Petition for A Writ of Certiorari — Bekken v. Merrill Lynch, Pierce, Fenner & Smith, Inc.

iB FILED

Ree AUG 11 1975

MICHAEL ROBAK.

IN THE

Supreme Court of the United States

OCTOBER TERM, 1975

| No. 75-218

DEAN D. BEKKEN.

Petitioner.

versus

MERRILL LYNCH, PIERCE.

FENNER & SMITH. INC..

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

ROSCOE ROBERTS. JR.

Counsel for Petitioner

Post Office Box 287

Huntsville. Alabama 35804

Telephone: 205/533-3500

SCOFIELDS’ QUALITY PRINTERS P O BOX 53096 N O LA 70153 504 822 1611

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SEE > can gna ucdhomkeutMesenscucecoasictea

EE 1 ick dations. 6s keWiewaw ea Wands abeseusnan

SE IIE WS Waki Cendaneeceieded eben uescas

Statutes and Regulations Involved ...............

NE Oe SUE ccc ce hen siereb as bakasireesas

Reasons for Granting the Writ ...................

Discussion of Reason Numbered 1 .............

Discussion of Reason Numbered2 ...........

Discussion of Reason Numbered 3 .............

Discussion of Reason Numbered 4 .............

i EEK, eps, AN Te OES Gis 2 52K. Sool yea be, SES

Appendix A — Judgment of the United States

URIS, Sek c's ch oun bua ccs psmeenes bakes cba

Appendix B — Decision of Court of Appeals......

Appendix C — Jury Insturctions by Trial

Court Coincident with Directed Verdict ......

AUTHOR:TIES CITED

Cases:

Avery v. Merrill Lynch, Pierce, Fenner &

Smith, 328 F. Supp. 677 (D.C., 1971) ............

Brenner v. Mitchum, Jones and Templeton,

Inc., 494 F (2) 881 (9th Cir., 1974) ...............

Bright v. Philadelphia-Baltimore-

Washington Stock Exchange, 327 F. Supp.

gg er rer rere Pere eer Tee

shh SIRES RI 2

ii

AUTHORITIES CITED (Continued)

Page

Colonial Realty Corporation v. Bache & Com-

pany, 385 F(2) 178 (2nd Cir., 1966) .............4. 22

Daly v. Capitol Bank & Trust Company, 506

EP OEE, SOUS vicccc ccs ccesasencucences 25

Freeman v. Marine Midland Bank, 494 F(2)

Se a ges wines Seen ee deaseeacance 25

Goldenburg v. Bache & Company, 270 F(2) 675

ES ro 23

Goldman v. Bank of Commonwealth, 467 F(2)

OE ne rr 25

Gordon v. duPont Glore Forgan, Incor-

porated, 487 F(2) 1260 (5th Cir., 1974); cert.

den. June 10, 1974, 94S. Ct. 3071 .. 16,17,18,20,21,24

Grove v. First National Bank of Herminie, 489

I MEME occ ce ce hebancvancecccens 24

J. I. Case Company v. Borak, 377 U.S. 426, 84

S. Ct. 1555, 12 L. Ed. (2) 423 (1964) .............. 22

Jennings, et. al. v. Boenning & Company, 482

ress BUFO) ciao sa cavesuaceeanancene 24

Landry v. Hemphill, Noyer & Co., 473 F(2) 365

EES ES a 25

McCormick, et. al. v. Esposito, et. al., 500 F(2)

i EE a cae bd sr ete edwnesences 17,20,25

Neflatin v. Merrill Lynch, Pierce, Fenner &

Smith, Inc., 499 F(2) 1166 (8th Cir., 1972) ...... 26

Pearlstein v. Scudder & German, 429 F(2) 1136

a 20,22

Remar v. Clayton Securities Corp., 81

ee ) 26

EE! FED 7

{ROUGH

iii

AUTHORITIES CITED (Continued)

Page

Serzysko v. Chase Manhattan Bank, 290

F. Supp. 74 (S.D.N.Y., 1968) aff'd 409 F(2)

1360 (2nd Cir., 1969) ...... cece cece ee cree eeennns 25

Silver v. New York Stock Exchange, 373 U.S.

341, 360, 10 L. Ed. (2) 389, 402 ....... cee eee 21

Spoon v. Walston & Co., 345 F. Supp. 518, 478

F(2) 246 (6th Cir., 1973) ........ cece cece ee wees 24

Statutes:

Securities Exchange Act of 1934

Section 2, 48 Stat. 881; 15 U.S.C. 78b ............. 3

Section 6, 48 Stat. 885; 15 U.S.C. 78f ............. 3

Section 7, 48 Stat. 886; 15 U.S.C. 78g .. 5,21,22,24,26

Titi BR UK. CO CED 5 ain oan cise s cweas var ewcciecans 2

.y og ER Coke 7 ° VRP PereTEReTTEC TET LOSE (TLE 9,17

Rules:

Rule 431, New York Stock Exchange Guide,

Rules and Regulations, March 1, 1973 ....2,8,12,16,

17,19,20,22,23,26

Other Authorities:

S.E.C. Report of Special Study of Securities

Market, H.R. Document No. 95, 88th Con-

gress, Sth Session (1963) .......... cc cece eee nens 22

ciIrcceom &

IN THE

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1975

DEAN D. BEKKEN,

Petitioner,

versus

MERRILL LYNCH, PIERCE,

FENNER & SMITH, INC.,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE

FIFTH CIRCUIT

Petitioner prays that a writ of certiorari issue to

review the judgment of the United States Court of

Appeals for the Fifth Circuit entered in the above case

on May 15, 1975.

OPINIONS BELOW

The opinion of the District Court for the Northern

District of Alabama nor the opinion of the Court of

Appeals for the Fifth District was reported. Both are

appended together with the District Court's instruc-

tion to the jury on the entering of the directed verdict.

———- . ~~ - |

2

JURISDICTION

The judgment of the Court of Appeals for the Fifth

Circuit was made and entered on May 15, 1975, a copy

of which is appended.

The jurisdiction of this Court is invoked under Title

28, U.S.C. 1254(1).

QUESTIONS PRESENTED

1. Are requirements of New York Stock Exchange

Rule 431 pertaining to margins which must be main-

tained in margin accounts of customers part of a stat-

utory scheme of self-regulation as prescribed by the

Securities Exchange Act of 1934?

2. Isabreach of Rule 431 by a broker member of the

New York Stock Exchange a bar to a recovery froma

~stomer for a debt unpaid as a proximate conse-

quence of non compliance with Rule 431?

3. May abreach of Rule 431 by a broker under given

circumstances give rise to a cause of action in favor of

the customer?

4. Was there evidence which if believed would pre-

sent a jury question on either the complaint by Merrill

or the cross-complaint by Bekken.

STATUTES AND REGULATIONS INVOLVED

Pertinent portions of the Securities Exchange Actof

1934, as follows:

HR OUGH

3

Necessity for regulation:

For the reasons hereinafter enumerated,

transactions in securities as commonly con-

ducted upon securities exchanges and over-

the-counter markets are affected with a

national public interest which makes it nec-

essary to provide for regulation and control of

such transactions and of practices and mat-

ters related thereto, including transactions by

officers, directors and principal security hold-

ers, to require appropriate reports, and to im-

pose requirements necessary to make such

regulation and control reasonably complete

and effective, in order to protect interstate

commerce, the national credit,. . .Section 2, 48

Stat. 881; 15 U.S.C. 78b.

Regulation of national securities exchanges:

(a) Any exchange may be registered with the

Commission as a national securities ex-

change under the terms and conditions here-

inafter provided in this section, by filing a reg-

istration statement in such form as the Com-

mission may prescribe, containing the

agreements, setting forth the information, and

accompanied by the documents, below speci-

fied:

(1) An agreement (which shall not be con-

strued as a waiver of any constitutional right

or any right to contest the validity of any rule

or regulation) to comply, and to enforce so far

as is within its powers compliance by its

VD es cua ea iste:

ere

ithe

CEN tiny nen ea eet

4

members, with the provisions of this chapter,

and any amendment thereto and any rule or

regulation made or to be made thereunder;

(2) Such data as to its organization, rules

or procedure, and membership, and such other

information as the Commission may by rules

and regulations require as being necessary or

appropriate in the public interest or for the

protection of investors;

(3) Copies of its constitution, articles of in-

corporation with all amendments thereto, and

of its existing bylaws or rules or instruments

corresponding thereto, whatever the name,

which are hereinafter collectively referred to

as the “rules of the exchange’: and

(4) An agreement to furnish to the Com-

mission copies of any amendments to the

rules of the exchange forthwith upon their

adoption.

(b) No registration shall be granted or re-

main in force unless the rules of the exchange

include provision for the expulsion, suspen-

sion, or discipling of a member for conduct or

proceeding inconsistent with just and

equitable principles of trade, and declare that

the willful violation of any provisions of this

chapter or any rule or regulation thereunder

shall be considered conduct or proceeding in-

consistent with just and equitable principles

of trade.

5

(c) Nothing in this chapter shall be con-

strued to prevent any exchange from adopting

and enforcing any rule not inconsistent with

this chapter and the rules and regulations

thereunder and the applicable laws of the

State in which it is located.

(d) Ifit appears to the Commissions that the

exchange applying for registration is so

organized as to be able to comply with the

provisions of this chapter and the rules and

regulations thereunder and that the rules of

the exchange are just and adequate to insure

fair dealing and to protect investors, the Com-

mission shall cause such exchange to be reg-

istered as a national securities exchange....

Section 6, 48 Stat. 885, 15 U.S.C. 78f.

Margin requirements:

(a) For the purpose of preventing the exces-

sive use of credit for the purchase or carrying

of securities, the Board of Governors of the

Federal Reserve System shall, prior to Oc-

tober 1, 1934, and from time to time thereafter,

prescribe rules and regulations with respect

to the amountof credit that may be initially ex-

tended and subsequently maintained on any

security (other than an exempted security).

For the initial extension of credit, such rules

and regulations shall be based upon the

following standard: An amount not greater

than whichever is the higher of —

6

(1) 55 per centum of the current market

price of the security, or

(2) 100 per centum of the lowesi market

price of the security during the preceding

thirty-six calendar months, but not more than

75 per centum of the current market price.

Such rules and regulations may make appro-

priate provision with respect to the carrying

of undermargined accounts for limited pe-

riods and under specified conditions; the with-

drawal of funds or securities; the substitution

or additional purchases of securities; the

transfer of accounts from one lender to

another; special or different margin re-

quirements for delayed deliveries, short sales,

arbitrage transactions, and securities to

which paragraph (2) of this subsection does

not apply: the bases and the methods to be used

in calculating loans, and margins and market

prices; and similar administrative ad-

justments and details. For the purposes of

paragraph (2) of this subsection, until July 1,

1936, the lowest price at which a security has

sold on or after July 1, 1933, shall be con-

sidered as the lowest price at which such

security has sold during the preceding thirty-

six calendar months.

(b) Notwithstanding the provisions of sub-

section (a) of this section, the Board of Gover-

nors of the Federal Reserve System, may,

from time to time, with respect to all or speci-

fied securities or transactions, or classes of

ELEED ‘1

‘ROUGH

7

securities, or classes of transactions, by such

rules and regulations (1) prescribe such lower

margin requirements for the initial extension

or maintenance of credit as it deems neces-

sary or appropriate for the accommodation of

commerce and industry, having due regard to

the general credit situation of the country, and

(2) prescribe such higher requirements forthe

initial extension or maintenance of credit as it

may deem necessary or appropriate to pre-

vent the excessive use of credit to finance

transactions in securities.

(c) It shall be unlawful for any member of a

national securities exchange or any broker or

dealer, 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 (other than an ex-

empted security), in contravention of the

rules and regulations which the Board of

Governors of the Federal Reserve System

shall prescribe under subsections (a) and

(b) of this section;

(2) without collateral or on any

collateral other than securities, except in

accordance with such rules and regula-

tions as the Board of Governors of the

Federal Reserve System may prescribe

(A) to permit under specified conditions

and for a limited period any such mem-

ber. broker, or dealer to maintain a credit

initially extended in conformity with the

BLURRED COF*

8

rules and regulations of the Board of

Governors of the Federal Reserve Sys-

tem, and (B) to permit the extension or

maintenance of credit in cases where the

extension or maintenance of credit is not

for the purpose of purchasing or carrying

q securities or of evading or circumventing

: the provisions of paragraph (1) of this sub-

; section....

i Section 7, 48 Stat. 886, as amended: 15 U.S.C. 789.

Also, Rule 431 of the Rules of the New York Stock

Exchange, Inc. pertaining to the Operation of Mem-

ber Organizations, in pertinent part as follows:

Margin Requirements.

Rule 431

Maintenance Margin Rule.

(b) The margin which must be main-

tained in margin accounts of customers

... Shall be as follows:

(1) twenty-five percent of the market

value of all securities “long” in the ac-

count...

(d)

(6) Time Within Which Margin

Must Be Obtained: The amount of

Margin... required by any provision of

this Rule shall be obtained as promptly

as possible and in any event within a

reasonable time.

ELEED

‘HR OUGH

9

New York Stock Exchange Guide, Constitu-

tion and Rules, March 1, 1973.

STATEMENT OF THE CASE

In July of 1971, Dean Bekken opened, with a “loan”

agreement, a margin account with Merrill Lynch.

On May 18, 1973, Merrill exercised the authority con-

tained in the “loan” agreement and sold all stock in

Bekken’s account. There remained an “indebtedness”

outstanding, after applying the proceeds, of $16,284.77.

On November 13, 1974, a suit based on diversity of

citizenship and under the authority of Title 15, U.S.C.

78 aa. was heard beforea jury in the United States Dis-

trict Court for the Northern District of Alabama. At the

close of evidence, the Court gave a directed verdict for

Merrill for the sum claimed, $16,284.77 plus interest

from May 18, 1973.

Not in dispute was the following:

Beginning on March 16, 1973, Bekken received print-

ed form notices by mail of outstanding margin mainte-

nance calls on thirty-one of the next forty-five trade

days; that Yarbro, Merrill's account executive for

Bekken. and Bekken talked daily except for May 16

when Yarbro was out of town ona business cultivation

trip; that the securities in Bekken’s account in April

and May were primarily Kaufman and Broad stocks

and warrants; that trading of Kaufman and Broad on

the N.Y.S.E. was suspended for one day, May 14,

because of adverse publicity; that pertinent circum-

stances pertaining to the market and the Bekken ac-

count, from April 24 through May 18 wereas follows:

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11

Petitioner believes that Merrill would agree that the

following facts are not in dispute:

1. That Bekken had extended previous experience

in the market (Bekken testified that he had never

previously received a maintenance margin call and

his only awareness of an obligation was to do that

which Merrill requested).

2. That Bekken asked Merrill to explain the first

call he received and how it was calculated; that he was

told that there were three ways of meeting

maintenance margin calls: (a) cash payments; (b)

stock liquidation; and (c) stock appreciation.

3. That Bekken was knowledgeable about Kauf-

man and Broad stock.

4. That Bekken did not want to sell the Kaufman

and Broad stock.

5. That Bekken was not asked to sell the Kaufman

and Broad stock during the period in question.

6. That Bekken was not told that there was a time

cer’ .1n in which the margin maintenance calls were to

be met.

7. That the only discussion as to what would

happen if the calls were not met after so long a time

was “then Merrill Lynch has a prerogative to sell in

order to meet the call if it continues to decline”.

BLURRED COF,.

12

8. That Merrill's policy is that the Account Ex-

ecutive takes precedence over the printed notice in ex-

pressing Merrill's position on maintenance calls.

9. That neither Edwards (Office Manager for

Merrill) or Yarbro (Account Executive) knew of other

situations where securities were not sold prior to the

account getting in a deficit position.

10. That Bekken and Merrill knew thateither could

sell Bekken’s securities at any time.

11. That Merrill did not mention thatN.Y.S.E. hada

margin requirement, nor Rule 431, nor that Merrill's

discretion was controlled by a rule of the N.Y.S.E.

12. That Merrill's position on margin maintenance

calls is accurately reflected in the following

testimony:

That the policy was that each customer was

“weighed on a different basis. If he was a good

customer and he had met previous margin

calls by liquidation or depositing money or

showed good faith, then certainly that would

be considered, but there was no firm rule.”

Yarbro was asked if Merrill had the discretion to

permit Bekken to remain undermargined:

A Fora period of time, yes.

Q How much period of time?

A Well. it varies from customerto customer.

EI! FED

‘HR OUGH

oO > oO >

o>

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13

There's no strict rule or was not at that

time.

It was whatever you deemed was

reasonable under the circumstances?

That's correct.

And did you deem, Mr. Yarbro, that it was

reasonable under the circumstances not to

sell his stock on May 15th following the

opening of the market?

Yes, per his request.

Atthat time there was not enough valuein

the securities to even pay the indebtedness

to you, was there?

That's correct.

And at that time there wasa rule of Merrill

Lynch as well as the New York Stock Ex-

change that required upwards of twenty-

five percent, twenty-five percent or up-

wards excess of value over the in-

debtedness?

Yes.

But you say that it was reasonable in your

judgment not to sell on that occasion?

Well. that’s — it varies from customer to

customer, and in Dean's case he wanted to

keep the stock, hoping for a rebound, and

we were not going to try to sell his account

out unless we absolutely had to.

Yarbro testified as follows:

Q

Did Merrill Lynch instruct you as to what

their policy was in terms of requiring

customers to respond to maintenance

calls.

BLURRED COF*

14

A_ No, they leave it to our judgment. The rule

is a reasonable time, and we have to exer-

cise that judgment with each customer.

Q From what source were you advised that

that was a matter for the account ex-

ecutive’s judgment as to what he con-

sidered a reasonable time in dealing with

any given customer?

A Two sources, the operation manager and

the office manager.

Q At what point in time. Mr. Yarbro, would

your judgment be subject to being

superseded or set aside by the manager of

the local office?

When the margin call was a large percen-

tage of the equity in the account.

What does large percentage mean to you?

Say twenty-five or thirty percent. When it

gets in the six to ten thousand dollar

category.

; Q At that point in time, the office manager

has advised that he will make the judg-

ment as to when to sell securities?

A That would be the usual case, yes. sir.

12 Sach Shere iets Rp AC RAS Sa cach!

>O >

On asking Mr. Yarbro why Merrill did not sell

Bekken’s securities in the latter part of March, the

following occurred:

A ...Weare brokers for the customer and we

did not sell it because the customer didn't

want it sold and he had been a good

customer and we don't sell out accounts

unless it’s absolutely necessary.

Q All right, sir, would you say that that

reason which you have just stated was

Bedi

Dio ans

EPLEED ~

15

controlling on those other occasions in

which maintenance calls were made but

not satisfied?

A The reason I just gave you because the

customer didn't want it sold?

Q Yes.

A Yes, sir.

Q Because the customer did not want it sold

and he was a good customer?

A Yes.

Q Now. when you say good customer. Mr.

Yarbro, are you talking about from the

standpoint of the commission made on

sales and purchases?

A Well. that’s part of it, the size of the ac-

count and promptness to pay and —

Q The meaning that the account has to

Merrill Lynch?

A That's correct.

Q And the broker?

A Yes, sir.

Mr. Edwards, Office Manager for Merrill, stated that

the policy of Merrill as to when a margin call must be

met, was as follows:

A There is nota particular deadline that any

client had to meet a maintenance call. It

was to be looked at as to the accounts past

history, of the desirability of the customer

to retain his position, as to the ability of

the customer to continue to meet

maintenance calls through either market

appreciation or liquidation of stock in the

account. Each customer was weighed as to

+R OUGH

BLURRED COFY

}

}

4

}

ee

16

their ability orso they thought would have

the ability to meet maintenance calls, and

we looked at and tried to appraise each in-

dividual account on its own merit.

REASONS FOR GRANTING THE WRIT

1. Certiorari should be granted because this deci-

sion of the Court of Appeals for the Fifth Circuit is in

direct conflict with its earlier holding in Gordon v. du-

Pont Glore Forgan, Incorporated, 487 F (2), 260; Cert.

denied June 10, 1974, 94 S. Ct. 3071.

2. The holding is that Merrill is relieved of the duty

to require compliance with maintenance margin re-

quirements of Rule 431 if compliance would be con-

trary to the customer's wishes. The import of this deci-

sion involves much more than the rights here ad-

judicated. Merrill is invested with the judicially

declared license to so apply (oromit to apply) the Rule

in its daily dealings.

In view of (a) the frequency of credit not initially un-

dermargined (Regulation T) becoming so (Rule 431)

(b) the scope and national import of Merrill's ac-

tivities (c) the likelihood of Merrill's judicially sanc-

tioned policy becoming a controlling example for its

sister brokerage houses (d) the congressional

prescription that the national public interest requires

the regulation of security transactions (e) and the

prescription that the “Board of Governors of the

Federal Reserve System shall prescribe rules and

regulations with respect to the amount of credit that

may be initially extended and subsequently main-

tained”, it is respectfully submitted that a writ of cer-

tiorari should be granted.

EI|\FED)

HR OUGH

17

3. Certiorari should be granted because of the in-

creasing frequency of decisions in the several Cir-

cuits arising out of 15 U.S.C. 78g and the rules and

regulations based thereon, together with the per-

vading importance of protecting against excessive

credit in the carrying of securities as well as their

purchase.

4. Certiorari should be granted because Bekken, no

more and no less important in the eyes of the law than

any citizen in the land, has been wrongfully divested

of his property and wrongfully ordered to pay a judg-

ment over because of a clear, certain and manifest

misapplication of the law.

DISCUSSION OF REASON NUMBERED 1

In granting to Merrill a directed verdict, the trial

judge manifestly erred in his application of the hold-

ings of Gordon v. duPont Glore Forgan, Inc., 487 F.2d

1260, and McCormick v. Esposito, U.S. Fifth Circuit

Court of Appeals, September, 1974, Cause No. 73-1118,

500 F(2) 620.

In McCormick the customer sued the broker for

damages for violation of Rule 431.". . .recordsclearly

show that the margin in McCormick's account was

below twenty-five percent for each day during the

November 18-28 period”. “The issue presented to us on

this appeal is whether, having established a violation

of N.Y.S.E. Rule 431(b) McCormick as a customer of

Goodbody has a private cause of action against Good-

body under the Securities Exchange Act of 1934, 15

U.S.C. 78 aa’. There was no claim by the broker, Good-

MIT imnmeriny Cor.

ee aa NSS ee eee |

a

18

body, against the customer, McCormick. Yet the trial

court, in explaining to Bekken jury why it was direct-

ing a verdict for Merrill, applied the McCormick

court's rational for not giving the customer a judg-

ment against the broker as being controlling in its

giving Merrill, the broker, a judgment against

Bekken, the customer. The Trial Court further com-

pounded this grievious and manifest error by citing

the rational enunciated in Gordon as to why the

customer was not entitled to relief in his suit against

the broker as likewise being controlling in directing a

verdict for the broker, Merrill, against the customer,

Bekken.

In Gordon, the customer, Gordon, sued the broker,

duPont, following liquidation by broker, for damages

caused by omission to timely notify of the under-

margined account, an omission which was inadver-

tent. Upon discovery the broker immediately asked

Gordon to meet the call; negotiations ensued; upon the

customer not tendering within a week the monies

needed, his securities were sold, leaving a deficit of

$1,550.00. The Court found that the account remained

undermargined, with the customer's silent knowledge

from July 14, 1971, to November 22, 1971; that omission

to notify by the broker was inadvertent; that im-

mediate demand, on discovery. was made and the

stock sold following a week's’ unsuccessful

negotiations.

The Court held that:

Gordon's claim for damages was denied

because Gordon knew of breach of duty and did

not complain: that his conduct constituted ac-

quiescence to the breach; that this constituted

in pari delicto defense.

FIFE

THROUGH

19

Broker's claim was denied in that it breached

its duty to compute the margin status correct-

ly and give prompt notice of the under-

margining; that the deficit was at least partial-

ly the result of the broker's breach of duty.

For duPont's breach of duty to notify (it did effect a

sale on discovery) the broker was denied recovery

(even though the customer had the notice which the

broker omitted to give).

Bekken stated throughout that he thought the

maintenance call was Merrill's sole prerogative and

that he only was obligated to do what Merrill re-

quested: that Yarbro (Merrill's Account Executive)

never encouraged him to do more than he did. Yarbro

states that he never mentioned a N.Y.S.E. margin call

to him; that he never asked him to sell! his stock: and

the record was replete with his characterization of

Bekken as being a good customer. For weighing the

propriety of a directed verdict, it is uncontroverted

that Bekken was “innocent” in his belief that comply-

ing with Yarbro’s request was the measure of his

obligation. But except for the weighing of Bekken's

cross-complaint, we submit that whether Bekken was

innocent or not in his reaction to the margin status 1s

immaterial; the question is whether Merrill breached

a duty which proximately contributed to the deficit.

As evidenced by the history of this account, set out

in the Statement of the Case, the required equity was

not maintained. Rule 431 was violated. Notwithstand-

ing, the market actually being closed for trading in the

only stock of value in Bekken’s account, Merrill did

not sell ituntil four days thereafter — each subsequent

reeartrerenrrnrs morse *

ike Tae. Wig ern th. Wiha tah aga

tee (abe Tilo wes

20

day the account had no margin, Bekken had no equity

— only an increasing deficit. Yarbro was schooled on

Rule 431 and the securities laws charge the brokers

and dealers with knowledge of margin requirements,

and the duty to obey them. Pearlstein v. Scudder &

German, 429 F(2) 1136 (2nd Cir., 1970). Merrill's omis-

sion to comply with Rule 431 was willful — however

well intended. Compliance is not contingent upon the

customer's wishes; if so, the Rule would have no

significance — for if the customer wanted it sold, a

problem would never arise; if he didn't, under Merrill's

contention and the Court's holding, Rule 431 would be

a nullity.

And in the McCormick case, the Court found the fac-

tual situation to be similar to the Gordon case. The

broker was unaware that the account was in margin;

the customer knew it and remained silent. The Court

noted that there was no intentional violation by the

broker nor was the customer misled. The Court did not

permit the customer to recover from the broker — the

Court chose not to imply a right of action in the

customer's favor. But the case most certainly is not

authority for the proposition that notwithstanding the

brokers breach of duty. the broker is entitled to

recover the deficit from the customer. “We cannot

allow duPont to recover indebtedness that resulted

from its own breach of duty, and therefore we must re-

ject its counterclaim”. (Gordon v. duPont Glore

Forgan, Inc., supra)

eiFcEnNn

“HR OUGH

21

In the limited significance of this Court's holding,

Bekken has been wrongfully deprived of his property;

he relied for redress on the Court of Appeals previous

pronouncement in Gordon v. duPont Glore Forgan,

Inc., supra. In the much broader significance, the issue

presented is of a practical, present, and far reaching

importance. It is reasonable to conclude that Bekken

is one of hundreds of daily instances in which a

maintenance margin situation is present. Merrill.

much involved in this proceedings, has all the

assurance that our judicial system can give that its

duty toenforce credit requirements is contingent upon

its customer's wishes — unless this Honorable Court

grants certiorari.

DISCUSSION OF REASON NUMBERED 2

Congress mandated the Board of Governors of the

Federal Reserve System to prescribe rules and

regulations with respect to the amount of credit that

may be subsequently maintained in carrying

securities. 15 U.S.C. 78g(a). In implementing this

prescription, the Board of Governors delegated to the

Securities and Exchange Commission and the Stock

Exchanges the regulation of maintenance margins.

Our Courts have consistently held that the Securities

Exchange Act imposes a duty upon an Exchange to en-

force its rules promulgated and filed with the

Securities and Exchange Commission. Bright v.

Philadelphia-Baltimore-Washington Stock Ex-

change, 327 F. Supp. 495 (1971, Pa.): Silver v. New York

Stock Exchange, 373 U.S. 341, 360; 10 L. Ed. (2) 389, 402:

and one of these rules is Rule 431. Rule 431, a margin

requirement, is in lieu of acommission rule; as such it

is an official arm or delegate of governmental power.

22

Colonial Realty Corporation v. Bache & Company, 385

F(2) 178 (1966). It is the duty of Courts to be alert to

provide such remedies as are necessary to make effec-

tive the congressional purpose of an act. J.I. Case

Company v. Borak, 377 U.S. 426, 84 S. Ct. 1555, 12

L. Ed. (2) 423 (1964): S.E.C. Report of Special Study of

Securities Market H. R. Docui:ent No. 95, 88th Con-

gress, First Session (1963). The onus of meeting cer-

tain minimum margin percentages are clearly placed

on the brokers and dealers, and not on their customers.

Avery v. Merrill Lynch, Pierce, Fenner & Smith, 328

F. Supp. 677. The Avery case involved Regulation T

and initial margins but the holding and reasoning is

equally applicable to maintenance margin re-

quirements, for the language of 15 U.S.C. 78g makes no

distinction between its concern for the two.

The federal securities laws charge brokers and

dealers with knowledge of margin requirements and

the duty to obey them. Pearlstein v. Scudder & Ger-

man, supra.

The rules of the New York Stock Exchange which

Merrill agrees to abide by as a member: the Securities

Exchange Act requiring that such rules be filed and

approved (and remain unchanged unless a proposed

change has the Commission's prior approval); the

mandate by Congress that the “national public in-

terest’ requires rules to be promulgated respecting

the amount of credit that can be initially extended and

subsequently maintained — all place a duty, indepen-

dent of the customer's involvement or wishes, on

Merrill to comply with Rule 431. The effect of the trial

court s holding as affirmed by the Court of Appeals is

that Merrill can sit back, the customer being willing,

THR OUGH

23

and with impunity await the customer's decision. If

and when Merrill chooses to convert the securities to

money, it is entitled to a judgment against the

customer for such deficit as there upon results.

This action may be looked upon as ex contracto bas-

ed on the contract between the stockholder and the

customer as affected by federal statutes and

regulations. Goldenburg v. Bache & Company, 270

F(2) 675 (Sth Cir., 1959). Both the common law duty

arising out of the fiduciary relationship. the contrac-

tual duty imposed by Merrill's membership in the

N.Y.S.E., and that duty imposed by statute setting out

the scheme of self-regulation as part of a partnership

between the private and public sector contemplated by

the Securities Exchange Act. all place the un-

avoidable duty of complying with Rule 431 on the

broker.

Petitioner submits that the import of this decision is

of great, immediate and recurring importance. This

credit policy as interpreted by the trial court and Court

of Appeals to Merrill and applied by Merrill with the

approval of these Courts has the potential for tremen-

dous cumulative effect on the incidence of “excessive”

credit. and perforce, on the nation’s public interest.

Merrill has, through the inadvertence of the trial court

and the Court of Appeals, been commissioned to use

Merrill's words, not to sell out “accounts unless it is

absolutely necessary” the yardstick of what is

“necessary being governed not by the presence or

absence of the required margin, but by how good a

customer the account in question has been.

mor,riipmpcrs mroc

eee ee

bs

4s

24

DISCUSSION OF REASON NUMBERED 3

An examinaiion of Volumes 475 F(2) to date reveals

that the margin aspect of Section 7 of the Securities

Exchange Act (15 U.S.C. 78g) has been the subject of

the following cases:

Spoon v. Walston & Co., 345 F. Supp. 518, 478 F(2) 246

(6th Cir., 1973).

This was an action under Regulation T governing on

the authority of 15 U.S.C. 78g initial margins. The Dis-

trict Court stated:

“The Court will not entertain a cocophony of

blame on the part of the brokers and customers

— each blaming the other for not meeting the

requirements — the ultimate responsibility

must be placed somewhere and Congress has

indicated that it is with the brokers or dealers.

This Court does not intend to change this ex-

plicitly expressed legislative judgment by im-

posing common law causation standards

upon the regulations.”

Jennings, et. al. v. Boenning & Company, 482 F(2)

1128 (3rd Cir., 1973).

Gordon v. duPont, supra, re maintenance margin.

Grove v. First National Bank of Herminie, 489 F(2)

513, (3rd Cir., 1973) pertains to a suit by customer

against Bank under Regulation U promulgated under

the authority of Section 7 of the Securities Exchange

Act (15 U.S.C. 78g). Bank lent more than permissible.

> CULPRNE BESS eS a st

25

Court, sitting without a jury, held that a lending bank

may not recover a deficiency where it violated margin

requirements, and sucha recovery may be precluded

even if the borrower knowingly and intentionally de-

ceived the Bank as to the actual purpose of the loan.

The Court gave a judgment for the customer. Serzysko

v. Chase Manhattan Bank, 290 F. Supp. 74 (S.D.N.Y..

1968) aff'd. 409 F(2) 1360 (2nd Cir.. 1969); Goldman v.

Bank of Commonwealth, 467 F(2) 439 (6th Cir.. 1972).

Brenner v. Mitchum, Jones and Templeton, Inc.. 494

F(2) 881 (9th Cir., 1974) involved a suit under Regula-

tion T and the principle of collateral estoppel.

Freeman v. Marine Midland Bank, 494 F(2) 1334 (2nd

Cir., 1974) pertained to a suit under Regulation U.

McCormick v. Esposito, supra.

Daly v. Capito] Bank & Trust Company, 506 F(2) 1375

(1st Cir. 1974) pertained to a suit under Regulation U.

“The margin provisions of the Exchange Act

were enacted primarily to stabilize the

securities market by regulating the flow of

credit and secondarily to protect margin stock

purchasers.”

Landry v. Hemphill, Noyer & Co., 473 F(2) 365 (ist

Cir., 1973):

“It is well established that a subsidiary pur-

pose of 78 g of the Securities Exchange Act is

to protect the small investor from the danger

THR OUGH

re? tirarerrs ~~ 7am \

ott dec EID be ae Bhan

(riteindaadien

esa 1)

Tha

26

of excessive trading on credit. (Remar v.

Clayton Securities Corp. 81 F.Supp. 1014)

(Mass., 1949)

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

Inc., 499 F(2) 1166 (8th Cir., 1972) pertains to Regula-

tion T and “churning”.

The purpose in citing the above was to give con-

venient insight into the time which has been devoted

in the several circuits on questions involving mainte-

nance margins which are the subject of 15 U.S.C. 78g —

one of two primary purposes of the Securities Ex-

change Act. We respectfully submit that a clear ex-

pression by this Court is needed on the part that Rule

431, or such other self-regulating margin governing

procedure as may be substituted therefor, is to play in

controlling credit in the purchase or carrying of

securities. Congress has evidenced its concern by

enacting the Securities Exchange Act which, by all

measurements, has become one of the country’s most

important pieces of legislation. The amount of litiga-

tion involving same is impressive. The holding of the

Trial Court and the Court of Appeals in this case has

rendered the self-governing aspect of the Actas it per-

tains to credit which may be subsequently main-

tained inoperative to accomplish its purpose — that of

controlling the amount of credit outstanding.

We respectfully submit that a writ of certiorari

should issue.

27

DISCUSSION OF REASON NUMBERED 4

With all the frustrations of not being able to getour

judicial system to prevent a glaring, and certain,

wrong, personally tragic in both its financial and psy-

chological impact on this petitioner, and more impor-

tant in the larger sense, publicly tragic because it is

clearly in conflict with and contrary to important and

substantial principles of law enunciated by statute

and the Courts, which have widespread, present and

recurrent application, we respectfully submit that a

writ of certiorari should be issued. If the question here

raised is not resolved by this Court, the mechanics for

making effective maintenance margin requirement

will have been emasculated — if it is fair to presume

that what's “lawful” for Merrill is likewise for its

fellow brokers.

CONCLUSION

The Petition for Certiorari should be granted.

Respectfully submitted,

Roscoe Roberts, Jr.

Counsel for Petitioner

Post Office Box 287

Huntsville, Alabama 35801

(Telephone: Area Code 205

533-3500)

-R OLIGH

28

PROOF OF SERVICE

I, Ernest L. Potter, of the firm of Butler & Potter, at-

torneys for Merrill Lynch, Pierce, Fenner & Smith,

Inc. hereby acknowledge receipt of the foregoing Peti-

tion for Writ of Certiorari on this ___ day of August,

1975.

Ernest L. Potter

Butler & Potter

Counsel of Record

for Merrill Lynch,

i Pierce, Fenner

; & Smith

‘ 122 South Side Square

Huntsville, Alabama 35801

CERTIFICATE OF SERVICE

1. Roscoe Roberts, Jr., attorney of record for Dean D.

Bekken, Petitioner, hereby certify that all parties re-

quired to be served have been served acopy of the Peti-

tion for Writ of Certiorari.

This ___ day of August, 1975.

Roscoe Roberts, Jr.

FIFEED

la

APPENDIX A

WEDNESDAY NOVEMBER 13th 1974

JUDGMENT ON DECISION BY THE COURT

UNITED STATES DISTRICT COURT

FOR THE

NORTHERN DISTRICT OF ALABAMA,

NORTHEASTERN DIVISION

MERRILL LYNCH, PIERCE, FENNER

& SMITH, INC., A Corp.

versus No. CA-74-L-542-NE

DEAN D. BEKKEN

JUDGMENT

This action came on for trial on November 12, 1974

before the Court and a jury, Honorable Seybourn H.

Lynne, United States District Judge, presiding, and

the issues having been duly tried and a decision hav-

ing been duly rendered, on November 13, 1974

It is Ordered and Adjudged that upon motion for a

directed verdict filed by the plaintiff at the close of all

evidence be and the same is hereby granted; that the

plaintiff Merrill Lynch, Pierce, Fenner & Smith, Inc.,a

Corp. have and recover of the defendant Dean D.

Bekken the sum of $17,734.56; and taxing costs against

the defendant Dean D. Bekken.

THR OUGH

bY

i

2a

It is further Ordered by the Court that the defendant

pay direct to the attorneys or record for the plaintiff

the proceeds of the judgment and costs recovered

herein by the plaintiff, and that upon receipt thereof,

the attorneys of record for the plaintiff will satisfy

said judgment on the record of this court.

William E. Davis,

Clerk

/s/ {ILLEGIBLE}

Deputy Clerk

Court Reporter — John Weaver

Decatur, Alabama

Filed: November 13, 1974

William E. Davis,

Clerk

/s/ [ILLEGIBLE]

Deputy Clerk

3a

APPENDIX B

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 75-1188

Summary Calendar*

MERRILL, LYNCH, PIERCE,

FENNER & SMITH, INC..,

Plaintiff-Appellee,

versus

DEAN D. BEKKEN,

Defendant-Appellant.

Appeal from the United States District Court for the

Northern District of Alabama

(May 15, 1975)

BEFORE GEWIN, GOLDBERG and DYER, Circuit

Judges.

PER CURIAM: AFFIRMED. See Local Rule 21.1

* Rule 18,5 Cir.; See Isbell Enterprises, Inc. v. Citizens Casualty

Co. of New York, et al., 5 Cir. 1970, 431 F.2d 409.

1 See N.L.R.B. v. Amalgamated Clothing Workers of America. 5

Cir., 1970, 430 F.2d 966.

HR OUGH

4a

APPENDIX C

Jury Instruction by Trial Court

Coincident with Directed Verdict

THE COURT:

Ladies and gentlemen of the jury, this case was sub-

mitted for the judgment of the Court on the motion of

plaintiff for summary judgment. At that time my law

clerk, Mr. Mabry Rogers, prepared a memorandum

dealing with the application of Rule 431 of the New

York Stock Exchange to the facts as disclosed on the

motion forsummary judgment and recommended that

there should be a full tria: and it should not be dis-

posed of on motion for summary judgment, and with

that recommendation I agreed and denied the motion

for summary judgment.

It now becomes my duty to determine whether or not

there are any fact questions to be submitted to the jury,

and I have determined under the law asI understand it

that there are no fact questions to be presented on the

original claim of the plaintiff or on the counter-claim

of the defendant, and as I usually do. I like to try to ad-

vise the jury of my thinking in coming to the conclu-

sion that the plaintiff is entitled to a directed verdict

for the amount sued for with interest at six percent

from May the 18th, 1973, to date.

My reasoning is based upon the cases dealing with

that rule decided by the Court of Appeals for the Fifth

Circuit by those opinions I am bound. The first of the

cases with which I deal is the case of Gordon versus

duPont Glore Forgan, Inc., which is reported in 487

Federal Second at page 1260 decided by the Fifth Cir-

cuit on December the 10th, 1973. Later on that case was

followed by the case of McCormick versus Esposito

SLeec

5a

which was decided by the Fifth Circuit Court of

Appeals on September the 13th. 1974, and I think that

by reading you certain statements in that opinion you

will follow the reasoning which has led me to direct a

verdict in favor of the plaintiff in this case, and I'm go-

ing to interpolate certain terms in here after I read it.

McCormick contends that over a substantial period

of time Goodbody, which is a brokerage house,

violated Rules 431 and 432 of the New York Stock Ex-

change by the manner in which it maintained McCor-

mick’s account. Judge Thornberry, writing for the

Court in Gordon, which is the case which I referred

which was decided last December, explained the ine-

quity of permitting the customer to recover under

such circumstances, and those circumstances were

that McCormick received a monthly statement of his

account and was aware of the varying equity debit

status of his account. He certainly had reason toknow

when his account was under-margined. As far as the

District Court found, Mr. McCormick is a lawyer, has

been in and out of the securities marketplace since

1929, personally maintained full control over his ac-

count and was at all times completely informed as to

the securities position of his account. McCormick did

not complain of Goodbody’s Maintenance margin

practices or take any corrective action before Good-

body liquidated his account in February, 1970, and he

continued his silence until Goodbody brought its State

Court action against him in January, 1971.

Now, in referring to that case, in the Gordon case, the

writer of the opinion in McCormick said that Judge

Thornberry writing for the Court in Gordon ex-

plained the inequity of permitting the customer to

recover under such circumstances, and I quote from

Judge Thornberry’s opinion. “The broker's error al-

lowed Gordon to avoid bothersome margin calls while

THROUGH )

BLURRED COCFY

ae BR EE 77)

6a

his equity dwindled. He could gamble that his stock

would appreciate in value without having to bolster

his margin account with resources he could employ

elsewhere. And when his stock fell so low that his

margin account had a deficit instead of equity, he had

no incentive at all to put up more margin, for he could

simply let the broker sell him out and let duPont take

part of the loss.”

And in further comment, the Court said, “In the

absence of any evidence of a broker's intentional

violation of Exchange rules misleading of its

customer and in the presence of a customer who knew

or should have known that his account was under-

margined but took nocorrective steps for so long as he

stood to benefit from such under-margining, we

decline to depart from the rule in Gordon. Finally,

while we do not foreclose the use of New York Stock

Exchange Rules 431 and 432 as a protective cloak for

investors if circumstances warrant, we will not per-

mit their use here by a knowing beneficiary as a

dagger against his perhaps too lenient broker.”

Now, this Court is bound by that interpretation of

Rule 431, and 431 is at the heart of this case under the

defendant's defense and his counter-claim and,

therefore, Iam compelled by the decisional law ofthis

circuit to direct a verdict in favor of the plaintiff and

against the defendant in the amount of seventeen thou-

sand seven hundred thirty-four dollars and fifty-six

cents, which is the amount of the deficit at the time of

the liquidation of the account, together with interest at

six percent from that date.

Mr. Clerk, will you hand that verdict to one of the

jurors.