of the securities themselves, but to the terms of the relationship between the broker and the customer." Id. Accordingly, the alleged nondisclosure does not constitute securities fraud in violation of section 10(b) and Rule 10b-5.
Since MLPF&S's alleged failure to disclose that it earned interest on its customers' collateral and the proceeds of their short sales was not "in connection with" the purchase or sale of securities, plaintiff's securities fraud claim based upon Rule 10b-5 is hereby dismissed. Because I hold that Bissell has failed to satisfy the "in connection with" requirement, I need not reach MLPF&S's arguments that plaintiff has failed to adequately plead other elements of his securities fraud claim.
2. Rule 10b-16
Plaintiff also alleges that MLPF&S violated SEC Rule 10b-16, the SEC analogue to the Truth-in-Lending Act. See 17 C.F.R. § 240.10b-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 Levitin, 933 F. Supp. 325, 1996 U.S. Dist. LEXIS 9560, 1996 WL 384912, at *5. Plaintiff alleges that MLPF&S's conduct violated Rule 10b-16's requirements concerning disclosure of (a) finance charges, (b) conditions under which annual rates of interest can be charged, (c) rebates, (d) methods of computing interest, (e) methods of determining debit balance or balances on which interest is to be charged and whether credit is to be given for credit balances in cash accounts, (f) other charges resulting from extensions of credit, and (g) the nature of the broker's interest in the security or other property held as collateral and the conditions under which additional collateral can be required. Complaint P 40.
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 (2d Cir. 1984), other circuit and district 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 v. Prudential-Bache Secs., Inc., 764 F.2d 939, 949-50 (3d Cir.), cert. denied, 474 U.S. 935, 106 S. Ct. 267, 88 L. Ed. 2d 274 (1985); 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 (S.D.N.Y. 1988); Slomiak v. Bear Stearns & Co., 597 F. Supp. 676 (S.D.N.Y. 1984).
As with the other SEC 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." Levitin, 933 F. Supp. 325, 1996 U.S. Dist. LEXIS 9560, 1996 WL 384912, at *4; 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 10b-16). Here, as in Levitin, where the alleged fraud does not pertain to the purchase or sale of securities, Bissell cannot recover under section 10(b) for the alleged violations of Rule 10b-16. Levitin, 933 F. Supp. 325, 1996 U.S. Dist. LEXIS 9560, 1996 WL 384912, at *6.
Even if this Court were to hold that the alleged non-disclosures did pertain to the purchase or sale of securities, three alternative grounds exist for dismissing plaintiff's claims under Rule 10b-16: (1) the statute of limitations for certain claims under Rule 10b-16 has expired; (2) plaintiff does not allege that MLPF&S failed to establish procedures to provide the requisite Rule 10b-16 disclosures; and (3) Rule 10b-16 does not require the specific disclosures which plaintiff contends that MLPF&S failed to make.
The Complaint does not specify which specific provision of Rule 10b-16 was allegedly violated. Subsection (a)(1) requires the broker to establish procedures to assure that each customer is given a written statement disclosing information regarding interest charges at the time an account is opened; subsection (a)(2) requires the broker to establish procedures to assure that each customer is given periodic statements disclosing credit balances, interest charges, and all other charges resulting from the extension of credit.
Plaintiff appears to concede that any claim based on subsection (a)(1) is time-barred, see Opp. Mem. at 21 ("a claim under 10b-16(a)(1) may now be time barred"), and the Court so finds. Litigation under section 10(b) "must be commenced within one year after the discovery of the facts constituting the violation and within three years after such violation." Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 363, 111 S. Ct. 2773, 2782, 115 L. Ed. 2d 321 (1991). Bissell opened his margin account in 1981 but did not commence this action until December 1, 1993. Thus, any claim under subsection (a)(1) of Rule 10b-16 based on MLPF&S's alleged failure to disclose credit information when Bissell's account was opened is time-barred because it was filed more than three years after the alleged violation.
In addition, courts recognizing an implied right of action under Rule 10b-16 have required the plaintiff to allege that the defendant failed to establish procedures to provide the requisite Rule 10b-16 disclosures. See Slomiak, 597 F. Supp. at 685; see also Nick v. Shearson/American Express, Inc., 612 F. Supp. 15, 18 (D. Minn. 1984) (plaintiff must allege that defendants "failed to establish procedures to provide credit disclosure or that the terms initially established for the . . . [plaintiff's] account . . . were changed without the required notice"). Bissell's Complaint fails to make such allegations.
Finally, plaintiff's discussion in his Opposition Memorandum regarding the adequacy of MLPF&S's monthly statements demonstrates that there is no violation of the specific disclosure requirements of subsection (a)(2) of Rule 10b-16. In his memorandum, plaintiff reproduces certain entries from his monthly statement for September 1985. After commenting (with apparent approval) on MLPF&S's disclosures relating to interest charges, plaintiff finds fault with the entries relating to interest credits. Specifically, plaintiff states that
with respect to credit interest ("Cr. Int."), Merrill Lynch simply reported "50% BCR SMV." ("BCR" means "brokers call rate"; "SMV" means "short market value".) Merrill Lynch did not quantify BCR.
Opp. Mem. at 9 (emphasis added). However, unlike disclosures relating to interest charges which do require an itemized breakdown under Rule 10b-16, there is no SEC rule or regulation requiring any particular disclosure format with respect to interest credits.
For the foregoing reasons, plaintiff's claim under Rule 10b-16 is hereby dismissed.
B. Other Claims
1. Breach of Fiduciary Duty, the Shingle Theory, and Principles of Trust and Agency
In his third claim for relief, plaintiff asserts that under the law of New York, MLPF&S, "as a broker acting as agent for its customers, is under a fiduciary duty to deal fairly and in complete candor with its customers concerning the matters entrusted to the broker, and not to misappropriate the economic benefits of collateral or property of the cestui qui trust." Complaint P 44. In his fourth and fifth claims, plaintiff alleges similarly that MLPF&S violated the "shingle theory"
and principles of "trust and agency" in connection with his short sales. Since these claims all allege theories of fiduciary law, they will be resolved together.
The issue posed by these related claims is whether MLPF&S owes plaintiff a fiduciary or agency duty with respect to the specific practices regarding collateral in dispute in this action. MLPF&S concedes that it owes a fiduciary duty to the plaintiff -- arising from its role as plaintiff's agent -- to execute his securities transactions at the best prices reasonably obtainable. Plaintiff makes no allegation that MLPF&S failed to carry out this obligation. However, MLPF&S disputes that it owes plaintiff a fiduciary duty with respect to the collateral practices in question, arguing that the duty which plaintiff seeks to impose does not implicate MLPF&S's role as plaintiff's agent or fiduciary. Rather, MLPF&S contends, such a duty arises -- if at all -- from the relationship with MLPF&S recognized in plaintiff's margin agreement, namely, that of debtor and creditor. The Court agrees, for the reasons set forth below.
Under New York law, the "'mere existence of a broker-customer relationship is not proof of its fiduciary character.'" Rush v. Oppenheimer & Co., 681 F. Supp. 1045, 1055 (S.D.N.Y. 1988) (quoting Fey v. Walston & Co., 493 F.2d 1036, 1049 (7th Cir. 1974)). The fiduciary obligation between a broker and customer under New York law is limited to affairs entrusted to the broker, and "the scope of affairs entrusted to a broker is generally limited to the completion of a transaction." Schenck v. Bear, Stearns & Co., 484 F. Supp. 937, 947 (S.D.N.Y. 1979), overruled on other grounds, Conway v. Icahn & Co., 16 F.3d 504 (2d Cir. 1994). In the absence of discretionary trading authority delegated by the customer to the broker -- and none is alleged in the case at bar -- a broker does not owe a general fiduciary duty to his client. Schenck, 484 F. Supp. at 946-47.
The law of states other than New York is similar. The Arizona Supreme Court has stated that
the agency relationship between customer and broker normally terminates with the execution of the order because the broker's duties, unlike those of an investment advisor or those of a manager of a discretionary account are only to fulfill the mechanical, ministerial requirements of the purchase or sale of the security . . . . While a broker and a customer have an agent-principal relationship with respect to each transaction to buy or sell, they may also have a separate and distinct relationship as creditor and debtor.
Walston & Co. v. Miller, 100 Ariz. 48, 51-52, 410 P.2d 658, 661 (1966); see also Caravan Mobile Home Sales, Inc. v. Lehman Bros. Kuhn Loeb, Inc., 769 F.2d 561 (9th Cir. 1985) (finding no continuing fiduciary relationship where customer had a non-discretionary account with broker); Leib v. Merrill Lynch, Pierce, Fenner & Smith Inc., 461 F. Supp. 951 (E.D. Mich. 1978) (finding that broker owed only limited, transactional duties to customer who maintained non-discretionary account), aff'd, 647 F.2d 165 (6th Cir. 1981). The SEC has also recognized that the relationship of brokers to customers with respect to credit and debit balances in their accounts is that of debtor and creditor. In adopting Rule 15c3-2 governing the use of free credit balances in customer accounts, the SEC explained:
Many customers of broker-dealers are not aware (1) that when they leave free credit balances with a broker-dealer the funds generally are not segregated and held for the customer, but are commingled with other assets of the broker-dealer and used in the operation of the business, and (2) that the relationship between the broker-dealer and the customer as a result thereof is that of creditor-debtor.