Appeal from the District Court of the United States for the Eastern District of Pennsylvania; Oliver B. Dickinson, Judge.
Before BUFFINGTON, WOOLLEY, and DAVIS, Circuit Judges.
These are appeals from judgments entered in favor of Gilbert C. Davis and Richard Hano et al. against the Continental Casualty Company on a bond on which it became surety to indemnify Richard Hano et al. against loss sustained:
"(a) Through any dishonest act of any of the employees, wherever committed, and whether committed directly or by collusion with others.
(b) Through any loss as a result of any loan made by the Insured or by any of the employees, whether authorized or unauthorized, if such loan was made with the intent on the part of such employees to defraud the Insured, (or, through)
(c) Any loss sustained through trades fraudulently conducted by an employee in the name of a genuine customer."
Richard Hano et al. were brokers, and had in their employ one Edward K. Garrett, Jr., who, as chief margin clerk, kept the records of all the margin accounts. It was his duty to call the attention of his employers to any account whose margin was below the required amount and to notify the customer to furnish more collateral.
Gilbert C. Davis was a customer of the plaintiffs. Garrett gave quotations to him on stock and took from him orders to buy and sell.In September, 1929, Davis placed with him an order for the purchase of the stock of Horn & Hardart Company, gave him a "tip" that the stock was going up, and told "him to get in on it if he wanted to make some money." Garrett told Davis that he did not have any money, and besides it was against the rules of the Stock Exchange and the brokerage firm by which he was employed to trade in his own name. Thereupon Davis said, "Buy 100 shares in my account and get out on Monday." This he did, and made a profit of $159.46. A check was drawn to the order of Davis by the brokerage firm, which, however, did not know what had taken place between Davis and Garrett. This was the first and only transaction put through the regular account of Davis with his knowledge and consent, but this started a train of consequences that resulted in the loss sought to be recovered in this litigation.
On September 18, 1929, Garrett purchased 100 shares of General Theatres in the name of Davis, but without his knowledge, and sold it an hour later the same day and made a profit of $223.50. However, after the stock had been bought and sold, but before the transaction was entered in the books, Garrett telephoned to Davis and asked permission to run the deal through his account. Davis complained that this would increase his income taxes. Garrett then suggested opening a No. 2 account through which to run the General Theatres account and agreed to pay the income tax on that account. Davis consented, and, when the check for the profit was given him, he indorsed it to Garrett.
The evidence does not indicate that Davis intended that other purchases and sales were to be put through account No. 2, but on the following day, without the knowledge of Davis, Garrett again bought 100 shares of General Theatres and sold it at a profit of $123.50. This transaction he put through account No. 2, but left the profit in the account. Subsequently Garrett bought 100 shares of Commonwealth & Southern. After the purchase, but before the record thereof had been entered in the ledger, he telephoned Davis, told him of the purchase, and asked permission to run it through the account. Davis consented, and told him to leave it in the account overnight. The market was down the following day, and the stock remained in the account until the end of the week, when Garrett sold the stock at the request of Davis at a profit of $40. This left a profit in the account of $163.50 at this time.
During the balance of September and the whole month of October, Garrett, without authority, consent, or knowledge of Davis, made many purchases and sales in the name of Davis, and ran them through account No. 2, and, as a result, the account, at the beginning of November, showed a net loss of $13,234.43.
Garrett directed the stenographer in the office of the plaintiffs to give him all the notices and confirmations belonging to Davis, and said that he would deliver them personally. He delivered thos relating to accounts Nos. 1 and 3, which Davis carried with the firm, but destroyed those relating to account No. 2, in order to conceal from Davis his unauthorized transactions. For the same purpose he took the margin cards of that account out of the regular rack provided for them and hid them in his desk.
Davis does not appear to have known of any of these transactions, except those of the General Theatres and the Commonwealth & Southern, until November 3, 1929, when an audit was made of the firm's books, and the auditors reported to Mr. Chandor, the manager, that they could not find the margin cards of the No. 2 account of Davis. Garrett denied that he had anything to do with that account. However, he ran away to New York, but returned in a day or two, and confessed that he had made these purchases ...