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February 16, 1990


The opinion of the court was delivered by: Stewart, District Judge:


Plaintiff Citizens and Southern Securities Corporation ("C & S Securities") brought suit alleging causes of action against defendants Milton Braten and the Estate of Bernard Braten (the "Estate") arising from circumstances surrounding a discount brokerage account opened by the Estate with the Citizens and Southern National Bank of South Carolina ("C & S South Carolina").*fn1

Background Facts

In 1984, the Estate, with the deposit of approximately $100,000 worth of stock certificates by defendant Braten, opened a securities margin account (the "Account" or "Estate Account") with C & S South Carolina. Defendant Braten or his agent, Larry Cornfield, were informed when margin calls were issued for the Account. It is undisputed that until the events in question, defendants met all their margin calls. Over its course more than $1,000,000 was received by either C & S South Carolina or C & S Securities for the Account. Payments made by third-party checks were accepted without objection by C & S South Carolina or C & S Securities. The equity in the Account was over $1,000,000 at several times, and as of September 27, 1987 the Account's equity was in excess of $500,000. The parties agree that on October 14, 1987, the Estate met a margin call in order that the Account remain in compliance with Regulation T, 12 C.F.R. §§ 220.1 — 220.130. The instant dispute essentially centers around an alleged subsequent margin call.

Plaintiff contends that a maintenance call for approximately $142,000 was made pursuant to the Rules of the New York Stock Exchange and/or the Broadcourt Capital Corporation and was issued on October 15, 1987. Defendants were told the margin call had to be met by October 19, 1987.*fn3 According to plaintiff, defendants requested and received an extension to answer the margin call. Due to the stock market crash on October 19, 1987 (the "October crash"), defendants' position deteriorated. When defendants did not meet the margin call subsequent to October 19th, plaintiff liquidated the security positions in defendant's account on October 26, 1987, leaving a balance due plaintiff of $259,664.52.*fn4

Defendants counter that no request for money was made of them to cover any margin calls on or between October 14, 1987 and October 16, 1987. They assert that liquidation of the Account should have occurred no later than October 16, 1987 and that plaintiff, as the broker for the Estate, was "negligent, grossly negligent, reckless, willful, and wanton in failing to manage the account and liquidate it properly to avoid losses to its client" by waiting until after the October crash to liquidate the Account. Defts' Brief In Opposition at 3-5.

Finally, defendants argue that since the Estate Account was opened with C & S South Carolina it never had any contractual relationship with C & S Securities, the plaintiff in this action. Therefore, defendants assert that they should not be held accountable for the actions of "other parties," presumably referring to allegedly negligent conduct of C & S South Carolina. January 26, 1989 Defendants' Memorandum In Support of Motion For Summary Judgment ("Defts' Memo.") at 10.


Plaintiff's Motion To Strike the Strong and Brown Affidavits

In support of their motion for summary judgment and in opposition to plaintiff's motion for partial summary judgment, defendants submitted affidavits from James W. Strong and John W. Brown, III. These affiants render opinions regarding what they consider the lack of care exhibited by plaintiff toward the Estate account.

Plaintiff moves to strike these affidavits on the grounds that these affiants are not qualified to render an opinion as to the relevant issues in this action, and that there is an insufficient foundation for these opinions. In particular, plaintiff asserts that defendants' affiants are familiar with only the standards required of full-service brokerage firms and have no exposure to the standard procedures or the standards of care required of a discount broker-dealer such as plaintiff. In support of this argument plaintiff submits its own affidavit from Anthony J. Negus, a securities consultant, which details the differences between the responsibilities of full-service brokers and discount broker-dealers.

In their answering papers, defendants do not contest plaintiff's assertion that there is a difference between the responsibilities of a full-service brokerage firm and a discount brokerage firm. They further do not contest plaintiff's assertion that plaintiff is a discount broker-dealer. Finally, defendants do not contest plaintiff's assertion that Strong and Brown's area of expertise may lie solely in the area of full-service brokerage firms. Defendants merely counter that "assuming the worst case scenario," presumably that Strong and Brown are only qualified to speak as to the responsibilities of full-service brokers, these affiants should nonetheless be heard as experts since their profession generally "deals with the subject in hand." Defendants' Brief in Opposition to Plaintiff's Motion to Strike ("Defts' Motion to Strike Brief") at 3. It is defendants' view that plaintiff's objections go only to the weight accorded the affidavits, not to whether the affidavits should be accepted by the court.*fn5 Defts' Motion to Strike Brief at 1-2.

In light of the apparent differences between the responsibilities of full service and discount brokers we question the relevancy of the information and opinions contained in the Strong and Brown affidavits to the issues in the instant action. However, if "specialized knowledge will assist the trier of fact to understand the evidence," a court may permit the opinion of a qualified witness to be heard. See Fed.R.Evid. 702.

Accordingly, we will accept the proffered affidavits attached to the defendants' papers for the limited purpose of helping to provide us with a general background as to working of investment brokers, particularly how full-service brokers handle investment accounts. Further, we accept the affidavits in the realization that this approach is not necessarily required of discount broker-dealers. With that understanding and limitation, we deny plaintiff's motion to strike the Strong and Brown affidavits.*fn6

Motion to Amend the Complaint

Plaintiff moves for leave to amend the complaint pursuant to Fed.R.Civ.P. 15(a). Specifically, plaintiff asserts that the original complaint inaccurately stated Regulation T, 12 C.F.R. §§ 220.1 — 220.130) as the basis for the margin maintenance call given in the securities account of Defendant.*fn7 Plaintiff wishes to amend the complaint to reflect its contention that the basis for the additional margin call was made pursuant to New York Stock Exchange Rule 431 and/or the margin requirements of Broadcourt Capital Corporation, the plaintiff's clearing broker-dealer.*fn8

Rule 15(a) of the Federal Rules of Civil Procedure states that leave to amend "shall be freely given when justice so requires it." The Supreme Court has stated:

  [i]n the absence of any apparent or declared
  reason — such as undue delay, bad faith, or
  dilatory motive on the part of the movant, repeated
  failure to cure deficiencies by amendments
  previously allowed, undue prejudice to the opposing
  party by virtue of allowance of the amendment,
  futility of amendment, etc. — the leave sought
  should, as the rules require, be "freely given."

Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 230, 9 L.Ed.2d 222 (1962); see also United States v. Continental Illinois National Bank and Trust, 889 F.2d 1248, 1254 (2d Cir. 1989) (quoting Foman, supra).

Prejudice to the opposing party is ordinarily the most compelling reason for denying a motion to amend under Rule 15(a). See 6 Wright & Miller, Federal Practice and Procedure § 1487; cf. Barrows v. Forest Laboratories, Inc., 742 F.2d 54, 58 (2d Cir. 1984) (undue delay, bad faith, and prejudice to opposing party are the "touchstones" of court's discretion to deny leave to amend). Prejudice has been found when proposed amendment contained an unexpected allegation or defense. See Evans v. Syracuse City School District, 704 F.2d 44, 47 (2d Cir. 1983). Prejudice may also occur when the proposed amended pleading is interposed after the completion of discovery, or is based upon a new set of operative facts. See Ansam Associates Inc. v. Cola Petroleum, Ltd., 760 F.2d 442, 446 (2d Cir. 1985).

Plaintiff alluded to the possibility of amending the original complaint in its early motion papers. Indeed, defendant addressed the issue of plaintiff's contemplated change in its own motion papers. See Defendants' Reply to Plaintiff's Brief in Opposition to Defendant's Summary Judgment Motion ("Defts' Reply") at 1-3. We disagree with plaintiff that the proposed amendment will not necessitate a "second discovery process" particularly since discovery is not yet complete. Moreover, the differences between Regulation T requirements and maintenance calls were addressed by defendants in their deposition of Nanda Reed. See November 11, 1988 Deposition of Nanda Reed at 141. Therefore, it is our view that plaintiff's proposed amendment will not prejudice defendant.

Finally, that defendants and the court were advised early in the briefing process that the instant motion to amend would be forthcoming is inconsistent with a finding of bad faith or undue delay on plaintiff's part. Accordingly, we grant plaintiff's ...

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