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June 17, 1971

Helen Jane AVERY, Plaintiff,

Gasch, District Judge.

The opinion of the court was delivered by: GASCH

GASCH, District Judge.

 This is an action for damages for alleged violation of the Securities and Exchange Act of 1934 and the Federal Reserve Board regulations, and rescission of the sale of stock and a return of money on deposit. This matter came on for consideration on the plaintiff's motion for summary judgment.

 On May 26, 1970, the defendant, acting as broker for the plaintiff, sold short for the plaintiff 500 shares of Teleprompter stock. At the time of the sale the plaintiff had $14,024.57 on deposit in her account with the defendant. The proceeds from the short sale were $22,999.23. The parties agree that a short sale is a margin transaction and as such subject to Section 7 of the Securities and Exchange Act of 1934, *fn1" and Regulation T of the Federal Reserve Board. *fn2" At the time of the sale the margin requirement of the Federal Reserve Board was 65 percent, which in this case amounted to $14,949.69 or $925.12 more than the plaintiff had in her account. Under the Regulation, the margin requirement must be met before the end of the fifth full trading day after the transaction. *fn3" Here, however, the margin requirements were not met within the requisite time. The defendant on June 8th or 9th liquidated the plaintiff's short position for a total price of $31,385.38 which resulted in a loss of $8,382.51 which was deducted from the plaintiff's account, reducing that account from $14,024.57 to $5,642.06.

 Plaintiff contends that the defendant violated the margin requirements of 15 U.S.C. § 78g and Regulation T; and the signature requirement of 15 U.S.C. § 78g implemented by 17 C.F.R. 240.17a-3, and therefore, pursuant to Section 29 *fn4" of the Securities and Exchange Act of 1934, as amended, 15 U.S.C. § 78cc(b), contends that the short sale should be declared null and void and rescinded.

 The defendant contends that there were no violations of the regulations at the time of the initial sale, and to the extent they may have later been violated, any violation was solely attributable to the plaintiff who refused to comply with the margin and signature requirements despite alleged repeated requests by the defendant. The defendant further contends, however, that if there were technical violations, they relate only to the 40 shares which needed to be liquidated to meet the margin requirements.

 The Court is disturbed by the entire transaction. It appears that a knowledgeable customer experienced in the requirements and functions of the Exchange authorized a short sale of a considerable quantity of stock by one of the world's largest stockbrokers and then later repudiated the sale when she saw it was going poorly. It seems that both the plaintiff and the defendant were aware that the margin requirements were not met within the requisite five days. The defendant alleges that the plaintiff promised to supply the money to meet the margin requirements and also to sign the signature card and that because of these representations the defendant did not meet the requirements by liquidating.

 An analysis of the background of the 1934 Act would be helpful. The Act was passed in reaction to the stock market "crash" of 1929, and in order to prevent a similar occurrence in the future. The primary concern of the Congress was to prevent excessive speculative credit transactions and with this objective in view provided for the margin requirements.

The main purpose of these margin provisions * * * is not to increase the safety of security loans for lenders. Banks and brokers normally require sufficient collateral to make themselves safe without the help of law. Nor is the main purpose even protection of the small speculator by making it impossible for him to spread himself too thinly -- although such a result may be achieved as a byproduct of the main purpose.
The main purpose is to give a government credit agency an effective method of reducing the aggregate amount of the nation's credit resources which can be directed by speculation in the stock market and out of other more desirable uses of commerce and industry -- to prevent a recurrence of the pre-crash situation where funds which would otherwise be available at normal interest rates for uses of local commerce, industry and agriculture were drained by far higher rates into security loans and the New York call market. *fn5"

 In addition, another less important purpose of the legislation was to protect the margin purchaser or innocent individual investor. *fn6"

 The recent cases have been uniform in recognizing civil liability for violation of the margin requirements of Regulation T. *fn7" These cases hold that the transaction is voidable at the option of the innocent party. *fn8" The defendant in opposing the present motion relies strongly upon a group of cases which allegedly stand for the proposition that the plaintiff's instigation or wilful participation in the violation would preclude her recovery by rescission. *fn9" Defendant contends that the plaintiff is not entitled to judgment if she were in pari delicto. The plaintiff seeks in her opposition to distinguish these cases contending that the Moscarelli case involved fraudulent conspiracy, not alleged or alluded to in the instant case; that the Aubin case involved a contested issue of fact, not here present; *fn10" and that the Serzysko case involved knowing deception, again, not alleged here. Plaintiff cites Serzysko as the authority for the proposition that mere participation in a violation of the Regulation without anything further does not bar the plaintiff from relief. *fn11"

 The logic behind the Moscarelli case and the others denying recovery is that "Congress did not intend to protect investors at all times and under all circumstances regardless of their conduct." *fn12" The protection of investors is only a secondary or ancillary purpose of the Act with the primary consideration being prevention of excessive speculation on credit. These decisions seem to say that "to permit a broker's customer, who conspires or aids and abets the broker in violation of the provisions of Section 7(c), to recover his losses from his broker, would defeat the very purpose of the section and the economic considerations which underlie its enactment." *fn13" This proposition is advanced by Judge Friendly, dissenting in the case of Pearlstein v. Scudder & German.

* * * I doubt whether permitting the customer to shift the risk of market decline to the broker is generally either necessary or desirable as a means of furthering the primary purpose of § 7(c). Occasional and isolated violations of Regulation T do not threaten to cause a significant alteration in the allocation of credit in the economy; only widespread or repeated violations would pose a danger. But it is in just such situations that we may confidently expect application of the administrative and criminal sanctions provided by the Act. The economic purpose behind § 7(c) thus causes the provision to differ ...

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