Before SWAN, AUGUSTUS N. HAND, and CLARK, Circuit Judges .
AUGUSTUS N. HAND, Circuit Judge .
In the opinion of a majority of the court the judgments must be affirmed. The facts are stated in Judge CLARK'S opinion and need not be here repeated.
We accede to the view that the Stock Exchange violated a duty when it failed to take disciplinary action against Richard Whitney on November 24, 1937, after there was reason to believe that the latter had converted the plaintiffs' securities. But to justify a judgment in favor of either plaintiff, such a breach of duty must have resulted in damage that can be traced to the breach. We can see no substantial resemblance between the duties of bailees or other fiduciaries and those of the Stock Exchange. The duties of the former are to safeguard property over which they have some right of control. In the case of the Exchange there was no duty except to investigate the dealings and the financial conditions of the members and to suspend or expel members who it had reason to believe had been guilty of conduct inconsistent with just and equitable principles of trade. It appears from the record that by reason of unauthorized pledges the securities had all been converted prior to November 24, 1937, and were then in the possession of pledgee banks and so remained for some time thereafter, though at certain times all of them were returned to the pledgor and during the same day repledged to secure other loans. We can see no likelihood that the expulsion or suspension of Richard Whitney when his conversions came to the notice of the officers of the Exchange on November 24, 1937, would have in the least benefited the plaintiffs for the securities were then all converted and in the hands of pledgees.
It is argued that Richard Whitney's brother, George, might have advanced money to Richard sufficient to redeem the securities just as was done in the case of the Gratuity Fund. But there is no reason to suppose that action by the Exchange on November 24 would have brought relief to Richard or the plaintiffs. On the other hand there is good ground for believing that it would not only have brought no relief to the plaintiffs but would have prevented the salvage of the Gratuity Fund since the additional loans to Richard were undoubtedly made to save his name and to prevent the exposing of a major scandal.
It is further suggested that George estimated the liquidating value of his brother's estate at $500,000. But this estimate was shown to have been based on false statements by Richard as to the value of his distilling business. As the record stands, there is every reason to believe that in November 1937, Richard was hopelessly insolvent and that he only obtained a loan through his brother by means of false statements and because of the latter's belief that exposure would be averted if he furnished enough money to redeem the Gratuity Fund. Whether George would or could have procured more money for Richard is a matter of speculation. He surely would not have done so if Richard's dealings with customers' securities had been exposed for after there was exposure the loans ceased to be made.
The plaintiffs presented their proof upon the theory that they had valid claims against the Stock Exchange on account of its failure to take action against Richard Whitney on November 24, 1937, and that their loss was the result of that failure. The cases were tried on the only possible theory on which recovery could have been hoped for. The plaintiffs were allowed to introduce all the proof of damages they desired. They had the burden of showing that the breach of duty was the cause of their loss. We think that they have failed to show this and have presented claims of damage resting on the merest speculation with all reasonable chances against practical realization.
On the record the trial judge would not have been justified in any finding that the plaintiffs suffered damage and he in fact found to the contrary. ("Fifth" and "Sixth" Conclusions of Law.) The plaintiffs have had their day in court with an opportunity to offer their proof, which they presented unchecked. Under such circumstances there can be no basis for a new trial and the judgment is affirmed.
CLARK, Circuit Judge (dissenting, in part from the opinion, and from the judgment).
This is an appeal from a judgment dismissing the complaints of Mary Stevens Baird and the New York Yacht Club in actions brought against the New York Stock Exchange to hold the latter liable for the loss of plaintiffs' securities through embezzlement by Richard Whitney. The actions were consolidated below for joint trial under Federal Rules of Civil Procedure, Rule 42 (a), 28 U.S.C.A. following Section 723c, and have been consolidated for the purposes of appeal. The named defendant is the treasurer of the Exchange, who is sued as representing the Exchange pursuant to New York General Associations Law, § 13, Consol. Laws, c. 29. Jurisdiction of the district court is based upon the Securities Exchange Act of 1934, § 27, 15 U.S.C.A. § 78aa.
Richard Whitney was senior partner in the New York Stock Exchange firm of Richard Whitney & Co. and owned a seat on the Exchange. From 1928 until March 8, 1938, he was treasurer of plaintiff The New York Yacht Club, which position made him the lawful custodian of all securities owned by the Club and gave him sole access thereto. As broker for plaintiff Mary Stevens Baird during the same period, Whitney was also entrusted with a large number of her securities. For some time before November 22, 1937, and until January 26, 1938, Whitney, involved in speculations in the stock of a liquor company, had been criminally hypothecating the securities of both plaintiffs without their knowledge or consent for loans made to him personally. On January 26, 1938, he paid off the loans for which the securities stood at that time as collateral, but later in the same day he repledged them with the Public National Bank & Trust Company and the New York Trust Company for new loans made to himself. This was all part of the vicious circle in which Whitney was caught as the threat of disclosure impended. As one creditor started to press him, he was forced to pay that loan off, redeem the collateral, and then immediately put it out on another loan from some other source.
In 1937, the Stock Exchange maintained for the benefit of the families of deceased members an invested fund, amounting to some $2,000,000 in cash and securities, known as the Gratuity Fund. Under the Constitution of the Exchange this fund was managed by seven trustees "acting as agent for the Exchange."*fn3 These trustees consisted of the president and the treasurer of the Exchange and five elected trustees, including, as chairman, Edward Henry Harriman Simmons, president of the Exchange from 1924 to 1930 and member of its Law Committee and of its Governing Committee (on which he had served for 24 years), and, as members, Blair Williams, who was a member of the Exchange's Business Conduct Committee and Governing Committee (on which he had served for 32 years), and Whitney, who was the broker selected to execute transactions for the fund. Whitney, too, had served as president of the Exchange in 1930-1935, and at this time was a member of long standing of the Governing Committee, as well as of other committees of that Exchange. At a meeting of the trustees on November 22, 1937, which Whitney did not attend, it was decided that a block of $200,000 railroad bonds which had been delivered to Whitney for sale 2 months previously should not be sold, but should be returned. Thereupon the clerk to the trustees announced that, in addition to the railroad bonds, Whitney had in his possession, despite five demands from the clerk, $700,000 in other bonds and some $221,000 in cash which belonged to the Fund.
Simmons and the other trustees were exceedingly surprised at this news, for it had long been Whitney's custom to give meticulous accountings to the trustees of his transactions with the securities and cash of the Fund. Simmons, therefore, immediately telephoned Richard Whitney & Co. It was about three o'clock in the afternoon, and Whitney was not in; but his partner, Rodewald, was reached, and the latter stated that the securities and cash would be returned the following day. Later that afternoon Whitney himself called back to confirm Rodewald's promise. By noon the next day, however, no action had been taken. Instead, Whitney called on Simmons to ask for another day of grace. This request was peremptorily turned down; so Whitney went to his brother, George Whitney, of J.P. Morgan & Co., and told him of his defalcations and the trouble he was in. George having agreed to make good for his brother, Richard returned to Simmons and said to him: "Everything is all right; I will have everything over for you tomorrow; * * * I have been over to talk to my brother George * * *." Satisfied by this, Simmons then granted the requested delay.
Prior to Whitney's second visit, however, Simmons had reported the occurrence to Roland Redmond, counsel for the Exchange, and to his fellow trustee, Blair Williams. Redmond, when advised that Richard had been to see his brother, advised Simmons to go over himself and talk to George, in order to try to discover if there was any question "about Mr. Richard Whitney being able to continue in his business the next day." This he did, and he was reassured by George Whitney that things were all right. Simmons testified that at this point he knew that there was danger of Richard Whitney's being suspended the next morning; that Whitney had used the cash of the Gratuity Fund for his own personal affairs without permission from the trustees; that Whitney had borrowed the money to restore the Fund from his brother because he had not the proper assets to raise such sums at a bank; and that the effect of George's financial assistance had been merely to substitute George as a creditor in place of the Gratuity Fund, without changing Richard's asset position ...