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Borthwick v. First Georgetown Securities Inc.

decided: December 14, 1989.


Appeal from a judgment entered in the United States District Court for the District of Connecticut, Nevas, J., granting plaintiffs-appellees' motion for partial summary judgment and awarding them $109,210.05 in damages for violation of the broker registration requirements of the Connecticut Uniform Securities Act, Conn. Gen. Stat. § 36-474 (1989). Judgment vacated and remanded.

Lumbard, Meskill and Winter, Circuit Judges.

Author: Meskill

MESKILL, Circuit Judge:

Appellant First Georgetown Securities, Inc. (First Georgetown), a District of Columbia corporation, is a discount securities broker. From September 2, 1982 through September 25, 1985, First Georgetown placed orders for the purchase of various penny stocks on behalf of appellees (the Borthwicks). However, neither First Georgetown nor appellant Brookstein, an officer and director of First Georgetown, was registered as a securities broker as required by the Connecticut Uniform Securities Act (CUSA), Conn.Gen.Stat. § 36-474 (1989). The subsequent sales of those stocks, also made through First Georgetown, resulted in substantial losses to the Borthwicks. On August 17, 1987, the Borthwicks brought suit against appellants for damages pursuant to Conn.Gen.Stat. § 36-498 (1989).

In the district court, the Borthwicks moved for partial summary judgment on count one of their complaint. After hearing oral argument on the motion, the district court ruled from the bench in favor of the Borthwicks on the issue of liability but reserved decision on the calculation of damages, requesting that the parties submit additional briefs on the matter. The Borthwicks filed a supplemental memorandum, including a proposed calculation of damages based on all of the stocks purchased and sold through First Georgetown. Appellants did not timely file a similar brief in opposition. In a written endorsement ruling, the district court accepted the Borthwicks' proposed calculations and awarded total damages pursuant to Conn.Gen.Stat. § 36-498(a) in the amount of $109,210.05, which included interest and attorney's fees. The Borthwicks subsequently moved for and were granted judgment in their favor on count one and dismissal of the remaining counts of their complaint.


A. Statute of Limitations

Securities brokers are required to register with the State Banking Commissioner before conducting business in Connecticut. Conn.Gen.Stat. § 36-474. Appellants admit that they were not registered when the purchases and sales of the securities in question were made. Nevertheless, they contend that the district court erred in its award of damages because the Borthwicks were barred by the statute of limitations from recovering a large portion of their alleged losses.

An action alleging violation of the broker registration requirement of Conn.Gen.Stat. § 36-474 must be brought no later than "two years after the contract of sale." Conn.Gen.Stat. § 36-498(f) (1989). This action was commenced on August 17, 1987; thus, the operative date for purposes of the statute of limitations is August 17, 1985. All but four of the Borthwicks' purchases were made before August 17, 1985. The Borthwicks nonetheless maintain that the remedy provided by Conn.Gen.Stat. § 36-498 is available when securities are purchased from or when sold to an unregistered broker. Thus, they contend that they may recover on not only those securities purchased within the two year period prior to the commencement of this action, but also on those sold through First Georgetown after August 17, 1985 but purchased through First Georgetown before that date. By contrast, appellants argue that the running of the statute of limitations commences with the purchase of the securities, and that therefore the Borthwicks are barred from recovering on all but four of the transactions in question.

Section 36-498 provides a cause of action based on violations of the broker registration requirement. It is entitled "Buyer's remedies" and provides, in pertinent part, that

[any] person who: (1) Offers or sells a security in violation of subsection (a) of section 36-474 . . . is liable to the person buying the security from him, who may sue either at law or in equity to recover the consideration paid for the security, together with interest at eight per cent per year from the date of payment, costs and reasonable attorneys' fees, less the amount of any income received on the security, upon the tender of the security, or for damages if he no longer owns the security.

Conn.Gen.Stat. § 36-498(a). The language of this section refers only to purchases of securities from a broker, and not to sales to a broker.

We recognize that section 36-498 is a remedial statute, and as such should be construed liberally. MacPeg Ross O'Connell and Goldhaber, Inc. v. Castello, 686 F. Supp. 397, 399 (ED.N.Y. 1988); see Hartford Fire Ins. Co. v. Brown, 164 Conn. 497, 503, 325 A.2d 228, 232 (1973). However, the construction offered by the Borthwicks is untenable. If, as the Borthwicks suggest, an action under section 36-498 may be brought within two years after a purchase from or a sale to an unregistered broker, the statute of limitations would be effectively subverted. Purchasers of securities could, under the Borthwicks' interpretation, wait to see how their investment pans out. If it results in a loss, they could sell the stocks through an unregistered broker regardless of how long they have held the securities and thereafter bring suit to recover damages.

The Borthwicks maintain that the legislature intended this bizarre result as a means of further deterring unregistered brokers from transacting business in violation of section 36-474. We cannot agree. They cannot point to anything in the language of CUSA or its legislative history that lends support to their interpretation of the statute. The only reasonable construction is that the two year statute of limitations provided in section 36-498(f) begins running at the time the securities are purchased from the unregistered broker. To accept a contrary interpretation would render the ...

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