
413 F.Supp. 43 (1976)
UNITED STATES FIDELITY & GUARANTY COMPANY, Plaintiff,
v.
ROYAL NATIONAL BANK OF NEW YORK and Merrill Lynch, Pierce, Fenner & Smith, Inc., Defendants.
No. 68 Civ. 2054 (HFW).
United States District Court, S. D. New York.
January 12, 1976.
As Amended February 9, 1976.
*44 Samuel Komoroff, New York City, for plaintiff.
Konheim & Halpern, New York City, for defendant Merrill Lynch, Pierce, Fenner & Smith, Inc.
Hart & Hume, New York City, for defendant Royal Nat. Bank of New York.

OPINION
WERKER, District Judge.
This is an action to recover damages for the conversion of certain United States Treasury Notes arising under the following circumstances.
On May 15, 1966, W. E. Hutton & Company (Hutton) had in its possession the Treasury Notes which are the subject of this action in a vault room in the Bankers TrustCompany at 14 Wall Street, New York, New York. Late in August 1966 when the *45 cashier of Hutton conducted an in-house audit it was discovered that these Treasury Notes were missing. Thereafter Hutton made a physical search of the vault in order to assure itself that the notes had not been misplaced. As early as September 24, 1966 James Barbi, a partner in Hutton, learned of the missing notes.
United States Fidelity and Guaranty Company (USF&G) was formally notified by Hutton of the loss by letter dated September 28, 1966 to its agent William H. Kreidler Agency which contained a list of the numbers and values of the notes. This letter was written from the Cincinnati office of Hutton by its assistant operations officer, Thomas A. Rockafeller, who