## Facts

- A charitable corporation owned registered railway bonds recorded in its name and transferable only on the issuer’s books.
- The charity’s treasurer wrongfully took the bonds and sought to convert them for personal gain.
- The issuer required a board resolution and a power of attorney to effect any transfer or conversion.
- The treasurer procured a forged corporate resolution and executed a power of attorney in the charity’s name without authority.
- A broker assisted the treasurer by preparing or arranging the transfer documents, witnessing the power of attorney, and facilitating the transaction.
- Relying on the forged documents, the issuer cancelled the registered bonds and issued instruments payable to bearer.
- The broker sold the bearer bonds and delivered the proceeds to the treasurer; the charity received nothing and did not authorize the transfer.
- The charity sued the issuer and the broker for the value of the bonds; the issuer sought judgment over against the broker.

## Issues

1. Whether an issuer of registered bonds is liable to the registered owner when it cancels the bonds and issues bearer bonds based on forged corporate authorization and an unauthorized power of attorney.
2. Whether a broker who materially assists the fraudulent transfer and sale is liable to the owner for the loss.
3. Whether the issuer, if liable to the owner, is entitled to indemnity (judgment over) against the broker whose conduct enabled the wrongful transfer.

## Decision

- The court held the charity could recover the bonds’ value from the issuer because forged or unauthorized transfer papers did not divest the registered owner’s rights, and cancellation based on such papers was a wrongful act against the owner.
- The court held the broker was liable for his participation in the transaction that enabled the misappropriation.
- The court granted the issuer judgment over against the broker for amounts the issuer was required to pay the charity, placing ultimate responsibility on the broker as an active participant in the wrongful transfer.
- The judgment for the charity was affirmed, with indemnity in favor of the issuer against the broker.

## Legal Principles

- A registered owner’s interest in securities transferable only on the issuer’s books is not cut off by a transfer or cancellation procured through forged corporate authority or an unauthorized power of attorney.
- An issuer that cancels registered securities and effects a transfer or conversion on forged or unauthorized documents acts at its peril and remains liable to the true registered owner.
- A broker or intermediary who knowingly, or in circumstances indicating reckless disregard, assists in preparing, validating, or using unauthorized transfer documents and sells the resulting securities may be liable for conversion or participation in the wrong.
- Where the issuer’s liability to the owner results from reliance on an intermediary’s wrongful assistance in the fraud, indemnity may shift the loss to the intermediary as the more culpable actor.

## Conclusion

The court required the issuer to make the registered owner whole after the issuer cancelled registered bonds and issued bearer bonds on forged authority, and it shifted the ultimate loss to the broker whose assistance materially enabled the fraudulent conversion and sale.


Jennie Clarkson Home for Children v. Mo., Kan. & Tex. Ry. Co., 182 N.Y. 47, 74 N.E. 571 (1905)