The opinion of the court was delivered by: KNAPP
This is an appeal from an order of Bankruptcy Judge Ryan denying a motion by the Trustee for the liquidation of Provident Securities, Inc., a brokerage firm, for summary judgment expunging the claims of Michael and Eve Komons. Their claims, if granted, would entitle them to recover out of a special fund established pursuant to the Securities Investors' Protection Act of 1970, ("S.I.P.A."), which fund is made up of assessments levied on other brokerage firms. We have reviewed Judge Ryan's findings of fact, and approve and adopt them.
We disagree, however, with the Judge's conclusions of law, and grant the Trustee's motion.
The Trustee contends that S.E.C. v. Packer, Wilbur & Co., Inc. (2d Cir. 1974) 498 F.2d 978 is here controlling. Judge Ryan, conceded that "broad language used by the District Court and approved by the Circuit Court in Packer, Wilbur might appear to cover the facts of the instant case." However, he found such language not to be controlling and the decision distinguishable.We disagree. We find that the Court of Appeals did not intend to narrowly limit its decision to the facts before it. Rather, it intended to announce a basic public policy that persons who found themselves in the position of claimant's as a result of having violated regulations promulgated pursuant to the Securities and Exchange Act were not intended to be beneficiaries of the public funds established pursuant to S.I.P.A.
/ The Komonses
/ clearly come within this category of securities law violators and are therefore not entitled to claim under S.I.P.A.
The order of the Bankruptcy Judge is therefore reversed, and he is directed to grant the Trustee's motion for summary judgment.
(Excerpt from the Opinion of Hon. Edward J. Ryan, Bankruptcy Judge)
The Trustee received claims from the Komonses (Claims #808 and 809) in April, 1973, for approximately $7,000 in securities and more that $34,000 in cash from the SIPA fund.The claims to SIPA funds represent money that the Komonses had deposited with Provident for the alleged purpose of purchasing securities. The Trustee argues that the Komonses are not entitled to recover those claims from the SIPA fund because they had obtained the money they deposited with Provident by means of a bank loan of a type prohibited by the Securities and Exchange Act of 1934 (15 U.S.C. § 78g) (Exchange Act) and by margin regulations promulgated under that Act.
The founder and president of Provident was Pericles Constantinou. Komons had traded with Constantinou not only after Constantinou founded Provident in 1969, but also for several years before then, when Constantinou was associated with other brokerage firms. Komons was an active investor who made, on the average, two or three transactions a week, mostly in high-risk, over-the-counter stocks. He usually maintained two or three accounts at a time, but dealt primarily with Constantinou.
On January 8, 1973, only two weeks before Provident went out of business, Komons took out a loan for $40,000 from Chase Manhattan Bank (Chase). Constantinou had made all the arrangements for the loan to Komons and for four similar loans, also for $40,000 each, that Chase extended to four other persons at the same time. Constantinou allegedly explained to Komons that Komons was to deposit the proceeds of the loan in his Provident account and that Constantinou would use the funds to purchase shares of Repadco, Inc., stock. For purposes of this motion for summary judgment, we assume, without deciding, that the purpose of the Chase loan was the purchase of securities.
On the purpose statement (Federal Reserve Form U-1) that Komons signed when he took out the loan, however, the purpose of the loan is not stated to be the purchase of securities. Rather the purpose is stated to be "to purchase real estate in Queens." That response is crossed out, and beneath it is written "personal loan to P. Constantinou."
Constantinou had arranged to have the loan collaterized by shares of Repadco stock owned by a third party who was a friend of Constantinou. In fact, not Repadco stock but Fantastic Fudge, Inc., stock was deposited with Chase as collateral. Regulation T (12 C.F.R. § 220.3(b) and § 220.7), one of the margin regulations promulgated by the Federal Reserve Board pursuant to authority vested in it by the Exchange Act, has the effect of barring a broker from either extending credit to or arranging for the extension of credit to a customer where the credit is collaterized by securities not registered on a national securities exchange or included in the Federal Reserve's list of over-the-counter margin stocks. See Alaska Inter-state Co. v. McMillian, 402 F. Supp. 532, 553-54 (D. Del. 1975). At the time the Chase loan was transacted neither Repadco nor Fantastic Fudge stock was traded on a national exchange or included in the Federal Reserve Board's list of approved stocks.
With the proceeds of the loan Komons deposited $24,000 on his account at Provident and opened an account for his wife in the amount of $15,000. The transaction resulted in a credit balance of less than $20,000 in Komons' account because there was a preexisting debit balance.
These funds remained in the Komonses' accounts until Provident went out of business on January 23, 1973. No purchase of securities was ...