Voisin, Cannon, Inc., 325 F. Supp. 50 (S.D.N.Y.1971).
In order for the defense to be applicable in a securities fraud action, two conditions must be satisfied. There must be substantially equal fault between the parties, in this instance the broker-tipper and the customer-tippee. In addition, it must be determined that the regulatory purpose of the securities laws, protection of the investing public, is best served by allowing rather than disallowing the defense. See Nathanson v. Weis, Voisin, Cannon, Inc., supra, 325 F. Supp. at 52-58; Tarasi v. Pittsburgh Nat'l Bank, supra, 555 F.2d at 1161-64.
Neither condition is satisfied here. On the facts presented, defendants' customer's man purported to be furnishing inside tips to these plaintiffs, he made clear that what he was offering was non-public information and he shared the information as part of a series of transactions involving these two stocks, while embellishing his communications with an aura of secrecy. Such conduct is prohibited. It is not suggested in plaintiffs' depositions that the broker was coerced or pressured by his customers into purporting to provide inside information in this instance; indeed plaintiffs indicate that he voluntarily and regularly supplied such non-public information on numerous other stocks over a period of years.
Brokers such as defendants are in the position of quasi-fiduciaries; they are held to a high degree of trustworthiness and fair dealing. In the complex, highly regulated securities field, primary responsibility must rest on licensed brokers and their employees in order to achieve maximum conformance with federal statutes and implementing regulations. See Nathanson v. Weis, Voisin, Cannon, Inc., supra; Rolf v. Blyth Eastman Dillon & Co., 424 F. Supp. 1021, 1036 (S.D.N.Y.1977), Aff'd in part, 570 F.2d 38 (2d Cir.); Cert. denied, 439 U.S. 1039, 99 S. Ct. 642, 58 L. Ed. 2d 698 (1978). See also Hanly v. SEC, 415 F.2d 589 (2d Cir. 1969); Avery v. Merrill Lynch, Pierce, Fenner & Smith, 328 F. Supp. 677 (D.D.C.1971). A licensed broker engaging in conduct such as reflected by this record cannot be said to be equally at fault with his receptive but duped investors, no matter how experienced those investors may be.
The broker-dealer as tipper presents a greater threat than the customer-tippee to the integrity of the regulatory framework that prohibits trading on material inside information. Brokers, far more than customers, have access to sources of inside information. Preventing confidential dissemination of such information is most effectively achieved by discouraging the initial illicit disclosure. See Nathanson v. Weis, Voisin, Cannon, Inc., supra, 325 F. Supp. at 56-58. Further, the Court takes judicial notice of a tendency on the part of brokers to suggest or intimate that they are in possession of information not generally available. By insisting that brokers who tip must be held to act at their peril, courts discourage such a deceptive course of dealing, and at the same time avoid encouraging a conspiracy of silence between tippers and tippees. Only through private enforcement actions can the rules requiring disclosure or abstention become the controlling standard of the securities market place.
It is argued that the customer-investor is given an undue advantage since of course he will pocket gains and only sue when he loses. Not only is the law developing to force his disgorgement of profit under certain circumstances, but given the heavier responsibility placed on the broker it would defeat public policy to exonerate him in cases where his customer is a knowing recipient of his improper sales tips.
Defendants' motion for summary judgment is denied.
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