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CANT v. A.G. BECKER & CO.

United States District Court, Northern District of Illinois


March 28, 1974

JOHN F. CANT, PLAINTIFF,
v.
A.G. BECKER & CO., INC., DEFENDANT.

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

MEMORANDUM OPINION AND ORDER

This cause comes on the stipulation of the parties that this matter is submitted to the Court for decision pursuant to Rule 39(b) of the Federal Rules of Civil Procedure. The parties have further stipulated that this Court's decision is to be based on the pleadings, depositions and exhibits thereto, interrogatories and answers, stipulations and exhibits thereto, and affidavits filed by the parties in support of their respective positions.

The plaintiff in the instant action seeks to redress alleged violations of the Securities Act of 1933, the Securities Exchange Act of 1934, and the rules and regulations of the Securities and Exchange Commission promulgated thereunder.

The plaintiff, John F. Cant ("Cant") is a physician residing in the Chicago metropolitan area. The defendant A.G. Becker & Co., Inc. ("Becker") is a Delaware corporation. During all times relevant hereto Becker was engaged in the retail sale of securities from various business locations in the Chicago metropolitan area. Becker has been, at all times relevant to this suit, a broker and dealer of securities within the meaning of Sections 3(a)(4) and (5) of the Securities Exchange Act of 1934, 15 U.S.C. § 78c(a)(4) and (5). The jurisdiction of this Court is alleged to be based upon Section 27 of the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq., and Section 22 of the Securities Act of 1933, 15 U.S.C. § 77a et seq.

The plaintiff in the complaint makes the following allegations inter alia:

  1. Plaintiff maintained several accounts with
     defendant beginning in approximately 1944 until
     approximately late 1969, at which time plaintiff
     removed his accounts from defendant. All of
     plaintiff's securities transactions from 1944
     until approximately late 1969 were transacted
     through defendant. All purchases of securities by
     plaintiff were made based upon recommendations
     initiated by defendant who frequently and
     regularly telephoned plaintiff for the specific
     purpose of suggesting the purchase by plaintiff of
     certain securities. Plaintiff seldom, if ever, in
     the twenty-five years during which plaintiff
     conducted his securities transactions through
     defendant, purchased any securities except those
     specifically recommended to plaintiff by
     defendant. Defendant knew that plaintiff relied
     upon defendant's recommendations and that as a
     matter of course plaintiff always accepted
     defendant's recommendations.

  2. On approximately November 19, 1968, defendant
     initiated a telephone call to plaintiff for the
     purpose of specifically recommending to plaintiff
     the purchase of shares of Red Rope Industries Inc.
     ("Red Rope"), a security traded in the over-the
     counter securities market. In reliance upon the
     recommendation made by defendant, plaintiff
     authorized the purchase on his behalf of 1,000
     shares of Red Rope. Defendant then sold and
     delivered from its own inventory, as principal and
     on its own behalf, said shares of Red Rope to
     plaintiff. A confirmation statement sent by
     defendant through the United States Mails and
     received by plaintiff indicated an aggregate
     purchase price of $7,250.00, which amount was paid
     to defendant. Since the date of purchase the value
     of the 1,000 shares of Red Rope, which are
     presently still owned by plaintiff, has declined
     and a recent per share bid price quoted in the
     National Daily Quotation Bureau Service was
     approximately $2.00 or an aggregate value of
     approximately $2,000.00.*fn1

  3. On approximately December 16, 1968, defendant
     initiated a telephone call to plaintiff for the
     purpose of specifically recommending to plaintiff
     that he purchase shares of Red Rope, a security
     traded in the over-the-counter securities market.
     In reliance upon the recommendation made by
     defendant, plaintiff authorized the purchase on
     his behalf of 1,500 shares of Red Rope. Defendant
     then sold and delivered from its own inventory, as
     principal and on its own behalf, said shares of
     Red Rope to plaintiff. A confirmation statement
     sent by defendant through the United States Mails
     and received by plaintiff indicated an aggregate
     purchase price of $10,687.50, which amount was in
     fact paid to defendant. Since the

     date of purchase, the value of the 1,500 shares of
     Red Rope, which are presently still owned by
     plaintiff, has declined and a recent per share bid
     price quoted in the National Daily Quotation
     Bureau Service was approximately $2.00 or an
     aggregate value of approximately $3,000.*fn2

  4. On approximately March 19, 1969, defendant
     initiated a telephone call to plaintiff for the
     purpose of specifically recommending to plaintiff
     that he purchase shares of Red Rope, a security
     traded in the over-the-counter securities market.
     In reliance upon the recommendation made by
     defendant, plaintiff authorized the purchase on
     his behalf of 500 shares of Red Rope. Defendant
     then sold and delivered from its own inventory, as
     principal and on its own behalf said shares of Red
     Rope to plaintiff. A confirmation statement sent
     by defendant through the United States Mails and
     received by plaintiff indicated an aggregate
     purchase price of $3,500.00, which amount was in
     fact paid to defendant. Since the date of
     purchase, the value of the 500 shares of Red Rope,
     which are presently still owned by plaintiff, has
     declined and the present per share bid price is
     quoted in the National Daily Quotation Bureau
     Service at approximately $2.00 or an aggregate
     value of approximately $1,000.00.*fn3

  5. On approximately July 19, 1969, defendant
     initiated a telephone call to plaintiff for the
     purpose of specifically recommending to plaintiff
     the purchase of shares of Rancher's Exploration
     and Development Corp. ("Ranchers"), a security
     traded in the over-the-counter securities market.
     In reliance upon the recommendation made by
     defendant, plaintiff authorized the purchase on
     his behalf of 600 shares of Ranchers. Defendant
     then sold and delivered from its own inventory, as
     principal, and on its own behalf said shares of
     Ranchers to Plaintiff. A confirmation statement
     sent by defendant through the United States Mails
     and received by plaintiff indicated an aggregate
     purchase price of $26,700.00, which amount was
     paid to defendant. On March 24, 1970, a 2 for 1
     stock split occurred which resulted in plaintiff's
     600 shares of Ranchers becoming 1,200 shares of
     Ranchers. On April 23, 1970, plaintiff sold the
     shares of Ranchers attributable to this purchase.
     The net sales price received by plaintiff was
     $23,676.00.*fn4

  6. On approximately October 14, 1968, defendant
     initiated a telephone call to plaintiff for the
     purpose of specifically recommending to plaintiff
     the purchase of shares of Ranchers, a security
     traded in the over-the-counter securities market.
     In reliance upon the recommendation

     made by defendant, plaintiff authorized the
     purchase on his behalf of 200 shares of Ranchers.
     Defendant then sold and delivered from its own
     inventory, as principal, and on its own behalf,
     said shares of Ranchers to plaintiff. A
     confirmation statement sent by defendant through
     the United States Mails and received by plaintiff
     indicated an aggregate purchase price of
     $8,500.00, which amount was paid to defendant. On
     March 24, 1970, a 2 for 1 stock split occurred
     which resulted in plaintiff's 200 shares of
     Ranchers becoming 400 shares of Ranchers. On April
     23, 1970, plaintiff sold the shares of Ranchers
     attributable to the purchase described above. The
     net sales price received by plaintiff was
     $7,941.50.*fn5

  7. On approximately June 18, 1969 defendant initiated
     a telephone call to plaintiff for the purpose of
     specifically recommending to plaintiff the
     purchase of shares of Ranchers, a security traded
     in the over-the-counter securities market. In
     reliance upon the recommendation made by
     defendant, plaintiff authorized the purchase on
     his behalf of 500 shares of Ranchers. Defendant
     then sold and delivered from its own inventory, as
     principal, and on its own behalf, said shares of
     Ranchers to plaintiff. A confirmation statement
     sent by defendant through the United States Mails
     and received by plaintiff indicated an aggregate
     purchase price of $16,187.50, which amount was
     paid to defendant. On March 24, 1970 a 2 for 1
     stock split occurred which resulted in plaintiff's
     500 shares of Ranchers becoming 1,000 shares of
     Ranchers. Since the date of purchase as set forth
     above, the value of the 1,000 after split shares
     of Ranchers, which are presently still owned by
     plaintiff, has declined and a recent quotation was
     approximately $15.25 per share or an aggregate
     value of approximately $15,250.00.*fn6

  8. In all the above described transactions no
     disclosures were made at the time of the
     communication initiated by defendant that
     defendant was recommending for purchase by
     plaintiff a security which was owned by defendant
     and which was in fact sold and delivered to
     plaintiff out of defendant's own inventory with
     defendant acting as a principal in the transaction
     and not acting as agent. Failure by defendant to
     make full and complete disclosure to plaintiff
     that defendant was acting as principal in the
     aforedescribed recommended transactions and that
     an adverse interest existed in the transaction
     constituted a fraud and deceit upon plaintiff as
     those terms are used in Section 10(b) of the
     Securities Exchange Act of 1934 and Rule 10b-5 of
     the General Rules and Regulations promulgated
     thereunder.*fn7 Defendant

     used means and instrumentalities of interstate
     commerce, and the United States Mails, to so
     induce plaintiff to act as aforesaid and to so
     purchase Red Rope, to provide and pay the purchase
     price, all through such misrepresentations,
     concealments and omissions and all in violation of
     Section 10(b) of the Securities Exchange Act of
     1934 and Rule 10b-5 of the General Rules and
     Regulations promulgated thereunder.

  9. In order to effect the sale of the aforedescribed
     securities, the aforesaid defendant utilizing
     instrumentalities of interstate commerce and the
     mails, employed devices, schemes or artifices to
     defraud; made untrue statements of material facts
     or omitted to state material facts necessary to
     make the statements made, in the light of the
     circumstances under which they were made, not
     misleading; and engaged in transactions, practices
     or courses of business which operated as a fraud
     and deceit upon the aforesaid plaintiff, all in
     violation of Section 17(a) of the Securities Act
     of 1933.*fn8

In addition to the factual allegations of the complaint which are apparently undisputed, the following facts which were established by pre-trial discovery, are important to the proper disposition of the instant action.

Becker admits that it sold to Cant from its own account as principal, the following amounts of common stock as of the individual trade dates:

  (1) Red Rope, 1,000 shares purchased on November 19,
      1968 for an aggregate purchase price of $7,250;

  (2) Red Rope, 1,500 shares purchased on December 16,
      1968, for an aggregate price of $10,687.50;

  (3) Red Rope, 500 shares purchased on March 19, 1969,
      for an aggregate price of $3,500;

  (4) Ranchers, 600 shares purchased on July 18, 1968,
      for an aggregate price of $26,700;

  (5) Ranchers, 200 shares purchased on October 11,
      1968, for an aggregate price of $8,500;

  (6) Ranchers, 500 shares purchased on June 18, 1969,
      for an aggregate purchase price of
      $16,187.50.*fn9

Becker has admitted that each of the above transactions was evidenced by a confirmation slip which was sent to Cant through the United States Mails, on the trade date indicated for each purchase.*fn10

For the last 15 years during which Dr. Cant dealt with Becker, the plaintiff's primary contact with that firm was through Robert E. Weiczorowski.*fn11 As was the practice, Mr. Wieczorowski would call Dr. Cant and suggest certain securities for purchase.*fn12 On each of the six occasions listed above Dr. Cant was contacted and did purchase the six blocks of securities of Red Rope and Ranchers at the invitations of Mr. Wieczorowski.*fn13

Dr. Cant relied on defendant's recommendations and during the entire period of their relationship expressed complete confidence in Becker and especially Mr. Wieczorowski.*fn14 Mr. Wieczorowski was keenly aware of this relationship of reliance.*fn15 Dr. Cant rarely went against the defendant's recommendations.*fn16

In his deposition Dr. Cant stated that with respect to each of the six transactions he was not informed that defendant was acting as principal.*fn17 Dr. Cant further testified that he did not learn that Becker was dealing as a principal until approximately the time the instant action was instituted.*fn18

The defendant Becker contends that it disclosed to plaintiff that A.G. Becker was acting as principal by virtue of the confirmation slips sent to Dr. Cant. More specifically at the top right-hand side of the confirmation slip are a number of small boxes with numerals in them. One box is labeled "Exch." and it contains the numeral "9". On the reverse side of the document are the words "Code Symbols" and underneath these words in lettering approximately one-half the size of typewritten print, the word "Exch." appears with nine numerals in a column alongside it. After the numeral "9", the following appears: "for our own account as principal".*fn19 This document is the only information Cant received from Becker that the defendant was not buying stock for Cant as Cant's agent but instead selling to Cant as a principal the stock which was part of Becker's inventory.

Dr. Cant testified that even if he had read the confirmation slip with its code section the term principal would not have meant anything to him because the defendant never explained the code or the terms to Dr. Cant.*fn20 Dr. Cant has testified that aside from no one informing him at any time that Becker was acting as principal, even if he had read the confirmation slip he could not have understood the meaning of the descriptive phrase on the confirmation slip and he would have had difficulty finding the relevant coded sections which would disclose the information that defendant was acting as principal.*fn21

Mr. Wieczorowski, who Dr. Cant almost exclusively dealt with, was questioned as to whether or not he could recall specifically stating to Dr. Cant that the Red Rope and Ranchers transactions were being engaged in by A.G. Becker as principal.*fn22 Mr. Wieczorowski was ambivalent as to the possible methods of communicating the concept of dealing from inventory to Dr. Cant and used vague types of terminology as "7 1/4 net" or "I have available for you" or other similar terminology.*fn23 Mr. Wieczorowski also stated in his deposition that he had no recollection of specifically explaining the concept of principal to Dr. Cant.*fn24

Mr. Wieczorowski testified that failure to sell securities held in inventory at a greater price than their cost to A.G. Becker resulted in a loss to A.G. Becker which in certain circumstances might be shared by himself.*fn25

Both the plaintiff and defendant have agreed that discovery has reduced the instant litigation to the following two issues of law:

  1. Whether or not A.G. Becker's disclosure by
     complying with Rule 15c1-4,
17 C.F.R. § 240.15c1-4, was complete and adequate.

  2. Whether or not under all the circumstances of this
     case A.G. Becker's disclosure was complete and
     adequate.

  I. THE RELEVANT SECURITIES STATUTES AND THE PROBLEM OF
     DISCLOSURE.

Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), makes it unlawful

  ". . . for any person, directly or indirectly, by the
  use of any means or instrumentality of interstate
  commerce or of the mails, or of any facility of any
  national securities exchange —

  (b) To use or employ, in connection with the purchase
  or sale of any security registered on a national
  securities exchange or any security not so
  registered, any manipulative or deceptive device or
  contrivance in contravention of such rules and
  regulations as the Commission may prescribe as
  necessary or appropriate in the public interest or
  for the protection of investors."

Rule 10b-5, 17 C.F.R. § 240.10b-5, makes it unlawful for any person, directly or indirectly, by use of any of the jurisdictional means set forth in Section 10(b).

  "(a) To employ any device, scheme or artifice to
  defraud,

  (b) To make any untrue statement of a material fact
  or to omit to state a material fact necessary in
  order to make the statements made, in the light of
  the circumstances under which they were made, not
  misleading, or

  (c) To engage in any act, practice, or course of
  business which operates or would operate as a fraud
  or deceit upon any person, in connection with the
  purchase or sale of any security."

The heart of the instant complaint appears to be the defendant's failure to disclose that it was acting as a principal at the time of the communication initiated by defendant. Defendant draws the Court's attention to Section 15(c)(1) of the Securities Exchange Act of 1934, 15 U.S.C. § 78o(c)(1), a section which deals with the over-the-counter transactions. This section provides that:

  "No broker or dealer shall make use of the mails or
  of any means or instrumentality of interstate
  commerce to effect any transaction in, or to induce
  the purchase or sale of, any security . . . otherwise
  than on a national securities exchange [i.e., in the
  over-the-counter market], by means of any
  manipulative, deceptive, or other fraudulent device
  or contrivance. The Commission shall, for the
  purposes of this subsection, by rules and regulations
  define such devices or contrivances as are
  manipulative, deceptive, or otherwise fraudulent.

In accordance with the mandate of Section 15(c)(1), the Securities and Exchange Commission has promulgated, inter alia, Rule 15c1-4, 17 C.F.R. § 240.15c1-4, entitled "Confirmation of Transactions". This rule sets forth the disclosure required to be given by a broker-dealer to a customer when the broker-dealer sells to the customer an over-the-counter security as a "dealer for his own account". The rule states

    "The term `manipulative, deceptive, or other
  fraudulent device or contrivance,' as used in section
  15(c)(1) . . . is hereby defined to include any act
  of any broker or dealer designed to effect with or
  for the account of a customer any transaction in, or
  to induce the purchase or sale by such customer of,
  any security . . . unless such broker or dealer, at
  or before the completion of each such transaction,
  gives or sends to such customer written notification
  disclosing (a) whether he is acting as a broker for
  such customer, as a dealer for his own account, as a
  broker for some other person, or as broker for both
  such customer and some other person. . . ."

Failure of a broker-dealer to make the disclosure required by Rule 15c1-4 has been defined by the Securities and Exchange Commission in Rule 10b-3, 17 C.F.R. § 240.10b-3, to be a manipulative or deceptive device or contrivance within the meaning of Section 10(b).

Defendant contends that by sending the coded confirmation slips, it has complied fully with Rules 15c1-4 and 10b-3 and thus has not engaged in activity which would come within any of Section 10(b) or Rule 10b-5's prohibitions.

II. EFFECTIVE DISCLOSURE.

The keystone of the entire legislative scheme of the securities laws is disclosure.*fn26 The emphasis on disclosure rests on two considerations. One relates to the proper function of federal government in regulating investment matters. Apart from the prevention of fraud and manipulation, the draftsmen of the 1933 and 1934 Acts viewed that responsibility as being primarily one of seeing to it that investors and speculators had access to enough information to enable them to arrive at their own rational decisions. The other, less direct, rests on the belief that appropriate publicity tends to deter questionable practices and to elevate standards of business conduct. The fundamental purpose of federal security legislation was to substitute a philosophy of full disclosure for the philosophy of caveat emptor and thus to achieve a high standard of business ethics in the securities industry. SEC v. Capital Gains Research Bureau, 375 U.S. 180, 84 S.Ct. 275, 11 L.Ed.2d 237 (1963). The focus on disclosure reflects the insight gained by experience that without complete, accurate and intelligible information about a securities transaction investors cannot make intelligent investment decisions.

III. THE INSTANT ACTION AND THE DISCLOSURE REQUIRED.

The spirit of disclosure as required by Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 of the General Rules and Regulations promulgated thereunder and Section 17 of the Securities Act of 1933 is flexible and the antifraud sections are remedial in nature, prophylactic in scope and should be liberally construed to encompass devices that are alien to the climate of fair dealings and full and adequate disclosure. Tcherepnin v. Knight, 389 U.S. 332, 88 S.Ct. 548, 19 L.Ed.2d 564 (1967); SEC v. Capital Gains Research Bureau, supra; Herpich v. Wallace, 430 F.2d 792 (5th Cir. 1970). These antifraud provisions have been liberally interpreted by the Courts in order to determine under all factual situations whether a material misrepresentation was made or omitted in connection with the sale of a security, and what might constitute such a material fact. Special circumstances and relationships may effect and influence the responsibility for disclosure. For example, Dr. Cant's long and dependent relationship with defendant creates a special circumstance that results in an obligation exceeding the normal duties owing to a casual customer or a customer whose reliance is not as clearly placed with the broker-dealer as in this case. The coverage of the antifraud sections is not limited to those devices or contrivances that were known at the time of enactment, but rather the sections are meant to reach practices employed in connection with purchase or sale of securities contrary to public interest or interest of investors. Herpich v. Wallace, supra. The antifraud sections prohibit all fraudulent schemes in connection with the purchase or sale of securities whether or not the artifice employed involves a garden-type variety of fraud or is a unique or subtle form of deception. Carroll v. First National Bank of Lincolnwood, 413 F.2d 353 (7th Cir. 1969), cert. denied, 396 U.S. 1003, 90 S.Ct. 552, 24 L.Ed.2d 494 (1969); Ferraioli v. Cantor, 281 F. Supp. 354 (S.D.N.Y. 1957); Opper v. Hancock Securities Corp., 250 F. Supp. 668, aff'd, 367 F.2d 157 (2nd Cir. 1966).

The issue is whether the defendant failed to communicate a material fact to Dr. Cant. The test of "materiality" to be applied in connection with the antifraud sections is whether a reasonable man would attach importance to the fact not disclosed in determining his choice of action in the transactions in question. Affiliated UTE Citizens of Utah v. United States, 406 U.S. 128, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972); Mills v. Electric Auto-Lite Co., 396 U.S. 375, 90 S.Ct. 616, 24 L.Ed.2d 593 (1970); Roger v. Ilikon Corp., 361 F.2d 260 (1st Cir. 1966); SEC v. Texas Gulf Sulpher Co., 401 F.2d 833 (2nd Cir. 1968); Ross v. Licht, 263 F. Supp. 395 (S.D.N.Y. 1967).

In addition to the responsibility for making disclosures of material facts is the implicit further responsibility of accomplishing this disclosure in a manner that results in the facts being clearly and intelligibly communicated and not obtusely or cryptically communicated. Feit v. Leasco Data Processing Equipment Corporation, 332 F. Supp. 544 (S.D.N Y 1971).

It is clear to this Court that, given the unique and special relationship between the parties, the defendant A.G. Becker breached its affirmative duty to disclose all information concerning the defendant's status as principal and the significance of such a selling posture in the plaintiff's purchase of the securities in question. Further, the defendant's disclosure by means of the confirmation slips was not sufficient given the plaintiff's long standing reliance upon defendant's investment advice, and the failure of Mr. Wieczorowski to inform and educate the plaintiff on the code and the terminology, and the fact that the plaintiff apparently did not understand the code or the terminology or that the defendant was acting as a principal and not a broker.

The defendant A.G. Becker predicates its position on the case of Batchelor v. Legg & Company, 52 F.R.D. 553 (D.Md. 1971). However, the Batchelor case does not involve the same type of special customer relationship and reliance that existed in the instant action. Cf. Chasins v. Smith, Barney & Company, 438 F.2d 1167 (2nd Cir. 1971). This Court is not holding that a broker is liable in every instance where the broker is acting as a principal and this change in status is not expressly, clearly and painstakingly explained to the investor. Rather, this Court is holding that where there is, as in the case at bar, a special relationship of confidence between the investor and broker and the broker fails to adequately and clearly inform or educate the investor as to the change in the broker's status, the broker will be liable because the investor due to this failure to disclose cannot make a properly informed investment decision. It is thus the opinion of this Court that defendant A.G. Becker is liable to the plaintiff Dr. Cant on Count I through Count VI and X through XV of the complaint.

IV. DAMAGES.

As to the issue of damages it is the desire of this Court that the parties file briefs in support of their respective theories. The parties can supplement the present record with whatever affidavits, exhibits or depositions they consider relevant and necessary.

Accordingly, it is hereby ordered that the defendants are adjudged liable on Counts I, II, III, IV, V, VI, X, XI, XII, XIII, XIV, and XV. It is further ordered that the plaintiff has until April 26, 1974 to file its brief on the issue of damages, the defendant has until May 17, 1974 to answer and the plaintiff has until May 31, 1974 to reply; and that this Court will rule on the issue of damages on June 18, 1974.


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