Before MARIS, GOODRICH and McLAUGHLIN, Circuit Judges.
McLAUGHLIN, Circuit Judge.
This is an appeal from a judgment of the district court sitting without a jury wherein Roth, the appellant, was allowed a partial recovery of his claims against Maryland Casualty Company, the appellee.*fn1 The basis of jurisdiction is diversity of citizenship.
Roth, trading as Roth & Company, a securities broker in Allentown, Pennsylvania, during all times here material was insured by appellee under an indemnity bond of a type known as a broker's blanket bond. From 1942 until November, 1947, Roth had in his employ as office manager one Harry L. Fletcher. The latter received as compensation a weekly salary plus a 20% commission on net profits in Roth's "mark-up account."*fn2 This account was maintained to buy and sell various securities for Roth's customers. As each transaction was consummated it was marked up from one-eighth to one-quarter point per share, representing the house's charge for the service rendered. For convenience and to save transfer taxes these securities were cleared through and kept in the Trust Company of North America, Roth's correspondent bank in New York. The bank debited or credited the mark-up account, as the case might be, whenever securities were bought or sold. Fletcher's function was to see to it that customers' orders were executed. It was of course to his benefit to have the mark-up account show as large a net profit as possible.*fn3 Fletcher appears to have been paid his 20% commissions at the end of the year, at which time the net profits, as reduced by certain charges against gross profits, were computed.
While the record is not quite clear how this occurred without Roth's knowledge, it seems to be undisputed that from 1942 to November, 1947, Fletcher used the mark-up account to buy and sell securities for profit, which profit, however, was not realized by him directly except as it increased his commissions.*fn4 Until 1946 Fletcher's unauthorized transactions were profitable; in that year and until November, 1947, they showed a total claimed loss of $11,918.13.*fn5 This loss, as well as several other unrelated losses which were held by the district court to be within the coverage of the indemnity bond or were admitted to be by appellee and concerning which there is no appeal, was discovered upon an audit of Roth's books on November 10, 1947.
The sole issue on appeal is whether the losses sustained by Roth as a result of Fletcher's 1946 and 1947 transactions in the mark-up account are covered by the indemnity bond. The insuring clause of the bond provides that:
"Section 1. - The Maryland Casualty Company * * * agrees to indemnify Sydney Roth * * * T/A Roth & Company, Allentown, Pa. * * * against the direct loss of any property * * * sustained * * * as follows:
"(A) - Through any dishonest act, wherever committed, of any of the Employees, as defined in Section 6 hereof, whether acting alone or in collusion with others."
Section 7 of the bond, containing certain exclusionary language, reads in part as follows:
"Section 7. - This bond does not cover:
"(f) - Any loss resulting directly or indirectly from trading with or without the knowledge of the Insured, in the name of the Insured or otherwise, whether or not represented by any indebtedness or balance shown to be due the Insured on any customer's account, actual or fictitious, and notwithstanding any act or omission on the part of any Employee in connection with any account relating to such trading, indebtedness, or balance."
Because this is a diversity case we must apply the law of Pennsylvania. Under that jurisdiction's conflict of laws rule an insurance policy is interpreted by the laws of the state where it is contracted and it is contracted where the policy is delivered. Absent proof as to the place of delivery it is presumed that delivery took place at insured's residence. New York Life Insurance Co. v. Levine, 3 Cir., 1943, 138 F.2d 286. We are thus referred to Pennsylvania substantive law. Since the latter is silent on the questions before us we must determine for ourselves how they would be answered had the instant suit been brought in the state courts.
Appellant makes the contention (1) that Fletcher's transactions did not constitute trading within the meaning of the bond and (2) that even if they did the exclusion, above quoted, is not applicable to dishonest acts.
The first argument is completely without merit. If what Fletcher did cannot be characterized as trading it is difficult to conceive what that term embraces. Appellant's reasoning on this phase of the case is that because Fletcher was not authorized to enter into these transactions he simply misappropriated Roth's funds and was not trading at all. In other words, appellant seeks to equate "trading" with authorized trading. We are not persuaded that the term should be so restricted. Another facet of this argument which we find equally unrealistic suggests that because Roth maintained both a "trading account" in which his own (Roth's) securities were kept and a "mark-up account" for customers only, trading, of securities not ...