Meisel v. North Jersey Trust Co. of Ridgewood, NJ, Inc.

• Decision Date: 22 May 1963
• Citation: 218 F. Supp. 274
• Parties: Theodore MEISEL, Plaintiff, v. NORTH JERSEY TRUST COMPANY OF RIDGEWOOD, NEW JERSEY, INCORPORATED, First Discount Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Reynolds & Company, Defendants.
• Court: U.S. District Court — Southern District of New York

218 F. Supp. 274

Theodore MEISEL, Plaintiff, v. NORTH JERSEY TRUST COMPANY OF RIDGEWOOD, NEW JERSEY, INCORPORATED, First Discount Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Reynolds & Company, Defendants.

United States District Court S. D. New York.

May 22, 1963.

Mermelstein, Burns, Lesser & Goldman, New York City, Stanley Goldman, New York City, Gerald D. Fischer, of counsel, for plaintiff.

Townsend & Lewis, New York City, Eliot H. Lumbard, Donald F. X. Finn, Thomas J. Finnegan, Jr., New York City, of counsel, for defendant Reynolds & Co.

WYATT, District Judge.

This motion is by defendant Reynolds & Co. for an order dismissing the third, fourth and fifth counts of the amended complaint for failure to state a claim upon which relief can be granted (Fed. R.Civ.P. 12(b) (6)) or in the alternative for an order requiring plaintiff to make a more definite statement of these counts (Fed.R.Civ.P. 12(e)).

The Third Count.

Plaintiff alleges that on April 10, 1961 he bought 1,000 shares of Atlantic Refining common stock through "his broker" Merrill Lynch; that he borrowed a substantial part of the purchase price from First Discount; that there was an agreement under which North Jersey Trust would take delivery of the 1,000 Atlantic Refining shares from Merrill Lynch and would hold such shares for plaintiff and as collateral for the loan to him by First Discount; that on April 10, 1961 (the date of plaintiff's purchase) First Discount sold the 1,000 Atlantic Refining shares through the moving defendant Reynolds & Co.; that on or about May 22, 1961 Merrill Lynch actually delivered the 1,000 Atlantic Refining shares to North Jersey Trust for plaintiff's account; that North Jersey Trust on the same date wrongfully delivered the 1,000 shares to First Discount or to Reynolds & Co.; that Reynolds & Co. had knowledge of all the other facts alleged; that by accepting delivery of the 1,000 shares 42 days after execution of their sale, Reynolds & Co. violated Section 7(c) of the Securities Exchange Act of 1934 (15 U.S. C.A. § 78g(c)) and Regulation T of the Board of Governors of the Federal Reserve System; that these violations caused damage to plaintiff, who is also entitled to punitive damages.

The customer of Reynolds & Co. was First Discount, and not plaintiff. Indeed there are no transactions alleged between plaintiff and Reynolds & Co.

The damage done to plaintiff was caused by the wrongful act of North Jersey Trust in turning over the shares to First Discount and by the wrongful act of First Discount in selling and delivering the shares. There is no clear statement that the shares were ever delivered to Reynolds & Co. The complaint, paragraph 19, avers that they were delivered "to First Discount and/or to Reynolds & Co.". This does not aver delivery to Reynolds & Co. In paragraphs 39 and 40 such delivery appears to be alleged in an indirect fashion and will be assumed for purposes of this motion.

The third count, however, is not based on conversion or the like but entirely on an alleged violation by Reynolds & Co. of 15 U.S.C.A. § 78g(c) and Regulation T. These deal with credit transactions between brokers and their customers, the so-called margin requirements.

It is not easy to determine whether a violation is alleged. The theory of plaintiff seems to be, that First Discount was operating with Reynolds through a "special cash account" and that sale of 1,000 Atlantic Refining shares could not be made by Reynolds & Co. on April 10, 1961 because First Discount did not own the shares and did not, and could not, make an agreement in good faith "promptly" to deposit the shares in the account (Regulation T, 12 C.F.R. 220.4 (c)).

The course of dealing and state of accounts between First Discount and Reynolds & Co. are not alleged and without these it seems impossible to tell whether there was a violation of Regulation T or not. The "special cash account" provisions may not be the only provisions applicable.

It will be assumed that the complaint sufficiently alleges a violation. The third count is defective nonetheless because in my opinion (a) there is no right of action for violation of Section 7(c) except by a customer of the broker, (b) there is no causal connection between the alleged violation and damage to plaintiff and (c) there can be no recovery of punitive damages.

Although there is no provision for a civil action for violation of Section 7(c), the Courts have permitted such actions. Smith v. Bear, 237 F.2d 79, 88 (2d Cir. 1956); Goldenberg v. Bache and Co., 270 F.2d 675 (5th Cir. 1959); Remar v. Clayton Securities Corp., 81 F.Supp. 1014 (D.Mass.1949); Reader v. Hirsch & Co., 197 F.Supp. 111 (S.D.N.Y.1961).

The principle of these decisions is that Section 7(c) was passed for the benefit of customers and that a member of the class to be benefited can have a private action for violation of the statute. In each of the cited cases, the plaintiff was a customer of the defendant broker. In Smith v. Bear, above, the Court said:

"If a broker or dealer * * * extends credit to a customer in violation of the Act or the regulations promulgated pursuant thereto, all to induce a customer to purchase securities, then the broker has violated the law and the customer may recover from him any loss proximately resulting therefrom." (237 F.2d at 87-88; emphasis supplied.)

In Remar v. Clayton Securities Corp., above, the Court said:

"The Securities and Exchange Act does not expressly give a right or remedy to a private person injured by § 7(c) of that Act. But such a right may nonetheless be implied. * * * Broadly stated, the rule is that where defendant's violation of a prohibitory statute has caused injury to plaintiff the latter has a right of action if one of the purposes of the enactment was to protect individual interests like the plaintiff's.

"That rule applies to the case at bar. Undoubtedly `the main purpose' of § 7 of the Securities and Exchange Act was `to give a government credit agency an effective method of reducing the aggregate amount of the nation's credit resources which can be directed by speculation into the stock market.' House Com.Rep. 73rd Cong., 2nd Sess. No. 1383. But Congress recognized that `protection of the small speculator by making it impossible for him to spread himself too thin * * * will be achieved as a by-product of the main purpose.' Ibid. In short, the intent of the enactment was in part to protect an individual like plaintiff from losing his equities in stocks pledged to a broker, dealer or bank, due to his having a lower margin than the level approved by the Federal Reserve Board."

Professor Loss has this to say:

"More recently there have been several cases in which the courts have sustained a customer's right to sue his broker (together with a bank in one case) for damages allegedly resulting from overextension of credit in violation of the margin regulations. The courts applied the common law tort doctrine which supplies a remedy based on violation of a statute passed for the plaintiff's benefit." Loss, Securities Regulation, second ed., pp. 1263-1264. (Emphasis supplied.)

There was no customer-broker relation between plaintiff and Reynolds & Co.; so far as Reynolds & Co. were concerned plaintiff was not a member of the class protected by...