Opinion ID: 308225
Heading Depth: 2
Heading Rank: 1

Heading: Partial Overextensions of Credit

Text: 11 Arguing that no evidence was presented at trial from which the jury could reasonably conclude that defendant's partial overextension of credit was causally related to plaintiff's entire loss on the Xerox transaction, Hemphill, Noyes contends that the district court's failure to give its requested instruction was reversible error. While we are in agreement that proof of proximate cause was an indispensable part of plaintiff's burden in this case, see, e.g., Junger v. Hertz, Neumark & Warner, 426 F.2d 805 (2d Cir.), cert. denied, 400 U.S. 880, 91 S.Ct. 125, 27 L.Ed.2d 118 (1970); Aubin v. H. Hentz & Co., 303 F.Supp. 1119 (S.D.Fla.1969); Moscarelli v. Stamm, 288 F.Supp. 453 (E.D.N.Y.1968), we nevertheless conclude that the measure of recovery applied by the jury was proper. 12 It is well established that a subsidiary purpose of Sec. 7(c) of the Securities Exchange Act is to protect the small investor from the dangers of excessive trading on credit. See, e. g., Remar v. Clayton Securities Corp., 81 F.Supp. 1014 (D.Mass.1949). To the extent that Regulation T accomplishes this purpose, it does so by preventing the investor from engaging in speculative securities transactions which he could not, or would not, enter if the margin requirements were complied with. Thus, in order to show that his loss on a particular transaction was caused by a broker-dealer's violation of Regulation T, the plaintiff must establish that defendant's liberal offer of credit induced him to purchase stock which he would not have otherwise acquired. See Note, Federal Margin Requirements as a Basis for Civil Liability, 66 Colum.L.Rev. 1462, 1466, 1471-72 (1966). The plaintiff's proof on this issue, however, must of necessity be something less than definitive. His burden will most often be met by a showing that his financial position was such that he could not, or would not have complied with a request for margin in accordance with the federal rules. Once such a showing has been made with respect to a particular transaction, however, we feel that it would place an unfair burden on the plaintiff to require that he also prove that he would not have entered a different transaction which was, in fact, not made, i. e., the one which could have been legally effected in view of the excess credit then existing in his account. The attractiveness of margin trading arises from the possibility of realizing quick profits on a relatively small capital investment. Thus, it is purely speculative to assume that, because an investor is demonstrably willing to purchase 100 shares of a security on a particular cash payment, he would make the same capital investment in anticipation of the profits on an 80 share acquisition. We therefore hold that once a Regulation T plaintiff establishes that he has been induced to enter a transaction by an illegal extension of credit, he may recover any losses sustained thereon, regardless of whether a smaller transaction in the same security would have been consistent with the margin requirements. In so holding, we resolve a highly intangible issue of proximate cause in favor of those the statute is designed to protect. Cf. Mills v. Electric Auto-Lite Co., 396 U.S. 375, 385, 90 S.Ct. 616, 24 L.Ed.2d 593 (1970). We do not believe that our holding will prove to be inequitable to broker-dealers, since the degree to which credit was overextended will still be relevant to the issue of whether the plaintiff would have entered the disputed transaction regardless of any Regulation T violation. Moreover, to the extent that the defendant can establish the plaintiff's determination to make some purchase or short sale of the relevant security, he will have a good defense to plaintiff's claim for his entire transactional loss.