Opinion ID: 1954920
Heading Depth: 1
Heading Rank: 6

Heading: impact of securities act

Text: In his fourth special defense Cole claimed that Merrill Lynch's action was barred by General Statutes § 36-346 (f) because of Merrill Lynch's violation of § 36-338 (a) (Rev. to 1975). The trial court ruled that § 36-346 protected only buyers of securities and therefore was unavailable to Cole as a seller. It also found that Cole had failed to sustain his burden of proof on this defense. Both the ruling and the finding raise issues which require further discussion. Section 36-346, [10] entitled Civil liability for sales in violation of law provides a variety of protections against security transactions made in violation of law. Subsection (a) gives a buyer a right of action against any person who offers or sells a security in violation, inter alia, of § 36-338. Subsection (f) bars an action by any person who has made a contract in violation of any provision of the chapter. This would include § 36-338. Subsection (h) provides that the rights and remedies of this statute are in addition to any rights and remedies that exist at law or in equity but this chapter shall not create any cause of action not specified in this section. While it may be said that § 36-346 (a) provides only a buyer with a sword, subsection (f) provides both buyer and seller with a shield. Section 36-338 prohibits certain activities in connection with the sale or purchase of any security. Because this statute is modeled after § 10 (b) of the Securities Act of 1934 and § 17 (a) of the Securities Act of 1933, we may look to decisions under the federal law for guidance. Elida, Inc. v. Harmor Realty Corporation, 177 Conn. 218, 226, 413 A.2d 1226 (1979). We begin with an analysis of the relationship between a broker-dealer and his customer. As a broker he acts as an agent with all of the responsibility to his customer that such status implies. But even when, as a dealer in his own securities, he acts as a principal in relation to his customer he is not free to operate under the principle of caveat venditor. Inherent in the relationship between a dealer and his customer is the vital representation that the customer will be dealt with fairly, and in accordance with the standards of the profession. Duker & Duker, 6 S.E.C. 386, 388 (1939). The theory is that even a dealer at arm's length impliedly represents when he hangs out his shingle that he will deal fairly with the public. 3 Loss, Securities Regulation (2d Ed. 1961) p. 1483. The shingle theory, first recognized by the federal courts in the case of Charles Hughes & Co., Inc. v. S.E.C., 139 F.2d 434, 435-36 (2d Cir. 1943), cert. denied, 321 U.S. 786, 64 S. Ct. 781, 88 L. Ed. 1077 (1944), has become a well established doctrine in the securities field. Loss, op. cit., 1487. See S.E.C. v. Capital Gains Bureau, 375 U.S. 180, 186, 84 S. Ct. 275, 11 L. Ed. 2d 237 (1963). Section 36-338 (a) (2) imposes upon a dealer in securities a special duty not to make any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading.... Cole claims that, at the very time Merrill Lynch was offering to buy from Cole 5000 CG shares at $51.50, Merrill Lynch had already sold short 11,000 CG shares at more than $52 a share and that, by failing to disclose this short sale transaction, Merrill Lynch violated § 36-338 and therefore is barred from recovering for breach of contract by virtue of § 36-346 (f). It is undisputed that Merrill Lynch did not disclose the short sale to Cole. If this sale, or any significant part of it, occurred before the 5000 share transaction then Merrill Lynch's duty to disclose is clear and its failure to do so would bar any suit to recover any losses resulting from the breach of contract. General Statutes §§ 36-338, 36-346 (f). In this case, however, Merrill Lynch in answer to Cole's motion for disclosure asserted that [o]n 2-20-74, after it had agreed to purchase such [5000] shares from the defendant [Cole], the plaintiff [Merrill Lynch] sold 2000 shares to Shield & Co., and 3000 shares (as part of an 8000 share order) to Investment Company of America. Both transactions were as principal. At the trial the parties stipulated to the same effect. Although Cole maintained that, at all times, the transaction involved only the sale of his entire block of CG shares, the court was not obliged to accept his version of the facts. The court having found that the agreement was for the purchase by Merrill Lynch as principal of 5000 shares together with a time limit option to purchase the remainder, the stipulation of the parties established the time frame of that purchase and the subsequent short sale. In these circumstances, even under the shingle theory, there was nothing for Merrill Lynch to disclose. Obviously, had Merrill Lynch exercised its option to purchase the remaining shares it would have also been obligated to disclose the earlier short sale. Cole's further contention that the amount of damages was incorrectly calculated is without merit. The court awarded Merrill Lynch the difference between the cost of purchasing 5000 CG shares in the open market and the contract price. This represented Merrill Lynch's loss which resulted from Cole's breach of contract and was the correct measure of damages. It is analogous to the damages which the Uniform Commercial Code makes available to a buyer of goods who, because of a seller's breach, is obliged to cover the contract by procuring substitute goods. General Statutes § 42a-2-712. [11] White & Summers, Uniform Commercial Code (2d Ed.) § 6-3 p. 216ff.