Liang v. Dean Witter & Co., Inc.

CourtUnited States Courts of Appeals. United States Court of Appeals (District of Columbia)
Citation540 F.2d 1107,176 U.S.App.D.C. 328
Decision Date16 July 1976

Page 1107

540 F.2d 1107
176 U.S.App.D.C. 328, Fed. Sec. L. Rep. P 95,646
Robert N. LIANG and Susan A. Liang, Appellants,
v.
DEAN WITTER AND CO., INC., et al.
No. 75-1868.
United States Court of Appeals,
District of Columbia Circuit.
Argued 13 April 1976.
Decided 16 July 1976.
As Amended 6 Oct. 1976.
Rehearing Denied 15 Oct. 1976.

Thomas Lumbard, Washington, D. C., for appellants.

Steven A. Winkelman, Washington, D. C., for appellees.

Before McGOWAN, ROBINSON and WILKEY, Circuit Judges.

Opinion for the Court filed by WILKEY, Circuit Judge.

WILKEY, Circuit Judge:

Securities and Exchange Commission Rule 10b-16 1 requires, among other mandatory

Page 1109

disclosures, a broker to provide to a customer with a margin account 2 a written statement of "the conditions under which additional collateral can be required." In connection with the margin account opened with Dean Witter & Company, Inc., (Dean Witter) by the appellants, the appellees informed the appellants in writing that Dean Witter may require "such additional collateral as, in our sole discretion, we determine is necessary as security for your obligation to us." The question presented by this case is whether such notice constitutes full compliance with the disclosure requirement of Rule 10b-16. The District Court for the District of Columbia (Corcoran, J.) dismissed the complaint "for failure to state a claim upon which relief can be granted." For reasons more fully explained below, we reverse and remand for further proceedings.
I

On 7 April 1972 Robert and Susan Liang (the Liangs) opened a margin account with Dean Witter. 3 Dean Witter assigned Roger Carter, the other appellee, as its customer representative for the Liangs' account. At the time of the opening, the Liangs signed a standard form "Customer's Agreement" supplied by Dean Witter; 4 soon afterwards the Liangs also received another standard form from Dean Witter entitled "Credit Charges." 5

The "Customer's Agreement" provides in pertinent part as follows:

7. You are hereby authorized, in your discretion, should the undersigned die or should you for any reason whatsoever deem it necessary for your protection, to sell any or all of the securities and commodities or other property which may be in your possession or which you may be carrying for the undersigned . . . . Such sale . . . may be made according to your judgment and may be made, at your discretion . . . without advertising the same and without notice to the undersigned. (emphasis added).

The "Credit Charges" form reads in part:

5. LIENS AND COLLATERAL As provided in our Customer's Agreement, we have a general lien upon all securities which we hold for you for the discharge of all your obligations to us, however arising and irrespective of the number of accounts you maintain. We may at any time require you to deposit cash or such additional collateral as, in our sole discretion, we determine is necessary as security for your obligation to us. (emphasis added).

On 18 July 1973 Dean Witter wrote to the Liangs that "At the present level of prices there is not sufficient margin in your account to protect it." 6 Dean Witter "therefore" requested $2600 in additional collateral, asking for "immediate attention" by 1 August 1973. In neither the letter nor in subsequent communication, despite inquiry from the Liangs, did Dean Witter explain the exact basis for the lack of "sufficient margin." As the demand for the additional collateral was not met, 7 Dean

Page 1110

Witter conducted two sets of sales of securities from the Liangs' account, one on about 8 August and the other on about 13 August. Upon learning of the sales by appellees, 8 the Liangs demanded the replacement of the securities and, upon refusal, sued in the District Court for the difference between the amount realized by the sales in August 1973 and the amount that the securities could have been sold for "within a reasonable time thereafter." 9 The District Court had jurisdiction under 15 U.S.C. § 78aa.

Appellees moved to dismiss the complaint under Fed.R.Civ.P. Rule 12(b)(6) on the grounds that the documents received by the Liangs "satisfy the requirements of Rule 10b-16." The District Court granted the motion to dismiss, without opinion, and this appeal followed. This court has jurisdiction of the appeal pursuant to 28 U.S.C. § 1291.

II

Rule 10b-16 provides in part as follows:

(a) It shall be unlawful for any broker or dealer to extend credit, directly or indirectly, to any customer in connection with any securities transaction unless such broker or dealer has established procedures to assure that each customer

(1) is given or sent at the time of opening an account, a written statement or statements disclosing (i) the conditions under which an interest charge will be imposed; (ii) the annual rate or rates of interest that can be imposed; (iii) the method of computing interest; (iv) if rates of interest are subject to change without prior notice, the specific conditions under which they can be changed; (v) the method of determining the debit balance or balances on which interest is to be charged and whether credit is to be given for credit balances in cash accounts; (vi) what other charges resulting from the extension of credit, if any, will be made and under what conditions; and (vii) the nature of any interest or lien retained by the broker or dealer in the security or other property held as collateral and the conditions under which additional collateral can be required . . . .

(b) It shall be unlawful for any broker or dealer to make any change in the terms and conditions under which credit charges will be made (as described in the initial statement made under Paragraph (a) of this Rule), unless the customer shall have been given not less than thirty (30) days written notice of such changes, except that no such prior notice shall be necessary where such changes are required by law . . . . (emphasis added).

Since this case calls for one of the first judicial interpretations of Rule 10b-16, 10 it may be helpful to set out its history in some detail, particularly since this interpretation may require the revision of some of the forms that seek to comply with Rule 10b-16. When Congress passed the Truth in Lending Act in 1968, 11 it expressly exempted securities accounts from its coverage. 12

Page 1111

The Senate Report noted:

The Committee has been informed by the Securities and Exchange Commission that the Commission has adequate regulatory authority under the Securities Exchange Act of 1934 to require adequate disclosure of the costs of such credit. The Committee has also been informed in a letter from the SEC that "the Commission is prepared to adopt its own rules to whatever extent may be necessary."

In recommending an exemption for stockbroker margin loans in the bill, the Committee intends for the SEC to require substantially similar disclosure by regulation as soon as it is possible to issue such regulation. 13

The House Report agreed. 14

Rule 10b-16 represents the SEC implementation of the instruction from Congress. It was adopted on 1 December 1969, 15 after notice and comments, and became effective 1 April 1970. The SEC authority for the Rule is derived, of course, from the prohibition in Section 10(b) 16 of the Securities Exchange Act of 1934 against the use of "any manipulative or deceptive device" in connection with the purchase or sale of any security. Tracking the express purpose of the Truth in Lending Act, 17 the SEC announced the disclosure sought by Rule 10b-16 as follows:

The initial disclosure is designed to insure that the investor, before his account is opened, understands the terms and conditions under which credit charges will be made. This will...

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22 practice notes
  • Haynes v. Anderson & Strudwick, Inc., Civ. A. No. 80-0732-R.
    • United States
    • United States District Courts. 4th Circuit. United States District Court (Eastern District of Virginia)
    • February 3, 1981
    ...was unaware of a case establishing any private right of action for damages under Rule 10b-16. In Liang v. Dean Witter & Co., Inc., 540 F.2d 1107 (D.C.Cir.1976), the District of Columbia Circuit permitted a private cause of action for alleged noncompliance with Rule 10b-16. Judge Wilkey ......
  • Angelastro v. Prudential-Bache Securities, Inc., PRUDENTIAL-BACHE
    • United States
    • United States Courts of Appeals. United States Court of Appeals (3rd Circuit)
    • June 12, 1985
    ...of action under Rule 10b-16. See Robertson v. Dean Witter Reynolds, Inc., 749 F.2d 530 (9th Cir.1984); Liang v. Dean Witter & Co., 540 F.2d 1107 (D.C.Cir.1976); cf. Zerman v. Ball, 735 F.2d 15 (2d Cir.1984) (raising but not reaching the question). In addition, a majority of the district......
  • Jaksich v. Thomson McKinnon Securities, Inc., No. 81 Civ. 7675 (IBC).
    • United States
    • United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
    • February 10, 1984
    ...on the merits. See Stephens v. Reynolds Securities, Inc., 413 F.Supp. 50 (N.D. Ala.1976). Cf. Liang v. Dean Witter & Co., Inc., 540 F.2d 1107 (D.C.Cir.1976) (general interpretation of Rule 10b-16 with remand to district court to find necessary facts); Haynes v. Anderson & Strudwick,......
  • Finne v. Dain Bosworth Inc., Civ. No. 4-86-399.
    • United States
    • United States District Courts. 8th Circuit. United States District Court of Minnesota
    • November 13, 1986
    ...F.Supp. 676 (S.D.N.Y.1984); Robertson v. Dean Witter Reynolds, Inc., 749 F.2d 530, 534-39 (9th Cir.1984); Liang v. Dean Witter & Co., 540 F.2d 1107, 1113 n. 25 (D.C.Cir.1976); Abeles v. Oppenheimer & Co., 597 F.Supp. 532 (N.D.Ill.1983); and cases holding that private action does not......
  • Request a trial to view additional results
22 cases
  • Haynes v. Anderson & Strudwick, Inc., Civ. A. No. 80-0732-R.
    • United States
    • United States District Courts. 4th Circuit. United States District Court (Eastern District of Virginia)
    • February 3, 1981
    ...court was unaware of a case establishing any private right of action for damages under Rule 10b-16. In Liang v. Dean Witter & Co., Inc., 540 F.2d 1107 (D.C.Cir.1976), the District of Columbia Circuit permitted a private cause of action for alleged noncompliance with Rule 10b-16. Judge Wilke......
  • Angelastro v. Prudential-Bache Securities, Inc., PRUDENTIAL-BACHE
    • United States
    • United States Courts of Appeals. United States Court of Appeals (3rd Circuit)
    • June 12, 1985
    ...right of action under Rule 10b-16. See Robertson v. Dean Witter Reynolds, Inc., 749 F.2d 530 (9th Cir.1984); Liang v. Dean Witter & Co., 540 F.2d 1107 (D.C.Cir.1976); cf. Zerman v. Ball, 735 F.2d 15 (2d Cir.1984) (raising but not reaching the question). In addition, a majority of the distri......
  • Jaksich v. Thomson McKinnon Securities, Inc., No. 81 Civ. 7675 (IBC).
    • United States
    • United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
    • February 10, 1984
    ...10b-16 on the merits. See Stephens v. Reynolds Securities, Inc., 413 F.Supp. 50 (N.D. Ala.1976). Cf. Liang v. Dean Witter & Co., Inc., 540 F.2d 1107 (D.C.Cir.1976) (general interpretation of Rule 10b-16 with remand to district court to find necessary facts); Haynes v. Anderson & Strudwick, ......
  • Finne v. Dain Bosworth Inc., Civ. No. 4-86-399.
    • United States
    • United States District Courts. 8th Circuit. United States District Court of Minnesota
    • November 13, 1986
    ...597 F.Supp. 676 (S.D.N.Y.1984); Robertson v. Dean Witter Reynolds, Inc., 749 F.2d 530, 534-39 (9th Cir.1984); Liang v. Dean Witter & Co., 540 F.2d 1107, 1113 n. 25 (D.C.Cir.1976); Abeles v. Oppenheimer & Co., 597 F.Supp. 532 (N.D.Ill.1983); and cases holding that private action does not lie......
  • Request a trial to view additional results

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