1. The petition of a stockbroker, against a customer of the plaintiff and another stockbroker for fraudulent conspiracy to misrepresent the customer's financial position and induce the plaintiff to accept the customer's worthless checks in payment for security purchases, did not show that the plaintiff could not recover as a matter of law, even if the petition showed that the plaintiff violated a regulation of the Federal Reserve Board restricting purchases and sales of securities effected by stockbrokers, but did not show a wilful violation by the plaintiff.
2. In an action for conspiracy to defraud, the petition did not show as a matter of law that the plaintiff by the exercise of ordinary care could have discovered the falsity of the alleged fraudulent representations.
3. In an action for conspiracy to defraud, allegations of facts having a bearing on and a tendency to prove the existence of the conspiracy are not subject to special demurrer.
In this case the defendant A. M. Kidder & Co. Inc., (hereinafter called Kidder) assigns error on a judgment of the trial court overruling general and special demurrers to the plaintiff's petition. The plaintiff (hereinafter called Evans) is a stockbroker. The defendant McAlpin was a customer of the plaintiff. The defendant Kidder is a stockbroker, and the defendant Garrett was an employee through whom Kidder acted in the transactions alleged in the petition, which we shall summarize: During February through September in 1961 Evans conducted transactions for the purchase and sale of various securities for McAlpin. Beginning about June 19, 1961, these transactions were conducted upon an agreement whereby payment was required within four business days following the date of each purchase transaction. Evans did not know that, as early as July 31, 1961, McAlpin was insolvent, and McAlpin and Garrett knowingly entered into a conspiracy to represent falsely to Evans that McAlpin was solvent and financially responsible and owned specified assets. Garrett advised and assisted McAlpin in a fraudulent scheme to misrepresent McAlpin's financial status. The scheme included a cycle of transactions whereby McAlpin obtained loans from banks in the Atlanta area by purporting to pledge securities that he did not own, thus maintaining an apparent solvent financial position and being permitted to continue bank borrowings and activities. Other false representations of McAlpin's financial condition were made in the following transactions described in the petition.
For the purpose of paying an indebtedness to another (third) stockbroker McAlpin, upon counseling by Garrett, sold through Evans 300 shares of Magnavox stock which he did not then own, on August 2, 1961, the day before a planned three-to-one stock split by the Magnavox Company. One week later, after the stock split, Garrett purchased for McAlpin's account with Kidder 900 shares of new Magnavox stock. Upon receipt of these shares McAlpin delivered 300 to Evans and sold 600 shares through a fourth stockbroker, and used the proceeds from this sale to pay his indebtedness to the third stockbroker. Upon demand by Evans for the remaining 600 shares of new Magnavox stock due to Evans by McAlpin, Garrett represented that only 300 shares had been forwarded due to a mix-up in Kidder's New York office, and assured Evans orally and in writing that the remaining 600 shares would be delivered to it. Garrett then purchased 600 shares of new Magnavox stock for McAlpin's account, which McAlpin thereafter delivered to Evans. Similarly McAlpin during the period August 10, 1961, through August 31, 1961, sold through Evans shares of stock of other companies which McAlpin did not then own and which Garrett afterwards purchased for him for delivery to Evans, but Garrett did not require McAlpin to pay for the shares before delivery to him. Upon receipt of the shares Evans paid McAlpin the proceeds of the sale, and McAlpin paid Kidder for the purchase of the shares with the proceeds of their sale which he received from Evans.
In other instances McAlpin would give to Garrett a worthless check on an out-of-town bank for securities which he purchased through Kidder, Garrett would delay the deposit of the check in Kidder's account and during the time required for the check to reach the out-of-town bank McAlpin would sell the securities purchased through Kidder and deposit the proceeds to cover the check given Kidder for their purchase.
In some instances McAlpin ordered securities from Kidder's New York office and Garrett delivered them to McAlpin without requiring payment; McAlpin then sold the securities to Evans and used the sale proceeds to pay Kidder for the purchase.
Beginning about August 15, 1961, McAlpin purchased various securities through Evans and sold them through Evans on the same day or the following day. On September 20, 22, 25 and 26 Evans received McAlpin's checks on an out-of-town bank for five purchases of stock it had made for McAlpin. Evans delivered to McAlpin its checks for the sale of the stock on the same day or, in one instance, on the day following its receipt of McAlpin's check. On September 29, 1961, McAlpin's five checks for the purchase of the securities were returned to Evans due to insufficient funds, after Evans had paid McAlpin the proceeds of the sale of the securities, and McAlpin had delivered these proceeds to Kidder or others. At the time McAlpin drew the checks to Evans for the purchase of these securities he knew that he did not have sufficient funds in the drawee bank or elsewhere to pay the same, but expected to cover them by depositing proceeds from the sale of securities before they reached the out-of-town bank. These transactions and other transactions by which Evans closed out McAlpin's account resulted in an indebtedness by McAlpin to Evans of $308,133.95.
The plaintiff had a right to rely on the representations of Garrett and Kidder because it knew that both Evans and Kidder were members of the National Association of Securities Dealers, Inc. and Garrett was a registered representative of a member of the Association and as such all had agreed to abide by the bylaws, rules and regulations of that Association. The conduct of Garrett and Kidder was contrary to the Rules of Fair Practice of the Association and violated specified sections of those Rules set out in the petition. Said Rules of Fair Practice were well known practices, usages and customs of the trade of the stockbrokerage business in Atlanta known to plaintiff and the defendants, as was the practice that stockbrokers would require that the purchase price of securities be paid in full before or at the time of delivering the securities to their customers. The plaintiff relied upon these practices, usages and customs of the trade and believed that the securities delivered to it by McAlpin had been paid for in full.
The conduct of the defendants was knowingly and wilfully designed to represent McAlpin as a financially responsible and solvent individual owning specified assets with the intention to mislead, deceive and defraud the plaintiff for the benefit of the defendants in that Kidder and Garrett would receive commissions and fees for securities transactions on behalf of McAlpin; and said conduct did deceive the plaintiff to its detriment, in that the plaintiff was induced to believe that McAlpin was financially responsible and solvent and owned specified assets and to accept worthless checks of McAlpin in payment for securities in the belief that they were good checks. The plaintiff did not know that the representations and conduct of the defendants were false and fraudulent and relied on the truth of the representations and thereby sustained its stated loss, which the defendants have refused to pay.
1. For the purposes of this opinion we will assume, but do not decide, that Kidder is correct in its contention that in purchasing securities for McAlpin after the transactions on September 19 and 20, 1961, in which McAlpin gave Evans his check for the purchase of securities, and then sold the securities in the account and withdrew the proceeds of sale before his check for their purchase had been honored by the drawee bank, Evans violated Section 4 (c) (8) of Regulation T of the Federal Reserve Board, 12 C.F.R. 220, 4 (c) (8), which provides: "Unless funds sufficient for the purpose are already in the account, no security other than an exempted security shall be purchased for, or sold to, any customer in a special cash account with the creditor if any security other than an exempted security has been purchased by such customer in such an account during the preceding 90 days, and then, for any reason whatever, without having been previously paid for in full by the customer, the security has been sold in the account or delivered out to any broker or dealer: . . ." See 12 C.F.R. 162, 220.117.
Kidder contends that the violation of Regulation T was conduct expressly declared against the public policy of the United States, and shows as a matter of law that Evans has no right to recover. "The courts have struggled with conflicting considerations of policy for hundreds of years in situations akin to the one here now." Fellner v. Marino, 158 NYS2d 24, 26. While we find cases dealing with situations akin to the one now before this court, we find none like it. Instead of precedents we find only statements of general principles applicable to problems of this nature.
This is an action for damages sustained by Evans as a result of a conspiracy in which the defendants made to Evans fraudulent misrepresentations which induced Evans to act to its detriment. There was no contract between Evans and Kidder. The defendant in a fraud action cannot assert as a defense that the transaction induced by the fraud was illegal or against public policy. 37 CJS 361, 68. The doctrine barring recovery for fraud where the parties are in pari delicto is based on the principle that to give the plaintiff relief would contravene public morals and impair the good of society. Hence, it should not be applied in a case in which to withhold relief would, to a greater extent, offend public morals. 23 Am. Jur. 1005, 183; 1 CJS 1001, 13. A court of justice will not lend its aid to the enforcement of any contract, the making of which is prohibited, nor in support of any action by either party where the same is dependent upon an illegal or immoral transaction. Glass v. Childs, 9 Ga. App. 520
, 522 (71 SE 920
); Smith v. Patterson, 82 Ga. App. 595
, 598 (61 SE2d 679
). But a person does not become an outlaw and lose all rights by doing an illegal act. Cases where the action is based on an illegal contract do not apply where the action is based on the right not to be led by fraud to change one's situation, or where the parties are not in pari delicto. National Bank & Loan Co. v. Petrie, 189 U. S. 423, 425 (23 SC 512, 47 LE 879); accord Wallace v. Cannon, 38 Ga. 199
, 205; Drake v. Parkman, 79 Ga. App. 679
, 681 (54 SE2d 714
); Allen v. Gornto, 100 Ga. App. 744
, 757 (112 SE2d 368
); Waggoner v. Western Carolina Pub. Co., 190 N.C. 829 (130 SE 609
). Not every violation of a statutory command or prohibition gives rise to civil liability to one harmed by the violation or carries with it as a penalty an inability to enforce civil rights from acts which would have been lawful except for the statute. Irving Weis & Co. v. Offenberger, 220 NYS2d 1001, 1003.
The view taken by the Federal Government of its regulation may be helpful in evaluating the needs of public policy affecting this case. In 1953 the Securities and Exchange Commission acted in proceedings brought to revoke registration and to invoke other disciplinary action against a broker, charging that the broker extended credit to a customer in violation of Sections 7 (c) (1) and (2) of the Securities Exchange Act and Regulation T of the Federal Reserve Board. The Commission found that the broker effected five sales of securities prior to receipt of payment for them, and that these sales were relatively insignificant in number as compared to the total transactions effected for the customer, and the broker was entitled to continue to believe that the customer would pay for his purchases promptly and that he did not contemplate selling the securities prior to making payment. The Commission found that credit was extended to the customer in violation of Section 4 (c) (8) of Regulation T in that, within 90 days after the five sales effected before payment for the securities had been received, 24 purchase transactions were effected for the cash account customer when funds sufficient for payment were not already in his securities account. "Section 4 (c) (8) . . . does not exonerate a broker who has acted in reliance on a good faith agreement, but rather sets forth an absolute prohibition, although we may take good faith into consideration in determining whether a sanction is appropriate in the public interest, and we have considered it in that connection . . . Under all of the circumstances we find that although registrant violated Section 4 (c) (8) of Regulation T, such violation was not willful . . . Under all the circumstances, we do not consider it necessary or appropriate in the public interest or for the protection of investors that disciplinary action be taken." In the Matter of Thompson v. McKinnon, 35 S.E.C. Decisions and Reports 451, 459, 460.
We are of the opinion that the public interest does not require denial of recovery to the plaintiff as a matter of law under the facts alleged in this petition, which do not show a wilful violation of law by the plaintiff.
2. Kidder contends further that the petition shows that Evans cannot recover because it did not exercise ordinary care to protect itself from the effect of the alleged fraudulent conduct of the defendants, since the requirements of Regulation T establish the standard of diligence required of a broker. It does not appear that the purpose of Regulation T was to protect brokers from the conduct of other brokers, but that it was to protect investors and the health of the economy. See Report on Stock Exchange Practices, S. Rep. No. 1955, 73 Cong., 2d Sess. 11 (1934); Hearings on Stock Exchange Practices Before Senate Committee on Banking and Currency, 73 Cong., 2d Sess. pt. 15 (1934); H. R. Rep. No. 1383, 73d Cong. 2d Sess. 8 (1934).
In Scott v. Fulton Nat. Bank, 92 Ga. App. 741 (89 SE2d 892)
, relied on by the defendant, the petition did not allege facts showing the bank's agent to have been knowingly and intentionally deceitful or dishonest, or facts from which it could be reasonably inferred that the plaintiff acted with diligence. This case and Glover v. Townsend, Crane & Co., 30 Ga. 90
, and the cases which the Glover case follows, are not applicable to the present issue.
Where an action is brought for false representations, the question whether the plaintiff could by the exercise of ordinary diligence have discovered the falsity of the representations is for the determination of the jury. Summerour v. Pappa, 119 Ga. 1
, 5 (45 SE 713
); Scoggins v. Puckett, 219 Ga. 282 (133 SE2d 17)
; Daugert v. Holland Furnace Co., 107 Ga. App. 566
, 570 (130 SE2d 763
). The facts shown in the present petition are not sufficient to authorize us to say as a matter of law that the plaintiff was wanting in ordinary diligence to protect itself from the defendant's alleged wrongful conduct.
3. The trial court did not err in overruling special demurrers to certain paragraphs of the petition, setting out transactions between the defendants and banks and other brokerage houses, on the ground that they were not germane to the alleged cause of action. Every fact which has bearing on and a tendency to prove the ultimate fact in issue--the existence of a conspiracy to defraud--is entitled to be considered. Horton v. Johnson, 192 Ga. 338
, 346 (15 SE2d 603
); Cook v. Robinson, 216 Ga. 328 (116 SE2d 742)
; Bank of Commerce &c. Co. v. Schooner, 263 Mass. 199 (160 NE 790).
Judgment affirmed. Nichols, P. J., and Russell, J., concur.