The opinion of the court was delivered by: CONNER
Plaintiff in the above-captioned action sues defendant Telstat Systems Inc., and its Executive Vice-President William Stern, for $500,000 in damages, allegedly the result of defendant's fraudulent activities in connection with plaintiff's "contract to purchase securities." Counts I and II of the complaint allege violations of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 of the Securities and Exchange Commission, 17 C.F.R. § 240.10b-5; jurisdiction is founded upon § 27 of the 1934 Act, 15 U.S.C. § 78aa. The remaining three counts allege "common law" causes of action and invoke the Court's pendent jurisdiction. Presently before the Court is defendant Telstat's motion, pursuant to Rules 12(b)(1) and (6), F.R.Civ.P., to dismiss the complaint for lack of jurisdiction over the subject matter and for failure to state a claim upon which relief can be granted.
Plaintiff is a finder in the field of corporate acquisitions; its business, according to the complaint, is to provide services to companies interested in having their assets acquired by others. Defendant is a New York State corporation which allegedly engaged plaintiff's services in November of 1975. The terms of that engagement were not reduced to writing, but, under the oral agreement as alleged, plaintiff was engaged "to obtain a buyer interested in acquiring the defendant corporation by a purchase of its stock or assets or by a merger or consolidation." Plaintiff was informed by defendant that it was "seeking stock of a publicly held company with a value of $15 to $17, to be exchanged for each share of the defendant corporation's stock then outstanding." In the event of an acquisition, defendant agreed to transfer to plaintiff, as payment for its services, "a portion of the securities" received from the buyer.
Encouraged by defendant to expend its time, effort and funds in locating a buyer, plaintiff prepared detailed reports describing defendant's business and operations, disseminated the reports to prospective buyers whom plaintiff had selected, arranged and participated in meetings between defendant and interested buyers and rendered advice and counsel to defendant as to methods and strategies by which it could obtain a favorable offer.
The acquisition of defendant was accomplished in June of 1976 -- plaintiff, however, was not responsible for the introduction of the buyer-corporation to defendant and was denied any compensation. As the basis for recovering damages under the federal securities laws, plaintiff contends that defendant fraudulently misrepresented its intentions at the time of entering into the oral agreement of November 1975.
Two theories of fraud are alleged, resting upon differing versions of the November 1975 agreement. The first, rather nebulously drawn, is set forth in Count I. It alleges an agreement between the parties whereby plaintiff would be entitled to a fee, in the form of securities in the acquiring corporation, upon defendant's acquisition by "a buyer," whether or not introduced to defendant by plaintiff. The fraud is said to rest in the fact that, at the time of entering into the agreement, defendant's undisclosed intention was to pay the fee only in the event of plaintiff's serving as the actual finder in the transaction.
According to Count II, the agreement provided for plaintiff's entitlement to a fee in the event that it actually served as the finder of the acquiring corporation. The fraud alleged here is twofold. First, defendant failed to disclose, at the time that the parties entered into their contract, that defendant had resumed acquisition negotiations with the Western Union corporation. Second, during the period of several months following the agreement, defendant failed to disclose its final determination to consummate the acquisition with Western Union, rather than with one of plaintiff's buyers. Pursuant to a fraudulent scheme, it consciously exploited plaintiff's advice and services as a means of obtaining a more favorable offer from Western Union.
Under both counts, plaintiff alleges that the fair and reasonable value of its work, labor and services was $500,000 and claims that amount as damages.
Plaintiff is aware of the "purchaser-seller" limitation upon private damage actions brought under § 10(b) of the Securities Exchange Act of 1934.
Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 44 L. Ed. 2d 539, 95 S. Ct. 1917 (1975); Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2d Cir. 1952), cert. denied, 343 U.S. 956, 96 L. Ed. 1356, 72 S. Ct. 1051 (1952). The section extends its protection to only the defrauded purchaser or seller of securities, and plaintiff was neither under the facts as presented in the complaint. Section 3(a)(13) of the Act, 15 U.S.C. § 78c(a)(13), however, defines the terms "buy" and "purchase" to include " any contract to buy, purchase or otherwise acquire." (Emphasis added.) Plaintiff contends that since its finder's fee was payable in securities under the oral agreement with defendant Telstat, it was a contractual purchaser possessing the requisite standing to sue under § 10(b).
Section 3(a)(13) is obviously sweeping in its breadth. Within its purview are contracts not only to purchase, but "otherwise [to] acquire" securities as well. Assuming the existence of an enforceable contract between the parties,
we are of the view that plaintiff was the holder of such a contractual right under its employment agreement with Telstat. Cf. Collins v. Rukin, 342 F. Supp. 1282 (D. Mass. 1972); S.E.C. v. Addison, 194 F. Supp. 709, 716, 722 (N.D. Tex. 1961); Truncale v. Blumberg, 80 F. Supp. 387, 392 (S.D.N.Y. 1948).
Thus, were status as a statutory "purchaser" under § 10(b) dependent upon no more than a literal reading of statutory language, plaintiff would possess the requisite standing to sue.
More, however, is required. The boundaries of the purchaser-seller requirement are, and always have been, tied to the purposes underlying § 10(b). Herpich v. Wallace, 430 F.2d 792, 806-07 (5th Cir. 1970); see S.E.C. v. National Securities, 393 U.S. 453, 466-67, 89 S. Ct. 564, 21 L. Ed. 2d 668 (1969); International Controls Corp. v. Vesco, 490 F.2d 1334, 1345 (2d Cir. 1974). Indeed, only recently, in Santa Fe Industries v. Green, 430 U.S. 462, 97 S. Ct. 1292, 51 L. Ed. 2d 480, 45 U.S.L.W. 4317, 4321 (1977), the Supreme Court emphasized the importance of ascertaining the congressional purposes underlying the statute as a means of defining the scope of the implied private right of action under § 10(b); it said, specifically, that "[although] [it had] recognized an implied cause of action under that section in some circumstances * * * [it had] also recognized that a private cause of action under the antifraud provisions of the Securities Exchange Act should not be implied where it is 'unnecessary to ensure the fulfillment of Congress' purposes' in adopting the Act." Certainly in the light of Green, and prior case law cited supra, the judicial eye must remain focused upon the congressional concerns behind § 10(b) in the determination of the issue of a plaintiff's standing to sue.
The Section was aimed at manipulative and deceptive devices employed "in connection with the purchase or sale of any security" and contravening the rules and regulations established by the Securities and Exchange Commission. The rules and regulations, according to the statute, were to be promulgated by the Commission " in the public interest or for the protection of investors." [Emphasis added.] See A. T. Brod v. Perlow, 375 F.2d 393, 396 (2d Cir. 1967). Rule 10b-5 was adopted pursuant to that statutory direction. SEC Sec. Exch. Act Rel. No. 3230 (May 21, 1942). Thus, the concern underlying the statute, as the Fifth Circuit Court of Appeals observed in Herpich v. Wallace, supra, 430 F.2d at 808, is "not * * * so much with fraud per se as * * * with the effect of fraud upon investors and upon the public interest in the maintenance of free and open securities markets nurtured in a climate of fair dealing." See also Shapiro v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 495 F.2d 228, 235 (2d Cir. 1974); Crane Company v. Westinghouse Air Brake Company, 419 F.2d 787, 793 (2d Cir. 1969); Hooper v. Mountain States Securities Corporation, 282 F.2d 195, 201-02 (5th Cir. 1960). The body of decisional precedent on the issue of § 10(b) standing reflects that concern. It supports the proposition that the proper litigant under the section, in a private suit for damages, is only one whose suit will serve an "investment interest" or the "public interest" as defined by the special purposes of the 1934 legislation. See A. T. Brod v. Perlow, supra.
In the vast majority of cases, "purchasers" and "sellers" for § 10(b) purposes have been owners of rights in identified securities -- i.e., investors -- faced with the decisions and risks attendant upon that status: the corporate shareholder, for example, exchanging his stock pursuant to a merger
the holder of an investment contract, agreeing to substantial modifications in contract terms;
the recipient of a stock option, relying upon his employer's prediction of the stock's imminent appreciation in value;
the trust beneficiary, potential victim of the trustee's fraudulent management of trust corpus securities;
the pledgee of stock pursuant to a loan contract, assuming the "very real investment risk that the pledged securities will have continuing value";
the holder of convertible stock, allegedly induced to forego the exercise of his conversion right;
the party placing a sale order with his securities broker, relying upon the broker's good-faith intention to execute the contract;
the party entering into a contract to purchase specific corporate securities, relying upon the seller's good-faith intention to follow through with his ...