Continental Insurance v. Morgan, Olmstead, Kennedy & Gardner, Inc.

*597 Opinion

Continental Insurance Company (Continental), as subrogee of Manufacturers Hanover Trust Company (Manufacturers), sued Morgan, Olmstead, Kennedy & Gardner, Inc. (Morgan), a broker which had acted as principal or agent in purchasing United States treasury bills which had been stolen from Manufacturers. The complaint asserts several theories of liability. It claims that Morgan failed to use due diligence to learn the essential facts concerning its customer’s acquisition of the bills, that Morgan violated rule 405 of the New York Stock Exchange and article III of the Manual of the National Association of Securities Dealers, Inc., both of which impose a duty to exercise due diligence to ascertain essential facts relative to customers of brokerage houses, that Morgan converted the treasury bills, common counts, and the right to implied indemnity.

At the time of Morgan’s purchase of the stolen treasury bills, Morgan was insured by Aetna Insurance Company (Aetna) by a brokers blanket bond indemnifying Morgan against loss or liability imposed by the insured’s good faith dealing for its own account or for others with securities that proved to have been stolen. The Aetna…