APPELLATE COURT OF ILLINOIS, FOURTH DISTRICT
513 N.E.2d 558, 160 Ill. App. 3d 483, 112 Ill. Dec. 144 1987.IL.1319
Appeal from the Circuit Court of Macon County; the Hon. Art Powers, Jr., Judge, presiding.
JUSTICE LUND delivered the opinion of the court. McCULLOUGH and KNECHT, JJ., concur.
DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE LUND
Plaintiff is a lawyer residing in Decatur, Illinois. At the time of the transaction involved in this case, he was also chairman of the board of directors of Soy Capital Bank and Trust Company. He served on the bank's executive, personnel, audit, and loan committees. Soy Capital Bank and Trust Company is a wholly owned subsidiary of SCB Bancorp, Inc. The total number of shares issued and outstanding of SCB Bancorp, Inc., is 93,359. The plaintiff or his family affects the voting of approximately 18% of the total shares.
Plaintiff has an account with defendant, Edward D. Jones and Company. Defendant is a Missouri limited partnership with principal offices in St. Louis, Missouri. Defendant is a stockbroker doing business throughout the Midwest. It maintains two offices in Decatur and is a member of the NASD. Plaintiff has, apparently, done business with the defendant on an occasional basis since 1966.
Defendant was allocated 11,500 shares of Marine Corporation, an Illinois bank holding company, as part of a public offering of 465,000 shares. On March 13, 1986, one of defendant's Decatur representatives, Frederick Owings, called plaintiff and advised him of the proposed offering of Marine Corporation stock, stating the anticipated price per share to be between $20.50 and $22.50. Plaintiff indicated he would be interested. On March 18, 1986, Owings again called plaintiff and stated the price was set at $23 per share. Plaintiff placed an order for 500 shares for a total price of $11,500. Payment was due on March 25, 1986. A written order confirming the purchase and sale contract was mailed to plaintiff by defendant.
Defendant states in its answer that the order was cancelled on March 18, 1986, because the issue was selling at a premium as of that date. Prior to receiving payment, defendant informed plaintiff of the cancellation of his order, and further stated that the cancellation was due to plaintiff's status as a bank director, citing NASD rules.
The rule involved in this case is an interpretation of article III, section 1, of NASD's Rules of Fair Practice. Article III, section 1, states a general ethical rule:
"A member, in the conduct of his business, shall observe high standards of commercial honor and just and equitable principles of trade." (NASD Manual, par. .)
An "interpretation" of this ethical standard adopted by the NASD's Board of Governors deals with the abuse of "free-riding and withholding." In relevant part, it states:
"Except as provided herein, it shall be inconsistent with high standards of commercial honor and just and equitable principles of trade and a violation of Article III, Section 1 of the Association's Rules of Fair Practice for a member, or a person associated with a member, to fail to make a bona fide public distribution at the public offering price of securities of a public offering which trade at a premium in the secondary market whenever such secondary market begins regardless of whether such securities are acquired by the member as an underwriter, a selling group member or from a member participating in the distribution as an underwriter or selling group member, or otherwise. Therefore, it shall be a violation of Article III, Section 1 for a member, or a person associated with a member to:
4. Sell any securities to any senior officer of a bank, savings and loan institution, . . . or to any person in the securities department of, or to any employee or any other person who may influence or whose activities directly or indirectly involve or are related to the function of ...