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RICH v. NEW YORK STOCK EXCH.

July 23, 1974

Rich, et al.
v.
New York Stock Exchange, et al.


Brieant, District Judge.


The opinion of the court was delivered by: BRIEANT

BRIEANT, District Judge:

Early in the year 1973, Weis Securities, Inc. (hereinafter "Weis"), a member firm of the New York Stock Exchange, (hereinafter the "Exchange" or "NYSE") was engulfed by financial difficulties. On May 24, 1973, when its condition appeared to be beyond salvation, the Securities Investors Protection Corporation ("SIPC") petitioned this Court, pursuant to the provisions of the Securities Investor Protection Act of 1970 for liquidation of Weis, and the appointment of a SIPC trustee. 15 U.S.C. § 78aaa, et seq. The trustee was appointed on May 30, 1973 and proceeded immediately thereafter to resolve customer claims.

 Plaintiffs were among 35,000 customers of Weis who, until May 24, 1973, were unaware and uninformed of Weis' impending demise. Institution of SIPC proceedings then deprived plaintiffs of access to or physical possession of their securities in Weis' possession and the use of the capital these securities represented. This deprivation continued in most cases for at least several weeks, while the SIPC trustee performed his duties. Some customers, as is usual in such matters, never received all their securities in kind, although paid in cash to the limits of the protection provided under the SIPC provisions.

 By this purported class action pursuant to Rule 23, F.R. Civ. P. plaintiffs seek damages for themselves and those similarly situated, from the Exchange, former officers and directors of Weis and Ladenburg, Thalmann & Co. (hereinafter "Ladenburg"), a member NYSE firm.

 Plaintiffs' second amended complaint alleges five causes of action, but upon analysis and consideration of the affidavits and memoranda submitted in their behalf, it appears that plaintiffs' claims are based on two theories only.

 First, plaintiffs assert that the Exchange failed to discharge its duty imposed by section 6(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78f, to supervise and discipline Weis. This failure allegedly was the proximate cause of the SIPC liquidation, as a result of which they were damaged. *fn1" Second, plaintiffs assert that just prior to the liquidation, Weis, with the aid and acquiescence of the other defendants, transferred certain of its large and "privileged" margin accounts ("tippees") to other members of the Exchange, including defendant Ladenburg.

 This action allegedly was also in violation of section 6(b) and section 10 of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78f, 78j and Rule 10b-5 promulgated by the Securities and Exchange Commission (hereinafter "SEC").

 In April 1973 several principals of Weis informed the Exchange that, for an unspecified period, the firm "may have" been "understating its profit and loss report to the Exchange by several million dollars." (Bishop deposition, p. 25). Defendants disclaim any prior actual knowledge by the Exchange that Weis faced financial difficulties. Plaintiffs come forward with no evidence to the contrary.

 The Exchange immediately launched an intensive effort to study Weis' problems, and aid in improving its capital position, so that the firm would survive and customer safety would be assured. As a result of those efforts, a merger of Weis with Ladenburg was suggested. Weis accepted this suggestion and, in turn, proposed to the Exchange that, pending negotiations and consummation of the merger, it transfer some of its larger margin accounts to Ladenburg in order to effect an automatic and immediate improvement of its debt-capital ratio. This suggestion was approved by the Exchange, as a time tested technique of "restoring stability to financially troubled firms." (Defendants' brief, p. 9). According to the Exchange, Weis then unilaterally selected and transferred to Ladenburg those accounts with the largest debit balances. (Defendants' brief, p. 9)

 Defendants oppose plaintiffs' motion for class action determination, and have moved for summary judgment pursuant to Rule 56, F.R. Civ. P. Defendants' summary judgment motion is based on the contention that plaintiffs have no provable damages. We need not reach this point. Obviously speculative, remote or conjectural damages cannot be recovered in an action under the securities laws. However, arguably, on the facts of this case, plaintiffs' right to immediate possession of certificates for their shares of stock, and their right to draw out their cash on demand were impaired by the unavoidable delay consequent on the activities of SIPC. If defendants by their tortious conduct produced this result, and if the damage was foreseeable, as it would be, it would seem plaintiffs could recover the traditional measure of damages for the wrongful distraint of a chattel, Chattanooga Discount Corp. v. West, 219 F. Supp. 140 (D.C. Ala. 1963), or the wrongful failure to pay money when due. *fn2" But we need not reach this issue because, upon uncontested facts and evidence presented in the affidavits on this motion and the depositions, no cause of action exists in plaintiffs' favor.

 Plaintiffs' first theory is based on defendant NYSE's alleged violations of section 6(b) of the Securities Exchange Act of 1934. Section 6(b), which provides for the registration of National Securities Exchanges with the SEC:

 
"No registration shall be granted or remain in force unless the rules of the exchange include provision for the expulsion, suspension, or disciplining of a member for conduct or proceeding inconsistent with just and equitable principles of trade, and declare that the willful violation of any provisions of this title or any rule or regulation thereunder shall be considered conduct or proceeding inconsistent with just and equitable principles of trade."

 Section 6(b) further provides that one purpose of the rules and regulations enacted by the Exchanges is "to insure fair dealing and to protect investors." In addition, section 15A(b) (8) of the 1934 Act, 15 U.S.C. § 78o-3(b) (8) specifies that a national securities association may not register under the 1934 Act unless:

 
". . . The rules of the association are designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade . . . and, in general to ...

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