Mansbach v. Prescott, Ball & Turben, 77-3226

CourtUnited States Courts of Appeals. United States Court of Appeals (6th Circuit)
Citation598 F.2d 1017
Docket NumberNo. 77-3226,77-3226
PartiesFed. Sec. L. Rep. P 96,861 Gerald MANSBACH, Plaintiff-Appellant, v. PRESCOTT, BALL & TURBEN et al., Defendants-Appellees.
Decision Date07 May 1979

Page 1017

598 F.2d 1017
Fed. Sec. L. Rep. P 96,861
Gerald MANSBACH, Plaintiff-Appellant,
PRESCOTT, BALL & TURBEN et al., Defendants-Appellees.
No. 77-3226.
United States Court of Appeals,
Sixth Circuit.
Argued Feb. 20, 1979.
Decided May 7, 1979.

Page 1019

Barnett & Alagia, Jack E. Ruck, Bernard H. Barnett, Louisville, Ky., for plaintiff-appellant.

Charles S. Cassis, Hal Nance Bogard, Brown, Todd & Heyburn, Louisville, Ky., for defendants-appellees.

Before CELEBREZZE and LIVELY, Circuit Judges, and PHILLIPS, Senior Circuit Judge.

CELEBREZZE, Circuit Judge.

Plaintiff-appellant, Gerald Mansbach, brought this action against Prescott, Ball & Turben (PBT), a regional securities broker-dealer, and its general partners. The complaint alleged various violations of the federal securities laws and corresponding state law claims based on diversity jurisdiction. The district court dismissed the federal claims for failure to state a claim upon which relief can be granted and stayed proceedings on the state claims pending arbitration. We reverse.


Since the district court disposed of the case on a motion to dismiss, we have before us only the allegations of the complaint. We assume the truth of the allegations in order to determine whether the complaint states a claim upon which relief can be granted.

Mansbach is an individual investor and a resident of Kentucky. PBT is a securities broker-dealer doing business as a limited partnership organized under the laws of Ohio with its principal place of business in Cleveland. The events involved here arose from PBT's Louisville, Kentucky, office. The general partners of PBT joined as defendants are all residents of states other than Kentucky.

The complaint alleges that in early 1974 Mr. John Siegel 1 entered the employ of PBT at the Louisville office. Not long thereafter Siegel solicited Mansbach to engage PBT as a stockbroker and investment adviser. In particular, Siegel encouraged Mansbach to enter the options market, in which Siegel thought good profits could be made. Mansbach accepted this invitation and delivered to PBT 300 corporate bonds having a total face value of $300,000 as collateral for his anticipated transactions with PBT.

On April 25, 1974, Mansbach was called by Siegel, who related that PBT's financial analysis of Upjohn Corporation indicated that the price of Upjohn's stock would materially decrease over the next few months. Siegel recommended that Mansbach "sell short an unspecified number of options in Upjohn stock on the basis and belief that when the stock declined in value, (Mansbach) would make a profit on the transaction by retaining the purchase price of the options he had sold, less commission. If the stock were to rise in price above a predetermined 'striking price,' (Mansbach) understood that he would be required to enter the market, buy shares of the corporation at the then current market price, and sell those shares to the buyer of the options at the 'striking price.' In this event, he would lose the difference between the market price and the 'striking price' on each share, which loss would then be offset by the amount received in the original sales of the options." (Complaint, P 10.)

Mansbach relied upon Siegel's advice and authorized PBT to sell short 100 options, each option representing 100 shares of Upjohn stock (10,000 shares total). The stock was then selling at 67 1/4 and the striking price for the options was 75. The options expired July 31, 1974. PBT sold the 100

Page 1020

options on April 25 for prices ranging from 2 1/2 to 2 7/8, with a net to Mansbach of $25,429.50. 2

By April 29, Mansbach had second thoughts about PBT's forecast for Upjohn. Worried that the price would rise above the striking price, Mansbach advised Siegel that he wanted to purchase fifty Upjohn options, each option again representing 100 shares of stock (5000 shares total). Thus, if the price of Upjohn stock rose above 75 by July 31, Mansbach would only have to buy an additional 5000 shares on the market for sale at the striking price to the holders of the options he had sold.

Siegel allegedly failed to execute this order for fifty Upjohn options on April 29. The opening quote for the options that day was 2 3/8, but it rose during the day's trading session. Siegel did not inform Mansbach of this development until after the market had closed on April 29, explaining that he had not purchased any of the fifty options because the 2 3/8 quote had not been available. Mansbach expressed his displeasure with this failure to purchase by Siegel, saying it was imperative to buy the fifty options.

Siegel called Mansbach the next morning, April 30, and explained that the Upjohn option price had risen to 3 1/2. Mansbach instructed Siegel to buy the fifty options. Siegel called Mansbach later that day and said that he had purchased forty Upjohn options at 3 1/2 3 but that the price was still rising and he wanted further instructions. Mansbach instructed Siegel that forty options would suffice and no more should be purchased that day.

The price of Upjohn stock had climbed well above the striking price (75) by May 9, 1974. Mansbach therefore contacted Siegel on May 10 and ordered Siegel to purchase an additional sixty Upjohn options at the market price in order to reduce the potential loss if the stock price continued to rise. Contrary to these instructions, PBT purchased sixty-three Upjohn options for Mansbach at prices ranging from 7 to 8 3/8, for a total cost to Mansbach of $50,732.55. 4 Siegel called Mansbach later on May 10 and told Mansbach that he had purchased sixty-three options rather than the requested sixty because a PBT secretary made a clerical error in the earlier transaction so that only thirty-seven instead of forty options had actually been purchased then.

Mansbach told Siegel that he would not pay the additional cost of the three options purchased on May 10 which should have been purchased on April 29 or 30 when their price was lower. Siegel assured Mansbach that PBT would assume responsibility for that amount. Mansbach was apparently frustrated by Siegel's alleged ineptness, however, and informed Siegel that he should prepare a complete statement of what Mansbach owed PBT. Mansbach said he would pay this entire amount immediately in order to obtain the bonds pledged to PBT as collateral. Siegel informed Mansbach that his current balance showed that he owed PBT a total of $27,247.31 for both the Upjohn and other transactions. Mansbach paid this entire amount by check, which payment was credited to Mansbach's account on May 20.

By early June Mansbach had not received any verification of his $27,247.31 payment, nor had he received his pledged bonds. On or about June 10, Mansbach called Siegel and demanded return of the bonds. Siegel acknowledged receipt of the $27,247.31 but contended that Mansbach owed PBT an additional $1,069.86. This additional sum arose from PBT's determination that it was not liable for the failure to purchase all forty options ordered on April 30, despite Siegel's prior representation that PBT would assume this difference in cost. Mansbach denied liability for this additional amount and again demanded return of the bonds.

Page 1021

On or about June 13, Mansbach called Mr. Gary Tarbis, 5 the manager of the Louisville PBT office, who was unaware of the situation. After investigation, Tarbis called Mansbach later on June 13 and informed Mansbach that PBT would assume responsibility for the failure to purchase all forty options when initially ordered so that Mansbach's account was entirely paid. Tarbis stated that the pledged bonds would be returned to Mansbach but only after Mansbach executed a written release absolving PBT and its employees from all liability in connection with the option trading. Mansbach refused to execute such a release.

Mansbach called Siegel on June 25 and repeated his demand for the bonds. Siegel confirmed that Mansbach owed PBT nothing but he still refused to release the bonds until Mansbach executed a release. Mansbach again refused to do so.

On July 2, PBT offered to return to Mansbach 295 of the 300 bonds which was done on July 8. Mansbach sold these 295 bonds on July 9, allegedly at a loss due to the lowering of their market price between the time Mansbach demanded their return and the time of their return. As of the date of filing of the complaint (August 1, 1974), PBT continued to hold the remaining five bonds. 6


Mansbach filed his complaint in the district court for the Western District of Kentucky. It alleged the facts related above and contained appropriate jurisdictional allegations and demanded a jury trial. The complaint was framed in three counts.

Count I sought relief from the actions of Siegel, as PBT's agent and employee, in failing to execute Mansbach's order to purchase fifty Upjohn options on April 29, in failing to properly execute Mansbach's renewed order to purchase the fifty options on April 30, in representing that forty options had been purchased when only thirty-seven had been purchased, and in purchasing sixty-three options on May 10 contrary to the instructions to purchase only sixty. Mansbach contended these facts stated a claim for relief under the federal securities laws, Kentucky statutory law on fraud, common law fraud and breach of contract, the Rules of Fair Practice of the National Association of Securities Dealers (NASD), and the applicable options exchange rules. Mansbach prayed for $11,734.17 in damages, plus costs, interest and attorney fees.

Count II sought relief from the actions of Siegel and Tarbis, as PBT's agents and employees, in refusing to return the corporate bonds Mansbach had pledged to PBT as collateral unless Mansbach released PBT from liability despite the fact that Mansbach owed PBT no money. Mansbach stated that this alleged conversion of his bonds stated a claim for relief under the federal securities...

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