The opinion of the court was delivered by: COOPER
We are asked to deny to a registered broker-dealer and to an active securities trader, each claiming financial losses resulting from a stock transaction between them, the legal right to reimbursement out of the funds administered by the Securities Investor Protection Corporation (SIPC) as provided by the Securities Investor Protection Act of 1970 (15 U.S.C. § 78aaa-78iii). The application before us is by the Trustee of Packer Wilbur & Co., Inc. (Packer Wilbur); the active securities trader is Effram Arenstein (Arenstein); Coggeshall & Hicks, Inc. (Coggeshall), the registered broker-dealer. The application has legal merit; we uphold it.
The claims herein arise from the same transaction. On February 3, 1971, Arenstein, a customer of both Coggeshall and Packer Wilbur, instructed Coggeshall to purchase two thousand (2,000) shares of Syntex common stock. The purchase was effected at a net price of $90,933.82, settlement date February 10. Arenstein did not have sufficient funds in his Coggeshall account to cover the cost of the securities.
Three days prior to settlement date, February 8, 1971, Arenstein instructed Coggeshall to deliver 2,000 shares of Syntex against payment to Packer Wilbur. Coggeshall delivered the shares, receiving from Packer Wilbur two checks payable to its order aggregating $90,933.82. The checks were dishonored upon presentment to the bank because of insufficient funds. To date they have not been paid. (See Trustee's Memorandum of November 22, 1972, p. 2.)
On the same date (February 8), Arenstein instructed Packer Wilbur to sell 2,000 shares of Syntex. At that time Arenstein did not have any Syntex stock in his Packer Wilbur account and did not own any. (See Trustee's Memorandum, supra at p. 2.) Packer Wilbur, having obtained possession of the 2,000 shares of stock, resold the same for $94,101.71.
Coggeshall commenced an action against Packer Wilbur for the amount due on the dishonored checks. This action was stayed by order of this Court upon appointment of the Trustee as Receiver for Packer Wilbur on June 21, 1971. Thereupon Arenstein and Coggeshall filed their respective claims which we now dispose of.
The Securities Investor Protection Act of 1970 was enacted to stem the growing loss of confidence of public investors in the ability of the brokerage industry to protect customer accounts and generally strengthen the financial responsibility of broker-dealers so as to thereby eliminate, to the maximum extent possible, risks which lead to customer loss. Moreover, the Act seeks to insulate the securities market from any domino effect which may result from the failure of a brokerage house. Senate Report No. 1218. House Report No. 1613, 91st Cong., 2nd Sess. (1970). See also Securities Investor Protection Corp. v. Charisma Securities Corp., 352 F. Supp. 302 (S.D.N.Y. 1972).
To effect its purpose, the Act established a fund created from mandatory assessments of all broker-dealers, to be utilized for the purpose of reimbursing customers who incur losses at the hands of insolvent brokers. The fund is administered by the Securities Investor Protection Corp., a nonprofit corporation whose members consist of all broker-dealers and members of national securities exchanges.
Upon determination that a broker is in danger of insolvency, SIPC is authorized to apply to the Court for an adjudication that the customers of the allegedly insolvent broker should be afforded the protection of the Act. See SIPC v. Charisma Securities Corp., supra. On June 21, 1971, this Court, upon such an application, appointed the Trustee, the movant herein, pursuant to Section 5(b)(3) of the Act. 15 U.S.C. § 78eee(b)(3).
Arenstein contends that his claim against Packer Wilbur should be recognized as a valid claim upon the "single and separate fund" established pursuant to the Act. 1970 Act, § 6(c)(2)(B), (f); 15 U.S.C. § 78fff(c)(2)(B), (f). Arenstein concedes that to the extent that Coggeshall's claim is allowed, his claim should be reduced accordingly. We do not agree.
We find from the facts aforementioned that Arenstein was attempting to effect a purchase and sale of stock and realize a profit thereon without any cash investment. If the transaction had been successfully completed, Coggeshall would have received payment for the stock from Packer Wilbur, leaving a zero balance in his Coggeshall account; Packer Wilbur would have completed the sale, leaving Arenstein's net profit of $3,269.82 in his Packer Wilbur account.
Section 220.4(c) of the Federal Reserve Board regulations (hereafter "Regulation T"), promulgated pursuant to the Exchange Act of ...