Appeal from an order granting summary judgment to defendants-appellees, Merrill Lynch, Pierce, Fenner & Smith, Inc. and Merrill Lynch Money Markets, Inc., entered in the United States District Court for the Southern District of New York (Brieant, J.) dismissing plaintiff-appellant Gary Plastic Packaging Corporation's complaint that alleged that appellees charged it an undisclosed commission when appellant purchased certificates of deposit through appellees' investment program, in violation of §§ 5(a) and 17 of the Securities Act of 1933 and § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. Reversed and remanded.
Newman, Cardamone and Davis,*fn* Circuit Judges.
CARDAMONE, Circuit Judge:
On this appeal we must determine whether a program devised by defendants Merrill, Lynch, Pierce, Fenner & Smith, Inc. (Merrill Lynch) and its wholly-owned subsidiary, Merrill Lynch Money Markets, Inc. (Money Markets), to sell bank certificates of deposit (CDs) is within the compass of the federal securities law. In Marine Bank v. Weaver, 455 U.S. 551, 71 L. Ed. 2d 409, 102 S. Ct. 1220 (1982), the Supreme Court held that a conventional CD purchased from an issuing bank is not a security under the anti-fraud provisions of the federal securities laws. Nonetheless, the Court stated that each transaction must be analyzed on the content of the particular instrument involved and the factual setting as a whole. The possibility that in certain circumstances a CD might be a security within the scope of the federal securities laws was specifically left open. Id. at 560 n.11.
The complaint alleges that defendants publish the Money Market Information Bulletin, which tells prospective customers that Merrill Lynch has available negotiable, insured, and liquid $100,000 CDs, for which they will maintain a secondary market. Defendants advertise that they screen daily a large group of quality banks to provide their customers with CDs with "competitive" yields from a variety of issuers. They represent that they will monitor the creditworthiness of issuing banks on a regular basis, and they discourage potential customers from seeking to deal directly with those banks. If the allegations of plaintiff's amended complaint are true, this sales message might be characterized as artful, but certainly not candid.
Plaintiff, who purchased 12 of the $100,000 CDs, claims that these certificates are not those regularly available at the issuing banks. Instead, plaintiff asserts that these CDs are specially created, issued and sold only to Merrill Lynch customers. Most significantly, plaintiff alleges that the rates of interest on the Merrill Lynch CDs were lower than the rates paid by the banks on their ordinarily issued CDs and that defendants pocketed the difference between the rates as an undisclosed commission. From the gold that flows through a broker's hands, a small shaving may be taken as commission. Yet, credibility and confidence in the market may demand that the amount of this shaving be revealed to investors. At this early stage of the litigation, before any discovery, it is difficult to discern if there is merit to plaintiff's claims against these defendants. It is sufficient to say that in our view plaintiff's complaint states a cause of action and should not have been dismissed on defendant's motion for summary judgment.
Plaintiff Gary Plastic Packaging Corporation (Gary Plastic) brought this action in the United States District Court for the Southern District of Florida, for itself and for all others similarly situated, against defendants Merrill Lynch and Money Markets. The action was transferred, pursuant to 28 U.S.C. § 1404(a), to the Southern District of New York (Brieant, J.) in December 1983. The complaint contains four counts that allege violations of §§ 5(a) and 17 of the Securities Act of 1933, § 10(b) of the Securities Exchange Act of 1934, and the SEC's Rule 10b-5. One count alleges a civil RICO violation, 18 U.S.C. § 1962(c). All allegations stem from the same transactions between Gary Plastic and Merrill Lynch. In its Money Market Information Bulletin, Merrill Lynch described its CD Program involving bank certificates of deposit*fn1 issued by both commercial and savings and loan institutions (referred to as banks) as follows:
FULLY INSURED $100,000 NEGOTIABLE CERTIFICATES OF DEPOSIT
Merrill Lynch Money Markets Inc. (MLMMI) is offering its customers a unique opportunity to purchase $100,000 negotiable certificates of deposit that are fully insured and liquid.
This opportunity, for individuals or corporate investors with $100,000 or more to invest, has been made possible as a result of recent changes in Federal Deposit Insurance Corporation (FDIC) and Federal Savings and Loan Insurance Corporation (FSLIC) regulations dealing with deposit insurance coverage. In essence, both the FDIC and FSLIC have raised their deposit insurance coverage to $100,000 from $40,000 per depositor per institution.
The extended coverage will enable an investor to purchase a $100,000 certificate of deposit from an FDIC or FSLIC insured commercial bank or savings and loan association and have the total principal amount of the investment covered by Federal deposit insurance. Carrying this a step further, one could distribute investible funds in $100,000 increments among a number of banks to ensure Federal deposit insurance coverage of the total amount.
Investors can now purchase $100,000 negotiable certificates of deposit and enjoy the benefits of having their entire deposit insured by a Federal agency and at the same time take advantage of the exemption from interest rate ceilings that Regulation Q provides for certificates of deposit that are $100,000 or larger.
MLMMI will provide its investors with an opportunity to take advantage of this regulatory change by offering, on a daily basis, a broad selection of fully insured $100,000 certificates of deposit issued by domestic commercial banks and savings and loan associations in a range of maturities. Each of the issuers whose certificates of deposit are offered has been reviewed and approved by the MLPF&S Corporate Credit Department and is monitored on a regular basis. Credit reports that provide an historical analysis on each issuer will be readily available through your MLPF&S Account Executive.
The $100,00 certificates of deposit that MLMMI is offering enjoy a high degree of liquidity since they are in negotiable bearer form and are fully insured by a Federal agency. In addition, MLMMI fully intends to maintain a secondary market for its customers which would enable them to sell their certificates of deposit back to MLMMI at prevailing market rates without the significant interest rate penalties ...