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KROESE v. NEW YORK STOCK EXCH.

February 26, 1964

John S. KROESE, Plaintiff,
v.
NEW YORK STOCK EXCHANGE and Texas Pacific Land Trust, Defendants



The opinion of the court was delivered by: DAWSON

Both defendants in this action have moved for summary judgment pursuant to Rule 56 of the Rules of Civil Procedure.

The following facts appear to exist without substantial controversy:

 Plaintiff John S. Kroese is an owner of sub-share certificates of proprietary interest in the defendant Texas Pacific Land Trust (Texas Pacific). Texas Pacific is a trust established on February 1, 1888, under a declaration of trust. Texas Pacific trust certificates were listed on the New York Stock Exchange on June 27, 1888. Sub-share certificates of proprietary interest, representing fractional interests in the original trust certificates, became listed on January 13, 1927 and are the securities of Texas Pacific presently traded on the Exchange. The Exchange is an unincorporated association registered as a national securities exchange under Section 6(a) of the Securities Exchange Act of 1934.

 Plaintiff's complaint seeks an order directing the Stock Exchange to require compliance by Texas Pacific with the rules of the Exchange and directing Texas Pacific 'to so comply by holding regular meetings of certificate holders and soliciting proxies therefor.' Both defendants have moved for summary judgment asserting that under undisputed facts judgment should be rendered for the defendants.

 Jurisdiction in this action is founded upon the Securities Exchange Act of 1934, Sections 6 and 27, 15 U.S.C. §§ 78f and 78aa. Section 6 of the Securities Exchange Act provides for registration of national securities exchanges. The registration statement provided for in Section 6(a) requires the Exchange to execute 'an agreement * * * to comply, and to enforce so far as is within its powers compliance by its members with the provisions of this title, and any amendment thereto and any rule or regulation made or to be made thereunder * * *.' Section 6(b) provides that:

 'No registration shall be granted or remain in force unless the rules of the exchange include provision for the expulsion, suspension, or disciplining 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 title or any rule or regulation thereunder shall be considered conduct or proceeding inconsistent with just and equitable principles of trade.'

 Section 6(d) states that before registration it must appear to the Commission that the rules of the exchange 'are just and adequate to insure fair dealing and to protect investors.'

 In the event that the rules of the Exchange are not enforced, Section 19 of the Act gives the Securities and Exchange Commission the power to alter or supplement the rules of the Exchange or to suspend or withdraw the registration of the Exchange. Furthermore, Section 32 provides that a fine may be imposed.

 Section 6(b) and 6(d) of the Securities Exchange Act place a duty upon the Exchange to enforce the rules and regulations prescribed by that section. Silver v. New York Stock Exchange, 373 U.S. 341, 83 S. Ct. 1246, 10 L. Ed. 2d 389 (1963). The Second Circuit has recognized the right of a private individual to sue an exchange for damage resulting from the failure of the exchange to enforce its rules. In the case of Baird v. Franklin, 141 F.2d 238 (2d Cir. 1944), cert. denied, 323 U.S. 737, 65 S. Ct. 38, 89 L. Ed. 591, plaintiffs had been damaged by acts of a member of the New York Stock Exchange. The Second Circuit upheld plaintiffs' right to sue the Exchange for failure to take disciplinary action, but held that under the circumstances of the case defendant's violation of a duty was not causally related to plaintiffs' damage.

 The rule relied on by plaintiff in the case at bar is rule 499 of the New York Stock Exchange:

 'Securities admitted to the list may be suspended from dealings or removed from the list at any time.'

 Following the rule, the New York Stock Exchange Guide lists 'supplementary material' which reads in relevant part as follows:

 '.10 Criteria -- The appropriateness of continued listing on the Exchange cannot be measured mathematically. However, under present circumstances, there are some criteria which usually lead to a re-examination of a security's eligibility for continued dealings on the Exchange.

 'It must be remembered however, that the Exchange may at any time suspend or delist a security if the Exchange believes that continued dealings in the security on the Exchange are not advisable, whether the security meets or ...


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