what the defendants charged. More specifically, no authority of which this Court has been advised involves a markup even remotely as small as the 1/6 of a percent markup at issue in this case; indeed, from the Court's review, "excessiveness" appears not even to become a consideration in debt-security cases until markups reach the three to three and one-half percent range. See, e.g., In re Lehman Bros., 1996 WL 519914, at *3-7. In sum, because the amount of the markup charged here by the defendants was not excessive, Press cannot establish on that basis that the defendants were obliged to disclose it to him at any time during the course of his Treasury bill transaction.
As for Press's alternate theory, he appears to argue that the defendants owed him a duty of disclosure based on his naked allegation in the Complaint that they "were his fiduciaries" for purposes of the Treasury bill transaction. This argument fails as well. Generally speaking, a fiduciary relationship exists under New York law "'when one [person] is under a duty to act for or to give advice for the benefit of another upon matters within the scope of the relation.'" Flickinger v. Harold C. Brown & Co., 947 F.2d 595, 599 (2d Cir. 1991) (quoting Mandelblatt v. Devon Stores, Inc., 132 A.D.2d 162, 521 N.Y.S.2d 672, 676 (1st Dep't 1987) (quoting Restatement (Second) of Torts § 874 comment a (1977))) (alteration in Flickinger). Such a relationship may inhere as between securities brokers and purchasers. See, e.g., Scott v. Dime Sav. Bank of New York, FSB, 886 F. Supp. 1073, 1079 (S.D.N.Y. 1995) ("Under New York law, stockbrokers may owe fiduciary duties to their customers."), aff'd, 101 F.3d 107 (2d Cir. 1996), cert. denied, 137 L. Ed. 2d 339, 117 S. Ct. 1260 (1997); Schenck v. Bear, Stearns & Co., 484 F. Supp. 937, 946 (S.D.N.Y. 1979), overruled on other grounds by Conway v. Icahn & Co., Inc., 16 F.3d 504, 509 (2d Cir. 1994).
Nevertheless, the "mere existence of a broker-customer relationship is not proof of its fiduciary character." Bissell v. Merrill Lynch & Co., 937 F. Supp. 237, 246 (S.D.N.Y. 1996) (quoting Rush v. Oppenheimer & Co., 681 F. Supp. 1045, 1055 (S.D.N.Y. 1988)). Indeed, "New York courts repeatedly have held that 'a broker does not, in the ordinary course of business, owe a fiduciary duty to a purchaser of securities.'" A. Ronald Sirna, Jr., P.C. Profit Sharing Plan v. Prudential Secs., Inc., 964 F. Supp. 147, 152 (S.D.N.Y. 1997) (quoting Fekety v. Gruntal & Co., 191 A.D.2d 370, 595 N.Y.S.2d 190, 190-91 (1st Dep't 1993)); accord Perl v. Smith Barney Inc., 230 A.D.2d 664, 646 N.Y.S.2d 678, 680 (1st Dep't 1996). This is because a broker's fiduciary obligation, if any, "is limited to affairs entrusted to the broker, and 'the scope of affairs entrusted to the broker is generally limited to the completion of a transaction.'" Bissell, 937 F. Supp. at 246 (quoting Schenck, 484 F. Supp. 937 at 947) (alteration in Bissell) (emphasis added). See also Rush, 681 F. Supp. at 1055.
The crucial factor in determining whether a broker has been "entrusted" with particular matters such that a fiduciary obligation attaches, appears to be whether the broker exercises discretion over those matters. In other words, "in the absence of discretionary trading authority delegated by the customer to the broker . . . a broker does not owe a general fiduciary duty to his client." Bissell, 937 F. Supp. at 246 (emphasis added).
See Schenck, 484 F. Supp. at 947 (where defendant "had neither discretion nor responsibility over supervision of plaintiff's account" for certain matters, the "matters were not entrusted to [defendant], [and] there was no fiduciary obligation between [defendant] and plaintiff with respect to" those matters). See also Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114, 120 (2d Cir. 1991) ("Shearson owed no fiduciary duty to HMK other than to execute the trades requested because the accounts were non-discretionary."); Lowenbraun v. Rothschild, 685 F. Supp. 336, 343 (S.D.N.Y. 1988) ("A broker who has discretionary powers over an account owes his client fiduciary duties, and shares a principal-agent relationship with the client.") (citing Rolf v. Blyth Eastman Dillon & Co., 570 F.2d 38, 45 (2d Cir. 1978)). Cf., e.g., Howell v. Freifeld, 631 F. Supp. 1222, 1224 (S.D.N.Y. 1986) ("It is significant that plaintiff maintained a discretionary account with [defendant]. This imposed upon [defendant] 'broad' fiduciary duties to plaintiff with respect to the management of the account.").
Under these standards, Press cannot establish that the defendants owed him a fiduciary duty -- thereby requiring them to disclose the markup -- because his Complaint contains absolutely no allegations indicating that they had any discretionary authority whatever with respect to the transaction they executed on his behalf. Indeed, his unequivocal and consistent allegations support precisely the opposite conclusion, i.e., that he entered into a single, arms-length transaction with the defendants, in which their sole function was to purchase and eventually pay over the proceeds of a single instrument specifically chosen by him.
The Complaint recites that Press telephoned Chemical and inquired about buying a six-month Treasury bill worth approximately $ 100,000; he spoke to Chemical's employee Green, who informed him, inter alia, of the price he would have to pay and the return he would receive; he went to Chemical's premises and purchased the bill; he later communicated with Chemical about obtaining the proceeds on the maturity date; and he ultimately received from Chemical a check in the amount of the proceeds. These allegations "do not purport to assert a relationship different from that of an ordinary broker-client relationship," Perl, 646 N.Y.S.2d at 680, and consequently, the allegations are insufficient to establish that the defendants owed Press a fiduciary duty with respect to his Treasury bill transaction. See, e.g., Salzmann v. Prudential Secs. Inc., 1994 U.S. Dist. LEXIS 6377, 91 Civ. 4253 (KTD), 1994 WL 191855, at *7 (S.D.N.Y. May 16, 1994) (holding that because plaintiffs' "allegations suggest that the relationship [with defendants] was typical," inasmuch as plaintiffs' account was "non-discretionary" and they "pre-approved every trade," defendants "did not owe plaintiffs a fiduciary duty"). Cf., e.g., Flickinger, 947 F.2d at 599 (fiduciary relationship did exist where broker and customer "had a long-standing relationship during which [broker] provided investment advice and services"); Shahzad v. H.J. Meyers & Co., 1997 U.S. Dist. LEXIS 1128, 95 Civ. 6196 (DAB), 1997 WL 47817, at *11 (S.D.N.Y. Feb. 6, 1997) (unlike case where plaintiff "was simply a purchaser 'in the ordinary course of business,' who did not have an on-going relationship with the broker-defendant," here "Plaintiff entrusted Defendants to purchase securities on thirteen occasions . . . and acted upon the advice of the Defendants and did not simply put in orders of the stocks he wished to purchase").
Given Press's inability to establish that the defendants were his fiduciaries for purposes of the transaction at issue, his claim that they owed him a duty of disclosure on the basis of a fiduciary relationship necessarily fails. Accordingly, because Press's allegation of a material omission with respect to the defendants' markup cannot succeed absent a showing that they had a duty to disclose such information, his markup claim must be dismissed.
2. Misrepresentation of Yield
Press's claim that the defendants misrepresented the yield on his transaction is equally deficient under Rule 10b-5. In the first place, it is difficult to see how Press relied in deciding whether to purchase the Treasury bill on the yield figure reported in his trade confirmation form, when he concedes that he received the form "several days after" the purchase. Press argues in opposing this motion that purchasers of Treasury securities such as himself "reasonably rely upon the fact that they will receive an accurate disclosure of the yield on their securities," and he seeks leave to replead a more detailed accounting of the fact that, at the time of his transaction, he "requested and received express representations concerning the yield."
Nevertheless, even if Press could amend his Complaint to allege reliance, or even if he were entitled to a presumption of reliance insofar as he alleges a material omission,
Press still cannot succeed on his yield claim because the substantive allegation on which it depends fails as a matter of law to establish a material consideration. In short, the difference between the 178 day period from settlement to maturity that was actually used to calculate his yield figure, and the 181 day period from purchase to maturity that he claims should have been used, is immaterial as a matter of law.
No rational juror could conclude that, in determining whether to purchase the Treasury bill at issue, it would have "assumed actual significance" in the deliberations of a reasonable investor, TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449, 48 L. Ed. 2d 757, 96 S. Ct. 2126 (1976), to learn that the proffered yield figure for the transaction understated the value of the investment by the trivial monetary equivalent of a three-day expansion in the maturity period. The information concerning yield therefore cannot serve as the basis of either a misrepresentation or a material omission, and Press's claim based on that information must be dismissed.
3. Delayed Access to Proceeds
Press's final claim under Section 10(b) and Rule 10b-5 is that he entered into the Treasury bill purchase in reliance on the fact that he would be able to receive the proceeds of that transaction on the stated May 9, 1996 maturity date. That allegation is deficient as a matter of law for several reasons, including failure to plead materiality adequately; that is, Press cannot plausibly show that the mere two-day difference in the availability of the proceeds (or four-day difference in receipt) would have been a material factor in his decision whether to purchase the Treasury bill.
Cf. Feinman v. Dean Witter Reynolds, Inc., 84 F.3d 539, 541 (2d Cir. 1996) ("Reasonable minds could not find that an individual investing in the stock market would be affected in a decision to purchase or sell a security by knowledge that the broker was pocketing a dollar or two of the fee charged for the transaction.") The Court also finds Press's proceeds claim flawed in two additional respects: it fails to satisfy the "in connection with" requirement of Rule 10b-5, and is grounded on insufficient allegations of scienter under Rule 9(b), Fed. R. Civ. P.
First, the defendants' failure to advise Press that he would be unable to obtain the proceeds of his investment on the maturity date does not constitute a fraudulent omission "in connection with the purchase or sale of a security," as is necessary to state a claim under Section 10(b). Shapiro v. Cantor, 123 F.3d 717, 720-21 (2d Cir. 1997). To satisfy this requirement, a plaintiff need only demonstrate "an injury as a result of deceptive practices 'touching' its purchase or sale of securities." In re Ames Dep't Stores Inc. Stock Litig., 991 F.2d 953, 967 (2d Cir. 1993) (quoting Superintendent of Ins. of the State of N.Y. v. Bankers Life & Cas. Co., 404 U.S. 6, 12-13, 30 L. Ed. 2d 128, 92 S. Ct. 165 (1971)). Nevertheless, "the incidental involvement of securities does not implicate the anti-fraud provisions of the federal securities laws," that is, the fraud alleged must be "integral to the purchase and sale of the securities in question." Pross v. Katz, 784 F.2d 455, 459 (2d Cir. 1986). In the usual case, the requisite connection is satisfied "when the fraud alleged is that the plaintiff bought or sold a security in reliance on misrepresentations as to its value." Ames, 991 F.2d at 967 (emphasis added). As Judge Friendly explained, the purpose of Section 10(b) and Rule 10b-5 "is to protect persons who are deceived in securities transactions--to make sure that buyers of securities get what they think they are getting." Chemical Bank v. Arthur Andersen & Co., 726 F.2d 930, 943 (2d Cir. 1984) (emphasis added).
Following Chemical Bank and Pross, courts within this Circuit have consistently held that "misrepresentations or omissions involved in a securities transaction but not pertaining to the securities themselves cannot form the basis of a violation of Section 10(b) or Rule 10b-5." Manufacturers Hanover Trust Co. v. Smith Barney, Harris Upham & Co., 770 F. Supp. 176, 181 (S.D.N.Y. 1991) (citing Chemical Bank, 726 F.2d at 943; Pross, 784 F.2d at 459). In particular, the majority of recent cases concur that, for a plaintiff's complaint to state a viable cause of action, "the misrepresentation must relate to the value of the security."
Vigilant Ins. Co. v. C. & F. Brokerage Servs., 751 F. Supp. 436, 438 (S.D.N.Y. 1990) (emphasis added). See also Bissell v. Merrill Lynch & Co., 937 F. Supp. 237, 242-43 (S.D.N.Y. 1996) (citing cases).
Under these standards, the defendants' omission of information regarding the precise date on which Press could obtain his proceeds did not occur "in connection with" his purchase of the Treasury bill that produced those proceeds. At most this information related to an implied promise by the defendants that, upon maturity of the bill, Press would be afforded prompt access to the proceeds. But the exact availability date was not "integral" to the purchase or sale of the bill, Pross, 784 F.2d at 459, and in no way concerned its "value" as a security, Vigilant, 751 F. Supp. at 438, or affected the total amount of Press's return.
To the contrary, the release date of the proceeds was "merely a term of the arrangement between the broker and its customer under which the broker conducts [Treasury bill purchases] for the customer." Levitin v. PaineWebber, Inc., 933 F. Supp. 325, 329 (S.D.N.Y. 1996) (holding that broker's alleged failure to disclose that it used customers' collateral and proceeds from short sales to earn interest and gain other financial benefits stated no claim under Section 10(b) or Rule 10b-5). In other words, even if the defendants did make an omission or misrepresentation regarding the date on which Press could access his Treasury bill proceeds,
this sort of misrepresentation . . . goes not to any inducement by the defendants regarding the investment purpose of the sale, but to the arrangements concerning the mechanics of the sale.
Bosio v. Norbay Secs., Inc., 599 F. Supp. 1563, 1566 (E.D.N.Y. 1985) (holding that no claims were stated under Section 10(b) by allegations that defendant fraudulently promised to follow plaintiff's instructions regarding stock sales and falsely represented that he would forward sale proceeds to plaintiff). Thus, Press did "get what [he] thought [he] [was] getting" in his Treasury bill purchase, Chemical Bank, 726 F.2d at 943, notwithstanding anything that the defendants said or omitted to say about the date the proceeds of that purchase would be available. His claim based on the delivery of those proceeds therefore fails to satisfy the "in connection with" requirement of Rule 10b-5 and must be dismissed.
Press's proceeds claim also fails to meet the special requirements for pleading scienter under Rule 9(b). A plaintiff alleging fraud must assert scienter, or fraudulent intent,
either (a) by alleging facts to show that defendants had both motive and opportunity to commit fraud, or (b) by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness.
Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1128 (2d Cir. 1994).
In either case, however, "the facts alleged in the complaint must give rise to a 'strong inference' of fraudulent intent." Time Warner, 9 F.3d at 268 (alteration in original) (internal quotations and citations omitted) (emphasis added); accord Acito, 47 F.3d at 52. The allegations in Press's Complaint give rise to no such inference here.
As noted, the Complaint states that the defendants "knowingly or recklessly" made "materially false and misleading statements" or "failed to disclose material facts" to Press and the class, had "actual knowledge of the materially false and misleading statements" and omissions, and "intended to deceive [Press] and members of the class or acted with reckless disregard for the truth." These are mere conclusory assertions, however, wholly unsupported by the substantive allegations that precede them in the Complaint. Press's own account of his dealings with Chemical, from his first inquiry regarding a Treasury bill purchase to his final receipt of the proceeds, reveals those transactions to have been totally benign. His allegations do not come close to raising a "strong inference" that Chemical and Pershing either had a motive to defraud him or displayed conscious misbehavior or recklessness toward him.
Shields, 25 F.3d at 1128. Indeed, the Court would find otherwise if it were required to do so. At the very least, the Court cannot find that the facts alleged in Press's Complaint concerning the date on which his proceeds became available raise a sufficient inference of fraudulent intent to survive a motion to dismiss.
C. Remaining Claims
Press also seeks to impose liability on Chase and DLJ as the "controlling persons" of Chemical and Pershing under Section 20(a) of the 1934 Act, 15 U.S.C. § 78t(a). But that claim for derivative liability fails a fortiori in light of the Court's dismissal of Press's claims under Section 10(b) and Rules 10b-5 and 10b-10. See Moss v. Morgan Stanley Inc., 719 F.2d 5, 16-17 (2d Cir. 1983). As to Press's state law causes of action, the Complaint contains no allegations to support diversity jurisdiction, and the Court declines to exercise supplemental jurisdiction over those claims.
Press's claims under the federal securities laws are dismissed with prejudice, and his claims under state common law are dismissed without prejudice pursuant to this Court's discretion under 28 U.S.C. § 1367(c)(3). Because this is an Amended Complaint and the deficiencies in the pleadings cannot be cured by further amendment, Press will not be granted leave to amend.
The Clerk of Court is directed to enter judgment for the defendants and close the case.
Dated: New York, New York
December 22, 1997
United States District Judge