The opinion of the court was delivered by: BRIEANT
Plaintiff, a disappointed former customer of an investment house, brings this action against her stockbrokers ("Walston"), and also against the executors of a deceased registered representative formerly employed by Walston, ("decedent"). The action is based upon alleged violations of the Securities Act of 1933, 15 U.S.C. § 77a et seq., the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq., and the Investment Advisers Act of 1940, 15 U.S.C. § 80b-1 et seq. The complaint also makes reference to Section 352 of the General Business Law of the State of New York.
Plaintiff is a resident of the City, County and State of New York. The corporate defendant is a Delaware corporation, having its principal office in the City of New York, and is authorized to do business in this State. Decedent was a resident of Greenwich, Connecticut, and his Will was duly admitted to probate there.
This action was tried before me, without a jury, on December 8 and 9, 1971. Decedent was registered as an investment adviser pursuant to § 203 of the Investment Advisers Act of 1940, 15 U.S.C. § 80b-3. He was a registered representative of the corporate defendant, and in charge of its investment advisory service. Decedent was highly respected in the securities industry, and had been a registered representative for many years prior to his death at the age of 61 in 1965. He was Senior Vice President and Director of Technical Research for Walston.
For a number of years he had authored a "Weekly Market Letter." This letter was circulated by mail each Friday to customers and potential customers of Walston.
In 1963-4, Walston was a substantial broker-dealer in securities, having more than 2,000 employees, and offices in several major cities. It was a Member Firm of the New York Stock Exchange and was represented on other national securities exchanges. In 1963, plaintiff had an account in the Waldorf Astoria branch of Walston. In April, 1964, plaintiff, at her request, had her account transferred to the 72 Wall Street branch of Walston in New York City, and, simultaneously, arranged for decedent to become her registered representative.
At that time, Walston had a "Technical Research Department" located at that address. This Department consisted of decedent, his son and four or five registered representatives. All accounts serviced by the Technical Research Department were considered as accounts of the Department.
The first count of the complaint asserts that defendants employed devices and schemes which were calculated to defraud the plaintiff, by distributing bulletins, news items and other writings suggesting and recommending the purchase, retention or disposition of various securities at a time when defendants, their employees and officers, decedent and his associates, had, within a short time prior to recommending the purchase of certain securities, effected purchases of the same securities for themselves, and thereafter "intended to and in fact did effect the sale of said securities after the distribution of said recommendations."
It was asserted that plaintiff purchased certain securities relying on such recommendations, without knowledge of the fact that defendants had purchased securities prior thereto at a lower price and intended to sell such securities at the same time, but these allegations, contained in paragraph 11 were subsequently retracted by plaintiff prior to trial.
The first count, as in part retracted, states that defendants induced plaintiff to sell her previously acquired securities at a loss and that the practices employed by defendants operated as a fraud and deceit, and plaintiff was damaged in the amount of $75,000.00.
The second count in the complaint repeats the allegations in the first count and states that plaintiff employed defendants for the purpose of recommending securities purchases and sales and for the purpose of effecting such purchases and sales, that they owed plaintiff a high degree of fiduciary duty in performing services for her and in so representing her.
Paragraph 18 of the second count has also been retracted. This paragraph alleged that the defendants breached their fiduciary duty to her by purchasing for her account securities which had previously been purchased by defendants while intending at the same time to sell their own securities.
The third count in the complaint alleges that plaintiff had instructed defendants to purchase for her 100 shares of General Motors Common Stock and 100 shares of Common Stock of Xerox Corporation and that defendants failed and refused to purchase these securities, and had they done so, plaintiff would have enjoyed a profit of $15,000.00. The third count was dismissed at the close of the plaintiff's case and with respect thereto I find that plaintiff did instruct the defendants to purchase for her account the two securities mentioned, and that defendants then and there at the same time orally refused to do so. Immediately on giving the instructions, plaintiff knew that her agents and fiduciaries were not going to make these purchases, and in refusing to make the purchases for her account they acted within their rights. Plaintiff can claim no damages as a result of the failure to buy these securities since at the very least she had the immediate duty to purchase them elsewhere so as to minimize her damages. A stockbroker need not accept the orders of a customer so long as he makes clear at the time the orders are given that he refuses to perform them. See Busch v. L.F. Rothschild & Co., 23 A.D. 2d 189, 259 N.Y.S. 2d 239 (1965) and cases cited therein.
Plaintiff, a single woman whose age was approximately 38 at the time of the incidents complained of, is a professional artist. She graduated from Radcliffe College, magna cum laude, and was elected to Phi Beta Kappa. She had considerable experience in the securities market. For a number of years she had a joint account in another house with her mother, and later with her sister. She inherited stocks from her mother. At the time that she opened her account with Walston she was also trading at E.F. Hutton & Company. While her pattern of trading was ordinarily what would be described as that of a long term investor, rather than that of an in-and-out trader, or speculator, plaintiff had the education, experience and ability to trade in a knowledgeable manner in the securities market. She held stocks on margin, and was, as suggested by defendants' counsel on the trial, "no babein-the-woods."
In April, 1964, when, at her request, her account at Walston had been transferred to the Technical Research Department, to be operated under the general direction and advice of decedent, a representative of Walston told plaintiff that decedent would not accept transfer of her account at Walston's Waldorf Astoria branch, unless she would also transfer her account at E.F. Hutton & Co. As decedent dealt only with large accounts, plaintiff was advised, all accounts would have to be transferred to him. Plaintiff accordingly signed transfer cards, and had her Waldorf branch account and her E.F. Hutton account transferred to decedent's Department at 72 Wall Street. At that time the debit balance in her margin account was approximately $90,000.00, and the market value of the securities was slightly more than twice that, or $180,000.00.
At the time of the transfer, plaintiff told decedent that she was an artist, and had little time or interest to handle her affairs, and that she desired to travel in Europe and elsewhere and wanted to have her account managed in her absence. Acting on this information, defendant furnished the usual printed form of power of attorney to allow decedent to administer her account at Walston as a "discretionary account", and to give orders for purchases and sales in her absence, and without her express directions. Plaintiff failed to sign this card, although asked to do so on more than one occasion, and the account never became a discretionary account. Notwithstanding this fact, I find that plaintiff did seek investment advice from decedent, and those registered representatives working under his direct control, that a fiduciary relationship existed, and the relationship of investment adviser and customer as contemplated by the Investment Advisers Act of 1940 arose. Such relationship need not depend upon the execution of a formal power of attorney to arise under all of the circumstances of this case. When a registered representative is giving more than the normal amount of incidental investment advice, and has instilled in the customer such a degree of confidence in himself and reliance upon his advice that the customer clearly feels, and the registered representative knows that the customer feels, that the registered representative is acting in the customer's interest, a fiduciary relationship may arise, notwithstanding the fact that the "blue card" giving defendants power of attorney to trade the account was never signed and filed. Haley & Co., 37 S.E.C. 100, 106 (1956).
Decedent reviewed a list of plaintiff's stocks showing historical costs and made circles indicating his recommendation to sell a number of these stocks. The stated purposes of these recommendations were to obtain the recognition of tax losses which already existed with respect to all but one of these securities, to save interest on the margin account, and also to generate buying power. Plaintiff took issue with this recommendation, and reminded decedent that it was Spring, and generally one took tax losses in December, and asked how she could know what profits she would realize during the balance of the calendar year.
Decedent, in support of his recommendation, told plaintiff that stocks would be recommended to her in advance of the weekly market letter, and that those were the stocks she was to buy, but that in her margin account she did not have cash to buy. Decedent told her, and she states that she already knew, that he had a market letter and that she would be advised in advance of what was coming out in this letter, and that she must buy those recommended stocks and those stocks only, or he would not be bothered with her account.
Plaintiff, a reasonably sophisticated investor and an educated person, was looking at this time for an "edge". She entered into the relationship with defendants intending to benefit by this practice of recommending stocks to customers prior to their appearance in the influential and highly regarded weekly market letter. Her expectations were reinforced by Walston's employee, the witness Crane, who told her in substance that decedent was a great genius, the genius of Wall Street, and that she must do as he said or that he would not be bothered with the account.
Later, plaintiff, accompanied by the witness Adamson, visited decedent and Crane during the middle of April, having made a prior telephone appointment, and on this occasion, decedent told her that if she wanted to have him as her adviser, she would have to do as he said, which was to buy the stocks recommended in his market letter, and that she would be told in advance of the market letter so that therefore she would get them cheaper. At that time decedent reiterated his advice to sell certain securities and added one more sale recommendation. On the occasion of that visit, Crane again advised her that decedent was a great genius, and that she must do as he said or he would not be bothered with her.
Thereafter, plaintiff made sales through Walston totaling $29,806.27. (Details omitted)
Plaintiff reiterated that the purpose of making these sales and the basic reason given her by decedent was "to raise buying power so I could buy the stocks he recommended". Subsequently, plaintiff bought certain shares through Walston on the recommendation of decedent. She purchased 100 shares of American Can on June 5, 1964 at $44 1/2 and 100 shares of Ilikon on June 11, 1964 at $27 5/8. Except for Ilikon, which is quoted in the over-the-counter market, all of the securities sold or purchased through defendants by plaintiff are listed on the New York Stock Exchange. Instrumentalities of interstate commerce were utilized, in that plaintiff on more than one occasion made appointments with decedent by telephone.
On June 19, 1964, the weekly market letter recommended the purchase of Copperweld Steel. The July 10, 1964 market letter recommended the purchase of Clevite Corporation. Crane told plaintiff that she had to buy these stocks, particularly Clevite, but she did not do so. The conversations with respect to Clevite and Copperweld took place before the market letter was actually received.
There is no proof that decedent or Walston or any persons acting for them or in their behalf, purchased any of the stocks mentioned in the market letter, or sold any of them during the relevant period. The market letter, copies of which were offered in evidence, contains the specific disclaimer "Walston & Co., Inc. and Officers, Directors, Stockholders and Employees thereof, purchase, sell and may have an interest in securities mentioned herein."
Defendants had the right to tell plaintiff that they would not act as her investment adviser or represent her in any way if she did not follow their advice. Such a statement does not constitute "duress" and I find no duress practiced on plaintiff on the record before me. Nor were any so-called "boiler room tactics" or "pressure" imposed upon her, as claimed.
Plaintiff's complaint is somewhat fanciful, and in no way supported by evidence, insofar as concerns the charges made that defendants purchased stocks for their own account or sold them for their own account in order to dovetail their activities with the effect on price, if any, of the market letter, or that they conducted a "pool".
Nevertheless, plaintiff is entitled to have her pleading deemed amended to conform to the proof and, if based on the proof, any liability under the Securities laws may be found, she is then entitled to her compensatory damages. Federal Rules of Civil Procedure, Rule 15(b).
I find that defendants were making recommendations to customers of stocks prior to the appearance thereof in the weekly market letter, and were offering to give plaintiff, and presumably others, the benefit of advance notice of what would appear in the market letter. This, without more, is a fraudulent and deceptive device in connection with the sale of securities. It had as its purpose, effective in the case of plaintiff, to induce the sale of securities which she owned, through defendants, and the purchase of securities recommended by defendants. This, of course, generated a trading volume, and produced brokers' commissions beneficial both to the registered representatives advising plaintiff and to Walston. Use of this device, without more, gives rise to liability, although it is satisfactorily established that the securities recommended were considered "good" recommendations, and that the sales recommendations made are justified, at least in part, by an opportunity to realize for tax purposes already existing paper losses, and to cut down on the risk and interest cost incident upon a margin account.
A fortiori, to gain customers and do business upon the suggestion, directly or indirectly, that "tips" of stocks which would be written up in the market letter at a subsequent date would be made available ahead of time to a customer, is also a fraudulent and deceptive practice, even if the suggestion were not followed in actual practice.
Admittedly, plaintiff is an interested witness, and the individual defendant is now deceased. The witness Crane denied on the trial that he was ever told in advance to recommend the purchase of particular stocks which would subsequently become recommendations of the market letter. This denial was categorical.
However, it appeared that in giving his deposition, prior to trial, the witness admitted that "on maybe one or two occasions" decedent had advised Crane that he was going to write up a stock, when he recommended it for purchase by customers. More damning is the testimony of decedent's son and executor. At the times complained of, he, too, was a registered representative, working closely with his father for Walston. He did not testify at the trial. At his deposition, he testified "On occasion of advising -- he would in many cases at meetings among members of our staff, mention what stock he intended to write up in the letter." Decedent's son further testified that on occasion decedent would advise others in the Department prior to writing up the market letter, as to which company would be written up at a particular period or date and that usually less than a week prior to the appearance of the letter he would advise the various members of the Department as to which company was going to be involved in the write up and that decedent occasionally recommended the purchase of a stock to a customer prior to writing it up in the market letter.
No explanation was offered on the trial why plaintiff's account was transferred from the Waldorf Astoria branch of Walston to a different registered representative, the author of the market letter, at a different, downtown branch of Walston, other than the testimony of plaintiff herself. That office was further away. There was no need to make this change merely to get the benefit of the market letter when it hit the street, because the letter was then available without charge to customers of Walston and potential customers. Plaintiff testifies, and her testimony in this regard is uncontradicted, that she transferred her two accounts, and went downtown to get the advantage of decedent's special knowledge, and to enjoy in advance of publication, his recommendations which he would be pushing in the market letter.
A provision of the Investment Advisers Act of 1940, found in 15 U.S.C. § 80b-6 and entitled "Prohibited transactions by investment ...