The opinion of the court was delivered by: SHAPIRO
Plaintiff, Insurance Company of North America, (INA), as assignee and subrogee of Cannon & Company, Inc. (CANNON), brings this action against the United States, Norman Carroll and William Carroll, Administrators of the Estate of Morris Carroll, deceased (CARROLL) and Pershing & Co., Inc. (PERSHING). Plaintiff sues the United States of America under the Tucker Act, 28 U.S.C. § 1346(a)(2) as a contract action and alternatively under the Federal Tort Claims Act, 28 U.S.C. @@ 1346(b), 2671, et seq. Claims against Carroll, from whom Cannon purchased the bonds, are based on s §§ 27 and 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. s §§ 78j(b) and Rule 10(b)(5) of the Securities and Exchange Commission thereunder; plaintiff has also brought pendent state claims of common law fraud and deceit, and further asks this court to issue a declaratory judgment of the rights of INA and Carroll in a proceeding pending in state court. Claims against Pershing are brought pursuant to this court's diversity jurisdiction based on wrongful transfer of the bonds under U.C.C. § 8-315
and the common law tort of conversion.
1. Plaintiff, INA is a corporation organized and existing under the laws of the Commonwealth of Pennsylvania, with its principal place of business at 1600 Arch Street, Philadelphia, Pennsylvania. Defendant Pershing is a corporation organized and existing under the laws of the State of Delaware, with its principal place of business at 120 Broadway, New York, New York. Pershing is engaged in the securities brokerage business and is a regular member organization of, and transacts business on and through, the Philadelphia-Baltimore-Washington Stock Exchange (PBW) in Philadelphia, Pennsylvania, as well as the New York, American and other stock exchanges.
2. At the time of the transactions in suit, Cannon, INA's insured, was a securities broker-dealer with offices in Flourtown, Pennsylvania. Cannon was a member of the PBW and of the National Association of Securities Dealers (NASD) but not of the New York or American Stock Exchanges.
3. Defendants Norman and William Carroll are administrators of the Estate of Morris Carroll, deceased. Between April and August 1971, Morris Carroll delivered to Cannon bonds with a face value of $172,000.00 for Cannon to sell on his behalf. All but $27,000.00 of those bonds had been stolen from Pershing.
4. On various dates between August 1971 and March 1972 Cannon delivered these bonds to the FBI for investigation of their theft. On November 8, 1974, the FBI delivered the bonds to Pershing rather than to Cannon.
5. INA was Cannon's insurer and reimbursed Cannon for its loss under the terms of its policy. At the time INA indemnified Cannon the latter assigned to INA all of its interest in the bonds and in receipts signed by the FBI when it took possession of the bonds. Cannon so advised the FBI.
6. INA, as the subrogee of Cannon, brought this suit against Pershing to recover the value of the bonds and against the personal representatives of Morris Carroll to recover the $91,610.33 paid to Carroll in connection with the sale of some of the bonds and against the United States for breach of contract as bailee of the bonds, for negligence and conversion of the bonds. INA claims interest and costs of suit in damages.
7. Dominick Paciolla was a Cannon account executive; he had been in the securities business since 1968 and employed by Cannon since 1970.
8. Paciolla met Samuel Cartier (CARTIER) in early 1971. Cartier held himself out as a financial consultant who specialized in corporate financing, mergers, and acquisitions. Cartier gave Paciolla his business card stating an address of his financial consulting office in the Land Title Building, Broad and Chestnut Streets, Philadelphia, Pennsylvania, and a business telephone number.
9. Paciolla had several conversations with Cartier during the two or three months preceding April 1971.
10. Paciolla asked Cartier to use his services as a securities salesman.
11. Cartier inquired if Paciolla would handle sales for an individual for whom he was the financial consultant and who owned bearer bonds he desired to sell. This individual was Morris Carroll.
12. Cartier delivered $44,000.00 of Gulf & Western bearer bonds to Paciolla on April 19, 1971 at a prearranged meeting place on a street corner in Philadelphia.
14. John C. Williams, President of Cannon, a 25-year veteran of the securities industry, reviewed the form, satisfied himself that all information required was present, and countersigned the card on April 21, 1971. In the course of his normal duties, Williams reviewed all daily trades and all customer monthly statements including the Carroll trades and statements and found nothing suspicious about the Morris Carroll account.
15. It was normal Cannon practice for Mr. Williams' secretary to telephone bank references given by a customer to see if the bank would confirm the account and to check the address provided. However, in 1971 it was the practice of First Pennsylvania not to reveal such information. The secretary would report only contradictory information to Williams. She would not report a refusal to give information on an account and did not make any report on the Carroll account. She did not report any problem with the address, although it was later found to be incorrect. Williams had no recollection whether Cannon ran a credit check on Carroll, as was the periodic practice with regard to every fifth or sixth account of "size".
16. On April 20, 1971, Paciolla presented the first group of Gulf & Western bonds for sale. Each of the bonds received was payable to order of bearer, was complete and regular on its face and contained no overdue interest coupons. None of the bonds was indorsed "for collection", "for surrender", or any other purpose not involving transfer. Nor did any of the bonds contain any statement or legend reflecting that they were the property of anyone other than Carroll.
17. Prior to executing the sale, Paciolla, together with Harry Byerly, Vice-President and Cashier at Cannon, examined accumulated lists of lost/stolen securities which Cannon had. Byerly and Paciolla compared serial numbers of the bonds presented for sale against serial numbers designated on the lists of lost and stolen securities. None of the bond serial numbers were listed on any of the lost security flyers in Cannon's possession on April 20, 1971.
18. Cannon sold the bonds for Carroll's account at the market price on April 20, 1971. On the following day, Cartier requested payment of the proceeds to Carroll (a "prepayment"). Settlement is ordinarily in five business days. Prepayments were requested by Cannon customers only three or four times per month although there were 7,000 to 8,000 trades per year. So long as an appropriate reason for a request was made and the bonds had been delivered, cash settlement was permitted after deduction of an appropriate interest charge. No one could recall the reason given for this request.
19. Approximately three weeks later, Cartier called Paciolla and advised that Carroll desired to sell more of the same Gulf & Western bond issue.
20. On May 12, 1971 Paciolla again met Cartier outside the office and received $25,000.00 of Gulf & Western bonds, for which he wrote "Received 25 Gulf & Western 5 1/4 1987" on the back of his business card which he gave to Cartier. Each of these bonds was also complete and regular on its face, payable to the order of the bearer, with no overdue interest coupons. None of the bonds was indorsed "for collection", "for surrender" or for any other purpose not involving transfer. Nor did any bond contain any statement or legend reflecting that it was the property of anyone other than Carroll. These bonds were sold on May 13, 1971, after Harry Byerly, Operations Manager at Cannon, checked them against the lost/stolen lists maintained by Cannon.
22. The net proceeds of sale were paid to Carroll for the second, third, and fourth trades.
23. The Gulf & Western bonds sold in these trades were delivered after the trade date but before the settlement date.
24. The Gulf & Western bonds delivered to Paciolla on April 19 were in Cannon's office on April 20, 1971, at the time of the initial trade.
25. On May 27, 1971, Cannon sold $20,000.00 of Yonkers Electric Power & Light bonds on behalf of the Carroll account and remitted the proceeds to Carroll. No one at Cannon checked the lost/stolen lists prior to this sale.
26. Pershing & Company maintained an inventory of both street name and bearer investment securities. Pershing audited its inventory of these securities quarter-annually and performed an audit in January 1971.
27. On or about April 16, 1971, Pershing began to notice irregularities with respect to its inventory of securities and began its quarterly annual audit. Pershing first compared the securities physically present in Pershing's vault with the amount of securities on its books. This revealed the amount of missing securities of each issue but not the specific serial numbers of the missing securities.
28. Beginning on April 20, 1971, Pershing tried to ascertain the serial numbers of the securities lost or stolen. As the serial numbers of the securities were obtained, Pershing alerted the New York Stock Exchange by lost security flyers which the Exchange circulated to its members.
29. Cannon was not a member of the New York Stock Exchange and did not receive copies of the Pershing flyers.
30. Pershing relied on its advice to the New York Stock Exchange with respect to the securities and did not purchase the services of a firm to send notices of these security serial numbers ...