Opinion
Decided January 9, 1933.
Criminal law — Protection of public from financial loss and regulating businesses — Constitutional law — Regulation of sale or disposition of customer's securities in broker's possession — Section 13108-2, General Code — Printed notation, on purchase confirmation slip, not consent to repledge securities — Demand and tender by customer not prerequisite to broker's prosecution — Rehypothecation in broker's general loans prohibited — Broker cannot rehypothecate.
1. Laws may be enacted under police power to protect public from financial loss and to regulate certain businesses so as to prevent fraud upon depositing and investing public.
2. Statute regulating sale or disposition of stock or bonds of customers in possession of broker, and providing penalty for violation thereof, held not invalid as being unreasonable, oppressive, confiscatory, and in contravention of broker's constitutional rights (Section 13108-2, General Code).
3. Statute defining criminal offense is not objectionable as being vague, indefinite, and uncertain, if understandable to person of ordinary intelligence who is subject to its penalties.
4. Notation in fine print on slip confirming purchase of securities, relating to repledge of securities carried in customer's marginal account, held not consent to broker's repledge of customer's purchased and pledged securities for greater amount than customer owed broker (Section 13108-2, General Code).
5. Customer's demand for return of securities pledged with broker, and tender of amount due on marginal account, held not condition precedent to criminal liability of broker for repledge, without customer's consent, of securities for amount greater than customer's indebtedness to broker (Section 13108-2, General Code).
6. Statutory provision prohibiting rehypothecation by broker of customer's securities for excessive amount held broad enough in scope to prohibit rehypothecation in broker's general loans (Section 13108-2, General Code).
7. A broker may not rehypothecate his customer's securities pledged to secure his marginal account for any sum in excess of his customer's debt without the customer's consent, or unless the broker has in possession or control securities of like kind and amount to satisfy his customer upon payment of the balance due on his account.
8. If customer delivered bonds to broker as additional security for marginal account with understanding that broker was to return described stock previously pledged, broker, upon failure to return stock, would be without right to retain bonds as security and repledge such bonds without consent of customer (Section 13108-2, General Code).
9. In prosecution against stockbrokers based on repledge of customer's securities for excessive amount, testimony showing brokers' knowledge of insolvency, similar transactions, and other independent acts criminal in character, held admissible to establish intent of brokers (Sections 13108-2 and 13444-19, General Code).
ERROR: Court of Appeals for Hamilton county.
Mr. Sanford Headley and Mr. Walter K. Sibbald, for plaintiffs in error.
Mr. Robert N. Gorman, prosecuting attorney, Mr. R.T. Dickerson and Mr. Vern H. Wilson, for defendant in error.
Jesse N. Roberts and Walker P. Hall stand convicted on two counts of violating the provisions of the Tallentire Brokerage Act (General Code, Section 13108-2). They urge on these counts that they were wrongly adjudged to be guilty, and advance many reasons why the judgment entered should be reversed.
The indictment contained four counts. An instructed verdict in the defendants' favor removed counts 1 and 4 from the jury's consideration. The substance of the charges embodied in counts 2 and 3 is as follows:
The second count charges that on November 8, 1929, the defendants, as partners, did fraudulently and unlawfully dispose of, for their own benefit, certain pledged stock, then in their possession, to wit, 25 shares of the Fifth Third Union Trust Company stock of the value of $8,250, the property of one Lucy Passmore, a customer, by depositing the same as security for a note made by the partners to one Mary Anderson in the sum of $43,000.
The third count charges that on the 27th day of December, 1929, the partners fraudulently and unlawfully repledged, for their own benefit, certain bonds, of the par value of $16,000, belonging to the same customer, and without her consent; the same being rehypothecated to one Goodman to secure a note held by him against them in a sum in excess of the sum then due from the customer to the brokers.
On September 26, 1929, Lucy Passmore opened an account with the defendant brokers with a deposit of 100 shares of General Motors stock as collateral for a marginal purchase of 100 shares of Amrad Corporation and 100 shares of Crosley Radio stock. These shares were purchased by the brokers at a cost to the customer of $19,545, through their New York correspondents, and were by the defendants rehypothecated to secure their brokerage account with the New York correspondents. On October 8th, an additional 100 shares of Crosley stock were ordered and purchased at a cost of $9,295; and on October 16th, another 100 shares of Amrad were acquired at a cost of $10,625. This second 200 share purchase was made, financed, and held in this same fashion. The total purchase obligation of the customer, therefore, was $39,465.
During the month of October, the purchaser, in response to marginal calls, paid to her brokers on her purchase indebtedness the sum of $4,000 in cash, and thereby reduced the same, using the defendant's figures, to $35,671.72. Within this period the customer further intrusted her brokers in pledge with an additional 530 shares of General Motors Company stock, which the defendants promptly repledged to secure their brokerage account with their New York correspondents. And being further called upon in the month of November, the purchaser further pledged 25 shares of the Fifth Third Union Trust Company stock, to secure her debt. These shares appeared in the name of Lyda Corcoran, a sister. At the time of the pledge of these 25 shares, the customer signed and delivered to the defendants the following instrument:
"Cincinnati, Ohio, Nov. 7, 1929.
"_____ hereby authorizes Roberts Hall to use as collateral the following securities: 25 Fifth Third Union Trust Company, #2115.
"[Signed] Mrs. Lyda Corcoran.
"Witness: Charles H. Steffan, Jr."
On the next day these 25 shares were negotiated by the brokers to secure their Anderson note.
On December 26, 1929, the customer, in response to a call of December 19th for further marginal security, pledged to the defendant brokers $16,000 of Lucas and Montgomery county bonds. And on the next day these bonds were repledged by them to one Timothy S. Goodman, to secure their note of $43,000, which he then held. On this date the customer's debt, due the defendant brokers, was $35,613.95.
It is further in evidence that at the time of each purchase the customer immediately thereafter received from the brokers what is denominated a confirmation of purchase. On this confirmation, in very fine print, appears the following clause, along with others: "That all securities from time to time carried in the customer's marginal account, or deposited to protect the same, may be loaned by the broker, or may be pledged by him either separately or together with other securities, either for the sum due thereon or for a greater sum, all without further notice to the customer."
It nowhere appears in this record that the brokers, at the time of purchase, required of the purchaser the signing of any card or memorandum, containing any such consent or agreement. The defendants say they believe that such a card was signed. Any such card was not produced at the trial. The customer says none was signed by her. She further testifies that she never read the finely printed matter at the bottom of the confirmation purchase slips or consented to the terms thereof.
Other developed facts are pertinent to a consideration of the particular counts in the indictment. Such will be referred to in our consideration thereof.
It is the first claim of the accused that Section 13108-2, General Code, is unconstitutional: First, in that it is unreasonable, oppressive, confiscatory, and in contravention of their rights; second, that being a law of a general nature it has not uniform operation; third, that it is so vague, indefinite, and uncertain that it is not understandable; and, fourth, that by reason of its uncertainty it violates the constitutional provisions of due process of law. The section reads: "Any broker in stocks or bonds who (a) having in his possession for safe keeping or otherwise stocks, bonds or other securities belonging to a customer, without having any lien thereon or any special property therein, pledges, sells or disposes thereof without such customer's consent, or (b) having in his possession stocks, bonds or other securities on which he has a lien for indebtedness, pledges the same for more than the amount due to him thereon, or otherwise disposes thereof for his own benefit without the consent of the customer, and without having in his possession or subject to his control stocks, bonds or other evidences of debt of the same kind and amount available for free delivery and sufficient to satisfy all customers entitled thereto upon demand therefor and tender of the amount due thereon and thereby causes the customer to lose in whole or in part such stocks, bonds or other securities of the value of proceeds thereof, shall be imprisoned in the penitentiary not more than ten years, or shall be fined not more than $10,000, or both."
It may first be remarked that this section has never been considered in any reported Ohio case. The section was taken from the penal section 956 of the laws of New York (Consol. Laws N Y c. 40), with some modifications. The courts of that state, in so far as we are able to learn, have in but a few instances had occasion in criminal cases to consider that state's act. Its constitutionality has never been questioned.
In Holsman v. Thomas, City Clerk, 112 Ohio St. 397, 147 N.E. 750, 39 A.L.R., 760, it is held that, within the police powers, laws may be enacted to protect the public from financial loss, and that certain businesses and occupations may be so regulated as to prevent frauds upon the depositing and investing public. Ohio in numerous instances has recognized the necessity of such protection of the public's goods and moneys placed in the possession of those engaged in certain businesses, examples of which are found in Section 710-172, General Code, defining embezzlement of bank funds and deposits by a bank's officers. Section 12472, General Code, is a like section referring to building and loan associations. Section 12469, General Code, refers to innkeepers and carriers. Section 12470, General Code, has reference to warehousemen and consignors. Such statutes have universally been upheld, for they are general in their nature and have a uniform operation throughout the state on all persons engaged in the particular class of business specified. The section in question here has the intent and purpose of protecting the public in its investments. It is a valid enactment in the accomplishment of that purpose and is not unconstitutional in the respect claimed. Nor is it oppressive and confiscatory. All criminal enactments are oppressive to those whose criminal activities are curtailed thereby. But it must be remembered that the people have some rights, one of which is that an investment broker may not, without the consent of the customer, appropriate his property to his own use in any manner he chooses. If he chooses to engage in such financial enterprise, he must comply with the restrictions imposed thereon; and a statute which assures an investor that he may get back his securities, or their equal in kind, on payment of his indebtedness to his broker, is but fair and just. It would indeed be confiscatory and oppressive to an investor if such were not true. The statute but makes a crime that which was theretofore recognized as a civil wrong.
Is the statute vague, indefinite, and uncertain to the extent that it should be held unconstitutional? Our answer is that it is not. The purpose and intent of the act is clear as previously indicated. Its provisions are not in conflict. Neither is it incomplete, nor is it necessary for this court to supply any deficiency therein, as far as the facts in the case are concerned. The defendants have been engaged in the brokerage business for many years. They should have been conversant with the rules of the game in which they engaged. The law is that criminal statutes which create and provide for the punishment of criminal offenses must be so clear and explicit that all persons of ordinary intelligence who are subject to their penalties will understand their provisions. This statute was of such a character. We must conclude that the defendants knew the statute's purpose and intent, and what a broker was not permitted to do, and knew what he must do and perform to free himself of the burden if he did rehypothecate his customer's pledges for a greater amount than the customer's debt, or otherwise disposed of such for his own benefit, without the consent of the customer.
Perhaps, without explanation, the statute is not understandable to the ordinary layman; or to an attorney, or a court, for that matter. That should not make the statute unconstitutional for vagueness or uncertainty. The true test is: Is it understandable to a person of ordinary intelligence who is subject to its penalties? It applies to a stockbroker, and if it is understandable to a stockbroker it is not vague and uncertain.
We would next consider the defense made that the brokers had the full consent of their customer to rehypothecate the purchased and pledged securities of the customer for a greater amount than she owed the brokers. Reverting to the finely printed notation appearing on the confirmation purchase slip, we hold this not to be a consent for so doing. We adopt the reasons stated in Heaphy v. Kerr, 190 App. Div. 810, 180 N.Y.S., 542, affirmed in 232 N.Y., 527, 134 N.E. 557: "Here he was merely receiving notices of purchases by the brokers. He was making no contract and signed nothing. No one has reason to expect that in the mere notice of the purchase of stock the broker is inveigling him into some further contract as to rights in collateral which he would not otherwise possess. * * * With proof positive that he did not read them, and with no legal obligation to read them, there can be no implied consent to the making of a new contract by reason of his failure to express dissent therefrom. * * * if an implied consent may be deemed sufficient, that implied consent must be upon facts that leave no mistake that the party against whom the consent is implied intended to give it."
Meyer, in his work, "The Law of Stock Brokers and Stock Exchanges," page 685, remarks what a broker should do, and what is generally done by a broker in accepting his customer's order, which things the defendants did not do in this instance or require of many of their customers. "In practice a broker cannot conduct business without repledging the securities of his marginal customers in his general loans. As these loans are virtually always for amounts in excess of the indebtedness of any particular customer, brokers find it necessary, in order to escape criminal responsibility under this section, [Penal Section 956 of the laws of New York] to obtain the written consent of marginal customers to rehypothecate the customers' securities in their general loans."
And now considering the instrument executed by the customer at the time of the pledge of the 25 shares of bank stock, we entertain the view that this was not a consent to an unauthorized pledge, as contemplated by our act, nor authority to the brokers to otherwise dispose of this stock for the broker's benefit. By its very terms, it does not so import. It goes no further than grant the brokers a right which they already lawfully possessed. It was no doubt taken because of the fact that the certificate was issued in the name of the customer's sister, and was the broker's protection for its future lawful repledge.
The record discloses in reference to the second count that the Anderson note, held by the accused in their lock box in bank, solely for safe-keeping, was not amply secured. And learning that the owner desired to recheck its securities, the brokers attached the bank stock to the note as collateral. This act on its face looks like a pledge thereof. However, it appears from the record that Roberts, on February 19, 1930, had testified in a civil proceeding then considering this note and bank stock that his firm had no interest therein. Taking this as true, the act could not have been a pledge thereof to Anderson, for as pledger his firm would have had an interest therein; that is, its right to redeem. But if it had no interest therein by way of pledge, then the broker must have otherwise disposed thereof for his or some one else's benefit without the consent of the customer. Now this was in contravention of the terms of the statute, unless the brokers had in their possession or subject to their control similar and sufficient bank stock. The record shows that they did not have such in their possession, and, further, that other nonconsenting customers' stock of like kind had been repledged or otherwise so disposed of by the brokers.
It is shown by the record that upon order of court, in the civil proceeding noted, this bank stock was turned over to Mrs. Anderson and sold; and that Mrs. Passmore did not, and could not, get her stock back; neither did she or could she have gotten sufficient stock of like kind in its stead, for two reasons, the brokers had no stock of like kind, and the brokers being hopelessly insolvent she could only have received in part the value thereof.
Now it remains to be considered if the words of the statute, "upon demand therefor and tender of the amount due thereon," have any special significance in the nature of a condition precedent with respect to fixing criminal responsibility upon the defendants.
Is it the purpose and intent of the statute in this provision to make it incumbent upon the state to prove demand and tender as a part of its case? If this is so, then this judgment must be reversed. Or was it the legislative purpose to advise a broker that he should at all times so keep his house in order that upon a customer's demand and tender he could escape criminal responsibility by having in his possession, or under his control, stock of like kind, or in lieu thereof could make the customer whole by avoiding a loss to him?
We are of opinion that the latter is the correct understanding and interpretation of the section under consideration.
Our Supreme Court, in an embezzlement case, State v. Bailey, 50 Ohio St. 636, 36 N.E. 233, reasons that a demand and failure to account are but evidence of the crime, and that the crime was committed when the moneys were wrongfully converted, and that "if a demand was necessary to complete the offense of embezzlement, the offender could always prevent its completion by a timely flight." Now reason prompts the invocation of like logic in interpreting the statute before this court. The gravamen of the act lies in (a) pledging stock upon which the broker has no lien, and (b) in repledging stock for a greater amount than the customer's debt, or in otherwise disposing of pledged stock for his own benefit, without the customer's consent, when the broker has no stock of like kind and amount available in his possession or under his control to satisfy all his customers who have pledged like stock — and to save them from loss in whole or in part — and does not lie in a requirement that the customer shall first make demand and tender of the amount of his debt. The brokers might be insolvent, as they were in this instance, and the doing of these acts would have been a vain requirement. A customer might have pledged his all, and this all may have many times exceeded his debt. Can it be that a customer's demand and tender is a prerequisite to fixing criminal responsibility upon his broker for his wrongful act already done? If so, the statute is farcical and a shield for the wrongdoer.
The Second Circuit Court of Appeals, considering the New York act, in the case of In re Salmon Weed Co., Inc., and Scheuer v. Salmon Weed Co., Inc., 53 F.2d 335, 79 A.L.R., 379, held: "Stockbrokers' unauthorized repledge of customer's stock for greater amount than original loan, especially where state statute declared such act felony if customer suffered loss, held conversion ipso facto, without customer's tender or demand (Penal Law N.Y. § 956)." Paragraph 6, syllabus.
The court makes the further observations in the opinion in the Salmon Weed Co. case:
"Certainly the legislative policy as to rehypothecation by a broker of a customer's stock to secure amounts in excess of his own advances is very clear. Unless consent of the customer is obtained, the transaction is undoubtedly illegal, and if loss ensues it is a felony. * * *
"There is another reason for holding that a repledge for an amount in excess of the original loan is a conversion. If such a repledge is only a conversion where there is a financial inability to make a tender, a wrongful repledge will rarely affect a solvent broker. He can go merrily on in fair weather using his customers' stocks as capital in his business, whereas when storms arise such unlawful repledges are certain to cause losses to creditors who have given no authority to repledge their stocks beyond the amounts of their own indebtedness. In other words, to impose no liability upon a broker for such unauthorized acts tempts him to risk his customers' property in good times for his own advantage and to make his customers bear his business losses if he becomes insolvent. The most practical way to check such wrongs is by treating brokers who have used their customers' securities without the latter's consent as converters. This on principle they certainly are."
Quoting further from the opinion: "Whether a demand and tender are necessary before an excessive repledge can be regarded as a conversion has not been decided by the New York Court of Appeals. * * * While the Appellate Divisions have uttered discordant notes and the Court of Appeals has not yet spoken on this precise question, American courts in general, and the New York courts in particular, have been almost unanimous in holding that a sale by a pledgee contrary to the terms of the agreement is a conversion and that trover will lie without a tender or demand. In reason the same rule should apply to a repledge for an excessive amount."
We see no reason why the same rule should not apply with equal force in a criminal action for an unlawful disposal of stock for the benefit of a broker, without the consent of the customer.
And now, examining the matters pertaining to the third count, we learn from the record that within four days from the pledging of the $16,000 worth of bonds the defendants made voluntary application for the appointment of a receiver. They knew that they were hopelessly insolvent; that their brokerage account requirements according to the rules of the New York Stock Exchange, of which they were members, needed bolstering to the extent of some $800,000. Nevertheless, they repledged their customer's bonds, without her consent, as collateral to their Goodman loan of $32,000. They now say that in doing so they were within their rights, and that such was not an excessive pledge. We do not think so.
It must be kept in mind that the customer's purchased securities, to wit, 200 shares of Amrad, 200 shares of Crosley, and 630 shares of General Motors stock, had already been repledged with the defendants' New York correspondents to secure the defendants' general loans for many thousand of dollars, an amount far in excess of $35,613.95, plus interest, the customer's debt. And her bank stock had been negotiated to secure a $43,000 private loan.
It is said in Meyer's work, previously mentioned, at page 337: "The provision of the Penal Law of the State of New York prohibiting rehypothecation of the customer's securities for an excessive amount is broad enough in its scope to prohibit a rehypothecation in the broker's general loans."
We agree with this statement, and it is equally true of the Ohio law. Now when the defendants repledged these bonds, they had already rehypothecated their customer's securities for an amount in excess of her debt, without her consent. They, therefore, knew that any repledge of these bonds for any amount on their part would be an excessive pledge, without her consent, and unlawful. It was not the agreement that the customer should finance her agents' business in its entirety, but only that she should protect her marginal account.
To say that a broker may take, for instance, his customer's purchases and marginal stock payments pledged as security, if purchased and pledged in six blocks at different times, and rehypothecate each block for an amount somewhat less than the customer's final or total debt, and then permit the broker to say that only the last-purchased block of pledged securities received were rehypothecated for an amount less than her debt, would be to countenance and recognize as lawful, say, six repledges of $10,000, each, making these repledges total $60,000 in all, when the customer's total debt was perhaps only $20,000. The fallacy of such a claim is at once discernible.
It is the intended spirit and purpose of the law that a broker at all times should so manage his business that his customer upon tender of the balance due to the broker may demand and receive the purchased and pledged securities in like kind and amount, and that the customer's balance due when tendered and paid should fully liquidate any and all of the broker agent's debts, which are secured in whole or in part by the purchased or pledged securities, so that the customer may have that which is his or her own without reliance upon the credit or ability of the broker to pay. This, of course, is qualified in that the customer must not have consented thereto, or that the broker out of stock in possession or under his control may otherwise satisfy his customer in like kind and amount, as the statute provides.
We direct attention to the case of Vance Lumber Co. v. Fraser, Goodwin Colver, 162 Wn. 347, 298 P. 438, wherein the following statements were made:
"From the time the respondent pledged its customers' securities for an amount exceeding the debt owed by the customers to the respondent, such excessive pledging amounted to a conversion. * * *
"Each repledge by the respondent of its margin customers' securities for an amount exceeding the indebtedness of the customer to the respondent, constituted an unlawful pledge."
It is, therefore, our view that the state had a perfect right to and was required to prove that the brokers' previous pledges of the securities of the prosecuting witness were for an amount in excess of her debt. Such was proved conclusively in this case. The defendant's wrongful act in making a repledge of his customer's bonds to secure an amount greater than the customer's debt was definitely shown.
Conviction on this count might be affirmed upon another ground. The customer asserts that when she delivered her bonds in pledge it was understood that the brokers were to return to her 100 shares of her General Motors stock, previously pledged. This, agents of the brokers deny. It was a disputed issuable fact, of which the jury was the judge. If the customer's testimony was true, then the brokers had no right to these bonds as securities pledged to them without return of these 100 shares to the customer, which was never done, and subdivision (a) of the act would have covered the situation.
The state's theory of this prosecution was founded on the assumption that the defendants were engaged in a conspiracy to cheat and defraud their customers, one of whom was Mrs. Passmore. To that end, the state proceeded to make proof of known insolvency, of similar transactions, and of other independent acts criminal in character. The defendants claim that in the admission of this testimony they were prejudiced. They further maintain that intent was not an issue, and that admitted proof of any plan or scheme to show any such intent was highly erroneous.
We are of the view that intent was an issue herein. The defendants do not admit that the customer's securities were pledged "for his own benefit." It was, therefore, the state's burden to prove that fact. Had it not done so, it might have been advanced that the acts complained of were the result of mistake, or for the benefit of another, and the state must have failed. By proof of conspiracy, of which intent is always an element, and of a criminal practice and plan, and other like and similar transactions, all going to show that the defendants converted the pledges of other customers to their own use, it was established beyond question that these acts were done for defendants' own benefit.
The intent of the defendants being an issue, Section 13444-19, General Code, has direct application. We see it recognized and approved in Beckman v. State, 122 Ohio St. 443, 172 N.E. 145. In Sprague v. State, 203 Ind. 581, 181 N.E. 507, it was recently held that acts of a different kind were admissible in evidence, "not for the purpose of showing the commission of distinct crimes, but as tending to show a general system inaugurated by appellant [a stock broker] to defraud, or as bearing on the question of criminal intent in his dealings with" his customer. All this evidence was properly qualified not only on its admission, but also by the court's general charge.
The defendants make the point that the customer did not attempt to recover her securities; that she in fact made an agreement with the receiver to stand as a general creditor of the insolvent defendants. They say that she sustained no loss; but, almost in the same breath, we are told that she has received a 40 per cent. dividend from the receiver. She had a provable claim, whatever its amount was. She has lost 60 per cent. thereof. She must, therefore, have received a loss "in part." Mrs. Passmore did all that she could do. She could not have recovered her repledged securities from the defendants' innocent pledgees thereof, even if her brokers had wrongfully hypothecated them. None of her securities remained unpledged, hence the exclusion of the court's order in the receivership transaction fixing a time limit for recovery of securities of the defendant firm could in no way change Mrs. Passmore's position, or minimize her loss, nor could this evidence have aided the defendants.
We are unable to find any prejudicial error in the charge of the court when considered as a whole, or in any of the other claimed errors, and it is our judgment that the judgment of the court of common pleas of Hamilton county should be affirmed and the causes remanded for execution of sentence.
Judgment affirmed.
ROSS, P.J., and HAMILTON, J., concur.