Plaintiff, a member of the National Association of Securities Dealers, brought this action to recover from defendant, a customer, the loss it suffered by reason of defendant’s failure to pay for securities purchased by plaintiff for the defendant. Although the trial court found that defendant had, through his agent, ordered the securities, it denied recovery and dismissed the complaint on the ground that plaintiff’s failure to liquidate the transaction on the seventh day after defendant breached his purchase agreement by nonpayment barred plaintiff “from recovering the deficiency after liquidation”. We cannot agree with this determination.
The contract between the parties created a “ Special Cash Account ’ ’ transaction. Under subdivision (c) of section 4 of regulation “T” of the Board of Governors of the Federal Reserve System (Code of Fed. Reg., tit. 12, § 220.4, subd. [c], par. [2]), a customer who purchases a security in a Special Cash Account must make full cash payment within seven days after the purchase date. If such payment is not made, the broker must promptly liquidate the transaction. Here the customer failed to pay and the broker failed to liquidate for about one month past the liquidation date. Such a failure on the part of the broker was an unlawful extension of credit, proscribed by subdivision (c) of section 7 of the Act (U. S. Code, tit. 15, § 78g, subd. [c]) and may, under certain circumstances, be a basis for disciplinary action against the broker by the Securities Exchange Commission, and may even affect the broker’s license. (See Matter of John W. Yeaman, Inc., CCH Fed. Sec. L. Rep. ¶77, 202 [1965]; Matter of Coburn Co., CCH, Fed. Sec. L. Rep. ¶77, 219 [1965]; Matter of Madison Mgt. Corp., CCH Fed. Sec. L. Rep. ¶77, 151 [1964].) However, we are dealing here with a customer-broker relationship and the respective rights of the parties created by the agreement between them. As a matter of public policy, the broker should not be permitted to reap any benefit from an unlawful act, even though the customer may have participated in the arrangement. An example of such a situation would be an agreement by the broker at the inception of the contract of purchase that the customer need not pay for the stock until some time after the seven-day period (Myer v. Shields & Co., 25 A D 2d 126). However, where the purchase transaction is the usual situation in which a customer simply orders the purchase and the broker executes it, as in the case at bar, the broker is entitled to recover his damages caused
The trial court properly determined that defendant should have judgment on his counterclaim. However, a new trial of the counterclaim for conversion is required solely to determine damages. Defendant’s damages are not to be measured by the highest value of the securities prevailing during a reasonable period following the conversion, as ordered by the trial court, but rather by the highest value of the securities prevailing during a reasonable period following the date of notice of the conversion, which was October 2, 1964 in the case of the Consolidated Mogador stock, and October 9, 1964 in the case of the Base Metals stock (see Mayer v. Monzo, 221 N. Y. 442). Execution of the judgment for plaintiff in the sum of $3,525 and interest should be stayed until the determination of the amount due defendant on his counterclaim. After determination of this amount the defendant should be awarded judgment for the net amount due him after offsetting the amount due plaintiff as set forth above.