The opinion of the court was delivered by: NEAHER
This is an action by a purchaser of stock in Equity Funding Corporation of America ("Equity Funding") against his brokerage firm, Merrill Lynch, Pierce, Fenner & Smith, Inc. ("Merrill Lynch"), and Thomas Tatigikis, the account executive assigned to service his account. Plaintiff seeks to rescind the agency contract under which Merrill Lynch was to purchase 2,000 shares of Equity Funding common stock, or, alternatively, to recover damages. The asserted grounds of liability are § 10(b) of the Securities Exchange Act of 1934 ("the Act"), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 204.10b-5, and pendent claims of common law fraud, breach of fiduciary duty, negligence and conversion.
Merrill Lynch has counterclaimed for money due and owing.
The case was tried to the court and the following constitutes the court's findings of fact and conclusions of law. Rule 52(a), F.R.Civ.P.
The focus of this lawsuit is on events which occurred on March 27, 1973, the day the New York Stock Exchange (NYSE) suspended trading in the common stock of Equity Funding because of rumors and questions concerning practices subsequently well-documented as fraudulent.
Plaintiff, who was self-employed as a consultant on business opportunities in the clinical laboratory field, had maintained both cash and margin accounts with the Melville, New York branch office of Merrill Lynch in March and April 1973. He may be described as a speculator in stock, as that term is commonly known, well-versed in the vagaries of the market. He frequently visited his broker, Tatigikis, whose office was conveniently located in the same office building as his own, often read Tatigikis' copy of The Wall Street Journal, followed trading on the tape and discussed the market and particular stocks. Some investments were made on his broker's recommendation; many others, including those of March 27, were unsolicited and based upon his own judgment.
On Tuesday, March 27, 1973, plaintiff was watching the tape in Tatigikis' office shortly after trading opened on the NYSE, when he observed an "uptick" on the Equity Funding stock, the first he had seen after watching the stock for some time. He immediately placed an order with Tatigikis to purchase 2,000 common shares at market price on his margin account. Plaintiff testified he bought the stock as "a purely emotional reaction," looking for a technical advance. He knew the price of the stock had dropped from the mid-forties to 17 and, when he purchased, hoped it would go to 19 or 20 at which time he intended to sell. About 10:30 a.m. Merrill Lynch executed the order on the NYSE, purchasing the stock at $17-1/2 per share for a total price of $35,382 including commission, and settlement was set, as was customary, for April 3, 1973, one week later.
That morning an article had appeared in The Wall Street Journal, set forth in full in the margin, captioned "Equity Funding Stock Falls Amid Rumors about a Unit," which related the existence of rumors about the operations of a life insurance subsidiary accompanying recent heavy selling of the stock.
Plaintiff testified he had not read the article. It was not mentioned by Tatigikis, who testified he could not recall whether he had read the article prior to plaintiff's purchase.
Plaintiff paid a second visit to Tatigikis about 11:00 a.m. that morning and placed an order, also unsolicited, for the purchase of 2,000 shares of Oakhill Sportswear common stock on the over-the-counter market for his cash account. This order was executed at a price ranging from $7-3/4 to $8 per share for a total of $16,038.98 including commissions, and was also to settle on April 3, 1973.
Plaintiff came to see Tatigikis a third time, at about noon. Tatigikis told him the Equity Funding stock was "dropping like a bomb," that plaintiff had "taken beatings before and the stock [did] not look too well, this [was] strictly tape action" and suggested plaintiff sell. Plaintiff responded that he was not worried about the tape action and would hold on.
At 12:45 p.m. the NYSE suspended trading in Equity Funding common stock. The following day, March 28, the SEC suspended trading in all Equity Funding securities. The suspension lasted through October 17, 1976.
That same day or the next, it is unclear, plaintiff sought the advice of his attorney as to what he should do and was told to request his broker to supply him with the names of the selling brokers or sellers "and we will proceed from there." Pachter asked Tatigikis for the names, stating his attorney's desire for the information in order "to find out whether we bought insider stock." Considering the request unusual, Tatigikis relayed it to the branch manager, Cappiello, who subsequently referred it to Merrill Lynch's legal department. Although no one at Merrill Lynch refused to supply the information, the names were apparently not provided to plaintiff until the lawsuit ensued between the parties referred to in n. 2, supra.
On Monday, April 2, plaintiff again questioned Tatigikis about the requested information and told him that, because of the delay, he had decided there must be something phony about the stock, that he did not want it, and did not want Merrill Lynch to take delivery or to act on his behalf anymore. Tatigikis and Cappiello then met with plaintiff, who reiterated his position. Cappiello told plaintiff he was instructed by the Merrill Lynch legal department that the suspension of trading did not change the ...