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KIRSHNER v. GOLDBERG

January 15, 1981

Alfred KIRSHNER, Individually and Derivatively on behalf of Teachers Retirement System of the City of New York, Plaintiff,
v.
Bernard GOLDBERG, et al., Individually, and as Trustees of Teachers Retirement System of the City of New York, Morgan Guaranty Trust Company, Citibank, N.A. and Hugh L. Carey, as Governor of the State of New York, Defendants



The opinion of the court was delivered by: WERKER

This action challenging investment of New York City Teachers' Retirement funds in obligations of the Municipal Assistance Corporation for the City of New York ("MAC") is before this Court on motions to dismiss the amended complaint by all defendants except Citibank, N.A.

Plaintiff commenced this action pro se in 1977 against the United States, various federal officials, and Trustees of the Teachers' Retirement System ("TRS"). The thrust of plaintiff's complaint centered around an agreement entered into by five New York City pension trusts, including TRS, the City of New York, MAC, and eleven New York City banks dated November 26, 1975, pursuant to which TRS agreed, with the other pension funds, to purchase general obligation bonds from the City of New York or MAC. As a beneficiary of TRS, plaintiff alleged that the November 26, 1975 agreement violated the Contract, Due Process, and Equal Protection Clauses of the United States Constitution; that by entering into the agreement the Trustees violated § 10(b) of the Securities Exchange Act of 1934 ("the 1934 Act"), 15 U.S.C. § 78j(b) and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, as well as § 17(a) of the Securities Act of 1933 ("the 1933 Act"), 15 U.S.C. § 77q(a), and breached their fiduciary duties under state law.

 This Court (Pierce, J.) dismissed the purported constitutional claims as well as the claims against the federal officials. With respect to the alleged violations of the federal securities laws, it dismissed the complaint on the ground that plaintiff lacked standing to sue the Trustees. The Second Circuit affirmed the dismissal of plaintiff's claims for relief pursuant to the Constitution and the claims against the federal officials. Kirshner v. United States, 603 F.2d 234, 239-40 (2d Cir. 1978), cert. denied, 442 U.S. 909, 99 S. Ct. 2821, 61 L. Ed. 2d 274 (1979). With respect to the federal securities laws claims, however, it reversed, holding that as a beneficiary of the pension trust, plaintiff had standing to allege securities fraud claims against the Trustees. Having found that plaintiff had standing to assert federal claims, the Second Circuit also reversed the dismissal of the pendent state claims. Id. at 240-41.

 On remand, plaintiff, who is now represented by counsel, filed an amended complaint. The facts as alleged in plaintiff's amended complaint and as set forth in Kirshner v. United States, supra, will not be repeated here. In essence, Kirshner, as a beneficiary of TRS, challenges TRS investments in MAC and City bonds, attacking the Trustees of TRS *fn1" as well as Morgan Guaranty Trust Company ("Morgan Guaranty") and Citibank, N.A. for violations of § 10(b) of the 1934 Act and § 17(a) of the 1933 Act. Plaintiff further charges defendant Trustees with breach of fiduciary duty under common law. The amended complaint also purports to state a claim for relief under the Contract Clause of the Constitution and 42 U.S.C. § 1983 against all defendants which include the Trustees of TRS, Morgan Guaranty, Citibank and Governor Carey.

 Defendant Morgan Guaranty has moved to dismiss the amended complaint for failure to plead fraud with particularity, Fed.R.Civ.P. 9(b); for failure to state a claim, Fed.R.Civ.P. 12(b)(6); and for failure to verify the amended complaint, Fed.R.Civ.P. 23.1. Defendant Trustees have also moved to dismiss pursuant to Fed.R.Civ.P. 12(b)(1) and (6) for lack of subject matter jurisdiction and failure to state a claim, and in the alternative, for vacatur of this Court's grant of leave to plaintiff to amend the complaint. Defendant Carey similarly seeks dismissal for lack of subject matter jurisdiction, failure to state a claim and improper venue. These motions will be addressed seriatim below.

 Morgan Guaranty's Motion to Dismiss Counts 9 and 10

 Counts 9 and 10 of the amended complaint charge that Morgan Guaranty knowingly defrauded TRS and its members by omitting to inform the Trustees that Morgan had ceased purchasing City securities for its trust accounts, reduced its holdings of City obligations prior to the November 1975 agreement and that it had an interest in TRS' investment in City securities because of its potential liability for having underwritten City securities and obligations prior to the agreement, in violation of § 10(b) of the 1934 Act *fn2" and § 17(a) of the 1933 Act. *fn3" Morgan Guaranty seeks dismissal of these counts by arguing that since Morgan Guaranty did not offer to sell or in fact sell any securities to TRS, it was not under a duty to disclose. Absent a duty to disclose, it contends, there can be no liability for omission of a material fact under either § 17(a) or § 10(b) and Rule 10b-5.

 The Supreme Court has recently held that the failure to disclose material facts does not by itself create liability. Rather, a plaintiff must plead and prove a duty to disclose in order to establish that silence in connection with the purchase or sale of securities is actionable. Chiarella v. United States, 445 U.S. 222, 235, 100 S. Ct. 1108, 1118, 63 L. Ed. 2d 348 (1980). Accord, Stromfeld v. Great A. & P. Tea Co., 496 F. Supp. 1084, 1087-88 (S.D.N.Y.1980). The Court found in Chiarella that the circumstances in which a duty to disclose exists are narrow. Holding that a purchaser-seller relationship alone is not enough to create a duty to disclose under § 10(b), the Court stated that a fiduciary relationship must exist as a prerequisite for a finding of liability. Id. at 232-33, 100 S. Ct. at 1116-17. *fn4"

 Moreover, relying on Chiarella, the Second Circuit recently held that a plaintiff cannot avoid dismissal of a complaint for failure to state a claim by merely alleging in conclusory terms a fiduciary relationship in the absence of factual allegations demonstrating the existence of such a relationship. Walton v. Morgan Stanley & Co., 623 F.2d 796, 799 (2d Cir. 1980).

 Counts 9 and 10 of the amended complaint fail to allege any facts upon which a fiduciary relationship arises. Both counts merely recite the failure to disclose the aforementioned alleged material facts. Consequently, I find that plaintiff's failure to plead the existence of and facts surrounding a relationship of trust between the Trustees of TRS and Morgan Guaranty which would give rise to a duty to disclose on the part of Morgan Guaranty must result in dismissal of counts 9 and 10.

 Counts 13 and 14

 Counts 13 and 14 allege secondary liability on behalf of Morgan Guaranty based on a theory of aiding and abetting. Morgan Guaranty urges dismissal of these counts by contending that a failure to act can only give rise to secondary liability under § 10(b) when defendant is under a duty to disclose the omission. *fn5" The elements of a claim for aiding and abetting a securities law violation were recently restated by the Second Circuit in IIT v. Cornfeld, 619 F.2d 909 (2d Cir. 1980) as follows:

 
(1) the existence of a securities law violation by the primary ... party;
 
(2) "knowledge" of this violation on the part of the aider ...

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