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ROTH v. MARYLAND CAS. CO.

July 13, 1953

ROTH
v.
MARYLAND CAS. CO.



The opinion of the court was delivered by: GRIM

This is an action by a securities broker upon two successive and substantially identical bonds of indemnity (hereinafter referred to as 'the bond'), to recover losses sustained by him as a result of certain dishonest and unauthorized acts of one of his employees.

The losses were incurred while plaintiff, Sydney Roth, was engaged in business in Allentown, Pennsylvania, as a licensed dealer in securities trading under the name of 'Roth & Company'. At all pertinent times plaintiff was covered by the bond, known as a 'broker's blanket bond', issued to him by defendant, and the coverage exceeded the total amount of losses here claimed.

 In 1946 and 1947, Harry L. Fletcher, while employed as plaintiff's office manager, in connection with his employment committed a number of wrongful and unauthorized acts resulting in losses, which were first discovered by Roth on November 10, 1947. Defendant, Maryland Casualty Company, has admitted its liability as to several of the claimed losses and has paid them, but has denied liability as to the bulk of plaintiff's claims, which are based on a series of losses incurred as a result of Fletcher's manipulation of a certain account described below. Whether the bond covers this group of losses is the principal question in the case.

 The losses in question arose under the following circumstances. On a number of occasions in 1946 and 1947, Fletcher, without authority and without the knowledge of plaintiff, bought and sold in plaintiff's trade name, Roth & Company, various stocks and bonds through a certain account which, at the trial, was referred to as the 'mark-up account' by Fletcher. What it is called is immaterial, for there is no dispute as to what Fletcher was authorized to do and what he actually did do through the account.

 Fletcher's only authority in connection with the account was to buy and sell securities for customers on written orders from the customers themselves or from Roth or his salesmen on behalf of customers. For the sole purpose of filling customers' orders Fletcher was authorized to buy and sell securities in this account in the name of Roth & Company itself as principal. These securities were to be bought from or sold to the ordering customer at a discount or mark-up of an eight or a quarter of a point, which represented plaintiff's only profit on the transaction. Under his employment contract with plaintiff, Fletcher was to receive 20% and plaintiff was to receive 80% of the net profits realized from this 'mark-up account' or 'trading account' at the end of each year.

 Although Roth had not authorized Fletcher to use this account as a trading account (that is, an account for the buying and selling of securities for the purpose of realizing gains from fluctuations in the securities markets), Fletcher without plaintiff's knowledge had in fact traded by using the account from the time it was set up in 1942 until the time the losses now in question were discovered in 1947. Fletcher's scheme was to reap 20% of the account's annual capital gains profits in addition to the legitimate mark-up profits. Until 1946 his scheme had worked successfully, with the account each year showing a profit of which Fletcher pocketed 20%. But in 1946 and 1947 Fletcher's unauthorized trading (perhaps 'speculation' is a more accurate word) went awry, most of the securities he purchased dropped in value, and the account sustained losses disclosed for the first time by an audit in November of 1947.

 The securities traded in the account cleared through and were kept in the possession of the Trust Company of North America, which was plaintiff's correspondent bank in New York City. When Roth learned of the dishonest scheme on November 10, 1947, many of the wrongfully purchased securities were still in the possession of the Trust Company of North America. They were disposed of the following week at a loss of $ 8,588.86, which constitutes the bulk of the losses, totalling $ 11,918.13, claimed on the bond.

 The insuring clause of the bond provides as follows:

 'Section 1.- The Maryland Casualty Company * * * agrees to indemnify Sydney Roth * * * T/A Roth & Company, Allentown, Pa. * * * against the direct loss of any Property * * * sustained * * * as follows:

 '(A)- Through any dishonest act hereafter committed, of any of the Employees, as defined in Section 6 hereof, whether acting alone or in conclusion with others.'

 The excluding clause of the bond on which the defendant relies in disclaiming liability provides as follows:

 'Section 7.- This bond does not cover:

 '(f)- Any loss resulting directly or indirectly from trading 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.'

 There is no doubt that Fletcher's unauthorized transactions were 'dishonest acts' within the scope of Section 1(A) of the bond. It is equally clear that these dishonest acts constituted 'trading' and that the losses resulting therefrom are explicitly ...


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