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PEARLSTEIN v. SCUDDER & GERMAN

June 9, 1972

Stanley S. PEARLSTEIN, Plaintiff,
v.
SCUDDER & GERMAN, a partnership, Defendant


Brieant, District Judge.


The opinion of the court was delivered by: BRIEANT

BRIEANT, District Judge.

This litigation, commenced on April 5, 1962, is now before this Court pursuant to the remand of the Court of Appeals (Pearlstein v. Scudder & German, 429 F.2d 1136, decided July 2, 1970, cert. den. 401 U.S. 1013, 91 S. Ct. 1250, 28 L. Ed. 2d 550 on April 5, 1971). The directions of the Court of Appeals, found at p. 1145 of 429 F.2d are as follows:

 
"Accordingly we reverse and remand to the district court to determine the proper measure and amount of damages. We leave open the question whether defendant's liability for the bonds' decline in price ended when they were sold by the bank or was terminated at some earlier date."

 Jurisdiction here is limited by those directions. The original trial was held in October, 1967 before Judge Cooper of this Court, without a jury. After trial, Judge Cooper granted judgment for the defendant on July 24, 1968 (295 F. Supp. 1197) which was reversed and remanded, as noted above.

 Following remand, there was an exchange of letters between counsel and Judge Cooper, including a letter from plaintiff's then attorney, Joseph Tiefenbrun, stating that:

 
"The plaintiff intends to offer additional evidence concerning the question raised by the Court of Appeals as to the legality of the transaction because of the size of the loans, and further evidence as to the issue of damage (sic)."

 Thereafter, by Memorandum filed May 6, 1971, pursuant to Rule 34 of the General Rules of this Court, and because it appeared that trial of a fact issue was required, Judge Cooper directed that this cause be placed on the General Calendar of the Court, for trial of all issues necessitated by the remand.

 Plaintiff moved for a preference, and by order dated June 12, 1971, then Chief Judge Sugarman directed that the cause be placed on the calendar as a preferred cause "for the trial of only the issue remanded by the Court of Appeals."

 Against this procedural background, the cause was called in on December 6, 1971 for trial before me on December 10th. Plaintiff on December 6, 1971 moved for an order requiring John H. Scudder, a resident of Brooklyn, New York, to give his deposition prior to trial and produce certain documents. The proposed deposition was denied, as seeking irrelevant material ("to acquaint plaintiff and his associate with more of Mr. Scudder's background which previious EBT's had failed to obtain due to the obfusiatory (sic) actions of Mr. Scudder and his late trial counsel.") and also because sought in violation of Rule 9(l) of the General Rules of this Court.

 At the same time, plaintiff moved for leave to file a "Second Amended and Supplemental Complaint" by which, inter alia, he sought to amend his claim to seek punitive damages of $1,000,000.00 and to change the theory of his lawsuit. This branch of the motion was disposed of by my Memorandum and Order dated December 8, 1971, which is reported in 335 F. Supp. 83.

 A trial of the issue of damages was held before me on December 10, 1971. Subsequently, while the exchange of briefs was pending, plaintiff, by a "Letter in Lieu of Motion" dated January 25, 1972, sought to reopen the record before me, for reargument and further testimony. Because sufficient relevant evidence exists to discharge our obligations under the remand, that motion by plaintiff is in all respects denied. *fn1"

 As the factual background of this decade long quest for Justice is detailed in Judge Cooper's reported opinion, and the opinions of the Court of Appeals, above cited, it will not be repeated in detail. Plaintiff, an educated man, and member of the bar of this Court, and of the State of New York, was age 47 in 1961 at the time of the acts complained of. He abandoned the legal profession in 1953 to pursue his avocation, as a writer of fiction, without profit. He became a knowledgeable investor, and after about 1956, supported himself in a modest way from his investments.

 Defendant is a partnership formerly engaged as a stockbroker. Plaintiff opened his account with Scudder & German on February 20, 1961. It was a cash account. (12 C.F.R. § 220.4(c).) Such a special cash account is predicated upon the investor's intention to make full payment of all securities purchased within seven days from the trade date, and not to sell any securities before payment is completed. If plaintiff had an ordinary or "regular way" account, payment would have been required within a five day period. (12 C.F.R. § 220.3(e).)

 As a result of some trades not relevant to this litigation, on March 6, 1961, there remained in Pearlstein's account with Scudder & German a cash balance of $4,599.00, representing net profits from prior sales after repayment of loans. On that day, Pearlstein purchased 50 Lionel Corporation convertible debentures, each having the face value of $1,000.00, at a total price of $58,525.00, together with stock exchange commissions of $100.00, making a total cost for the bonds of $58,625.00 (Exhibit 21). He also paid accrued interest on the debentures of $985.41.

 In order to pay for the Lionel debentures, Pearlstein obtained through defendant, and from a money broker, Garvin, Bantel & Co., a bank loan in the amount of $48,000.00. He also applied his aforementioned cash balance of $4,599.00.

 Plaintiff was obligated to pay the additional $7,026.88 balance of the purchase price for the Lionel debentures by March 15, 1961. This was required by Regulation "T", 12 C.F.R. Part 220, § 220.4(c), promulgated under § 7(c) of the Securities Exchange Act of 1934, 15 U.S.C. § 78g(c).

 Defendant, upon plaintiff's failure to pay, should have "promptly [cancelled] or otherwise [liquidated] the transaction or the unsettled portion thereof." Defendant did not do this. Instead, on April 5, 1961, it transferred the Lionel debentures to the lending bank. Payment was not demanded by defendant of the balance due until June 8, 1961. On August 7, 1961, defendant sued plaintiff in the State court by service of a summons asserting a demand for this unpaid balance, together also with moneys due on American Machine and Foundry ("AMF") convertible debentures (infra). On August 9, 1961, defendant signed a stipulation of settlement and consent to judgment in the State court action, and pursuant thereto, time for payment of part of the unpaid balance was further extended by defendant. By September 20, 1961, plaintiff had paid fully for the Lionel bonds.

 These bonds were sold for plaintiff's account, by a bank holding them as collateral. Sales were made in separate lots on May 11, 1962, May 18, 1962 and April 19, 1963. The amount received on sale was $33,159.14. This election to sell was made by the bank, and consented to by plaintiff.

 It has previously been found as a fact that plaintiff at all times until the date of sale, had the power and ability to direct a sale of this security, and also the AMF debentures (infra). Defendant had the power and ability to direct a sale and the duty to do so at all times after March 15, 1961. While defendant lost physical custody of the Lionel debentures, essential to a sale of these bearer securities, on April 5, 1961, by delivering them to the lending bank, the Court of Appeals held (p. 1142 of 429 F.2d):

 
". . . defendant should have used its best efforts to secure the return of the [Lionel] bonds which it had improperly delivered to the banks, by replevin if necessary, and to sell them."

 Plaintiff's amended and supplemental complaint claims damages in the amount of $26,487.91, together with interest, costs, attorneys' fees and an allowance for the depreciation in the value of the dollar since 1961, all with respect to the Lionel transaction.

 The transaction with respect to the AMF convertible debentures is factually similar. On March 7, 1961, plaintiff agreed with Scudder & German to buy AMF on a "when issued" basis. The parties agreed to a short sale of the AMF debentures by Scudder & German to Pearlstein, and he purchased 100 convertible debentures of AMF, not then actually issued, but being actively traded on the New York Stock Exchange, at a total price of $150,082.64 for delivery when available after issue.

 These securities became available for delivery on March 23, 1961, and payment, under Regulation T, should have been made on April 4, 1961. Although payment was not made on that date, defendant made no demand until May 22, 1961. Here again, the AMF debentures found their way into the hands of a lending bank, obtained by plaintiff with the assistance of defendant, through Garvin, Bantel & Co., a money broker. The bank advanced $100,000.00 towards the price of the AMF debentures, but plaintiff never paid the balance of the price until after February 26, 1962. The AMF debentures were sold May 29, 1962 by a bank, again on ...


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