a private right of action exists for violation of Rule 10b-10. Cf. Arst v. Stifel, Nicolaus & Co., 86 F.3d 973, 1996 U.S. App. LEXIS 14138, No. 95-3005, 1996 WL 312721, at *3-4 (10th Cir. June 11, 1996) (declining to recognize cause of action for failure to provide names of customers as required by Rule 10b-10(a)(7)(i) where conduct at issue was not prohibited by section 10(b) of 1934 Act). I need not resolve this issue, however, because even assuming that a private cause of action exists for violations of Rule 10b-10 Levitin has failed to state a claim under section 10(b) of the 1934 Act.
In assessing the scope of liability under the SEC regulations promulgated pursuant to section 10(b), courts are to follow the language of the enabling statute.
See Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 128 L. Ed. 2d 119, 114 S. Ct. 1439, 1446 (1994) ("The private plaintiff may not bring a 10b-5 suit against a defendant for acts not prohibited by the text of § 10(b)."); Ernst & Ernst, 425 U.S. at 213-14, 96 S. Ct. at 1391; Crane Co. v. American Standard, Inc., 603 F.2d 244, 249 n.11 (2d Cir. 1979); Angelastro v. Prudential-Bache Sec., Inc., 764 F.2d 939, 949-50 (3d Cir. 1985), cert. denied, 474 U.S. 935, 88 L. Ed. 2d 274, 106 S. Ct. 267 (1985) ("Since section 10(b) contains the 'in connection with' language, all rules stemming from it must also contain this limitation.") (citation omitted). Therefore, liability under Rule 10b-10 can only be imposed for conduct that violates section 10(b) of the 1934 Act. Because PaineWebber's alleged nondisclosures were not in connection with the purchase or sale of a security, they are not prohibited by the statute and, hence, cannot support a claim for securities fraud under section 10(b) of the 1934 Act. See Arst, 1996 U.S. App. LEXIS 14138, 1996 WL 312721, at *4 (nondisclosures after sale were not in connection with purchase or sale of securities, and, therefore, defendants' conduct did not give rise to private cause of action even though it was proscribed by Rule 10b-10).
Accordingly, Levitin's claim based upon PaineWebber's failure to comply with the disclosure requirements of Rule 10b-10 must be dismissed, because the alleged nondisclosure was not in connection with the purchase or sale of a security within the meaning of the 1934 Act.
3. Rule 10b-16
Rule 10b-16 prohibits brokers from extending credit to customers in securities transactions without disclosing the terms of the extension of credit, including interest rates, the method of determining balances, and other charges resulting from the extension of credit. See 17 C.F.R. § 240.10b-16. Levitin alleges that PaineWebber's conduct violated Rule 10b-16's requirements concerning disclosure of, inter alia, finance charges, conditions under which annual interest rates can be imposed, rebates, methods of computing interest, methods of determining balances on which interest is to be charged and whether credit is to be given for credit balances in cash accounts, other charges resulting from the extension of credit, and the nature of the broker's interest in the collateral. See Cmplt. P 43. As Levitin's complaint contains no factual allegations regarding finance charges, interest rates, methods of determining balances, or provision of credit for credit balances, however, these alleged violations of Rule 10b-16 cannot form the basis of Levitin's claim. The only facts that plaintiff alleges in support of this claim, and, hence, the only facts that I will consider in ruling on this motion, concern PaineWebber's nondisclosure of the interest it earns on its customers' collateral.
Although Rule 10b-16 does not create an express cause of action for violation of its provisions and the Second Circuit has declined to resolve the issue of whether an implied cause of action exists, see Zerman v. Ball, 735 F.2d 15, 23 (2d Cir. 1984), other courts have recognized an implied cause of action under section 10(b) of the 1934 Act for violations of Rule 10b-16. See, e.g., Angelastro, 764 F.2d at 949-50; Robertson v. Dean Witter Reynolds, Inc., 749 F.2d 530, 539 (9th Cir. 1984); Liang v. Dean Witter & Co., 176 U.S. App. D.C. 328, 540 F.2d 1107, 1113 n.25 (D.C. Cir. 1976); Metzner v. D.H. Blair & Co., 689 F. Supp. 262, 267 (S.D.N.Y. 1988); Slomiak v. Bear Stearns & Co., 597 F. Supp. 676, 677-81 (S.D.N.Y. 1984).
As with the other regulations promulgated under section 10(b) of the 1934 Act, however, a cause of action for violation of Rule 10b-16 can only be maintained where the claim stems from the enabling statute's prohibition of the use of deceptive and manipulative devices in connection with the purchase or sale of securities. See Angelastro, 764 F.2d at 946; Greenblatt v. Drexel Burnham Lambert, Inc., 763 F.2d 1352, 1358 n.8 (11th Cir. 1985) (without deciding issue, court stated that "violations of Rule 10b-16 may give rise to a private cause of action under section 10(b) only to the extent that the violations arise out of the purchase or sale of securities"); cf. Metzner, 689 F. Supp. at 267 (holding that plaintiff stated claim for violation of Rule 10b-16 where it could be inferred that plaintiffs were misled into purchasing securities due to broker's violation of rule) Here, as PaineWebber's nondisclosures did not pertain to the purchase or sale of securities, Levitin cannot recover under section 10(b) for the alleged violations of Rule 10b-16.
As Levitin has failed to state a claim upon which relief may be granted under section 10(b) of the 1934 Act, her claims based upon that statute and the regulations promulgated thereunder are dismissed. Because I have dismissed all of plaintiff's federal claims, and given the early posture of this case, I decline to exercise supplemental jurisdiction over the state law claims. See 28 U.S.C. § 1367(c)(3); United Mine Workers of America v. Gibbs, 383 U.S. 715, 726, 86 S. Ct. 1130, 1139, 16 L. Ed. 2d 218 (1966); Castellano v. Board of Trustees of the Police Officers' Variable Supplements Fund, 937 F.2d 752, 758 (2d Cir.), cert. denied, 502 U.S. 941, 112 S. Ct. 378, 116 L. Ed. 2d 329 (1991).
Accordingly, the state law claims are dismissed as well.
Dated: New York, New York
July 9, 1996
United States District Judge