Hecht v. Harris, Upham & Co.

• Citation: 283 F. Supp. 417
• Decision Date: 28 March 1968
• Docket Number: Civ. No. 44137.
• Court: U.S. District Court — Northern District of California
• Parties: Bertha HECHT, Plaintiff, v. HARRIS, UPHAM & CO., a partnership, Harris, Upham & Co., Inc., a corporation, Arthur R. Mejia, Asa V. Wilder, George Upham Harris, Henry Upham Harris, Jr., Frank L. Patty, et al., Defendants.

283 F. Supp. 417

Bertha HECHT, Plaintiff, v. HARRIS, UPHAM & CO., a partnership, Harris, Upham & Co., Inc., a corporation, Arthur R. Mejia, Asa V. Wilder, George Upham Harris, Henry Upham Harris, Jr., Frank L. Patty, et al., Defendants.

Civ. No. 44137.

United States District Court N. D. California.

March 28, 1968.

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Lowenthal & Lowenthal by Reed Bement, Morris Lowenthal, San Francisco, Cal., Donald F. X. Finn, New York City, for plaintiff.

E. C. Mahoney, Burlingame, Cal., for defendant Asa V. Wilder.

Cooley, Crowley, Gaither, Godward, Castro & Huddleson, Thomas Hartwell, San Francisco, Cal., Emanuel Becker, New York City, for remaining defendants.

MEMORANDUM OF DECISION CONTAINING THE FINDINGS AND CONCLUSIONS OF THE COURT (Rule 52 F.R.Civ.P.)^*

SWEIGERT, District Judge.

Plaintiff, a customer of Harris, Upham Co., a brokerage firm dealing in securities and commodities, has brought this action against that firm and Asa V. Wilder, its Registered Representative and Commodities Manager, to recover damages for alleged violations of Section 17(a) of the Securities Act of 1933, (15 U.S.C. § 77q(a)); Section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78j(b); and, Securities Exchange Commission Rule 10b-5 (17 C.F.R. 240.10b-5); the Commodity Exchange Act of 1936 (7 U.S.C. § 1 et seq.); Art. III, Sec. 2 of the Rules of the National Association of Securities Dealers; and the common law of the State of California.

This Court has jurisdiction of this action under 28 U.S.C. §§ 1331 and 1337; Section 22(a) of the Securities Act of 1933 (15 U.S.C. § 77v(a)) and Section 27 of the Securities Exchange Act of 1934 (15 U.S.C. § 78aa).

Securities Act Section 17(a) (15 U.S. C. § 77q(a)), makes it unlawful for any person in the offer or sale of any securities by the use of interstate commerce directly or indirectly to (1) employ any device, scheme or artifice to defraud, or (2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (3) to engage in any transaction, practice or course of business which operates or would operate as a fraud or deceit upon the purchaser.

Securities Exchange Act Section 10(b) (15 U.S.C. § 78j(b)) makes it unlawful for any person, directly or indirectly, by the use of interstate commerce or of the mails or of any facility of any national securities exchange to use or employ, in connection with the purchase or sale of any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest for the protection of investors.

Pursuant to this Act the Securities Exchange Commission promulgated Rule 10b-5 (17 C.F.R. 240.10b-5), providing that it shall be unlawful for any person, directly or indirectly, by the use of interstate commerce, or of the mails or any facility of any national securities exchange, (a) to employ any device, scheme or artifice to defraud, (b) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, not misleading, or (c) to engage in any act, practice or course of business which operates as or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.

That a private civil action for damages lies for violation of the Securities Acts has become well established. Fratt v. Robinson, 203 F.2d 627, 37 A. L.R.2d 636 (9th Cir. 1953); Ellis v. Carter, 291 F.2d 270 (9th Cir. 1961); Matheson v. Armbrust, 284 F.2d 670 (9th Cir. 1960); Errion v. Connell, 236 F.2d 447 (9th Cir. 1956).

THE BASIC FACTS

The basic facts in this case are that plaintiff, now 77 years of age and a widow, was born and reared in England, attended grammar school and high school attended a teachers' college for 2 years and taught school there. She went to Canada at the age of 23 and worked there as a private tutor, then moved to New York where she supervised manual training for youngsters, moved to Salt Lake City and worked there as a salesgirl, and at the age of 32 moved to San Francisco to work as a saleslady in a department store.

In 1923 she became a housekeeper in the San Francisco home of the Koshlands, caring for the household and for the Koshland children over a period of 14 years. She then visited Europe for 6 months, returned to California and resumed employment as a tutor of children at the Crystal Springs School for Girls.

In 1939 her principal recommended her for the position of housekeeper and tutor in the home of Herbert Hecht of San Mateo County, whose wife had just died leaving with him a teenage daughter.

Hecht was a businessman engaged in the import and export business and he also maintained both a securities and a commodities account with Merrill Lynch, dealing with that firm through defendant Wilder and others. When Wilder left Merrill Lynch in 1953 to join another firm, Hooker & Fay, Hecht allowed him to handle an additional but relatively small soy bean commodity account at Hooker & Fay.

Plaintiff remained in the Hecht home in the capacity of housekeeper and tutor for 14 years. In 1953, she married Hecht and remained in the home for another 2 years as his wife—until he died suddenly of a heart attack in 1955, leaving a substantial estate which was eventually divided equally between plaintiff and Hecht's daughter.

Although her salary, during her years in the Koshland and Hecht homes up to the time of her 1953 marriage to Hecht, was never more than about $125 a month, plaintiff had been able to allocate a considerable part of it to a stock brokerage account. There is evidence that she had some dealings in stocks as early as 1928. In any event, she maintained a small margin account, involving about 5 to 10 transactions a month with Johnson Company from 1931 to 1936. In 1936 her account was transferred to Walston Company and maintained with that firm until 1955.

Plaintiff's dealings with these brokerage firms were carried on through Ernest Fairey, a brokerage representative. After her entry into the Hecht household in 1939 Herbert Hecht also assisted her in the handling of the Walston account.

During the last 16 years of her account at Walston Company (1939-1955), there were 32 security sales and 41 security purchases during that period—not more than 5 sales in any one year and generally less or no sales at all.

Starting with about $2,000, her personal account had increased in value during the years 1931-1955, to about $15,000, by 1939 and to about $65,000 in 1955. It was then reduced to $42,000 by reason of some withdrawals for the convenience of her husband shortly before his death.

In July 1955, shortly after her husband's death, the account (net value $42,000) was transferred from Walston Company to Hooker & Fay where defendant Wilder was employed. Wilder's acquaintance with plaintiff came about as a result of his previous business acquaintance with her husband and he and his wife befriended plaintiff at his home after her husband's death. Thus, the relationship between Wilder and the plaintiff was a social as well as a business relationship.

In June, 1956, after her husband's death, plaintiff, who up to that time had never maintained a commodities account, wrote a letter (Defendants' Exhibit RRR) to Wilder enclosing a check for $7,500 for "starting me on the soy beans when you think it is the right time." Plaintiff claims that she wrote this letter upon some inducement of Wilder, a commodities specialist, to deal in commodities through him.

Several months later (August, 1956) her account at Hooker & Fay was substantially augmented by stocks distributed to her from her husband's estate, stocks having a market value at that time of about $486,620, bringing the account to a net value of $508,532 (market value of securities $526,659; debit balance re securities $26,928; balance re commodities $8,792).

There is evidence that Wilder suggested to her that a portion of her newly acquired assets be placed in a trust or custody account with a bank, but that plaintiff refused to consider such arrangement.

Plaintiff dealt through Wilder with Hooker & Fay for about 21 months— until May, 1957, when the account was transferred to Harris, Upham Co., upon Wilder's leaving Hooker & Fay to become a Registered Representative and San Francisco Commodities Manager for Harris, Upham Company.

As of May, 1957, the date of transfer of the account to Harris, Upham Co., the account had a net value of about $533,161 (market value of securities $552,000; debit balance re securities $46,252; balance re commodities $27,413).

From May, 1957, plaintiff continued to deal through Wilder with Harris, Upham Co., for six years and ten months —until March, 1964, when she removed the account from the hands of Wilder and Harris, Upham upon being advised by her income tax accountants that the net value and the income potential of her account had greatly deteriorated.

By March, 1964, the account at Harris, Upham had dropped from its original net value of about $533,161 to about $251,308 (market value of securities $427,134; debit balance re securities $187,464, cash balance re commodities $11,638).

This suit was commenced against Wilder and Harris, Upham Co., on September 20, 1965.

It can be calculated that, if the original portfolio transferred to Harris, Upham in May, 1957, had been maintained intact during the period 1957-1964 (a period of general rise in securities values) it would have had a net value by March, 1964, of about $1,026,775 instead of $251,308.

It can also be calculated that, if the original portfolio of the securities...