Slomiak v. Bear Stearns & Co.

• Decision Date: 24 July 1984
• Docket Number: 82 Civ. 1542-CSH.
• Parties: Raymond SLOMIAK, Plaintiff, v. BEAR STEARNS & CO., Defendant.
• Court: U.S. District Court — Southern District of New York

597 F. Supp. 676

Raymond SLOMIAK, Plaintiff, v. BEAR STEARNS & CO., Defendant.

82 Civ. 1542-CSH.

United States District Court, S.D. New York.

July 24, 1984.

Barry J. Pinkowitz, New York City, for plaintiff; Harold Wm. Suckenik, New York City, of counsel.

Reavis & McGrath, New York City, for defendant; Nathaniel L. Gerber, Carol Zerbe Hurford, New York City, of counsel.

MEMORANDUM OPINION AND ORDER

HAIGHT, District Judge.

Plaintiff Raymond Slomiak brings this action pursuant to § 10(b) of the Securities Exchange Act of 1934 ("the Act"), 15 U.S.C. § 78j(b), and Rule 10b-16 ("the Rule") promulgated thereunder, 17 C.F.R. § 240.10b-16, to redress alleged violations by defendant Bear, Stearns & Co. ("Bear Stearns") of Rule 10b-16's credit information disclosure provisions. The case is presently before the Court on defendant's motion to dismiss the complaint pursuant to Fed.R.Civ.P. 12(b)(6) and plaintiff's motion for summary judgment. For the reasons stated, both motions are denied.

I. Background

The events giving rise to this action are not complicated. On May 4, 1977, plaintiff Slomiak opened a margin account with defendant Bear Stearns. On August 1, 1977, he opened a repurchase account with that firm. Each account was introduced to Bear Stearns by MKI Securities Corporation ("MKI"), another securities broker, with Bear Stearns acting in the capacity of clearing broker. (Aronson Aff. ¶ 5). Over the next three years, plaintiff purchased several millions of dollars in government bonds in his margin account, paying less than ten percent of the purchase price in cash. The remainder of the purchase price was loaned to plaintiff by Bear Stearns, initially in his margin account and subsequently in his repurchase account, the account to which the bonds had been transferred. (Slomiak Aff. ¶¶ 2 and 4).

During the years 1977 through 1979, Bear Stearns periodically debited plaintiff's accounts for the interest charged on its loans. In October of 1979, plaintiff was notified by telegram of a margin call on his account. He failed to produce the $155,000 in additional margin requested, and Bear Stearns liquidated the bonds in plaintiff's account with a consequent loss to plaintiff of $256,285. (Id. ¶¶ 5-6).

II. Defendant's Motion to Dismiss

A. Private Right of Action under Rule 10b-16

The crux of plaintiff's complaint is that, at the time he opened his margin and repurchase accounts with Bear Stearns, the firm allegedly failed to provide him with a written statement setting forth the terms under which credit would be extended to him, in violation of Section 10(b) of the 1934 Act and Rule 10b-16 promulgated thereunder. Defendant moves to dismiss the complaint on the ground that Rule 10b-16 does not create a private right of action for damages; accordingly, irrespective of the truth or falsity of plaintiff's allegations, his claim must be dismissed as a matter of law.

Rule 10b-16 provides, in pertinent 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 the 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." 17 C.F.R. § 240.10b-16.

Only a handful of district courts, and one circuit court, have addressed the question of whether a private right of action may be implied under Rule 10b-16. Most recently, the Court of Appeals for the Second Circuit expressly declined to consider the issue as unnecessary to the particular determination before it. Zerman v. Ball, Fomon, and E.F. Hutton, 735 F.2d 15 at 23 (2d Cir.1984), ("In the circumstances, we find it unnecessary to address the question of the existence of a private right of action under ... Rule 10b-16 promulgated under the 1934 Act."). The question therefore remains an open one in this Circuit.

A useful starting point is a review of the continually evolving judicial formulations of the circumstances giving rise to a private right of action. In recent years, the Supreme Court has pursued an increasingly restrictive approach to implying private remedies. See Merrill Lynch, Pierce, Fenner & Smith v. Curran, 456 U.S. 353, 374-78, 102 S.Ct. 1825, 1837-39, 72 L.Ed.2d 182 (1982). The relatively liberal inferences endorsed by the Court in J.I. Case Co. v. Borak, 377 U.S. 426, 84 S.Ct. 1555, 12 L.Ed.2d 423 (1964), wherein the broad remedial purposes of § 14(a) of the Securities Exchange Act were held to give rise to a private right of action for damages, were considerably narrowed a decade later in Cort v. Ash, 422 U.S. 66, 95 S.Ct. 2080, 45 L.Ed.2d 26 (1975). Cort set forth four factors to be considered by a court in determining whether a private right of action is implicit in a given statute. These included legislative intent, consistency of such a remedy with the underlying purposes of the legislative scheme, whether the plaintiff was a member of the class for whose benefit the statute was enacted, and whether the cause of action is one traditionally relegated to state law. Id. at 78, 95 S.Ct. at 2087-88. More recently, in Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11, 14, 100 S.Ct. 242, 244, 62 L.Ed.2d 146 (1979), Touche Ross & Co. v. Redington, 442 U.S. 560, 575, 99 S.Ct. 2479, 2488, 61 L.Ed.2d 82 (1979), and Merrill Lynch, supra, the Court narrowed the proper mode of analysis even further to a focused inquiry on the question of congressional intent, either implicit or explicit, as evidenced by the language of the statute, the contemporary context of its enactment, its legislative history, and its place in the overall enforcement scheme. Transamerica, supra, 444 U.S. at 23-24, 100 S.Ct. at 249.

Several factors make it difficult to discern congressional intent with respect to Rule 10b-16, as the differing analyses of the various courts that have considered the question demonstrate. In Liang v. Dean Witter & Co., Inc., 540 F.2d 1107 (D.C.Cir. 1976), one of the first judicial interpretations of the Rule, the Court of Appeals for the D.C. Circuit had occasion to discuss its evolution in considerable detail. As described in Liang, at the time Congress enacted the Truth in Lending Act ("TILA"), 15 U.S.C. § 1601 et seq., it expressly exempted securities dealers from compliance with TILA, relying on the Securities and Exchange Commission to adopt its own analogous disclosure rule. The Senate Report stated as follows:

"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."

S.Rep. No. 392, 90th Cong., 1st Sess. 9 (1967).

As stated by Judge Wilkey in Liang, supra:

"Rule 10b-16 represents the SEC implementation of the instruction from Congress .... The SEC authority for the Rule is derived, of course, from the prohibition in Section 10(b) 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, 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 enable him to compare the various credit terms available to him and to understand the methods used in computing the actual credit charges.'" SEC Release No. 8733, 34 F.R. 19717.

Liang, supra, 540 F.2d at 1111.

With respect to the narrow question presently before this Court—i.e., the implication of a private right of action under the Rule—the circuit court observed in a footnote:

"It may safely be assumed that noncompliance with Rule 10b-16 provides the basis for a private cause of action. It is already established that a violation of Rule 10b-5, a rule of disclosure analogous to Rule 10b-16, implies a civil remedy. Supt. of Insurance v. Bankers Life & Cas. Co., 404 U.S. 6, 13 n. 9 92 S.Ct. 165, 169 n. 9, 30 L.Ed.2d 128 (1971). Our recognition here accords with the view that `private enforcement of Commission rules may "provide a necessary supplement to Commission action."' Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 730 95 S.Ct. 1917, 1923, 44 L.Ed.2d 539 (1975), quoting J.I. Case Co. v. Borak, 377 U.S. 426, 432 84 S.Ct. 1555, 1560, 12 L.Ed.2d 423 (1964)." Liang, supra, 540 F.2d at 1113 n. 25.

In a similarly cursory, but contrary, holding, one district court in this Circuit dismissed a Rule 10b-16 claim on the ground that plaintiff had "cited no case (and the court is aware of none) holding that a plaintiff may...