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NEWMAN v. PERSHING & CO.

April 4, 1975

Newman
v.
Pershing & Co., Inc. et al.


Conner, District Judge.


The opinion of the court was delivered by: CONNER

CONNER, District Judge:

This is an action for a declaratory judgment that plaintiff, Gerald Newman, is not liable to defendants, Pershing & Co., Inc. (Pershing) and L. M. Rosenthal & Co., Inc. (Rosenthal), in any amount, under any circumstances, for his refusal to pay for 1,000 shares of the common stock of Electronic Arrays, Inc. (Arrays) which were allegedly purchased by plaintiff in October, 1973. Plaintiff additionally seeks a permanent injunction restraining defendants from attempting to recover any amount with regard to such alleged stock purchases.

 Concurrent with service of the summons and complaint, plaintiff moved, pursuant to Rule 65, F.R. Civ. P., for a preliminary injunction staying the arbitration proceeding which has been initiated by Pershing before the New York Stock Exchange. Subsequently, defendants moved, pursuant to Rule 12(b), F.R. Civ. P., for an order dismissing the complaint for lack of subject matter jurisdiction and failure to state a cause of action.

 The basis of this action and of plaintiff's motion is the contention that the matters in dispute involve violations of Regulation T, 12 C.F.R. § 220, *fn1" promulgated by the Board of Governors of the Federal Reserve System pursuant to Section 7 of the Securities Exchange Act of 1934, 15 U.S.C. § 78g *fn2" (the Exchange Act) and therefore:

 1) This Court has exclusive jurisdiction over this action, 15 U.S.C. § 78aa;

 2) the purchase agreements are void, 15 U.S.C. § 78cc;

 3) any pre-existing arbitration agreement is void, 15 U.S.C. § 78cc(a).

 This case presents a novel question concerning the scope of the private remedy for violations of Regulation T which has been implied under Section 29(a) of the Exchange Act. See Pearlstein v. Scudder & German, 429 F.2d 1136, 1140-41 (2d Cir. 1970), cert. denied, 401 U.S. 1013, 28 L. Ed. 2d 550, 91 S. Ct. 1250 (1971). That question is: Is a customer trading under a special cash account, 12 C.F.R. § 220.4(c), immune from any liability to a broker-dealer who seeks to recover all or part of the market loss on a transaction in which the broker-dealer failed to deliver or liquidate within the time limitation specified in Regulation T? Under the circumstances of this case, at least, I am constrained to rule that the answer is no.

 I.

 The facts are essentially these: In October, 1973 plaintiff maintained a cash, C.O.D. account with Rosenthal for the purpose of purchasing securities. Under the terms of this account, as it existed in October 1973, plaintiff was to place orders with Rosenthal, who was to execute the trades as broker. Pershing's function was to "clear" each transaction, that is, to pay for the securities purchased from the sellers and to deliver them C.O.D. to a bank designated by plaintiff. It was also Pershing's responsibility to handle the bookkeeping on the transactions and provide plaintiff with confirmation slips and monthly statements of his account.

 Initially, the designated bank was Underwriters Bank & Trust Co. (Underwriters). However, at some time subsequent to the establishment of plaintiff's account with Rosenthal in November 1972, but prior to October 1973, plaintiff transferred the designation to the American Bank & Trust Co. (American). It was during this same time period that Rosenthal arranged to have Pershing clear plaintiff's transactions. Pershing also agreed to maintain an account for plaintiff on a "disclosed" basis.

 In accordance with this arrangement, plaintiff executed a Cash Account Agreement and a Standing C.O.D. Account Instruction Agreement to Pershing. The former contained the following clause:

 
"Any controversy between you and the undersigned arising out of or relating to this agreement, or the breach thereof, shall be settled by arbitration, in accordance with the rules, then obtaining, of either the Arbitration Committee of the Chamber of Commerce of the State of New York, or the American Arbitration Association, or the Board of Arbitration of the New York Stock Exchange, as the undersigned may elect."

 On or about October 10, 1973, plaintiff ordered 500 shares of the common stock of Arrays from Rosenthal. These shares were delivered to American on November 9, 1973 and paid for. Defendants claim that plaintiff ordered additional lots of 500 shares of Arrays common on October 8 and 16, 1973. It was not until December 6, 1973 that Pershing attempted to deliver these shares to ...


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