The opinion of the court was delivered by: TYLER
This case is currently before the court on cross motions for summary judgment. Plaintiffs essentially allege that the court has subject matter competence over the claims raised because they arise from violations of the margin requirements (§ 7) and antifraud (§ 10) sections of the Securities Exchange Act and from violations of rules and regulations promulgated thereunder, including various rules of the New York Stock Exchange. Plaintiffs also allege a pendent state cause of action. The essence of plaintiffs' claims is that a margin purchaser can unilaterally void a margin transaction at any time if the broker does not obtain a margin agreement signed by the purchaser.
Plaintiffs apparently infer that this duty exists from their reading of the various securities laws and regulations they cite, although nowhere do they specify how or where the duty is implied in the many pages of statutes and rules to which they refer. They do allude to promoting the purposes of the Securities Exchange Act of 1934, but they do not specify to precisely what purpose they refer or how inferring a duty to obtain a signed margin agreement would promote that purpose. Since the court concludes that the duty on which the action appears to be based does not exist under federal law, it denies plaintiffs' motion for summary judgment and grants the cross-motions of defendants J. D. Winer & Co., Inc. ("Winer") and Loeb, Rhoades & Co. ("Rhoades").
Certain facts not alleged in the amended complaint might be considered to form the basis of certain claims not asserted in that complaint. Indeed, plaintiffs apparently seek to raise such claims belatedly in their affidavits and reply memorandum. In an effort to make clear the court's view of the merits of this action, the amended complaint of record will be considered to be further amended to include all facts and claims favorable to the plaintiffs which are indicated with comprehensible clarity anywhere on the record. Such claims include a contention that the initial margin requirements of Regulation T were violated and that plaintiffs were damaged as a result. But, as this opinion will demonstrate, neither this claim nor any other imaginable on the record in this case has any merit.
The essence of plaintiffs' primary claim is as follows. Mark and Samuel Bell, son and father, respectively, seek to recover the sums of $11,150.14 and $3,090.00, which sums were paid by them in connection with their purchases on margin of senior non-convertible debentures of G.A.C. Properties Credit, Inc. ("G.A.C."). They apparently base the relief requested on §§ 9(e), 18, 27, and 29 of the Securities Exchange Act of 1934 (15 U.S.C. §§ 78i(e), 78r, 78aa, and 78cc). As indicated, the thrust of the complaint of the Bells' is that the defendants failed to obtain from plaintiffs executed margin agreements which they were legally required to do by §§ 6, 7 and 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. §§ 78f, 78g, and 78j); Regulation T (12 C.F.R. § 220) and Rule 10b-5 (17 C.F.R. § 240.10b-5) promulgated thereunder; and various rules of the New York Stock Exchange. More specifically, plaintiffs' position on their motion is that, because no signed margin agreement was ever obtained from them, Winer and L. M. Rosenthal & Company, Inc. ("Rosenthal") were obligated to obtain full payment for the G.A.C. debentures within seven days of their purchase or sell the securities; that Rhoades, which succeeded Rosenthal as clearing agent for Winer in March, 1973, had no authority to sell the G.A.C. debentures following plaintiffs' failure to maintain adequate margin in their accounts; and that therefore plaintiffs are entitled to rescission of their margin purchases of G.A.C. debentures, with concomitant restitution to them of all monies paid in connection with said purchases.
Although there are minor disputes about peripheral facts, the essential facts in this case are not contested. To the extent that there are disagreements, the facts are set out herein in the light most favorable to plaintiffs. From March, 1971, through March 5, 1973, Rosenthal acted as clearing agent for Winer, a New York corporation engaged in retailing securities. After March 5, 1973, Rhoades took over the clearing functions for Winer pursuant to an agreement reached in late January of that year. On various dates in 1971 and 1972, plaintiffs purchased G.A.C. debentures. The dates, face amounts, net amounts of these purchases, and payments made are set forth as follows:
Purchase or Face Net Payment on
Payment Date Amount Amount Transaction
Aug. 24, 1971 $ 6,000 $ 6,682
Sept. 3, 1971 $ 2,000
Nov. 5, 1971 $22,000 $24,563
by Nov. 16, 1971 $ 1,209
Nov. 17, 1971 $ 2,160
Nov. 19, 1971 $ 4,004
Nov. 17, 1971 $ 5,000 $ 5,175
Nov. 26, 1971 $ 1,553
Purchase or Face Net Payment on
Payment Date Amount Amount Transaction
Oct. 17, 1972 $10,000 $10,365
Oct. 25, 1972 $ 3,090
$10,365 $ 3,090
It is these transactions which are the subject of this suit. Plaintiffs purchased these debentures on the condition that they would only pay a percentage of the purchase price and would pay interest at a stipulated rate on their outstanding debit balances. In short, Winer treated these purchases as margin transactions and computed the amounts due from plaintiffs in accordance with the requirements of Regulation T as well as their own firm's margin purchase requirements. Thus, Rosenthal opened for plaintiffs what is styled a "Type 8" margin account for nonconvertible debentures. Monthly statements were sent by Rosenthal to plaintiffs. These statements, of course, show the outstanding debit balances and interest charges.
In late January, 1973, Winer wrote plaintiffs that in early March, Rhoades would commence to act as Winer's clearing agent and indicated that, unless they objected, plaintiffs' accounts would be transferred from Rosenthal to Rhoades. There being no objection, the accounts were transferred. On March 5th, however, Rosenthal issued to Samuel Bell a margin call on his G.A.C. debentures. Samuel Bell declined to pay on this call.
Furthermore, between March 13 and April 9, 1973, Rhoades issued to both plaintiffs requests for additional margin and specifically warned that unless such margin was received, plaintiffs' G.A.C. debentures would be sold. These margin calls were as follows:
DATE TO AMOUNT
March 13 Mark Bell $1500
March 26 Samuel Bell $ 200
March 30 Samuel Bell $3400
March 30 Mark Bell $ 225
April 9 Mark Bell $11,000
April 9 Samuel Bell $2400
Except for the call on March 30 for $225 which was paid by Mark Bell, none of the requests for margin was met by the plaintiffs.
On or about April 18 and 19, 1973, Rhoades, with the consent of Winer, liquidated plaintiffs' holdings of G.A.C. debentures. As a result, Rhoades realized about $24,273 for Mark Bell, which sum when applied to his account reduced his outstanding debit balance to $819. For Samuel Bell, Rhoades realized about $6621 which sum reduced his outstanding debit balance to zero.
The pre-trial deposition of plaintiff Mark Bell establishes that he was fully aware that he was buying the G.A.C. debentures for a percentage of the purchase price and that he would pay interest on the outstanding debit balance. Plaintiffs apparently concede that Samuel Bell also understood this purchasing arrangement. There can be no reasonable doubt that plaintiffs knew they had purchased bonds which Winer was keeping as security for the loans on which the Bells were paying interest every month. Regardless of what label the Bells might apply to the transactions at issue, they understood the essential elements of those transactions for the purposes of the federal securities laws.
The moving defendants admit that they have no record of having obtained at any time a margin agreement signed by either plaintiff. It is conceded by all, however, that in March, 1973, Rhoades sent to plaintiffs its margin agreement form ("customer's agreement and consent to loan of securities"). Plaintiffs agree that they received these forms but refused to sign them, notwithstanding several written requests from Rhoades that they do so.
I first turn to the claim that brokers are under a legal duty to obtain a signed margin agreement from each purchaser in order to effect a valid margin transaction. Plaintiffs nowhere contend that such a duty is explicitly imposed on a broker, but they do suggest that such a duty is implicit. Although plaintiffs offer no direction as to how this duty can be inferred from the securities laws and regulations which they cite, this court has analyzed those laws and regulations; it finds no basis on which such an inference could be made. To the extent that the margin requirements section of the Act of 1934 and Regulation T thereunder are intended to protect individual investors (see Pearlstein v. Scudder & German, 429 F.2d 1136 (2d Cir. 1970), cert. denied, 401 U.S. 1013, 28 L. Ed. 2d 550, 91 S. Ct. 1250 (1971)), a duty to insure that the investor understands what a margin transaction is could be inferred. Assuming such an implied duty does exist, an individual investor might be granted standing to sue for a violation of the duty
since private actions might provide "a necessary supplement to Commission action." See J. I. Case Co. v. Borak, 377 U.S. 426, 432, 12 L. Ed. 2d 423, 84 S. Ct. 1555 (1964). However, in this case plaintiffs clearly understood at least the essential elements of the type of transaction in which they engaged through their broker. In light of this understanding, there appears to be no reason for this court to infer a duty that signed margin agreements be obtained.
Since the court concludes there is no such duty, there can be no violation of that duty and, hence, no violation of the federal securities laws for not acting as if there were such a duty. Without a violation of those laws, this court lacks subject matter competence and must dismiss the plaintiffs' claims to the extent they are based on the lack of a signed margin agreement.
Turning to § 10(b) of the 1934 Act and Rule 10b-5 thereunder, plaintiffs' claims are no more cogent, particularly in that there are no specific allegations whatsoever of any act of fraud or misrepresentation by concealment or misstatement on the part of the defendants. In short, the claims amount to no more than merely conclusory allegations that somehow the defendants' conduct was in violation of Rule 10b-5. The courts have rejected such allegations as being clearly insufficient as a matter of law. Shemtob v. Shearson, Hammill & Co., 448 F.2d 442, 444 (2d Cir. 1971).
Even more mystifying are plaintiffs' assertions, without specification or explanation, that the transactions at issue violated New York Stock Exchange Rules 342(b)(2), 401, 402(b), 402(d), 405(3), 406(2), 408(b), 431, and 432. To the limited extent that any of these rules seems relevant to the instant action, none appears to have been violated in any way which would support the claims asserted. Rule 402 does require a separate written authorization before a broker can lend to itself or others securities already pledged on a customer's account; however, such written authorization is nowhere required initially to pledge the securities bought for a customer's account or to sell them to satisfy the loan on which they were pledged as collateral. In fact, the failure to sell securities pledged as collateral on a margin loan, within a reasonable time after their value falls below the margin maintenance requirements, would itself violate Rule 431. In any case, federal courts have generally been unwilling to infer that private litigants have an implicit claim for relief and standing to sue for violation of NYSE Rules. See Colonial Realty Corp. v. Bache & Co., 358 F.2d 178 (2d Cir.), cert. denied, 385 U.S. 817, 17 L. Ed. 2d 56, 87 S. Ct. 40 (1966); cf. Buttrey v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 410 F.2d 135 (7th Cir.), cert. denied, 396 U.S. 838, 24 L. Ed. 2d 88, 90 S. Ct. 98 (1969). See generally Lowenfels, Implied Liabilities Based Upon Stock Exchange Rules, 66 Colum.L.Rev. 12 (1966). Aside from the considerations raised by those authorities, it is questionable whether the Federal Reserve Board has delegated rule-making authority to the NYSE, whether the Federal Reserve Board has the power to delegate its rule-making authority at all, and whether NYSE Rules are rules under the Exchange Act as required by § 27 (15 U.S.C. § 78aa) or are merely preconditions to ...