The opinion of the court was delivered by: FRANKEL
Plaintiff, an investor and trader in stocks, sues defendant broker for damages allegedly suffered from defendant's failure to execute faithfully an order to sell 3,000 shares of the stock of Medallion Pictures Corporation. The claim is that the order to sell was given on August 3, 1964; that defendant's president falsely assured plaintiff through the remainder of that month that he was making efforts to effect the sale; that defendant meanwhile was selling large quantities of Medallion shares for its own account; and that plaintiff finally found it necessary, early in September 1964, to sell the shares through another broker at prices substantially below those he would have realized had defendant fulfilled its fiduciary obligations. The complaint counts on both the New York law of agency and the anti-fraud provisions in sections 10(b) and 15(c) (1) of the Securities Exchange Act of 1934 (48 Stat. 891 and 895, as amended, 15 U.S.C. §§ 78j and 78(o), together with the implementing Rules (10b - 5 and 15c1 - 2, 17 C.F.R. §§ 240.10b - 5 and 240.15c1 - 2) of the Securities and Exchange Commission. The court has both diversity jurisdiction, 28 U.S.C. § 1332, and exclusive jurisdiction under the Securities Exchange Act of 1934, § 27, 48 Stat. 902, as amended, 15 U.S.C. § 78aa. Upon the facts as hereinafter found, we hold that plaintiff is entitled to judgment on either or both of his legal theories.
Plaintiff, an insurance agent, has been an active trader and investor in stocks for about thirty years. For some ten years preceding August of 1964, he had been a customer of William Mordecai Grossman, who worked for half of that period as a customer's man in various brokerage houses. In 1959 Grossman and Mortimer Tover formed defendant brokerage corporation, with Grossman as president and secretary, and Tover as vice president and treasurer. Plaintiff dealt with defendant through Grossman, continuing their long-standing personal relationship.
Defendant is a registered broker-dealer under the Securities Exchange Act of 1934 (see 15 U.S.C. § 78 o - 3) and is registered with the National Association of Securities Dealers, Inc. (N.A.S.D.), as a broker-dealer. In its brokerage capacity defendant buys and sells securities for its customers; as a dealer it trades for its own account. It selects its own role, either as broker or dealer, unilaterally in each transaction, and on many occasions it executes customers' orders by buying or selling for its own account. In confirming transactions to customers, its confirmation notices indicate whether defendant has conducted each transaction as "principal" or "broker," depending on whether defendant has dealt for its own account. Seeking profits from the sale of securities to its customers, defendant commonly earns a mark-up on such sales. On the other hand, in selling stocks for its customers, defendant frequently charges no brokerage commission, offering this service as an inducement to continued custom.
Defendant over the years dealt extensively in over-the-counter securities - i.e., securities not listed on one of the national exchanges. In some instances defendant functioned as a "market-maker" in a particular security, reporting for quotation "bid" and "asked" prices to indicate, respectively, amounts for which it proposed to buy or sell the stock. From time to time, defendant also served as "sponsor" of an over-the-counter stock, a capacity in which it devoted special efforts to advertising and trading to maintain the market for such stock.
For some time prior to the genesis of the present controversy, defendant had been a sponsor, and one of some eight or ten market-makers, of the over-the-counter stock of Medallion Pictures Corporation. Over a period of some years it had sold plaintiff 3,000 shares of this stock. During August of 1964 there were about 575,000 shares outstanding in the hands of the public, and defendant held varying inventories in its own account ranging as high as 13,924 shares.
On August 3, 1964, having been advised by another broker that the time was propitious for such a step, plaintiff telephoned Grossman (following their usual practice and the common practice in the industry) and placed an order for the sale of his 3,000 shares of Medallion. At this point we encounter what defendant posed as a substantial issue of fact at the trial. According to plaintiff's testimony, the order he placed on August 3 (and kept urging defendant to execute during the rest of that month) was an order "at the market" - i.e., to sell the shares at the best price obtainable. Grossman, on the other hand, testified that it was a "limit order" - to sell only at a price of 19 or higher. In our view of the case, plaintiff is entitled to judgment either way. Nevertheless, it is appropriate at this point to treat, and record the court's finding upon, this conflict in the testimony.
The short of the question, assuming it matters, is that we credit plaintiff's testimony on this, not Grossman's. Plaintiff was a straightforward and entirely credible witness. His testimony was consistent with the overall pattern of events on which the parties had no essential factual disagreement. It is not possible to say as much of Grossman.
Grossman tended to be grudging and evasive as he sparred with the question whether plaintiff had really given him any order at all. He said early in his direct testimony that he did not consider plaintiff to have given "a firm order." He stressed that plaintiff had not sent in his share certificates when he allegedly placed his order. Seizing upon this, Grossman said he would have considered that plaintiff had placed "a firm order if the stock were in [defendant's] possession with the firm order at 19." In the teeth of this testimony, the evidence showed that the defendant did not regularly (though it did sometimes) obtain plaintiff's certificates before executing and confirming to him an order to sell. And it may well be, in any event, that a court in New York City could notice judicially that brokers do not normally, or even commonly, deem delivery of the customer's certificates a condition for the effective placement of a sell order.
As his testimony proceeded through cross-examination, Grossman allowed that plaintiff had in fact told him "to sell this 3,000 at 19." He said he "considered it an order at that time." Amplifying or qualifying, he said it was deemed by him to be an order "[at] that time on that day. . . ." His attempts to confine the order's effectiveness to "that day" of August 3 alone were incredible (1) as he stated them on the stand and (2) in light of the other record circumstances, including his admissions that he continued repeatedly on the days following to discuss the proposed sale (and explain his delay in making it) with plaintiff. This infirmity, along with others, infects Grossman's attempt to refute plaintiff's assertion that he had actually placed a normal market order on August 3.
Grossman's credibility was marred in other respects. Giving his expert, though concededly interested, opinion, he said that a sale or offer by defendant of as many as 3,000 Medallion shares in August of 1964 would have had "a very destructive" or "a completely disastrous effect" upon the market. Yet it is an important and undisputed fact in the case (to be considered more fully below) that defendant in fact sold far more than this quantity for its own account in that month.
In addition to the contrast between the witnesses on the stand, there is basis in the documents and pertinent regulations for preferring plaintiff's version. It was shown that defendant made a practice of noting on the upper portion of its daily trading pads unexecuted orders from its customers. These notations showed the name of the stock and the number of shares involved. In recording only such limited information, defendant's practice failed to comply with S.E.C. regulations requiring that the broker make a memorandum, for each order or instruction, of "the terms and conditions . . . . the account for which entered the time of entry. . . ." 17 C.F.R. § 240.17a - 3(6). The vital point here, however, is that defendant had no record whatever of an August 3 order from plaintiff. Having conceded finally, after a course of testimony not notable for candor, that plaintiff had in fact placed an order, defendant was unable to produce even the legally insufficient record it normally prepared. It satisfies sense and fairness to treat this as an added circumstance favoring plaintiff's over defendant's version of the order.
To repeat, then, we think it should make no difference for the outcome of the case, but we find that plaintiff placed a market order, seeking the best price defendant could obtain, ...