The opinion of the court was delivered by: BRODERICK
BRODERICK, District Judge.
On March 1, 1972, this "Pearlstein" doctrine case was brought by the plaintiff under the theory that the defendant brokerage house should have liquidated certain unsettled bond transactions as required by the Federal Reserve Board's Regulation "T"
and that the failure of the brokerage house to so liquidate resulted in losses being suffered by the plaintiff. Plaintiff now seeks to recover these losses.
The losses complained of in this lawsuit are the culmination of approximately seven months of extremely active bond trading in the plaintiff, Helen Jennings', account with the defendant brokerage firm, Boenning and Company (Boenning). In August of 1965, the plaintiff's husband, John Jennings, was employed by Boenning as one of the firm's registered representatives. John Jennings immediately opened a "cash account" in his wife's name and began trading in the bond market. To accomplish the trading which John Jennings anticipated, he made arrangements for a clearance procedure with the American Trust Company, a bank in New York.
The following procedure would be pursued in purchasing the bonds. John Jennings, acting as the representative in charge of Helen Jennings' account, would place a purchase order with Boenning which would direct that the bonds were to be delivered to American Trust Company with the understanding that Boenning was to be paid immediately upon delivery of the bonds.
American Trust Company did not agree to loan any money to Helen Jennings or to take any risk of loss on the transaction, nor did the bank have on deposit substantial uncommitted funds belonging to the plaintiff. The American Trust Company would therefore accept the bonds from Boenning only if there were sufficient funds on hand to pay for the delivered securities. Helen Jennings would have sufficient funds on deposit with the bank only if John Jennings had sold the bonds prior to their delivery to American Trust Company and had deposited funds sufficient to cover the purchase price of the bonds. In other words, John Jennings would purchase bonds with the understanding that he would pay for them upon their delivery to the American Trust Company and he would then have to sell the bonds in the period it took Boenning to acquire physical possession of the bonds and deliver them to the American Trust Company so that he would have enough funds on deposit with the bank to cover the purchase price. If the sale price exceeded the purchase price, Helen Jennings would receive the difference as profit.
During the seven month period from August, 1965 to March, 1966, John Jennings, trading in the cash account of Helen Jennings, purchased and sold approximately seven million dollars worth of securities following generally the foregoing described procedure. The senior partner of Boenning, Harold Scattergood, made himself familiar with the trading in the Helen Jennings' account through daily reviews of the blotter and sales book.
For most of the time John Jennings was trading in the account of Helen Jennings, he was successful. However, on February 18, 1966, the American Trust Company, having insufficient funds to cover the purchase price of certain Eastern Airline and Rohr bonds because the bonds had not been sold, refused to accept delivery of the bonds by Boenning for the purchase price. John Jennings had not sold the bonds because their market value had decreased from the date of the purchase order until their delivery for payment. Immediately upon learning of American Trust Company's refusal to accept delivery and pay for the bonds, Harold Scattergood contacted the plaintiff, Helen Jennings, in an effort to speak with John Jennings. He finally spoke to Mr. Jennings on February 23, 1966 and was assured that arrangements would be made for either the acceptance of the bonds by the American Trust Company in New York or the payment of the loss in the account. However, neither Mr. Jennings nor the plaintiff, Helen Jennings, fulfilled these assurances and the bonds continued to decline in value. On March 1, 2 and 3, no action having been taken with respect to the bonds, Boenning sold the Eastern and Rohr bonds at a loss of over $32,000. This loss was debited to the plaintiff, Helen Jennings, account, leaving it with a negative balance.
It was plaintiff's theory at trial that the delay in selling the Eastern and Rohr bonds after the refusal of the American Trust Company to accept them for payment was a violation of the Federal Reserve Board's Regulation T and that the defendant's violation gave rise to a civil action for damages for the losses suffered between the time defendant should have sold the bonds and their actual sale. Regulation T provides in pertinent part:
(c) Special cash account -- (1) In a special cash account, a creditor may effect for or with any customer bona fide cash transactions in securities in which the creditor may:
(i) Purchase any security for, or sell any security to, any customer, Provided, Funds sufficient for the purpose are already held in the account or the purchase or sale is in reliance upon an agreement accepted by the creditor in good faith that the customer will promptly make full cash payment for the security and that the customer does not contemplate selling the security prior to making such payment.
(2) In a customer purchases a security (other than an exempted security) in the special cash account and does not make full cash payment for the security within 7 days after the date on which the security is so purchased, the creditor shall, except as provided in subparagraphs (3) - (7) of this paragraph, promptly cancel or otherwise liquidate the transaction or the unsettled portion thereof.
(5) If the creditor, acting in good faith in accordance with subparagraph (1) of this paragraph, purchases a security for a customer, or sells a security to a customer, with the understanding that he is to deliver the security promptly to the customer, and the full cash payment to be made promptly by the customer is to be made against such delivery, the creditor may at his option treat the transaction as one to which the period applicable under ...