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PRESS v. CHEMICAL INV. SERVS. CORP.

December 22, 1997

DONALD PRESS, on behalf of himself and all others similarly situated, Plaintiff,
v.
CHEMICAL INVESTMENT SERVICES CORP., CHASE MANHATTAN CORPORATION, PERSHING, a Corporate Division of Donaldson, Lufkin & Jenrette Securities Corporation, and DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION, Defendants.



The opinion of the court was delivered by: COTE

 DENISE COTE, District Judge:

 Plaintiff Donald Press ("Press") first filed this putative class action on November 6, 1996, and filed an Amended Complaint on February 24, 1997, alleging that the defendant securities brokerage firms (and their respective corporate parents) violated Section 10(b) of the Securities Exchange Act of 1934 ("the 1934 Act"), 15 U.S.C. § 78j(b); Rules 10b-5 and 10b-10 promulgated thereunder, 17 C.F.R. §§ 240.10b-5 and 240.10b-10; Section 20(a) of the 1934 Act, 15 U.S.C. § 78t(a); and New York State common law of conversion, unjust enrichment, and breach of fiduciary duty. Press alleges that he and the members of the putative class purchased U.S. Treasury securities through the defendants and were injured in one or more of the following ways: (a) they were assessed undisclosed charges, commissions, or markups on their purchases; (b) they received trade confirmation forms that incorrectly stated the yield or maturity for the securities, or incorrectly described the defendants' capacity in effectuating the trade; and (c) they were denied prompt access to their trade proceeds by the defendants, who improperly retained the proceeds after maturity and profited from them.

 On December 11, 1996, the Court signed a stipulated order granting the defendants until January 9, 1997, to make a motion with respect to the original complaint, and at least one of the defendants served such a motion. At a conference on January 31, 1997, the Court expressly questioned Press as to whether in light of that motion he wished to amend the complaint to cure any defects; the Court directed that any such amendment be filed by a deadline that through mutual consent of the parties was set at February 24, 1997, on which date Press did in fact file the present, Amended Complaint.

 The defendants have now moved to dismiss the Amended Complaint (hereinafter "Complaint") for failure to state a claim upon which relief can be granted, pursuant to Rule 12(b)(6), Fed. R. Civ. P., and for failure to plead fraud with particularity, pursuant to Rule 9(b), Fed. R. Civ. P. For the reasons set forth below, the defendants' motion is granted in full, and Press's federal claims are dismissed with prejudice. The Court declines to exercise supplemental jurisdiction over Press's state law claims under 28 U.S.C. § 1367(c), and therefore dismisses those claims without prejudice.

 STANDARD OF REVIEW

 This Court may dismiss an action pursuant to Rule 12(b)(6) only if "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Cohen v. Koenig, 25 F.3d 1168, 1172 (2d Cir. 1994) (quoting Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957)). In considering a motion to dismiss, the Court must take "as true the facts alleged in the complaint and draw[] all reasonable inferences in the plaintiff[s'] favor." Jackson Nat'l Life Ins. Co. v. Merrill Lynch & Co., 32 F.3d 697, 699-700 (2d Cir. 1994). In other words, the Court can dismiss Press's Complaint only if, assuming all facts as true, he still has failed to plead the basic elements of his causes of action.

 BACKGROUND

 Press's action is based on a single transaction: on November 10, 1995, he purchased a six-month U.S. Treasury bill worth roughly $ 100,000 from defendant Chemical Investment Services Corp. ("Chemical"), a wholly-owned subsidiary of defendant Chase Manhattan Corporation ("Chase"). The trade was cleared through defendant Pershing, a corporate division of defendant Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), both of which are registered securities broker-dealers like Chemical. Press alleges that when he telephoned Chemical to place an order for a Treasury bill in the $ 100,000 range, he spoke to an employee of Chemical named Ira Green, "who had, on at least one prior occasion, facilitated [Press's] purchase of a Treasury bill through defendants." Green advised Press that for $ 99,488.42 he could purchase a Treasury bill that would mature in six months at $ 102,000; in other words, for $ 99,488.42 Press could buy the right to obtain $ 2,511.58 in six months' time. Press agreed to the transaction, met Green at Chemical's premises, wrote out a check in the appropriate amount to Pershing, and received an Investment Receipt from Chemical.

 A few days later, Press received a trade confirmation form issued jointly by Chemical and Pershing, whose names and addresses were listed at the top of the document. The form confirmed that on November 10, 1995, Press had purchased a six-month Treasury bill that was set to mature at $ 102,000 on May 9, 1996. The form also provided two different calculations of the yield on the transaction; what Press describes as the "discount yield" ("DISC") was listed as 4.980, and what he terms the "bond equivalent yield" ("YLD . . . TO MAT") was listed as 5.177. Ira Green was named on the form as Press's "Investment Consultant," and the form further indicated that the "Trade Date" and "Process Date" for the transaction were November 10, 1995, and that the "Settlement Date" was November 13, 1995. A bold-type message noted that the form was " AN ADVICE NOT AN INVOICE. REMITTANCE OR SECURITIES ARE DUE ON OR BEFORE SETTLEMENT DATE." (Emphasis added.) Finally, under a box marked "MKT/CPTY" -- for "Market" and "Capacity" -- the form listed "4/5" without further immediate explanation. But a legend printed in bold on the bottom of the form stated: " SEE REVERSE SIDE FOR TERMS AND CONDITIONS AND EXPLANATION OF CODED SYMBOLS RELATING TO THIS CONFIRMATION." The reverse side of the form indicated that a "Market" figure of "4" represented the "Over the Counter" market, and that a "Capacity" listing of "5" meant that the "Capacity in Which Your Introducing Firm Acted" was "as principal." *fn1" (Emphasis added.)

 In early May 1996, shortly before the maturity date for his Treasury bill, Press contacted Chemical and indicated his desire to receive the proceeds of the transaction on the maturity date, May 9. He was informed by Mr. Green and others that Chemical's standard operating procedures would not permit receipt of the proceeds on that date; rather, Chemical would either post a check to him on the maturity date by regular mail, send the check to him one day after maturity by overnight courier (for arrival two days after maturity), or wire the proceeds directly to him one day after maturity. Press was told that he could not pick up the check in person at Chemical's headquarters (or any other location in New York City) on the maturity date, and subsequently learned that receipt of the proceeds by wire or overnight courier would entail a charge of $ 15 to $ 20. Press eventually received a check for the matured proceeds four days -- which included a weekend -- after the maturity date, and in an amount $ 15 dollars less than the stated maturity value of $ 102,000. According to Press, he was advised by Chemical that this deficiency represents a Federal Express or similar courier charge.

 DISCUSSION

 Press's claims fall into three broad categories corresponding to (a) the "markup" he paid in purchasing the security through the defendants, (b) the yield figures reported on his trade confirmation form, and (c) the delay he experienced in receiving the trade proceeds. It will be helpful to describe each in some detail before explaining why none presents a viable claim under federal securities law.

 First, as to the markup, Press's complaint is that the price he was charged for the Treasury bill was "significantly greater" than the price the defendants paid to obtain the bill in the first instance, and that he was never advised by the defendants -- either before entering into the trade or upon receipt of his post-trade confirmation -- that he was being assessed this "undisclosed commission and/or markup." Press essentially agrees that the amount of the "markup" was $ 158.86, *fn2" or the difference between the $ 99,329.56 price that the defendants paid for the Treasury bill and the $ 99,488.42 that they charged Press for the trade. He contends that this markup is "excessive," totaling more than 6% of the $ 2,511 yield realized on the transaction, and 1/6 of a percent of the bill's overall price, a figure that he describes as "approximately 5 times the industry standard of a spread of a 1/32 of a percentage point." Press concedes that brokers such as the defendants routinely charge higher markups when they act as "principals" in a transaction, i.e., for their own account, but he asserts that he was never told "prior to tendering payment" that the defendants were not "acting as his agents in this transaction," nor was he advised of the "material differences between defendants acting as agents or principals." (Emphasis added.)

 Second, although Press's yield claim is somewhat opaque, the crux of his allegation is that his trade confirmation form misrepresented the actual yield that he received on his Treasury bill transaction. Specifically, Press asserts that although 181 days elapsed between the November 10, 1995 "Trade Date " (when he purchased the security) and the May 9, 1996 maturity date, the 5.177 yield figure reported on his confirmation form was based on a 178 day time span, corresponding to the period between the November 13, 1995 "Settlement Date " and the maturity date. According to Press, because his security actually matured over 181 days, the form was incorrect in indicating that the $ 2,511 he received was based on a yield figure of 5.177; he contends that a lower figure should have been reported, *fn3" inasmuch as he was never informed that the yield calculations were "not from the date of his trade."

 Finally, with respect to his delayed access to the proceeds of the transaction, Press alleges that "at the time of the purchase, [he] expected and relied upon the fact that the bill would mature on May 9, 1996, and he would be able to receive the matured proceeds on that date." Such prompt receipt is necessary, he asserts, to enable investors to "obtain and reinvest the proceeds as soon as possible after maturity to maximize [their] profit"; conversely, a broker's "prolonged retention of the bill following maturity allows the broker to profit at the customer's expense," and "necessarily diminishes a customer's possible profit from the transaction." Despite the importance of early access to proceeds, Press claims that he never was informed, either upon entering into the transaction or receiving his confirmation form, that he would not receive the proceeds on the maturity date.

 While Press organizes these allegations into claims under Rule 10b-10 and under Section 10(b) and Rule 10b-5, the same three basic contentions remain. As to all three Press asserts that the defendants acted as "his fiduciaries with respect to [the Treasury bill] transaction," and that their conduct was "willful, wanton, and malicious." He also alleges fraud with respect to each claim, i.e., that the defendants "knowingly or recklessly" made "materially false and misleading statements" or "failed to disclose material facts" to himself and members of the putative class, and that the defendants "intended to deceive" the class and acted with "reckless disregard for the truth."

 A. Claims Under Rule 10b-10

 Rule 10b-10 prescribes the "specified information" that broker-dealers are required to disclose to customers in a written confirmation form "at or before completion of a transaction." See 17 C.F.R. § 240.10b-10, Preliminary Note. As the parties generally concur, the information relevant to Press's claims that must be provided includes:

 
(1) the date and time of the transaction, and the identity, price, and number of shares of the security that were purchased, id. § 240.10b-10(a)(1);
 
(2) whether the broker or dealer is acting "as agent" for the customer (and/or some other person), or "as principal for its own account"; and if the latter, whether the broker or dealer is a market maker in the security, id. § 240.10b-10(a)(2);
 
(3) the "dollar price at which the transaction was effected" and the "yield to maturity calculated from the dollar price," to the extent that the transaction was "effected exclusively on the basis of a dollar price," id. § 240.10b-10(a)(5); and,
 
(4) the "yield at which the transaction was effected, including the percentage amount and its characterization (e.g., current yield, yield to maturity, or yield to call)," along with the "dollar price calculated from the yield at which the transaction was effected," to the extent that the ...

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