United States District Court, Northern District of Illinois, E.D
October 3, 1972
OLGA HOCHFELDER ET AL., PLAINTIFFS,
MIDWEST STOCK EXCHANGE AND ERNST & ERNST, DEFENDANTS.
The opinion of the court was delivered by: McMILLEN, District Judge.
DECISION and ORDER
This cause comes on to be heard on the motion of defendant
Midwest Stock Exchange for summary judgment or, in the
alternative, for partial summary judgment. We find and conclude
that the motion of defendant Midwest Stock Exchange in this case
should be granted.
Plaintiffs' amended complaint against Midwest is founded on
Section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78j(b))
and S.E.C. Rule 10b-5 thereunder (17 C.F.R. § 240.10b-5).
Apparently as part of the 10b-5 violation plaintiffs also allege
that this defendant violated Section 6(a)(1) of the Securities
Exchange Act (15 U.S.C. § 78f). This section, in part, requires a
national securities exchange to file an agreement with the S.E.C.
"to enforce so far as is within its powers compliance by its
members, with the provisions of this chapter, and any amendment
thereto and any rule or regulation made or to be made
thereunder." Presumably such an agreement was filed by Midwest.
The background facts of this case are fully set forth in two
recent opinions of the Seventh Circuit Court of Appeals in
Securities and Exchange Commission v. First Securities Company of
463 F.2d 981, dated April 12, 1972 and 466 F.2d 1035, dated
August 1, 1972. The liability of Nay and his brokerage firm has
thereby been established. These decisions also control some of
the defendant's defenses. There is therefore no need to further
review the sordid details except insofar as they relate to
plaintiffs' claim against Midwest.
The facts insofar as Midwest's defenses are concerned are
contained in several affidavits filed with its motion
demonstrating its relationship to Nay and First Securities.
These facts are not controverted by counter-affidavits. The
remaining question, therefore, is whether any genuine issues of
material fact exists between the parties to this litigation. We
believe there are none and that the only issues remaining to be
decided are issues of law.
Insofar as any affirmative representation by Midwest is
concerned, plaintiffs rely almost entirely on a certificate
issued to Nay which was presumably displayed in his office and
| MIDWEST STOCK EXCHANGE |
| Organized 1882 |
| An Association for Brokers, Whose Object is to Establish |
| and Conduct a Market for Listed Securities, where High |
| Standards of Commercial Honor and Integrity are maintained |
| and Just and Equitable Principles of Trade and Business |
| prevail. |
| This certificate of Membership is Issued to |
| LESTON B. NAY |
| or |
| First Securities Company of Chicago |
| /s/ Carl E. Ogren /s/ James E. Day |
| Secretary President |
| (This Certificate is the Property of Midwest Stock Exchange).|
Since Nay's dishonesty did not involve the sale of "listed
securities" to plaintiffs, this certificate is not evidence of
any violation of Rule 10b-5. It does not apply to the sale or
issuance by Nay of promissory notes in his personal escrow
account, and plaintiffs do not allege any impropriety in the
purchase or sale of listed securities. They would not have been
justified in relying on this certificate when they turned over
the proceeds of sales of securities to Nay personally, and
affirmative representations under Rule 10b-5 are required to be
in connection with the purchase or sale of the security in
question. Cf. List v. Fashion Park Inc., 340 F.2d 457
(2nd Cir. 1965), cert. den., 382 U.S. 811
, 86 S.Ct. 23
L.Ed.2d 60 (1965), Katz v. Amos Treat & Co., 411 F.2d 1046
(2nd Cir. 1969).
The remainder of plaintiffs' allegations against this defendant
involve its alleged failure to investigate and supervise Nay's
activities sufficiently to discover his fraud. No case has been
cited where this type of omission or practice gives rise to an
action against an exchange under Rule 10b-5. The only cited case
resulted in summary judgment for the exchange. Butterman v.
Walston & Co., Inc., et al., 387 F.2d 822 (7th Cir. 1967). As a
matter of fact it is doubtful that the language of Section
6(a)(1) supports an action by a third party except possibly as a
The other cited cases involve representations or omissions made
with respect to the issuance or sale of specific securities. There
is no indication that Rule 10b-5 was intended to make a national
security exchange responsible for all of the personal
transactions and financial stability of its members. Cf. Buttrey
v. Merrill Lynch et al., 410 F.2d 135 (7th Cir. 1969) for a
typical case involving violations of a stock exchange rule by a
Assuming, however, that Midwest could be liable for
ineffectively policing its members' dealings in unlisted
securities, the defendant's affidavits demonstrate that it
adequately performed its agreement under Section 6(a)(1) of the
Act. Although plaintiffs have shown instances where this
defendant arguably was put on notice of Nay's untrustworthiness,
these do not raise an
issue of fact concerning the adequacy of the defendant's
supervision, but merely tend to show that it was not
fluoroscopic. Neither the law nor common sense requires
perfection but only an agreement "to enforce so far as is within
its powers compliance by its members . . ." (15 U.S.C. § 78f).
Defendant's affidavits establish this without contradiction.
The words of the Court of Appeals in # 71-1422 involving a
customer's claim against the broker are somewhat apropos to
Midwest's position in this case:
Nothing which occurred during the almost 25 years of
Schueren's dealings with First Securities and Nay can
be said to have put a reasonable person on notice
that anything was amiss. . . . Even the trust
department of the Union Bank was completely duped by
Nay for more than a year after Schueren's death until
The court finds and concludes as a matter of law that Midwest
performed its obligations under Section 6(a)(1) and that no
triable issue of fact remains therein.
There is no longer any issue in this case that Nay violated
Rule 10b-5 and committed fraud in the sale of "securities"
(Case # 71-1422, Seventh Circuit, August 1, 1972). It must also
be assumed that he violated one or more of defendant's rules
and regulations. This does not constitute fraudulent conduct by
the defendant exchange, as occurred in Carroll v. First National
Bank of Lincolnwood, 413 F.2d 353 (7th Cir. 1969), cert. den.
396 U.S. 1003, 90 S.Ct. 552, 24 L.Ed.2d 494 (1970). It also cannot be
said from any of the facts or alleged facts in this case that
defendant Midwest "aided and abetted" Nay in any actionable
sense. Wessel v. Buhler, 437 F.2d 279 (9th Cir. 1971); see also
Brennan v. Midwestern United Life Insurance Company,
417 F.2d 147, 154-155 (7th Cir. 1969), cert. den. 397 U.S. 989, 90 S.Ct.
1122, 25 L.Ed.2d 397 (1970).
Defendant Midwest alternatively contends that the three-year
statute of limitations had run by the time this case was filed
on February 19, 1971. Plaintiffs contend that the statute was
tolled by fraudulent concealment, but the facts do not support
this theory either. To toll the statute, the defendant must have
actively concealed the cause of action, and Midwest clearly was
not shown to have done this. The law on this point was not shown
to be different than it was in Morgan v. Koch, 419 F.2d 993 (7th
Cir. 1969). Since none of the plaintiffs entrusted funds to Nay
after 1966, their claims are barred.
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