may take issuers several months to assemble a pool of loans,
the issuers are subject to the risk that the market interest
rate could rise and the market value of the loans could fall
before the pool is organized. To avoid this risk, issuers sell
"forward": they contract to deliver GNMA certificates on a
future date (the "settlement" date) at a price fixed on the
date of the contract (the "trade" date). Typically, the issuer
sells to a dealer or broker who in turn finds a buyer. The
buyer gambles that before the settlement date the price of the
certificates will rise.
In addition to this market risk, the sellers and buyers face
the risk that the other party to the contract will not perform
on the settlement date. If the price of the certificate falls
in the interim period, the buyer may refuse to pay the
contract price and accept delivery. Conversely, the seller
might refuse to deliver the certificates at the contract price
if the certificates have risen in value in the interim.
One way to ensure against this risk is to have one or both
of the parties deposit with the other or a third party a sum
of money to be forfeited if performance is not forthcoming.
SEC regulations require such a deposit from the dealer to the
issuer in forward sales of GNMA certificates.
24 C.F.R. § 390.52(a)(1). The amount of the deposit may vary as price
changes indicate that a greater or lesser sum is necessary to
ensure performance. The same device is used to secure
performance of commodities futures contracts traded on
commodities exchanges; in that situation, the commodities
exchanges set the minimum deposit requirements. See Johnson,
Commodities Regulation § 1.10, p. 32.
Some GNMA certificates with future delivery dates are traded
on organized commodity exchanges and are thus subject to their
deposit rules. Bache Halsey Stuart, Inc. v. Affiliated Mortgage
Investments, Inc., 445 F. Supp. 644, 646 (N.D.Ga. 1977). Many,
including those at issue in this case, are not. Because these
are contracts between dealers and buyers, rather than issuers
and dealers, the SEC regulations which require deposits in GNMA
transactions do not apply. Since they occur off the exchanges,
the exchange rules also are inapplicable. These dealer-buyer
transactions are, however, individually negotiated, id., and
the parties may use contract terms to protect themselves from
the risk that on the settlement date the other party will
refuse to perform.
III. The Complaint.
In ruling on a motion to dismiss, the court must "take [the
plaintiff's] allegations to be true, and view them, together
with reasonable inferences to be drawn therefrom, in the light
most favorable to the plaintiff." Powe v. City of Chicago,
664 F.2d 639, 642 (7th Cir. 1981). The parties join issue in their
briefs as to the precise nature of the contracts between them,
but these factual disputes are inappropriate when the case is
before the court on a motion to dismiss. The facts as outlined
below are those which the plaintiffs allege in their complaint.
The Abeleses "purchased" GNMA certificates from Oppenheimer,
and the parties agreed that Oppenheimer would deliver the
certificates at a later date. Complaint ¶ 15. From the use of
the word "purchase," the court infers that the plaintiffs
allege that the parties intended to transfer title to the
certificates to the Abeleses as of the trade date, or as soon
thereafter as Oppenheimer acquired the certificates. The
contracts provided that if the price of the certificates rose
before the delivery date, the Abeleses would sell them back to
Oppenheimer at a profit. Complaint ¶ 12(d).
The contracts required the buyers to deposit on the trade
date cash or securities equal to 10%, of the face value of the
certificates, on which Oppenheimer would pay interest.
Complaint ¶ 12(b), (c). Oppenheimer retained the right to
require additional deposits if it deemed its security
insufficient in light of changed market conditions. Complaint ¶
12(e). A failure to provide such additional security would
constitute a repudiation of the contract and give Oppenheimer
the right to dispose of the certificates on the buyer's
Complaint ¶ 12(f). Plaintiffs were not informed that additional
security could be required or that a failure to provide it
would result in the sale of the certificates. Complaint ¶ 20.
The price of the certificates purchased by the plaintiffs
decreased between the trade date and the delivery date.
Complaint ¶ 16. Oppenheimer called for additional security,
which was not forthcoming, and Oppenheimer disposed of the
certificates at a loss. Complaint ¶ 17.
The plaintiffs bring this suit under Rule 10b-16 ("the
Rule") of the Securities and Exchange Commission ("SEC"),
which states in relevant part:
"(a) It shall be unlawful for any broker or
dealer to extend credit, directly or indirectly,
to any customer in connection with any securities
transaction unless such broker or dealer has
established procedures to assure that each
(i) Is given or sent at the time of opening the
account, a written statement or statements
disclosing . . . (vii) . . . the conditions
under which additional collateral can be
17 C.F.R. § 240.10b-16. The SEC issued the Rule pursuant to §
10(b) of the Securities Exchange Act of 1934. 15 U.S.C. § 78j(b).
The Rule is the SEC's response to an exemption granted
to securities dealers from the requirements of the Truth in
Lending Act ("the TILA"), 15 U.S.C. § 1601 et seq. The Senate
Report on that legislation stated that:
"The Committee has been informed by the
Securities and Exchange Commission that the
Commission has adequate regulatory authority
under the Securities Exchange Act of 1934 to
require adequate disclosure of the cost of such
credit [extended on margin transactions]. The
Committee has been informed in a letter from the
SEC that `the Commission is prepared to adopt its
own rules to whatever extent may be necessary.'
"In recommending an exemption for stockbroker
margin loans in the bill, the committee intends
for the SEC to require substantially similar
disclosure by regulation as soon as it is
possible to issue such regulations."
S.Rep. No. 392, 90th Cong., 1st Sess. 9 (1967). The Commission
adopted the rule on December 1, 1969. Securities Exchange Act
Release No. 8733, 34 F.R. 19717.