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SEC v. KELLY

November 25, 1974

Securities And Exchange Commission, et al., Plaintiffs
v.
Kelly, Andrews & Bradley, Inc., et al., Defendants


Weinfeld, District Judge.


The opinion of the court was delivered by: WEINFELD

WEINFELD, District Judge.

Upon the commencement of this action by the Securities and Exchange Commission against Kelly, Andrews & Bradley, Inc. ("Kelly, Andrews"), a broker-dealer, and its officers and directors, charging them with violations of the anti-fraud and other provisions of the Securities Acts of 1933 and 1934, a Trustee was appointed to liquidate Kelly, Andrews to protect its customers, pursuant to the provisions of the Securities Investor Protection Act of 1970 ("SIPA"). *fn1" After a trial on the merits, judgment was entered granting a permanent injunction in various respects against the defendants. *fn2" The matter now before the court is on the application of the Trustee to disallow, after hearing on notice, various claims filed for coverage pursuant to SIPA. *fn3" Three claimants object to the disallowance of their respective claims and each will be considered separately.

 Before considering their objections, a word about this relatively recent legislation under which the disputes arise is in order. SIPA was enacted to protect public customers of securities dealers from the consequences of financial instability in the broker-dealer industry *fn4" by assuring to customers recovery in the event of a broker-dealer's insolvency. The central provision of SIPA creates the Securities Investor Protection Corporation ("SIPC"), a non-profit corporation composed of all broker-dealers registered with the Securities and Exchange Commission under the Securities and Exchange Act of 1934 and all members of a national securities exchange. *fn5" When SIPC determines that a broker is on the brink of insolvency or otherwise is in need of the protection the Act affords, SIPC applies to a federal district court for a determination that the broker's customers are entitled to such protection. A trustee is then appointed. *fn6" If the trustee determines that a customer's claim against the broker is covered by the Act's provisions, SIPC advances funds to the trustee for payment of the claim, up to $50,000 for each customer owed securities and $20,000 for each customer owed cash from the financially precarious brokerage firm. *fn7" SIPC is funded by assessments made upon the members of the broker-dealer industry. *fn8"

 1. Claim of Steiner, Rouse & Co., Inc.

 This claimant, a broker-dealer, alleges that on September 23, 1971, acting as agent on behalf of its customers, it sold to Kelly, Andrews, the debtor, 4300 shares of International Technical Development stock for $2,265; that the debtor refused to accept delivery of such shares; that after repeated unsuccessful attempts to make delivery, Steiner, Rouse sold the securities on October 28, 1971 to another broker-dealer at a loss of $1,234.75. The Trustee does not dispute these facts or that the amount of the loss is allowable against the debtor's estate. The issue is whether the claimant is entitled to coverage under SIPA.

 First, the claimant contends that it is a "customer" of the debtor within the meaning of section 6(c)(2)(A)(ii) of SIPA *fn9" and consequently is entitled to payment pursuant to section 6(f)(1)(D) of the Act, *fn10" which affords protection to brokers who are "customers" of the debtor and who were acting for their own customers in the transaction. Section 6(c)(2)(A)(ii) of the Act in pertinent part provides:

 
"'customers' of a debtor means persons (including persons with whom the debtor deals as principal or agent) who have claims on account of securities received, acquired, or held by the debtor from or for the account of such persons (I) for safekeeping, or (II) with a view to sale, or (III) to cover consummated sales, or (IV) pursuant to purchases, or (V) as collateral security, or (VI) by way of loans of securities by such persons to the debtor, and shall include persons who have claims against the debtor arising out of sales or conversions of such securities, . . . ."

 Steiner, Rouse never delivered the securities to the debtor. It retained them until it effected their sale of October 28, 1971 and sustained the loss. The loss sustained upon their sale is not a claim "on account of securities received, acquired, or held by the debtor." Therefore claimant is not a customer as defined in the Act and is not entitled to SIPA coverage for its loss. Its claim is against the debtor's estate as a general unsecured creditor.

 Second, Steiner, Rouse contends that the transaction was an "open contractual commitment" and that therefore the Act obligates the Trustee to complete the transaction and make good claimant's loss. Under section 6(d) of SIPA, *fn11" the Trustee is required to:

 
"complete those contractual commitments of the debtor relating to transactions in securities which were made in the ordinary course of debtor's business and which were outstanding on the filing date --
 
(1) in which a customer had an interest, except those commitments the completion of which the Commission shall have determined by rule or regulation not to be in the public interest, or
 
(2) in which a customer did not have an interest, to the extent that the Commission shall by rule or regulation have determined the completion of such commitments to be in the public interest."

 Steiner, Rouse was acting as an agent for a customer in this transaction and, under section 6(d)'s unique definition of a "customer," *fn12" the claim here at issue would qualify for SIPC payment if the transaction were an open contractual commitment.

 Congress intentionally left the definition of an "open contractual commitment" subject to contraction and expansion by the SEC through rules and regulations, as experience dictated. *fn13" The Commission did not promulgate rules with respect to this provision until July, 1973. *fn14" These regulations may not be applied retroactively, *fn15" and the Commission does not seek to do so. *fn16" ...


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