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Harriss v. Indemnity Ins. Co.

December 13, 1937

HARRISS ET AL.
v.
INDEMNITY INS. CO. OF NORTH AMERICA ET AL.



Appeal from the District Court of the United States for the Southern District of New York.

Author: Swan

Before L. HAND, SWAN, and AUGUSTUS N. HAND, Circuit Judges.

SWAN, Circuit Judge.

The plaintiffs are a firm of stockbrokers. Their action sought recovery of$100,000 from each of the defendants upon a "brokers' blanket bond," insuring in an amount of $200,000 against losses sustained through the dishonesty of employees. Jurisdiction of the District Court rested upon diversity of citizenship. The case was tried to the court and a jury of one. At the conclusion of the trial each side moved for a directed verdict. The court directed a verdict against each defendant for $13,224, with interest and costs. From the judgment entered thereon, both parties have appealed. The questions presented are whether all or any of the losses sustained by the plaintiffs through acts of their employee Welker Cochran are within the coverage of the bond.

Cochran was in the employ of the plaintiffs as a customers' man from March 17 to May 30, 1930. During this period he brought to the plaintiffs twenty-two margin accounts which dealt almost exclusively in stock of Manhattan Electrical Supply Company. This stock was quoted on the New York Stock Exchange, but the market price was being "rigged" by the operation of a fraudulent pool conducted by men with whom Cochran was in collusion. He knew that the plaintiffs would not have accepted the accounts had they been aware of the pool, and he did not disclose to them its existence. When the pool withdrew support, the market price of the stock fell so fast that the plaintiffs could not close out the margin accounts in time to avoid loss. After they were closed out, the debit balances of customers on these twenty-two accounts aggregated $300,612.49. For the loss thus incurred the plaintiffs filed proof of loss as required by the bond, and then brought this action to recover the full amount of the insurance. The twenty-two accounts fall into three groups: (1) Eighteen accounts belonged to customers who had no knowledge of the pool; (2) two accounts, those of Ross and Christian, were operated for the pool; (3) two accounts were operated by Cochran for his own benefit in the names and with the consent of two friends, Ferguson and Bowles. It was contrary to the rules of the exchange for a customers' man to trade for his own account and contrary to the plaintiffs' instructions to Cochran. For the loss sustained in the accounts carried by Cochran in the names of Ferguson and Bowles the plaintiffs were awarded judgment; losses sustained on the other accounts were held not to be within the coverage of the bond. The material provisions of the bond read as follows:

"In consideration of the premium* * * the Underwriter hereby undertakes and agrees to indemnify the Insured and hold it harmless from and against any loss, to an amount not exceeding Two Hundred Thousand Dollars ($200,000.) of money [and other specified kinds of property] * * * sustained by the Insured.

"(A) Through any dishonest act of any of the Employes, wherever committed, and whether committed directly or by collusion with others.

"(B) Through larceny * * * while the Property is within [specified locations].

"(C) Through robbery * * * while the Property is in transit.

"The foregoing agreement is subject to the following conditions and limitations:

"2. This bond does not cover --

"* * * (d) Any loss the result of any loan made by the Insured or by any of the Employes, whether authorized or unauthorized, unless such loan be made with intent on the part of such Employes to defraud the Insured.

"(e) Any indebtedness or balance due the Insured on any customer's account, whether the account of an actual bona fide customer or a fictitious account; without prejudice, however, to the rights of the Insured with respect to any loss sustained through trades fraudulently conducted by an Employe in the name of a genuine customer: Provided the Insured shall comply with the following conditions, namely:

"(1) Shall put in effect a rule that the bookkeeper or the bookkeeping department shall each day send to each and every customer a memorandum of all trades made for his account, and at the end of each calendar month, send to each and every customer a detailed statement showing the status of his account, the securities on hand and the balance due; ...


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