipt and use by the correspondent of quotations received through the member broker. In regard to the furnishing of facilities by the member broker to the correspondent, Rule 460 of the New York Stock Exchange (defendant's exhibit No. 8) provides:

"No member or member firm shall establish or maintain any wire connection or permit communication by any private radio system between his or its office and the office of any non-member without the prior consent of the Exchange. The use of public telephone or telegraph service in such manner as to amount to private connection shall be deemed to be a wire connection within the meaning of this Rule. Every such means of communication shall be registered with the Exchange. Notice of the discontinuance of any such means of communication shall be promptly given. The Exchange may require at any time that any such means of communication forthwith be discontinued."

Rule 479 (defendant's exhibit No. 10) provides:

"No member or member firm shall directly or indirectly pay any expense pertaining to the office of a non-member, except that the cost of a means of communication between the office of a member or member firm and a non-member may be paid by the member or member firm."

4. The practice of Fenner & Beane in clearing transactions on the various Exchanges for the customers of correspondents is outlined fully in plaintiffs' exhibit No. 17.

"The purpose of this notice is to outline the plan which is followed by us in clearing transactions on the various Exchanges for the customers of our wire correspondents when the names of such customers are disclosed to us.

"Our wire correspondents transmit to us orders placed with them by their disclosed customers, whereupon we open an individual account for each customer and in addition to confirming all executions in those accounts to our wire correspondents, we send mail confirmations direct to the customers. At the end of each month, we issue a monthly statement of his account to each customer, sending a carbon copy to the wire correspondent.

"While we are authorized to make purchases and sales for the customer's account, in accordance with instructions received from his agent, the correspondent, we do not make deliveries of securities, or payments of funds except direct to the customer, unless he should instruct us from time to time to do otherwise.

"It is to be observed, therefore, that in addition to the responsibility of the wire correspondent, which is usually considerable, the customer has the full responsibility of our firm on every order which we receive and confirm to him and on funds or securities for which we issue receipts."

This practice remained effective through the various changes of the Fenner & Beane partnership, and was and is the practice followed by the defendants.

5. The account symbol assigned to correspondent Waddy was "BQ". Where the names of the customers were disclosed to the defendants, a segregated account was set up on the books of the defendants, and each customer was given a separate account number, such as, BQ 2 or BQ 10, etc. When a customer went to the office of D. S. Waddy and placed an order for the purchase of securities, Waddy gave him a confirmation stating "In accordance with your instructions we have this day bought for your account and risk: (Account number)" and containing the following information: quantity of securities; name of security; price on New York Stock Exchange; name of New York Stock Exchange Firm (at times the name of defendants' firm was stamped in but usually it was left blank); Commission charged by New York Stock Exchange Brokers; Our commission; Taxes; Shipping expense; and Totals. Correspondent Waddy then wired the order to defendants at New Orleans, and defendants executed it upon the floor of the New York Stock Exchange. If the order was placed with defendants upon a disclosed basis, a segregated account was opened in name of customer and a confirmation of the execution was then sent to the customer, with a copy going to correspondent Waddy, and the securities were held by defendants in their "street name", or in the name of the former owner, awaiting deposit of money covering the transaction. Defendants maintained bank accounts in the Merchants National Bank and First National Bank of Fort Smith, Arkansas, and made arrangements with these banks for them to notify defendants by code wire of...