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July 22, 1991


The opinion of the court was delivered by: William C. Conner, District Judge.


Manufacturers Hanover Trust Company ("MHT"), a stock transfer agent for various publicly traded issuers, seeks to recover under Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), Rule 10b-5 of the Securities Exchange Commission, 17 C.F.R. § 240.10b-5, and a variety of common law theories, losses it sustained as a result of the defalcations of the assistant manager of its stock transfer department, Thomas Brancato ("Brancato").

For the reasons set forth below defendants' motion is granted.


As a stock transfer agent, MHT is entrusted with the custody and care of publicly traded stock certificates, in transferable form, by the owners or depositors of such stock certificates. (Complaint ¶¶ 20-21, 28). Thomas Brancato was employed by MHT from 1974 to January, 1989. (Complaint ¶ 33). Brancato supervised MHT's stock transfer operations and had access to the books and records regarding those operations, and to the stock certificates held in safekeeping by MHT. (Complaint ¶ 34). MHT alleges that beginning in late 1987 and continuing through January 1989, Brancato embezzled numerous stock certificates which had been entrusted to MHT for safekeeping by MHT's client Depository Trust Company ("DTC"). (Complaint ¶ 45). MHT alleges that Brancato effected his scheme by cancelling stock certificates held in DTC's name and issuing new certificates at first in the names of his confederate Randolph Caden ("Caden") and Caden's wife, and later in the name of Brancato's Mackey Investment Fund ("Mackey"). Caden and his wife opened a brokerage account at Tucker Anthony in December 1987 and two accounts at Smith Barney in the fall of 1988. (Complaint ¶¶ 36, 40, 41). In December 1988, Brancato opened an additional brokerage account at Smith Barney under the Mackey name. (Complaint ¶ 42). The individual account executive for all these accounts was Robert Serio, who left Tucker Anthony and joined Smith Barney in the fall of 1988. (Complaint ¶ 37-39, 43). Brancato caused the reissued stock certificates to be delivered to and sold by Serio for the benefit of the aforementioned accounts. (Complaint ¶ 48-72).

MHT discovered Brancato's defalcations in January 1989, and settled with DTC, the owner of the stock stolen by Brancato, by replacing it at a cost in excess of one million dollars. DTC then assigned to MHT such rights as it has in this matter. (Complaint ¶¶ 91-93).

In April, 1989, Brancato pleaded guilty to three criminal counts of an information in United States v. Brancato, 89 Cr. 288 (JMW), in this Court. The offenses to which Brancato pleaded guilty included (i) theft, embezzlement, or misapplication of securities entrusted to the custody or care of a bank by a bank officer; (ii) making false entries in the books, reports or statements of a bank with intent to injure or defraud; and (iii) sale of forged securities with intent to deceive other persons and organizations, all in connection with the matters described herein. (Complaint ¶ 95).

In May, 1990, Caden pleaded guilty to one count of conspiracy in violation of 18 U.S.C. § 371, contained in a seventeen-count indictment in United States v. Caden, 89 Cr. 790 (DNE), also in this Court. (Complaint ¶ 96).

MHT served its complaint on June 26, 1990 alleging a conspiracy by all defendants to violate Section 10(b) of the Exchange Act and Rule 10b-5 of the SEC; violations by Smith Barney, Tucker Anthony and Serio of New York Stock Exchange Rule 405, the "Know Your Customer" Rule; and defendants' common law fraud, aiding and abetting, conversion and negligence. (Complaint ¶ 16).

Neither Smith Barney nor Serio knew who Brancato was until he opened the Mackey account in December 1988 shortly before Brancato's illegal activity was discovered by MHT in January 1989. (Complaint ¶¶ 73-74, 91). MHT does not allege that the stock certificates delivered by Caden to Serio and Smith Barney were in any way irregular or that Serio or Smith Barney could have determined from the face of the certificates that they were stolen. Similarly, there is no allegation of any specific misrepresentations or omissions by defendants Smith Barney, Tucker Anthony and Serio. Rather, MHT contends that Serio and Smith Barney breached a duty to the "investment public" by not exercising due diligence to learn essential facts about the Cadens and Brancato and their securities transactions as required under the "Know Your Customer Rule," New York Stock Exchange Rule 405. (Complaint ¶ 16, 73-77, 97-119). MHT alleges that if Smith Barney and Serio had exercised due diligence to acquire this information, they would have discovered that the trades by the Cadens and Brancato were uncharacteristically large; that the assets of the Cadens and Brancato were too modest to support a credible belief that the securities sold in their accounts belonged to them; and that neither the Cadens nor Brancato had documentation or a verifiable explanation supporting their claims of rightful ownership of the securities. (Complaint ¶ 104-109). MHT then asserts that if defendants had used this knowledge and made the "appropriate inquiries" to MHT, they would have learned that the securities were stolen in time to prevent the losses. (Complaint, 113-116).


In order to prevail on a motion to dismiss, the moving party must demonstrate "beyond doubt that the [non-moving party] can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-102, 2 L.Ed.2d 80 (1957); Dahlberg v. Becker, 748 F.2d 85, 88 (2d Cir. 1984), cert. denied, 470 U.S. 1084, 105 S.Ct. 1845, 85 L.Ed.2d 144 (1985). A court must take the factual allegations of the non-moving party's pleadings as true and construe them in the light most favorable to that party. See Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974); Dwyer v. Regan, 777 F.2d 825, 828-829 (2d Cir. 1985), reh'g denied, 793 F.2d 457 (2d Cir. 1986).

The essential elements of a claim under Section 10(b) and Rule 10b-5 promulgated thereunder are (1) damage to plaintiff; (2) caused by reliance on defendant's misrepresentations or omissions of material facts, or on a scheme by defendant to defraud; (3) made with an intent to deceive, manipulate or defraud (scienter); (4) in connection with the purchase or sale of securities; and (5) furthered by defendant's use of the mails in any facility of a ...

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