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O'CONNOR & ASSOCS. v. DEAN WITTER REYNOLDS

January 11, 1985

O'CONNOR & ASSOCIATES, et al., Plaintiffs,
v.
DEAN WITTER REYNOLDS, INC., et al., Defendants.



The opinion of the court was delivered by: LASKER

LASKER, D.J.

Defendants, Dean Witter Reynolds, Inc. ("DWRI"), Ann Marie Bero, Stephen Bradley, Fred Collins, John Damsen, John Hanson, Larry Hayden, Mike Kemp, David Kubat, Thomas C. Reed, Quaker Hill Development Corp., Jane Dunn, and Dennis Martino move pursuant to Federal Rule of Civil Procedure 12(c) for judgment on the pleadings to dismiss the fourth amended complaint in light of recent developments in the law. The motion is denied as to plaintiffs' federal securities laws and common law fraud claims and granted as to their RICO claims.

 I.

 In an earlier opinion we held that plaintiffs had standing to pursue their civil damage claim against the defendants for violating Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1982), and Securities and Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5 (1984), even though we found that defendants owed no fiduciary duty to options traders like plaintiff O'Connor & Associates ("O'Connor"). See O'Connor & Associates v. Dean Witter Reynolds, Inc., 529 F. Supp 1179, 1184-88 (S.D.N.Y. 1981). *fn1" At that time we took into account defendants' contention that Chiarella v. United States, 445 U.S. 222, 63 L. Ed. 2d 348, 100 S. Ct. 1108 (1980), precluded liability in such a case as this, observing that:

 
In the present case, in contrast to Chiarella, it is alleged that corporate insiders were the source of the material, inside information. There was no question in Chiarella that '[a]pplication of a duty to disclose prior to trading guarantees that corporate insiders, who have an obligation to place the shareholder's welfare before their own, will not benefit personally through fraudulent use of material, non-public information,' [Chiarella, supra, 445 U.S.] at 230 (footnote omitted), and that '"[t]ippees" of corporate insiders . . . have a duty not to profit from the use of inside information that they know or should know came from a corporate insider,' id. at 230, n. 12, citing Shapiro v. Merrill Lynch, Pierce, Fenner & Smith, Inc., [495 F.2d 228,] 237-38 [(2d Cir. 1974).] Consequently, by virtue of their fiduciary duty to the corporation and its shareholders, this additional duty to disclose is owed 'to the investing public,' Shapiro v. Merrill Lynch, Pierce, Fenner & Smith, Inc., supra at 240, 'to those investors trading contemporaneouly with the insider . . . ' Wilson v. Comtech Telecommunications Corp., [648 F.2d 88,] 94 [(2d Cir. 1981).]
 
Thus, by virture of the corporate insiders' duties to the corporation, they, and by derivation their tippees, indirectly came under a duty to O'Connor to 'abstain or disclose' if they possessed material nonpublic information.

 O'Connor & Associates, supra, 529 F. Supp. at 1187.

 On this new motion defendants contend here that Moss v. Morgan Stanley Inc., 719 F.2d 5 (2d Cir. 1983), cert. denied, 465 U.S. 1025, 104 S. Ct. 1280, 79 L. Ed. 2d 684 (1984), decided since our earlier opinion, resurrects and supports their contention that plaintiffs do not have standing to assert their Section 10(b) claim because defendants did not owe a duty to them. In Moss, the Court of Appeals found that the plaintiff, who sold the stock of a "target" company prior to the announcement of a tender offer could not obtain damages under Section 10(b) from the buyer of these shares who had obtained material nonpublic information from the tender offeror's investment advisor. See id. at 10-17. The court noted that the individual Moss defendants could not be viewed as "traditional" corporate insiders because they had acquired confidential information through the offeror's investment advisor and had no direct relationship with the takeover company. See id. at 11 & 15. Had they fallen into the category of "traditional" insider, the court pointed out,

 
[i]t is well settled that traditional corporate 'insiders' -- directors, officers and persons who have access to confidential information *fn8" -- must preserve the confidentiality of nonpublic information that belongs to and emanates from the corporation. Consistent with this duty, the 'insider' must either disclose nonpublic corporate information or abstain from trading in the securities of that corporation.

 Moss, supra, 719 F.2d at 10-11 & n. 8 (portions of footnote 8, and footnote 9 omitted). The Court of Appeals went on to find that as "nontraditional" insiders, the Moss defendants owed no duty of disclosure to the plaintiff because they were " 'complete stranger[s] who dealt with the sellers' " of the target company's stock " 'only through impersonal market transactions.' " Id. at 15, quoting, Chiarella, supra, 445 U.S. at 232-33.

 While the answer to the question raised by defendants' present motion is not altogether obvious, see e.g., Laventhall v. General Dynamics Corp., 704 F.2d 407, 413 (8th Cir.), cert. denied, 464 U.S. 846, 104 S. Ct. 150, 78 L. Ed. 2d 140 (1983), we do not agree with defendants that Moss, there was no allegation that the defendants had obtained their non-public information from corporate insiders and they could therefore not be considered "traditional" corporate insiders. See Moss, supra, 719 F.2d at 11. Here, by way of contrast, it is alleged that "corporate insiders were the source of material inside information", O'Connor & Associates, supra, 529 F. Supp at 1187, and there is no doubt that in this case the insiders as that term is used in Moss. *fn2" The District Court in Moss specifically recognized this distinction.

 
O'Connor, supra can be distinguished on its facts. The plaintiffs there claimed that the information traded upon without disclosure had come from the issuer, the other party to the merger, or both. While the Court did not specifically state that its conclusion would differ if the information had not come from the insiders, it did base much of its analysis on the duty of insiders. Thus, the Court did distinguish Chiarella, supra, by noting that in O'Connor, supra, the alleged sources of material information were insiders. This supports a reading of O'Connor, supra, to apply only to the situation of information leaked from the issuer. Any other reading of the case would flatly contradict the language in Chiarella, supra, that states that a duty to disclose arises from a relation between the parties. Id. 445 U.S. at 231, n. 14 . . . .

 Moss v. Morgan Stanley Inc., 553 F. Supp. 1347, 1354 (S.D.N.Y. 1983) (Pollack, J.). See also SEC v. Musella, 578 F. Supp. 425, 438-39 & n. 12 (S.D.N.Y. 1984).

 Inasmuch as the Court of Appeals in Moss made no suggestion that the fiduciary duty requirement extends to situations in which corporate insiders "tip" material inside information to others who then trade on the basis of this information, we are not persuaded that our earlier finding quoted above has been eroded by this latest ruling. Accordingly, given the essentially unchanged factual allegations found in the fourth amended complaint, the reasons set forth in our earlier opinion, and the ...


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