The opinion of the court was delivered by: WYATT
These are an appeal and five cross-appeals from an order of Bankruptcy Judge Babitt filed October 6, 1975.
Weis Securities, Inc. (Weis) was a broker-dealer which is now in liquidation under SIPA (15 U.S.C. § 78aaa and following). A Trustee was appointed on May 30, 1973, by this Court (15 U.S.C. § 78eee(b)(3)). See Exchange Bank v. Wyatt, 517 F.2d 453 (2d Cir. 1975). The "filing date" (15 U.S.C. § 78eee(b)(4)(B)) was May 24, 1973.
The appeal is by the Trustee; the cross-appeals are by option customers of Weis. The so-called "record on appeal" (Bankruptcy Rule 806) is made up of letters, affidavits, memoranda of law, and other papers. There seems to have been no hearing and no taking of evidence.
What is involved are charges made by the Trustee against certain option customers of Weis, that is, customers who caused Weis to sell option contracts. They are often called by the parties and by the Bankruptcy Judge option "writers" or option writer customers but in fact they wrote nothing and signed no options. They are called herein option customers.
The appeals and cross-appeals were heard in open Court on January 16, 1976. Thereafter counsel for the Trustee were asked to supply certain information and documents. On telephone notice to those who had appeared on January 16, these were supplied in open Court on February 18, 1976. There thus may be some information and documents before me which were not before the Bankruptcy Judge. The stenographic transcript shows the information supplied and the documents have been placed in the file.
There is much trading activity in stock option contracts, sometimes called "puts" and "calls". The techniques employed in option trading are described in H. Kook & Co. v. Scheinman, etc., 414 F.2d 93 (2d Cir. 1969).
At the relevant times and with respect to the option contracts here involved, these were sold for its customers by Weis through members of the "Put and Call Brokers and Dealers Association, Inc." (the Association).
An option contract requires one party (the "endorser") to buy from or to sell to the other party (the optionee, or the holder of the option) a specified number of shares (100 shares, nearly always) at a fixed price during a fixed period. If the option holder can require the endorser to sell shares, he holds a "call"; if the option holder can require the endorser to buy shares, he holds a "put". The option holder pays a premium (a money amount) for the option and this premium went to the Weis option customers.
The options sold by Weis for its customers were all on a one page printed contract form (in appearance like a promissory note) prepared by the Association and used by its members. Options sold by members of the Association must be "endorsed" by a member of the New York Stock Exchange but the word "endorsed" is misused because by the contract the "endorser" is primarily and solely liable to the option holder.
The option contract form states that "the bearer may call on the endorser" for a specified number of shares (100 shares seems to be the standard unit) at a specified price per share within a specified period from the date of the option contract. (The form for a "put" is similar; "the bearer may put to the endorser", etc.). The option contract states that the "stock option contract" must be presented to the "endorsing firm" before the expiry of the "exact time limit"; that "upon presentation to the endorser of this option . . . the endorser agrees to accept notice of the Bearer's exercise . . . and this acknowledgment shall constitute a contract and shall be controlling with respect to delivery of the stock and settlement in accordance with New York Stock Exchange usage". On the face of the option contract appears the signature of the member of the Association through whom the option was sold by the member of the New York Stock Exchange; the signing member of the Association, however, "acts as intermediary only . . .". On the back of the option contract appear the words "Endorsed By" and a space for the signature of a member of the New York Stock Exchange.
It doubtless was understood by all concerned that the endorser was acting at the instance of one of its customers in selling the option contract. Nevertheless, it seems clear from the option contract itself that it is between the "endorser" and the option holder; the claim of the option holder is solely against the endorser. There is no reference in the option contract to the customer and the name of the customer nowhere appears in that contract. So far as the contract goes, the option holder has no claim against the customer of the endorser.
The option contract runs to "bearer" and thus can be transferred by delivery; it is the equivalent of a bearer security and indeed may properly be described as a bearer security.
To call a customer for whom Weis sold options, an "option writing customer", is to use a highly inexact term because (as already seen) he has not written anything and his name does not appear in the option contracts.
The Weis customers here involved had each caused Weis, before May 24, 1973, to sell for their account option contracts. Weis had signed such contracts as "endorser".
As between Weis and the option holders, Weis was solely and primarily liable.
As between Weis and its own customers, for whom it had sold the options, Weis looked to its customers to indemnify it in respect of the options. It seems that most if not all such customers had cash or securities in their accounts as a protection to Weis on its liability as endorser.
The record is not entirely clear as to what the financial arrangement was between Weis and its option customers. Apparently any Weis customer with a margin account could sell options through that account, but a form of special agreement ("Puts and Calls Customer's Agreement", a copy of which was supplied by counsel to the Trustee) was required by Weis to be signed. This agreement provided, among other things, that Weis would not be "liable in connection with the . . . endorsing of puts and/or calls for my account, except for gross negligence . . .". and that the customer would reimburse Weis for all expense incurred by Weis in connection with the option contracts. This agreement seems to be a promise by the customer to pay to Weis any sum which Weis is required to lay out on account of the option. It seems to be, therefore, an indemnity agreement from the customer to Weis.
The Trustee sent a notice by mail to all customers of Weis, including the option customers, that Weis was being liquidated under SIPA and that claims of Weis customers would have to be filed with the Trustee (claim forms were sent). This notice is dated May 31, 1973, and seems to have been approved by the Bankruptcy Judge by an order made on June 1, 1973. The mailing was either on that date or at some time "before June 3 " (Trustee Brief, p. 18).
On June 1, 1973, the Trustee gave notice (by means of the Dow Jones "broad tape") to the holders of options endorsed by Weis. This notice stated that the procedure for dealing with outstanding options endorsed by Weis could be learned from any member of the Association. The Trustee advised such members of the procedure. This manner of notice was required because (as already seen) the holders of option contracts were not known to Weis; the option contracts ran to "bearer".
Some procedure had to be worked out by the Trustee for dealing with outstanding options "endorsed" by Weis. If Weis had continued in business or if the Trustee had continued its business, the options could be exercised by their holders in the normal fashion -- delivery by the holder to Weis of the shares against payment (on a "put") or delivery to the holder by Weis of the shares against payment (on a "call").
But the Trustee was liquidating Weis; the business of Weis had ceased.
The procedure followed by the Trustee was that when the option holders decided to exercise their options, at that time they presented the option to the Trustee, who would note on the option the time and date of presentation. The option holder could then file a claim against Weis for the difference between the option price and the market price on the day of presentation. The amount of such claim was charged against the account of the Weis option customer.
This procedure did not give to the option holder any right he did not already have; he had the right to exercise his option at any time during the option period. What the procedure accomplished was to fix the money amount of the option holder's claim because, by reason of the liquidation of Weis, it was not in the interest of the Weis estate in liquidation nor was it feasible for the Trustee partly to carry on the business of Weis by permitting the exercise of options in the normal fashion by delivery of securities to Weis against payment or by payment to Weis against delivery of securities.
On July 12, 1973, on application of the Trustee, the Bankruptcy Judge made an order authorizing the mailing to "each recipient of the option contracts" of Weis a copy of a claim form for the money difference between the option price and the market price on the date when the option was exercised (that is, when the notation was made of the presentation of the option contract under the procedure of the Trustee). The application for this order is poor in composition but it may be concluded that in substance it advised the Bankruptcy Judge of the procedure being followed by the Trustee in respect of the outstanding options endorsed by Weis and the order of the Bankruptcy Judge seems to be an approval of this procedure.
The Trustee gave attention also to the position of the option customers who would be better off if their accounts with Weis could be transferred to another broker so that the then unexercised options could be treated in normal fashion. The Trustee accordingly worked with Amfod, an acronym for "Association of Member Firms Option Departments", to develop a plan for handling the accounts of the option customers of Weis. Amfod describes itself as "a division of the Securities Industry Association" (a trade association of the securities ...