Court Opinion

ID: 6872131
Source: CourtListenerOpinion
Date Created: 2022-07-23 21:02:39.935456+00
Date Added: 2024-06-11T16:05:25.663741
License: Public Domain

MANTON, Circuit Judge
(dissenting).
Appellee sued to recover on two promissory notes and overdraft in the Harriman National Bank & Trust Company of the City of New York and on a guaranty. To these undisputed claims the appellant has filed counterclaims. It is therein alleged that the bank, by false representations and by manipulating the market in its own stock, induced the appellant, Blumenthal, to buy its stock in 1930 which turned out later to be worthless. Appellant demanded rescission and return of the purchase price of the stock. The court below directed a verdict for the appellee and dismissed the counterclaim. The evidence establishes, sufficiently for a jury’s consideration, that the bank was manipulating the market in its own stock. It had a trader in bank stocks, Corwin & Co., constantly in touch with the market for its shares. This firm specialized in “over-the-counter” trading, and the record establishes that, whenever stock was offered for sale, the market was supported by the bank’s offering to purchase it through these brokers. Appellant says that this constituted a material misrepresentation of fact as to the value of the stock. If the bank had not supported the market and made the purchases, its shares might well have had a precipitous drop in price which would have put the appellant on his guard. One of the members of the firm testified to a series of transactions occurring between January, 1930, and December 17, 1930, during which time the stock was maintained at a price varying from $1,350 to $1,500 and a few shares as high as $1,600. The method of offering stock for sale was for the trader to call the officers of the bank and ask for a bid on the stock before any sale in the stock was made. They would bid, first instructing the trader to urge the seller not to sell but retain his stock. He testified: “Several times they urged me to urge my customers not to sell it as they were going to do something which would make the stock worth considerably more money.”
Sometimes they “would not make a bid for as .many shares as we would have for sale,” in which case his firm would turn over to another broker those shares not taken by the bank from Corwin & Co., and that other broker would then offer the remainder of the lot to the bank. Presumably the bank did not know that the stock offered them by the second broker was part of the lot which Corwin & Co. had offered them originally. From'this course of dealing it would be reasonable *453to infer that the bank was taking only a few shares out of each block put on the market in order to insure price maintenance with a minimum expenditure of its own funds. It is also reasonable to infer that the dealers in the stock may have been aware of this, and thus they may have split allotments of the stock amongst various dealers, each of whom would offer a few shares to the bank. A witness said that “It was the invariable practice of our firm to offer every share of this stock to the Harriman Bank.” It appears from his testimony that he would tell the officers of the bank how much stock he had received for sale, and at these times the bid might be delayed, but in most instances was made and the stock sold to the bank.
In March or February, 1930, the bank’s president telephoned to appellant, Blumenthal, and said he would like to have him as a stockholder of the bank; that he could get a small amount of stock which was difficult to get,- and he would like him to buy it. He said the stock would have a material increase in value and he thought it was a good investment and was anxious to have their important depositors stockholders. The first purchase was on March 12, 1930, 15 shares at $1,417 a share; the second on May 6, 1930, 10 shares at $1,525; and the third on November 24, 1930, 15 shares at $1’,-512 a share — a total of $59,185.
At the time that the bank officials represented to the appellant that the stock was scarce and that they were selling it to him only because they valued him as an important depositor and they were conferring a special favor upon him by giving him a special invitation to become a stockholder, their own affiliate, Harriman Securities Company, was selling its stock to others, and they were supporting the market in the purchase of the stock sold. See Oppenheimer v. Harriman Nat Bank & Trust Co., 301 U.S. 206, 207, 57 S.Ct. 719, 81 L.Ed. 1042.
The 40 shares were never delivered by the bank to the appellant, and therefore he did not tender their return to the bank, but in May, 1933, he wrote rescinding the sale of the stock because of fraud and false representations and demanded the return of his purchase price.
Although the appellant bought his stock direct from the bank instead of via the market, Harriman in negotiating the sale informed him as to the market price of the stock. This testimony of a member of the trading firm was neither contradicted nor denied, and therefore stands unimpeached, There was sufficient evidence to support a finding that the bank was creating an artificial market in its own stock and that this was done with the fraudulent purpose of aiding the efforts to bolster the bank and unload its shares on the public.
The value placed upon the stock during the year 1930 by the Clearing House examiner the jury might have found to be erroneous. We may take note of the depression which came in October, 1929. Morris-Poston Coal Co. v. Comr, 42 F.2d 620 (C.C.A.6). This bank endeavored to make a better showing in its capital and surplus accounts in 1930, even though it was not justified by its actual earnings or by financial conditions. The Clearing House report showed the estimated value of the stock of the bank at the time to be $4,394,000, with 20,000 shares issued, or a price per share of $219.70. The value placed on the stock by an examiner of the New York Clearing House in 1930 was upon the basis of a payment of $35 per share on a par value of $100. However, a jury could well say that a dividend of $35 a share was unwarranted at that time.
The common law dealt with manipulation of the market long before the Securities Exchange Act (15 U.S.C.A. § 78a et seq.) appeared. That statute is not, of course, decisive of this case, since it was enacted subsequent to the transactions here in issue. However, the problem of manipulation at common law is important, for that statute, instead of supplanting the common-law remedies available to one injured by market manipulation, gives additional remedies supplementary thereto. 15 U.S.C.A. § 78bb. The gist of the decisions at common law seems to be that interference with a free market is actionable. “Matched orders” and “washed sales” support a civil suit by an injured party (Willcox v. Harriman Securities Corp., 10 F.Supp. 532 [D.C.S.D.N.Y.]; Miller v. Barber, 66 N.Y. 558; McElroy v. Harnack, 213 Pa. 444, 63 A. 127. So also do they give rise to criminal liability (U. S. v. Brown, 5 F.Supp. 81 [D.C.S.D.N.Y.]; People v. Far-*454sou, 244 N.Y. 413, 155 N.E. 724; section 953, N.Y.Penal Code; cf. Rex v. De Berenger, 3 M. & S. 67, 105 Eng.Rep. 536 [K.B.1814]), and the continuance of such practices may be enjoined in New York under the Martin Act (McKinney’s General Business Law, § 352). The theory of the “wash” sale cases seems to be that such tactics constitute a fraudulent misrepresentation of fact in that the public is led to believe that the market price is a true and accurate one. In the instant case there was no showing of “wash” sales, but, as has been pointed out, the evidence does indicate manipulation by means of actual purchases by the bank of its own shares. But the principle is the same in both cases, since in each there is a representation that the quoted prices were arrived at in a “free” market. In both instances this representation is false since, instead of a market price made by the free play of economic considerations, there is an artificial price foisted upon the public by duplicity. In each situation the injured party should have his remedy.
It is not necessary to condemn all efforts to support the market price of a stock; no such case is presented here. No doubt situations have arisen and will continue to arise where such a policy is justifiable as, for example, to protect stockholders from a “bear” raid or in order to insure a market when a stock is first introduced to the public on an exchange. See Landon v. Beiorley, 10 Law Times, 505 (1848). A reasonable and honest purpose should be an adequate shield to the innocent. See Sanderson and Levi v. The British Westralian Mines & Share Corp., 43 Sol.J. 45 (1898), affirmed London Times, July 19, 1899, also reprinted in U. S. v. Brown (D.C.) 5 F.Supp. 81, 90. Cf. Scott v. Brown, 2 Q.B. 724 (1892).
The problems inherent in manipulation of securities have been dealt with in Europe as well as in the United States and England. Nussbaum, American & Foreign Stock Exchange Legislation (1935) 21 Va.L.Rev. 839. As early as 1896 Germany enacted a comprehensive Exchange Act (Reichsgesetzblatt 1896, p. 157, as amended May 27, 1908, Reichsgesetzblatt 1908, p. 215), which fought vigorously against manipulation of security prices, and made it á criminal offense to “use, with fraudulent intent, deceptive means aimed at influencing market and exchange quotations of commodities or securities” (Boersengesetz, § 88, par. 1). See, also, article 419 of the French Code Penal, as amended by statute of December 3, 1926.
An agreement to support the market by actual purchases or by withholding stock from the market is unenforceable and void. Harper v. Crenshaw, 65 App.D.C. 239, 82 F.2d 845; Bacciocco v. Transamerica Corp., 2 Cal.App.2d 595, 38 P.2d 417; Scott v. Brown, supra. In Singleton v. Harriman, 152 Misc. 323, 272 N.Y.S. 905, affirmed 241 App.Div. 857, 271 N.Y.S. 996, the court held that manipulation by actual purchases would justify recovery to the injured party. See also, Jaskow v. Harriman Natl. Bank & Trust Co. 159 Misc. 39, 287 N.Y.S. 143, 147. “The gravamen of the complaint here is that the corporation, by placing and keeping its stock on the market, had represented that it is subject to an open market appraisal, and having done so, has substituted for the open market appraisal an artificial appraisal, other than that which would be reached were the market ‘free’.” Berle, Liability for Stock Market Manipulation (1931), 31 Col.L.Rev. 264, 277. See, also, Moore & Wiseman, Market Manipulation & The Exchange Act, 2 U. of Chi.L.Rev. 46, 50. “There is a tendency of the courts, even independently of the Securities Exchange Act, to hold illegal, pool operations of a manipulative or deceptive character.” Meyer, The Law of Stock Brokers & Stock Exchanges, p. 85 (vol. 2, 1936 Suppl.). Manipulated prices are not determinative of value for tax purposes. Appeal of Wallis Tractor Co., 3 B.T.A. 981; Parker v. Comr, 11 B.T.A. 1336. Supporting the market such as here practiced is a form of price fixing akin to that dealt with in the anti-trust acts. See U. S. v. Trenton Potteries Co., 273 U.S. 392, 47 S.Ct. 377, 71 L.Ed. 700, 50 A.L.R. 989.
For a corporation to trade in its own shares as was here done places it in a position opposed to the fiduciary duty which it owes to its own shareholders, with all the advantages in such dealings on the side of the corporation.
Due to the important part played in our economy by the market and the exchange, a sound public policy requires preventing manipulative duplicity. This has *455been recognized by some of the leading exchanges themselves.1
The counterclaim presented an issue of fact for the jury’s determination.
I dissent.

 See Constitution of N. Y. Stock Exchange, art. 17, § 2; Rules of N. Y, Stock Exchange, c. XIV, § 15, adopted February 13, 1934.