Petition for Writ of Certiorari — Avern Trust v. Clarke

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SUPREME COURT, U. Ss. |

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{ _ JAN 19 1979

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In THE

Supreme Court of the United States

Ocroser Term, 1969.

No. : 1091 : |

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AVERN TRUST, VIRGINIA P. DOOLEY, JAMES A. DOOLEY

and JAMES A. DOOLEY FOUNDATION, ;

a charitable corporation,

Petitioners,

vs,

JOHN W. CLARKE and JOHN W. CLARKE CO.,

a corporation,

Respondents.

og - .

Petition For A Writ Of Certiorari To The

United States Court Of Appeals

.For The Seventh Circuit

&

Rosert A, SpreEcHER

111 W. Monroe Street

@&- Chicago, Tlinois 60603

Attorney for Petitioners

I ERE ire Wt ante gap ar

Salou ieee

MIDWEST LAW PRINTING GO., CHICAGO 60601, FINANCIAL 6-3988_

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PAGE

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Jurisdictional Statement 22222... cece cee ececeeeeeeeceeeee 2

Questions Presented — onto. icc ccseneosccectcecceegenceseeseeeeees 2

Concise Statement of the Case 0.0... cceccceeeceeece. 3

Reasons for Granting the Writ : Weiapsue tebeiaih 2 Seen : oe 12

1. This decision is in direct conflict with another

decision of the same Court of Appeals on the |

same matter of Federal law ..................... 12

2. This statutory action was tried as if it were a

common law fraud case; In exacting proof of

_ *“ntentional and deliberate” wrongdoing, and

admitting evidence of other transactions on

- which the investor profited, this Opinion con-

flicts with decisions of this Court and those of

the Second and District of Columbia Cireuits ... 15

3. The decision interprets Rule 5% of the Federal

* Rules of Civil Procedure so that it is impossible

to have a court of review pass upon objections

to instructions—a deleterious effect upon the

failure of future administration of this rule ab. ee

. Prayer for Writ of Certiorari ....05.0002....-...--cc.00.-c- 24

List Or AUTHORITIES

Cases:

Buttrey v. Merrill, ‘orn Pierce, Fenner & Smith,

Inc., 410 F. 2d 135 (7th Cir., 1969) ................ 12, 14, 15

Globus, et'al. v. Law Research Service, Inc., et al.,

_ Docket Nos. a il 68, U.S.C.A. 2d Cir. 1969 ... ©

at ASIN. cathy spate ces sheesh in Cine orsbalp acm vaivcemeewpevenspeabatinee 17, 16, 19

Hughes v. S.E.C., 174 F. 2d 969, 974 —.002... 18, 19

S.E.C. v. Capital Gains Research Bureau, Inc., 375

Ee Re CRED i haces Se csets as act iack 16

| Statutes: x |

me A SM 2

Securities Act of 1933 : ig

" Seetion 12(2)..(15,.U.S.C. §771(2)) ............- 13, 16, 18

Section 17(a) (15 U.S.C. §77q(a)) ........ 36, 17%; 2

Securities Act of 1934 ;

Section 10b (15 U.S.C. $78} (b) ) -.-.--.2-2-------ce-ee-e 13, 17

Section 15A (15 U.S.C. §780-3) ...0....2.2. eee 13, 14

Section 15(¢)(1) (15 U.S.C. §780(e)(1)) ......-........- 13

Rules: >

Rule 10b-5 (17 C.F.R: 240.10b- Seeepeenee acarnce 13, 15, 20

Rule 15e1-2 (17 C.F.R, 240.15e1-2) .........................- 14, 20

Rule 51, F.R.C.P. (28 U.S.C. Rule 51)... 20, 24

Rule 405 of the New York Stock Exchange eae 15

N. A.S.D. Rules of Fair Practice, Art. ITT, §§ 1,2.

In Tue

Supreme Court of the United States

Octoser TERM, 1969

No.

AVERN TRUST, VIRGINIA P. DOOLEY, JAMES A. DOOLEY

and JAMES A. DOOLEY FOUNDATION,

sy eo corporation,

Petitioners,

vs,

= JOHN W. CLARKE and JOHN W. CLARKE Co.,

a corporation,

Respondents.

Petition For A.Writ Of Certiorari To The

United States Court Of Appeals

For The Seventh Circuit

¢

\

Petitioners pray that a writ of certiorari issue to the

United States Court of Appeals for the Seventh Circuit

to review the judgment of that Court entered on July

14, 1969, which affirmed a judgment of the District Court

for the Northern District of Illinois entered upon the

verdict of a jury finding the issues for the respondents.

£ ~

OPINION BELOW. *

No opinion was rendered by the United States District

Court. The opinion of the Court of Appeals for the

ain

Seventh Circuit affirming the District Court’s judgment

is reported as an Lege to 415 F. 2d Adyance Sheet

No. 4. ; om

eM oe :

=e <i

The order of ‘thd Court of ;Appeals for the Seventh

Cireuit sought to We,reviewed was entered on July 14,

1969. Petitioners filed a timely petition for rehearing,

which was denied on October 21, 1969.

The jurisdiction of this Court is invoked under 28 U.S.C.

§ 1254(1).

QUESTIONS PRESENTED.

——-

1. Can the same Cireuit Court of Appeals in one

case hold that rules for the protection of investors state

‘separate and independent cause of action from counts

predicated on the Securities Acts and the rules promul-

egated thereunder, and in this ease hold that the dismissal

of a count alleging the violation of ‘similar rules, while |

improper, is not erroneous?

2. Are investors’ actions under the Securities Acts

and the rules thereunder to be tried as common law fraud

actions, so that proof of deliberate intent is required,

profits on other transactions admitted, together with

evidence of what the stock would have been worth had it

not been sold? ‘

ane

3. In investors’ actions against an underwriter under

the Securities Acts and the rules thereunder, can a Court

frustrate the Congressional policy of full disclosure and

fail to recognize the fiduciary relationship as a matter

of law? This decision is in direct conflict with a recent

case of the Second Circuit. :

4. Can Rule 51 of the Federal Rules of Civil Procedure

be employed by a Court of Appeals to avoid passing. on

objections concerning an admittedly erroneous instruc-

tion,-when the same objections were timely urged in the

District Court in writing and regarded as such by the

District Judge? .

STATEMENT OF THE CASE.

5

—

The Court of Appeals in its opinion provided no state-

ment of facts, but merely cited the allegations of plain-

tiffs’ complaint. ae

The opinion of the Coutt of Appeals does not set forth

the facts. Hence a statement will be necessary. In the

interests of simplicity, we shall first set forth the facts

about which there was no contradiction.

The respondent John W. Clarke & Company was ona

tered with the National Association of: Security Deal

and with the Securities and Exchange Comfiission. fe

270) Neither Clarke nor his company had ever been

members of any stock exchange. (A. 422) In the City of

Chicago, ‘where the respondents operated, there are only

six brokerage houses without seats on — Stock ‘ Ex-

change. (A. 842, 843)--

Members of a stock exchange receive a prescribed com-

mission of about 34 of 1% on stock transactions. (A.

297-299) Stock exchange members are prohibited from

splitting commissions with non:members. (A. 298) The

employees of the Clarke Company were himself and his

wife. (A. 270)

— >

Petitioner, James A. Dooley acted on behalf of himself

and the other petitioners. He is a Chicago lawyer. He

is extremely active as a trial and appellate lawyer. He

has contributed to his profession in lecturing at law

‘schools, bar associations, authoring nunrerous law review

articles, and revising Judge Cooley’ s work on torts. (A.

439-441) en , ee

~

The District Judge stated:

“The Court: As far as his (petitioner Dooley’s)

activities are concerned, this Court is willing to take

judicial notice of the fact that he has been on trial

practically all of the working hours of the time... .

I am willing to take judicial notice, because I have

many times called him myself for ‘trial and found

him engaged regularly and consistently. There is no

‘question about that counsel,’’ (R. 1478, A. 740)

The respondent John W. Clarke knew that Dooley de-

voted virtually all of his time to the practice of law. He

wrote to Dooley from time to time and made such state-

ments as the following:.

‘*Knowing your busy schedule .

‘‘When you get your heav€ burden of court off your

shoulders. . .'.” (P. Ex. 12)

‘*L know’ you, like everyone else, must liave fifty .

times more: to read than you have the time in which

to do it. faa

‘**Tf you can pesaility find the time to read |this. . “ay

(Pl. Ex. 13) ana |

‘*T know vou don’t have time to think of your invest-

ments... .” (Pl. Ex. 14)

*

From 1938 or 1939 td’ 1960, Dopley had purchased se-

curities from Baker, Walsh and Company. (A. 425) John

F. Baker, a firm member, and Dooley had been law school .

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classmates. (A. 423, 425) At the end of 1960, Baker left

the security business to return to the practice of | ‘law.

(A. 423, 426) |

Baker acted as Dooley’s financial adviser from 1946 to

1960. (A. 443) Baker consulted with Dooley oe those

years. (A. 425, 431)

Baker, Walsh and Company riever handled ‘any under-

writings (A. 423, 430) and never owned any inventoried | -

stocks or bonds, (A. 423) The company was licensed as

a stock broker-dealer and was a stock exchange mémbher.

(A. 423)

On July 21, 1958, respondent Clarke telephoned Dooley

and invited him to lunch. (A. 308, 309, 444) Clarke had

read an article in the Wall Street Journal of July 7,

1958, (A. 309, 311) concerning a case wherein Dooley had

received a fee of $150,000. (Pl. Ex. 6) Clarke’s purpose

in hating the luncheon was to sell securities to Dooley.

(A. 311, 444, Pl. Ex. 7)

Dooley purchased $30,000 in bonds from respondents

in 1958 (A. 983, Pl. Ex. 142, 434) and $35,000 in bonds -

in 1959. (A. 984, Pl. Ex. 145) These transactions were

not the subject matter of petitioners’ complaint.

The relationship out of which this action arose com-

menced in 1960, when Baker was returning to the prac-

~—tice_of law. (A. 448) This“is manifest by Resp. Ex. 36, a

suggested program prepared by Clarke for Dooley dated-

September 14, 1960. (A. 966)

.

During this period, Clarke sold petitioners certain se-

curities, and petitioners sustained substantial losses.

A chart tells the facts. more succinctly than words:

igs Oa.

Peti-

Date Respondents’ tioners’

Issue Acq’d Profit* Loss**

American Nat’! Ins. 11/13/61 ¢$ 512.60 $ 1,287.40

Ariz. Pub. Serv. Co. 11/1/61 801.20 27,993.10

Ariz. Pub. Serv. Co. 9/18/62 1,000.00 21,619.78

Arlan’s Dept. Stores 9/26/61 695.75 1,592.40

} 5/10/62

Business Cap. Corp. 2/8/61 3,700.00 21,261.48

Calandrga..-Photo 8/9/61 235.00 510.15 —

‘Champion Spark Pl. 11/16/60 540.00 1,687.88.

Cowles Mag. & Broad. 10/30/61 . 680.00 4,530.88

Ford Motor ; 6/17/61 1,040.00 - 652.35

"| 2/24/62 1,015.00

Handschy Chemical 11/20/61 900.00 5,142.72

Rich. D. Irwin 8/29/61 234.00 1,406.86

Krvlon Ince. . 3/13/62 510.00 3,946.80

‘Marsh & McLennan 3/20/62 820.00 2,850.80

Metro-Goldwyn-Mayer 3/13/61 898.60 12,638.76 ©

Morse Shoe Co. 4/5/62 568.00 5,566.20

North Am. Accept. 11/29/61 | 400.00 2,384.98

Pauley Petroleum 1/19/62 547.60 18,547.60

Pioneer Nat’l Gas 346.90 22.20

Tip Top Products 12/14/61 3,460.00 39,617.85

Western Nat. Gas 11/2/61 1,315.15 24,789.18

| 2/15/62

3/16/62

Total Respondents’ Profit _. $20,219.80

Total Petitioners’ Loss $198,049.37

* As partially disclosed by respondents’ answers to interrogatories

. (A. 45-6) and summarized in petitioners’ Ex. 77, not received in evi-

dence but offered as part of offer of proof (A. 1275-6) and in peti-

tioners’ Ex. 20,.received in evidence. (A. 420) :

** As partially disclosed by respondents’ answers to interrogatories

(A. 39-44) and summarized in petitioner’s Ex. 82, received in e vi-

dence.

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The percentage of Clarke’s total allotment sold peti-

tioners and his profit per share are very telling:

Percentage of Profit

Issuer ; Respondents’ Shares Per

. Sold to Petitioners Share**

*Arizona Publi¢ Service Co, 100% ¢ 50

Arlan’s Dept. Stores (1) 114% 1.75

-Arlan’s Dept. Stores (2) 333, % 1.75

Business Capital Corp. 0% ° :1.00

_Calandra Photo Co. 3314 % 80

‘Champion Spark Plugs 40% 1.35

Cowles Mag. & Broadcast 20% 1.10

_*Ford Motor Co. (1) 3314 % . 2.66

_ *Ford Motor Co. (2) . 4124% 3.00

*General Motors Corp. 40% 1.00

Handschy..Chemical 25% 1.02

Inland Life Ins. 50% .24

*International Harvester Co. 100% 1.57

' Richard D. Irwin 3314 % 1.28

Kellwood Co. 40% 1.40

Krylon Ine. 40% =.

Marsh & McLennon % 25% 2.10

Morse Shoe Co. 32% » 1

North American Acceptance 6624 % 40

Northern Illinois Gas 20% 1.00

Sel-Rex Corp. 25% 1.98

Tip Top Products 50% 4.90

**21”’ Brands, Ine., . 16% 80

* Listed on New York Stock Exchange hut recommended and sold

to petitioners by Clarke only when underwriting or secondary issue

involved.

** Taken from Pl. Ex. 33, (R. 928-830) and Clarke’s testimony

(A. 374 et seq.).

a

On Clarke’s advice, petitioners sold Business Capital

Corporation an<l purchased California Growth. (So also on

his advice they sold Calandra Photo, Richard D. Irwin, .

Handsehy Chemical, Tip-Top Products, Western Natural

Gas, Pauley Petroleum, Cowles Magazine and Broad-

casting, Krylon” n’and Marsh and McLennan. (A. 410, 409,

411, 484, 412, 475, 479, 480, 481)

During this period, Clarke never advised petitioners to

purchase New York Stock Exchange stocks, unless he was

acting as an underw riter or a member of a selling group.

(A. 410) So also was it uncontradicted that when Dooley

would ask Clarke about a security listed on an exchange,

Clarke would tell him it was a poorly managed company.

(A. 449) Clarke himself said: ‘‘I might have told him

that in an effort to persuade him not to purchase the

security.” (A. 351)

Dooley and his wife were guests for dinner in the home

of Clarke and his wife during 1961 and 1962 (A. 315,

451-2); the Dooleys: were entertained at the Saddle and

Cycle’ Club by the Clarkes in 1961 (A. 316-452); the

Clarkes were guests for dinner in the Dooleys’ home (A.

316, 317, 452); Dooley and Clarke went on a retreat

together in December, 1960, at Bellarmine Hall (A. 316,

451); Dooley was invited to lunch by Clarke on ten or,

twelve occasions (A. 314, 452); Clarke and his wife rend-

ered some assistance to Dooley and his wife in connec-

tion with an adoption problem (A. 317-18), and Clarke

obtained San Francisco hotel accommodations for Dooley

in 1962 (Pl. Ex. 18), and throughout his correspondence

referred to Dooley as ‘‘Dear Jim.” (A. 317)

Clarke testified that he considered himself and Dooley

to be ‘‘companionable friends.’’ (A. 317)

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Clarke telephoned many times. (A. 314, 318-9) When

he could not reach Dooley, he left messages. (A. 318)

Dooley’s office kept a record of the times, Clarke called

but did not talk to Dooley. These showed 83 messages

between July 1958 and February 1963. (Pl. Ex. 7; A. 699;

A. 318-19) There were: 1 message in 1958; 5 messages in

1959; 12 messages in 1960; 27 messages in 1961; 35

messages in 1962, and 3 messages in 1963. (Pl. Ex. 7)

Clarke stated that frequently when he called Dooley,

Dooley was in court (A. 319-20), and that at times he

called“Dooley early in tlie morning before he went to

court. (A. 320)

In conversation with Dooley’s secretary, Clarke would

refer to Dooley as ‘‘our favorite slave” or ‘‘Dirty face”

—which he said were friendly salutations. (A. 319)

Clarke admitted that on three occasions he told Dooley

he was buying for his wife the same securities he was

recommending. He listed three separate securities: Cham-

pion Spark Plug (A. 335), Sel-Rex (A. 366-7) and North-

ern Illinois Gas Co. (A. 389) Dooley contended that

Clarke’s customary approach was that he had 4ought —

the identiegl security for his wife..(A. 470)

@

Marcella Niehoff, a widow, (A. 539) stated that Clarke

often invited her to dinner at his home (A. 539, 572);

that shortly after such dinners Clarke would telephone

her and recommend she purchase certain securities (A.

539, 540), and that several times he said (A. 544): ‘‘This

stock is good, because I just bdught a block of it diss my .

wife Maude.” (A. 542). .

During the acquisition of the above securities, Dooley

did not know in what capacity the respondents were act-

ing. (A. 457, 486) Dooley first learned of it in April 1963,

<PPLA_ERSLNP REAL ARAM Re =: ie St za

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- when another broker informed him that respondents had

been selling to the petitioners as principals at an unusual

profit. (A. 457, 492) Daley would not have purchased the

securities if he had, known of the respondents’ real inter-

_ est in those securities, namely, if he was confining his

recommendations to situations where he was an under-:

writer or member of a selling group, and thus making a

substantial profit. (A. 491, 716)

Dooley: did ngt know that the respondents were not

members of any stock exchange. (A. 714-715)

Respondents failed to provide petitioners with final

prospectuses with or before confirmations, although the

confirmation reads: ‘‘copy of prospectus has been for-

warded to customer.” (A. 271, 272, 273 and see PI. Ex.

1) It is sent with the confirmation, if it is available, (A.

973) and in many cases is sent out after the confirma-

‘tion. (A. 273, 276) The sale becomes effective upon the

confirmation (A. 272) so the customer does not see the

final prospectus until after the sale has been completed.

_ (A. 287) Petitioners were never advised by respondents

that in most of the transactions, respondents were acting

as underwriters,,and in at least one, as a market-maker,

except that the confirmations showed an ‘‘X” mark in a

box purporting to show respondents acted as ‘‘principal”’

or ‘‘agent” in each transaction.

The only controverted facts turn around: (a) Dooley’s

testimony that generdlly Clarke advised him he was buy-

ing for his wife the same security he sought Dooley to

purchase; and (b) what occurred at the September 1960

luncheon, the beginning of the relationship. ss

i

At the September, 1960, luncheon according to Dooley,

he told Clarke that Baker was going out of the securities

business, and that Dooley was, therefore, contemplating

engaging the investment services of Stein, Roe and Farn-

ham (A. 448), who are investment counselors rather than

brokers or dealers. (A. 349) Dooley further told Clarke

that he devoted all of his time to his profession and

had no time to look after investments. (A. 450) Clarke

told Dooley that he had been on LaSalle Street since he

was a boy, was well acquainted with all phases of finan-

cial work and| would give Dooley his personalized atten-

tion, (A. 449) /and would be happy to look after Dooley’s

investments. (A. 450) 4

Clarke admitted he took Dooley to lunch on September

16, 1960, but denied’ that Dooley mentioned Baker or

Stein, Roe and Farnham. (A. 348-9) However, Clarke

admitted that as part of his business, he tells people -

what they ought to or ought not to buy, tells them the

good points and bad points of securities and recommends

securities when ‘‘I have in mind their particular needs,

or I at least attempt to evaluate their needs in connec-

tion with the security.’? (A. 312)

The petitioners suffered the following losses on its —

transactions with the respondents (Pl. Ex. 82).:

_Virginia P. Dooley $69,061.63

James A. Dooley 92,601.90

Avern Trust 29,280.50

James A. Dooley Foundation 7,105.34

Total losses $198,049.37

—12—

a A ae Ba Ses Ne

REASONS FOR GRANTING THE WRIT.

_ 1, ‘This decision is in direct conflict with another deci- .

sion of the same Court of Appeals on the same matter of

Federal law.

The opinion in this case is directly, contrary to Buttrey

vy. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 410 F. 2d

135 (7th Cir., 1969), decided by same Court of Appeals.

: Petitioners urged error in the District Court’s dismissal

prior to trial (A. 153) of the second count of the amended

complaint (A. 85-5), based on respondents’ violations of

certain Sections of Article III of the Rules of Fair Prac-

tice of the National Association of Securities Dealers

; \\(N.A.S.D.) promulgated under the Securities Exchange

: Act of 1934. These sections provide, inter alia, as follows:

‘‘Section 1. A member, in the conduct of his busi-

ness, shall observe high standards of commercial

honor and justice and equitable principles of trade.”

‘‘Section 2. In recommending to a customer the

ara purchase, sale or exchange of any security, a mem-

ber shall have reasonable grounds for believing that

the recommendation is suitable for such customer

upon the basis of the facts, if any, disclosed by such

customer as to his other security holdings and as to

his financial situation and needs.”’

This Court of Appeals conceded that under Buttrey v. ©

Merrill, Lynch, Pierce, Fenner & Smith, Inc., the district

court in this case ‘‘improperly dismissed the claim for

violation of section 2” because section 2 is intended ‘‘for

the direct protection of investors.”

&

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4

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The Buttrey case involved the ‘‘Know Your Customer

Rule” or ‘“‘The Rule of Due Diligence,’’ of the New York

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Stock Exchange, which was held to authorize an implied :

private right of action because it was intended to protect

the public. -

The Court of Appeals admitted that the N.A.S.D. rules

- are for the protection of the publicas is Rule 405 of-the

New York Stock Exchange ft held that the district court

- improperly dismisse e claim for violation of section 2

of the N.A.S.D: Rules, but concluded ‘‘plaintiff was not™

prejudiced by dismissal because the same theory was in-

corporated under the claim for violation of section 15 of

the Securities and Exchange Act * * *”. (Opin. p. 7a) This

conclusion is without basis. It is no more correct than af-

firming a dismissal of an action under the Federal Safety

Appliance Act because the jury found for the defend-

ant under the Federal Employers’ Liability Act. The

Court of Appeals (a) itself made an election of remedies

causing petitioners to travel the more difficult road; (b)

affirmed an admittedly erroneous dismissal of a court.

which could well be the basis of a favorable jury verdict.

¥

The N.A.S.D. rules were adopted pursuant to Section

15A of the Securities Exchange Act of 1934, not pur-

suant to Section 15 (an entirely separate and different

section of the act).

Plaintiffs’ Count I, which was the only count tried by

the jury, was based on Sections 12(2) and 17(a) of the |

Securities Act of 1933 and on Section 10(b) (and Rule

10 b-5 promulgated thereunder) of the Securities Ex-

change Act of 1934 (A. 81-2).

Section. 15(¢c)(1) provides:

‘*No broker or dealer shall make use of the mails

or of any means or instrumentality of interstate com-

merce to effect any transaction in, or to induce the

ee

_ purchase or sale of, any security (other than com-

mercial paper, bankers’acceptance, or commercial

bills) otherwise than’ on a national securities ex-

change, by means of any manipulative, deceptive or

other fraudulent device or contrivanée. * * *”

Rule-te 1-2, promulgated under Section 15(¢)(1) reads

__-as follows: : 3

ae

‘‘(a) The term manipulative, deceptive or other.

fraudulent device or contrivance, as used in section

15(c)(1) of the Act, is hereby defined to include any

act, practice, or course of business which operates or _

would operate as a fraud or deceit upon any person.

‘‘(b) The term manipulative, deceptive or other

fraudulent device or contrivance, as used’ in section

' 15(ce)(1) of the Act, ‘is hereby defined 40 oe

untrue statement of a material fact4nd any omission

to state a material fact necessarv-in order to make

the statements made, in the light of the circumstances

under which they are made, not misleading, which

statement or omission is made with knowledge or

reasonable grounds to believe that it is untrue or

misleading. :

‘“¢e) The seope of this rule shall not be limited

by any specific definitions of the term manipulative,

deceptive, or other fraudulent device or contrivance

contained in other rules adopted pursuant to section

15(¢)(1) of the Act.”’

Neither Section 15 (Section 15(c)(1)) nor the rule

promulgated thereunder (Rule 15¢ 1-2), relied upon by

the petitioners in Count I, bears any resemblance to the

sections of the N.A.S.D. rules, which have definite specific

prohibitions.

In Buttrey, this same Court of Appeals held each of

- the three counts stated a separate cause of action. Count

=. = —a

”

Se

_~ I was based on Rule 405 of the New York Stock Ex-

change; Count IT ‘‘was based on the same factual. al-

legations’’ and alleged a violation of Section 17 of the ©

1933 Act and Rule 10 b-5 under the 1934 Act; and Count

ITI alleged violations also of Section 17 and Rule 10 b-5.

If the three counts in By#ttrey stated separate causes

of action, the two counts in this case stated separate |

causes of action the:Court of Appeals erroneously :

held that Count I incorporated: ‘‘the same theory” as

“Petitioners were entitled to a jury determina-

on Count II.

2. This statutory action was tried as if it were a com-

mon law fraud case; in exacting proof of “intentional and

deliberate” wrongdoing, and admitting evidence of other

transactions on which the investor profited, this opinion

conflicts with decisions of this Court and those of the Sec- ©

ond and District of Columbia Circuits.

Today actions between. investor and broker represent

a substantial segment of civil litigdtion. There has been

no decision of this Court articulating’ the guidelines for

the trial of cases under this Act of Congress. Until this -—

Court acts, problems.arising under this federal statute, .

which must have a uniform interpretation, will be inter-

preted in the same patchwork fashion as actions .under

the Federal Employers’ Liability Act were prior to this

Court’s intervention three decades ago. ’

Here the District Court and the Seventh Circuit Court

of Appeals have exacted that plaintiff, in an action un-

der this statute, prove intentional and deliberate: wrong-

doing by defendants, allowed evidence of investors’ profits

on other transactions not in violation of the Act, per-

mitted evidence as to market fluctuations after the sale

: —16—

by the investor, notwithstanding the statute itself fixes

the damages (15 U.S.C. 77L).

Above all, there was a refusal to recognize the fiduciary .

relationship whieh exited between petitioners and _re-

paren At the instance of respondents, ‘over petition-

ers’ specific objections, the jury was instructed thus:

‘‘You are instructed that in order for you to re-

turn a verdict in’ favor of the plaintiffs on such

charge, you must be convinced that the plaintiffs

established by a preponderance of the evidence each

and every one of the following propositions: ... .

**(2) That the defendants in connection with sales

of securities to plaintiffs made false statements of

material facts or omitted to state material facts nec-

essary to be stated in order to make the statements

made in the light of the cirétimstances under which

they were made not misleading and_,that the acts,

practices, and course of condutt engaged in by the

defendants constituted a device, scheme or artifice to

defraud and that the said acts, practices and course

‘of conduct did operate as a fraud or deceit upon

the purchasers, and

**(3) That said alleged falee statements, omissions,

acts, practices and course of conduct were intentional

and deliberate.” (Emphasis added.) »

’ The Court of Appeals regarded intent necessary, say-

ing: ‘‘The specific intentional and deliberate violations

of the anti-fraud of the Act charged were that the de-

fendants sold to the plaintiffs a substantial portion of

each, underwriting Clarke and Company participated in

..’’ (Opinion p. 2a)

This Court pointed out in S.E.C. v. Capital Gains Re-

search Bureau, Inc., 375 U.S. 180 (1963), in construing

the Investment Advisers Act of 1940, and granting the

Commission an injunction:

a

a a

‘It would defeat the manifest purpose of the In-

vestment Advisers Act of 1940 for us to hold, there-

fore, that Congress, in empowering the courts to

enjoin any practice which operates ‘as a fraud or de-

ceit,’ intended to require proof of intent to injure

and actual injury to clients.” (p. 192) pat

But this opinion does not seem to have resolved this

issue in investors’ actions under the Securities Acts. Thus

in the recent case of Globus, et al. v. Law Research

Service, Inc., et al., Docket Nos. 32766-68, decided Sep-

tember 8, 1969, by the Court of Appeals for the Second

Cireuit, that Court noted that in actions under the Se-

eurities Act, the question of intent to defraud ‘‘has been

the subject of much debate. See, e.g., SEC v. VanHorn,

371 F. 2d 181, 185 (7th Cir. 1966); Ellis v. Carter, 291

F. 2d 270 (9th Cir. 1961); Royal Air Properties, Inc. v.

Smith, supra; Fishmay vi, Raytheon Mfg. Co.,. supra;

Weber v. C.M.P. Corp., 242 F. Supp. 321 (S.D. N.Y. 1965) ;

Bromberg, Securities Law, §§ 2.6(1), 2.7(1); 6 Loss,

supra, at 3552-53, 3883-88." It continued thus: ‘‘But the

trend is clearly away frem enforcing a scienter require-

ment equal to the ‘intent to defraud’ required for common

law fraud. Before there may be a violation of the securi-

ties acts there need not be present all of the same ele-

ments essential to a common law fraud, see SEC vy. Great

American Industries, 407. F..2d 453, 463, cert. denied, .

ee U.S. ..... (my coneurring opinion).”

Petitioners tendered their Instruetion No. 25:

‘*In order for the plaintiffs to recover for a viola-

tion of the securities laws it is-not necessary that

they prove that the defendants had a fraudulent

intent.” (A. 1426)

Further demonstration of the common law concept of

this statutory action was manifest in allowing respond-

218—

ents. to show profits by petitioners on transactions other

than those in issue. (A, 589, 595, 617, 622, 649, 650, 659-

60, 671) In such an action, the only issue is whether

the defendant violated the Act on issues complained of.

If the law were otherwise, it would permit the violating

broker to tell the defrauded investor that on certain

other. transactions the imvestor had made a profit.

The Court of Appeals opinion of the Seventh Circuit

is directly counter to that of the Second Circuit in the

Globus ease, (Globus, et al. v; Law Research Service, Inc.,

_ et al., Docket Nos. 32766-68, aes. 2d Cir.) where

J udge Kaufman, stated:

‘‘But, Judge Mansfield was correct in stating the is-

sue to the extent of the loss the plaintiffs suffered

as a result of their sale, not whether subsequent

transactions in the stock led to a profit. Any other

concept would prevent one from suing an. issuer of

stock even for the most flagrant violations.’’

To the same effect is the District of Columbia Court of

Appeals in Hughes v. S.E.C., 174 F. 2d 969, 974.

Another manifestation of improper use of common law

concepts was the admission in evidence, over petitioners’

objection, of respondents’ Exhibits 169 to 175 inclusive.

(A, 1123-1153, 1489) These-were charts” transactions

not in issue, profits realized, profits unrealized, and the

stock market as of March '6, 1964, the date of the filing

of the suit, notwithstanding that petitioners had admit-

tedly sold the securities and sustained the loss. This fact

fixed their damages under the statute. (15 U.S.C. 77 1)

If a broker-dealer, who defrauds an investor, can urge

that the investor would have sustained no loss had he

held the security in question, then the acts and the rules

of the Commission are meaningless.

a

The frustration of the Congressional policy of full dis-

closure was complete when the Court of Appeals con-

sidered this case as one involving ‘‘a dealer and his cus-

tomer.” It is well established that an underwriter or a

market-maker is a fiduciary as a matter of law.

In Globus v. Law Research Service, Inc., ...... Rb. lie

(2nd Cir., 1969), the Court of Appeals said:

‘‘And Congress intended to impose a ‘high stand-

ard of trusteeship’ on underwriters.”

The Court cited Kroll, ‘‘Some Reflections on Indemnifi-

- cation Provisions and S.E.C. Liability Insurance in the

Light of Barchris and Globus,” 24 Business Lawyer 681

(1969) at page 687, where the following appears:

‘“We all know that Congress intended that Sec-

tion 11 would impose on management and under-

writers who sponsor and issue a high standard of

trusteeship and a ‘duty of competence as well as

innocence.’ |H.R. Rep. No. 85, 73rd Cong., Ist Sess.

(1933) 3, 5, 9; 8. Rep. No. 47, 73rd Cong., 1st Sess.

5 (1933)]. The section was intended to ‘promote care-

ful adherence to the statutory requirements.’ _

nr

See also: Hughes v. Securities & Exchange Com., 174

F. 2d 969 (C.A. D.C.), which cannot be reconciled. with

this decision, and Cohen’s analysis of the status of broker-

dealer as a fiduciary, Duke University Law School, ‘‘Con-

ference on Seturities Regulation’? (Commerce Clearing

House, 1965) pp. 60-61.

It must be remembered that of the twenty transactions

in issue, fourteen involved respondents as underwriters,

and a fifteenth as a market-maker.

The Court of Appeals did not address itself to this

question of law, but stated: ‘‘* * * here, the jury, by vir-

SEE GE eo a re EIR, Mette RES OB 2 ee BER NIE aS ues eS APRS

—_), |

tue of its general verdict, necessarily found that such a

relationship did not exist.’’ (Op. p. 3a)

Of course, there is no proposition of law that a gen-

eral verdict has any such significance, partionlarly when

error has intervened.

3. The: decision interprets Rule 51 of the Federal Rules

of Civil Procedure so that it is impossible to have a court

of review pass upon objections to instructions—a deleteri-.

ous effect upon the future administration of this rule.

We have already set forth respondents’ given Instruc-

tion 18, ante, p. 16, whereby, in order to recover, peti-

tioners were required to prove: (a) all the elements of

wrongdoing provided for by the Act and rules, although

-the Act and the rules are in the disjunctive ‘‘or’’ and

(b) deliberate and intentional wrong. :

The error described by the Court of ee was as

follows:

‘*. . . the elements of wrongdoing are connected by

the word § and’ in the instructions given, whereas, the |

Act and Rules join them by the disjunctive word

‘or’.” (Op. p. 6a)

In the applicable statute and rules (Section 17(a) of

the 1933 Act and Rule 10b-5 and Rule 15e 1-2), the first

two ‘‘ands”’ in paragraph 2 of the instruction are ‘‘ors”

and paragraph 3 of the instruction is not in the statute.

The Court of Appeals stated that ‘‘With reference to

Instruction No. 18, plaintiffs’ counsel. merely stated that

it was repetitious’’ and that this was an inadeqtate ob-

jection under Rule 51. |

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and these objections to this instruction covered the exact

re é \

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The record shows. that petitioners tifcia in f=

grounds urged in the Cotirt of Appeals.

The conference on instructions commenced on Friday, |

January 26, 1968 (A. 1286) and petitioners’ objections to

respondents’ instruction No. 18 covered four pages of the

record (A. 1303-1306), including a continuing objection

by petitioners as to the magnitude of the burden of proof

which No. 18 saddled upon petitioners.@

The conference on instructions was adjourned to Mon-

day, January 29 (A. 1325). When the conference on in-

structions was resumed on Monday, the following oc-

eurred (A. 1326-7):

‘*Mr. Dooley: Your Honor, we prepared some writ-

ten instructions—written objections—to the defend-

ants’ tendered instructions. :

‘‘The Court: If we have written objections that

will save us time. Leave is granted to plaintiffs to

file its objections to the tendered instructions in

, written form, and it will not be necessary to hear

anything any further on that.

‘‘Mr. Flynn: I don’t even have a copy of it,: your

Honor.

‘‘The Court: That is what I am saying, J will re-

tire and study them. You will take time to look at

them and then I will hear you briefly on that and

very briefly and rebuttal, because these are very

extensive. So we will handle it in that manner.”

(Emphasis added.)

It is obvious that the written objections were part of

the conference and were regarded as such by the District

Court and counsel.

The written objections eovered 15 pages and included

eight specific objections to respondents’ instruction No.

4

ba J

—29__

18 (A. 163-165), including the following se cane (A.

164):

“<Defendants’ Tendered Instruction No. 18

‘‘Plaintiffs object to this Instruction for the fol-

lowing reasons:

es Fe Re, ae Ke

‘PD. Refers to the Sections by Terminology which

is improper since the jurors will not have the cor-

rect terminology of the Statute. We refer to Sec-

tions (a) (1) (2) and (3):

* * * * *

“EF. Paragraph 2 of the said complaint [should

be ‘instruction’] requires the plaintiffs to prove cer-

tain facts in the conjunctive ‘and that the acts,

practices’ etc., whereas under plaintiffs’ complaint

and in the law in this case there can be a recov-

ery upon proof of any charge within the complaint

—“G, There is no requirement under the Act as

set forth im paragraph (3) of this Instruction to

prove that the omissions, acts and courses of con-

duct ‘were intentional and deliberate.’ To hold that

_ the plaintiffs had to do. this is.to place wpon them

an onus with the law which the law does not.’’ (Km-

phasis added.) (A. 164, 165) .

The objection was made as clearly and specifically as

possible.

The written objections were made during, and in fact

at the very beginning of, the Monday conference (A.

1326-27).

The district court stated in the record that prior to the

charge he would take a recess to retire and study the

written objections (A. er hae following occurred (A.

1346) :

a ee

“The Court: Well now, counsel, you have given me

a 15-page written, which I am going to file, and

your record is protected.”

“The Court: All right, let the record show that.

this Court has given a hearing for the purposes of

conforming to the rules in order that all instructions

may be submitted and that all may be objected to by

the respective parties in order to preserve the rec-

ord for possible appeal.

‘‘Mr. Barnett: (Counsel for Plaintiff) And our

written objections will stand.’’

“The Court: I have notified the Clerk to file your

written objections.” (Emphasis added.)

As if that were not enough, petitioners tendered their

instruction 25, concerning intent. (A. 1426)

There was nothing humanly possible that petitioners

could have done further to make their objections and to

state the grounds for the objections.. The Court of Ap-

peals stated:

**. . . the trial judge gave the plaintiffs an oppor-

tunity to elaborate upon the written objections. With

reference to instruction number 18, plaintiffs’ coun-

sel merely stated that it was ‘repetitious’.”’

The district court did not ‘‘give an opportunity to

elaborate.’’ Petitioners’ counsel simply volunteered as fol-

lows (A. 1359):

‘“Your Honor, may we note that there are 1, 5, 16,

25, 13, 17, 18 and 19 instructions tendered by the

defendant which the Court has indicated he is going

to give dealing with the preponderance of the evi-

dence and the burden of proof. We object on the

-ground of ‘repetition along with the other objections

we have already stated.’’ (Emphasis added.)

Certainly Rule 51 was never intended for the purpose

for which it was thus employed in these circumstances.

If this be true, then there can be no preservation of ob-

jections to instructions.

For a Court of Appeals to say the objections were not

made is hardly consistent with its responsibility. This

alone should justify the granting of this writ under the

supervisory powers of this Court, to insure the rights

of other litigants.

PRAYER FOR WRIT OF CERTIORARI.

Wherefore, petitioners pray this Court’s writ of certi-

orari to review and reverse the judgment of the ‘Court of

Appeals for the Seventh Circuit in this case.

Respectfully submitted,

Rospert A, SPRECHER

111 W. Monroe Street

Chicago, Illinois 60603

» Attorney for Petitioners

— fs

In the

Bnited States Court of Appeals

For the Seventh Circuit

4 |

_Sepretiser Term, 1968 < Aprit Session, 1969

No. 16957 f

AverN Trust, Viratnia P. Doo.ey,

‘James A. Dootey and James A.

Dootey Founpation, a corpora- | Appeal from the

tion, r United States Dis-

Plaintiff s-A ppellants, trict Court for, the

Oe ae g Northern District

Vv. of Illinois, Eastern

Divis; |

JoHN W. CiarkeE and Joun W. ee

CuarKE & Co., a corporation,

Defendants-A ppellees. )

JuLy 14, 1969

Before Kirey, Swycert and Kerner, Circuit Judges.

Swycert, Circuit Judge. The plaintiffs in this action, /.

James A. Dooley, his wife, Virginia, the Avern Trust,

of which the Dooleys are the beneficiaries, and the James

A. Dooley Foundation, a charitable corporation, seek

damages for fraud and breach of a fiduciary relationship—

arising from a series of securities transactions during

1961-63 with the defendants, John W. Clarke & Co., a

broker-dealer in securities, and John W. Clarke, its pres-

ident. -

The amended complaint charged the defendants with

fraud by virtue of their alleged violation of sections

"on

(Opinion of the United States Court of Appeals)

12(2) and 17(a)(1)(2) and (3) of the Securities Act of

1933, 15 U.S.C. §§771(2) and q(a)(1)(2) and (3), and

certain antifraud provisions and rules promulgated there-

under of the Securities Exchange Act of 1934, section

10(b) and Rule 10b-5 and section 15(¢)(1) and Rule 15e

1-2, 15 U.S.C. §78j}(b), 17 CFR 240.10b-5, and 15 U.S.C.

§780(¢)(1), 17 CFR 240.15¢ 1-2. The amended complaint

further charged the defendants with a violation of section

18A(b)(7) of the Exchange Act, 15 U.S.C. §780-3(b) (7),

and sections 1, 2 and 18 of Article III of the Rules of

Fair Practice of the National Association of Securities

Dealers. Compensatory damages in the amount of $152,500

and punitive damages in the amount of $295,000 were

demanded. :

The specific intentional and deliberate violations, of the

antifraud provisions of the Acts charged were that the

defendants sold to the plaintiffs a substantial portion

of each underwriting Clarke & Co. participated in for the

purpose of realizing an underwriting. profit that was

larger than the commission charged ih connection with

the purchase of listed securities and for the purpose of

avoiding any possible liability on the underwriting com-

mitment of Clarke & Co.; that the defendants did not

advise the plaintiffs of the “risks inherent” in the securi-

ties purchased by the: plaintiffs; that the defendants

consistently took a position adverse to the plaintiffs in

that Clarke & Co. secretly dealt as a principal with the

plaintiffs; and that'the defendant, Clarke, made the mis-

representation that he was purchasing large blocks of

securities being offered to the plaintiffs for the acqount |

of his avife and that he held large blocks of such securities.

After extensive discovery, a jury trial was held and,

after denial of the defendants’ motions for a directed

verdict made at the close of the plaintiffs’ case and after

all the evidence was in, the jury returned its verdict

finding the, issues for the Paap eao Plaintiffs’? motions

for judgmént notwithstanding the verdict and for a new

trial were denied. This appeal followed.

Since the evidence in this case is voluminous, we will

discuss it only as it relates to particular errors that have

been raised in this appeal. Most of the errors here relate .

B »

a

(Opinion of the United States Court of Appeals)

to questions of fact that were within the province of the |

jury to determine. Thus, as a court of review, our inquiry

is limited to deciding whether there was substantial

evidence to support the jury’s verdict.

The first contention presented is that the plaintiffs

were entitled to a judgment notwithstanding the verdict.

The standard to be applied in determining whether they

were entitled to a judgment n.o.v. was recently stated

by this court in Funk v. Franklin Life Ins. Co., 392 F.2d

913, 915 (7th Cir. 1968); “The. motion is properly denied

where the evidence, along with all inferences to be reason-

ably drawn therefrom, when viewed in the light most .

favorable to the party opposing such motion, is such that

reasonable men in a fair and impartial exercise of their

judgment may reach different conclusions.”

The plaintiffs suggest that as a matter of law a fiduciary

relationship existed between plaintiffs and defendants.

Support for this position is said to be found in the eases

of Charles Hughes & Co. v. S.E.C., 139 F.2d 434 (2d Cir.

1943), cert denied, 321 U.S. 786 (1944), Hughes v. S.E.C.,

174 F.2d 969 (D.C. Cir. 1949), and Norris & Hirshberg,

Inc. v. S.E.C., 177 F.2d 228 (D.C. Cir. 1949). These au-

thorities are not controlling here since all present Sub-

stantially dissimilar factual situations and in each the

finder of fact eoncluded from the evidence that a relation-

ship of trust and confidence existed between a dealer

and his customer, whereas, here, the jury, by virtue of its

general verdict necessarily found that such a relationship

did not exist. Although there was much evidence that

the defendant, Clarke,-promoted a friendship with. Dooley

for the purpose of selling him securities, there was also

evidence that Dooley acted in a manner inconsistent with

his claimed financial naivete and fiduciary relianee. For.

example, Dooley maintained quite detailed ledger sheets

covering all of his investments during the course of his

dealings with the defendants. These ledger sheets reveal

that Dooley had the time and interest to look after his

investments and that he was aware of the nature of the

securities being sold to him by Clarke, as well as Clarke’s

capacity. The dispute between the parties in April 1961

over the clipping by Clarke’s secretary of certain mu-

—4a—

(Opinion of the United States Court of Appeals)

nicipal bond coupons belonging to Dooley and Dooley’s

careful comparison pricing in September 1962 of some

$1,000,000 of government bonds which he intended to

purchase are further evidence of Dooley’s lack of com-

plete reliance on Clarke’s financial advice and services.

A major contention of the plaintiffs is that they were

defrauded by Clarke in that they did not know and Clarke

did not disclose to them that hep was an underwriter and,

thus, when he was acting as a principal in dealing with

them, Clarke was making a profit as a principal. Further,

the plaintiffs assert that they did not know the difference

between a principal and an agent in securities transactions

until 1963. This was a question of credibility for the jury.

Further, the con!irmation of each sale made by the defen-

dants to the plaintiffs stated whether the confirmed sale

was made with the defendants acting in their capacity |

as principal or agent. The jury had reason to believe

that the plaintiff, Dooley, especially in light of his legal

experience and the volume of his previous securities

transactions, knew the difference between principal and

agent transactions and was fully cognizant of Clarke’s

role as underwriter.

For the first time in their reply brief, the plaintiffs

urge thatthe defendants violated section 5(b) of the

Securities Act of 1933 in that they did not always accom- _

pany or precede confirmations of sale with a final form

of the prospectus. This violation of section 5(b) is said

to constitute liability under section’12. At trial, the plain-

tiffs proceeded on the theory that the defendants failed

to comply with the provisions of Rule 1l5cl-4, 17 CFR

240.15¢1-4, promulgated under the Exchange Act of 1934.

Since that rule requires only that a final prospectus be

received by the customer before completion of the sale,

there was no issue whether a final form prospectus pre-

* eeded confirmation. The proof at trial as well as the

tendered jury instructions related only to a theory of

recovery under the, Exchange Act Rule. Thus, the factual

inquiry was whether with respect to each of the under-

writings in question the plaintiffs received prior to the

time payment was due a final form prospectus which

disclosed that Clarke & Co. was an underwriter and the

=

- (Opinion of the United States Court of Appeals) -

total amount of underwriting profit. The jury instructions »

spoke only in terms of whether a rospectus was received

prior to the time payment was due. Under the circum-

‘stances, the plaintiffs are precluded from arguing a new

theory of recovery for the first time on appeal. Cleury

v. Indiana Beach, Inc., 275 F.2d 543 (7th Cir.), cert. denied,

364 U.S. 825 (1960); Miller v. Avirom, 384 F.2d 319 (D.C.

Cir. 1967). t ;

The plaintiffs claim that the business operations of

Clarke & Co. were conducted in a manner similar to a

Roars aaa “Ht There is no support in the record for this

assertion. The securities sold by Clarke *& Co. were not

of the low-priced speculative variety normally associated

with such operations. Additionally, there is no evidence

of high-pressure selling methods or misrepresentations

concerning the securities involved.

Despite the plaintiffs’ contention, the evidence estab-

lished that the plaintiffs authorized each transaction they

had with the defendants. The plaintiffs rely on Dooley’s

‘testimony that the defendants purchased several issues

on behalf of the plaintiffs without prior authorization.

Clarke denied this testimony and stated that prior to

selling each of the securities in question he discussed

them with Dooley and obtained his approval to buy them.

The jury believed Clarke. Dooley’s testimony cannot be

the basis for a judgment n.o.v.

The plaintiffs’ final argument relating to its judgment

n.o.v. contention is that certain “admissions” of John

Clarke constituted a prima facie case of fraud and viola-

tion of a fiduciary relationship. We have considered these

statements of defendant Clarke, most of which are in-

nocuous or ambiguous, and do not view them in the light

suggested by the plaintiffs.

The second major category of errors alleged by the

plaintiffs pertains to the instructions given by the district

court. The plaintiffs cite the giving or failure to give

thirteen separate instructions as reversible error. We will

only discuss the more substantial of the alleged errors,

since we find no error in the instructions.

The plaintiffs specify as error defendants’ instruction

number 18. which sets forth what matters plaintiffs must

—

(Opinion of the United States Court of Appeals)

prove to show a violation by defendants of section 17(a)

(1)(2) and (3) of the Securities Act and Rules 10b-5 and

15e1-2 promulgated under the Exchange Act. Plaintiffs

complain that this instruction is erroneous in that the

elements of wrongdoing are connected by the word “and”

in the instruction—given, whereas, the Act and Rules

join them by the disjunctive word “or.” It.is our view

that the plaintiffs waived their right to raise this error

since at the conference on instructions and following the

court’s charge, they failed to make the objection that is

now being relied upon. The plaintiffs’ further contention

that thgir written objections to the instructions contained

the efor now raised must fall. After leave was granted

to file written objections just minutes before the jury

was charged, the trial judge gave the plaintiffs an oppor-

tunity to elaborate upon the written objections. With

1eference to instruction number 18, plaintiffs’ counsel

merely stated that it was “repetitious.” This was inade-

quate notice of the objection. Rule 51 of the Federal Rules

of Civil Procedure precludes the assignment of error

when no. specific objection to an instruction is made.

Likewise, the Supreme Court has -expressly required that

objections be specific. Palmer v. Hoffman,-318 U.S. 109,

119 (1943). 7

Three of the instructions complained of, numbers 2,

25 and 28, were the plaintiffs’ own instructions. We do

not find that any jury confusion could have resulted

from. the asserted inconsistency between the plaintiffs’

tendered instructions and the defendants’ instructions

numbered 18, 20 and 30. Defendants’ instructions numbers °

8 and 7 were taken verbatim from Mathes: and Devitt,

Federal Jury Practice and Instructions (1965). These.

instructions were not erroneous.

Plaintiffs claim a variety of evidentiary errors were

committed by the trial judge. These errors are said to

arise from the allowance into evidence of certain testi-

mony adduced by the defendants and the exclusion from

evidence of certain matters that the plaintiffs sought to

introduce. It would serve no useful purpose to canvass

these claims of prejudicial error. We have considered

the claims and find them to be without merit.

wa

(Opinion of the United States Court of Appeals)

Error is asserted to have resulted from the district

court’s striking the plaintiffs’ claim for punitive damages.

It is difficult to see how. the plaintiffs can complain about

this. Not only was their proof insufficient to persuade

the jury to award compensatory damages, but also the

evidence in the case was completely devoid of any hint

of the wantonness, malice or impropriety that must under-

line a claim for punitive damages. Further, it has been

held that punitive damages cannot be recovered in a

private aetion brought under the Exchange Act and the

Rules thereunder. Estate Counseling Service, Inc. v.

Merrill Lynch, Pierce, Fenner & Smith, Inc., 303 F.2d

527 (10th Cir: 1952). In addition, section 12(2) of the

Securities Act expressly provides that the measure of

damages is recovery of “the consideration paid for such

security with interest thereon.”

Plaintiff alleges as error’the dismissal by the district

judge of the claim based on violations of section 1, 2

and 18 of Article III of the Rules of Fair Practice of the

National Association of Securities Dealers. In Buttrey

v. Merrill Lynch, Pierce, Fenner & Smith, Inc., No. 17136

(7th Cir., filed April 17, 1969), this court held that there

was a private right of action for violation of Rule 405

of the New York Stock Exchange in order to protect

the public. The Rules of the N.A.S.D. were enacted under

section 15A of the Securities and Exchange Act. 5 U.S.C.

§780-3: Section 2 of Article III of the Rules of Fair

Practice is intended “for the direct protection of in-

vestors.” Lowenfels, Implied Liabilities Based Upon Stock

Exchange Rules, 66 Colum. L. Rev. 12, 29 (1966). There-

fore,- the district judge improperly dismissed the claim

for violation of section 2. However, plaintiff was not

prejudiced by dismissal because the same theory. was

incorporated under the claim for violation of section 15

- of the Securities and Exchange Act. 15 U.S.C. $780.

We have considered the other errors raised by the

plaintiffs and find them to be without substance. This

-lawsuit grew out of a complicated factual background.

The issues of fraud and breach of a fiduciary relationship

in-the last analysis presented questions of credibility

and fact. The jury was in the best position to make a

determination of these facts. We are unwilling to overturn

-

5s BIB WO Si <TR EI a OL —

Se rae

(Opinion of the United States Court of Appeals)

_ the result of a trial that lasted almost three weeks and

where substantial evidence supports the jury’s verdict.

The judgment of the district court is affirmed.

A true Copy:

Teste:

,

Clerk of the United States Court of

Appeals for the Seventh Circuit.

ak ae mere,

* F

°

.

P

"

ol)

LIBRARY 6 ea eee

UPREME COURT, U.S. | FEB 17 1970

- Jv Fans, een

IN THE

_—S Court of the Gnited States

Oorommn Tena, 1969.

Pate

a

No. 1091

AVERN TRUST, VIRGINIA P. DOOLEY, JAMES A.

DOOLEY axp JAMES A. DOOLEY FOUNDATION, |

A CORPORATION, .

Petitioners,

vs.

JOHN W. CLARKE np JOHN W. CLARKE & CO.,

A CORPORATION,

: Respondents.

1 ——————

BRIEF nN OPPOSITION TO PETITION FOR

WRIT OF CERTIORARI.

*

-Joun H. Bisuopr,

. 141 West Jackson Boulevard,

Chicago, Illinois 60604, _

Attorney for Respondents. ¢

Of Counsel:

Bisnor, Ericson & FiYNyN,

141 West Jackson Boulevard,

Chicago, Illinois 60604.

THE GUNTHORP-GARREN PRINTING COMPANY, OMICARO

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INDEX.

PAGF

mensoment. Of the Case. osnk ss os os Ko eo ees oi ea ary

I. Nature of the Action and Proceedings Below.. 3

II. Facts Relevant to the Issues Raised by. the

hes i, AR ee PLES Pees We RIG Re 4

The Writ Should Not Be Granted ........:......: 2)

I. The Decision Below Is Absolutely Consistent

With Buttrey v. Merrill Lynch, and Therefore

Is No Conflict of Decisions Within the Seventh

i a RS Ea ee LC pn er see een TONG wena StL) he ap 25

II. The Opinion Below Is Not In Conflict With

Any Decision of this Court or of the Courts of

Appeals of the Second and District of Colum-

bia Circuits With Regard to the Necessary Fle-

ments to be Established in a Private Action

Under the Securities Act or Exchange Act .... 29

IIT. The Court of Appeals Has. Applied Rule 51 of

the Federal Rules of Civil Procedure in Ac-

cordance With the Mandate of This Court Laid

Down in Palmer v. Hoffman .........:...... 34

COMME Os are ee ee en ote ea rs dee ens 36

AUTHORITIES.

Cases.

Buttrey v. Merrill Lynch, Pierce, Fenner & Smith,

Inc., 410 F. 2d 135 (7th Cir., 1969) .:........... . .20, 26

Colonial Realty Corporation v. Bache & Co., 358 F. 2d

RIG (AG Rite BOY as Ses bad SAG oe eee ee ed 26

Globus v. Law Research Service, Inc., Nos. 32766-68 |

mag ie. Une (2nd Cir., 1969); Fed. See. L. Rep.

Rt Se aay ere pare Pee re eee pee pats chy Ay Ua 31 -.