Appendix — Serzysko v. Chase Manhattan Bank

Supreme Court brief1969

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APPENDIX A

_ Per Curiam Decision of the Circuit Court of Apple

~~ for the Second Cireuit

UNITED STATES COURT OF. APPEALS

For THE SECOND Cicurr.

Nos. 531 and 582—September Term, 1968. :

( on April 22, 1969 Decided May 20, 1969.)

* Docket Nos. 33096 and 33097

Epwarp Srrzysko, »

Plaintiff-A ppellant- A tppete,

—V.—’

‘ Pes >

THe CuHase Manuarttan Bank,

; Defendanit-Respondent-A ppellant.

’

Bef or e: ack

LumBarp, Chief Judge,

Awpenson, Circuit, Judge, and’ Wvars, District Judge.*

; Appeal, and cross-appeal, from a judgment of the Dis-,

trict Court for the Southern District:of New York, Graven,

J., dismissing plaintiff’s complaint for damages sustained -

by reason of defendant having made ‘loans to plaintiff. in

violation of Federal Reserve Board Regulation U, and dis-

—

* Sitting by designation. |

Mage @ 2a

Per Curiam Decision of the. Circuit Court of Appeals

_for the Second Circuit

missing defendant’s counterclaim for, the unpaid balance

of the indebtedness incurred by plaintiff on the loans. ~»

ied on "

Aare C. Purr, New York, N. ¥. (Pink, Wein-

berger & Levin and Walter Talmont, on the

brief), ‘for plaintiff - appellant-appellee.

A. Donatp MacKinnon, New York, N.: Y. (Mil-

bank, Tweed, Hadley & McCloy and Adlai

, 8S. Hardin, Jr., on the brief), for defendant-

reapondant-apperiant.

| PER CuRIAM: ° Sen ‘t 9 -

‘We affirm in all respects the judgment of the District

Court for the Southern District of New York for the rea-

_Sons stated in the thorcugh and well reasoned opinion of"

* Judge Graven —— at 290 F. Supp. 74 (S. D. N. Y.

— )

fn,

\. _-. Tae Coase Mannattan Bank,

APPENDIX B ”

Opinion of the District, Court

Epwarp SERzyYsko, re

: Plaintiff,

—vV oo

No. 65 Civil 718.

‘United States District Court

( oi S. D. New York |

Sept. 19, 1968

Jay J. Gurfein and Arthur M. Gurfein, of Gurfein &

Gurfein, New York City, and Walter scenes Garden vats

N. Y., for plaintiff.

A. Donald MacKinnon ‘and Adlai S. Hardin, Jr., of Mil.

bank, Tweed, Hadley & ms New York City, for de- sti

fendant.

- MEMORANDUM oko

GRAVEN, Senior District Jade (by assignmnt)..

1. The plaintiff i is a citizen and resident of the State, of

New York. The defendant is a corporation engaged in the.

banking business in the City of New York, New York. The -

vlaintiff seeks to recover is ay allegedly caused to him ~

by -reason of loans made to him by the defendant, which’

-. loans he alleges were made in violation of Regulation U ~

(12 C.F.R. 221) promulgated by the Board of Governors”

of the Federal Reserve System pursuant to Section 7(a)

of the Securities Exchange Act of 1934, 15 U.S.C.A. Sec.

78g. That Baawation ' relates to the margin requitements

‘

Defendant.

3 é

2 »

SE ee ee ae ee

Opinion of the District Court

for loans made for the purpose. of the purchasing or carry-

ing of registered securities. Jurisdiction is ‘based upon the

Securities Exchange Act of 1934, 15 U.S.C.A. Sec. 78aa.

The trial was to the Court. ‘

Under the provisions of the Securities Exchange Aet of

~ 1934 and the regulations ‘promulgated thereunder, issues

of stock which are registered on a national.securities ex-

change constitute registered securities. The New York zm:

Stock Exchange is é national securities exchange.

. Commencing in September, 1958, the defendant made . —

ke plaintiff a number of loans. The loans were secured by

' collateral. The collateral in the main consisted of registered :

securities. In 1962, following a decline inthe market value

of the collateral, the defendant sold the collateral. then

« remaining and, ‘applied the_proceeds \ thereof on the then

existing loan ‘of the plaintiff. After applying the proceeds

there was an unpaid balance on the loan of approximately

$14,000.00. In this action the plaintiff seeks to recover the

damages allegedly sustained by him by reason of the loans

and such sale. The defendant by a counterclaim seeks to

recover. from the Plaintiff the present unpaid balance of

-» the loan. . ;

3. "Bestion 78g, Title 15 US. C. A, provides in’ part, as

follows:

“(a) For the purpose of preventing the excessive

use of credit for the purchase or carrying of securities,

the Board of Governors of the Federal Reserve Sys-

* tem shall, prior to October 1, 1934, and from: time to

time thereafter, prescribe rules and regulations with

respect to, the amount of credit that may be initially

extended and subsequently maintained on any security

da tg

Opinion of the District Court

** * registered on a ee exchange. * * *

“es * & :

“(e) It shall be unlawful for any member ae a na- »

tional securities exchange or any broker or dealer who

transacts a business in securities through the medium

of any such member, directly or indirectly to extend

or maintain credit or arrange for the extension or

maintenance of credit. to or for any customer—

“(1) On any security * * * registered on a ‘national —

°securities exchange, in contravention of the rules and

regulations which the Board of Governors of the Fed- .

eral Reserve System shall prescribe under subsections

(a) and\(b) of this section. |

oe & #

“(d) It shall be unlawful for any: person -not sub-

‘ject to subsection (c) of this section to extend or main;

tain credit or to arrange for the extension or mainte-

nance of credit for the purpose of purchasing or car-

rying any iia teh registered on a-national securities _

exchange, in contravention of such rules and regula- © ©

tions as the Board of Governors of the Federal Re- ‘|

_ serve System shall prescribe to prevent the excessive

use of credit for the purchasing or carrying of or trad-

ing in securities in circumvention of the other provi- |

sions of this section. a a hl a | Q

> Paragraph (c) above set forth relates to brokers and deal-.

ers. Paragraph (d) above set forth relates to banker

lenders. ;

* Pursuant to the authority granted to the Board of Gov-

ernors of the Federal Reserve System, by the Securities

Exchange Act of 1934, that Board promulgated Regula-

eal

6a | on S en

Opinion of the District Court

tions T and U. Regulation T governs the extension of

credit to a customer by any member of a national. exchange

or any broker or dealer transacting business with a mem-

ber. Regulation U covers loans by banks for the purpose —

of purchasing or carrying registered securities. Both pre-

scribe minimum margin requirements referred to-as maxi-

mum loan values which have been varied from time to time.

It appears that the regulation places the entire burden of

observing the margin requireffents on the lender.

The Board of Governors of the Federal: Reserve System

- is charged with the responsibility of promulgating regu-

lations relating to margin requirements and the admin-

istration of them. The enforcement of the regulations of |

that Board has been assigned to the Securities and Ex-

change Commission. The Segurities and Exchange Com-

mission may bring an action to enjoin violators of the ‘

~ Act or to transmit evidence’ of violations to the Attorney

General for the institution of criminal Se See-

tion 78u, Title 15 U.S.C:A. '

Section 78ff, Title a US. U. A. | provides, in part, as fol-

—

of toe

“(a) Any: person who. willfully violates any provi:

. sion of this chapter, or any rule or regulation there-

under the violation of which is made unlawful or_ the |

observance of which is. required. under the terms of

this chapter *.* *-shall upon conviction be fined not

‘more than $10,000, or imprisoned not more than two

| years, or both *.* *; but no. person shall be subject

to imprisonment ee this section for the violation

of any rule or regulation if he proves that he had.no

knowledge of such rule or regulation. _— se

oe?

_ Opinion of the District Court. &

Section 78¢e, Title 15 US. C. A,, provides, in part, as

_ follows:

“ee ; * | : Rages

“(b) Every cliched made in violation of any als:

vision of this chapter or of any rule of regulation

thereunder, and every contract * * * heretofore or

‘hereafter made, the performance of which involves |

the violation of, or the*continuance of any relation-

ship or practice in violation of, any provision of this

chapter or any rule or “regulation thereunder, shall .

be’ void (1) as regards the rights of any person who,

in violation of’ any such provision, rule, or regulation,,

shall have made or engaged in the performance of any

‘ , . aps a,

' Ta :

Py HRA

Sad as aan ids Te tach ale aoe Uh hia a

. such contract, and (2)"as regards the rights of any

person who, not being a party to such contract, shal]

have acquired any right thereunder with actual knowl.

“edge of the facts by reason of which-the making or

performance of*sucn contract was in violation of any

: such provision, rule, or regulation shih et |

Section 221. 1(a) of theca U provides, i in part:

“No bank sa make any loan secured directly or

indirectly by any stock for the purpose of purchasing

or carrying any stock registered on a national securi-

- ties, exchange * * * in an amount exceeding the maxi-

mum loan value of the collateral, as prescribed’ from .

time to-time for sto¢ks in Section mA? * *

In Section. 221. 3(b) of the Regulation “earrying” is de-

fined as encompassing a loan made “for the purchase of

reducing or tetiring indebtedness incurred to a

that stock.” |

PAIS PSR eee

RYE LNLLLAT PSAS LLN I NEL 25, FE IR ere He

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Opinion of the District Court

Section 221. 3( a) of Regulation U provides:

“(a) In determining whether or -not a loan.is for...

“the purpose specified * * * 9 bank may rely upon a

statement with respect thereto only if such statement.

(1) is signed by the borrower; (2) is accepted in good *

faith and signed by an officer of the bank as having

been $0 accepted; and (3) if it merely states what-is

not the purpose of the loan, is supported by a menio-

‘randum or notation of the lending officer describing

‘the purpose of the loan.. To accept the statement in .

good faith, the officer nfust be alert to the: circum-

stances surrounding the loan. and the borrower. and

must have no information. which: would put a prudent —

man upon inquiry and if investigated with reasonable

diligence would lead to the. discovery of the falsity

of the statement.” ;

- Section 78aa, Title 15 USCA; provides, in part, as

follows:

“The district courts of the United States * * *

shall have exclusive jurisdiction of violations of this

chapter or 5 rules and regulations thereunder, and

of: all guits Mh equity and actions of law brought to

enforce any chapter or the rules and regulations there-

; under. * * @% °

3 a ae

[1] 4.. The Securities Exchange Act contains no provi-

sion providing for a private cause of action for violation

of- the regulations promulgated by the Board of Governors

. of the Federal Reserve System relating to margin require-

_ ments. Private remedies are expressly provided in connec-

tion with Violations of certain other sections of the Act.

cy ; js ;

- 9a

Opinion of-the District er:

Sections 78i(e), 78p(e), ‘78r(a), Title 15 USCA. There

are a number of other sections as to which the Act has‘

not provided any private remedies ies as to which a steno

(1964), 377 U.S. 426, 84 S.Ct. 15585, ‘12 L.Ed.2d 423—(im- rae

" plied as to Section 14(a) of the Act Section 78n(a), Title

15 U.S.C.A.). See Notes, 77 Harvard L. Review*285 (1963- °

1964), 66 Columbia L. Review 1462 (1966). See, also; 61.

Michigan L. Review 947 (1962-1963). The weight of au-

thority i is toothe effect that a private cause of action is to.

be implied in the case of a-violation of the margin regu-

.lations promulgated under the provisions of “the Act.

‘Smith v. Bear (2d Cir. 1956), 237 F.2d 79, 87-88, 60 A.L.R.

2d 1119; Remar v. Clayton Securities Corporation - (D.C.

- Mass. 1949), 81 F.Supp, 1014; Appel v. Levine (S.D.N.Y.’

1948), 85 F.Supp. 240; Warshow v. H.. Hentz & Co. (S.D. .

N.Y. 1961), 199 F.Supp. 581; Glickman v. Schweickart &

Co. (8. D.N.Y. 1965), 242 F.Supp. 670; Moscarelli-v. Stamm

(E:D.N.Y. July 12, 1968), 288 F.Supp. 453.

This Court holds that a private cause of action for vio-

lation of the margin requirements of the Act is to be im-

plied. The troublesome and difficult questions involved in

“the present case and in certain other cases is as to the

nature and character of the’ ‘implied private cause of ac-

tion. In all_of the District Court cases above cited, the

‘question as to the implied cause of action arose in connec-

tion-either with motions to dismiss or for summary judg-

ment and there was no evidentiary hearing on the merits. .

In the present case there was a complete and lengthy evi- |

dentiary hearing at which all of the.facts relating to the

transactions involved were fully aga

an . ~

d. The plaintiff was born in Poland i in -1906.- He served

in the Polish Merchant Marine until 1943. From 1943 up

10a

Opinion of the District Court

to September, 1952, he served in the United States Mer-

chant Marine. From September, 1952, up until June, 1953,

he attended the New York Finance Institute of the New

York Stock Exchange. His courses in that Institute in-

cluded courses on stock exchange transactions. From July,

1953, until October, 1953, he was a trainee with the stock-

broker firm of Cosgrove, Miller & Whitehead. From Octo.

ber, 1953, until March 24, 1956, he was a registered repre-

sentative of that firm and its successor. From March 23,

1960, until May 24, 1962, he was a registered representa-_

tive of the stockbroker firm of Hill, Darlington & Com-

pany and its successor. From May 25, 1962 on, he was a

registered representative of the stockbroker firm of Burn-

ham & Company. All of the firms referred to were mem-

bers of the New York Stock Exchange. As a .registered |

representative of the broker firms referred to, the plain-

tiff handled the accounts of customers of the firms, includ-

ing margin accounts.

During the periods of time here involved Harold Hardi-

man was the executive officer in charge of a branch of the

defendant referred to as the Broadway Branch. George _

Hughes was also an officer of the same branch. During

the forenoon of September 8, 1958, Thomas W. Hill, a mem-

ber of the firm of Hill, Darlington & Company, talked with

Mr. Hardiman. Mr. Hardiman had been acquainted with

Mr. Hill for some time and regarded him as being highly

_ reputable. Mr. Hill stated to Mr. Hardiman that Edward

Serzysko, one of their registered representatives, was de-

sirous of securing a loan from the Chase Manhattan Bank

for the purpose of opening up a checking account. Mr.

Hill further stated that he had a very high regard for

Mr. Serzysko. Mr. Hardiman then brought up the matter

of Regulation U. He informed Mr. Hill that the Bank

OE.)

lla

oa Opinion of the District Court -

— not consider making a lean for use in sietihieiitie

or carrying registered securities within the scope of Regu-

lation U. Loans not within the scope of Regulation U are

_ referted to as nonpurpose loans. Mr. Hardiman, Mr. Hill

and the plaintiff met for lunch on September 8, 1958, at

which time the matter of the loan was discussed. The dis-

cussion covered the matter of Regulation U. All of them

were familiar. with that Regulation. Mr. Hardiman told

the plaintiff and Mr. Hill that the Bank would only make

a nonpurpose loan. The plaintiff represented to Mr. Hardi-

man that he desired the loan for the purpose of purchas-

ing convertible bonds and other bonds. The purchase of

. bonds was not within the scope of Regulation U and a

loan for such purpose would be a nonpurpose loan.

Pursuant. to the ‘discussion Hardiman prepared the —

papers for the propdsed loan, which papers were dated

September 12, 1958. On that date the plaintiff was the

owner pf registered securities having a market value of

” $203,704.00. They were pledged with a loan from the plain-

tiff from Hill, Darlington & Company in the approximate

amount of $100,000.00. During the discussion on Septem-

ber 8, 1958, the matter of that loan was not referred to.

On September 12, 1958, the Bank made the plaintiff a loan

in the sum of $150,000.00 evidenced by a demand note. As

security for the payment of the note the plaintiff pledged .

the shares of stock owned by him which, as heretofore

noted, had a market value of around $200,000.00. On Sep-

tember. 9, 1958. prior to the closing of the loan, the plain-

. tiff in writing directed the Bank to pay Hill, Darlington

& Company approximately $100,500.00 for debit to his

account. Upon the delivery of the shares of stock the

Bank paid Hill, Darlington & Company the sum of

$100,623.03. At the time of the making of the loan the

oe”

- 4 6 gurchesing or carrying® stock registered on a na-

. *

Y a . 4 ei a ‘s

12a '

5 Opinion of the District Court

plaintiff was ‘orally informed y- Mi. ,Hardiman that he

would be expected to maintain a checking account equal

to 10 percent of the loan. »%

tember connection with the securing of dines? of Sep- ;

r 12, 1958, the plaintiff executed a purpose statemsat. me

Phat statement was, in part, as follows:

- “@Srarement:-Wirn Respect To Purpose - Loan

Date Sep 12°1958

‘To Tur Cuase Mawnarrax Ban, b

189 Broadway Branch

(Head Office. or Branch)

‘Pursuant to Regulation U promulgated by the Board

of Governors of the Federal Reserve System} the fol- ~

lowing statement refers\to a loan in. the amount of

~ $150,000.00, dated Sep 121958 due on demand, made

_ by said bank “to the undersigned. :

A. The above described loan is not for the purpose

(is or is not)

tional securities a

fy Signature of Borrower or Bank Officer)

_ eee Rersynctee [sic] .

—

* Regulation U prescribes that no loan is for thé purpose of

earrying a stock registered on a national securities exchange unless

the purpose of the loan is to enable the borrower to reduce or

retire indebteduess which was rn incurred to w_—: such

stock.

13a

Opinion of the District Court

scribed by the Board of Governors of the Federal ‘Reserve

System.

The Bank made the plaintiff several collateral ‘loans.

The dates and amounts are as follows:

“e ; Dates | Amounts

a 4 : September 12, 1055 $150,000.00

aoe il eg AO October’ 27, 1958 21,000.00

. July 30, 1959 20,000.00

December 3, 1959 ~ 35,000.00

( January 6/&1960 12,000.00 ©

. \ ‘January 16, 1961 11,000.00 .

\ _ March 8, 1961 21,000.00 ~ ~

i | All ae t the above loans wire eviderte@A by notes payable on

‘demand. On October 2, 1961, the plaintiff’s indebtedness

to the Bank on his demand notes was renewed by a note

- for! $270,000.00 payable in ninety days. That note was re-

newed ‘on January 2, 1962, and on April .3, 1962. The

issugs 0 of stock pledged by the,plaintiff for the $150,000.00

loan were twenty-seven in number. The plaintiff testified

« they were investments of a oe nature. The mar-

ket value. of the collateral varied during the period of

time in jquestion. At the time of the making of the loan

of September 12, 1958, the maximum Joan value specified

under p emer U was 30 percent. At the time of thg

making he other loans the maximum loan value speci-

- fied under Regulation U was either 30 percent or 10 per-

cent. The amount of the loans secured by the collateral

on the average amounted to approximately 74 percent of

the market value of the collateral.

The form of purpose statement was sinanienins one pre- .

NS ate oe ea

14a

Opinion of the District Court

: 7. The loans made by the defendant to the plaintiff fol-

lowing the loan of September 12, 1958, will next be referred

to. On October 27, 1958, the Bank made. thg plaintiff a loan

of $21,000.00 secured by the collateral then held by the

Bank. In connection therewith the plaintiff executed a

purpose statement similar to that executed in connection

with the loan of $150, 000.00. In that statement the plain-

tiff stated that the loan was not for the purpose of. pur-

chasing or carrying stock registered on a national securi-

ties exchange.

On May 4, 1959, the plaintiff wrote the. Bank i inquiring

how much it would loan him er certain, specified con- -

vertible bonds.

- On July 30, 1959, the Bank made the plaintiff a‘loan of

$20,000.00. The plaintiff stated: that he wanted the loan

for the purpose of’ purchasing convertible bonds. In con-

nection with the loan the plaintiff executed a purpose

‘statement. That statement was in different form from the

two previous purpose statements. That statement was, in

part, as follows:

“StaTEMENT WitH Respect to Purpose or LOAN

" Date Ju 30 1959

) aa

T¢@ THe Cuase Manwattan Bank *

Pursuant to Regulation U of the Board of Governors

of the Federal Reserve System, the Statement indi-

cated below is made in reference to a loan in the

amount of $20,000.00, dated July 30, 1959, made by

you to the undersigned,

* . * * *

ray

lda

Opinion of the District Court.

[X] Statement II.

Said loan is not for the*purpose of purchasing or °

carrying any stock registered on a national securities

exchange Pipe ae |

(Check (x) provision that. is to apply)

[X] Other: Purchase of ie ea

cs (Fill Blank)

a * * *. i

/s/ Edward Serzysko

Signature of Borrower”.

On December 3, 1959, the Bank made the plaintiff a loan

of* $35,000.00. That loan was handled: by George Hughes

acting for the Bank. At. the time the plaintiff stated to’

Mr. Hughes that he intended to purchase bonds with the

loan. He signed a. purpose statement reg

just above set forth. In it he stated that the loan was for

the “Purchase of Bonds.” As collateral’ sécurity for: the

loan he deposited with the Bank $13,000.00 Burroughs

_ pace 412% Convertible Subordinated Debentures,

some shares of stock he had secured as a dividend, and

some shares of Stock which he had purchased.

On/January 6, 1960, the Bank made the plaintiff a loan

of $12,000.00. He stated to Mr. Hardiman that he was go-

ing to use the loan to purchase convertible honds or other

bonds. Prior to the making of the loan the plaintiff de-

posited with the Bank collateral which consisted, in part,

of $10,000.00 Vanadium Corporation of America 414%

Convertible Subordinated Debentures. The plaintiff exe-

cuted a purpose statement in which he stated that he was

to the one -

ePRRS r

ay a ae -

—

b .

16a .

—

re. of the District Court .

going to use ‘the loan “To purchase convertible or other

bonds.”

On J anuary 16, 1961, the Bank made the plaintiff a loan

of ‘$11,000.00. He requested the loan for the purpose of

paying taxes. In the purpose statement signed by him he —

stated that the loan was for “Taxes.” The loan was secured

by the collateral then held by the Bank.

On March 3, 1961, the Bank made the plaintiff a loan

of $21,000.00. It was heretofore noted that the Bank had

informed the plaintiff that he wads expected to maintain

a balance in his checking account equal to 10 percent of

-hi8 loan. On March 3, 1961, ‘the balance in his checking

account was below that percentage. The loan was made

' for the purpose of maintaining such balance. In the pur-

pose statement signed by him he stated that the loan was -

“To maintaimbalances.” That hoan was secured by the

collateral the Bank then held. ce

- On Metober 18, “1961, the ‘plaintiff deposited $15,000.00.

in United States Treasurey Notes as collateral. On May

21, 1962 he deposited $40,000.00 in those Notes as collateral.

On June 18, 1962, he. Geponited $13,000.00 in those Notes

as . =

ee lowing the making of the original loan there were

periods when the market value of the collateral substan-

tially increased. There was also some increase in its

value due to stock dividends on thie stock held’ as collateral.

There was also some increase in the value of the collateral

due to the deposit of additional collateral and exchanges

- of collateral. .

A dddiine in stock market values commenced. in 1961

which continued into 1962, and the balance of the plain-

tiff’s checking account went down below 10 percent. Com-

17a

Opinion of the District Court ,

/ = i o . ; :

mencing in 1962 the Bank repeatedly urged the plaintiff to °

maintain a proper balance in his checking account and to

- reduce his indebtedness and furnish additional collateral.

‘The plaintiff did not so do. From April 18, 1962, to June

7, 1962, after securing margin calls from the Bank, the

plaintiff directed the sale of certain of the collateral and:

reduced the loan from $270,000.00 to $145,000.00. The mar-

ket continued to decline and in, May and June, 1962, the

Bank sold the remaining collateral and eppsP

_ leaving a balance presently unpaid of $12,749.49 with in-

terest for which the , Bank asks aback against the

plaintiff, -

Subséquent: to the sale by the Bank of the shares of

stock held by it as collateral in 1962, there was a steady

appreciation in the market value of those shares. The

plaintiff testified that as of J anuary, 1958, the value of

the shares sold by the Bank taking credit for stock splits

and stock dividends had value of between $659, 000. 00 and

$675,000.00. ;

On March 9, 1965, the plaintiff commenced the present

action. In his complaint the plaintiff, after setting forth

the loans made to him by the defendant, goes on- to state:

“16. That all loans were collateralized by senariigie

registered — on..the New York Stock Exchange and

.-American Stock ‘Exchange which the plaintiff was

carrying or had purchased out of borrowed funds

' which facts were known to the defendant or in the ex- -

rcise of reasonable prudence should have been &nown

to the deferidant. :

Pun gw ate adc taentes seers vim

18a

Opinion of the District Court

“17, That the defendant’s conduet in making the’

loans and maintaining the loan account was in violation -

of the Securities and Exchange Act-of 1934 and Reg-

ulation U promulgated by the Federal Reserve Board.

“18, That by reason of defendant’s violation of the

statute and Regulation | as. aforesaid, the plaintiff has

been damaged i in \ the sum of #268, 031 00.” 7

Prior ti the trial the plaintiff moved to amend the ad

-’ damnum clause to ask’“for the return of the securities —

sold by the defendant in “May and June of 1962- or the

present value thereof.” :

It is apparent from the proposed sanntiiinnak that the

plaintiff i is of the view that there would be available in‘the

‘stock market for acquisition by the defendant shares of

stoek.which are the same as those sold bythe defendant in

1962 and that the défendant should be required to. replace _

them. That request is, in substance, asking for rescission

of the loan transactions. In the event that return of the

shares not be had, the plaintiff seeks: to recover the dam-.

ages allegedly caused to him: by the sales of the stock in

1962. .

The plaintiff as collateral for the original faa, pledged

97 issues of stock. Over 20. issues of that stock were still

in the collateral in 1962. It was heretofore noted that the

plaintiff testified that: those issues constituted conservative

“investments. He further testified that he made use of the

proceeds of the loans made to him by the defendant to

purchase speculative issues. i \

The matter as to the amount of damages was* by agree-

ment’ of counsel deferred pending a determination of the

issue as to liability. . ;

The plaintiff testified that he used the available pesienbile

‘of the loans exclusively for the purpose of purchasing or

~ Wa

Opinion of the District Court - a ose.

carrying registered securities. - The plaintiff alleges that

the defendant either knew or in the exercise of reasonable }

diligence should have known that he was using the pro-. |

ceeds of the loans for such purposes and hence the loans»

were in a of. ——- U.

12; 9, It 1 is the aonted tion of the plaintiff that where a

lendér makes a loan enabling the borrower to reduce or

retire an indebtedness which was originally incurred for’

the purchase of registered securities such a loan. consti-:

tutes a loan for the purpose of ,carrying registered securi- |

ties in violation of Regulation U. It is the view of the-

Court that such is the proper interpretation of Regula-

tion U.. The plaintiff-further coritends that in the situation. :

_ just above referred to the fact that the borrower has. ~

signed. a purpose statement’ stating that the loan. was not

being obtained for the purpose of carrying registered se-

curities does not’absolvée the lender from *tesponsibility

under Regulation U if the lender in the exercise of reason- ~—

‘able diligence would have ‘ascertained that such was not

the true situation. The plaintiff further contends that

_ where a borrower is using the. proceeds of loans to pur-

chase and carry registered securities notwithstanding his

having signed statements that the proceeds would not be

So used, there is a violation of Regulation U if the lender ~—

could have discovered such misuse in the exercise of reason-

able —

10. The evidence preponderates “shat 4 the plaintiff know-

ingly and intentionally, by oral and written statements,

deceived the Bank as to the purposes for which he intended |

to use ‘the proceeds of the loans. The evidence preponder-

ates that none_of the officers of the defendant having to do

20a

Opinion of the District t Court

_ with the loans had any actual knowledge of the falsity of

- the plaintiff's statements or his misuse of the proceeds of

the loans. Where the proceeds of loans made by a bank

are used by: the borrower for the purpose of: -purchasing

or carrying registered securities the fact the lender has

no actual knowledge. of.such use does. not completely an-

swer the question as to whether Regulation U has been

violated. Regulation U would be violated if the lender in

the ‘exercise of , reasonable diligence should have known

that the proceeds were being so used. Manifestly, if all

_ that was required by a lender was to have the borrower

1 execute a. purpose statement and nothing more the object

and purpose of that Regulation could be easily thwarted.

The plaintiff contends that he was not a sophisticated in-

— vestor. He ‘testified that he was not familiar with the pro-

- visions - of Regulation U. He also’ testified that several of

_' the purpose’ statements were signed by ‘him in blank and . ».

that the statements contained - therein as to the use of the .

proceeds of the loans were afterwards incorrectly filled in .

by the defendant. The Court finds that the plaintiff was -

a sophisticated investor and was familiar with the provi-

-sions of Regulation U and thatthe statements contained

‘in the purpose statements as to purposes of the loans were

. in. accord with his representations. .

The plaintiff calls.attention to certain evidence which

he asserts supports his claim that the defendant in the —

exercise of reasonable “diligence should have discovered

that the ‘proceeds of the loan were being used by him for

the purpose of purchasing or carrying registered securities.

During negofiations' ‘for the original,loan there was no

discussion of the loan had by the plaiftiff with Hill, Dar-

lington and Company. However, later the plaintiff gave

the. Banka written order to pay around $100,000.00 of

| Opinion of the District Cours

‘the proceeds of the loan to Hill, Sian & Company

to be debited to the plaintiff. When Hill, Darlington &

Company delivered the securities held by that firm to the

Bank, on a statement accompanying the delivery there ©

appeared in typewriting the words “Margin—25.” Mr.

Hardiman testified that he did not observe those words on

the statement and did not learn until after thetlast original

loan was made in 1961 that the amount paid fo Hill,

Darlington & Company was in payment~of a margin ac- .

count loan of the plaintiff with that firm arising out of —

the purchase of registered securities. |

.. The plaintiff also calls attention to the evidence which

shows that on three occasions during the loan period the

defendant made payments directly to Hill, Darlington &

Company from the proceeds of loans to’ the plaintiff’s

. éredit against the delivery of registered securities to be

added to the plaintifi’s collateral. On, November 17, 1960,

the defendant paid Hill, Darlington & Company $26,009.95

against delivery of 525 shares of stock. On November 25,

1960, the defendant paid Hill, Darlington’ & Company

$1,418.34 against the delivery of 100 shares of Avnet

Electronics Corporation. On February 16, 1962, the de-

fendant paid Hill, Darlington & Company $13,065.05 against

the delivery of 300 shares of Thiokol Chemical Corpora-

tion. ;

Mr. Haridman testifled that deine the latter part of

the loan period he began to be suspicious that the plaintiff

was not using the proceeds of the loans in accord with his

purpose statements. The defendant after January 3, 1961,

made no further new loans to the plaintiff and in | 1962 =

liquidated the collateral. ;

The question of reasonable diligence on the part of the

defendant i is troublesome. The plaintiff had been recom-

220

Opinion of the District Court

, mended to the defendant as being highly reputable. The

plaintiff both orally and in writing had repeatedly stated’

that the | -were not being used for the purpose of pur-

chasing eaketea registered securities. The defendant's

branch which handled the loans cond & large busi-

ness with a myriad of transactions involving the ipt

and -delivery ‘of registered securities held as co “+2

However, some of the plaintiff's activities,,as ~e

the defendant’s records, were such as to indi nee

was not using the proceeds of the loans in accord with his

oral dnd written representations. The situation was such

as to indicate the need for investigation on the part of the

‘ defendant as to the use he had been and was making of the

proceeds of the loans. Such investigation would have dis-

closed the fact that the plaintiff, contrary to his representa-

tions, had been using part of the proceeds of some of the

loans for. the purpose of purchasing or carrying registered

securities. The Court is of the view that the defendant in

the exercise of reasonable diligence would have discovered

the falsity of the plaintiff's representations. ~ ‘

(3) 11. In the present case there was a violation of

Regulation U by the defendant in connection with some of

the loans. due to its failure to exercise reasonable diligence.

In the. present case the plaintiff was a registered repre-

sentative of a brokerage firm who was experienced and

sophisticated in the matter of the investment of registered

- securities. and the purchase of such securities on margin

and familiar with the provisions of Regulation U. By false

oral .and written representations he induced and brought

about the vidlation of Regulation U.

' The deferidant makes several contentions. It contends

that the plaintiff is notwithin the class of those entitled to

maintain an. implied. right of action for violation of the

23a

_ Opinion of the District Court

margin requirements of the Securities Sidieioe Act. of

1934 and Regulation U promulgated thereunder. The de-

fendant also contends that the conduct of the plaintiff in

connection with the loans was such as to bar any recovery

on his part under the implied right of action. The de- —

fendant makes the further contention that the claims of

the plaintiff based upon the first two loans are barred by

the statute of limitations..

The first two contentions of the defendant will be next:

considered.. Those contentions bring up for consideration

the substantive features and the character of the private

cause of action implied under the margin requirements of

the Securities Exchange Act-of 1934 and the regulations

- promulgated thereunder. .

The early and landmark case in this area is the case of

_ Remar vy. Clayton Securities Corporation (D.C.Mass.1949),

81 F.Supp. 1014. In that case the plaintiff owned certain

securities. He was advised by a broker to purchase other

securities. The broker arranged with a bank to loan the

plaintiff money to so do. The plaintiff pledged the securi-

ties owned by him and the securities purchased by means

of the loan as collateral for the loan. Later the bank sold

the collateral and there was a loan deficiency. The loan

violated Regulation U. The plaintiff brought an action

against the broker for the damages sustained by him for

the loss of the securities. Recovery was sought under the

provisions of Section 7(c) of the Securities Exchange Act

of 1934 relating to mergin requirements. The defendant

moved to dismiss the complaint on the ground that the

plaintiff did not have a remedy under that Act. The

motion was overruled. The Court stated (p. 1017):

“The Securities and Exchange Act does not ex-

pressly give a right or remedy to a private person in-

= ( —

24a ;

Opinion of the Distviet Court. i

pe by. §7(c) of that Act. But such a right may

nonetheless be implied. * *-* The general principle

‘regarding civil liability for -violation of prohibitory

statuteshas been put with precision in Restatement,

_ + Torts, $286 [1934]. Broadly stated, the rule is that

where defendgnt’s violation of a prohibitory statute

lias caused injury to plaintiff the latter has a right

- of action if_one of the purposes of the enactment was

to protect iridividual interests like the plaintiff's. :

“That rule applies to the case at bar. Undoubtedly

‘the main purpose’ of §7 of the Securities and Ex-

~ change 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 rec-

ognized that ‘protection of the small -speculator by

making it impossible for lim to spread himself, too.

thin. * * * will be achieved as a by-prodinet of the

main purpose.’ Ibid. * * *

“Plaintiff's right of action is-not affected by his

participation as. borrower in the transaction in which ~

- Clayton-and the bank violated the statute. Since the

statute was passed for the benefit of people like plain-

tiff, "and since the’ Legislature regarded him as in- -

capable of protecting himself, he is not disabled from

suing for the injury. he sustained. See Restatement,

Torts, § 286° comment j * * *.”

The Court goes on ‘to state (p. 1017) : ,

“Tn holding that a private person may have a right

of action under -§7(c), I have not considered and do

not decide whether this plaintiff has suffered ae.

eo’

25a

: + Opinion of the District Court

which are the jroximase consequence of Clayton $ vio-

lation. ** *”. | ; \e

Restatement of Torts, Sec. 286 (1934), referred to in the h

opinion, provides, in part: , pie he gar F \

| 286. ViotaTions Creatine Crvin Lrasiuiry. - Loe

“The viohition'’ of a legislative.enagtment by doing :

“ee @.@

ies .

‘ a prohibited act, or by failing to do a required act, ;

, makes the actor liable for an invasion of an interest of a

another if: :

“(a) thd intent of the, ensetmend is exclisively “or in ;

part to protect an interest of the other as an‘individual ; . ;

- and : sia /

‘

“(4) the violation is a legal cause of the invasion, and ;

the other has not so conducted himself~as to disable

himself from maintaiging an action.”

CRANE

aT ED

In a hearing before the Senate Committee on Banking

and Currency, 73d Congress, 1st Session, pt. 15, at page

'-6494, Mr. Corcoran, one of the drafters of the Exchange

Act stated in regard to the matter of margin provisions:

“Qne is to protect the lamb; another, and probably the .

more important of the two * * * is the.protection of the _

national business system from the fluctuations that are

induced by fluctuations in the market, which in turn. °

stem back to this very exquisite liquidity you get°when

you have a lot of borrowed nfoney in the market. mn. *

At a hearing before a Senate. Committee on the Secusities

Exchange Act of 1934, a representative of the Federal Re-

«> serve Board stated: y

’ °

. )

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. ‘ ° " ;

- °

Sie ; U

264

‘Opinion of the District Court

“We are leas, concerned about what happens to him

[the large buyer], because he is very likely a person

who knows the game, whereas when there are a thou-

sand people buying on a small scale, they are buying it

blind, and I think our interest, socially, is to protect

’ them against the stock market.” Hearings before Com-

mittee on Interstate and Foreign Commerce, 73d Con-

gress, 2d Session 74 (1934).

In a Note, Federal Margin Requirements As A Basis For

~ Civil Liability, 66 Columbia L. Review 1462, 1482- -83 (1966),

the author stated : .

«* * * In the case of the knowing plaintaff-purchaser,

--however, the policy considerations are different. On

~ the one hand, section 7 manifests an intention that the

' dender bear the entire burden of compliance with the

margin requirements. On the other, the predominant.

‘purpose of the provision is to prevent ‘the excessive

use, of credit for the purchase or carrying of securities.’

Where the investor is a willful participant in a transac-

tion violative of the margin regulations, these policies

cannot be reconciled by allowing him to undo his con-

tractual obligations whenever they prove unfavorable.

Such’ license would serye as an incentive for margin

traders to effect as many illegal transactions as pos-

_ sible. In this ‘situation the two policies unavoidably

conflict, and the policy against excessive security credit

should prevail over the subsidiary intent to impose the

burden of compliance upon the lender only. The sophis-

ticated investor should therefore be deemed an accom-

plice to the. defendant’s violation and denied the right

to rescind the contract under section 29 (b).”

v :

trader, is not within the class of those who may bring an j

"being within, the general class of those who may bring a

—4 :

. o Sie; pon 4 ©

‘Goaisé of the District Court ~ =

In a Note in 61 Michigan L. Heviow 940..(1963), velating

to private remedy’ for violation of margin reagizements,

the author stated (p. 954): o

“Perhaps the tort remedy should be available to an

inexperienced trader in certain cases, but not. to a’.

sophisticated trader who knowingly assumes the risk

of an inadequate margin. * * *

“Tt seems likelythat courts will continue to imply

. civil remedies for violations of credit regulations, at | |

least for the.protection of inexperienced margin trad- 3

ers. However, recovery should be denied the sophis- ;

_ticated trader on the ground that he is an accomplice in.

the violation. Denying him a remedy would serve as a

- greater deterrent to future violations * * * than an

allowance of relief.* * *”. —

12. It was heretofore noted that it was the contention

of the defendant that the plaintiff, being a sophisticated.

implied private action based upon violation of the margin

requirements. ‘ ,

There is a distinction between the matter of a person

private action based on a violation of a regulatory statute

and the right of such person to prevail on. the merits in such

i tication would present difficulty. In many cases the deter-

It aragid seen seem _— one who comes within the classification

an action when brought. To attempt to ‘define the classes

of investor-borrowers who may bring an action for the vio-

lation of Regulation U in terms of the extent of their dophis-

mination of the extent of the sophistication of the investor-

borrower would require a preliminary evidentiary hearing.

eT ey ee ae as

ote > a 2 © AES

4 : x

cate GAAS RSA Dio RF EE Mes oe te f “ .

Opinion of the Dist ict Court,

\ of an investor-borrower in connecti -with icans’o on regis-

tered securities may bring a private action for the damages

allegedly sustained by him by’r reason of, the violation of

-Regulation U subject to his being deniéd recovery on the

“merits. In connection with the merits the sophistication of -

‘. a particular investor-borrower could, as in the present case,

be of relevance in connection with the question as to whether

-- his conduct: should prevent recovery by him..— °

[4] It.is the view of the Court that nbbwithetanting the

fact the p aintiff was a sophisticated investor-borrower hé

is not for that reason prohibited. from bringing this private

action for |the damages allegedly. sustained. by him. ,by reason

- Of violation of Regulation U. However, his sophistication

enters info the situation iz connection -with‘the matter: of

ful conduct, i.-e., the procuring and inducing of

loans by means of false Jedpiesntatione. Because of his ©’

sophistication, he was familiar with Regulation U and

knew what would constitute violations of it. N evertheless,

he knowingly and intentionally. procured or induced the

violations of which he now complains.

13. Where a plaintiff brings an action based upon a vi0-

lation of a regulatory statute; there is frequently presented

the question as to what effect ‘is to be given to his own

wrongful conduct. in connection with the violation. That.

tion would seem ‘to be connected with the question as

‘to, t e nature of the action: In the case of Goldenberg v.

Bache and Comipany \ (5th Cir. 1959), 270 F.2d 675, there

. was volved in.a private action by an investor agaizst a*

‘broke the matter of the violation of Regulation T. In‘con-:

nectio gl the nature’ of -the action the Court stated Ap.

680) :

Opinion es the District Court

; “This action could be looked on either as an action

"ex contractu, based on the contract between stockbroker

and customer as affected by the federal statute and

_ regulations, or as an action ea delicto, based upon ‘fed--

_eral canon law torts? **°”

“tn the ‘case of Warshow v. H. Hentz & Co. (S.D.NY.

~ 1961), 199 F.Supp. 581, the plaintiff in his complaint alleged

’ the making of a joan to him in violation of the margin

requirements of the Act. The plaintiff sought either rescis-

sion or: damages. The Court overruled a motion to dismiss

the complaint. It stated (p. 582):

‘ “Section 29(b) of the ee re Exchange Act of

1934, 15 US. C.A.°§ 78ee(b), provides that every ‘con- |

tract which violates any provision of the Act or regu-

_ lations thereunder is void and unenforceable by the

party violating the Act, and the other party is entitled:

to rescission. * * * Further, the complaint supports a

’ claim for damages sustained as the proximate gonse- -

quence of defendant’s act. made illegal by tage ‘7(¢).

of the Act, 15 U.S.C.A. § 78g(c).* * *”

Under the case of. Remar v. Chagton Saeuriiice: Corpora-

tion; ‘supra, and cases following that decision, it appears

hat an action by:an investor against a lender based upon .

a violation of Regulation U is regarded. as an action in.

tort under the rules stated: i in Section 286, Restatement of

Torts (1934): Treating the action as a tort: action gives

. Tise to‘a.number of, troublesome questions as to the .appli-

_ eation of well-recognized tort rules relating ‘to contribu-

tory negligence and other conduct of the plaintiff and

causation and damages. .

In all situations relating to violations of Regulation U,

there 1 is always “sala the feature of the investor having

. w;,

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Se of the District Court

executed je note for the loan involved. Therefore, he is in *

a. ‘sense a participant in the making of the illegal loan.

However, it was noted in the case of Remar v.. Clayton

Soouvitive Corporation, supra, that the Court held that the -

plaintiff's right of action was not barred by his participa-

tion in the making of the illegal loan. It would seem that

the-mere fact that: the. investor participated in the making

of a loan which violated ai ieee U does not per se bar

him from relief.

- Under Section‘ 286 of the Restatement heretofore set out

and which has, in general, been. regarded as applicable to: ‘

. actions brought for violation of the margin requirements. ~

violator of a legislative enactment, subject. to certain re-

quirements, is. liable for damagés legally caused to another.

Qne of those requirements is that the complaining party —

“has not so conducted himself as to disable himself. from

maintaining an action.” ‘However, there are certain deci=

sions of the United States Supreme.Court that have to be”

considered in connection With the last portion of .the Ré-

statement Rule*just referred to.

‘In the case ‘of J. E.-Case Co. v. Borak, (1964) 377 US..:

496, 84 S.Ct. 1555, 12 L.Ed.2d 423, the plaintiff brought a

private action based upon a claimed violation by ‘the defen- i

.dant of Section 14(a) of the Securities Exchange Act of

1934, 15 U.S.C.A. 78n(a). The Act did not expressly pro-

* vide for a private action for a violation of that Section. The

Court held that a private cause’of action would be implied

-not only for the protection of investors but also to providea

necessary supplement to the Securities and Exchange Com-

mission’s enforcement: of the provisions of the Act: In that

connection .it mentioned that the statutory treble| damage

attion provided for in civil antitrust actions‘ served as an”

—— — ‘

“ ed er

. *:

‘

)

» (

«> ® ’

. — . , , wif Oo sil Batata ls Mes isnt ae —_—e

] 3 ‘ :

Bla

Sulake of the Disteies Court

effective weapon in the ‘énforeenent of the bivil antitrust .

statute. The matter of the wrongful conduct of a plaintiff 43

in‘connection with the matter df the recovery of damages

allegedly sustained by: him by violation of a regulatory =

. Statute was recently considered. by the United States Su- :

preme Court in the case of Perma Life Mufflers, Inc, aA

International Parts Corporation (June 10, 1968), 392 US. :

134, 88 S.Ct. 1981, 20 L.Ed2d 982. In that action the plain.

defendants under the provisions of 15 U.S.C.A. Sec. 15 _

for violation of the civil antitrust laws. The claimed viola- :

tion occurred in connection with franchise arrangements. _ i

The defendants made a motion for:summary judgment

' based upon a showing that the plaintiffs had participated

in the franchising arrangements. The motion was sustained

by the trial court.. That ruling was affirmed by the Seventh .

Circuit Court of. Appeals (376 F.2d 692). On appeal the

wee Supreme Court reversed. It stated (p: 135. of 392 US,

eos

Pie

__p. 1982 of 88 S.Ct.) :

' “The principal question presented is. whether the . -

plaintiffs in this private antitrust action were barred

froth recovery by a doctrine known by the Latin phrase

m part delicto, which literally means ‘of equal fault.’

*2.#99

e Si)”

+ The Court further stated (pp. 138-139 of 392, U.S. p. 1984

_ of 88 S.Ct.) :

a ad be There i is nothing i in the language of the anti-

o e, }

- \. trust acts which indicates -that’ Congress wanted to

\\make the common-law pari delicto doctrine a defense to

‘treble-damage actiorfs, and the facts of this case sug-—

gest no basis for ‘applying such a doctrine pven if it

_ did exist. Although 4 on Uiaii delicto sais means ‘of

- 32a /

ray

Opinion of the District Court

equal fault, the doctrine has been applied, correctly or

incorrectly, in a wide variety of situations in which a

plaintiff: seeking damages or equitable relief is himself

involved in some of the same sort of: wrongdoing. We

have often indicated the inappropriateness of invoking

broad common-law barriers to relief’where a private

suit serves important public purposes. * * * The plain-

tiff who reaps the reward of treble damages may be no

less morally reprehensible than the defendant, but the

law encourages his suit to further the overriding public —

gard for the relative moral worth of the parties would

only result in seriously undermining the usefulness of

the. private action as a bulwark of antitrust enforce- —

ment. And permitting the plaintiff to recover a wind-

fall gain does not encourage continued violations by

‘those in his position since they remain fully subject

to civil and criminal penalties for their own illegal

- conduct. * * *”

[5] Thus it appears that the rules stated in Section 286

of the Restatement in regard to a private cause of-action

for violation of legislative enactments must be considered. ~

in the light of the Supreme Court cases just referred to.

Under the doctrine of those cases a private cause of action

for violation of a regulatory statute must be considered in

_ the light of the enforcement of such a statute.

‘It is to be noted that i in the case of Perma Life Mufflers,

Ine. v. International Parts ne supra, the action

provision.’ That is not the situation in the present case.

It is also to be noted that in that case the Court noted that -

7 33a

Opinion of the District Court”

_ the plaintiffs as participating wrongdoers would themselves

be subject to statutory civil and criminal penalties. That is

not the situation in the present case. It is also to be noted

that in that case it appeared that the; defendants actively

and knowingly participated in the claimed violations. That

is not the situation in the present case.

[6] 14. The purpose statement to be signed by an in-

vestor-borrowér in connection with the securing of a loan is

of importance in carrying out. the object and: purpose of

the margin requirement regulations. The knowing and in- ~

tentional making of a false statement by an investor-bor-

rower in a purpose statement is fraught with prejudice to

- the enforcement of such regulations. If an investor-bor-

rower could by means of false representations and state-

ments mislead a lender into making a loan for thé purchas- .~

ing or carrying of registered securities when the lender

did not know or intend that the loan would be used for such

purpose, and then recover heavy damages from the lender

on the basis that the lender in the exercises of reasonable

diligence should ‘have discovered the deceit, there would be

far as the

_ practice which, in substance, would be that so-f

investor-borrower i is concerned he could keep the profits if

_ his ‘speculation. proved profitable and have the lender bear.

the oom if the speculation proved unprofitable.

ap 15. In some of the cases ‘referred. to reference is

made to the doctrine of in- pari delicto which is said to

- literally mean “of equal fault. ” The term in pari delicto

has been applied to_a variety of situations. It is the view :

of the Court that whatever the scope that doctrine may be

“it can hardly be said that one who is deceived by false rep-.

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“34a

——

Opimion of the District Court —\

resentations. of another can be said to be in. paré delicto

with him because of the fact that the deception might have

been discovered in the. exergse of reasonable diligence. It

is clear from the decisions that in connection with an im-

plied private cause of action for violation of a regulatory

statute there must be taken into ‘consideration -the matter

of supplementing the enforcement of the statute. The en-

_ forcement of such a statute is supplemented when the rules

applied in private actions having to do with its violation

are.such as toytend to encourge the observance of the statute

aridto deter nonobservance of it. It is the view of the Court

that to allow the plaintiff to recover in this action would

be to encourage rather than discourage deception on the

part of investor-borrowers with resulting prejudice ‘to the

observance of the margin requirements of the Act. In the

,case of Moscarelli v. Stamm, supra, the Court was of the.

view that to permit an investor-borrower who had wilfully

participated in the violation of-a margin requirement: to

recover damages for such violation would defeat the pur-

pose of such requirement. The law tends-to look with a

jaundiced eye upon the claim of a deceiver that his victim

should not have been deceived. However, in the case of:

the margin requirements here involved there is‘ again in-

volved the matter of the enforcement of a regulatory stat-

ute. Under the requirements of the margin regulations here

involved, a lender in making.a loan may not safely ignore

the posstbility of deceit on the part of the investor-borrower

as to the use of the proceeds of ‘the loan and to that end is”

required to exercise reasonable diligence under the circum- .

stances in connection with the matter of the probable mis-

use of the proceeds of the loan on the part of the investor-

~ borrower. = | | a

; ‘\ 35a’ : .

. . ; 4 ‘€ ,

Opinion of the District Court =

& ha oy

‘Some of the occurrences in connection with and follow- 7

ing the ‘arrangements for the loans were ‘such as to indi-

-eate the reasonable likelihood that the plaintiff was using °

the proceeds of the loans for the purchasing or carrying

‘of registered securities. If an investigation: had been made

it would have revealed that the plaintiff,’ contrary to his

_ oral and written statements, was making use of the pro-. :

“ go

ceeds of some of the. loans to purchase or carry registered

securities. It is the view of the Court that the defendant’

should have made such an investigation and that-in not

- doing so the defendant failed to exercise reasonable oe

gence.

. -f-

[8, 9] 16. It was heretofore aii ‘that the deteniinais |

by counterclaim seeks to recover the’unpaid balance of the

last loan made which is in the approximate sum of.

_ $12,000.00. Under the provisions: of Section 221.3(a) of

Regulation U heretofore set out, a lender is chargeable '

with exerc] reasonable diligence in the matter of in-

quiring and investigating as to possible misconduct of- the

borrower in connection ‘with the loan and the failure of

the lender to exercise such diligence makes the ‘loan a

’ violation of Regulation -U. Under the provisions‘ of 15

US. C.A. See 77ee(b) heretofore set out, contracts Which

are in violation of Regulation U are declared void.

It is the view of the Court that the note upon which the

defendant seeks to reedver comes within the nore of that

Section. oe J

17. It ‘is the view of the Court. that the plaintiff, by

reason of his conduct, should be denied the relief requested

by him. Such denial renders it-unnecessary for the Court

to pass upon the partial defense of the defendant based

on the statute of limitations.

Opinion of the District Court =

“18, It ig the view of the Court that ‘the. defendant, by

_- reason of its failure to exercise. reasonable sae ac should Mea

be denied the relief ‘requested by it. 3 ;

“Comcuusioms or Law

1. This Court has jurisdiction of ‘the subject ‘matter of °

: this action and the Serna? to the action:

7 at

inne

2. The plaintiff in alo justly entitled to the relief eee ar

quested by- him. .- |

3. ‘The. defendant: is not ne entitind-se ‘the relief re-

quested by it. ee

|. APPENDIX C

Pertinent Statutes and Regilations

Pibshcrsiee ‘iiabicams AND Recutations

"The following Statutes and Regulations are involved: ,

The Securities and Exchange. ‘Act of 1934, Title 15

‘U.S.C.A. Sections 78g, 78cc and 78ff ; |

rp reo. U, 12 CFR 221, caries Bi 1a), 221.3(a)

and (b)(1). Sie Ge :

Section 78g, Title 15 U.S.C.A. provides in part as follows:

“(a) For: the purpose of preventing the’ excessive

‘use of credit for the purchase or carrying of securities, ra

the Board of Governors of the Federal Reserve System

shall, prior to October 1, 1934, and from time to time .

' thereafter, prescribe rules and fogulations with respect

to the amount of credit that may be initially extended

and subsequently maintained on any security * * *

registered on a national securities exchange. * * *

66 ° * * y at

“* “(e) It shall be laa for any member of a na-

_ tional securities exchange or any broker or dealer who

' transacts a business in securities: through the medium

of any gach member, directly or indirectly to extend

or maintain credit or arrange for the extension or

maintenance of credit to er for any customer—

“(1) On.any security oo* registered ona national

securities exchange, in. contravention of the rules and -

regulations which the Board of Governors of the Fed-

eral Reserve System shall prescribe under subsections

(a) and (b) " this section.

“oe & &

~, * s e a

APL ABRLIN LY I

L\ 88s

, & Pertinent Statutes.and. Regulations. ~

“(a)” It shall be unlawful for any person not ‘subject

to subsection (c) of this section to extend or maintain —

credit or to arrange for the extension or maintenance

_ of credit for the purpose of purchasing or carrying any

security registered on a national securities ‘exchange,

in contravention of such rules and regulations as the”

Board of, Governors of the Federal Reserve System

shall prescribe ,to prevent. the excessive“use of credit

for the purchasing or carrying of ov trading in securi-

fies in circumvention. of the other provisions of thjs.

section.

* *# #99

Section 78cc, Title 15. U.S.C.A. provides, in’ part, as

follows: Uieaecee os

“(b) Every contract made in violation of any pro-

vision. of this chapter or of any. rule or regulatto

thereunder, and every contract * * * heretofore or

hereafter made, the performance of which involves the

violation of, or the continuance of any_relationship-

or practice in violation of, any provision of this chap-

ter or any rule or regulation thereunder,. shall be void

(1) as regards the rights of any person who, in viola- |

tion of. any such provision, rule, or regulation, shall

have made or engaged in the performance'of any such

contract, and (2). as regards the rights of any person

who, not being a party to such contract, shall havé ac-

quired any right thereunder with actual knowledge of

ance of such contract was in violation of -any such

provision, rule, or regulation* * *.” .

‘the facts by reason of which the making: or perform- ;

wo ee ie ee

| Pertinent Statutes and Regulations .

Section 78ff, Title 15 v. S.C.A. provides, in part, as

follows:

°o

2 (a) Any person who willfully violates any provi-

sion of this chapter, or. any: ryle or regulation there-

under the violation of which is made unlawful or the

- < ebservance*of which is required under the terms. of

this chapter * * * shall upon conviction be fined not

more -than $10, 000, or imprisoned not more ‘than two

years, or both * * * ; but no person shall be subject to

‘ » imprisonment bide: this section for the violation of

any rule or regulation | if He proves that he had no

. Rai il Yes of such rule or regulation. * * *”

Section 221.1 of Regulation U, provides, in ‘part, as. :

follows: — |

“(a) No bank ied make any loan jdeniak directly

or indirectly by any stock for the purpose of purchas-

-ing or carrying any steck ‘registered on a national

securities exchange (and no bank-shall make any loan

, | described in § 221.3(q) regardless of wheter or “not

Bare? such loan is secured by any stock) in an amount ex-

» ceeding the maximum loan value-of the collateral, as

prescribed from time to time for stocks in § 221.4

\ . (the Supplement to Regulation U) and as determined

by the peek in good faith for any collateral other than |

stocks.

“*(b) For the purpose. of this part, the entire indebt-

edness of any borrower to any bank incurred at any ’

time for the purpose of purchasing or carrying stocks

_ registered on a national securities exchange shall be

considered a single loan; and all the collateral secur-

BECP iSite tN a ON ERED .

_ was Ori

a si = , 2

Pertinent | Statutes and Regulations

ing’ such ndebtedilons- aliall be Ghoaitened ' in determin.

ing whether or not the loan complies with this part.” |

" Section’ 221.3 of Regulation U, provides, in Bett as

follows:~~. °,

" (a) In determining whether or not 4 loati is for

the purpose specified in § 221.1 or for any of the pur-

' poses specified in §-221.2, a bank may rely upon a state-

ment with respect thereto only if such statement (1)

is signed by the borrower ; (2) is accepted in good faith

and signed by an officer of the bank as having been so

accepted in good faith and signed by an officer of the

- . bank as having been so accepted; and (3) if it merely

states what is not the purpose of the loan, is supported

by a memorandum or notation of the’ lending officer

describing the purpose of the loan. To accept the state-

ment in good faith, the officer must be alert to‘the. .

circumstances surrounding the loan and the ‘borrower ea

and ‘must havé no information.-which.would..put a-'

‘prudent man upon inquiry and if investigated with

- reasonable diligence would lead. to, the discovery of |

_ the falsity of the statement.

“(b) (£) No loan, however it may be secured: need

be ‘treated ‘asa loan for the purpose of ‘carrying’ a __

~ stock régistered on a national securities exchange un-

less the loan-is-as described ‘in subparagraph (2) of

this paragraph or the purpose of the loan i is to enable

the con to reduce or retire indebtedness which

customers.”

/ 4

ally incurred |to. purchase such a stock, or, .

if he be/a: broker or a dealer, to carry, such stocks ’for _

‘ . ‘ 5 41 a .

oo "APPENDIX D

Judgment of the Circuit Court of Appeals for the

_—— Cireuit s

4 . ‘UNITED. STATES COURT OF —

sis THE Seconp Cicurr fn Bi

At a Stated Term of the United States Court of ‘A ppesils,

in and.for the Second Circuit, held at the ‘United States

Courthouse in the City of New York, on the twentieth day |

{- of May one Shousand nine —, and sixty-nine.

"Present : ,

om ll Eo, Mpwann Lupazp, os

: Chief Judge,

cies oi : Hon. Rosenr P: ANDERSON, ae

BAG ecto : ; Cirowtt Judge, =

Hon. ine B. Wearr,

gE ca a, _ Diséract Fudge.

_ Plawntiff-Appellant,

Ms v. , :

; THE CHASE Mannatran Bank,

pe et ee, Defendant-A ppellan. |

ia from the United States Distriet Couit for the

‘Southern District of New: York. ea .

This cause came ~ be” heard on the transcript of

record from the United-States District Court'for the South-

- ern District of. New, York, and was argued by counsel.

. 4

é ?

~ Beil 8 oe % a ee ae SR Se eee vie bie Soe Ae Ete BPR PAOLCLS nee Lite, Hees akg

7% °

° -

ete 42a

; Be Judgment of the Circuit Court. of Appeals for the:

| Second Circuit A :

On ConstDeratIon ‘Wueneor, it. is Now ieisby aniieeéa; eh

adjudged, and decreed ‘that ‘the judgment of said siusaaaiee

Te be. and it hereby 1 is affirmed: ie

ee ee A Din: "Fusaro Sian

; Palisa aye) a _ Clerk.

3 : : ; > Ps :

? te

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.