The opinion of the court was delivered by: BONSAL
Plaintiff, Bernard Weinberger, a former limited partner in the now defunct brokerage firm of Ira Haupt & Co. ("Haupt"), commenced this action against defendant, New York Stock Exchange ("Exchange"), on October 9, 1969. An amended complaint was filed on January 22, 1970. Issue was joined and the case was submitted to the Court for decision on a stipulated record in lieu of trial. Thereafter, the parties filed "post-trial" memoranda and proposed findings of fact and conclusions of law. Oral argument was heard on June 2, 1975.
Plaintiff, a retired clothing store owner, learned of an opportunity to become a limited partner in Haupt through discussions in May or June 1963 with his friend, Sam Teiger. Sam's son, David, was a general partner in Haupt and related by marriage to Haupt's senior partner, Ira Haupt. Shortly thereafter, plaintiff met with David Teiger at Haupt's offices to discuss becoming a limited partner in Haupt. Plaintiff indicated to David that he could invest $250,000 and was informed that for his investment he would receive from Haupt interest at the rate of 6 percent and a share of the profits.
During this visit to Haupt's offices, plaintiff toured the facilities and talked with Morton Kamerman, Haupt's managing partner. Plaintiff testified at his deposition that Kamerman told him that he had nothing to worry about, that Haupt was solid, that Haupt was making money, and that the stock exchange was in back of them. Plaintiff also stated that he knew Haupt was in the brokerage business, knew it was selling stocks and bonds, and did not inquire any further into the nature of the business. At this time, plaintiff also received a copy of Haupt's statement of financial condition as of May 29, 1963, which had been certified by Peat, Marwick, Mitchell & Co.
Plaintiff showed the statement of financial condition to his accountant, Milton Lieberman. Lieberman told plaintiff that he would need a more recent statement before he could evaluate Haupt. Plaintiff testified that he requested a more recent statement from David Teiger, that he was told that one was in process, but that he never received one. About this same period in time, plaintiff talked with his stockbrokers and with his banker, and was informed that Haupt had a good reputation. Prior to becoming a limited partner in Haupt, plaintiff also received a copy of Haupt's partnership agreement, which he did not review with either legal counsel or his accountant.
Article IX, section 7(a)(1) of the Exchange Constitution, as in effect in 1963, provides in relevant part that ". . . no member, allied member or member firm shall admit any person to partnership in a member firm, without the prior approval of the Board of Governors." Pursuant to Exchange Rule 311, as in effect in 1963, "[a] member who proposes . . . to admit any person as a participant in a member organization . . . shall notify the Secretary of the Exchange in writing before any such . . . admission, and shall submit such information as may be required by the Exchange."
On or about September 26, 1963 Exchange received plaintiff's application to be admitted as a limited partner in Haupt, which contained information on plaintiff's background and financial condition. Exchange reviewed its own records for information concerning plaintiff, made inquiries to two brokerage houses and one bank where plaintiff had dealings, and obtained from a private investigative agency a confidential report as to plaintiff's reputation, employment history, financial status, police record, and other related matters. In addition, plaintiff's name was placed in the weekly bulletins dated September 27, 1963 and October 4, 1963 under the heading "proposed admission" and in the weekly bulletin dated October 11, 1963 under the heading "personnel changes."
On October 10, 1963 Exchange approved plaintiff's application to become a limited partner in Haupt. This approval was based on information supplied in plaintiff's application and obtained through Exchange's investigation and on the absence of information indicating that plaintiff had engaged in any fraudulent or dishonest acts or that his admission as a limited partner would hinder the maintenance of a fair and honest market for securities, fair dealing, just and equitable principles of trade, or the protection of public investors. Exchange did not require Haupt to disclose to plaintiff any information prior to his purchase of a limited partnership interest and did not investigate the appropriateness of such an investment by plaintiff.
On October 10, 1963 plaintiff became a limited partner in Haupt, investing $250,000. Prior to becoming a limited partner, plaintiff had no conversations with anyone from Exchange with respect to his investment, made no requests of Exchange for any information, and had no correspondence with Exchange. Exchange did not know what information had or had not been given to plaintiff by Haupt, with respect to Haupt, prior to his becoming a limited partner. Nevertheless, plaintiff testified at his deposition that he felt that Exchange was in back of the investment and that the investment was secure because of the amount of information he had to provide Exchange in his application.
During the period between April 1, 1960 and November 20, 1963, Haupt was a limited partnership formed pursuant to New York law. It conducted a general brokerage and commission business and was a member of Exchange.
In the fall of 1962 Allied Crude Vegetable Oil Refining Corporation ("Allied") was introduced to Haupt as a potential commodities customer. Allied was seeking export loans to finance overseas deliveries of crude vegetable oil as well as a commodities futures trading account. After twice rejecting the Allied account, Haupt entered into a "Letter of Intent" with Allied, dated May 23, 1963, setting forth terms under which Haupt would carry the Allied account. The "Letter of Intent" was signed by Ira Haupt, II, a general partner, on behalf of Haupt, and by Anthony "Tino" De Angelis on behalf of Allied. Prior to the signing of the "Letter of Intent," Ira Haupt, II obtained approval for carrying the account from Kamerman, Haupt's managing partner.
On September 10, 1963 loans made by Haupt to Allied in the export loan account exceeded the "Letter of Intent's" maximum of $2,500,000 for the first time. On November 4, 1963 the total export loans to Allied amounted to $10,000,000. These export loans were secured by warehouse receipts for quantities of vegetable oil. In addition to export loans, Haupt made loans to Allied to provide margin in Allied's commodities futures accounts. These margin loans were also secured by warehouse receipts.
In November 1963, Haupt was carrying on margin for Allied substantial long positions in cottonseed oil and soybean oil futures. On Friday, November 15, margin calls were made on Allied in the amounts of $1,151,000 and $5,127,000. An additional margin call in the amount of $9,216,000 was made on Allied on Monday, November 18. None of these margin calls were met, and on November 19, 1963 Allied filed a voluntary petition in bankruptcy.
Also on November 19, 1963, Haupt notified Exchange that it was below the net capital requirements of Exchange Rule 325 by approximately $187,000. On November 20, 1963 Exchange suspended Haupt under section 2 of Article XIII of the Exchange Constitution because it was determined that Haupt could not continue in business without danger to its creditors.
On November 20 and 21, 1963, the contracts in cottonseed and soybean oil were liquidated. Inspection of the tanks supposedly storing the vegetable oil which secured Haupt's export and margin loans to Allied revealed that there was no oil and that the warehouse receipts were fraudulent. An involuntary petition in bankruptcy was filed against Haupt on March 23, 1964, and on June 24, 1964 Haupt was adjudicated a bankrupt.
During 1963, Exchange had 670 member organizations with approximately 31,941 registered personnel. In addition, 90,500 other persons were employed by member organizations at some 3,345 offices throughout the world.
Pursuant to Exchange Rule 416, Haupt submitted answers to three Exchange financial questionnaires in 1963. Haupt's answers to the Exchange special financial questionnaire as of February 28, 1963, which were received on March 25, 1963, revealed that Haupt's ratio of aggregate indebtedness to net capital as of February 28, 1963 was 1514 percent and that Haupt had "excess net capital" of $1,089,000. Haupt's answers to the Exchange regular financial questionnaire as of May 29, 1963 were received by Exchange on June 28, 1963. They were prepared by Peat, Marwick, Mitchell & Company after conducting a "surprise" audit of Haupt's books and records pursuant to Exchange Rule 418 and revealed an indebtedness to net capital ratio of 1410 percent and an "excess net capital" of $1,509,000. Haupt's answers to the Exchange special financial questionnaire as of September 26, 1963 were received by Exchange on October 21, 1963 and revealed that the indebtedness to net capital ratio as of September 26, 1963 was 1734 percent and that Haupt had "excess net capital" of $679,000. In connection with the special financial questionnaire as of September 26, 1963, an Exchange examiner commenced a routine visit to Haupt on November 12, 1963. He was still conducting his examination of Haupt's books and records when on November 19, 1963 Haupt informed Exchange of its financial difficulties.
Of his $250,000 investment, plaintiff has recovered in settlement of other related actions $10,000 in October 1968 from the Estate of Ira Haupt, and $135,000 in May 1971 from the bankruptcy estate of Ira Haupt & Co.
Plaintiff's amended complaint asserts two causes of action. The first alleges that in violation of its agreement with the Securities and Exchange Commission ("the SEC"), pursuant to section 6(a)(1) of the Securities Exchange Act of 1934 ("the Exchange Act"), 15 U.S.C. § 78f(a)(1),
of which agreement plaintiff as an investor is a third-party beneficiary, Exchange failed to comply and to enforce compliance by Haupt with the Exchange Act, with the SEC rules promulgated thereunder, and with Exchange's own rules. Plaintiff's second cause of action charges Exchange with a direct violation of section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b) and SEC Rule ...