Murphy v. Cady
| Decision Date | 11 December 1939 |
| Citation | 30 F. Supp. 466 |
| Parties | MURPHY v. CADY et al. |
| Court | U.S. District Court — District of Maine |
Nathan W. Thompson and Richard S. Chapman, both of Portland, Me., for plaintiff.
Richard Wait, of Boston, Mass., and Verrill, Hale, Dana & Walker, of Portland, Me. (Robert Hale, of Portland Me., of counsel), for defendants.
The plaintiff is a small securities broker in Portland. The defendants, fifteen in number, constitute a brokerage firm in Boston with which the plaintiff did most of his purchasing business for several years.
The writ, dated October 6, 1937, after amendment, contains four counts; three under the Securities Act of 1933, 15 U.S.C. A. § 77a et seq., and one a common law count for deceit, all on the same facts, claiming damages for false representations in the sale of a block of stock in early March, 1937.
The defense is a general denial with requests for rulings directed toward the points relied upon, principally as follows:
(1) That the count for deceit at common law is not sustained by the evidence;
(2) That Section 12, giving the right of action, does not apply to a broker who acts as such only and who does not sell his own stock, and
(3) That the defendants, in the sale of stock, did not act as principals and consequently did not "sell" the security and cannot be held liable under the counts based upon the Securities Act, even if false representations were made.
The case was tried without a jury.
From the somewhat conflicting evidence I consider the following facts established:
The stock sold to the plaintiff by the defendants — acting either as brokers or owners — consisted of 1,700 shares of South American Utilities Corporation common, and the price paid was $4.50 per share. The business was wholly done in behalf of the defendants by Francis E. Lynch, so-called head trader of the firm. Knowing that the plaintiff, Murphy, was looking for a stock with some speculative possibilities to sell to his customers for a profitable rise, Lynch, from the office of the firm in Boston, called Murphy in Portland by telephone and informed him that the firm would soon be in a position to sell him or obtain for him such a stock, as they had in mind a certain company they were investigating.
Later on, Lynch by telephone disclosed to Murphy the name of the company, and, in the course of various telephone conversations, made the statements claimed by the plaintiff to be false representations.
At this point it is enough to say that in numerous telephone conversations between Boston and Portland, Lynch, for his firm, solicited from the plaintiff an offer to buy the stock mentioned, and as a result of Lynch's solicitations and representations the plaintiff bought the stock, paying the price named and a brokerage commission of four cents a share.
The plaintiff made no inquiries elsewhere about the stock, which was not listed on any exchange, and no investigation, except to find that it was not mentioned in Moody's Manual. He explains the fact that he invested a large part of his small capital in this stock, without seeing a financial statement or any statement of earnings, by saying that he had great confidence in the defendant firm, and relied wholly on the statements made by their agent Lynch.
As soon as the plaintiff received the stock he sold most of it in small lots, but soon thereafter received information which caused him to think the stock was not a proper one to sell to his customers, and he immediately bought back all the stock he had sold without loss to the purchasers. The stock was actually without substantial value at any time.
After taking the stock back the plaintiff made the usual tenders and demands on the defendants, without result, and this suit followed.
The defendants deny that any false representations were made by their agent Lynch. If their position is correct — if plaintiff has not proved by a clear preponderance of the evidence in a case of this nature that false representations were made — he cannot and should not prevail from any point of view or on any counts in his writ. So the question of false representations is fundamental.
On this point the plaintiff himself testified with positiveness and apparent sincerity as to what Lynch said to him in the numerous telephone conversations about this stock, being, in effect, that the South American Utilities Corporation was a "nice little operating company", managed by the Chase Bank of New York and practically controlled by that bank; that the earnings of the company were twenty-five to thirty cents a share; that the Chase Bank had refused an offer of $8 a share and was holding its stock for $12; that the South American laws and regulations, as well as the exchange situation, were favorable; and that this information was obtained by one of the partners of the defendants from an officer of the South American Utilities Corporation while in Florida.
The testimony of the plaintiff as to the statements of Lynch is corroborated by one of his salesmen, Rand, who was to handle some of the stock for the plaintiff, and who said he thought they ought to have more information about it before proceeding to sell. Whereupon Murphy called Lynch by telephone and put Rand on the line, saying to Lynch "Tell Mr. Rand the story that you told me"; whereupon, as Rand testified, Lynch repeated substantially the same facts he had given to Murphy, repeating the statements, among others, that the Chase Bank, owning a large amount of the stock, had refused $8 a share and wanted $12, and that the earnings were between twenty and thirty cents a share. The stories of Murphy and Rand are also corroborated to some extent by other witnesses and in other ways.
Lynch, on the stand, did not deny that he gave Murphy the information substantially as testified to by him, nor that it was false in the most important respects; but said that he himself got the information from one E. E. Smith, a small trader in New York, from whom Lynch testified he obtained the stock, and that he told Murphy that Smith was the only source of his information.
Both Murphy and Rand deny that Smith's name was mentioned in their conversations with Murphy at any time when Murphy had the purchase under consideration.
From all the testimony on this subject it is impossible to believe that Lynch simply passed on to Murphy the statements of Smith without recourse, so to speak. Murphy did not know Smith and had never heard of him. It is conceivable that Murphy, a broker himself of some years experience, would invest his money relying on the statements of a highly reputable firm with which he had had satisfactory dealings for years, but it is highly improbable that he would do so on nothing but secondhand statements attributed to an unknown small trader...
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