Court Opinion

ID: 9464991
Source: CourtListenerOpinion
Date Created: 2023-08-05 00:32:49.921705+00
Date Added: 2024-06-11T17:38:55.411803
License: Public Domain

MESKILL, Circuit Judge,
dissenting:
I respectfully dissent. In my judgment, the loss suffered by Index Fund was clearly within the “trading exclusion” of the bond issued by I.N.A. Index Fund could have purchased a more expensive bond which would have protected it from the type of *1164loss involved here, but it chose not to do so. The majority’s use of the provisions of the Investment Company Act to relieve Index Fund of the consequences of its choice is unprecedented and unwarranted.
The insurance contract purchased by Index Fund is a fidelity bond labeled “Brokers’ Blanket Bond, Form No. 14.” This same bond is issued by I.N.A. to stockbrokers, investment banks and mutual funds. The bond provides in part as follows:
The losses covered by this bond are as follows:
DISHONESTY
(A) Loss through any dishonest or fraudulent act of any of the Employees, committed anywhere and whether committed directly or by collusion with others, including loss of Property through any such act of any of the Employees.
The foregoing agreement is subject to the following conditions and limitations: Section 1. This bond does not cover:
(e)(1) Any loss resulting directly or indirectly from trading, including all transactions involving the purchase, sale or exchange of securities, with or without the knowledge of the Insured, in the name of the Insured or otherwise, whether or not represented by any indebtedness or balance shown to be due the Insured on any customer’s account, actual or fictitious, and notwithstanding any act or omission on the part of any Employee in connection with any account relating to such trading, indebtedness, or balance.
Unlike the majority, I do not believe that, at least in its application to the circumstances of this case, this provision is “subject to more than one reasonable construction.” Ante at 1162. Nor do I believe that this Court should strain to construe the provision against I.N.A.
The bond is clear. Losses resulting from dishonest or fraudulent acts of employees are covered unless they result “directly or indirectly from trading, including all transactions involving the purchase, sale or exchange of securities.” (emphasis added). The district court was no doubt correct in its determination that Hagopian’s actions were dishonest and that those actions occasioned the loss. It is equally obvious to me that the loss resulted “directly or indirectly” from “trading,” i. e., from a transaction “involving the purchase, sale or exchange of securities.”
Mr. George F. Hoffman, president of Index Fund, testified that Hagopian had arranged for Index Fund to acquire eight different securities, the aggregate “purchase price” or “cost” of which was over a million dollars. He also testified that the “sale and disposition” of those securities resulted in “aggregate proceeds” amounting to a little over $300,000. The loss, then, was over $700,000. On cross-examination, the following colloquy took place:
Q. And the loss is computed as total loss, the difference between the total price paid for the stock when you bought it and the total price that you got for the stock when you sold it, is that correct?
A. That’s correct.
In other words, the loss resulted from “trading” as that term is understood in an entirely ordinary sense — the buying and selling of securities. The fact that the “trading exclusion” is phrased in expansive terms serves only to strengthen my belief that the loss here resulted from precisely the type of activity that the parties intended and understood to be excluded. See Sutro Bros. & Co. v. Indemnity Insurance Co., 264 F.Supp. 273, 289 (S.D.N.Y.), aff’d, 386 F.2d 798, 802 (2d Cir. 1967).
The majority concludes that, “[wjhere, as here, the obligee is a regulated investment company, rather than a broker, fraudulent purchase of securities for the company by the covered employee at a manipulated price may well be considered outside the contemplated meaning of ‘trading.’ ” Ante at 1162. In the early stages of this litigation, however, the district court denied a *1165motion for summary judgment precisely because it believed that “there was a genuine issue as to the meaning of ‘trading’ in a brokers’ bond when issued to an investment company.” At trial, the issue was litigated, and I.N.A. introduced evidence to support the conclusion that in each situation the term “trading” should be given the interpretation offered in the bond itself — “transactions involving the purchase, sale or exchange of securities.” No evidence was introduced showing that the term should be interpreted one way for investment companies and another way for brokers. And neither evidence nor argument to that effect is offered here by the majority. In the absence of some persuasive reason to do otherwise, I would conclude that the term has the same meaning regardless of the identity of the plaintiff.
Second, I would not use the Investment Company Act as a device to “bail out” Index Fund from an apparent error in business judgment. Index Fund chose not to purchase a bond that would have covered its loss.1 The “trading exclusion” of the bond actually purchased by Index contains the proviso that trading losses involving forgery or alteration (Insuring Clause D) and trading losses involving securities forgery (Insuring Clause E) were covered by the bond even though they resulted from trading.2 The fact that Index Fund declined to purchase a bond that also covered trading losses resulting from employee dishonesty (Insuring Clause A) — no doubt because such a bond would cost substantially more than the bond it purchased — leads me to conclude that Index Fund rather than I.N.A. should absorb the loss resulting from Hagopian’s activity. Although the majority correctly states that the bond “must be read in conjunction with the statutory requirements pursuant to which it was issued” and that “[cjonsideration must be given to the language of the statute and the purpose for which the bond is given,” ante at 1162, I fear that today’s decision gives undue, in fact, controlling, weight to the statute in circumstances involving statutorily required bonds, even to the exclusion of the obvious intent and understanding of the parties to the contract. No court should go that far.
The district court found sufficient evidence to conclude that Index Fund intended to purchase a bond which would conform to § 17(g) of the Act, 15 U.S.C. § 80a-17(g), and the regulation promulgated thereunder, 17 C.F.R. § 270.17g-l. I have no quarrel with this determination. I note also that the Fifth Circuit has made the following suggestion:
As a general rule, the liability of a surety on a bond which is plain and unambiguous is governed, like any other contract, by the intention of the parties as expressed in the instrument. However, in determining the legal effect of a statutory bond such as is here before the Court, certain rules of construction are to be considered. A statutory bond will be reviewed in the light of the statute creating the duty to give security. It will be generally held that the provisions of the statute and regulations will be read into the bond. So also, if a statutory bond contains provisions which do not comply with the requirements of law, they may be eliminated as surplusage and denied legal effect.
*1166American Casualty Co. v. Irvin, 426 F.2d 647, 650 (5th Cir. 1970) (emphasis added; citations omitted). I doubt that the Fifth Circuit would go as far as today’s decision. Here, Index Fund simply failed to meet its obligation under the statute, apparently for purely economic reasons. To read the bond as the majority does is to ignore both the plain language of the bond and the significance of Index Fund’s decision to purchase this bond rather than another. Index Fund knew that it was engaged primarily in “trading,” and so did the agents who procured this bond on its behalf. The effect of today’s decision is to use the statute to give Index Fund precisely that form of additional coverage that it had previously declined to buy. I cannot believe that Congress intended the statute to produce such a result.
I would affirm the decision of the district court and hold Index Fund to its bargain.

. The “trading exclusion” in that bond would have read as follows:
Any loss resulting directly or indirectly from trading, including all transactions involving the purchase, sale or exchange of securities, with or without the knowledge of the Insured, in the name of the Insured or otherwise, whether or not represented by any indebtedness or balance shown to be due the Insured on any customer’s account, actual or fictitious, except when covered under Insuring Clause (A), (D) or (E).
(emphasis added).

. The proviso reads as follows:
If any instrument covered under Insuring Clause (D) or (E) is involved in any trading loss, then this subsection (e) shall not be construed as excluding liability under Insuring Clause (D) or (E) on account of such instrument for the amount recoverable thereunder, but in no event for an amount in excess of the amount applicable under this bond for the payment of such loss.