<2 C Ig ?tate QJoUcge of J^griculturs 3Vt (fjorrtell UntaerBita Jtljara, Jf. f. IQibrarti HG4572.Cir""'™"">"-"'™^ ■""he^jaw of stockbrokers, including the la 3 1924 014 447 613 ,„ AUQ 13 1924 $^^1^-.^!*;^^^^ Cornell University Library The original of tiiis book is in tine Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/details/cu31924014447613 THE LAW OF STOCKBROKERS THE LAW OF STOCKBROKERS WITH REFERENCE TO TRANSACTIONS FOR CUSTOMERS ON THE NEW YORK STOCK EXCHANGE BY DOUGLAS CAMPBELL OF THE NEW YORK BAR NEW YORK BAKER, VOORHIS & CO. 1914 Copyright, 1913 Bt DOUGLAS CAMPBELL CONTENTS. PAGE Table of Cases ix CHAPTER I. THE NEW YORK STOCK EXCHANGE. 1. The Exchange: Its Nature and Powers 1 2. The Stock-List 2 3. The Clearmg-House 3 4. Statute of Frauds 7 CHAPTER II. THE STOCKBROKER. 1. Nature of the Broker's Transactions for a Customer, and His Relation to the Customer in Connection Therewith 10 (a) The purchase of securities on margin, and the relation between the broker and the customer in such a transaction 12 (b) Short sales of securities on margin, and the relation between the broker and the customer in such a transaction 14 (c) The Margin 19 2. Relation of the Brokers to Each Other 21 3. Relation of The Broker to the Customers of Other Brokers 22 4. Relation of the Customers to Each Other 24 5. Legality of Transactions on Margin ' 24 (a) A purchase of securities on margin 24 (b) A short sale on margin 25 6. Options: Calls, Puts and Straddles 26 V VI CONTENTS. CHAPTER III. MUTUAL EIGHTS AND DUTIES OF THE BROKER AND THE CUSTOMER ON THE PURCHASE OP SECURITIES ON MARGIN. PAGE 1. Duties of the Broker as Agent in Making the Purchase; His Commission; the Right to Indemnity 28 (a) General Duties 28 (b) Notice to the customer of a transaction 30 (e) The broker's commission 30 (d) Right to indemnity from the customer 31 2. Whether the Broker May Pledge the Securities carried on Margin 31 3. Whether the Broker May Loan Securities carried on Margin to Other Brokers 35 4. Whether the Broker May Use the Seeiu'ities Carried on Margin for One Customer to Make DeUvery on a Short Sale for An- other 35 5. Whether the Broker May Pledge Securities Deposited to Secure a Customer's Account 36 6. When the Broker May Close a Transaction 37 7. The Necessity of Giving Notice before Closing a Transaction . . 38 8. What is Reasonable Notice 39 9. The Service of Notice 42 10. The Damages 44 CHAPTER IV. MUTUAL EIGHTS AND DUTIES OF THE BROKER AND THE CUSTOMER ON A SHORT SALE OF SECURITIES ON MARGIN. 1. Duties of the Broker as Agent in Making the Sale; His Commis- sion; the Right to Indemnity 47 2. When the Broker May Close the Transaction 47 3. The Necessity of Giving Notice 49 4. What is Reasonable Notice 49 CONTENTS. VU PAGE 5. The Service of the Notice 50 6. The Damages 50 7. Whether a Loss Incurred in Borrowing Stock to DeUver on a Short Sale for a Customer Falls on the Broker or on the Cus- tomer 51 CHAPTER V. SECURITIES. 1. Securities Usually Dealt in on the Stock Exchange 52 2. Securities That Have Been Converted or Stolen: The Title Thereto, and Liabilities in Connection with the Transfer Thereof 52 (a) Bonds 52 (b) Stocks 53 3. The Broker's Liability on the Delivery of Forged or Stolen Se- curities 56 4. The Broker's Guarantee of Signature on the Transfer of Stock or Registered Bonds 56 CHAPTER VI. BEMEDIES. A. KEMEDIES or THE CUSTOMER WHEN THE BROKER IS SOLVENT. (a) Action in equity for an accounting 58 (b) Action at law for money had and received 59 (c) Remedy for nonfeasance or misfeasance of the broker as agent 59 (d) Remedy for conversion 59 (e) Remedy for failure to carry a short sale 60 B. REMEDIES OF THE CUSTOMER WHEN THE BROKER IS INSOLVENT. 1. The Redemption of Securities by the Customer When the Broker Fails 60 Vm CONTENTS. PAGE Ca) Identification of (he securities 60 (b) Situation of the securities 61 (c) When ffie title of the broker's pledgee is invalid against the cus- tomer 64 2. The Customer's Right to Money in the Hands of the Broker as Agent 65 3. Whether the Customer Can Have Legal Process Against the Broker's Seat on the Exchange 67 4. Whether a Customer Whose Broker Has Failed Can Enforce DeUvery Under a Contract of Purchase or Sale Made for Him by the Broker 69 C. REMEDIES OF THE BHOKEH AGAINST THE CUSTbMER. Page 71 CHAPTER VII. SECTIONS OF THE PENAL LAW AFFECTING STOCEBROKBBS. Page 73 CHAPTER VIII. A SPECIAL AGREEMENT WITH THE CUSTOMER. Page 78 APPENDIX. Sections of the Constitution of the New York Stock Exchange and Resolutions of its Governing Committee cited in the text 81 INDEX. Page 97 TABLE OF CASES. References are to pages. A Adams v. Holley 71 Alexander v. Redmond 65 Allen V. Patterson 71 American Exchange Nat. Bank v. Woodlawn Cemetery 55 Anderson v. Nicholas 54, 55 B Baker v. Drake 38 Baker v. N. Y, National Ex. Bank 65 Baltzen v. Nicolay 7 Bangor Elec. L. & P. Co. v. Robinson 55 Barber v. ElUngwood 18, 44, 45, 46, 47, 48, 60, 60 Bassett v. Perkins 56 Bibb V. Allen 30 Blair «. Hill 66 Board of Commissioners v. Strawn 66, 67 Board of Commissioners v. SutM 53 Board of Trade v. Christie Grain & Stock Co 6 Bosoian v. Hubbard 78 Brady v. Mount Morris Bank 54 Briggs V. Partridge 23 Brown, In re 66 Brown, In re 63 Brown, In re 61 Brown, In re 3 Brown, In re 3 ix X TABLE OF CASES. References are to pages. Brown, In re 66 Brown, In re 66, 67 Brownson v. Chapman 9 Bryan v. Baldwin 43 Burhom v. Lockwood 44, 45 Burkett v. Taylor 40 Bumham v. Lawson 42, 46 C Cameron v. Durkheim 30, 40, 42, 50 Campbell v. Wright 48, 50 Carlisle v. Norris 55 Caswell V. Putnam 31 Cavin V. Gleason 67 Central, etc., Co. v. Farmers, etc., Co 53 Chamberlain v. Greenleaf 62 Chapman v. Brooks 32 Chapman r. Forbes .59 City Bank v. Babcock 43 Clark ('. Pinckney 66 Clarkson Home v. Mo., K. & T. R. Co 53, 55, 56 Clews V. Jamieson 5, 24, 26 Coe i: Tough •. 8 Cole V. Cole 66 Colt V. Owens 45, 46 Content v. Banner 13, 38, 39 Cooper V. 111. Cent. R. R. Co 53 Cromwell v. Sac Coimty 53 Cudlipp V. Whipple 71 D Davis V. Shields 8 Des Jardins v. Hotchkin 59^ 72 District Bank, In re 66 Doherty v. Shields 71 TABLE OF CASES. XI References are to pages. Donald v. Gardner 72 Douglas V. Carpenter 32, 33, 35, 62 Dutchess Co. Ins. Co. v. Hachfield 53 E Ennis,Inre 64, 66 Ernst V. Mechanics' & Metals Nat'l Bank of the City of New York . . 65 Estes V. Perkins 78 Evans v. Wrenn 29 Everston v. Newport Nat. Bank 53 F Fairchild v. Flomerfelt 46 Frothingham v. Satterlee 59, 72 G Gillett V. Whiting , 13, 37, 38 Goldowitz V. Kupfer & Co 8 Gorman v. Littlefield 61 Gould V. Central Trust Co 62 Grand Rapids R. R. v. Sanders 53 Granite Bank v. Ayres 43 Griggs V. Day 44, 46 Grocers' Bank v. Murphy 68 Gruman v. Smith 13, 37 H Haight V. Haight & Freese Co 14, 58, 66 Hall V. Wagner 54, 55 Harding v. Churchman 72 Harris v. Tumbridge 27, 28 Hellman, Matter of 68 Hentz V. Miner 71 Hess V. Rau 31, 38, 47, 48, 49 Hibbs V. Brown 53 XU * TABLE OF CASES. References are to pages. Hicks, Matter of 66, 67 Hopkins v. Clark 28 Hopper V. Sage 31 Horton v. Morgan 30, 32 Hotchkiss V. National City Bank of New York 65 Hurt V. MiUer 45, 46 I Ishamw. Post 28 J James v. Patten : . 8 Jones V. Littledale 22 Jordan v. Underbill 14, 58, 59, 66 K Katz V. Nast 13 Keller v. Halsey 78 Kent V. De Coppet 22, 24, 70 Kilmer v. Hutton 54, 55 Knapp V. Simon 71 Knatchbull v. Hallett 66 Knox V. Eden Musee Am. Co 53, 54, 55 L Landeker v. Co-operative BuUding Bank 8 Lawrence v. Maxwell 30 Lazare v. Allen 40, 41, 48, 49, 50 Le Marchant v. Moore 62, 63 Levy V. Loeb 29, 32 Lewis V. Wilson 2 27 Leycraft v. Dempsey 59 Little V. McClain 42 59 72 Livermore v. Bushnell 74 Lockwood V. Thome 59 72 TABLE OF CASES. XUl References are to pages. Mc McBurney v. Martin 66 McClelland v. Norfolk R. R 52 McGivern v. Fleming 8 Mclntyre & Co., In re 61, 62, 63, 64, 66 Mclntyre, In re 66, 67 Mclntyre v. Whitney 33, 44 McMorris v. Simpson 59 McNeil V. The Tenth National Bank 32, 54, 62 M Manhattan, etc., Instit. v. N. Y., etc., Bank 53 Markham v. Jaudon 10, 12, 13, 19, 30, 37, 38, 39 Marvin v. Brooks 14, 58, 66 Mayer v. Monzo 33 Meadows, Williams & Co., In re 61 Mechanics' & Metals Nat'l Bank of the City of New York v. Ernst 65 Mills V. Hunt 22 Mills, Matter of 15, 17, 18, 36, 51, 54, 63, 64 Miller v. Ins. Co. of North America 31 Milliken v. Dehon 42 Minor v. Beveridge 44, 45, 46, 71 Moffet V. Sackett 71 Moore v. Rodewald 44 Morgan v. Mason 31 Mould V. Importers & Traders' Nat. Bank 61 Mullen V. Quinlan 46 N Nat'l Bank v. Insurance Co 65 National City Bank of New York v. Hotchkiss 65 Nat'l Safe Dep., etc., Co. v. Hibbs 56 Neukirch v. Keppler 2 Nickalls v. Merry 23 Nicoll V. Burke 23 Northampton Nat. Bank v. Kidder 53 XIV TABLE OF CASES. References are to pages. Ogdenw. Lathrop 38 Orvis V. Wells, Fargo & Co 23, 24 P Page V. Edmunds 68 Pawie V. Gunn 9 Pearce v. Rice 5 People V. Meadows 14, 58, 66 Pierson v. Frenkel 42, 50 Piatt V. Jones 68 Porter v. Wormser 29 Potter V. Thompson 42 Price V. Keyes 28 R Randall v. Albany City Nat. Bank 45 Renville, Matter of 2 Richardson v. Shaw 13, 14, 66, 67 Roberts v. Ely 59 Robinson v. Crawford 71, 78 Rodsborski v. American Sugar Ref . Co 8 Rogers v. Gould 9 Rogers v. Wheeler 14 Rogers v. Wiley 49, 50 Rosenbaum v. Stiebel 43, 45 Rothschild v. Allen 33, 38, 62 Ryers v. Tuska 8, 9 S Sanger v. Price 79 Sartorius v. Gottlieb 71 Sexton V. Kessler Co 61 Seymour v. Warren 72 Shiel V. Stoneham 32 TABLE OF CASES. XV References are to pages. Sillcocks V. Gallaudet 62, 63 Skiff V. Stoddard 61 Small V. Housman 39, 41, 42 Smith V. Craig 43, 50 Smith V. Savin 45, 62, 63 SpeUman v. Muehlfeld 72 Spier V. Hyde 58 Springs V. James 7, 25, 30 Stenton v. Jerome 37, 38, 72 Stewart v. Drake 32, 40 Story V. Solomon 27 Strickland v. Magoun 33, 45, 46, 62, 64 T Taintor v. Prendergast 23, 24 Taussig V. Hart 29 Thompkins v. Morton Trust 54, 64 Tracy, In re 64, 66 Treadwell v. Clark 54 U Union, etc., Co. v. So., etc., Co 53 Union Trust Co. v. Oliver 55 Unity Banking Co. v. Bettman 55 Usher v. Van Vranken 38 V Van Alen v. American Natioilal Bank 65, 66 Vielie v. Osgood 8 TV- Waters V. Marrin 66 Weed V. Small 59 Weir V. Dwyer 39 White V. Brownell 2 XVI TABLE OF CASES. References are to pages. White V. Smith 47, 48, 49, 50 Whitlock V. Seaboard Nat'l Bank 62 Willard v. White 63 Willoughby v. Comstock 39 Wilson V. Telegram Co 2 Wolff V. Lockwood 38, 41, 43, 44 Wright ». Bank of Metropolis 46 Y Yerkes v. Salomon 27 Young p. Eames 2 Z Zimmerman v. Weber 31, 71 Zimmermann v. Heil 31 THE LAW OF STOCKBROKERS CHAPTER I. THE NEW YORK STOCK EXCHANGE. 1. The Exchange : Its Nature and Powers. The New York Stock Exchange is an association of men engaged in the business of buying and selling stocks and other securities, for the purpose of providing a common meeting place in which to deal with each other and of prescribing rules imder which their deaUng with each other shall be carried on. The association is formed by a contract in writing be- tween all the members, known as the Constitution of the New York Stock Exchange, which each person becoming a member of the association signs. ^ Each member thereby expressly agrees to abide by the Constitution and all subsequent amendments to it,^ and accordingly to be bound by the rules therein set forth, and the resolutions adopted by the Governing Committee in accordance with its provisions,^ for the regulation of the conduct or business of members. Such rules and regulations are therefore binding upon the members, provided they are not unreasonable or contrary to law or to public policy. The Exchange itself does not engage in the business of buying and selling securities. Such business on the Exchange is done by its members as individuals, who deal 1 Const. N. Y. Stock Exch. Art. XIII, Sec. 5. See Appendix. 2 Const. N. Y. Stock Exch. Art. Ill, Sec. 2, Art. XVII, Sec. 6. See Appendix. 1 2 THE LAW OF STOCKBROKEKS there with each other on their own account and as brokers for others. The relation between the members as such is in no sense that of partners. In their dealing with each other on the Exchange they act for opposed interests. The Exchange is not incorporated. It is a private association, and is self governing. Subject to special legislative restrictions/ it has the same right as any private individual to conduct its business as it pleases.^ Its members are such by voluntary contract, and have only the rights which their contract gives them.^ By this contract there is reserved to the association, acting through its Governing Committee, large disciplinary powers, which, by reason of the extraordinary value to the members of the uninterrupted exercise of the rights of membership, are readily enforced. When a member is suspended or expelled, the courts do not interfere if it appears that the charge against him concerns a violation of an existing rule, that there is evidence to support it, and that the Governing Committee acted in good faith in determining his guilt. The action of the Governing Committee in expelling or suspending a member, whenever litigated in the courts, has always been sustained. 2. The Stock-List. An important function of the Exchange as such is to determine what issues of stocks and bonds shall be dealt in on the Exchange. This it does through its Stock List Committee. The requirements of the Exchange are more rigorous than the legal requirements, and where it is desired to list a new issue of securities on the Exchange, it is essential that in creating the issue all the requirements ' Post, Chap. VII, p. 77. 2 Matter of Renville, 46 App. Div. 37; Wilson v. Telegram Co., 18 N. Y. St. R. 78. ' White V. Brownell, 2 Daly 329; Lewis v. Wilson, 121 N. Y. 284; Neu- kirch V. Keppler, 56 App. Div. 225; 174 N. Y. 509; Young v. Eames, 78 App. Div. 229; 181 N. Y. 542. THE NEW YORK STOCK EXCHANGE 6 with regard to it insisted upon by the Exchange should be observed. The fact that an issue of stock or bonds is listed on the Exchange stamps the issue in the eyes of the community as one of some importance, and may be of advantage in marketing the securities. But the New York Stock Exchange is not in any sense an exclusive market. Trans- actions in stocks take place in great volume elsewhere, and the amount of bonds dealt in outside exceed many times the amount bought and sold within the Exchange. The number of corporations in the United States is up- wards of 272,000. The aggregate amount of stock of these corporations is $58,000,000,000, and of bonds, $30,000,000,000. There are Usted on the New York Stock Exchange 550 issues of stock having an aggregate par value of $13,000,000,000, and 1,208 issues of bonds having an aggregate par value of $13,000,000,000. The remaining issues are dealt in elsewhere. 3. The Clearing-House. All bids and offers made and accepted on the Exchange are for delivery upon the business day following the con- tract, unless the time of delivery is otherwise stated.' At the end of a business day the broker, in his dealing in any active stock or bond, has both bought and sold the same kind of securities a number of times, from and to the same or different brokers, at the same or different prices, and all are deUverable at the same hour on the following day. The manual delivery of such securities may be largely avoided by setting off contracts of sale against contracts of purchase and settUng differences in price by payments of cash balances,^ and to assist its members in doing this the Exchange has its Clearing-House,^ ' Const. Art. XXIII, Sees. 1-3. See Appendix. 2 In re Brown, 185 Fed. Rep. 766; In re A. O. Brown & Co., 185 Fed. Rep. 972. » Const. Art. XXVII. See Appendix. 4 THE LAW OF STOCKBROKERS which acts as the common agent of the members for the purpose. The Clearing-House Committee designates from time to time what securities shall be cleared, and a rule of the Exchange provides that in all transactions in such se- curities, the deliveries shall be made through the Clearing- House, unless otherwise specially stipulated in the bid or offer, or otherwise agreed upon.^ Practically all the active issues of securities dealt in on the Exchange are listed for delivery through the Clearing-House. Each day the broker reports to the Clearing-House all his transactions in such securities, showing the balance of each kind of such securities deliverable to or by him. The Clearing- House combines these reports during the night, and the next morning gives each broker the name of the broker to whom he is to deliver or from whom he is to receive, at the Clearing-House price, his balance of each kind of se- curities dealt in by him, and pays to or receives from him the cash balance due from or to him on account of differ- ences in price. Where brokers have both bought from and sold to each other an inactive security which is not deliverable through the Clearing-House, they may, by agreement between themselves, obviate cross-deliveries by set-off and the payment of differences. Ordinarily, however, in such cases, each broker makes manual delivery to the other. The question has sometimes been raised whether the practice of clearing transactions by delivery through the Clearing-House is evidence that the transactions are wagering contracts and as such void. The rule is that if under the guise of a contract for the sale of property to be delivered in the futiu-e, the real intent of both parties is that the property shall not be delivered, but that the con- tract shall be executed by the payment of the difference between the contract price and the market price of the property at or before the time fixed for dehvery, the 1 Const. Art. XXVII, Sec. 3. See Appendix. THE NEW YOEK STOCK EXCHANGE 5 transaction constitutes a wager and is void.^ When a sale is naade on the Exchange, the parties, under the rule of the Exchange,^ agree from the beginning that dehvery shall be made through the Clearing-House, and must expect or may know that the contract will be satisfied merely by a payment of differences as between that and other transactions in the same security aheady made or to be made on the same day. But it is obvious that this is not evidence of a wagering contract within the above rule. Each separate transaction is a real purchase or a real sale. A subsequent purchase which offsets a prior sale is usually made, not to avoid delivery, but because of an order received by the broker from some customer; and even if it were made to avoid delivery and both the sale and the subsequent purchase happened to be made between the same two brokers, the transaction would not be a wager unless both brokers at the time of the sale understood that a purchase would subsequently be made which would offset the sale.^ Such is never the case. As far as the customer is concerned in the transaction, there is still less reason for inferring a wagering contract. Transactions on the same day which offset each other in the matter of delivery are seldom made by a broker for the same customer. And if they were, there would be no chance of an understan4ing between the customer and the broker on the floor of the Exchange with whom the transaction was had for his account that it should be followed by a subsequent transaction which would make the satisfaction of the first merely a matter of paying differences. The fact, if it were a fact, that the customer, 1 Clews V. Jamieson, 182 U. S. p. 489; Pearce v. Rice, 142 U. S. 28; 1 R. S. (N. Y.) 661, Sec. 8. 2 Const. Art. XXVII, Sec. 3. Appendix. ' A broker who, having sold securities on a customer's order, buys similar securities for his own account in order to avoid delivering the securities sold, is trading against the customer's order within the meaning of a penal statute in New York, and is guilty of a felony. (See post, Chap. VII, pp. 74, 75.) 6 THE LAW OF STOCKBROKERS in his own mind, intended, at the time of entering upon a transaction, to cover it by a subsequent transaction in time to avoid deUvery, would be immaterial. The method of clearing transactions by set-off and the payment of differences was considered and approved, and the transactions involved were distinguished from wagers, by the Supreme Court of the United States in Board of Trade v. Christie Grain & Stock Co., ^ where it was con- tended that the Chicago Board of Trade was a bucket shop within the meaning of an Illinois statute against places wherein wagering contracts are permitted. Mr. Justice Holmes, delivering the opinion of the Court, said:^ "The fact that contracts are satisfied in this way by set-off and the payment of differences detracts in no de- gree from the good faith of the parties, and if the parties know when they make such contracts that they are very likely to have a chance to satisfy them ia that way and intend to make use of it, that fact is perfectly consistent with a serious business purpose and an intent that the contract shall mean what it says. * * * The sales in the pits are not pretended, but, as we have said, are meant and supposed to be binding. A set-off is in legal effect a delivery. * * * In the view which we take, the proportion of the dealings ia the pit which are settled in this way throws no light on the question of the proportion of serious dealings for legitimate business purposes to those which fairly can be classed as wagers or pretended contracts. No more does the fact that the contracts thus disposed of call for many times the total receipts of grain in Chicago. The fact that they can be and are set off sufficiently ex- plains the possibility, which is no more wonderful than the enormous disproportion between the currency of the country and contracts for the payment of money, many of which in like manner are set off in clearing-houses without any one dreaming that they are not paid, and for the rest 1198 U.S. 236. ' Id., pp. 248, 249, 250. THE NEW YOEK STOCK EXCHANGE 7 of which the same money suffices in succession, the less being needed the more rapid the circulation is." This authority was cited and followed in the recent case of Springs v. James, ^ in which case the plaintiffs, who were members of the New York Cotton Exchange, brought an action to recover a balance of account against a cus- tomer who had been trading through them on the Cotton Exchange for a number of years. The customer set up as a defense that the Cotton Exchange was a bucket shop and that the transactions for his account on that exchange were gambling transactions upon which no recovery could be had. He showed the practice of clearing transactions as between the members of the Exchange, and testified that his own purpose was "to play the market" and that he did not intend to deliver or receive any of the cotton which he ordered the plaintiffs to buy and sell upon the exchange for his account. It was held that the customer had not sustained the burden of showing that his transac- tions with the plaintiffs were wagers, and the judgment for the plaintiffs was affirmed. 4. Statute of Frauds. All bids and offers on the floor of the Exchange are made and accepted orally. Each of the parties to a transaction makes a memorandum of it at the time for his own in- formation, but there is no exchange of memoranda be- tween them until after the closing of the Exchange for the day.^ And the agreement, mitil delivery is made on the following day, is executory. Such an agreement is within the terms of the New York Statute of Frauds,^ v/hich provides: " 1. A contract to sell or a sale of any goods or choses in action of the value of fifty dollars or upwards shall not be » 137 App. Div. 110, aff'd, 202 N. Y. 603. « Const. Art. XXIV, Sees. 1-8. Appendix. » Personal Property Law, Sec. 85. Baltzen v. Nicolay, 53 N. Y. 467. 8 THE LAW OF STOCKBROKERS enforceable by action imless the buyer shall accept part of the goods or choses in action so contracted to be sold or sold, and actually receive the same, or give something in earnest to bind the contract, or in part payment, or unless some note or memorandum in writing of the contract or sale be signed by the party to be charged or his agent in that behalf." The Constitution of the New York Stock Exchange provides: ^ "All bids and offers made and accepted in accordance with these rules shall be binding." It further provides that in case of default in making delivery, the contract may be closed "under the rule," ^ by the pur- chase or sale, as the case may be, of the securities, and if the difference in price is not paid by the member in de- fault, he is suspended from membership,' and his seat may be subjected to the payment of the claim. ^ While, therefore, a purchase or sale, when originally made on the floor of the Exchange, is invaUd under the Statute of Frauds and could not be enforced in a court of law if the broker should repudiate it before exchanging Clearing-House tickets or comparison tickets ^ after the closing of the Exchange,* nevertheless it is obUgatory from the beginning upon the parties by reason of the rules of the Exchange to which they have agreed beforehand, ' Const. Art. XXIII, Sec. 1. Appendix. 2 Const. Art. XXVI, Sec. 1. Appendix. ' Art. XXVIII, Sec. 8, Art. XVI, Sees. 1, 2. Appendix. * Art. XVI, Sec. 3, Art. XV, Sec. 3. Appendix. ' Where the securities axe to be delivered through the Clearing-House, Clearing-House tickets are exchanged. Otherwise, comparison tickets are exchanged. In the latter case, the ticket given by the party making the comparison usually is not subscribed by him, and as against him the con- tract would be invalid under the Statute of Frauds until deUvery. As to the sufficiency of Clearing-House tickets in the usual form to validate the con- tract, see: Davis v. Shields, 26 Wend. 351; Vielie v. Osgood, 8 Barb. 130; James v. Patten, 6 N. Y. 9; McGivem v. Fleming, 66 How. Prac. 300; Coe V. Tough, 116 N. Y. 273; Rodsborski v. American Sugar Ref. Co., 151 App. Div. 403; Goldowitz v. Kupfer & Co., 80 Misc. 487; Landeker v. Co-operative Building Bank, 71 Misc. 517. • Const. Art. XXrV; Ryers v. Tuska, 14 N. Y. Supp. 926. THE NEW YORK STOCK EXCHANGE 9 and may be enforced against them to the extent and in the manner provided by the rules. ^ A customer whose order to buy or sell securities had been partially executed by a verbal contract on the Exchange, could not direct the broker who had accepted his order to repudiate the contract as void under the Statute of Frauds. The broker having, in reliance upon the customer's order, subjected himself to the enforce- ment of the contract imder the rules, would be entitled to complete the transaction and thus validate the contract under the statute.^ ' Brownson v. Chapman, 63 N. Y. 625; Ryers v. Tuska, 14 N. Y. Supp. 926. 2 See Rogers v. Gould, 6 Hun 229; Pawle v. Gunn, 4 Bing. New Gas. 445. CHAPTER n. THE STOCKBROKER. 1. Nattire of the Broker's Transactions for a Customer, and His Relation to the Customer in Connection Therewith. A stockbroker is one who is employed to buy or sell stocks, bonds, and other securities, receiving a commission as compensation for his services. In making the pm-chase, or sale, he acts as the agent of the person for whom it is made, and in that capacity he has an interest in the trans- action only to the extent of his conmiission. A member of the Stock Exchange, in his dealings on the Exchange for others, may and frequently does, as between himself and his customer, act merely in the capacity of a stockbroker, buying securities with money furnished by the customer, or selling securities belonging to the cus- tomer and assigned by him for deUvery to the purchaser. But by far the greater part of the broker's business for customers consists of transactions in which the interest of the broker in the property dealt in and his relations to the customer in connection therewith are broader and more complex than those of an agent merely.* The transactions which constitute the greater part of a stockbroker's business for a customer are those where the customer buys securities through the broker with money that in whole or in part is advanced by the broker, or where the customer seUs through the broker securities that he does not own and which are suppUed for deUvery by the broker. On such a purchase of securities, the * Markham v. Jaudon, 41 N. Y, p. 256. 10 THE STOCKBROKER 11 broker retains possession of them to secure his advances, which are repaid out of the proceeds of the securities when they are subsequently sold. On such a sale of secu- rities the broker retains the proceeds of the sale to secure him in providing the securities to deliver, which are re- placed when a like kind and amoimt of securities are sub- sequently bought for the customer. In the case of either transaction, the broker ordinarily requires from the cus- tomer a deposit of money or of securities, to create a margin to the credit of the customer in the broker's hands beyond the amount of the broker's advances or of the market value of the securities supplied by him for deUv- ery.^ Hence these transactions are sometimes termed marginal transactions. A transaction on margin, from the time it is begun by a deposit of margin and a purchase or sale, until it is closed by a corresponding sale or purchase, is the subject of a running account with the broker, which is known as the customer's marginal account, or as his trading account. Such an account may embrace one transaction or many transactions at the same time. When securities are bought for a customer on margin, the securities are, as it is termed, "carried" for the cus- tomer until the transaction is closed, by a sale or other- wise, and meanwhile the customer's account is said to be "long" of such securities. When securities are sold for a customer which he does not own, it is known as a "short sale," and until the sale is, as it is termed, "covered" by a purchase, the customer's account is said to be "short" of such securities. Most of the legal questions that arise between a broker and his customer relate either to purchases on margin or to short sales on margin. These two classes of transactions will now be analyzed more exactly and the relations be- tween the parties to them considered. 1 See post, "The Margin," pp. 19-21. 12 THE LAW OF STOCKBROKERS (a) The purchase of securities on margin, and the relation between the broker and the customer in such a trans- action. The nature of the transaction where the broker buys stocks or other securities for a customer on margin, and the respective imdertakings of the broker and the cus- tomer as between themselves in connection therewith, are described by Hirnt, Ch. J., in the leading case of Mark- ham V. Jaudon ^ as follows: "The customer * * * employs the broker * * * to buy certain stocks for his account, and to pay for them, and to hold them subject to his order as to the time of sale. The customer advances ten per cent, of their market value, and agrees to keep good such proportionate advance according to the fluctuations of the market. * * * The broker imdertakes and agrees: 1. At once to buy for the customer the stocks indicated. 2. To advance all the money required for the purchase, beyond the ten per cent, furnished by the customer. 3. To carry or hold such stocks for the benefit of the customer so long as the margin of ten per cent, is kept good, or until notice is given by either party that the transaction must be closed. An appreciation in the value of the stocks is the gain of the customer, and not of the broker. 4. At aU times to have in his name or under his control, ready fordehveiy, the shares purchased, or an equal amount of other shares of the same stock. 5. To deliver such shares to the customer when required by him, upon the receipt of the advances and commissions accruing to the broker; or 6. To sell such shares upon the order of the customer, upon payment of the like sums to him, and account to the customer for the proceeds of such sale. Under this contract, the customer undertakes : 1. To pay a margin of ten per cent, on the current mar- ket value of the shares. ' 41 N. Y. 235. THE STOCKBROKER 13 2. To keep good such margin according to the fluctua- tions of the market. 3. To take the shares so purchased on his order, whenever required by the broker, and to pay the difference between the percentage advanced by him and the amount paid therefor by the broker." In specifying ten per cent, of the market price as the' amount of the margin, the court has reference to the fact in that regard as it existed in the case before it. The margin may be an amount equal to ten per cent, of the market price, or more, or less, according to agreement, or it may consist of securities deposited with the broker as collateral.^ With this exception, the transaction before the court in Markham v. Jaudon is a typical one, and the court's analysis states succinctly the obligations of the parties which are implied in a purchase of securities on margin. It is obvious that in the course of such a transaction the broker stands in various relations to the customer. In making the purchase upon the order of the customer, he acts as the latter's agent. In advancing money for the purchase, he becomes the creditor of the customer. When the securities purchased are delivered to the broker, the customer becomes the general owner of them, but they remain in the possession of the broker who has a general lien upon them for the amount of his advances on the customer's account and for his commissions. He becomes the pledgee of the securities. Thus the legal relations which arise between the customer and the broker on a purchase of securities on margin are at once those of principal and agent, debtor and creditor, and pledgor and pledgee.^ And inasmuch as the broker in his transactions for a > Post, "Margin" p. 20. 2 Markham v. Jaudon, 41 N. Y. 235; Gruman v. Smith, 81 N. Y. 25; Gillett 1). Whiting, 120 N. Y. 402; Content v. Banner, 184 N. Y. 121; Richardson v. Shaw, 209 U. S. 365; Katz v. Nast, 187 Fed. Rep. 529. 14 THE LAW OP STOCKBROKEBS customer is dealing with property belonging to the cus- tomer, which is intrusted to him in a confidential capacity, his agency is fiduciary in character.^ The customer being the general owner of the securities bought and carried for him, his account is credited with any interest or dividends received on the securities while they are being carried. It is debited with interest on the purchase price of the securities, and is credited with inter- est on any moneys deposited as margin. The interest is debited and credited monthly. The rates of interest charged and allowed depend upon agreement, and may differ with different brokers. It is usually about 1% per annum more than the average rate paid by the broker during the month for his call loans. The risk of the venture in the purchase of securities on margin is entirely upon the customer. If the securities advance in price, he makes a profit; if their price declines, he realizes a loss. The broker gets out of the transaction, when closed in accordance with the understanding of the parties, his commission and interest on advances, and nothing else.^ (b) Short sales of securities on margin, and the relation between the broker and the customer in such a transac- tion. By accepting a customer's order to sell securities short on margin, the broker becomes the agent of the customer to effect the sale, and, from the nature of the transaction, impliedly undertakes to obtain the securities to deliver to the pm-chaser, and to carry the transaction by continuing the loan of the secm-ities long enough to afford the cus- » Marvin v. Brooks, 94 N. Y. 71; Haight v. Haight & Freese Co., 112 App. Div. 475, 190 N. Y. 540; Jordan v. Underhill, 91 App. Div. 124; Rogers v. Wheeler, 89 App. Div. 435; People v. Meadows, 199 N. Y. 1. See post, Chap. VI, pp. 66, 67. 2 Kiohardson v. Shaw, 299 U. S. 365. THE STOCKBROKER 15 tomer a reasonable opportunity to realize a profit from the speculation.^ How the securities to be delivered are obtained by the broker is of no interest to the customer.^ The broker may deliver securities of his own, or securities which he is carrying for other customers, if authorized by them to do so,^ or he may borrow secm-ities from other brokers,* or from outsiders. When the broker borrows the securities, it is usually from another member of the Exchange, and the customary terms of the transaction between the broker who borrows and the broker who lends are well established. (1) They deal with each other as principals, and each is personally responsible to the other for the performance of the contract on his part.^ (2) The legal title to the securities loaned is transferred to the borrower, who expects to deliver them to a buyer on a short sale, and accordingly, if it is stock that is bor- rowed, the certificate of stock is assigned by the lender in blank. (3) The loan may be ended at any time by either party. The borrower then returns the securities, i. e. the same kind and amount of securities, to the lender. (4) The borrower deposits with the lender as security when the loan is made the full market price of the se- curities, and thereafter, while the loan lasts, the sum in the hands of the lender is kept, by payments back and forth between the parties, at the market price of the borrowed securities, as it fluctuates. The borrower may also be required to keep with the seller in addition some fixed percentage, usually not more than ten per cent., of the par 1 Matter of Mills, 139 App. Div. 54, 58-63; post, Chap. IV, p. 47. ^ Matter of Mills, 139 App. Div. p. 58. ' See as to the legality of using securities of one customer to deliver on a short sale for another, post, pp. 35, 36. * See as to the legality of loaning securities of customers to be used by the borrower in making delivery on a short sale, post, p. 35. ' Post, pp. 21, 22. 16 THE IiAW OF STOCKBROKERS value of the borrowed securities, which is known as the "margin," When the loan is ended, the lender repays the amount of money then on deposit with him, including the additional sum paid him as margin, if any. (5) The lender has the use of the money deposited with him while the loan lasts, and accordingly pays the bor- rower interest upon it at such rate as may be agreed upon between them. The usual rate is about the same as the prevailing rate for "caU loans" of money. The borrower, if he is obhged to do so to get the securities, may waive the payment of interest. The securities are then said to be "loaned flat." If there is an unusual demand for the securities, the borrower may even have to pay a cash consideration to get the loan. The amount so paid is known as a "premium." (6) As the lender remains theoretically, as between him and the borrower, the owner of the secvuities loaned, the borrower must pay the lender any interest or dividends on the securities which the latter would have received had he kept them; and likewise the lender must pay the borrower any assessment on the securities that he would have paid had he kept them. On a short sale of securities on margin, the contract between the broker and the customer with respect to the securities provided by the former for delivery reflects the terms of a contract between the borrower and lender of such secm-ities on the Exchange, but is not altogether the same. The broker retains the proceeds of the sale in the first, instance to secm-e him in providing the securities for delivery, and requires in addition a deposit of money to provide a margin above the market value of the se- curities. This margin is some agreed percentage of the par value of the secmities, and must be maintained by the customer on demand.^ The customer is charged with the amount of any interest or dividends paid on the securities while the sale is outstanding, and with the amount of any ^Posl, "The Margin," p. 19. THE STOCKBROKER 17 premium at which the securities are being loaned in the market. He is credited with the amount of any assessment on the securities during the transaction. The loan of securities to the customer cannot be ended by the broker at will. If the broker has borrowed the securities from another member on the Exchange and the loan is called, he must, if necessary, replace the loan elsewhere.^ Ordi- narily, the customer is not allowed interest on the proceeds of the sale so far as they are used in borrowing securities to deliver. But in large transactions he may be able to stipulate for part, usually one-half, of the interest received by the broker from the lender of the securities, or, if the broker delivers securities of his own, then one-half the prevailing rate payable by a lender of such securities. The customer is allowed interest on the margin in his favor where it consists of money. If the market value of the securities sold declines, the difference between their market value and the amoimt for which they were sold is margin upon which the customer is allowed interest. Where the margin consists of securities deposited as collateral, the customer is entitled to any dividends or interest paid on them while in the possession of the broker. If the margin consists entirely of collateral, and the mar- ket value of the securities sold advances, the broker must advance the money required, in addition to the proceeds of the sale, to continue the loan of the securities, and the customer is charged with interest on such advance. The relation that exists between the broker and the customer on a short sale on margin has recently been the subject of judicial discussion. In making the contract of sale and in completing it by a delivery of the securities, the broker is clearly acting as the agent of the customer. But in what character does he act in carrying out his implied obligation to obtain the securities to deliver? He may dehver securities of his own. In that case he himself undoubtedly lends the securities to his customer, 1 Matter of Mills, 139 App. Div. 54, 58-63. 18 THE LAW OF STOCKBROKERS and the relation between them is that of borrower and lender of the secxmties. Usually, however, the broker borrows the securities from others to deliver. In effecting and maintaining the loan he deals with the lender as the apparent principal and with the responsibiUty of a prin- cipal, but does he, as between himself and his customer, borrow the securities as the customer's agent, or does he borrow them as principal and in turn lend them to the customer? The distinction would be of importance if a loss should arise through default on the part of the person from whom he borrows the securities.^ The question is discussed at length by Presiding Jus- tice Ingraham in Matter of Mills, "^ who arrives at the conclusion, expressly concurred in by Mr. Justice Laugh- lin,^ that the broker is under an implied contract to pro- vide the necessary secm-ities to carry a short sale, and that if he borrows them for that purpose, he acts in so doing, not as the agent of his customer, but in his own behalf. The decision of the question was not necessary in that case, and it was not considered by the other members of the court. In a recent case in the same com-t,* Mr. Jus- tice Scott, writing the opinion, refers to the exhaustive examination of the subject of a broker's implied under- taking on a short sale in the opinion of the presiding justice in the above case, as stating the law on the subject. There is no rule of the Stock Exchange, nor any cus- tom among brokers, bearing directly upon this question. Nor has the question been directly considered in any other jurisdiction than New York. It has usually been assumed that the broker in bor- rowing the securities to deliver acts as the agent of the customer. But in view of the opinion expressed in the 1 Post, p. 51. 2 139 App. Div. 54, 57-63. ' Id., p. 56. * Barber v. Ellingwood, No. 1, 144 App. Div. 514. THE STOCKBROKER 19 Appellate Division, it may be concluded, that, in the ab- sence of an express term to the contrary in the contract between the broker and the customer, or of some circum- stance showing a contrary intention, such as a direction to the broker to "borrow for delivery," the broker lends the securities to his customer, however he may have obtained them, undertaking to continue the loan imtil the transaction is closed. (c) The Margin. What is known as the margin in the customer's account with the broker is the customer's equity in the assets to his credit in the hands of the broker. It is figured on the basis of the current market prices of the secm-ities bought and carried or sold short for the customer, and is measured by the excess of the money and the market value of se- curities to the credit of the customer with the broker over the money due the broker for advances and commissions and the market value of securities supplied by him for delivery on short sales. The margin may be provided for in the first instance by a deposit with the broker of money or of securities. The extent of the margin is a matter of agreement between the broker and the customer. It may be ten per cent, of the par value of the securities dealt in, or a greater or less percentage. If the securities to be bought or sold are high priced, the percentage of their par value required as margin will be greater, and if low priced, it will be less. The customer impliedly undertakes to keep the margin good upon demand.^ Thus, if on a purchase of securities having a par value and also a market value of $10,000, the broker in the beginning requires a deposit of $1,000 and the market value of the securities bought declines to $9,500, he may demand, and the customer must then deposit, an additional $500, to re-establish the margin at 1 Markham v. Jaudon, 41 N. Y. 235. 20 THE LAW OF STOCKBROKERS $1,000. That is, the margin must be maintained at the agreed percentage of the par value of the securities, and not, as is sometimes stated, at an agreed percentage of the market value of the securities as it fluctuates. It may be that two or more kinds of securities are being carried for a customer, and that some of these may advance while others decline in price. The margin is figured for the account of the customer as a whole, and the amount required to maintain it is based upon the net result of advances and declines in the prices of all securities dealt in at the same time. If the margin is increased by changes in the market value of the securities dealt in for the customer's account beyond the amount originally agreed upon, he may reduce it to such amount by drawing upon the broker for the difference. When securities are deposited by the customer instead of money to create the margin, they are deposited as collateral to secxire the account. The broker acquires a lien upon them for his advances and may re-pledge them as security for loans to himself.^ If the securities deposited are stocks, the certificates are indorsed in blank by the customer. The broker may then have the shares of stock transferred to his own name, or may leave them in the name of the customer. The banks will accept as security from the broker stocks in the name of a third person, provided the signature of such person to the assignment in blank on the certificate is guaranteed by the broker. One advantage in leaving such stock in the name of the customer is that payment of a transfer tax on the transfer to the broker and again on the transfer back to the cus- tomer is avoided. Where the stock remains in the name of the customer, any dividends paid upon it will be re- ceived by him directly. Dividends or interest received by the broker on securities deposited as margin are cred- ited to the customer's account. 1 Post, p. 36. THE STOCKBROKER 21 The margin is primarily for the protection of the broker against fluctuations in price which might leave the cus- tomer indebted to the broker in an amount greater than the value of the security in the broker's hands. But the margin has another use in that, when sufficiently large, it eliminates the danger of a customer trading beyond his means. The Stock Exchange, through its Governing Conmaittee, on February 13, 1913, adopted a resolution: "That the acceptance and carrying of an account for a customer, either a member or a non-member, without proper and adequate margin may constitute an act detrimental to the interest and welfare of the Exchange, and the offending member may be proceeded against under Section 8 of Article XVII of the Constitution." And subsequently the Constitution was amended to provide for a "Com- mittee on Business Conduct," one of whose duties it is to "consider matters relating to the business conduct of members with respect to customers' accounts." ^ 2. Relation of the Brokers to Each Other. The broker in his transactions with other brokers on the floor of the Exchange, whether deahng for his own accoimt or for the account of a customer, has, as between him and the broker with whom he deals, all the rights and responsibilities of a principal dealing with a principal. Not only does this result from the rules of the Exchange, which contemplate that its members shall deal with each other as principals, but is also in accordance with the principles of the law of agency when appUed to the facts of an ordinary transaction between brokers. According to the practice, the broker, though executing the order of a customer, does not disclose to the broker with whom he deals the name of his principal or the fact that he is buying or selling for a principal; and in con- summating the transaction, he himself pays or receives * Const. Art. XI, Sec. I, Fourth. See Appendix. 22 THE LAW OF STOCKBROKEKS the purchase price and receives or delivers the securities purchased or sold. He communicates to his customer the name of the party, i. e. the name of the other broker, from whom he has purchased, or to whom he has sold, the securities in accordance Aivith the customer's order. ^ But such other broker has no means of knowing who that principal is, or, in fact, whether the broker is dealing for a principal or for his own account. Under these circimastances, the broker is personally bound by the contract, and it would be no defense in a court of law that he actually entered into it, not as prin- cipal, but as agent for another.^ The practice of brokers in dealing as principals on the Exchange, though not expressly estabhshed by any rule- of the Exchange, is contemplated by the rules; and, before the tribimal of the Exchange, the broker is held to his contract as a principal imder penalty of suspension and expulsion, and after that to the extent of the proceeds of his seat on the Exchange.' The rule of the Exchange * which provides: "No party to a contract shall be compelled to accept a substitute principal, unless the name proposed to be substituted shall be declared in making the offer, and as a part thereof," refers, by the words "substitute principal," not to a cus- tomer of the broker, but to some other member of the Exchange.' 3. Relation of fhe Broker to the Customers of Other Brokers. Where a transaction has been entered into on the floor of the Exchange between brokers each of whom is execu- '■ See "Notice to the customer of a transaction," post, Chap. Ill, p. 30. 2 Kent V. De Coppet, 149 App. Div. 589; Jones v. Littledale, 6 A. & E. 486; Mills v. Hunt, 20 Wend. 431. 3 Const. Arts. XXIV, XXV; Art. XXVI, Sec. 1; Art. XXVUI; Art. XVI, Sees. 1, 2, 3; Art. XV, Sec. 3. Appendix. * Const. Art. XXIV, Sec. 9. ' Kent V. De Coppet, 149 App. Div. 598. THE STOCKBROKER 23 ting the order of a customer, and the same has become a vahd contract mider the Statute of Frauds by the exchange of clearmg-house tickets or comparison tickets between the brokers/ there is privity of contract between each broker and the undisclosed customer of the other. The Stock Exchange does not take cognizance of the con- tractual relation thus established. It will enforce the con- tract only as between the two brokers. But at law the contract may be enforced directly by or against the real principal. The broker may sue on the contract the cus- tomer of the broker with whom it was made, or he may be sued upon it by such customer.^ This is not the less so because of the fact that the customer receives from his broker an immediate report of the transaction in which the opposite broker is named as the other contracting party.' The rights and liabilities imder the contract as between the customer and the opposite broker are strictly limited to the rights and liabilities which have thereby arisen between the brokers. The principal, at the time when he discloses himself, has no greater rights than his agent has acquired, and cannot be subjected to any greater liability than his agent has undertaken. The contract being made by brokers on the Exchange, is subject to the rules of the Exchange, and those rules, so far as they determine the rights of the brokers under the contract, determine also the rights of the principals. Thus if, on the insolvency of a broker, or default in delivery for other cause, the contract is closed under the rule of the Exchange applying to such a case,^ and the rights of the brokers are thereby limited under the rule to a claim for a money difference fixed by the price at which the contract is ' Ante, Chap. I, p. 8. 2 Taintor v. Prendergast, 3 Hill, 72; Briggs v. Partridge, 64 N. Y. 357; NicoU V. Burke, 78 N. Y. 580; Orvis v. Wells, Fargo & Co., 73 Fed. Rep. 110; Nickalls v. Merry, L. R. 7 Ch. App. Cas. 733. 3 Post, Chap. Ill, p. 30. * Const. Art. XXVIII, Sec. 1. Appendix. 24 THE LAW OF STOCKBROKERS closed, the principals of the broker are bound thereby and limited accordingly in their legal rights.^ 4. Relation of the Customers to Each Other. The same privity of contract that exists between the customer whose order is executed by his broker on the Exchange and the broker with whom the transaction is had, exists also between such customer and the customer, if any, of the broker with whom the transaction is had. There is no communication between the two customers; they are not even aware that the opposite broker has not purchased or sold for his own account. But they are the real principals in the transaction. The Exchange has no jurisdiction over them. Their remedy against one another for breach of the contract must be had at law, and each has against the other the rights only which his broker, who has made the contract subject to the rules of the Exchange, would have at law.^ 5. Legality of Transactions on Margin. (a) A purchase of securities on margin. The only question that can arise as to the legality of the broker's ordinary transactions for customers, is whether they can be classed as wagering contracts, which are illegal at common law and void.' There can be no doubt of the legaUty in this respect of a purchase of securities for a customer on margin. As far as the customer is concerned, it may be, and xisuaUy is, a purely speculative transaction, in the sense that he never expects to receive the thing purchased or to pay the piu-chase price, but only to receive or pay the differ- ence between the price at which the securities are pur- chased and the price at which they are finally sold. But there are in fact a real purchase and a real sale of prop- 'Kent V. De Coppet, 149 App. Div. 589; Orvis v. Wells, Fargo & Co., 73 Fed. Rep. 110; Tadntor v. Prendergast, 3 Hill, 72. And see, post, Chap. VI, pp. 69, 70. « Orvis ij. Wells, Fargo & Co., 73 Fed. Rep. 110. ' Clews V. Jamieson, 182 U. S. p. 489. THE STOCKBROKER 25 erty. The customer accepts delivery on the purchase and makes dehvery on the sale by his agent, the broker. Neither the opposite broker from whom the purchase is made nor the broker to whom the sale is made is a party to the customer's speculation, and each of them, in his separate case, contemplates actual and permanent deliv- ery of the property. Moreover, in the case of a pm-chase, unlike the case of a short sale on margin, the broker who is carrying securities for a customer may require him to receive possession of them at any time and pay the amount advanced by the broker in making the purchase. Such a transaction differs essentially from a wager. ^ (b) A short sale on margin. Short sales of securities are expressly legaUzed in New York by the statute which provides: "An agreement for the purchase, sale, transfer or dehvery of a certificate or other evidence of debt, issued by the United States or by any state, or a municipal or other corporation, or of any share or interest in the stock of any bank, corporation or joint stock association, incorporated or organized under the laws of the United States or of any state, is not void or voidable * * * because the vendor, at the time of making such contract, is not the owner or possessor of the certificate or certificates or other evidence of debt, share or interest." ^ An act to the same effect, though differing in form, was first passed in 1858,^ repealing a section in the Revised Laws of 1812,* which declared void all contracts for the sale of securities which the seller does not own or actually possess at the time of the contract. The law in New York thus established by statute with 1 Springs V. James, 137 App. Div. 110, 202 N. Y. 603. ' Personal Property Law, Sec. 33, being Sec. 33 of Chap. 45 of Laws of 1909. ' Chap. 134, Laws of 1858, repealed by the Personal Property Law, and therein reenacted in amended form. < 2 K. L. 187, Sec. 18. 26 THE LAW OF STOCKBROKERS respect to securities is in harmony with the doctrine of the common law as to all personalty, "that a contract for the sale of goods to be dehvered at a future day is valid, even though the seller has not the goods, nor any other means of getting them than to go into the market and buy them." ^ A short sale of securities dififers from a future sale of property which the seller does not own, only in form. Sales on the Exchange in the "regular way" call for deUv- ery on the business day following the contract.^ One may sell secm-ities in the regular way, which he does not own, by borrowing them to deliver. This is a short sale. In- stead of buying the securities in the market at a later date to make dehvery, as in the case of a sale for future dehvery, he buys them at a later date to return the loan of those already dehvered. The two transactions are equally vahd. A short sale is not the less vaUd because it is made through a broker on margin. The seller then borrows the securities from his seUing agent instead of from a stranger, lea\'ing with the agent the proceeds of the sale, together with the margin, to secure him in making the loan. As far as the customer is concerned, the transaction can have no other purpose than a speculative one. But the buyer on the sale is not a party to the speculation, and the broker is a party to it, as principal, only in that he lends to his customer the securities to sell and is under con- tract to continue the loan until the customer has had a reasonable opportunity to realize a profit on the operation. The sale involves an actual dehvery, which the customer is boimd by the contract to make and which is made by the broker as his agent. It is no less a sale in good faith because the customer must later buy securities to replace those that have been loaned to him. 6. Options: Calls, Puts and Straddles. Transactions for the purchase or sale of securities fre- » Clews V. Jamieson, 182 U. S. p. 489. 'Const. Art.XXIII, Sec. 3. Appendix. THE STOCKBROKER 27 quently take the form of what are known as option con- tracts, which are of three kinds, namely: "calls," "puts" and "straddles." An "option," as applied to transactions in securities, is a contract by which one party, for a cash consideration, acquires the privilege of buying from or selling to the other specified securities at a fixed price within a certain time.^ A "call" gives the option of buy- ing securities. A "put" gives the option of selling. A "straddle" is a combination of the two, and gives the option of buying or selling.^ While an "option" may be shown to be a mere cover for a wager, it is not prima facie a gambling contract.' 1 Story V. Salomon, 71 N. Y. 420; Harris v. Tumbridge, 83 N. Y. 92. 2 Id. ^ Id.; Yerkes v. Salomon, 11 Hun, 471; Lewis v. Wilson, 50 Hun, 166, 121 N. Y. 284. CHAPTER ni. MUTUAL RIGHTS AND DUTIES OF THE BROKER AND THE CUS- TOMER ON THE PURCHASE OF SECURITIES ON MARGIN. 1. Duties of the Broker as Agent in Making the Pur- chase; His Commission; The Right to Indemnity. (a) General Duties. The relation of the broker to his customer in making the purchase of securities on margin being that of an agent to his principal, his duties and rights in the premises are prescribed by the law of agency. As an agent, he must exercise skill and dUigence in carrying out the customer's order, and must act in good faith toward his customer.^ The degree of skiU and dihgence which he must exercise is that which competent and experienced stockbrokers are accustomed to show under similar circumstances.^ The standard set for the stockbroker by the Exchange itseK is a high one. If the customer has given an order to buy at a certain price which is reached on that day, and the broker does not make the purchase, he may show that he was present when the price was reached, but was unable to buy because of the limited supply. But if he was not present, he must take the loss arising from having to buy at a higher price. If, however, the price goes to any extent below the price named, the broker is Uable for the loss, whether or not he was present when the price was reached. The duty of acting in good faith toward the customer 1 Harris v. Tumbridge, 83 N. Y. 92. - Isham i;. Post, 141 N. Y. 100; Price v. Keyes, 62 N. Y. 378; Hopkins ». Clark, 158 N. Y. 299. 28 PURCHASE OF SECURITIES ON MARGIN 29 is very stringently enforced both by the Exchange and by the courts. If the broker is able to buy and does buy at a lower price than that named by the customer, the broker, beiag merely an agent in the transaction, cannot retain the difference. If the customer suspects that the broker has made the purchase at one price and reported it to him at another, he can notify the Secretary of the Exchange, who will verify the report through the opposite broker. The penalty imposed by the Exchange for such an act of bad faith is expulsion. Under a well established rule of the law of agency, the broker who receives an order from a customer to buy or sell securities, cannot, in execution of the order, buy the securities from or sell them to himself, irrespective of whether or not there is any evidence of bad faith on his part.^ Such dealing is also prohibited by a rule of the Exchange.^ But when the broker has an order to buy and an order to sell the same securities at the same price, he may, under a rule of the Exchange, execute the two orders by making the transactions with himself, as agent for an undisclosed principal, provided he first offers the securities for sale on the market at one-eighth per cent, higher than the price at which he piirchases them.' Custom permits the broker to delegate the execution of an order to some other member of the Exchange. In executing an order the broker may make as many contracts as he deems advisable for amounts aggregating the total amount of securities designated in the order. He must contract for as many securities, in the multiples prescribed by the rules of the Exchange, as possible at the designated price up to the amount specified in the order. ^ The broker is impliedly authorized by his customer to 1 Taussig V. Hart, 49 N. Y. 301, 58 N. Y. 425; Levy v. Loeb, 85 N. Y. 365, 89 N. Y. 386; Porter v. Wormser, 94 N. Y. 431. 2 Ees. March 30, 1910. Appendix, pp. 93, 94. ' Res. Dec. 14, 1898. Appendix, p. 93. * Evans v. Wrenn, 93 App. Div. 346. 30 THE IiAW OP STOCKBROKERS deal according to the customs of stockbrokers and the rules of the Stock Exchange, provided the same are not contrary to law or public poUcy or such as to change the intrinsic character of the undertaking.^ Generally speak- ing, therefore, such customs and rules are binding upon the customer. The exceptions will appear hereafter. (b) Notice to the customer of a transaction. It is the invariable practice of brokers upon making a contract for the purchase or sale of securities for a cus- tomer, to send him a notice thereof. A statute in New York, which went into effect on September 1, 1913, pro- vides that the broker "shall deliver to each customer on whose behalf a purchase or sale of such securities is made by him a statement or memorandum of such purchase or sale, a description of the securities pm-chased or sold, the name of the person, firm or corporation from whom such securities were purchased, or to which the same were sold, and the day, and the hom^ between which the transaction took place," and further provides that a broker who refuses to dehver such a statement to the customer within twenty-four hours of a written demand therefor shall be guilty of a misdemeanor.^ The usual notice delivered by a broker to his customer differ:? from the statement prescribed by the statute only in that it does not specify the hours between which the transaction took place. (c) The broker's commission. The minimum amoimt of the broker's commission on a piu-chase or sale of securities on the Exchange for a cus- tomer is fixed by a rule of the Exchange ^ at one-eighth of one per cent, of the par value of the securities bought or 1 Horton v. Morgan, 19 N. Y. 170; Cameron v. Durkheim, 55 N. Y. 425; Lawrence v. Maxwell, 53 N. Y. 19; Markham v. Jaudon, 41 N. Y. 235; Springs v. James, 137 App. Div. 110; Bibb v. Allen, 149 U. S. 481. ' Section 957 of the Penal Law, added by Chap. 593 of the Laws of 1913. ' Const. Art. XXXIV, Sec. 3. Appendix. PURCHASE OF SECURITIES ON MARGIN 31 sold. By the custom of brokers, the actual rate charged is the minimum rate fixed by the rule. A customer who gives an order to a broker impliedly offers to pay the customary commission, and this offer becomes a contractual obligation on his part when the order is executed.^ In practice, on a marginal transaction, the amount of the commission is debited to the customer's account, and is brought to his notice for the first time when a statement of account is rendered to him. (d) Right to indemnity from the customer. A broker who accepts an order from a customer must, in his capacity as agent, follow the instructions of the customer in executing the same, buying or selling at the price and in the manner directed.^ If he carries out the terms of the order, the customer is bound thereby, and is under an impUed obligation to reimburse and indemnify the broker for all expenditures and losses incurred by the broker in connection therewith from the time he accepted the order.' 2. Whether the Broker May Pledge the Securities Car- ried on Margin. The general rule has long been established that a broker who purchases securities for a customer on margin may take title to the securities in his own name, and is not bound to retain or deliver the identical sectu-ities pur- chased for the customer, but that he must keep on hand, or under his control, either the securities of the customer or a like kind and amount of securities, and have them in such a situation that the customer, by paying the amount due from him thereon, could at any time obtain them.^ 1 Morgan v. Mason, 4 E. D. Smith (N. Y.) 636; Miller v. Ins. Co. of No. Am., 1 Abb. New Gas. 470. ^ Zimmermann v. Heil, 86 Hun, 114. ' Hess V. Rau, 95 N. Y. 359, 363; Zimmerman v. Weber, 135 App. Div. 428. « Caswell V. Putnam, 120 N. Y. 153; Hopper v. Sage, 112 N. Y. 530; 32 THE LAW OF STOCKBEOKERS There is no doubt that under this rule the broker may lawfully pledge the customer's securities, by themselves, separate and apart from others, for an amoxmt not exceed- ing the indebtedness to him of the customer on accoimt of their purchase. It is equally clear that if the broker pledges the customer's securities, separately, for an amount exceeding the indebtedness to him of the customer on account of them, and does not retain in his possession other securities of a like kind and amount, the act con- stitutes a conversion of the customer's securities. For the seciudties would not then be in a situation where the customer, by paying the amount due from him, could at any time obtain them. ' But the general rule stated above has received an interpretation which is not so obvious and which is not very widely understood. It is the daily practice of the broker to mingle the securities piu-chased for a customer on margin with the securities of other customers and to pledge the whole in bulk to a third party without retaining in his possession other secxu-ities of a like kind and amount, and ordinarily the amoxmt for which the securities as a whole are pledged by the broker is greater than the amount of the indebtedness to him of any one customer. These are what are known as the broker's general loans. When this is done, it is said, the customer's securities are no longer in a situation where he could, by paying the amount due from him to the broker thereon, at any time obtain them. For, if the broker were insolvent, the cus- tomer would not be entitled to obtain his securities from the broker's pledgee until the latter received the whole amount for which all the securities were pledged to him by the broker. It was held in the case of Douglas v. Carpenter, - that this Horton v. Morgan, 19 N. Y. 170; Stewart v. Drake, 46 N. Y. 449, 453; Levy V. Loeb, 85 N. Y. 365; Shiel v. Stoneham, 77 Misc. 125. 1 Chapman v. Brooks, 31 N. Y. 76; Douglas v. Carpenter, 17 App. Div. 329, 333; McNeil v. The Tenth National Bank, 46 N. Y. 325. ' 17 App. Div. 329. PURCHASE OF SECURITIES ON MARGIN 33 practice of the broker is illegal. That is to say, if the broker mingles the customer's securities with others, and pledges the whole to a third party for an amount greater than the amount of the customer's indebtedness to the broker, the act constitutes a conversion of the customer's securities, unless the broker retains in his possession other securities of a like kind and amount. Douglas v. Carpenter has been cited frequently with ap- proval, but the question there decided has never been passed upon by the Court of Appeals. Nor has the inter- pretation placed upon the general rule in that case been squarely reaffirmed by any subsequent decision.^ On the contrary, in the recent case of Mayer v. Monzo,^ the same court that decided Douglas v. Carpenter held that it is not a conversion ipso facto for the broker to mingle stocks belonging to different customers in one loan the amount of which is in excess of the amount due from any one of the customers whose stocks are thus mingled. Still more recently, however, by statute in New York, it has been made a felony for a broker to pledge securities belonging to a customer for more than the amount due him thereon, provided the customer thereby loses the securities or their value or any part -thereof.^ The question is one of importance to the broker, aside from the danger of criminal liability involved, because, if the stock declines in value after the hypothecation, the measure of damages for conversion would be the market value of the stock at the time it was hypothecated^ So that, did the hypothecation by the broker constitute a conver- sion, the customer could hold the broker liable for the entire loss in his speculation, if the price declined, while, if the stock advanced in price, he could waive the con- version and take the profit. 1 Rothschild v. Allen, 90 App. Div. 233; Strickland v. Magoun, 119 App. Div. 113, aff'd 190 N. Y. 545. 2 151 App. Div. 866 (1912). ' Section 956 of the Penal Law, added by Chap. 500 of the Laws of 1913. * Mclntyre v. Whitney, 139 App. Div. 557, aff'd 201 N. Y. 526. 84 THE LAW OF STOCKBROKERS The only contingency in which a loss to the customer could result from mingling his securities with others in a general loan, would be in case the broker failed. In such an event, the customer could compel the bank to satisfy its loan first out of any securities in the loan belonging to the broker, and then out of all the remaining seciuities in the loan belonging to various customers, proportionately. In so far as any customer contributed pro rata to the pay- ment of the loan, his indebtedness to the broker on account of the piffchase thereof would be satisfied. The usual margin required of brokers by banks in making loans to the former is greater than the usual margin required of cus- tomers by brokers, so that ordinarily, when a customer's secmities are placed in the broker's loans, the proportion of the loan made by the bank against those secmities is less than the customer's indebtedness thereon to the broker.^ Where such is the case, the only loss to which the customer could be subjected on failure of the broker would be through delay and expense in asserting his rights against the bank and others whose secimties were in the loan. Ordinarily, on announcement of the broker's failiu-p, the bank would immediately sell enough of the securities to satisfy its loan, and, unless notified to the contrary by customers owning securities, would deliver the balance to the assignee, receiver or trustee in bank- ruptcy of the broker. To apportion contribution, a legal proceeding might be necessary, and a sale of the remaining securities would become advisable. The delay and ex- pense to the customer would be increased, if, as would usually happen, the seciuities belonging to him were scattered among different loans. In that case the secu- ' This wovild be true also in cases where the customer, instead of paying money to the broker for margin, deposits collateral to secure the account, and the broker re-hyjxJthecates with some bank, not only the securities purchased on margin, but also the securities deposited as collateral. In such cases, the broker advances the whole purchase price of the secmitiea bought, and the value of the collateral deposited represents the Tnargin in the account. PURCHASE OP SECURITIES ON MARGIN 35 rities in each loan would contribute pro rata to the pay- ment of the loan and then would be subject to the entire indebtedness to the broker as reduced by pro rata contri- butions on account of all other securities of the same cus- tomer similarly situated in other loans. 3. Whether the Broker May Loan Securities Carried on Margin to Other Brokers. Where a broker "loans" securities to another broker to be used by the latter for deUvery on a short sale for a customer, he receives for them the full market value of the securities, and thereafter, by payments between the brokers, the "loan price" of the stock is kept at the market price as it fluctuates.^ If the stock thus "loaned" is stock which is being carried by the first broker for a customer on margin, these particular securities are no longer in a situation where the customer by paying the amount due thereon can at any time obtain them, and the transaction constitutes a conversion, unless the broker retains in his possession or under his control, available for the cus- tomer's demand, other securities of a like kind and amount over and above those carried for other customers.^ 4. Whether the Broker May Use the Securities Carried on Margin for One Customer to Make Delivery on a Short Sale for Another. Where the broker uses securities purchased for one customer to make deUvery on a short sale for another customer, it is a conversion of the first customer's secu- rities, unless the broker has in his possession or imder his control other securities of a like kind and amount over and above those carried for other customers, so that the customer could at any time, by paying the amount due from him, obtain them.' ' Ante, Chap. II, p. 15. 2 Douglas V. Carpenter, 17 App. Div. 329. 3 Id. 36 THE LAW OF STOCKBROKERS If the broker is carrying the same kind of securities for several customers, none of which can be identified as belonging to any particular one of such customers, and delivers part of them to a buyer on a short sale for another customer, it is a conversion of a pro rata amount of the seciu-ities of each customer for whom the same are being carried.^ 5. Whether the Broker May Pledge Securities Deposited to Secure a Customer's Account. Where the customer deposits securities with the broker, instead of cash, to provide a margin in his account, the broker has a hen upon them for the amount of his advances on behalf of the customer. The securities are deposited with the broker as a pledge to secure the account, and are held by the broker in the same way that the secu- rities purchased by him for the customer are held. He may borrow money upon them, and may rehypothecate them for this purpose in the same manner that he may rehypothecate securities purchased and carried for the customer on margin. In this respect there is no difference between the two classes of secm-ities.^ If securities belonging to a customer are in the posses- sion of the broker, but the latter has no lien upon them for money advanced, he of course has no right to pledge them either by placing them in his general loans or other- wise. To do so would be a conversion of the securities for which he would be hable to the customer in damages. It would also be a criminal offense under a New York statute ^ which declares a broker guilty of a felony, who " 1 . Having in his possession, for safe keeping or otherwise, stocks, bonds or other evidences of debt of a corporation, com- pany or association belonging to a customer, without ' Post, Chap. VI, p. 61. 2 Matter of Mills, 125 App. Div. 730, 193 N. Y. 626. ' See. 956, subd. 1, of the Penal Law, added by Chap. 500 of the Laws of 1913. PURCHASE OF SECURITIES ON MARGIN 37 having any lien thereon or any special property therein, pledges or disposes thereof without such customer's con- sent." 6. When the Broker May Close a Transaction. If no definite time is agreed upon during which the securities purchased on margin are to be carried, the broker may close the transaction at any time regardless of the condition of the margin, by tendering the securities to the customer and requesting him to take them and pay the difference between the percentage advanced by him and the amount paid for them by the broker. In the event that the customer fails to so redeem the securities, the broker may sell them to satisfy his hen upon giving the customer reasonable notice of the time and place of sale. ^ Where the parties have agreed that the customer shall keep with the broker a certain margin according to the fluctuations of the market, the customer is in default as to margin if the original percentage becomes in any degree impaired and he fails to make it good upon demand. The broker may then sell the securities, after giving the cus- tomer reasonable notice of the time and place of sale. Although the parties do not expressly agree that a certain margin shall be maintained, yet if they fix upon a certain margin to be deposited by the customer at the time the stock is purchased, the customer impliedly agrees to keep that margin good upon demand. ^ In such a case, the broker may sell the securities upon reasonable notice, whenever the customer fails to keep the original margin good upon demand. If the parties do not fix upon a definite margin in the first place, there is nothing on which to base an implied agreement by the customer to keep a certain margin with the broker. In such a case the customer is not in default unless he fails, upon demand, to keep the broker supplied 1 Markham v. Jaudon, 41 N. Y. 235; Stenton v. Jerome, 54 N. Y. 480. 2 Gruman v. Smith, 81 N. Y. 25; Gillett v. Whiting, 120 N. Y. 402. 38 THE LAW OF STOCKBROKEES with an amoimt reasonably sufficient to protect him from loss. The question whether the margin has become insuffi- cient for the protection of the broker is one of fact to be determined in each case upon its own pecuhar circum- stances. In Wolff V. Lockwood,^ it was held that a margin of $1,770 on 1,000 shares of stock was sufficient to protect the customer's account from an arbitrary sale by the broker.^ Upon the death of a customer for whom stock is being carried on margin, the broker should ordinarily continue to carry the transaction without change until the appoint- ment and qualification of the legal representative of the decedent's estate. ' 7. The Necessity of Giving Notice Before Closing a Transaction. In the ordinary case of a pledge of personal property, the pledgee, upon default by the debtor, can seU the sub- ject of the pledge only after giving the debtor notice to redeem and also notice of the time and place of sale. This rule is appUed where seciuities are purchased and carried on margin. Although the margin is impaired, or even exhausted, the broker, before he can sell the securities for lack of margin, must demand of the customer the amount of money required to fill the margin, and must also, in the absence of a special agreement to the contrary, give the customer reasonable notice of the intention to sell, specifying in the notice the time and place of sale.* >70App.Div. 569(1902). '' And see post, Cliap. IV, pp. 48, 49. ' Hess V. Rau, 95 N. Y. 359. * Markham v. Jaudon, 41 N. Y. 235; Stenton v. Jerome, 64 N. Y. 480; Ogden V. Lathrop, 65 N. Y. 158; Baker v. Drake, 66 N. Y. 518; GUlett v. Whiting, 120 N. Y. 402; Usher v. Van Vranken, 48 App. Div. 413; Roths- child V. Allen, 90 App. Div. 233, aff'd, 180 N. Y. 561 (1905); Content ... Banner, 184 N. Y. 121 (1906). PURCHASE OF SECURITIES ON MARGIN 39 The demand for additional margin should specify the amoimt required. If, however, the customer, or his agent, knows what further sum is necessary to bring the margin up to the amount required or agreed upon, a mere demand for more margin is sufficient without stating the amount.^ The notice of sale may accompany the demand for margin, or it may be given separately. The notice of sale, to be effective for the protection of the broker, must state that the securities will be sold at a given hour of a given day on the New York Stock Ex- change, or on the Broad Street Curb, or at a place of public auction, as the case may be.^ If the notice of sale specifies a certain hour at which the securities will be sold on the Stock Exchange, it is sufficiently complied with if the securities are sold at that time or as soon thereafter as the market affords an opportunity.^ Although such has been the rule of law laid down by the courts for many years, their decisions have had no effect upon the custom of brokers in this regard. Accord- ing to the custom of brokers, when a customer's margin falls below the percentage agreed upon, he is notified to furnish additional margin, and if he fails to do so within the time fixed by the demand, his stock is sold on the Exchange without notice of the time and place of sale. This is a conversion unless there is a special agreement between the broker and the customer permitting it. 8. What is Reasonable Notice. Reasonable notice of sale on default as to margin is such notice as will give the customer a reasonable time in which to make the margin good before the sale takes 1 Small V. Housman, 142 App. Div. 760. 2 Markham v. Jaudon, 41 N. Y. 235; Content v. Banner, 184 N. Y. 121; Weir V. Dwyer, 62 Misc. 7; Willoughby v. Comstock, 3 Hill, 389. 3 Small V. Housman, 142 App. Div. 760. 40 THE LAW OF STOCKBROKEHS place. Whether the time given to the customer in which to replenish the margin is reasonable depends upon the circumstances of each particular case. Such time may be an hovir, a day, or a week, according to the location of the parties, the condition of the margin, the condition of the market, the natiu-e of the stock, the ability of the cus- tomer to respond, etc.^ In Stewart v. Drake, ^ a notice given on Thm-sday after- noon that the customer's stock would be sold at a certain hour the following Satiu-day imless prior to that time he furnished additional margin was held reasonable, both parties hving and being in the City of New York. In Burkett v. Taylor,^ the Court intimated that a no- tice demanding additional margin before 12 o'clock of the day on which it was dated would not be sufficient notice in poiat of time. In Cameron v. Durkheim,* the broker sold gold short for a customer at 140. On the morning of the 23d of the month gold was quoted at 1413^, and at night it reached 143. On the 24th gold opened at 150, and rose rapidly until, about 11:30, it reached 162}/^. At 12:15 it broke to 136, and then to 133. This was "Black Friday." In the midst of the excitement the broker demanded addi- tional margin, and the customer replied that he had no money, he was ruLtied, and the broker must protect him- self as best he could. Thereupon the broker made a settlement at 150. The Coiui;, on the trial, excluded evidence of the customer's reply and instructed the jury that the customer was entitled to notice covering at least the usual bank hoiu-s of the day within which to comply with the demand for margin. The jury gave a verdict for the customer. On appeal the judgment was reversed and a new trial ordered on the groimd that the reply of the * Stewart v. Drake, 46 N. Y. 449; Cameron v. Durkheim, 55 N. Y. 425; Burkett v. Taylor, 86 N. Y. 618; Lazare ti. Allen, 20 App. Div. 616. 2 46 N. Y. 449. ' 86 N. Y. 618. * 55 N. Y. 425. PURCHASE OF SECURITIES ON MARGIN 41 customer to the demand for margin should have been admitted in evidence on the question whether the cus- tomer had waived reasonable notice and authorized the broker to make a settlement. In Lazare v. Allen,^ which was a case of a short sale, the original margin was a narrow one. It became impaired, and the broker demanded additional margin on September 18, 19 and 20. These demands were not met. On Septem- ber 22, at 10:30 a. m., the broker notified the customer that he must have more margin at once. The customer said he would try to get it. The stock was purchased at noon. It was found on the trial that the notice given by the broker was reasonable under the circumstances, and the judgment was affirmed on appeal. The Court inti- mated, however, that the notice of an hour and a half given on September 22 would not alone have been suffi- cient to be deemed reasonable in point of time. In Wolff V. Lockwood,^ the Court intimated that a notice given on an afternoon, demanding additional mar- gin before the opening of the Stock Exchange on the following morning, might be sufficient in point of time. In Small v. Housman,^ the Court said: "Certainly, a reasonable time was allowed because at least two days elapsed after the first demand, not complied with, before a sale was made." If a sufficient demand for additional margin is made a reasonable time before the sale, notice of the time and place of sale may be of the shortest. In Small v. Housman, * at least two days elapsed after the first demand for mar- gin before the sale took place, and the notice of sale was that the securities would be sold "forthwith." The Appellate Division held that, as matter of law, this was sufficient, but on appeal to the Court of Appeals the 1 20 App. Div. 616. ' 70 App. Div. 669. » 142 App. Div. 760. « 142 App. Div. 760. 42 THE LAW OP STOCKBROKERS judgment below was reversed and a new trial ordered, the court holding that the question whether the notice was reasonable in time shoiild have been submitted to the jury.* When to a demand for more margin the customer re- pUes that he cannot supply it, and it is necessary that the broker should seU immediately in order to protect himself from loss, he should always, in the absence of a special agreement on the subject, ask for and obtain from the customer a verbal consent to a sale without notice.^ If the broker, having made a sale without notice, renders a statement thereof to the customer, and the latter fails to repudiate the sale within a reasonable time, he may, imder certain circumstances, be deemed to have ratified it.' 9. The Service of Notice. The general rule is that the notice of sale should be served upon or given to the customer in person. To this, however, there are certaia exceptions. The notice may be served upon an agent of the cus- tomer, if the agent has authority, express or impUed, to receive it. Thus, if the transaction in relation to which the notice is to be served has been conducted by the cus- tomer through an agent, the broker would be safe in serving the notice on that agent.* So also, where the customer has left the city, notice may be served upon an agent having a general power of attorney to transact bus- iness for the customer.* If the customer has departed from the city without 1 208 N. Y. 115. 'Cameron ». Durkheim, 55 N. Y. 425; Pierson v. Prenkel, 103 N. Y. Supp. 49. » Bumham v. Lawson, 118 App. Div. 389 (1907); Little ». MeCaam, 134 App. Div. 197 (1909). * Milliken ». Dehon, 27 N. Y. 364; Small v. Housman, 142 App. Div. 760, 208 N. Y. 115. 5 Potter V. Thompson, 10 R. I. 1. PURCHASE OP SECURITIES ON MARGIN 43 leaving his out-of-town address and without leaving an agent authorized to receive notice, the notice may be sent to his business address in the city.^ If the customer is in the city, but the broker is unable to communicate with him after using all reasonable means to do so, the notice should be sent to the customer's bus- iness address, or to the address given by the customer for the purpose. The presumption would then arise that the notice reached the customer in due course. But, it seems, if the customer can show that he did not actually receive it, and that his failure to receive it was not due to any want of care on his part, then such notice is without effect.^ In Wolff V. Lockwood,^ the broker made reasonable efforts to notify the customer in person of the sale. Failing in this, he sent the notice to the Reform Club, the address which the customer had given for that purpose. The notice was not received by the customer prior to the sale. The customer was in the city; he went to the Reform Club each day; and on the day of the sale he made unsuccessful efforts to see the broker's agent. Held, that the customer was not bound by the notice delivered at his address. In Rosenbaum v. Stiebel,* it appeared that the customer had left New York for an extended vacation in the Maine woods. His post ofl&ce and telegraph address in Maine were known at his office in New York and could have been ascertained there readily by the broker. Held, that, under these circumstances, the broker was not reUeved from the necessity of notifying the customer of the sale of his securities. In Smith v. Craig, ^ where the purchase was for future 1 Granite Bank v. Ayres, 33 Mass. 394; Bryan v. Baldwin, 7 Lans. (N. Y.) 174; City Bank v. Babcock, 1 Holmes (C. C. U. S.), 180; Wolfi v. Lockwood, 70 App. Div. 569. 2 Wolff V. Lockwood, 70 App. Div. 569 (1902). 3 70 App. Div. 569. * 137 App. Div. 912 (1910). 6 151 App. Div. 648 (1912). 44 THE LAW OF STOCKBEOKERS delivery, so that nothing was held by the broker in pledge, it was held that the broker was not obliged under all circumstances to give the customer acttial notice before selling for default as to margin; that his duty in this regard might be performed by the exercise of ordinary care and reasonable efforts to give notice. When the customer deposits with the broker to pro- tect his accoimt securities belonging to another, which fact is known to the broker, the relation of pledgor and pledgee is established between the owner of the securities and the broker, and the notice of sale of such securities must be served upon the owner of them.^ 10. The Damages. When a customer is in default as to margin, and the broker, in the absence of a special agreement, sells the se- curities without the consent of the customer and without reasonable notice to him of the time and place of sale, the act constitutes a conversion of the securities, and the broker is hable to the customer therefor in damages. The measure of damages is, besides the price for which the stock sold, the difference between that price and the high- est market price in excess thereof within such reasonable time after notice of the sale to the customer as would have enabled him to replace the stock. ^ If the market price after the sale and within a reason- able time in which to replace the stock does not exceed the price realized, the price realized is the measure of damages and may be recovered by the customer less his indebtedness to the broker on account of the transaction.^ Reasonable time in which to replace the stock is such time as will give the customer opportunity to consult 1 Moore ». Rodewold, 142 App. Div. 741. 2 Barber v. EUingwood, 137 App. Div. 704, 712-714; Minor v. Beveridge, 141 N. Y. 399; Griggs v. Day, 158 N. Y. 1; Wolff v. Lockwood, 70 App. Div. 569; Burhom v. Lockwood, 71 App. Div. 301, aff'd 177 N. Y. 539. ' Mclntyre v. Whitney, 139 App. Div. 557, aff'd 201 N. Y. 526; Barber V. EUingwood, 137 App. Div. 704, 713-714. PtJRCHASE OF SECURITIES ON MARGIN 45 counsel, to employ other brokers, to watch the market for the purpose of determining at what price it is advisable to purchase, and to raise the money with which to make the purchase.^ In Smith v. Savin,^ it was stated that from May 14 to June 21 would have been more than a reasonable time. In Colt V. Owens,^ it was held that thirty days was a reasonable time. In Randall v. Albany City Nat. Bank,^ it was held that a reasonable time elapsed before the expiration of six months. In Burhorn v. Lockwood,^ the unlawful sale took place on May 13; the customer claimed that a month was a reasonable time within which to replace the stock under the circumstances, and based his claim for recovery on the price of the stock on June 13. Held, that a reasonable time in which to replace the stock elapsed prior to June 12, and that, inasmuch as the highest price reached by the stock prior to June 12 was the price at which the stock sold on May 18, the customer was entitled to recover on the basis of the price of the stock on May 18. In Minor v. Beveridge,^ there was evidence to show that for fifteen days after the unlawful sale the stock could have been repurchased in the open market for less than the price realized. Held, that this evidence should have been submitted to the jury on the question whether the customer had been damaged by the unlawful sale. Other cases on this subject are cited below.' When the facts are undisputed, the question what is ' Burhorn w.Lockwood, 71 App. Div. 301, 177 N. Y. 539. ' 141 N. Y. 315. ' 90 N. Y. 368. • 1 N. Y. St. R. 692. ' 71 App. Div. 301, 177 N. Y. 539. « 141 N. Y. 399. ' Strickland v. Magoun, 119 App. Div. 113, aff'd 190 N. Y. 545; Hurt v. Miller, 120 App. Div. 833, aff'd 190 N. Y. 553 (1907) ; Barber v. ElUngwood, 135 App. Div. 549; Rosenbaum v. Stiebel, 137 App. Div. 912. 46 THE LAW OF STOCKBROKERS a reasonable time in which to replace the stock converted is one of law for the court. ^ In Burnham v. Lawson,^ it was held that the damages could not be measured by the highest price intermediate the sale and notice thereof to the customer. It is no longer the law that a conversion by the broker of secmities carried on margin extinguishes all claim against the customer for advances made to him on ac- count of the secxirities. The broker is entitled to recover the amount of the advance less the damages suffered by the customer as the result of the conversion.' And such recovery may be by coxmterclaim in an action brought by the customer for conversion.* The decision in Fairchild v. Flomerfelt,^ decided by the Appellate Term in 1913, so far as the facts appear from the opinion, is not law. 1 Barber v. EUingwood, 135 App. Div. 549; Mullen ». Quinlan, 195 N. Y. 109; Bumham v. Lawson, 118 App. Div. 389; Strickland v. Magoun, 119 App. Div. 113; Hurt v. Miller, 120 App. Div. 833; Wright v. B^ik of Metropolis, 110 N. Y. 249; Colt v. Owens, 90 N. Y. 368; Griggs v. Day, 158 N. Y. 1, 22. 2 118 App. Div. 389 (1907). 3 Minor ». Beveridge, 141 N. Y. 399. * Barber v. EUingwood, 137 App. Div. 704, 714 (1910). 5 79 Misc. 42. CHAPTER IV. MUTUAL BIGHTS AND DUTIES OF THE BEOKER AND THE CUS- TOMER ON A SHORT SALE OF SECURITIES ON MARGIN. 1. Duties of the Broker as Agent in Making the Sale; His Commission; the Right to Indemnity. The broker who undertakes to sell securities short for a customer on margin acts as the agent of the customer in making the sale. His general duties in making the sale, his right to a com- mission, and his right to reimbursement and indemnity for expenses and habilities incurred in the performance of his duties as agent, are determined by the same princi- ples and customs that apply in the case of a pxirchase of securities on margin. These have been considered in a former chapter,^ and need not be reviewed here. After the sale has been made, the mutual rights and duties of the broker and his customer with regard to the transaction are somewhat different from what they are when securities have been purchased on margin. Such rights and duties on a short sale will now be stated. 2. When the Broker May Close the Transaction. Where a broker sells secixrities short for a customer on margin, the transaction implies a promise on the part of the broker to carry the securities a reasonable time in order to afford the customer an opportunity to realize the profit expected. ^ After the broker has carried the securities a reasonable 'Chap. Ill, pp. 28-31. 2 White V. Smith, 54 N. Y. 622; Hess v. Rau, 95 N. Y. 359; Barber v. EUingwood, 144 App. Div. 512. 47 48 THE LAW OF STOCKBROKERS length of time he may close the transaction, on notice, whether or not the margin is impaired.^ The notice to the customer of an intention to close the transaction should afford the latter a reasonable opportu- nity to replace the transaction by a sale through some other broker.^ When there is no agreement, express or impUed, be- tween the broker and his customer as to how much margin shall be kept with the broker, the customer is bound to maintain a margin sufficient to protect the broker from loss. If the margin at any time becomes insufficient for this purpose, the broker, after reasonable notice to the customer to supply additional margin, may close the transaction by purchasing the securities.^ Whether a certain margin is insufficient for the pro- tection of the broker, so that the customer is in default if, on demand, he fails to supply additional margin, is a question of fact depending upon the circumstances of the particular case. In Campbell v. Wright,'^ the broker, on April 9, sold 50,000 bushels of wheat short for a customer at 87|, the customer depositing §1,500 as margin. On AprU 13, the customer deposited 81,500 more as margin. TMieat closed on the 13th at 91|. Late in the evening of the 13th a demand was made for more margin, which was not met. On the 14th wheat was quoted at 92^, and another de- mand was made by the broker for more margin. To this demand the customer repUed by putting in a stop order to buy at 93|, which the margin of §3,000 would just permit. The broker purchased the wheat at 91|. The price did not reach 93|. The jiuy found that there was no default as to margin on the part of the customer and gave verdict for him. The judgment was affirmed on appeal. ' White f. Smith, 54 N. Y. 522; Hess v. Rau, 95 X. Y. 359. ' Barber v. Ellingwood, 144 App. Div. 512. » CMnpbell V. Wright, 118 N. Y. 594; Lazare v. Allen, 20 App. Div. 616. ' 118 X. Y. 594. SHORT SALE OF SECURITIES ON MARGIN 49 In Lazare v. Allen,^ the broker, on September 12, sold short for a customer 300 shares of L. & N. at 54|-f. Margin, $1,000. On September 18, the stock sold at 66, when the broker demanded more margin, but without avail. Similar demands were made with similar results, on September 19, 20 and 22. On September 22 the stock opened at 56f, and at noon the broker purchased at 56. It was found on the trial that the customer was in default as to margin, and verdict was given for the broker. The judgment was affirmed on appeal. 3. The Necessity of Giving Notice. On a short sale of securities on margin, the customer ■and his broker do not stand to each other in the relation of pledgor and pledgee. The technical rule of the law of pledge that the pledgee, on default of the pledgor, must give him notice of the exact time and place of sale, does not apply, therefore, in the case of a short sale. But be- fore the broker buys in securities for the account of a customer, because of deficiency in the margin, the customer should have an opportunity to make the margin good. Prior to the purchase, therefore, the broker must give the customer reasonable notice to supply additional margin.^ The rule of law here corresponds with the custom of brokers. 4. "What is Reasonable Notice. Reasonable notice prior to a purchase of securities sold short on margin is such notice as will give the cus- tomer a reasonable time in which to furnish the additional margin required. What is such reasonable time is a ques- tion of fact in each case, depending upon the same con- siderations which determine what is a reasonable notice of sale of securities purchased on margin. See, therefore, 1 20 App. Div. 616. 2 White V. Smith, 54 N. Y. 522; Hess v. Rau, 95 N. Y. 359; Rogers v. Wiley, 131 N. Y. 527; Lazare v. Allen, 20 App. Div. 616. 50 THE LAW OF STOCKBROKERS the discussion of what is reasonable notice in the last chapter.^ The cases of Cameron v. Durkheim, and Lazare V. Allen, there cited, were cases of short sales. 5. The Service of the Notice. As the subject matter of a short sale is not held by the broker in pledge, the strict rule as to the service of the notice that applies in the case of a purchase of securities on margin, namely, that the customer or his agent must actually receive the notice, does not apply in the case of a short sale. It is sufficient if the broker makes reasonable efforts to give notice.^ Otherwise, the rules that govern the service of the notice are the same in the case of a short sale as on the purchase of securities on margin, and have already been stated.' 6. The Damages. When a broker covers a short sale without authority from the customer, and without giving the customer reasonable notice thereof, the act does not constitute conversion. It is merely an unauthorized act of agency. It has been held that the customer may treat the purchase as though it had never been made, and may subsequently order the broker to cover, and if the broker declines to do so, may recover as damages the difference between what the securities were bought for by the broker and what they could have been bought for at the time the order to buy was given, provided they could then be bought for less than the broker paid in making theimauthorized pm-chase.^ On the other hand, in Barber v. Ellingwood,^ decided in 1911, it is said that the proper measm-e of damages in 1 Ante, Chap. Ill, 8, pp. 39-42. 2 Smith V. Craig, 151 App. Div. 648. ' AnU, Chap. Ill, 9, pp. 42-44. * White V. Smith, 54 N. Y. 522; CampbeU v. Wright, 118 N. Y. 594; Rogers v. Wiley, 131 N. Y. 527; Barber v. Ellingwood, 135 App. Div. 549, 557. 6 144 App. Div. 512. SHORT SALE OF SECURITIES ON MARGIN 51 such a case is the difference between what the securities were bought for by the broker and what they could have been bought for within a reasonable time in which to replace the transaction through another broker after notice of the purchase to the customer, provided they could then be bought for less than the broker paid in making the un- authorized purchase. It would seem that this later case states the true measure of damages. 7. Whether a Loss Incurred in Borrowing Stock to De- liver on a Short Sale for a Customer Falls on the Broker or on the Customer. Where the broker in carrying a short sale for a cus- tomer borrows the stock to deliver from another broker, he pays therefor the full market price, and thereafter, while the loan continues, the two brokers by payments between them keep the loan price of the borrowed stock at the market price as it fluctuates. It may readily happen in case of a violent decline in the market price that the broker from whom the stock is borrowed is unable to make the payment necessary to bring the loan price down to the declining market price, and that a loss results, without any apparent negligence on the part of the broker who borrows the stock. The question whether such loss falls on the broker who borrows the stock or on the customer for whom he delivers it, has not been directly decided in any court. It is not controlled by any rule or custom of the Stock Exchange. In Matter of Mills, ^ the question was raised for the first time. The decision went off on another point, but two members of the court expressed the opinion that the loss under such circumstances falls not on the customer but on the broker. The case was affirmed in the Court of Appeals without passing upon the question.^ ' 139 App. Div. 54 (1910). 2 200 N. Y. 583. CHAPTER V. SECURITIES. 1. Securities Usually Dealt in on the Stock Exchange. The general character of the property in which brokers deal on the Stock Exchange is comprehended under the name "securities." The most important of these securi- ties are: (1) Shares of the capital stock of corporations, commonly known as stocks, the title to which is evi- denced by certificates of stock; (2) Bonds, including bonds of raUroads, of manufacturing and industrial corporations, of public utility companies other than railroads, United States government and foreign government bonds, and State and City securities. Purchases and sales of stocks constitute by far the greater part of the daily transactions on the Exchange. The comparative extent to which the different kinds of bonds mentioned above are dealt in about corresponds to the order in which they are named. 2. Securities That Have Been Converted or Stolen: The Title Thereto, and Liabilities in Connection with the Transfer Thereof. (a) Bonds. A bond of a kind dealt in on the Stock Exchange, in the absence of some special feature,^ is a negotiable instru- ment. Owing to its negotiable character, the innocent pur- chaser or pledgee of a bond that has been converted or stolen obtains vahd title to it and is protected against all ' McClelland v. Norfolk R. R., 110 N. Y. 469. 52 SECURITIES 53 claims of prior owners that conflict with his interest therein.^ A person taking such a bond from a bona fide holder thereof for value is protected against claims of prior owners although he himself had notice of such claims.^ A bond that has been registered is no longer negotiable. If, after registration, it is stolen from the owner, and is transferred to bearer by the corporation acting with due care and in good faith, the owner may recover the bond from a subsequent bona fide holder for value, or he may recover its value from the corporation on account of the transfer.^ The question whether the innocent purchaser from whom such a bond is recovered could recover over against the corporation does not appear to have arisen. It would seem that he should be able to do so. (b) Stocks. A certificate of stock, though indorsed in blank, is not a negotiable instrument. So the principle that protects a bona fide holder for value of a bond against the claims of prior holders does not apply in the case of stock. But the circumstances attending a transfer of stock may be such that the true owner is estopped from asserting his title against a subsequent holder who has taken it in good faith and for value. Such is the case where a customer deposits stock in- dorsed in blank with a broker as collateral to secure a 1 Hibbs V. Brown, 190 N. Y. 167; Dutchess Co. Ins. Co. v. Hachfield, 73 N. Y. 226; Everston v. Newport Nat. Bank, 66 N. Y. 14; Manhattan, etc. Instit. v. N. Y. etc. Bank, 42 App. Div. 147, 170 N. Y. 58; Knox v. Eden Musee Am. Co., 148 N. Y. 441, 454. 2 Grand Rapids R. R. v. Sanders, 54 How. Pr. 214, rev'd on another point in 17 Hun, 552; Northampton Nat. Bank v. Kidder, 106 N. Y. 221; Cromwell v. Sac County, 96 U. S. 51; Union etc. Co. v. So., etc. Co., 51 Fed. Rep. 840; Board of Com. v. Sutliff, 97 Fed. Rep. 270; Central, etc., Co. V. Farmers, etc. Co., 114 Fed. Rep. 263. 3 Clarkson Home v. Mo. K. & T. R. Co., 182 N. Y. 47; Cooper v. 111. Cent. R. R. Co., 38 App. Div. 22. 54 THE LAW OF STOCKBROKERS trading account, thereby conferring upon a professional dealer in stocks the indicia of ownership and apparent right to transfer the title. If the broker converts the stock by selling or unlawfully repledging it, the innocent pur- chaser or pledgee gets a title which the owner cannot assail. ^ And even where stock indorsed in blank is de- posited with a broker merely for safe keeping, an in- nocent purchaser or pledgee thereof gets unassailable title, although the transfer by the broker is larceny under the statute.^ It may be that good title passes to one who piu-chases in good faith from any indi- vidual who has possession of stock indorsed in blank as pledgee.* But the owner of stock who entrusts the same indorsed in blank to a messenger selected by him to be carried to a place of deposit, is not estopped from assertiag his title against any subsequent holder to whom the messenger has unlawfully transferred it.* Nor is there any estoppel when stock indorsed in blank is delivered by the owner to an employee of a broker to be transferred by the broker for the account of the owner, and the employee has the stock transferred for his own account." The owner is not precluded from asserting his title when he has been deprived of the possession of stock in- dorsed in blank through theft, robbery or fraud.' This is true even though the thief be an agent in his employ, having access to the stock, provided the transfer of the stock was not within the apparent scope of the agent's • McNeil V. Tenth Nat. Bank, 46 X. Y. 325; Knox v. Eden Musee Am. Co., 148 N. Y. 441. 2 Tompkins v. Morton Trust, 91 App. Div. 274, aff'd on opimon below, 181 N. Y. 578; Matter of Mills, 125 App. Div., p. 732, aff'd without opin- ion, 193 N. Y. 626. ' Brady v. Mount Morris Bank, 65 App. Div. 213; TreadweD o. Clark, 114 App. Div., p. 502. * Hall V. Wagner, 111 App. Div. 70. 6 Kilmer v. Hutton, 131 App. Div. 625. « Anderson v. Nicholas, 28 N. Y. 600; Knox v. Eden Musee Am. Co., 148 N. Y. 441; Kihner i>. Hutton, 131 App. Div. 625. SECURITIES 55 authority.^ And it is the same when the theft is com- mitted by one having joint possession, with the owner, of the box in which the stock is kept.^ But when the theft is committed by one who has authority from the owner to make transfer of the stock for any purpose, the loss must fall upon the owner.' In Union Trust Co. v. Oliver,* where a certificate of stock indorsed in blank was delivered for transfer to the secretary of the company issuing the stock, and the secretary pledged the same to a bank for his own benefit, it was held that the bank obtained a valid lien on the stock for the amount of the pledge. If a certificate of stock which has been converted or stolen, has not been indorsed in blank by the owner, no title by estoppel can be established against him in favor of a later holder or purchaser for value without notice. This is true even where the stock is converted by a stock- broker with whom it has been deposited by the owner. In Unity Banking Co. v. Bettman,^ a certificate of stock was left with a broker without indorsement and upon the understanding that it was to remain in the broker's posses- sion. The broker forged the owner's signature to an assignment of the certificate and pledged it with a bank as security for money loaned. It was held that the bank acquired no lien upon the stock as against the owner. Any bona fide holder of stock that has been converted or stolen, who does not get valid title to it by estoppel, is in turn guilty of conversion when he transfers it, and the owner may proceed against him for the value of the stock.^ 1 Knox V. Eden Musee Am. Co., 148 N. Y. 441; Clarkson Home v. Mo. K. & T. R. Co., 182 N. Y. 56; Am. Exch. Nat. Bank «. Woodlawn Ceme- tery, 194 N. Y. 129. 2 Bangor Elec. L. & P. Co. v. Robinson, 52 Fed. Rep. 520. ' Carlisle v. Norris, 157 App. Div. 313. * 155 App. Div. 646. 6 217 U. S. 127. « Anderson v. Nicholas, 28 N. Y. 600; Hall v. Wagner, 111 App. Div. 70; Kilmer v. Button, 131 App. Div. 625. 56 THE LAW OF STOCKBROKEES 3. The Broker's Liability on the Delivery of Forged or Stolen Sectmties. A broker who sells stock for a customer, and delivers, pursuant to the agreement to sell, a certificate of stock received from the customer having a forged indorsement in blank, is himself liable to the purchaser for the value of the stock. ^ He would likewise be hable to the purchaser for dehvering securities that had been stolen, if the cir- cumstances were such that the purchaser would not get a vaUd title to the securities. In Clarkson Home v. Mo., K. & T. R. Co. et al.,^ where the treasurer of a corporation owning registered bonds, indorsed them for transfer to bearer in the name of the corporation, without authority express or implied, and sold them through a stockbroker for his own account, it was held that the broker was liable to the owner for the value of the bonds. In Nat'l Safe Deposit, etc. Co. v. Hibbs,^ where the pledgee of certain stock delivered the certificates of stock indorsed in blank to an agent in its employ for delivery to another, and the agent sold the stock through a stock- broker for his own account, it was held that the broker was not liable to the pledgee for the loss. 4. The Broker's Guarantee of Signature on the Transfer of Stock or Registered Bonds. The extent of the broker's guarantee of the signature to the assignment and power of attorney on the transfer of stock or registered bonds standing in the name of a corpo- ration was considered in the case of Clarkson Home v. Mo., K. & T. R. Co.^ In this case the treasurer of a charitable corporation signed the name of the corporation, by himself as treasurer, to the assignments and powers of ^ Basset v. Perkins, 65 Misc. 103. 2 182 N. Y. 47. "33 Supreme Court Rep. (U. S.) 818. < 182 N. y. 47. SECURITIES 57 attorney on four registered railroad bonds belonging to the corporation, and the signatures were indorsed by a mem- ber of the exchange. The bonds thus indorsed were pre- sented to the railroad for transfer to bearer accompanied by what purported to be a resolution of the board of directors of the corporation authorizing the transfer authenticated by the certificate of its secretary. The treasurer had no authority to transfer bonds for the corporation and the resolution of the directors and certifi- cate of the secretary were forgeries. The transfer to bearer was made, and later the bonds were sold and the treasurer absconded with the proceeds. Held that the broker's indorsement constituted a guarantee of the au- thority of the treasurer to execute the assignments of the corporation, and that the railroad could recover from him the amount of its liability to the owner of the bonds for making the transfer to bearer. Under this ruHng, the broker guaranteeing a corporate signature on the transfer of bonds or stock must inform himself at his peril of the authority of the officer signing for the corporation to make the transfer. CHAPTER VI. REMEDIES. REMEDIES OF THE CUSTOMER WHEN THE BROKER IS SOLVENT. (a) Action in equity for an accounting. The broker in executing the orders of his customer as agent deals with money or secvirities belonging to the customer, which are intrusted to him in a confidential relation and in which he has an interest that makes him a quasi trustee thereof for the customer. The obligation of the broker to the customer with respect to transactions for the latter's account is therefore fiduciary in character.^ Out of the fiduciary relation between the parties arises a right of action in equity on the part of the customer against the broker for an accounting with respect to the broker's transactions for the customer, in which the biu-den lies upon the broker to show the performance of his duties as agent and the manner of their performance.* The right to an action for an accounting does not de- pend upon whether something will be found to be due the customer on the accounting. It rests upon the mere fact that the fiduciary relation has been assumed by the broker and that the customer is ignorant of what has been done ' Haight V. Haight & Freese Co., 112 App. Div. 475, 190 N. Y. 540; Jordan v. Underbill, 91 App. Div. 124; People v. Meadows, 199 N. Y. 1. « Haight V. Haight & Freese Co., 112 App. Div. 475, 190 N. Y. 640; Marvin v. Brooks, 94 N. Y. 71; Jordan v. Underbill, 91 App. Div. 124; Spier V. Hyde, 92 App. Div. 467. 58 BEMEDIES 59 with reference to the property confided by him to the broker.^ If the broker has aheady furnished a statement of the customer's account to him, and the parties have expressly or impliedly agreed upon the balance therein shown, the plea of an account stated may be interposed by the broker in the action for an accounting, and is a complete answer thereto, unless fraud or mistake in the account as rendered can be shown. ^ (b) Action at law for money had and received. Where the customer does not need discovery, and merely seeks to recover a balance of account in his favor which the broker refuses to pay, the ordinary action at law in the nature of assumpsit or debt for money had and re- ceived would lie.^ (c) Remedy for nonfeasance or misfeasance of the broker as argent. For faxilts of omission or commission on the part of the broker in the performance of his. duties or implied vmder- takings as agent,* by which the customer is damaged, the remedy of the customer lies, at his election, either in an action in the natm-e of assumpsit, or in an action in the natm-e of a special action on the case.^ (d) Remedy for conversion. The remedy which the customer most frequently has occasion to pursue against the broker is an action at law 1 Jordan v. Underbill, 91 App. Div. 124. i'Weed V. SmuU, 7 Paige, 573; Leycraft v. Dempsey, 15 Wend. 83; Lock- wood V. Thorne, 18 N. Y. 285; Little v. McClain, 134 App. Div. 197; Des Jardins v. Hotchkin, 142 App. Div. 845; Frothingham v. Satterlee, 70 App. Div. 613; post, pp. 71, 72. ' Roberts v. Ely, 113 N. Y. 128; Chapman v. Forbes, 123 N. Y. 532. * See Chapters III and IV. * McMorris v. Simpson, 21 Wend. 610; 1 Clark and Skyles on Agency, Sec. 387. 60 THE LAW OP STOCKBROKERS in the nature of trover for damages resulting from con- version of securities belonging to the customer. The questions arising as to what acts of the broker will con- stitute a conversion of the customer's securities, and the measure of the customer's damages therefor, have been dealt with in a former chapter.^ (e) Remedy for failure to carry a short sale. Where, on a short sale of securities for a customer, the broker fails in the performance of any of the express or implied terms of his contract with the customer with respect to carrying the transaction, the latter may sue for the damages resulting from the breach of contract.^ What constitutes such a breach of the contract, and the measure of the damages resulting therefrom, have already been stated.* B. REMEDIES OF THE CUSTOMER WHEN THE BROKER IS INSOLVENT. 1. The Redemption of Securities by the Customer When the Broker Fails. When a broker who has purchased securities for a cus- tomer on margin fails, the right of the customer to redeem the securities by paying the amount of his indebtedness on account of their purchase depends, in the first place, upon whether he can identify his securities, and, in the second place, upon the situation of the securities at the time of the failure. (a) Identification of the securities. The identification is sufficient to enable the customer to 1 Chap. Ill, pp. 34-44; "The Damages," pp. 44-46. 2 Barber v. EUingwood, No. 1, 144 App. Div. 512. ' Chap. IV, pp. 47-50; "The Damages," pp. 50, 51. REMEDIES 61 redeem where it appears that the precise certificates of stock or evidences of title purchased in execution of his order were held for him at the time of the failure; ^ also, where it appears that certain particular certificates of stock or evidences of title were being carried by the broker in fulfillment of the customer's order at the time of the failm-e, although it may be impossible to establish that such certificates, etc., were the precise ones originally pur- chased in execution of that order; ^ also, where it appears that the broker at the time of the failure was carrying a block of stocks of the particular kind pm-chased for the customer sufficient to satisfy the demands of all customers for that kind of stock, although it may be impossible to show that any particular certificates were being carried for any particular customer.* Where it appears that the broker was carrying a block of stocks of the particular kind pvu-chased for the customer, none of which was being carried specifically for any particular customer, and the whole amount of such stock is insufficient to satisfy the demands of all customers for that kind of stock, the ident- ification is sufficient to enable each customer for whom the broker was carrying that kind of stock to redeem his pro rata share thereof.* (b) Situation of the securities. If the securities identified by the customer are in the actual possession of the broker at the time of the failure, the customer may redeem them by paying to the assignee of the broker or his trustee in bankruptcy the amount of his indebtedness to the broker on account of the securities. 1 In re Meadows, Williams & Co., 177 Fed. 1004. 2 Mould V. Importers & Traders' Nat. Bank, 72 App. Div. 30. ' Skiff 0. Stoddard, 26 Atl. Rep. (Conn.) 874; Sexton v. Kessler Co., 225 U. S. 90; Gorman v. Littlefield, 33 Sup. Ct. Rep. (U. S. 1913) 690, reversing In re Brown, 184 Fed. 454, and overruling In re Mclntyre, 181 Fed. 960. * Skiff V. Stoddard, 26 Atl. Rep. (Conn.) 874; Sexton v. Kessler Co., 225 U. S. 90; Gorman v. Littlefield, 33 Sup. Ct. Rep. (U. S.) 690. 62 THE LAW OF STOCKBROKERS If the securities identified by the customer have been pledged by the broker to a third party by themselves, separate and apart from others, for an amoimt not exceed- ing the indebtedness of the customer to the broker, the customer may redeem them by paying to the pledgee the amoimt for which the securities were pledged by the broker and the remainder of his indebtedness on account of the securities, if any, to the assignee of the broker or his trustee in bankruptcy.^ If the broker has pledged the securities of a customer, separately, for a greater amount than the indebtedness of the customer, it is conversion on the part of the broker. But the pledgee ordinarily obtains unassailable title to the secmities, and the customer can redeem them only by paying to the pledgee the full amount for which they were pledged to him by the broker. ^ If the broker has mingled the customer's securities with the securities of other customers carried on margin and pledged the whole for an amount greater than the indebt- edness of the customer to the broker, although this may be conversion on the part of the broker, the pledgee ordinarily obtains unassailable title to the securities. In such a situation each customer may redeem his securities by paying his fro rata share of the full amount for which all the securities were pledged by the broker. If part of the securities have been sold to satisfy the lien of the pledgee, the rest may be sold and the proceeds will be divided among the customers jrro rata, regardless of which ones among the customers owned the particular securities first sold by the pledgee.* 1 Chamberlain o. Greenleaf, 4 Abb. N. C. 178; Douglas v. Carpenter, 17 App. Div. 329, 333. 2 Strickland v. Magoun, 119 App. Div. 113, 116; McNeil v. The Tenth Nat. Bank, 46 N. Y. 325; Whitlock v. Seaboard National Bank, 29 Misc. 84; Le Marchant v. Moore, 150 N. Y. 209; Smith v. Savm, 141 N. Y. 315; Rothschild v. Allen, 90 App. Div. 233, 236. In re T. A. Mclntyre & Co., 181 Fed. Rep. 955. ' Gould V. Central Trust Co., 6 Abb. N. C. 381 ; Whitlock v. Seaboard Nat . Bank, 29 Misc. 84; Sillcocks v. Gallaudet, 66 Hun, 522. REMEDIES 63 If part of the securities pledged in bulk by the broker are the property of the broker himself, the customer may require the pledgee to satisfy his loan to the broker as far as possible out of the securities belonging to the broker before resorting to the securities of the customer.^ If a customer has deposited with a broker as collateral to secure a trading account stock owned by him outright, and this stock has been mingled by the broker with securities purchased for other customers on margin, and the whole has been pledged in bulk before the broker fails, such customer has no greater equity than have the cus- tomers who own the securities carried on margin. He can- not require the pledgee to satisfy his loan to the broker out of the secvirities carried on margin before resorting to the securities deposited by him with the broker as collateral, but must share jpro rata in the proceeds of all the securities after the pledgee has satisfied his lien out of them.^ If, however, the broker had no right to pledge the securities deposited with him as collateral, by reason of the fact that the transactions which such securities had been deposited to secure had not been made or had been closed, the owner of such securities has a superior equity to that of one whose securities have been rightfully pledged by the broker, and may require the lien of the pledgee to be satisfied first out of the latter's securities.^ Where stock has been left with the broker for safe keeping and has been mingled with securities carried on margin and with securities deposited as collateral to secure a trading account, and the whole has been pledged by the broker to secure a loan to himself, it is held that the superior equity is with the owner of the stock deposited 1 Le Marchant v. Moore, 150 N. Y. 209, 218; Smith v. Savin, 141 N. Y. 315. 2 Matter of Mills, 125 App. Div. 730, 193 N. Y. 626 (1908). Cmlm: Willard v. White, 56 Hun, 581; Sillcocks v. Gallaudet, 66 Hun, 522. 3 In re T. A. Mclntyre & Co., 181 Fed. Rep. 955; In re Brown, 183 Fed. Rep. 861. 64 THE LAW OF STOCKBROKERS for safe keeping. He may require the pledgee to satisfy his lien by selling first the stocks carried on margin and the stocks deposited with the broker as collateral, and if it happens that, when he learns of the situation, the pledgee has already sold his securities and satisfied the loan from the proceeds, he is entitled to have the remaining securities sold and so much of the proceeds paid to him as may be necessary to make good his loss on account of the sale of his securities.^ Generally speaking, the rule applied by courts of equity is that the customer whose secm-ities have been wrong- fully pledged by the broker has a superior equity to that of the customer whose securities have been rightfully pledged, and, other things being equal, resort must first be had, in satisfying the pledgee's hen, to the securities rightfully pledged with him.^ (c) When the title of the broker's pledgee is invalid against the customer. The rule that the pledgee of the broker obtains vahd title to the customer's secvurities, even though the hy- pothecation thereof was a conversion on the part of the broker, assumes that the hypothecation was for a present and valuable consideration and that the pledgee acted in good faith and without knowledge of the claims of the true owner. Where such is not the case, the pledgee ob- tains no title against the customer, and is guilty of conver- sion if he fails to deUver to the customer his secm-ities upon proper tender and demand.^ If a broker, who has become insolvent, pledges securities as additional secm-ity for an existing loan, and the pledgee has reasonable cause to beheve that the broker is insolvent, it is a preference within the meaning of the Bankruptcy » Matter of Mills, 125 App. Div. 730, aff'd, 193 N. Y. 926 (1908); Tomp- kins V. Morton Trust Co., 91 App. Div. 274, 181 N. Y. 578 (1905). 2 In re Mclntyre, 181 Fed. Rep. 955; In re Ennis, 187 Fed. Rep. 720; In re Tracy, 191 Fed. Rep. 810. 'Strickland v. Magoun, 119 App. Div. 113, aff'd, 190 N. Y. 545 (1907). REMEDIES 65 Act, and the securities may be recovered free from any lien on account of the loan.^ (d) Clearance Loans. Clearance loans are loans for the day which banks are accustomed to make to the broker for the specific purpose of enabling him to pay for securities to be delivered to him on that day, while he is receiving the proceeds of the securities which he is delivering to his purchasers. These loans are repaid during the day, and no interest is charged upon them. The question has arisen whether, in the event of the insolvency of the broker pending one of these loans, the bank making the loan has a preferred claim, by way of equitable lien or otherwise, upon the loan or upon the securities thereby released. It has been finally determined that it has not. It is merely a general creditor of the broker to the extent of the loan.^ 2. The Customer's Right to Money in the Hands of the Broker as Agent. It may be stated as a general principle that whenever money has come into the hands of an agent impressed with a trust in favor of his principal, such money may be fol- lowed by the principal imtil it comes into the hands of a holder for value without notice of the trust.^ And if the trust fund has been mingled with the general funds of the agent, the principal will be entitled to a first charge, 1 Hotchkiss V. National City Bank of New York, 200 Fed. 287, id. 299; 201 Fed. 664, aff'd by U. S. Supreme Court Nov. "3, 1913; Ernst v. Me- chanics' and Metals Nat'l Bank of the City of New York, 200 Fed. 295, aff'd by U. S. Supreme Court, Nov. 3, 1913; Alexander v. Redmond, 180 Fed. 92. 2 Mechanics' and Metals Nat'l Bank of the City of New York v. Ernst, and the National City Bank of New York v. Hotchkiss, decided by the U. S. Supreme Court, Nov. 3, 1913. 'Van Men ». Am. Nat. Bank, 52 N. Y. 1; Baker v. N. Y. Nat. Ex. Bank, 100 N. Y. 31; National Bank v. Insurance Co., 104 U. S. 54. 66 THE LAW OF STOCKBROKERS to the extent of the trust fund, upon any general funds of the agent into which it can be traced.^ Money in the hands of a stock broker to the credit of a customer over and above the amoimt of the customer's indebtedness to him, is held by the broker, ordinarily, not as the debtor of the customer, but in a fiduciary ca- pacity. He is a qtuisi trustee of it for the benefit of the customer.^ The broker need not segregate such money.' He may, and always does, mingle it with his general funds. In case of insolvency of the broker while holding such money for the customer, the latter would have a prior claim upon any general funds of the broker into which it could be traced. Thus, if the customer's money had been deposited by the broker, with other money, to the latter's individual account in a bank, the entire account would be charged with the customer's trust fund, to the extent of the amount remaining to the credit of the broker in that account continuously from the time of the deposit to the time of the insolvency.* The claim of the customer would be subject, however, to the proportionate rights of other customers whose money could be traced into the same account.' It is a general rule with regard to following trust fimds ' Van Alen v. Am. Xat. Bank, 52 N. Y. 1; Matter of BQcks, 170 X. Y. 195; Blair v. Hill, 50 App. Div. 33, 165 N. Y. 572; In re District Bank, 11 Ch. Div. 772; KnatchbuU v. Hallett, L. R. 13 Ch. Div. 696; Richardson v. Shaw, 209 U. S. 365. 2 People V. Meadows, 199 N. Y. 1; Haight v. Haight & Freese Co., 112 App. Div. 475, 190 N. Y. 540; Marvin v. Brooks, 94 N. Y. 71; Jordan v. Underbill, 91 App. Div. 124; Waters v. Marrin, 12 Daly, 445; Clark v. Pinckney, 50 Barb. 226; McBumey v. Martin, 6 Rob. 502; Richardson v. Shaw, 209 U. S. 365; In re Tracy, 185 Fed. 844. ' People V. Meadows, 199 N. Y. 1. * Blair v. Hill, 50 App. Div. 33, 165 X. Y. 572; Cole v. Cole, 54 App. Div. 37; In re Brown, 175 Fed. 769; In re Mclntyre, 185 Fed. 96; Board of Commissioners v. Strawn, 157 Fed. 49; In re Brown, 193 Fed. 24; In re Ennis, 187 Fed. 720; In re Ennis, 187 Fed. 728; In re Mclntyre, 181 Fed. 960; In re Brown, 189 Fed. 432. 5 In re Mclntrye & Co., 181 Fed. 960; Matter of Hicks, 170 N. Y. 195, p. 199. REMEDIES 67 that in order to subject them to the operation of the trust, they must be identified.^ Merely showing that at some time prior to insolvency the insolvent was in posses- sion of trust funds, is not sufficient to impose a charge upon the general assets in his estate at the time when he became insolvent.^ The claimant must at least show that the trust funds, in one form or another, are contained somewhere in the estate at the time of insolvency.^ In some jurisdictions, including the federal court in the second circuit, the claimant must do more than show that the trust fund has gone to swell, in one form or another, the general assets of the bankrupt.* He must show the specific property into which it has been trans- formed, or the specific fund in which it is included.^ In Richardson v. Shaw,^ it was held that a payment by an insolvent broker to a customer of cash representing the margin in the latter's account was not a preference under the Bankruptcy Act. 3. Whether the Customer Can Have Legal Process Against the Broker's Seat on the Exchange. The Constitution of the Stock Exchange provides that, when a broker fails, he is thereby suspended from member- ship until, after having settled with his creditors, he has been reinstated by the Committee on Admissions of the Exchange; and that, if he fails to settle with his creditors and apply for reinstatement within one year, his member- ship shall be disposed of by the Committee on Admissions.'' It further provides that the proceeds of the seat shall be paid to the insolvent or his representative only after the 1 Cavin v. Gleason, 105 N. Y. 256; Matter of Hicks, 170 N. Y. 195. 2 Matter of Hicks, 170 N. Y. 195. ' Cavin v. Gleason, 105 N. Y. 256. * Board of Commissioners v. Strawn, 167 Fed. 49; In re Brown, 193 Fed. 24. 5 In re Mclntyre, 185 Fed. 96; In re Brown, 193 Fed. 24. 6 309 U. S. 365. ' Const. Art. XVI, Sees. 1, 3. Appendix. 68 THE LAW OF STOCKBROKERS allowed claims of members of the Exchange have been satisfied therefrom.^ There is no doubt that when the insolvent broker's membership has thus been sold by the Committee on Admissions, the customer who has an imsatisfied claim against him can, along with other outside creditors, reach the proceeds of the sale remaining after the payment of claims due to members of the board.- But can the credi- tors of the insolvent broker reach his seat before the expiration of a year's time, at the end of which it would be sold in the ordinary course under the rule of the Exchange? It has been decided that the seat of a member on the Exchange is property, and as such appUcable to the pay- ment of his debts. ^ And, where there is an assignment for benefit of creditors, the seat passes, as between the mem- ber and the assignee, under the assignment. It also passes in the same sense to a receiver or trustee in bankruptcy.^ But a transfer of membership cannot be made without the consent and approval of the Exchange; and persons can become members only upon election by the Exchange. So that the sale of an insolvent member's seat would be impracticable except with the co-operation of the Ex- change. It is not Ukely that such co-operation would be had short of the time fixed by the board rule for the sale, unless the member himself requested it. If the insolvent member consents to an immediate sale of his seat, the practice of the Exchange is as follows : The insolvent member makes a request, in writing, addressed to the Secretary of the Exchange, asking the latter to sell his seat at a price which he names. He signs a written form provided by the Exchange consenting to the sale of the seat at the price named, and authorizes the payment of the proceeds to his assignee, receiver, or 1 Art. XV, Sec. 3. Appendix. - Grocers' Bank v. Murphy, 60 How. Pr. 426. ' Id.; Piatt V. Jones, 96 N. Y. 24. * Piatt V. Jones, 96 N. Y. 24; Matter of Hellman, 174 N. Y. 254, 257; Page V. Edmunds, 187 U. S. 596. BEMEDIBS 69 trustee in bankruptcy, who also consents to the sale at the price named, and furnishes a certified copy of his authority to act. The Secretary's office procures, if possible, a purchaser for the seat at the price named. The proposed purchaser is passed on by the Conmiittee on Admissions, and notice is sent to all members to prove claims against the insolvent member. The Committee on Admissions passes on such claims, the insolvent member having the right to appear before it to object to any claim filed against him and supply the Committee with information relating to it. The name of the proposed member is finally balloted on by the Committee. The Committee receives the pro- ceeds of the sale, and pays therefrom the allowed claims of creditor members. The balance is paid to the assignee, receiver or trustee in bankruptcy of the insolvent member. 4. Whether a Customer Whose Broker Has Failed Can Enforce Delivery Under a Contract of Purchase or Sale Made for Him by the Broker. When a member of the Exchange fails, announcement of the failure is made on the floor, and all members haying contracts with him close them forthwith, in accordance with a rule of the Exchange,^ by replacing the contracts with other members at the prices then prevailing. The legal rights of the customer of a broker who thus closes a contract made with a broker who has failed, are clear. His damages, if any, are fixed by the closing of the contract under the board rule. He has the right to re- cover these damages against the insolvent broker or against the latter's customer. More difficult questions arise as to the rights of the customer of the insolvent broker. If, after the contract of purchase or sale for his account has been made, the price moves in his favor, so that there is a difference between the contract price and the price at which the contract is closed under the rule which the opposite broker pays to 1 Const. Art. XXVIII, Sec. 1. Appendix. 70 THE LAW OF STOCKBROKERS the estate of the insolvent broker, the latter's customer doubtless is entitled to receive the amount so paid. But if the price has moved stUl further in the customer's favor at the time for delivery under the contract, can he personally tender performance at that time and enforce the contract against the opposite broker ignoring the fact that the latter has closed the contract in accordance with the rule of the Exchange? This question was raised in a recent case,^ where the plaintiff sold through a member of the Exchange twenty- five shares of stock, the certificates for which he had in his possession. His broker failed before the time for delivery, and the opposite broker thereupon closed the contract under the rule by purchasing the securities from another member. On the following day, at the time for delivery, the plaintiff tendered the stock to the opposite broker and his partners with a demand that they take and pay for the same. Upon their refusal, he brought action against them to recover the purchase price of the stock. The trial court gave judgment for the plaintiff upon the ground that he was the undisclosed principal of the insolvent broker, and could not be deprived of the benefit of his contract by the rule of the Stock Exchange prescribing the manner in which contracts shall be closed on the insolvency of a member. On appeal to the Appellate Division, the judg- ment was reversed and a new trial ordered, the court holding that, aside from the question whether the cus- tomer was bound by this particular rule of the Exchange, the contract had been closed by the defendants practically at the request of the plaintiff's agent, acting as the ap- parent principal, and that the plaintiff was bound thereby under general rules of the law of agency applying to such a state of facts. 1 Kent V. De Coppet, 149 App. Div. 580. REMEDIES 71 c. REMEDIES OF THE BROKER AGAINST THE CUSTOMER. The right of the broker to commissions on purchases and sales, or his right to reimbursement and indemnity for all expenses and Uabihties incurred by him in the due per- formance of his duties as agent for his customer,^ may be enforced against the customer in an action in the nature of general assumpsit.^ The recovery most frequently sought by the broker from the customer is of a general debit balance against the customer as shown in the account of the broker's transactions for him on the broker's books, which, gen- erally speaking, embraces as debit and credit items in connection with such transactions moneys advanced or re- ceived for the customer on purchases and sales and other- wise, interest charges and credits, payments by and to the customer, and conunissions earned. If the account has not been stated between the parties, the remedy of the broker to recover such a balance of indebtedness lies in an action on the account in the nature of indebitatus assumpsit.^ The broker at the end of each month renders a state- ment to the customer showing all transactions for his account during the preceding month and the balance of ac- count resulting therefrom at the end of the month. If the correctness of the account so rendered is expressly assented to by the customer, it becomes an account stated between the parties, having the effect of an admission on the part 1 See Chapters III and IV. 2 Robinson v. Crawford, 31 App. Div. 228; Knapp v. Simon, 96 N. Y. 284; Zimmerman v. Weber, 135 App. Div. 428. 3 Hentz V. Miner, 18 N. Y. Supp. 880; Moffet v. Sackett, 18 N. Y. 522; Cudlipp V. Whipple, 1 Abb. Pr. 106; Minor v. Beveridge, 141 N. Y. 399; Sartorius v. GottUeb, 80 App. Div. 112; Allen v. Patterson, 7 N. Y. 476; Adams v. HoUey, 12 How. Pr. 326; Doherty v. Shields, 86 Him, 303; 1 Abbott's Forms of Pleading, 288. 72 THE LAW OF STOCKBROKERS of the customer that the balance of indebtedness therein shown is due.^ And if the customer does not expressly acquiesce in the correctness of the account as rendered to him, but retains the statement of it without objecting to the items or the balance therein shown, his assent is pre- sumed after the lapse of a reasonable time in which to make such objection.^ The most convenient remedy that the broker can pursue to recover a balance of indebtedness against the customer, is an action on an account stated. On proof of the account stated, he is prima facie entitled to judgment for the amount of the balance shown in the account. ^ In such an action, the customer, under a general denial, may rebut the presumption of his acquiescence in the ac- count as rendered arising from his retention of the state- ment of it without objection, by proof of circumstances tending to a contrary inference.* And even though an account stated is established, since it has the effect, not of an estoppel, but of a mere admission, the customer may allege affirmatively in his answer and prove fraud or mistake in the account as a defense to the action.^ In his action against the customer the broker may join in his complaint an allegation of a cause of action upon an account stated with an allegation of a cause of action for the same recovery upon an indebitatus assumpsit, and can- not be compelled to elect before trial which cause of action he will rely upon. ^ > Lockwood V. Thome, 18 N. Y. 285; Frothingham v. Satterlee, 70 App. Div. 613. iiSpellman v. Muehlfeld, 166 N. Y. 245; Frothingham v. Satterlee, 70 App. Div. 613. ' Lockwood V. Thome, 18 N. Y. 285; Frothingham v. Satterlee, 70 App. Div. 613. < Lockwood V. Thome, 18 N. Y. 285; Stenton v. Jerome, 54 N. Y. 480. ' Donald v. Gardner, 44 App. Div. 235; Little v. McClain, 134 App. Div. 197; Des Jardins v. Hotchkin, 142 App. Div. 845. 'Harding v. Churchman, 128 App. Div. 901; Seymour v. Warren, 71 App. Div. 421. CHAPTER VII. SECTIONS OF THE PENAL LAW AFFECTING STOCKBROKERS. Several statutes affecting stockbrokers have recently been passed in New York as additional sections of the Penal Law. ^ Some of these have already been referred to. ^ It remains to call attention to others, and to see how far the subjects to which they relate are covered by existing rules of the Stock Exchange. Section 953 of the Penal Law, added by Chap. 253 of the Laws of 1913, provides in substance, under the heading: "Manipulation of the prices of securities," that any per- son who causes or attempts to cause changes in the prices of any securities, or combines or conspires with any other person so to do, by means of pretended purchases or sales thereof, that is, purchases or sales whereby a simulta- neous change of ownership of such securities is not affected, is guilty of a felony; and that such a pretended purchase or sale shall be prima facie evidence of the violation of this section by the person or persons taking part therein. When this act was passed, the Constitution of the Stock Exchange contained the following provision: ^ "Fictitious transactions are forbidden. Any member violating this rule shall be liable to suspension for a period not exceeding twelve months." And on February 5, 1913, the Governing Committee adopted the following resolution: "Resolved: That no Stock Exchange member, or member of a Stock Exchange firm shall give, or with knowledge execute, 1 Chap. 88, Art. 86 of the Laws of 1909, constituting Chap. 40 of the Consolidated Laws. 2 Ante, Chap. I, p. 5; Chap. Ill, pp. 30, 33. » Art. XXIII, Sec. 8. 73 74 THE LAW OF STOCKBROKERS orders for the purchase or sale of securities which would involve no change of ownership. The punishment for this offense shall be as prescribed in Section 8 of Article XXIII of the Constitution regarding fictitious transac- tions." The rules of the Exchange can control only indirectly, if at all, persons who are not members of the Exchange. The above section of the Penal Law reaches directly, not only the broker, but also the customer upon whose order a transaction violating the Act is made. In Livermore v. Bushnell,^ it was held that a broker could not recover for services and expenditures in buying and selling stock, where the transactions were fictitious and made for the purpose of advancing the price of the stock, the agreement under which he acted being against public pohcy and void. Section 954 of the Penal Law, added by Chap. 592 of the Laws of 1913, provides, in substance, that a broker, who, being employed by a customer to buy and carry securities on margin and while acting as broker in respect to such securities, sells for his own account the same kind of securities with intent to trade against the customer's order, or, who, being employed to sell securities for a customer and while acting as broker in respect to such sale, purchases for his own account the same kind of securities with intent to trade against the customer's order, is guilty of a felony. This section doubtless means that a broker buying securities for a customer may not sell similar securities for his own account in order to avoid receiving and paying for the securities bought, or, selling securities for a cus- tomer, may not buy similar seciu-ities for his own account in order to avoid delivering the seciu-ities sold.^ But does the section also extend to a case where the broker has received and paid for securities bought on a customer's 1 5 Hun, 285. * See ante, Chap. I, p. 5. THE PENAL LAW 75 order, and subsequently sells similar securities for his own account? It may be that he could not be said to be acting at that time as broker in respect to the customer's securities. If he could be said to be so acting, what would be proof, in such a case, of intent on his part to trade against the customer's order? If a broker who is carrying securities for a customer on margin sells the securities without having in his possession or under his control other securities of a like kind and amount, it is a conversion of the customer's securities. Is it also trading against the customer's order, and so a felony under this section of the Penal Law? The rule of the Stock Exchange on this subject is: "March 30, 1910. "ResGlved, That any member of the Exchange who, while acting as a broker, either as a "Specialist" or otherwise, shall buy or sell directly or indirectly for his own account, for account of a partner, or for any accoimt in which he has an interest, the securities, the order for the purchase or sale of which has been accepted by him for execution, shall be deemed guilty of conduct or proceeding incon- sistent with just and equitable principles of trade, and shall be subject to the penalties provided in Article XVII, Section 6, of the Constibution." Section 390 of the Penal Law, as amended by Chap. 236 of the Laws of 1913, provides, in part, that any person who shall make a contract, either on credit or on margin, respecting the purchase or sale of securities, intending that such contract shall be settled according to the market quotation of prices, and without intending a bona fide purchase or sale of the securities, or shall make such a contract not intending the actual bona fide receipt or delivery of the securities, but intending a settlement of the contract based on the difference in the market quotations of prices at which the seciu-ities are, or are asserted to be, bought or sold, shall be guilty of a felony. Under this section as it existed prior to the amendment 76 THE LAW OF STOCKBROKERS of 1913, the joint intent of both parties to the contract was necessary to a commission of the crime condemned. As amended, the crime may be committed by only one party to the contract, and it is unnecessary to prove that both shared in the intent. The object of the amendment is to reach a class of illegitimate enterprises commonly known as bucket shops. Section 955 of the Penal Law, added by Chap. 500 of the Laws of 1913, provides, in substance, that a stock- broker who, knowing that he is insolvent, thereafter accepts money or securities from a customer who is igno- rant of his insolvency, and thereby causes the customer to lose in whole or in part such money or securities, is guilty of a felony; and that he shall be deemed insolvent when- ever the aggregate of his property is insufficient in amount to pay his debts. The rules of the Stock Exchange provide, in this con- nection, that a member who is insolvent shall immediately inform the President of the Exchange that he or his firm is unable to meet their engagements, when announcement of the fact is made upon the Exchange, and the insolvent member is automatically suspended from membership, and his contracts with other members are closed.^ Section 956 of the Penal Law, added by Chap. 500 of the Laws of 1913, provides, in substance, that a stock- broker is guilty of a felony, who, (1) having in his posses- sion, for safe keeping or otherwise, securities of a customer on which he has no lien, pledges or disposes of the same without the customer's consent, or, (2) having in his possession securities of a customer on which he has a lien for indebtedness due to him by the customer, pledges the same for more than the amount due to him thereon, or otherwise disposes thereof for his own benefit, without the customer's consent, and without having in his possession or subject to his control securities of the kind and amount to which the customer is then entitled, for delivery to him 1 Const. Art. XVI, Sec. 1; Art. XXVIII, Sec. 1. Appendix. THE PENAL LAW 77 upon his demand therefor and tender of the amount due thereon, and thereby causes the customer to lose, in whole or in part, such seciu-ities, or the value thereof. It will be observed that subdivision 1 of this section is violated by the mere act of hypothecation, and that subdivision 2 is not violated unless the hypothecation is followed by a loss to the customer, that is, unless the broker fails while the customer's securities are pledged and the customer cannot then redeem them without paying more than the amount due from him to the broker.^ When a broker places securities which he is carrying for a customer on margin in a general loan, he is pledging the same for more than the amount due to him thereon, within the meaning of the Act.^ By a resolution of the Governing Committee of the Stock Exchange, adopted on February 13, 1913, it is provided: "That the improper use of a customer's se- curities by a member or his firm, is an act not in accordance with just and equitable principles of trade, and the offending member shall be subject to the penalties pro- vided in Section 6 of Article XVII of the Constitution." The penalty provided by the section referred to is sus- pension or expulsion from the Exchange as the Governing Committee may determine. Section 951, added by Chap. 476 of the Laws of 1913, provides, in substance, that any person who, with intent to deceive, reports or publishes, or causes to be reported or published, as a purchase or sale of securities, any trans- action therein whereby no actual change of ownership is effected, is guilty of a felony. Section 4A4, added by Chap. 477 of the Laws of 1913, provides, in part, that no exchange shall make or en- force any rule which shall prevent its members from deal- ing, at the regular rates of commission, with or for the members of any other exchange. 1 Ante, Chap. Ill, p. 34. 2 Ante, Chap. Ill, pp. 32, 33. CHAPTER VIII. A SPECIAL AGREEMENT WITH THE CUSTOMER. It is apparent that a special agreement between the broker and his customer is necessary for the former's protection, if he is to conduct his business in the usual way. It is usual for a broker to print at the foot of his notices of purchases and sales, a statement like the following: It is agreed between broker and customer: 1. That all transactions are subject to the rules and cus- toms of the New York Stock Exchange and its Clearing- House. 2. That all securities from time to time carried in the cus- tomer's marginal account, or deposited to protect the same, may be loaned by the broker, or may be pledged by him either separately or together with other seciu-ities, either for the sum due thereon, or for a greater sum, all without further notice to the customer. 3. That in all marginal business the broker may close transactions by the sale or purchase of securities at his discretion when the margin ia near exhaustion, without further notice to the customer. Such a statement contained in these notices would in the course of successive deahngs with the same customer become sufficient evidence of a special agreement under which that particular customer's accoimt is carried.^ The form of the statement given above is open to the criticism that the word "loaned," as used therein, may ' Robinson v. Crawford, 31 App. Div. 228; Keller v. Halsey, 130 App. Div. 598; Bosoian v. Hubbard, 121 App. Div. 510, 129 App. Div. 637, 198 N. Y. 563; Estes v. Perkins, 137 App. Div. 367; Keller v. Halsey, 202 N. V. 588. 78 SPECIAL AGREEMENT WITH THE CUSTOMER 79 be ambiguous. It should be apparent on the face of the statement that the broker reserves the right to loan secu- rities for delivery on short sales, receiving in exchange the full market price of the securities. The expression "with- out further notice" in the statement is unfortunate, in that the word "fm-ther" may imply a preliminary notice of some sort.^ In view of the statute in New York ^ making it a felony under certain circumstances for a broker to pledge, with- out the consent of the customer, securities of the cus- tomer on which he has a lien, the broker cannot pru- dently rely upon a special agreement to be inferred after successive dealings from a statement contained in notices sent to the customer, however clear and comprehensive the statement may be. He should require from the cus- tomer a consent in writing signed by the customer when his account is opened permitting the use of the customer's securities by the broker in the way desired. A consent from one customer would not necessarily protect the broker in pledging securities up to the amount carried for that customer. If he were carrying similar securities for others, there would ordinarily be no way to identify the securities pledged as those of the customer who had given his consent. It would be deemed a pledge of a pro rata amount of the securities of each customer for whom a like kind of securities was being carried.' A broker, therefore, should obtain the required consent in writing from each and every one of his customers. 1 Sanger v. Price, 114 App. Div. 78, 83. 2 Ante, pp. 33, 76. 3 Ante, Chap. VI, p. 62. APPENDIX. SECTIONS OF THE CONSTITUTION OF THE NEW YORK STOCK EXCHANGE AND RESOLUTIONS OF ITS GOVERNING COMMITTEE CITED IN THE FOREGOING TEXT. ARTICLE I. TITLE — OBJECTS. The title of this Association shall be the "New York Stock Exchange." Its objects shall be to furnish exchange rooms and other facilities for the convenient transaction of their business by its members, as brokers; to maintain high standards of commercial honor and integrity among its members; and to promote and inculcate just and equitable principles of trade and business. ARTICLE II. government. The government of the Exchange shall be vested in a Govern- ing Committee, composed of the President and the Treasurer of the Exchange, and of forty Members, elected in the manner hereinafter provided. The members of the Governing Commit- tee, and the Secretary, shall be the officers of the Exchange. ARTICLE III. GOVERNING COMMITTEE. Sec. 2. The Governing Committee shall determine the maimer and form by which its proceedings shall be conducted; 81 82 APPENDIX appoint and dissolve all Standing or other Committees; define, alter and regulate their jurisdiction as stated in this instrument; have original and supervisory jurisdiction over any and all subjects and matters referred to said Committees; it may direct and control their actions or proceedings at any stage thereof, and shall try all charges against members of the Ex- change and pimish such as may be found guilty. It shall have entire control of the finances of the Exchange and fix the amount of fees and compensation to be paid to members of Committees, to Officers of the Exchange and to appointees, of the Governing Committee. It may require of all officers or appointees of the Exchange a good and sufficient bond to secure the faithful performance of their duties. The Governing Conunittee shall be vested with all other powers necessary for the government of the Exchange, the regulation of the business conduct of its members, and the promotion of its welfare, objects and purposes. ARTICLE XI. STAiroiNG COMMITTEES. Sec. 1. Promptly after each annual election, the Governing Committee shall appoint from its Members the following Standing Committees: Fourth: A Conunittee on Business Conduct, to consist of five Members. It shall be the duty of this Committee to consider matters relating to the business conduct of members with respect to customers' accounts. It shall also be the duty of this Committee to keep in touch with the course of prices of securities listed on the Exchange, with the view of determining when improper transactions are being resorted to. It shall have p)ower to examine into the dealings of any mem- bers, with respect to the above subjects, and report it.s findings to the Governing Committee. APPENDIX 83 ARTICLE XIII. APPLICATIONS FOR MEMBERSHIP BLIGIBILITT INITIATION FEE. Sec. 5. No person, elected to membership, shall be admitted to the privileges thereof imtil he shall have signed the Constitu- tion of the Exchange. By such signature he pledges himself to abide by the same and by all subsequent amendments thereto. ARTICLE XV. TRANSFER OF MEMBERSHIP. Sec. 3. Upon any transfer of membership, whether made by a member voluntarily, or by the Governing Committee or the Committee on Admissions in pursuance of the provisions of the Constitution, the proceeds thereof shall be applied to the follow- ing purposes and in the following order of priority, viz. : First. — The payment of all fines, dues, assessments and charges of the Exchange, or any department thereof, against a member whose membership is transferred. Second. — The payment of creditors, members of the Exchange, or firms registered thereon, of all filed claims arising from con- tracts subject to the rules of the Exchange, if, and to the extent that, the same shall be allowed by the Committee on Admis- sions. If said proceeds shall be insufficient to pay said claims, as so allowed, in full, the same shall be applied to the payment thereof pro rata. Third. — The surplus, if any, of said proceeds shall be paid to the person whose membership is transferred, or to his legal representatives, upon the execution by him or them of a release or releases satisfactory to the Committee on Admissions. The Committee on Admissions shall have power, by rule or otherwise, to secure the observance of the provisions of this Article. 84 APPENDIX ARTICLE XVI. INSOLVENT MEMBERS SUSPENSION — EEINSTATEMENT. Sec. 1. A member who fails to comply with his contracts, or is insolvent, or who is a partner in a firm, registered upon the Exchange, which fails to comply with its contracts, or is in- solvent, shall immediately inform the President, in writing, that he or his firm, is unable to meet their engagements, and prompt notice thereof shall be given to the Exchange. He shall thereby become suspended from membership until, after having settled with his creditors, or the creditors of his firm, he has been reinstated by the Committee on Admissions. Sec. 2. Whenever the President shall ascertain that a member has failed to meet his engagements, or is insolvent, or that a firm registered upon the Exchange has failed to meet its engage- ments, or is insolvent, and that such member or such firm, has neglected to comply with the requirements of the preceding section, he shall announce to the Exchange the insolvency and suspension of such member or such firm. Sec. 3. If a member, suspended under this Article, fails to settle with his creditors and apply for reinstatement, within one year from the time of his suspension, his membership shall be disposed of by the Committee on Admissions. The Governing Committee may, by a two-thirds vote of the members present, extend the time of settlement for periods not exceeding one year each. At the expiration of the time granted, the membership of said suspended member shall be disposed of as above provided. ARTICLE XVII. EXPULSION AND SUSPENSION FROM MEMBERSHIP. Sec. 6. A member who shall have been adjudged, by a major- ity vote of all the existing members of the Governing Committee, guilty of wilful violation of the Constitution of the Exchange, or of any resolution of the Governing Committee regulating the conduct or business of members, or of any conduct or proceeding APPENDIX 85 inconsistent with just and equitable principles of trade, may be suspended or expelled as the said Committee may determine, unless some other penalty is expressly provided for such offense. Sec. 7. The Governing Committee may, by a two-thirds vote of its members present, require that a member of the Exchange shall submit to the Governing Committee or any Standing or Special Committee, for examination, such portion of his books or papers as are material and relevant to any matter under investigation by said Committee or by any Standing or Special Committee. Any member who shall refuse or neglect to comply with such requirement, or shall wilfully destroy any such required evidence, or who, being duly sum- moned, shall refuse or neglect to appear before the Governing Committee or any Standing or Special Committee, as a witness, or refuse to testify before any such Committee, may be adjudged guilty of an act detrimental to the interest or welfare of the Exchange. Sec. 8. The Governing Committee may, by a vote of a majority of all its existing members, suspend from the Exchange for a period not exceeding one year, any member who may be adjudged guilty of any act which may be determined by said Committee to be detrimental to the interest or welfare of the Exchange. ARTICLE XXIII. BIDS AND OFFERS. Sec. 1. All bids and offers made and accepted in accordance with these rules shall be binding. Sec. 2. All offers to buy or sell securities shall be for 100 shares of stock or for $10,000 par value of bonds, unless otherwise stated. Offers to buy or sell specific amounts, other than as above stated, may be made at the same time and may be independently accepted. Sec. 3. Bids and offers may be made only as follows: (a) "Cash," i. e., for delivery upon the day of contract; (b) "Regular Way," i. e., for delivery upon the business day following the contract; 86 APPENDIX (c) "At three days," i. e., for delivery upon the third day following the contract; (d) "Buyer's" or "Seller's" options for not less than four days nor more than sixty days. Bids and offers under each of these specifications may be made simultaneously, as being essentially different propositions, and may be separately accepted without precedence of one over another. Bids and offers made without stated conditions shall be con- sidered to be in the "Regular Way." On transactions for more than three days written contracts shall be exchanged on the day following the transaction, and shall carry interest at the legal rate, miless otherwise agreed; on such contracts one day's notice shall be given, at or before two-fifteen p. m., before the securities shall be delivered prior to the matimty of the contract. On offers to buy "Seller's Option" or to sell "Buyer's Op- tion," the longest option shall have precedence. On offers to buy "Buyer's Option" or to sell "Seller's Option," the shortest option shall have precedence. ARTICLE XXrV. COMPARISONS — ^LIABILITr ON CONTRACTS. Sec. 1. It shall be the duty of every member to report each of his transactions as promptly as possible at his office, where he shall furnish opportunity for prompt comparison. Sec. 2. It shall be the duty of the Seller to compare, or to en- deavor to compare, each transaction at the office of the Buyer, not later than one hour after the closing of the Exchange. Nothing iu this Article shall be construed to justify a refusal to compare before the closing of the Exchange. Sec. 3. It shall be the duty of the Buyer to investigate, be- fore ten o'clock a. m., of the day after the purchase, each trans- action which has not been compared by the Seller. Sec. 4. Neglect of a member to comply with the provisions of Sections 1 or 2 hereof shall render him liable to a fine not exceeding fifty dollars, to be imposed by the Committee of Arrangements. APPENDIX 87 Sec. 5. Comparison shall be made by an exchange of an original and a duplicate comparison ticket; the party to whom the comparison ticket is presented shall retain the original, if it be correct, and immediately return the duplicate duly signed. An exchange of Clearing-House tickets shall constitute a comparison. Sec. 6. Should a difference be discovered in an attempt to compare, the exact liability of the disputants shall be promptly established by purchase, sale or mutual agreement. . Sec. 7. If an original party to a transaction gives up his principal, the latter shall have the same duties in the matter of comparison as the original party. Sec. 8. No comparison or failure to compare, and no notifica- tion or acceptance of notification, shall have the effect of creating or of canceling a contract, or of changing the terms thereof, or of releasing the original parties from liability. Sec. 9. No party to a contract shall be compelled to accept a substitute principal, unless the name proposed to be sub- stituted shall be declared in making the offer and as a part thereof. Orders for the receipt or delivery of securities, issued by the Clearing-House, shall however, be binding and enforceable upon members or firms using the facilities of the Clearing-House. Sec. 10. When written contracts shall have been exchanged the signers thereof only are liable. ARTICLE XXV. PAYMENT AND DELIVERT. Sec. 1. In all deliveries of securities, the party delivering shall have the right to require the purchase money to be paid upon delivery; if delivery is made by transfer, payment may be required at time and place of transfer. . Sec. 2. The Receiver of shares of stock shall have the option of requiring the delivery to be made either in certificates there- for or by transfer thereof; except that in cases where personal likbility attaches to ownership, the Seller shall have the right to make delivery by transfer. 88 APPENDIX The right to require receipt or delivery by transfer shall not obtain while the transfer books are closed. Sec. 3. Deliveries of securities on contracts subject to the rules of the Exchange shall in all cases conform to the require- ments for regularity which may be made, from time to time, by the Committee on Securities. Sec. 4. The Buyer must, not later than two-fifteen o'clock p. m., accept and pay for all, or any portion of a lot of stock contracted for, which may be tendered in lots of one hxmdred shares or multiples thereof; and he may buy in "imder the rule" the undeUvered portion, in accordance with the provisions of Article XXVIII. This rule shall also apply to contracts for bonds when tender is made in lots of ten thousand dollars or multiples thereof. ARTICLE XXVI. SETTLEMENT OF CONTRACTS. Sec. 1. All dehveries of securities must be made before quarter after two o'clock p. m., and when deliveries are not made by that time the contract may be closed "imder the rule" in the manner provided in Article XXVIII of these Rules. In the absence of any notice or agreement the contract shall continue without interest until the foUowing business day; but in every case of non-delivery of securities the party in default shall be liable for any damages which may accrue thereby; and all claims for such damages m\ist be made before three o'clock p. m., on the business day following the default. ARTICLE XXVII. CLEABING-HOUSE. Sec. 1. There shall be a Clearing-House for the purpose of acting as the common agent of the members of the Exchange in receiving and delivering such securities as may from time to time be designated by the Clearing-House Committee. Sec. 2. Nothing in the conduct of the business of clearing APPENDIX 89 shall attach any liability to the Exchange, or to any member of the Clearmg-House Committee, and delays on the part of the Clearing-House shall not attach any liability to members who are clearing. Sec. 3. The Clearing-Hoiise Committee shall designate from time to time the securities which shall be cleared, and, in all transactions in such securities, the deliveries shall be made through the Clearing-House, unless otherwise specially stipu- lated in the bid or offer, or otherwise agreed upon. Sec. 4. The " Rules for Clearmg " and the " Rules for Dealmg " adopted by the Governing Committee, and all amendments thereto, shall be binding upon the members of the Exchange equally with the laws included in the Constitution. Amendments to "Rules for Clearing" or to "Rules for Dealing" may be adopted by a vote of two-thirds of all the existing members of the Governing Committee and need not be submitted to the members of the Exchange for approval. ARTICLE XXVIII. CLOSING CONTRACTS " UNDER THE RXJLE. " Sec. 1. When the insolvency of a member or firm is announced to the Exchange, members having contracts subject to the rules of the Exchange with the member or firm, shall without un- necessary delay proceed to close the same. If the contracts in- volve securities admitted to quotation upon the Exchange the closing must be in the Exchange, either officially by the Chair- man, or by personal purchase or sale. If the contracts involve securities not dealt in on the Exchange, the purchase or sale of such securities must be promptly made in the best available market. Should a contract not be closed, as above provided, the price of settlement shall be fixed by the price current at the time when such contract should have been closed under this rule. Sec. 2. A contract which has not been fulfilled according to the terms thereof may be officially closed "imder the rule" by the Chairman, as herein provided. Notice of intention to make such closing of a contract must be deUvered, at or before two-thirty o'clock p. m., at the reg- 90 APPENDIX istered office address of the member or firm in default. And the Chairman shall not close such contract before two thirty-five , o'clock p. m. Sec. 3. Every notice of intention to close a contract "under the rule," because of non-delivery, shall be in writing; and shall state the name of the member or firm by whom the order is given, also for whose accoimt — ^all of which shall be announced by the Chairman before closing the contract. The closing of a contract "vmder the rule", made in conform- ity with such notice, shall be also for the account and liability of each succeeding party in interest. ' Sec. 4. Notice of intention to close a contract "under the rule" may be given upon the entire amount in default or upon any portion thereof, but in this latter case for not less than one himdred shares of stock or ten thousand dollars of bonds. Sec. 5. When notice that a contract will be closed "vmder the rule" is received too late for transmission to other members or firms interested in such contract, within the time stated therefor, the notified member or firm who is unable to so transmit said notice may, immediately after the official closing "under the rule," re-establish such contract by a new purchase or sale in the "regular way;" and any loss arising therefrom shall be a valid claim against the successive party or parties in interest. Sec. 6. When a member has issued a notice of intention to close a contract "under the rule," for default in delivery, he must receive and pay for securities due upon such contract if tendered at his office within five minutes of the official time for closing; or thereafter, if tendered at the rostrum of the Exchange, before the Chairman has closed the contract. Sec. 7. When a contract has been closed "xmder the rule," the member or firm who gave the order must give prompt notice of such closing to the member or firm in default. Notification to successive parties in interest must be trans- mitted without delay, and claims for damages, arising there- from, must be made prior to three o'clock p. m. of the business day following the closing of the contract. Sec. 8. When a contract has been closed "imder the rule" the Chairman shall endorse upon the order therefor the name of the purchaser or seller, the price and the hour at which such contract is closed, and deliver the order to the Secretary of the APPENDtX 91 Exchange, who shall ascertam whether the money difference, if any, has been paid. If such difference shall not be paid within twenty-four hours after the closing of the contract, the Secretary shall report such default to the President. Sec. 9. When a contract is closed "under the rule," any mem- ber or firm accepting the bid or offer, as made by the Chairman, and not compljdng promptly therewith, shall be liable for any damages resulting therefrom. The member or firm, for whose account a contract is being closed "under the rule," shall not be permitted to accept the bid or offer made by the Chairman. Sec. 10. When a loan of money is not paid at or before two fifteen o'clock p. m. of the day upon which it becomes due, the borrower shall be considered as in default, and the lender may sell "under the rule" the securities pledged therefor, or so much thereof as may be necessary to liquidate the loan, in the manner prescribed in the foregoing Sections of this Article. ARTICLE XXXIV. COMMISSIONS. Sec. 1. Commissions shall be charged and paid, imder all cir- cumstances, upon all purchases or sales of securities dealt in upon the Exchange; and shall be absolutely net, and free from all or any rebatement, return, discount or allowance ia any shape or manner whatsoever, or by any method or arrangement, direct or indirect; and no bonus, nor any percentage or portion of the commission, shall be given, paid or allowed, directly or indirectly, or as a salary, or portion of a salary, to any clerk or person, for business sought or procured for any member of the Exchange. Sec. 2. All commissions shall be calculated upon the par value of securities and the rates shall be as follows: (a) On business for parties not members of the Exchange, including joint-account transactions ia which a non-member is interested, transactions for partners not members of the Ex- change, and for firms of which the Exchange, member or members are special partners only, the commission shall be not less than one-eighth of one per cent. 92 APPENDIX (b) On busiaess for members of the Exchange, , the commis- sion shall be not less than one-thirty-second of one per cent., except when a principal is given up, ia which case the commis- sion shall be not less than one-fiftieth of one per cent. (c) On Mining Shares, Subscription Rights, and Notes of Corporations, such rates, to members and non-members as may be determined, from time to time, by the Committee on Commissions, with the approval of the Governing Committee. (d) Government and Municipal Securities are exempted from the provisions of this Article. Sec. 3. A firm having as a general partner a member of the Exchange, shall be entitled to have its business transacted at the rates of commission hereinbefore prescribed for members. A member of the Exchange cannot confer this privilege upon more than one firm at any one time. The privileges provided for under this Section can only be conferred upon a Branch House in this country when established under the same name as the parent firm and in which the part- ners and their respective interests are identical with those of the parent firm. Sec. 4. A proposition for the transaction of business, at less than the minimum rates of commission herein provided, shall constitute a violation of this Article. Sec. 5. A member suspended by the Governing Committee shall not, during the time of his suspension, be entitled to have his business transacted at member's rates of commission. A member who is in suspension by reason of insolvency may have his business transacted at member's rates. Sec. 6. If the Governing Committee shall, by a majority vote of all its existing members, determine that a member of the Exchange has violated the provisions of this Article, it shall suspend such member, for the first offense, for such period not less than one year nor more than five years, as a majority of the members of said Committee present may determine. A member adjudged guilty of a second offense, by a majority vote of all the existing members of the Governing Committee, shall be expelled by a like vote. APPENDIX 93 ARTICLE XXXVIII. ALTERATIONS OF THE CONSTITUTION. The Governing Committee may make additions, alterations or amendments to the Constitution by a majority vote of all its existing members. Every proposed addition, alteration or amendment must be presented, in writing, at a regular meeting of the Governing Committee, and referred to the Committee on Constitution, which shall report thereon at the next regular meeting of the Governing Committee, or at a special meeting called for the sole purpose of considering it. Action thereon may be postponed to a fixed date by a vote of two-thirds of the members of the Governing Committee present. Such altera- tions when adopted by the Governing Committee shall be sub- mitted to the Exchange and shall stand as the law of the Ex- change, if not disapproved within one week by a majority vote of the entire membership. No alteration of Article XVTII shall ever be made which will impair, in any essential particular, the obligation of each mem- ber to contribute, as therein provided, to the provision for the families of deceased members. RESOLUTIONS ADOPTED BY THE GOVERNING COM- MITTEE. BIDS AND OFFERS. " December 14, 1898. "That where parties have orders to buy and orders to sell the same security, said parties must offer said security, whether it be stock or bonds, at one-eighth per cent, higher than their bid before making transactions with themselves." MEMBERS DEALING WITH THEMSELVES — SPECIALISTS. " March 30, 1910. (To take effect April 4, 1910.) "Resolved, That any member of the Exchange who, while 94 APPENDIX acting as a broker, either as a "Specialist" or otherwise, shall buy or sell directly or indirectly for his own account, for account of a partner, or for any account in which he has an interest, the securities, the order for the purchase or sale of which has been accepted by him for execution, shall be deemed guilty of con- duct or proceeding inconsistent with just and equitable princi- ples of trade, and shall be subject to the penalties provided in Article XVII, Section 6, of the Constitution. "The foregoing rule shall not apply to the act of a member who, by reason of his neglect to execute an order, is compelled to take or to supply on his own accoimt the securities named in the order; in such case the member is not acting as a broker and shall not charge a commission. "A member, acting as a broker, is permitted to report to his principal a transaction as made with himself, only when he has orders both to buy and to sell and not to give up, and then he must add to his name on the report, 'on order,' or words to that effect." BUCKET-SHOPS. May 19, 1909. "That any member of this Exchange who is interested in, or associated in business with, or whose office is connected, directly or indirectly, by public or private wire or other method or con- trivance with, or who transacts any business directly or in- directly with or for, any organization, firm or individual engaged in the business of dealing in differences or quotations (commonly called a bucket-shop) shall, on conviction thereof, be deemed to have committed an act or acts detrimental to the interest and welfare of this Exchange." February 5, 1913. At a meeting of the Governing Committee held this day, the following resolution was adopted: " Eesolved: That no Stock Exchange Member, or member of a Stock Exchange firm shall give, or with knowledge execute, orders for the purchase or sale of securities which would involve no change of ownership. " The punishment for this offense shall be as prescribed in APPENDIX 95 Section 8 of Article XXIII of the Constitution regarding fictitious transactions." February 13, 1913. At a meeting of the Governing Committee held this day, the following resolutions were adopted: "That the acceptance and carrying of an account for a cus- tomer, either a member or a non-member, without proper and adequate margin may constitute an act detrimental to the interest and welfare of the Exchange, and the offending member may be proceeded against under Section 8 of Article XVII of the Constitution. "That the improper use of a customer's securities by a mem- ber or his firm, is an act not in accordance with just and equi- table principles of trade, and the offending member shall be sub- ject to the penalties provided in Section 6 of Article XVII of the Constitution. "That reckless or imbusinesslike dealing is contrary to just and equitable principles of trade, and the offending member shall be subject to the penalties provided in Section 6 of Article XVII of the Constitution, in every case in which the offense does not come within the provisions of Section 5 of Article XVI thereof." INDEX. INDEX. References are to pages. Absence : Of broker when price named in order to buy or sell is reached on the Exchange , 28 Account: Of customer with broker in connection with transactions on margin 11 Marginal or trading account U Usual items therein 71 Margin figured for the customer's account as a whole 20 Accounting: (See Remedies.) Account Stated: (See Remedies.) Acquiescence : Of customer: In pledge or loan of securities by broker .76, 77, 78, 79 In sale of securities without notice, or covering short sales without notice 40, 41, 42, 78, 79 In correctness of an account rendered, effect of 71, 72 When presumed ^ . . 71, 72 Action: (See Remedies.) Administrators: Pending appointment of when customer dies, duty of broker 38 99 100 INDEX. References are to pages. Admission: (See Acquiescence.) Advances: (See Stockbroker.) Agent: (See Stockbroker.) Agreement: (See Special Agreement.) Answer: Counterclaim by broker in action for conversion of customer's securities 46 (See Remedies, Conversion.) Appendix : Constitution of N. Y. Stock Exchange and Regulations of Governing Committee 81-95 Assent: (See Acquiescence.) Assessments: On securities sold short, credited to customer 17 Assignment: Stock deposited with broker as collateral assigned in blank, when transferred to name of broker 20 Borrowed stock assigned in blank by lender 15 Where assignment of certificate forged, no title acquired against owner 55 Broker's liability where assignment is forged 56 Broker's guarantee of signature to assignment 56, 57 Assumpsit: (See Remedies.) INDEX. 101 References are to pages. Bankrupt: (See Insolvent, Remedies.) Bonds: (See Securities.) Borrowing Securities: Usual terms of contract between borrower and lender. . . 15, 16 (See Short Sales.) Broker: (See Stockbroker.) Buyer and Seller: When broker cannot be both (See Stockbroker.) Call: (See Options.) Claims: Against seat of broker on the Exchange (See Remedies.) Clearance Loans: (See Loan.) Clearing-House: Purpose of Stock Exchange Clearing-House, to avoid manual deliveries of securities 3,4 Its operation 4 Whether evidence of wagering contracts 4-7 Client: (See Customer.) Collateral: (See Securities, Mar^.) 102 INDEX. References are to pages. Commissions: Of Stockbrokers Rate 30-31 Lien for 13 Constitution of Exchange: (See Appendix.) Conversion: Of customer's securities by broker 32-34, 35, 36-37, 38-39 Measure of damages for conversion 44-46 Counterclaim by broker of balance of indebtedness in action for conversion by customer 46 Crimes: (See Penal Law.) Custom: Of stockbrokers and rules of Exchange, how far binding on customer 29-30 Orders delegated by broker according to custom 29 Rate of conunission determined by custom 30-31 Customary notice of sale contrary to law 38, 39 Pledge of securities by broker according to custom contrary to law 32-33 Lending securities according to custom contrary to law . . 35 Contract made on the Exchange is subject to its rules 23, 24, 69-70 Customer: Relation to the broker on the purchase of securities on margin 12-14 Relation to the broker on a short sale of securities on mar^ 14^19 Relation to the opposite broker 22-24 Relation to the opposite customer 24 Right to notice of execution of his order 30 INDEX. 103 References are to pages. Duty to indemnify broker 31 Right to notice before transaction is closed 37, 38-42, 47 48, 49-50 Profit or loss on marginal transaction belongs to the customer 12, 14 Rbk in borrowing securities is on broker 51 (See Remedies, Special Agreement, Stockbroker.) Damages: (See Remedies.) Measure of damages for conversion of customer's securities by sale of same without legal notice 44-46 By pledging or loaning same, or making delivery thereof on short sale for another 32, 33, 35, 36 Measure of, on a short sale, when broker closes transaction without legal notice or without giving customer reasonable opportunity to realize a profit 50, 51 Debt: (See Remedies.) Debtor and Creditor: (See Stockbroker.) Demand: Necessary to establish default on part of customer as to margin 19, 37, 38, 39, 48 Necessary before closing transaction when no default as to margin 37, 47, 48 Whether necessary to establish conversion of customer's se- curities by broker 31-33 Diligence: (See Stockbroker.) Exchange: (See Stock Exchange.) 104 INDEX. References are to pages. Executor: (See Administrator.) Felony: (See Penal Law.) Fictitious Transactions: (See Penal Law.) Fiduciary Relation: Broker's relation to customer fiduciary 13, 14, 66 (See Remedies, Stockbroker.) Forgery: (See Securities.) Form of Action: (See Remedies.) Frauds, Statute of: (See Statute of Frauds.) Gambling: (See Wager.) Guarantee: Broker's guarantee of signature on transfer of stock or reg- istered bonds 56, 57 Good Faith: (See Stockbroker.) Hypothecation: (See Pledge.) Illegal Transactions: (See Wager, Penal Law.) Indemnity: (See Stockbroker, Customer.) INDEX. 105 References are to pages. Insolvent: (See Remedies, Penal Law.) Interest: Interest credited to and charged against the customer in marginal account with broker 14, 16-17 Lender: (See Borrowing Stock, Short Sales.) Lien: (See Stockbroker, Pledge, Loan.) Loan: Broker's general or demand loans from the banks 32 Lien of the bank upon securities of customer pledged as collat- eral for general loans 62 Clearance loan defined 65 Whether bank making clearance loan to broker has equitable lien thereon 65 "Long": Of securities, meaning 11 Margin: Defined 11, 19 May consist of money or securities 19, 20 Extent of 19 How figured 19, 20 Customer's undertaking to maintain 19-20 Use by broker of securities deposited as margin 20 May transfer same to name of broker 20 Stock Exchange rule as to margin 21 Agreement as to extent of, express, implied 37 Reasonable mar^ for protection of broker 37-38, 48-49 Rights of broker when customer is in default as to margin 37-44, 48, 49-50 106 INDEX. References are to pages. Marginal Account: (See Account.) Measure of Damages: (See Damages.) Money Had and Received: (See Remedies.) Negotiable Securities: (See Securities.) New York Stock Exchange: (See Stock Exchange.) Non-Negotiable Securities: (See Securities.) Notice: To customer of execution of order 30. Of sale of securities carried on margin, must designate time and place of sale 37-39 What is reasonable notice of sale 39-42 Serraee of the notice.. 42-44 Waiver of notice by customer 42 Ratification of sale without notice 42 Notice of sale other than to the customer 44 Damages for sale without notice 44-46 Of purchase of secmities to cover a short sale, must be given to customer 48, 49 Form of differs from notice of sale 49 Reasonable notice of purchase 49-50 Service of the notice, actual receipt of by customer not indis- pensable 50 Damages for closing short sale without notice 50-51 Options: Defined 26-27 INDEX. 107 References are to pages. Options — Continued Puts, calls, straddles 26-27 Legality of 27 Not prima fade wagers 27 Ownership: (See Title.) Penal Law: Sections of affecting stockbrokers 5, 30, 33, 73-77 Notice to customer of execution of order 30 Pledge of securities by broker 33, 76-77 Trading against customer's order 74, 75 Insolvent broker accepting money or securities 76 Fictitious transactions 73, 74 Report of fictitious transactions 77 Bucket shops 75, 76 Business for members of other exchanges 77 Place: Of sale on default as to margin (See Notice.) Pledge: Broker holds as pledgee securities bought for customer on margin or deposited as margin 13, 20 How far broker may repledge such securities 31-35, 36, 37, 76-77 Title of broker's pledgee. (See Title.) Preference: (See Remedies.) Principal and Agent: (See Stockbroker.) Privity: (See Stockbroker.) 108 INDEX. References are to pages. Profits: Prom transaction on margin belong to customer 12, 14 Property: (See Seat.) "Put": (See Option.) Ratification: By customer of unauthorized purchase or sale 42 Reasonable Notice: (See Notice.) Reasonable Time: In which to replace securities sold by broker without authority 44, 45 In which to replace transaction through another broker where broker has covered short sale without authority 44, 45, 50-51 Rehypothecation : (See Pledge.) Remedies: Of Customer when Broker is Solvent: Accounting, action in equity for 58 Basis of right to 58 Defense of broker to 59 Money had and received, action for, to recover balance of account 59 Nonfeasance or misfeasance of broker, action in contract or tort for 59 Trover for conversion 59 Measure of damages for conversion 44-46 Counterclaim by broker in action for conversion 46 For breach of broker's implied contract to carry a short sale 60 Measure of damages for breach of such contract 50, 51 I INDEX. 109 References are to pages. Remedies — Continued Of Customer when Broker is Insolvent: Redemption of securities carried on margin or deposited as collateral, or for safe keeping , . . 60-64 Following money in hands of broker 65-67 Rights against broker's seat on the Exchange 67-69 Rights against opposite broker 69-70 Of Broker against Customer: Action on the contract for commissions and indemnity 71 Recovery of debit balance of marginal account .... 71, 72 Action on an account stated 72 Joinder of causes of action 72 Risk: Of loss in marginal transaction upon customer 12, 14 Rules: (See Stock Exchange, Custom.) Sale: (See Short Sale, Conversion, Stockbroker.) Seat: Whether property, subject to debts 68 Rights of customer against (See Remedies.) Securities: Usually dealt in on the Exchange 52 Negotiable securities 52 Non-negotiable secmities 53 Title to negotiable securities converted or stolen 52, 53 Title by estoppel to non-negotiable securities converted or stolen < 53-55 Broker liable to purchaser for delivery of forged or stolen securities 56 110 moEx. References are to pages. Securities — Continued When liable to the owner of stolen securities 56 Extent of broker's guarantee of signature on transfer of stock or registered bonds 56, 57 "Short": Defined U Short Sales on Margin: Nature of 10, 11, 14-19 Relation of broker to customer in connection with (See Stockbroker.) Usual terms of contract in borrowing securities to dehver on a short sale 15, 16 Terms of contract between broker and customer 16-17 Broker must continue the transaction a reasonable time . . . 47, 48 May close the transaction for default as to margin. . . . 48-49 Must give reasonable notice of closing the transaction. . 49-50 Loss incurred in borrowing stock to deliver falls on the broker 51 SkiU: (See Stockbroker.) Special Agreement: Necessary between broker and customer 33, 35, 38, 39, 76, 77, 78 EstabUshed in coiu'se of successive dealings by statements contained in purchase and sales notices 78 Usual form 78 Written consent signed by customer 79 Speculation: (See Wager.) Statute of Frauds: Transactions on the Exchange oral 7 Such transactions are within the terms of the statute 7, 8 INDEX. Ill References are to pages. Statute of Frauds — CovJtinued Transactions, though invalid under statute, are binding so far as enforceable by Exchange 8, 9 Validated under the statute by exchange of comparison tickets or Clearing-House tickets 8 Stock: (See Securities.) Stockbroker: Defined 10 Nature of usual transactions for customers 10-21 Buying securities for a customer on margin 12-14 Advances by broker of purchase price 10, 12 Has lien on secvuities 13 Customer general owner of securities 12, 14 Relations between customer and broker are those of: Principal and agent 13 Debtor and creditor 13 Pledgor and pledgee 13 Trustee and beneficiary 13, 14 Selling securities short on margin 14-19 Borrowing the securities to deliver 15, 16 Terms of the contract between broker and customer 14, 15, 16-18 Relations between customer and broker those of: Principal and agent 14, 17 Borrower and lender of securities 18 The margin 19-21 Exchange rule as to margin 21 Relation between brokers deahng for customers 21, 22 Relation between broker and the opposite customer 22-24 Duties of broker in marginal transactions 28-30, 47 Sldll and diligence 28 Good faith 28, 29 Cannot be both buyer and seller 29 The exception to above 29 May delegate execution of orders 29 112 INDEX. References are to pages. Stockbroker — Continued May deal according to customs and rules of the Exchange 29-30 Must give customer notice of execution of order 30 Right to commission 30-31 Right to indemnity from customer 31 Pledge of customer's securities 31-35, 36 Loan of customer's securities 35 DeUvery of customer's securities on sale for another 35 Closing transaction when no default as to margin 37 Closing transaction for default as to margia 37—44 Demand for margin 38, 39 Notice of sale 38-42 Service of the notice 42-44 Must carry a short sale for a customer a reasonable time 47, 48 Closing a short sale after a reasonable time 48 Closing a short sale for default as to margin 48-49 Demand for margin and notice of purchase 48, 49 Service of the notice 50 LiabiUties of broker for stolen, forged or converted securities (See Securities.) Remedies by and against broker (See Remedies.) Criminal liabihties of broker (See Penal Law.) Agreement with customer as to use of his securities and clos- ing transaction (See Special Agreement.) Relation to the Exchange (See Stock Exchange.) Stock Exchange: Its nature and powers 1, 2 Its members, their relation to the Exchange and to each other, 1 , 2 Its stock-list 2, 3 Its clearing house (See Clearing-House.) INDEX. 113 References are to pages. Stock Exchange — Continued Transactions on, within Statute of Frauds (See Statute of Frauds.) Stock-List: (See Stock Exchange.) Stolen Securities: (See Securities.) "Straddle": (See Option.) Tender: Necessary on closing transaction when no default as to margin 37 Theft: (See Securities.) Tickets, Comparison and Clearing-Hou6e Tickets: (See Statute of Frauds.) Title: Customer is the general owner of securities bought and carried ^for him on margin 13, 14 Broker has special property as pledgee in securities carried for customer on margin 13, 14 Title of the pledgee of the broker to the securities ... 62, 63, 64 Title to securities forged, stolen or converted (See Securities.) Trading Account: (See Account.) Transfer: To broker's name of securities bought on margin 31 To broker's name of securities deposited by customer as collateral 20 114 INDEX. References are to pages. Transfer — Continued Of forged transfers (See Securities.) Guarantee of signature by broker on transfer (See Guarantee.) Trover: (See Remedies.) Trust Funds: (See Remedies, "following money in hands of broker.") Trustee: (See Fiduciary Relation.) Under the Rule: The rule, appendix 89-&1 Customer bound by 23, 24 Closing of contract "under the rule" 69 Usage: (See Custom.) Wager r Common law rule 4, 5 Transaction on margin distinguished from 24r-26 Delivery through clearing-house not evidence of 4-7 Optional form of contract not evidence of 27 Waiver: (See Acquiescence.) Wash Sales: Fictitious transactions (See Penal Law.)