Vandervelde v. Put and Call Brokers and Dealers Ass'n

Decision Date14 April 1972
Docket NumberNo. 63 Civ. 3470.,63 Civ. 3470.
Citation344 F. Supp. 118
PartiesLee VANDERVELDE, et al., Plaintiffs, v. PUT AND CALL BROKERS AND DEALERS ASSOCIATION, Incorporated, et al., Defendants.
CourtU.S. District Court — Southern District of New York
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Malcolm A. Hoffmann, New York City, for plaintiff, Edward A. Woolley, Bernard Zucker and David Bender, New York City, of counsel.

Milbank, Tweed, Hadley & McCloy, New York City, for Put and Call Brokers and Dealers Assn., Inc., Henry Blair & Co., and Edna Blair, as Executrix of the Estate of Henry Blair, by Isaac Shapiro, Adlai S. Hardin, Jr., and Mark L. Davidson, New York City, of counsel.

Murray Gottesman, New York City, for Anne S. Filer, as Executrix of the Estate of Alvin V. Filer, and others.

Boskey, Boskey & Cole, New York City, for Boris M. Balson, the Executors of the Estate of Herbert Filer, and Filer Schmidt & Co., by Mortimer Cole, New York City, of counsel.

George Dines, New York City, for Lawrence G. Botts and Thomas, Haab & Botts.

Paskus, Gordon & Hyman, New York City, for Godnick & Son, Inc. by Philip H. Schaeffer, New York City, of counsel.

Bennett, Kaye & Scholly by James D. Bennett, Rockville Centre, N. Y., for

Melanie Haab, as Executrix of the Estate of Philip D. Haab.

Raphael P. Koenig, New York City, for Mildred Linburn, as Executrix of the Estate of Richard E. Linburn.

FINDINGS AND OPINION

POLLACK, District Judge.

Preliminary

This is a private antitrust action brought against the Put and Call Brokers and Dealers Association (the Association), a New York membership corporation, by one of its former members and the two wholly-owned corporations through which he conducted business. The complaint alleges that the Association unlawfully suspended Lee Vandervelde from membership, in violation of sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1 and 2, and that the suspension caused the termination of the business of the two corporate plaintiffs. The Court's jurisdiction is based on § 4 of the Clayton Act, 15 U.S.C. § 15.

Lee Vandervelde became a member of the Association in October, 1959. He was the President and sole shareholder of the corporate plaintiffs, L. Vandervelde & Co., Inc., a California corporation organized in 1959, and L. Vandervelde New York Corp., a New York corporation organized in 1961. The companies acted as dealers in and writers of puts and calls from November 1, 1959 and November, 1961, respectively, until early November, 1963. For convenience, Vandervelde and his enterprises will hereafter be referred to simply as "Vandervelde" unless otherwise indicated.

The corporate plaintiffs seek damages for loss of income and the termination of their business activities and Vandervelde himself seeks to recover for loss of salary as an employee of the corporate plaintiffs.

The defendants herein, in addition to the defendant Association, are 13 of its members and 8 put and call firms associated with Association members.1

The plaintiffs also named as defendants six member firms of the New York Stock Exchange. The Court dismissed the action against these defendants at the close of the trial.2

Summary Statement of the Action

On August 27, 1963, Lee Vandervelde and Donald Cohen, the manager of Vandervelde's New York office, were each suspended from the Association for their failure to pay $125 fines levied on each of them by the Association's Board of Directors, upon recommendation by its Committee on Business Conduct. Two months earlier, the same Committee had ruled that Vandervelde and Cohen had engaged in improper business conduct by informing another put and call member firm that an option advertised by Vandervelde was no longer available for sale, which was untrue, and further that Vandervelde had refused in violation of an Association rule, to grant a discount or allowance to a co-member of the Association who desired to purchase an advertised option from Vandervelde. The Committee also found that Vandervelde unfairly discriminated against co-members of the Association by granting discounts to stock brokerage firms upon sale to or through them of advertised options, by accepting discounts from Association members, but refusing to grant discounts to other members.

Plaintiffs contend that the discount rule of the Association, among others, is invalid as a restraint upon competition among option dealers, prohibited by § 1 of the Sherman Act, and that the suspension constituted an unlawful boycott of their business by the Association, also void under § 1. They make the additional claim that the suspension and ensuing boycott were part of an attempt by the Association and its members to monopolize trade in options, prohibited by § 2 of the Act. The suspension is claimed to have resulted in the loss of business from the six stock exchange firms mentioned above, depriving Vandervelde of his major source of options and customers, and rendering continuation of profitable operations impossible.

The defendants contend that none of the rules of the Association which plaintiffs cite in their allegations is unlawful and that the suspension was a justified instance of a trade association's acting to insure the ethical conduct of its members. Moreover, they contend that issues of antitrust liability need not ever be reached in this action because the facts demonstrate that the business had previously lost significant amounts of its capital and was worthless as a going concern at the time of the suspension and that the termination of the Vandervelde business was a voluntary one prompted by economic failure.

The resolution of the controversy between the parties requires a preliminary understanding of the nature of the option business and the organization and activities of the Association.

Put and Call Options

Put and call options are negotiable contracts in which the writer of the option, for a certain sum of money called the "premium", gives the buyer of the option the right to demand within a specified time the purchase or sale by the writer of a specified number of shares of a stock at a fixed price called the "contract price". A "put" gives the purchaser an option to sell, and commits the writer to buy, the shares covered by the option; a "call" gives the purchaser an option to buy, and commits the writer to sell, the subject shares.3 Options are always written in 100 share units.

The put and call broker-dealer firms are the intermediaries through whom trading in options is carried on. A person who wishes to sell or to purchase an option will utilize an option dealer to create the trade he seeks.4

In June, 1959, the Securities and Exchange Commission conducted a statistical survey of the option business and ascertained that there were two types of option firms; those which performed only a brokerage function and those which traded in options, purchasing options from writers for inventory in the hope of arranging a later, profitable sale. Securities and Exchange Commission, Report on Put and Call Options 69 (1961) (hereinafter cited as SEC 1961 Report). The SEC found that the ten firms which acted solely as intermediaries for specific trades between buyers and sellers dealt almost exclusively through New York Stock Exchange member firms. SEC 1961 Report at 69.

The report further showed that the great majority of options are written by persons who are not dealers in puts and calls, and that the put and call firms wrote less than 6.3% of the options outstanding at the time. SEC 1961 Report at 56, 55. It is not necessary to be a put and call dealer in order to write options.

Dealing in put and call options is a highly speculative and volatile sector of the securities industry. These options have several potential uses for buyers5 and present an opportunity for profit for option writers who feel that their judgment about the future course of activity in a security is correct. For both parties, the key factor on which an option trade is based is a competing prediction of market movement in a given security during a given period of time. However, the fact that an option's desirability is based on the fluctuation of stock prices creates a potential incentive for market manipulation and unscrupulous treatment of prospective option buyers. It was to prevent the development of such practices that self-regulation of the option business by the Association was initiated.

The Association of Dealers

The Association is composed entirely of individuals engaged in the put and call business. Any person may become a member of the Association if approved by the Board of Directors. The Board, with the assistance of the Committee on Admissions, considers the character and reputation of the applicant and also the applicant's knowledge of the put and call business and an affirmative vote of two-thirds of the Board is required for acceptance as a member. A corporation conducting a put and call business may have the benefit of the use of a membership held by an executive officer of such corporation and such firms are considered associated members.6

The Association was formed in August, 1934. The impetus for its creation was provided by congressional hearings, prior to passage of the Securities Exchange Act, which contemplated abolition of all option trading.7 After passage of the Exchange Act in 1934, which accepted regulation of option trading, 15 U.S.C. § 78i(b) (1971), as a substitute for prohibition of such trading altogether, the Association was formally organized. Fifty-five individuals became members of the Association at its first meeting. At the time Vandervelde joined the Association in 1959 there were 30 members, representing a somewhat smaller number of active put and call firms, and there are presently 30 members.

The purposes of the Association are:

To foster the maintenance of high standards of integrity and honor in all
...

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