The opinion of the court was delivered by: BONSAL
Plaintiff, Jack Isaacs, instituted this action on June 27, 1972 against Chartered New England Corporation ("Chartered"), Paul Tessler, and East River Savings Bank ("East River"), seeking to recover damages in the amount of $27,000 allegedly caused by the defendants' fraud in connection with the purchase by plaintiff of shares of common stock of Coatings Unlimited, Inc. ("Coatings").
Jurisdiction is alleged under section 22 of the Securities Act of 1933 ("the 1933 Act"), section 27 of the Securities Exchange Act of 1934 ("the 1934 Act"), and pendent jurisdiction. The action was tried to the Court without a jury.
The complaint contains two causes of action. In the first cause of action, Isaacs alleges that Chartered and Tessler (a registered representative employed by Chartered) "fraudulently induced plaintiff to purchase shares of stock of [Coatings], through the use of manipulative and deceptive devices and contrivances" in violation of the 1933 Act, the 1934 Act, the Rules of the Securities and Exchange Commission ("SEC") and common law. Isaacs also alleges that Chartered and Tessler, "with the aiding and abetting of [East River], arranged for an extension of credit to plaintiff to enable him to make payment for said purchase" in violation of section 7 of the 1934 Act and the Rules and Regulations of the Federal Reserve System. During the trial, the first cause of action was dismissed as to East River for lack of evidence.
In the second cause of action, Isaacs alleges that pursuant to the alleged scheme he received a check (which according to the evidence was in the amount of $27,000) which he deposited in his account at East River; that he was thereafter advised by East River employees that the check had cleared and that he could withdraw on it; that he made withdrawals from the account; that the check was later returned for insufficient funds and his account was charged; and that he was required to make up the deficit in his account with a payment to East River of $27,000.
Isaacs is a guidance counselor employed by the New York Board of Education. Prior to his purchase of Coatings stock in November and December of 1971, he was a small investor. Before meeting Tessler in 1967 he had made only two purchases of stock, each of ten shares. After meeting Tessler, who was then a registered representative at F. I. DuPont & Company, Isaacs usually purchased approximately 50 to 100 shares of stock at a time, substantially all of which purchases were made through Tessler. Isaacs testified that a purchase of $2,000 of stock would be a very large purchase for him and that a typical purchase cost around $500.
In July of 1971, Tessler left F. I. DuPont & Company and joined Chartered, a member of the New York Stock Exchange, as a registered representative and over-the-counter trader. Tessler opened an account for Isaacs at Chartered, filling out the new account application form himself and giving Isaacs' investment objectives as "speculation" and "trading." Isaacs continued to make purchases and sales of stock through Tessler while he was employed at Chartered. Mr. Tessler's immediate supervisor at Chartered was Mr. Bob Blankopf, who did not testify at the trial; and the President of Chartered, Milton Bomback (who did testify at the trial) had overall supervisory responsibility for retail accounts and for the firm's trading. Chartered cleared through another brokerage firm, Dryfoos & Company.
On Sunday, November 21, 1971, Tessler telephoned plaintiff and recommended a large purchase of Coatings shares. When Isaacs told Tessler that he could not afford such a purchase, Tessler told Isaacs that someone would loan him the money. On November 22, 1971, Isaacs purchased 2400 shares of Coatings at a total cost of $24,029.25. Isaacs was hesitant about making the purchase but agreed to do it when Tessler assured him that the transaction was legal and that the stock was going to "go ahead and appreciate." On the same day, November 22, 1971, Tessler and Isaacs met and Tessler gave Isaacs a check to Isaacs' order signed by James Feeney and drawn on The Royal Bank of Canada in the amount of $27,000. Isaacs had never met Feeney nor had he ever heard of him except through Tessler, who described Feeney as "a prominent person in the stock market." On November 24, 1971, Isaacs deposited the Feeney check in his savings account at East River.
Without prior authorization, Tessler sold 400 shares of Isaacs' Coatings stock on November 30 and 300 shares on December 1 and then purchased for Isaacs 200 shares of Coatings on December 3 and another 200 shares on December 6, 1971. Then the SEC ordered a suspension of over-the-counter trading of Coatings stock "because of an unexplained rapid rise in the price of Coatings common stock which, according to management, [was] not justified by any developments in the business".
Prior to December 3, 1971, Tessler urged that Isaacs withdraw funds from his account and pay for the stock and also informed Isaacs that Feeney wanted $1,500 back, which amount was approximately half of the surplus that remained after the purchase of the 2400 shares of Coatings. On December 3, 1971, Isaacs withdrew $24,605.95 from his account, securing one bank check payable to Chartered in the amount of $23,102.25, in payment of the Coatings stock, and two bank checks payable to Tessler in the amounts of $850 and $650, which were to be delivered to Feeney. Isaacs thereafter delivered the three checks to Tessler. While Isaacs testified that he intended to return the balance of the surplus to Feeney, there was no evidence that this was ever done.
On December 21, 1971, First National City Bank (East River's depositary bank) informed East River that the $27,000 check had been dishonored for "insufficient funds," and on the same day, East River so informed Isaacs and charged his account. On December 23, 1971, Isaacs borrowed $25,000 from his fiancee, Mrs. Helen Graf, the proceeds of which (together with $2,000 from his own account) he paid to East River to make up the deficit in his account.
Feeney testified at the trial that Coatings was a corporate shell with no assets nor liabilities but whose shares were publicly traded. Feeney related how in the fall of 1971 he, Tessler, and others were trying to cause an active market in the stock of Coatings in order to raise its price with a view to a later merger of America's Productions, Inc. (a private corporation engaged in the production of films and Latin American radio programs for the American market) with Coatings. Tessler and Feeney pleaded guilty before Judge Gurfein to an indictment charging them with conspiracy to commit violations of the securities laws in connection with their scheme to manipulate the market in Coatings stock. United States v. Feeney, et al., 73 Cr. 747, (S.D.N.Y.) (Feeney pleaded guilty on November 13, 1973, and Tessler, on December 18, 1973). On Decemeber 17, 1971 Tessler was discharged from his employment at Chartered "as a result of a failure to properly oversee customer accounts." Tessler did not testify at the trial, nor did he enter an appearance in this action. However, he did give a pretrial deposition. During November and December of 1971, while Feeney, Tessler, and others were manipulating the market in Coatings stock, Chartered was acting as a "market maker" for Coatings stock.
CHARTERED NEW ENGLAND CORPORATION
Isaacs contends that Chartered is liable for misrepresenting and misleading him as to its own activities as a market maker in Coatings stock and for its failure to ...