A. M. Kidder & Co. v. Clement A. Evans & Co.

• Decision Date: 11 March 1965
• Docket Number: No. 40926,No. 2,40926,2
• Citation: 111 Ga.App. 484,142 S.E.2d 269
• Parties: A. M. KIDDER & COMPANY, Inc. v. CLEMENT A. EVANS & COMPANY, Inc
• Court: Georgia Court of Appeals

Page 269

142 S.E.2d 269

111 Ga.App. 484

A. M. KIDDER & COMPANY, Inc. v. CLEMENT A. EVANS & COMPANY, Inc.

No. 40926.

Court of Appeals of Georgia, Division No. 2.

March 11, 1965.

Rehearing Denied April 2, 1965.

Syllabus by the Court

1. The petition of a stockbroker, against a customer of the plaintiff and another stockbroker for fraudulent conspiracy to misrepresent the customer's financial position and induce the plaintiff to accept the customer's worthless checks in payment for security purchases, did not show that the plaintiff could not recover as a matter of law, even if the petition showed that the plaintiff violated a regulation of the Federal Reserve Board restricting purchases and sales of securities effected by stockbrokers, but did not show a wilful violation by the plaintiff.

2. In an action for conspiracy to defraud, the petition did not show as a matter of law that plaintiff by the exercise of ordinary care could have discovered the falsity of the alleged fraudulent representations.

3. In an action for conspiracy to defraud, allegations of facts having a bearing on and a tendency to prove the existence of the conspiracy are not subject to special demurrer.

In this case the defendant A. M. Kidder & Co. Inc., (hereinafter called Kidder) assigns error on a judgment of the trial court overruling general and special demurrers to the plaintiff's petition. The plaintiff (hereinafter called Evans) is a stockbroker. The defendant McAlpin was a customer of the plaintiff. The defendant Kidder is a stockbroker, and the defendant Garrett was an employee through whom Kidder acted in the transactions alleged in the petition, which we shall summarize: During February through September in 1961 Evans conducted transactions for the purchase and sale of various securities for McAlpin. Beginning about June 19, 1961, these transactions were conducted upon an agreement whereby payment was required within four business days following the date of each purchase transaction. Evans did not know that, as early as July 31, 1961, McAlpin was insolvent, and McAlpin and Garrett knowingly entered into a conspiracy to represent falsely to Evans that McAlpin was solvent and financially responsible and owned specified assets. Garrett advised and assisted McAlpin in a fraudulent scheme to misrepresent McAlpin's financial status. The scheme included a cycle of transactions whereby McAlpin obtained loans from banks in the Atlanta area by purporting to pledge securities that he did not own, thus maintaining an apparent solvent financial position and being permitted to continue bank borrowings and activities. Other false representations of McAlpin's financial condition were made in the following transactions described in the petition.

For the purpose of paying an indebtedness to another (third) stockbroker McAlpin, upon counseling by Garrett, sold through Evans 300 shares of Magnovox stock which he did not then own, on August 2, 1961, the day before a planned three-to-one stock split by the Magnovox Company. One week later, after the stock split, Garrett purchased for McAlpin's account with Kidder 900 shares of new Magnovox stock. Upon receipt of these shares McAlpin delivered 300 to Evans and sold 600 shares through a fourth stockbroker, and used the proceeds from this sale to pay his indebtedness to the third stockbroker. Upon demand by Evans for the remaining 600 shares of new Magnovox stock due to Evans by McAlpin, Garrett represented that only 300 shares had been forwarded due to a mix-up in Kidder's New York office, and assured Evans orally and in writing that the remaining 600 shares would be delivered to it. Garrett then purchased 600 shares of new Magnovox stock for McAlpin's account, which McAlpin thereafter delivered to Evans. Similarly McAlpin during the period August 10, 1961, through August 31, 1961, sold through Evans shares of stock of other companies which McAlpin did not then own and which Garrett afterwards purchased for him for delivery to Evans, but Garrett did not require McAlpin to pay for the shares before delivery to him. Upon receipt of the shares Evans paid McAlpin the proceeds of the sale, and McAlpin paid Kidder for the purchase of the shares with the proceeds of their sale which he received from Evans.

In other instances McAlpin would give to Garrett a worthless check on an out-of-town bank for securities which he purchased through Kidder, Garrett would delay the deposit of the check in Kidder's account and during the time required for the check to reach the out-of-town bank McAplin would sell the securities purchased through kidder and deposit the proceeds to cover the check given Kidder for their purchase.

In some instances McAlpin ordered securities from Kidder's New York office and Garrett delivered them to McAlpin without requiring payment; McAlpin then sold the securities to Evans and used the sale proceeds to pay Kidder for the purchase.

Beginning about August 15, 1961, McAlpin purchased various securities through Evans and sold them through Evans on the same day or the following day. On September 20, 22, 25 and 26 Evans received McAlpin's checks on an out-of-town bank for five purchases of stock it had made for McAlpin. Evans delivered to McAlpin its checks for the sale of the stock on the same day or, in one instance, on the day following its receipt of McAlpin's check. On September 29, 1961, McAlpin's five checks for the purchase of the securities were returned to Evans due to insufficient funds, after Evans had paid McAlpin the proceeds of the sale of the securities, and McAlpin had delivered these proceeds to Kidder or others. At the time McAlpin drew the checks to Evans for the purchase of these securities he knew that he did not have sufficient funds in the drawee bank or elsewhere to pay the same, but expected to cover them by depositing proceeds from the sale of securities before they reached the out-of-town bank. These transactions and other transactions by which Evans closed out McAlpin's account resulted in an indebtedness by McAlpin to Evans of $308,133.95.

The plaintiff had a right to rely on the representations of Garrett and Kidder because it knew that both Evans and Kidder were members of the National Association of Securities Dealers, Inc. and Garrett was a registered representative of a member of the Association and as such all had agreed to abide by the bylaws, rules and regulations of that Association. The conduct of Garrett and Kidder was contrary to the Rules of Fair Practice of the Association and violated specified sections of those Rules set out in the petition. Said Rules of Fair Practice were well known practices, usages and customs of the trade of the stockbrokerage business in Atlanta known to plaintiff and the defendants, as was the practice that stockbrokers would require that the purchase price of securities be paid in full before or at the time of delivering the securities to their customers. The plaintiff relied upon these practices, usages and customs of the trade and believed that the securities delivered to it by McAlpin had been paid for in full.

The conduct of the defendant was knowingly and willfully designed to represent McAlpin as a financially responsible and solvent individual owning specified assets with the intention to mislead, deceive and defraud the plaintiff for the benefit of the defendants in that Kidder and Garrett would receive commissions and fees for securities transactions on behalf of McAlpin; and said conduct did deceive the plaintiff to its detriment, in that the plaintiff was induced to believe that McAlpin was financially responsible and solvent and owned specified assets and to accept worthless checks of McAlpin in payment for securities in the belief that they were good checks. The plaintiff did not know that the representations and conduct of the defendants were false and fraudulent and relied on the truth of the representations and thereby sustained its stated loss, which the defendants have refused to pay.

Smith, Ringel, Martin, Ansley & Carr, Hoke Smith, Atlanta, for plaintiff in error.

Hansell, Post, Brandon & Dorsey, Hugh M. Dorsey, Jr., J. Clifton Barlow, Jr., James C. Lockwood, Atlanta, for defendant in error.

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