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MORGAN v. SCHIPA

April 13, 1984

MORGAN, OLMSTEAD, KENNEDY & GARDNER INCORPORATED, MOSELEY, HALLGARTEN, ESTABROOK & WEEDON, INC., and SECURITIES SETTLEMENT CORPORATION, Plaintiffs, against VICTOR SCHIPA (a/k/a VITTORIO SCHIPA), GIRARD WILDE & CO., INC., and CARLISLE INSTITUTIONAL SERVICES, INC., Defendants.


The opinion of the court was delivered by: CONNER

OPINION AND ORDER

CONNER, D.J.:

 Plaintiffs Morgan, Olmstead, Kennedy & Gardner, Incorporated ("Morgan Olmstead"), Moseley, Hallgarten, Estabrook & Weedon, Inc. ("Moseley"), and Securities Settlement Corporation ("SCC") commenced the instant action seeking to recover losses of approximately $4,100,650 which they allege they suffered as a consequence of defendants' fraudulent conduct. They assert a claim under § 10(b) of the Securities Exchange Act of 1934 (the "Act"), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, as well as a pendent claim for common law fraud. Although defendants Girard Wilde & Co. ("Girard Wilde") and Carlisle Institutional Services, Inc. ("Carlisle") deny plaintiffs' allegations, they also raise certain other issues in repsonse to the complaint, including affirmative defenses of failure to mitigate damages and in part delicto, and a counterclaim alleging a right of set off against plaintiffs based alternatively upon their active participation in or their negligent failure to discover the fraud. *fn1"

 The case is currently before the Court on plaintiffs' motion to strike these two defenses and to dismiss the counter-claim on the ground that each is insufficient as a matter of law. For the reasons stated below, the motion is granted.

 I.

 Plaintiffs' complaint sketches an intriguing tale of surreptitious dealing by defendants, whereby each of the plaintiffs was caused to form a fundamentally different and inaccurate, view of the nature of the securities transaction in which all were participating. The allegations of the complaint are as follows:

 Defendant Victor Schipa ("Schipa") had been an active securities customer at Moseley since approximately 1977. (Complaint at P11). In late 1981, Schipa established Girard Wilde, and on January 4, 1982, he opened two non-discretionary securities accounts at Moseley for Girard Wilde. (Complaint at PP12-13). One was a regular account, while the other was established to buy and sell on a "delivery against payment" or "DVP" basis. *fn2" (Complaint at P14). Schipa described Girard Wilde to Moseley as a new firm that expected to engage in a high volume of purchases and sales of securities for its own account. (Complaint at P13).

 From approximately February 11, 1982 until July 13, 1982, Schipa engaged in numerous DVP transactions through Moseley on behalf of Girard Wilde. In connection with each of these transactions, Schipa instructed Moseley to cause stock to be transferred to or from the United States Trust Company ("U.S. Trust"), as Girard Wilde's agent. (Complaint at P17). At the time, Moseley had a contractual arrangement with SCC, whereby SSC performed the necessary clearing services for securities transactions on behalf of Moseley's customers. (Complaint at P16). Accordingly, Moseley directed SSC to carry out the transactions with U.S. Trust in conformance with Schipa's instructions. (Complaint at P17).

 In late July of 1982, Schipa represented to Moseley that Morgan Olmstead had replaced U.S. Trust as Girard Wilde's DVP agent. From that point until October 15, 1982, Moseley caused SSC to carry out transactions with Morgan Olmstead in accordance with DVP orders placed by Schipa for the account of Girard Wilde. (Complaint at P18).

 Although Moseley and SSC did not know it at the time, Morgan Olmstead had not agreed to act as Girard Wilde's DVP agent. Instead, Morgan Olmstead believed that it was engaging in stock loan transactions *fn3" arranged by defendants as finders. (Complaint at P19).

 During the fourteen-month period prior to August 1982, Schipa and Carlisle had acted regularly as finders in arranging loans of securities from Morgan Olmstead to other institutions. (Complaint at P22). In the summer of 1982, Schipa represented to Morgan Olmstead that defendants were in a position to arrange for a substantial volume of securities loans to a New York brokerage firm, subsequently identified as SSC, and Morgan Olmstead agreed to recognize Girard Wilde or Carlisle as a finder for any such loans that were actually arranged. (Complaint at P23).

 Thus, based upon defendants' false representations, Morgan Olmstead understood that it was engaging in stock loan transactions with SCC and Moseley. At the same time based upon other false representations by defendants, SSC and Moseley believed that they were involved in DVP transactions with Morgan Olmstead. (Complaint at P26). In the course of these transactions, Morgan Olmstead made periodic payments to defendants of interest it believed it owed to SSC and fees it believed it owed to defendants for arranging the transactions.(Complaint at P25). As of October 22, 1982, Morgan Olmstead's books showed open loans of stock to SSC having a market value of approximately four million dollars in excess of cash collateral. It was at this point that Morgan Olmstead demanded of SSC, for the first time, additional collateral or return of stock, and was informed by SSc that it had no records of loans from Morgan Olmstead and that all stock previously received had been sold for Girard Wilde's account. (Complaint at P27).

 The counterclaim and the affirmative defenses of failure to mitigate damages and in pari delicto asserted by defendants Girard Wilde and Carlisle are all based upon actions by plaintiffs which allegedly evince their assistance in or negligent disregard of any fraud that may have been practiced by defendants. Specifically, defendants contend that if plaintiffs had adhered to their ordinary business practices or exercised reasonable diligence, the fraud alleged in the complaint could not have occurred. Among the improper acts or omissions recited by defendants is Morgan Olmstead's failure to send out "mark to market" notices as the price of the loaned stock increased. Moreover, defendants point to specific evidence, obtained through discovery, that persons at SSC, Moseley's clearing agent, were ...


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