The opinion of the court was delivered by: COOPER
This litigation brings before us, as plaintiff, The Architectural League of New York ("the League") and, as defendants, Phillip Nicholas Bartos ("Bartos"), Flaks, Zaslow & Co., Inc. ("Flaks, Zaslow"), Stephen Flaks ("Flaks"), and Stanley Zaslow ("Zaslow"). The League is an eleemosynary institution chartered under the New York Not-For-Profit Corporation Law and organized as an educational and cultural center for architects and related professionals. Bartos was, at all relevant times, a securities salesman registered with the SEC and the National Association of Securities Dealers ("NASD") and had full discretionary powers over the League's account. During the relevant period Flaks, Zaslow was a broker-dealer in securities registered with the SEC and NASD, and Flaks and Zaslow were officers, directors and principals of Flaks, Zaslow.
Plaintiff brings this action for rescissional damages under the federal securities laws, NASD Rules, and New York statutory law. The essence of plaintiff's claims is that defendants were investing its account in highly speculative securities contrary to plaintiff's intentions or policy. Plaintiff alleges that defendants made fraudulent misrepresentations and omissions of material facts, but for which plaintiff would not have permitted them to exercise or continue to exercise discretion over the account. Plaintiff also alleges certain violations of regulations by Flaks, Zaslow and its principals, Flaks and Zaslow. Defendants deny these allegations and claim that the League knew that its account was being invested in speculative securities and that this was an announced policy of the League. Trial was held before the Court; we undertake now to dispose of these conflicting arguments and contentions. Upon all the evidence adduced before us and for all the reasons set forth below, we find in favor of defendants.
The period of time with which we are primarily concerned is February, 1972 to February, 1973, when the League's account was at Flaks, Zaslow. In order to put those transactions into perspective, however, we begin with a discussion of the League's investment portfolio prior to that time.
Prior to May, 1969 the League had invested about 70% of its funds with a mutual fund, and the rest in an interest-bearing bank account. In time the League grew dissatisfied with the low rate of return on its investments and Roy Moyer, the finance chairman, approached Bartos with respect to serving as its stockbroker. Bartos at the time was a registered representative with Halle & Stieglitz, a brokerage firm and not a party in this lawsuit. Bartos submitted a list of alternative mutual funds that might perform better; Moyer, after consulting with the League, responded that it had decided to purchase stocks instead. Shortly thereafter, at the League's suggestion and initiative, Bartos was given full discretionary powers over the League's portfolio at Halle & Stieglitz; he accepted discretion only after receiving assurances that the League could properly delegate investment discretion to him. (Tr. 9-11, 108-113; Ex. A-15 at p. 2, B)
Initially, Bartos pursued what he called a "moderately aggressive" investment course for the League. From the beginning the League's account was a trading account, that is, an account in which securities are bought and sold for the goal of short-term profits. From in or about June, 1969, through the fall of 1972, Bartos entered into more than two hundred purchase and sale transactions for the League's account, and the League received confirmation slips and monthly statements reflecting those transactions. (Tr. 17, 116-117; Ex. 7)
At the start Bartos did not do well. After the first year, of the original $90,000 investment in stocks,
only about $23,000 remained. The League noticed this rapid decline and in May, 1970 instructed Bartos through its treasurer, Edward Bloomstein, to stand still in its current positions. This ban was not lifted for several months. (Tr. 116-118, 120; Ex. A-4 at p. 2, C)
In late June or early July, 1970, Bartos appealed to Bloomstein to obtain a lift of the trading ban. He told Bloomstein that he felt the valuation at that time was quite low, and said, "If you go down like a swinger, you have to come back like one." Nevertheless, the ban was not lifted until the fall of 1970. (Tr. 36-37, 120-122)
Upon the lifting of the ban Bartos engaged in a more speculative investment course. This was in part due because, while the ban was in effect, the stocks of more substantial companies had largely recovered from the 1970 recession, and would not serve as a likely vehicle for recovery of the League's losses. This course proved reasonably successful. By the spring of 1971 Bartos had tripled the value of the stock investments from a low of about $23,000 to about $80,000. When informed of this recovery, John Jansson, recently elected treasurer of the League, wrote Bartos that he was "delighted." At Jansson's request, Bartos prepared a position report for the League's executive committee which outlined briefly the substantial fluctuations in the value of its account. (Tr. 122-127; Ex. D, I and 6)
During the remainder of 1971 and into early 1972, Bartos continued to pursue a predominantly speculative investment course for the League. On September 16, 1971 Bartos sent Jansson a letter listing the League's holdings: Health Chem. Industries, Cybermatics Inc., Faraday Laboratories, Digital Computer, American General Bond and Con Edison. That report also contained comments by Bartos on the economy and the stock market following the wage and price controls: "Companies without long earnings records who are in the developmental stage will fair [sic] better in such circumstances. They will not suffer from dividend cuts and their more rapid growth will probably be encouraged by limiting profit controls to larger companies. Of course, this is only speculation, but it's how I see it."
At trial Bartos described Health Chem Industries as a moderately speculative over-the-counter stock; Cybermatics Inc., Faraday Laboratories and Digital Computer as highly speculative over-the-counter stocks; and American General Bond and Con Edison as nonspeculative. As of September 16, 1971, about 65% of the League's portfolio, in terms of market price, was invested in speculative securities. Bartos had purchased the Faraday stock in August, 1971; in December, 1971 he bought the stock of Unimet Corporation. These two stocks later comprised a significant portion of the League's account at Flaks, Zaslow. As of late 1971, about 40% of the League's Halle & Stieglitz portfolio consisted of Faraday and Unimet stock. (Tr. 128-137; Ex. F, J-1, J-2 and 15)
In January, 1972 Bartos met with Jansson and discussed his prospective shift of employment from Halle & Stieglitz to Flaks, Zaslow. Patricia Luciani, the executive director of the League, was also present during part of the discussion. Bartos explained in detail the nature of the firm and his reasons for going there. Bartos also discussed with his father, Harold Bartos, his shift to Flaks, Zaslow. Harold Bartos had been intimately involved with the League, serving on the executive committee at various times as fourth vice-president, treasurer, and, from May 21, 1971 to the end of 1972, as chairman of the finance committee. Bartos told his father essentially what he had told Jansson. (Tr. 97-98, 141-145, 160-161)
The League subsequently formally approved the transfer of its account from Halle & Stieglitz to Flaks, Zaslow. The account remained fully discretionary, and on February 4, 1972, by Full Trading Authorization and corporate resolution, the League authorized Bartos "to buy, sell (including short sales) and trade in stocks, bonds and any other securities and/or commodities and/or contracts relating to the same on margin or otherwise . . ." (Tr. 143-144; Ex. 8)
Bartos estimated that at the time he started to work at Flaks, Zaslow in February, 1972 the value of the League's account was between $90,000 and $110,000. Counsel for plaintiff corroborated this and computed its value to be precisely $99,818.77.
Plaintiff now seeks damages in the amount of $86,916.24 (plus interest), which is the diminution in value of its account from the time Bartos commenced work to the time the account was finally liquidated ($12,902.53).
At issue here are 28 purchase and sale transactions entered into by Bartos for the League from February through October, 1972. Plaintiff does not complain about the number of transactions; its outcry goes to their quality. Bartos purchased seven securities for the League's account at Flaks, Zaslow: Faraday Laboratories, Inc., Unimet Corp., World Patent Development Corp., Fiberglass Homes of America, Inc., Micrex Corp., Econetics Corp., and Int'l Mining & Abrasives, Inc. At trial Bartos described Faraday as highly speculative and involving a high degree of risk, Unimet as relatively speculative and of limited marketability, World Patent Development and Fiberglass Homes as highly speculative, Micrex as speculative and involving a high degree of risk, and Int'l Mining & Abrasives as moderately speculative. Of these transactions, a few were over-the-counter and the remaining involved Flaks, Zaslow acting as a market-maker. (Tr. 5, 44-46, 58-84, 211; Ex. 27)
In March, 1972 Jansson announced that he would not run again for treasurer. Some months elapsed before his successor, Walter Rooney, assumed the position in the early summer, 1972. Some time later, still in the summer, Rooney called Bartos and arranged for a meeting, also attended by Pat Luciani; Bartos outlined in general terms the League's investment situation. (Tr. 264-266; 285-286; Asche aff. at p. 2)
On August 28, 1972 Miss Luciani telephoned Bartos and asked, as she did periodically, for an evaluation of the League's portfolio. Bartos computed it at $102,550; Miss Luciani then contacted another broker who computed it at $83,862. When Rooney later asked about this discrepancy, Bartos said that he could have made a mistake, and also explained that the League had a large number of shares of volatile, fluctuating stocks so that even a brief time difference could have caused the variance in ...