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July 18, 1969

Hugh Johnson & Co., Inc., et al.

Curtin, District Judge.

The opinion of the court was delivered by: CURTIN

CURTIN, District Judge:

In this action tried to the court without a jury, plaintiff seeks rescission of the purchase of ten (10) convertible bonds of Tenax, Inc. having a face value of $1,000 apiece. Plaintiff seeks to recover the purchase price of these bonds, including interest and expenses, totalling $5,910.28.

 Plaintiff relies upon Section 12(2) of the Securities Act of 1933 (15 U.S.C. § 77l), Section 10(b) of the Exchange Act of 1934 (15 U.S.C. § 78j), and Rule 10b-5 of the Securities and Exchange Commission Rules (17 C.F.R. § 240.10b-5).

 The original plaintiff, Dr. Jerzy Ruszkowski, died after the commencement of this lawsuit, and Helena Ruszowski, his widow and Executrix of his estate, was substituted as plaintiff by order of this court. Because of Dr. Ruszkowski's death, plaintiff's case consisted primarily of two depositions taken of the decedent before trial. Defense counsel objected to the consideration of these depositions since cross-examination of Dr. Ruszkowski was not completed before his death. The objection of defense counsel to the depositions was overruled and they were considered by the court.

 Before trial, the parties agreed that the action against Gregory & Sons should be discontinued, and, at trial, plaintiff further agreed to the dismissal of its action against Reynolds & Co., Inc. The action against both these defendants is ordered dismissed.

 With respect to the remaining defendants, Hugh Johnson & Co., Inc. and Reynolds & Co., the following constitutes this court's decision, findings of fact and conclusions of law.

 Prior to August, 1962, Dr. Jerzy T. Ruszkowski had engaged in numerous speculative transactions involving securities and convertible bonds, similar to those purchased in this case. Quite often, he would hold his purchases for a short term and then sell them for a small profit or loss. For example, his tax records for 1960 reflect that, during that year, he sold securities on approximately 12 different occasions, holding many of these securities for only a few days before selling. Tax records for 1961 show 25 similar short-term transactions occurred during that year.

 Dr. Ruszkowski purchased the ten (10) Tenax, Inc. convertible bonds in issue here on August 21, 1962 through Thomas A. Street, at that time a registered representative of defendant, Hugh Johnson. Before this, Dr. Ruszkowski had called Mr. Street on a number of occasions to obtain market quotations and current news about the market situation. Before August 21, 1962, Mr. Street had recommended securities to Dr. Ruszkowski on one or two occasions, but Dr. Ruszkowski had not acted on these recommendations. During this period, Dr. Ruszkowski bought some securities through Street but, on each occasion, Street had served merely as an "ordertaker." All the investment decisions were made by Dr. Ruszkowski. (See Transcript, p. 125 et seq. and p. 135 et seq.)

 During this period prior to August 21, 1962, Dr. Ruszkowski was a customer of Hugh Johnson and not of Reynolds. Reynolds, a New York limited partnership, is engaged in the business of a securities broker-dealer. During the period in question Reynolds was a correspondent firm of Hugh Johnson. Reynolds maintained a special brokerage account in the name of Hugh Johnson, through which transactions for Hugh Johnson were conducted on a customer-broker basis.

 Alexander Haig, Jr. was an "over-the-counter trader" with Reynolds, with whom out-of-town correspondent firms, including Hugh Johnson, could communicate. Reynolds did not make a market in Tenax, Inc. and Mr. Haig had nothing to do with bonds and did no trading in them.

 Shortly before August 21, 1962, Richard Posmantur, a registered representative employed by Hugh Johnson, called Mr. Haig on the telephone. During their conversation, Mr. Posmantur asked Mr. Haig what was new in the stock market. Mr. Haig responded that there was a rumor going around that Tenax, Inc. had been negotiating for a bank loan, not yet made public, which, if obtained, would place the company in a more advantageous financial condition. He further stated that this was not reflected in the price of the common stock of Tenax. During the course of the conversation, no mention was made of Tenax bonds or the use to which Mr. Posmantur would put the information. Some time during the day on August 21, Mr. Posmantur relayed this rumor to his associate at Hugh Johnson, Mr. Street.

 On August 21, during the course of one of frequent telephone conversations, Dr. Ruszkowski asked Mr. Street what was new in the market. Mr. Street responded that there was a rumor that a company called Tenax was going to receive a loan. Dr. Ruszkowski stated that he knew about Tenax and had some information about its convertible bond from another source. Dr. Ruszkowski asked Mr. Street to get him a quotation on the bonds and to call him back. Mr. Street found out that the bonds were at $56 bid and $62 offer. He relayed this information to Dr. Ruszkowski, who instructed Mr. Street to buy "$10,000 worth of the bonds at 56 with one point discretion." Mr. Street filled the order at $57 (actually $570 per $1000 bond). The total purchase price with interest and expenses was $5,910.28. There was no direct contact between Reynolds and Dr. Ruszkowski.

 A day or two after the purchase by Dr. Ruszkowski, the price of this security dropped sharply. In the fall of 1962, it reached a low of $10 and a high of $35 per $100 in bonds. Tenax, Inc. never obtained the rumored loan. Eventually the company went into bankruptcy and the bonds became worthless.

 No written report, research information or recommendation concerning Tenax was sent by Reynolds to either ...

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