The opinion of the court was delivered by: POLLACK
The plaintiff sues herein to recover losses sustained in margin trading in securities. The defendants are the stock brokers, members of the New York Stock Exchange, through whom the transactions were effected, and their registered representative who handled plaintiff's account. The case was tried to the Court without a jury on agreed upon findings of fact and on the oral and deposition testimony of employees of the brokerage firm. The plaintiff did not testify although he was present throughout the trial.
The sole claim tried is that the defendants permitted the plaintiff to purchase securities on margin in violation of the margin requirements imposed by Regulation T of the Federal Reserve System, 12 C.F.R. § 220, promulgated pursuant to Section 7 of the Securities Exchange Act of 1934, 15 U.S.C. § 78g.
The background is as follows.
Plaintiff was a margin trader in securities prior to 1969 and was the holder of a considerable number of speculative issues. On or about January 6, 1969, plaintiff opened a new margin account with the defendant brokerage firm through the individual defendant, one of its registered representatives, and instructed the transfer of his entire margin account maintained with other brokers to the defendant firm. The transferred account contained 8,757 shares of the stock of 26 different companies held as collateral security for an indebtedness to the former brokers of $36,713.64 which the defendant firm paid to the transferor on plaintiff's behalf.
In connection with opening the new account, plaintiff signed the defendants' usual customer's margin trading agreement, by which he undertook at all times to maintain margin in his account as required by the brokers from time to time. During the period that plaintiff maintained his account with defendants, the maintenance requirement set by the defendants called for a margin of 30% of the market value of the securities carried in a customer's account. This house rule required a higher margin than the 25% minimum which the Rules of the New York Stock Exchange required its members to prescribe as maintenance margin. Rule 431, New York Stock Exchange Guide, P2431 (1957).
Following the opening of his account, the plaintiff bought and sold securities therein, deposited cash as additional collateral, received dividends in the account from securities on hand, was debited with the cost of securities purchased and charged interest on the money balances owing to the brokers. He regularly received monthly statements of all transactions.
During 1969, plaintiff made 19 stock purchases on which he claims to have sustained an actual or paper loss in 1969 through 1971. He seeks to shift this loss to the brokers in this suit. These purchases involved 2,900 shares of the securities of 16 different corporations. In August, 1970, plaintiff's account fell below the 30% minimum margin which he was obligated to maintain. Sales of securities in the account were effected, resulting in the credit to the account of proceeds which were less than the cost to the plaintiff of the securities sold. By this suit plaintiff seeks also to recover this difference from the brokers.
This suit was commenced on December 23, 1970.
Regardless of the motivation of a customer who sues his agent for trading losses derived from unlucky speculation, it has been held that the customer has a right to seek damages resulting from purchases made in violation of Regulation T. Pearlstein v. Scudder & German, 429 F.2d 1136 (2d Cir. 1970). Such holdings are deemed to be required as a means of protecting the public from margin violations by brokers and dealers. Idem 1140. Consequently, a detailed analysis must be made to determine whether plaintiff's "buying power" in his accounts used to effect each of the purchases equalled the minimum initial margin requirement of 80% imposed in 1969 by Regulation T. A detailed scrutiny of the margin situation in plaintiff's accounts at the time of each purchase shows that there were free funds on hand with the brokers sufficient to meet the 80% initial margin requirement in every instance. Plaintiff's contentions to the contrary lack merit.
Plaintiff attempted to show that each of the transactions in issue was undermargined in violation of Regulation T, by use of the stipulated figures describing a) the value of the collateral in plaintiff's account and b) the debit balance due the brokers on the days of each purchase. He concluded two things from these two figures: 1) that the extent of margin legally available to make a purchase was 20% of the value of the collateral in his account; and 2) that since the existing indebtedness to the brokers in plaintiff's account was in excess of 20% of the aggregate market value of the collateral in the account, there was no "buying power" to meet initial margin requirements for the new purchases.
However, the source for satisfying Regulation T was not the securities existing in the account but a Special Miscellaneous Account, a type of memorandum account employed not only by these brokers for each of their customers but by virtually all other brokerage firms as well.
The Special Miscellaneous Account, or SMA as it is popularly known, is an account which contains and from which is drawn, by an accounting transfer, the margin needed to comply with Regulation T whenever a purchase of securities is made partly on credit. The available credit balance in the SMA consists of cash deposited by the customer, dividends on securities held by the broker for the customer's account, any available portion of the sales proceeds of securities sold in the margin account by the customer,
and any appreciation in market value of the securities held in the account over the price at which they were purchased.
Table I of the Appendix hereto, sets out, pursuant to stipulation, the history of plaintiff's SMA from just before the first transaction in question, dated March 11, 1969,
through the last transaction on December 11, 1969. Table I indicates that credit in the SMA was available (column 5) and did provide (column 3) the 80% initial margin required for each of the transactions in question. This table also indicates the extent of the credits to ...