Surgil v. Kidder, Peabody & Co.

• Decision Date: 11 May 1970
• Citation: 311 N.Y.S.2d 157,63 Misc.2d 473
• Parties: , Fed. Sec. L. Rep. P 92,674 Marilyn SURGIL v. KIDDER, PEABODY & CO., Inc.
• Court: New York City Court

Page 157

311 N.Y.S.2d 157

63 Misc.2d 473, Fed. Sec. L. Rep. P 92,674

Marilyn SURGIL v. KIDDER, PEABODY & CO., Inc.

Civil Court of the City of New York, New York County, Trial Term.

May 11, 1970.

Rudes & Lax, New York City (James E. Birdsall, New York City, of counsel) for plaintiff.

Sullivan & Cromwell, New York City (David L. McLean, New York City, of counsel) for defendant.

MARTIN B. STECHER, Judge.

On September 20, 1967, Marilyn Surgil, then 24 years of age, went to an office of Kidder, Peabody & Co. and opened a cash stock brokerage account. She revealed that she was unmarried, self-employed as a 'consultant'--no other occupational information was given or, apparently, solicited--and she gave a bank as her sole reference. Investigation by the broker revealed that Miss Surgil maintained there a special checking account, usually accepted as evidence of the most modest of balances. (At the trial she acknowledged her liquid assets to have been about $300.)

The following day she ordered the defendant, as her broker, to purchase 800 shares of Cameo Parkway Records, a 'high flyer' then listed on the American Stock Exchange. The defendant executed the order at a total price including commissions of $36,131.29. The broker's written confirmation specified September 27th as the settlement date.

The defendant promptly developed justifiable misgivings about the securities and the plaintiff's ability to pay for them, and pressed for payment in a series of telephone calls followed by a telegram dated September 26, 1967. On September 27, the settlement date, Miss Surgil gave, and the defendant, as brokers, attempted without success to execute successive 'limit orders' for the sale of the stock (sale at or above a designated price). Toward the end of the trading day the plaintiff ordered the securities sold at market, the price bid by would be purchasers; and the defendant, as her agent, executed the order.

This case differs from all similar cases called to my attention by a resulting net profit of $4,474.85.

The plaintiff demanded her profit. The defendant declined to make any payment until she paid the full purchase price. On clearance of her check, the defendant said, it would remit to her the entire sales price.

Efforts by plaintiff's attorneys to have the defendant moderate its position were unavailing. On November 9, 1967 funds having then been provided by a friend, the plaintiff's attorneys tendered to the defendant a bank teller's check in the full amount of the purchase price; the plaintiff's written and duly acknowledged instruction to the defendant to accept the funds for her account; and her direction to pay the proceeds of the sale to her attorney for her account. This tender was refused. As acknowledged in defendant's trial memorandum, 'payment to plaintiff would be made only to plaintiff and not to plaintiff's attorney in his capacity as attorney for plaintiff.' Acting on the instructions of the friend who provided the funds, plaintiff's attorney declined to make such payment and commenced this suit for the difference between the net sales and purchase prices.

Defendant having acted solely as plaintiff's agent in buying and selling the securities, the profit belongs solely to the plaintiff (McIntyre v. Whitney, 139 App.Div. 557, 124 N.Y.S. 234, aff'd 201 N.Y. 526, 94 N.E. 1096) and plaintiff is entitled to prevail unless the pleaded separate defenses are sufficient to mandate a different result. The answer alleges that plaintiff misrepresented her ability to pay for the purchased securities and 'therefore was not the purchaser of the 800 shares. * * * acquired by the defendant.' At the trial and in its memorandum of law, defendant emphasized, almost to the exclusion of all other defenses, that plaintiff's right of recovery was barred by the Securities Act of 1934 (15 U.S.C. Sec. 78g(c)) and by Regulation 'T' of the Board of Governors of the Federal Reserve System (12 C.F.R. 220.4(c)(2)) promulgated thereunder.

The cited provisions of the Securities Act (15 U.S.C. Sec. 78g(c)) declares the extension of credit by any broker in excess of that permitted by the Board of Governors of the Federal Reserve System to be 'unlawful'. Regulation 'T' bars a broker from extending credit on the sale of stock to a cash account customer in excess of seven business days; and should the customer fail to make payment in full during such period, the broker is required to 'promptly cancel or otherwise liquidate the transaction or the unsettled portion thereof' (12 C.F.R. 220.4(c)(2)).

The defendant's reliance on Regulation 'T' is misplaced. The seven business days referred to in the Regulation would have expired on September 30, 1967; but the extension of credit terminated on September 27, 1967 with the sale of the securities at a price exceeding the purchase price. Furthermore, the obligation to 'promptly cancel or otherwise liquidate the transaction' was never obeyed. The broker placed all of Miss Surgil's 'sell' orders in accordance with her instructions, consummated the final such order, and confirmed to her, in writing 'We executed this transaction (the sale) as your agent and solely for your account and risk * * *' The contention that the sale was a cancellation of the purchase is belied by the negotiation of the parties for six weeks after the sale. (Had the purchase in fact been cancelled, the broker would have been prohibited from thereafter accepting the payment and reinstating the transaction (1940 F.R.B. 772; 2 C.C.H. Fed.Sec.L.Rep. Par. 22, 216.16)).

Should we treat the purchase and sale as two independent transactions deeming credit to have been extended until actual payment was made, the Regulation 'T' defense must still fail. Until cancellation takes place a customer is entitled to stock for which he has paid or tendered payment (Myer v. Shields & Co., 25 A.D.2d 126, 267...