The opinion of the court was delivered by: GURFEIN
This is a motion pursuant to Fed. R. Civ. P. 12(b) (6) to dismiss the complaint for failure to state a claim upon which relief can be granted.
The complaint is by two customers against a stock broker, Bregman & Co. Plaintiffs allege that defendant has violated Section 17 (a) of the Securities Act of 1933 ("1933 Act"), 15 U.S.C. § 77q, and Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934 ("1934 Act"), 15 U.S.C. § 78 (j) (b) and 78t(a) and (b) and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5.
As their second count, plaintiffs claim liability on the part of defendant for its alleged violation of the Rules of Fair Practice of the National Association of Securities Dealers, Article I § 8 and Article III § 21.
For their third and final count, under the rubric of pendent jurisdiction, plaintiffs claim that defendant fraudulently and negligently handled their stock brokerage account.
No diversity of citizenship is claimed.
The early paragraphs of the complaint
which are incorporated by reference into all three claims for relief under attack may be summarized as follows.
During February, 1968, the plaintiffs purchased through defendant, with whom they maintained a stock brokerage account, 100 shares of Camin Industries Corporation common stock ("Camin"). Subsequent to that date, various purchases of Camin common stock were made through the defendant so that as of February 7, 1969, the plaintiffs were the owners of 300 shares of Camin common stock and 400 units, each unit consisting of two shares of common stock and one common stock purchase warrant which entitled the holder thereof to purchase one share of common stock at various prices over the life of the warrant. All the purchases made by the defendant on plaintiffs' behalf were made and held by the defendant in "street name." No shares or units were ever delivered to the plaintiffs.
On about February 17, 1969, Camin sent to its shareholders of record a written notification informing them that its Board of Directors had, on January 15, 1969, declared a two-for-one stock split to shareholders of record as of February 7, 1969. On or about February 28, 1969, Camin sent to its shareholders of record a certificate of stock representing the additional shares to which the shareholders were entitled as a result of the stock split. Since the plaintiffs were not stockholders of record, Camin did not forward to the plaintiffs either the notice of the split or the certificate. It is alleged that sufficient notices and certificates were sent to brokers for distribution to their customers for whom they held Camin stock in "street name." Defendant did not forward either the notice or the certificate to the plaintiffs. The plaintiffs allege that they were, therefore, never aware of the true amount of the shares which they owned.
Plaintiffs allege, moreover, that from the date of the stock split until shortly before this action was commenced on September 17, 1973, they received monthly statements from the defendant which showed them to be the owners of far fewer shares of Camin stock than they actually owned.
Plaintiffs claim that as a result of the allegedly "false, fraudulent and inaccurate statements sent by defendant to plaintiffs, plaintiffs were unaware of the true value of their holdings in Camin and therefore were unable to take advantage of the tremendous increase in the value of the stock."
The plaintiffs allege that the value of their stockholdings at the time of the stock split was approximately $45,400 and approximately $8,359 at the date they discovered that a stock split had been made. They claim damages in the amount of at least $37,041.
The defendant moves to dismiss the first count on the ground that the stock split did not constitute a "sale" within the meaning of Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2 Cir. 1956), cert. denied, 343 U.S. 956, 96 L. Ed. 1356, 72 S. Ct. 1051 (1956). It moves to dismiss the second count on the ground that the alleged violation of a rule of the National Association of Securities Dealers ("NASD") does not support a claim for private federal civil liability.
The defendant is right on both grounds.
The plaintiffs allege that the "stock split" constituted a "sale."
That is not so. The Securities Act of 1933, Section 2(3), 15 U.S.C. § 77 (b) (3) defines the term "sale" or "sell" as follows:
"The term 'sale ' or 'sell ' shall include every contract of sale or disposition of a security or interest in a security for value." (Emphasis added).
The Securities Exchange Act of 1934, Section 3(14), 15 U.S.C. § 78 (c) (a) (14) contains the definition:
"The terms 'sale ' or 'sell ' each include any contract to sell or ...