## Facts

- R.E. Bolton & Co., led by Richard Bolton, was the principal market maker for Resort and Urban Timeshares, Inc. (RUTI) securities traded over-the-counter on NASDAQ.
- Bolton ran an unlawful “stock parking” scheme designed to create the appearance of active trading and inflate RUTI’s price without corresponding improvement in corporate earnings.
- In December 1982, Bolton offered Donald Ross 26,900 RUTI units at $17.50 per share, with an understanding the units could be quickly resold at a higher price to Forbes, Walsh, Kelly & Co.
- Ross bought the shares in an account for his daughter, Victoria Ross; Bear, Stearns & Co. acted as Bolton’s clearing broker for the transaction.
- Ross alleged Bolton misrepresented its solvency and suggested the offering price reflected a free and open market price.
- Forbes declined to purchase the shares on resale; Bolton became insolvent, could not maintain the scheme, and RUTI’s price collapsed, causing the Rosses substantial losses.
- The Rosses sued Bear Stearns seeking to hold the clearing broker responsible for losses arising from the introducing broker’s fraudulent scheme.

## Issues

1. Whether a clearing broker may invoke the equitable defense of in pari delicto to bar an investor’s claims for losses on securities purchased through an introducing broker engaged in fraud.
2. Whether, on the record presented, the clearing broker owed duties to the introducing broker’s customer or could be liable as a participant, aider and abettor, or co-conspirator in the introducing broker’s fraud or RICO-related misconduct.

## Decision

- The Second Circuit affirmed summary judgment for Bear Stearns.
- The court held Bear Stearns could assert in pari delicto because the investor knowingly entered a transaction structured to profit from an artificial market, and the record did not show culpable conduct by the clearing broker.
- The court found no basis to attribute the introducing broker’s misconduct to Bear Stearns given its limited clearing role and the absence of evidence of active participation in the fraudulent scheme.

## Legal Principles

- In pari delicto may bar a plaintiff’s federal securities and related claims where the plaintiff is at least equally responsible for the wrongful conduct and equity does not favor shifting the loss to a non-wrongdoing defendant.
- A clearing broker that performs standard clearance and settlement functions is not, without special circumstances, treated as owing broad fiduciary or disclosure duties to customers of an introducing broker.
- Clearing-broker liability generally requires proof of direct misrepresentations, control, or substantial assistance/participation in the underlying fraud; routine clearing services, standing alone, are insufficient.

## Conclusion

The Second Circuit concluded that a clearing broker not shown to be culpable may rely on in pari delicto to defeat claims by a securities professional who entered a deal designed for a quick profit from a manipulated market, and it affirmed judgment for Bear Stearns.


Ross v. Bolton, 904 F.2d 819 (2d Cir. 1990)