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SIEDMAN v. MERRILL LYNCH

February 28, 1979

Sol SIEDMAN, Plaintiff,
v.
MERRILL LYNCH, PIERCE, FENNER & SMITH, INCORPORATED, Defendant



The opinion of the court was delivered by: GOETTEL

In this case, which has already been the subject of proceedings in this Court and extended arbitration hearings, the defendant moves for summary judgment.

As set forth in an earlier opinion of this Court, the plaintiff, Siedman, a man experienced in the brokerage field, had been a customer of Weis Securities, Inc. ("Weis") and had maintained a margin account there. Siedman was advised by Weis in May of 1973 to transfer the account to defendant, Merrill Lynch, Pierce, Fenner & Smith, Inc. ("Merrill Lynch"). Upon opening this new account with Merrill Lynch, plaintiff was required to enter into a "Customer's Agreement," in which he agreed to be bound by certain "Lending Agreement" provisions, one of which stipulated that the parties would arbitrate customer disputes before the New York Stock Exchange ("NYSE"). (The terms of this agreement were contained on a "Customer Agreement" card which the plaintiff signed.)

The complaint herein concerns 5,500 shares of American Home Products Company which were to be part of the transferred account. However, because a three to one stock dividend had been declared on May 11, 1973, certain clerical steps were required which delayed the transfer of these certificates. These shares never reached Merrill Lynch since Weis was placed in Securities Investor Protection Corporation receivership before the "due bill" for the securities could be cleared through the NYSE. Plaintiff pursued his SIPA (Securities Investor Protection Act) remedies and made a substantial, though not a full, recovery. A suit was then commenced against the SIPA trustees for the entire value of the shares, which was rejected by the Bankruptcy Court. (That decision was subsequently affirmed in district court.)

 This action was commenced against Merrill Lynch for negligence in failing to proceed expeditiously with regard to the transfer of the entire margin account. The complaint also alleged various violations of Regulation T and rule 15c3-3(b) of the Securities and Exchange Commission and the Rules of the NYSE. Defendant in response moved to dismiss the complaint or, alternatively, to stay the action pending arbitration pursuant to the Customer Agreement. (In light of a clearly arbitrable common law claim, the question of whether plaintiff stated a federal cause of action was not then decided.) As the plaintiff denied that he had ever signed such an agreement, the matter was referred to a Magistrate who conducted an evidentiary hearing, concluding that the agreement had been signed by him. This decision was confirmed by this Court and a motion for reargument denied. Arbitration of the dispute was then directed.

 Plaintiff then moved to have the arbitration take place before the American Arbitration Association, rather than the NYSE, because of the alleged bias and partiality of the latter. That application was denied in a Memorandum Endorsement of August 18, 1976.

 The arbitration finally proceeded. Nine sessions of hearings were held commencing February 27, 1978 and ending June 15, 1978. On June 28, 1978, the arbitration panel awarded Siedman $ 134,833 on his claims, less $ 5,933 awarded to Merrill Lynch on a counterclaim. (Siedman was also ordered to pay over to Merrill Lynch any further amounts that he may receive from the SIPA trustee on his claim.) This Court confirmed the award on September 25, 1978.

 The plaintiff contends that despite the arbitration proceedings and award he still retains valid federal securities claims which may be adjudicated by this Court. He alleges that recovery can be had for the defendant's violation of rules 412 and 255-259 of the NYSE, of rule 15c3-3(b) promulgated under section 15(c) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78(a) Et seq., and of Regulation T promulgated under section 7 of the Exchange Act, and asserts that an implied private right of action for damages exists under each of those provisions.

 Rules 412 and 255-259 of the New York Stock Exchange

 The violation of a stock exchange rule, promulgated pursuant to section 6(b) of the Exchange Act, it has been held, does not Per se give rise to a private right of action for damages under federal law. Colonial Realty Corp. v. Bache, 358 F.2d 178, 181 (2d Cir. 1966) Cert. denied, 385 U.S. 817, 87 S. Ct. 40, 17 L. Ed. 2d 56 (1966); Schonholtz v. American Stock Exchange, 376 F. Supp. 1089 (S.D.N.Y.1974). Rather, a court in deciding whether such right of action exists must "look to the nature of the particular rule and its place in the regulatory scheme, . . . (with) (t)he case for implication . . . strongest when the rule imposes an explicit duty unknown to the common law." Colonial Realty Corp. v. Bache, supra at 182. *fn1" In so deciding the Court must utilize the guidelines set down in Cort v. Ash, 422 U.S. 66, 78, 95 S. Ct. 2080, 2088, 45 L. Ed. 2d 26 (1975), which require determination of:

 
"First, is the plaintiff "one of the class for whose Especial benefit the statute was enacted.' . . . that is, does the statute create a federal right in favor of the plaintiff? Second, is there any indication of legislative intent, explicit or implicit, either to create such a remedy or to deny one? . . . Third, is it consistent with the underlying purposes of the legislative scheme to imply such a remedy for the plaintiff? And finally, is the cause of action one traditionally relegated to state law, in an area basically the concern of the States, so that it would be inappropriate to infer a cause of action based solely on federal law?"

 Rule 412 of the NYSE which deals with "Customer Account Transfer Contracts" provides for the coordinated transfer of accounts between the receiving and carrying brokers so that the customer suffers no loss as a result. *fn2" Rules 255-259 of the NYSE relate to "Due-Bills" and provide for the manner in which such bills shall be presented. *fn3" These rules have been promulgated by the Exchange so as to give brokers a standard of conduct to which they should adhere. While these rules arguably can be said to be primarily intended for the protection of investors (although they also would have the effect of insuring the orderly and efficient operation of the Exchange) the Court does not believe that implication of a private right of action for violation of these rules would be appropriate. These rules do not contain the type of precise directive which the courts have found necessary in order to imply such a remedy. Buttrey v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 410 F.2d 135, 141-143 (7th Cir. 1969) Cert. denied, 396 U.S. 838, 90 S. Ct. 98, 24 L. Ed. 2d 88 (1969); Starkman v. Seroussi, 377 F. Supp. 518 (S.D.N.Y.1974). See Van Alen v. Dominick & Dominick, Inc., 560 F.2d 547 (2d Cir. 1977). Rather, as noted in Jenny v. Shearson, Hammill & Co. (1974-75) Fed.Sec.L.Rep. (CCH) P 95,021 at 97,582 (S.D.N.Y.1975), these rules use language "commonly associated with misconduct amounting to negligence." But implication of liability for negligence or nonfeasance is clearly contrary to the scheme of federal securities laws and the principles established in Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S. Ct. 1375, 47 L. Ed. 2d 668 (1976) both of which aim to prevent deceptive, manipulative and fraudulent conduct. Action by brokers taken in violation of these NYSE rules are subject to state common law contract and negligence rules, and can be adequately remedied in such state proceedings. The Court believes that implication of a private right of action in this context would run counter to Congressional intent, See Colonial Realty Corp. v. Bache, 358 F.2d at 182, and would unnecessarily infringe upon an area (negligence) "traditionally relegated to state law." Accordingly, this Court declines to imply such a remedy.

 Rule 15c3-3(b)

 The plaintiff next asserts that the defendant violated Securities and Exchange Commission rule 15c3-3(b) *fn4" and that damages were suffered as a result. Since rule 15c3-3(b) does not provide for a private right of action for damages it again becomes necessary for the Court to determine whether a right of action should be implied.

 It has been held that a private right of action should be implied to a statute not otherwise providing for one only when implication would serve to promote the primary purpose of the legislation. Piper v. Chris-Craft Industries, Inc., 430 U.S. 1, 25, 97 S. Ct. 926, 51 L. Ed. 2d 124 (1977). If such purpose is served then the availability of a private remedy may provide "a necessary supplement to ...


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