The opinion of the court was delivered by: Michael B. Mukasey, U.S.D.J
Plaintiffs Tony H. Hoffman, Reuben Hekmat, Thomas E. Maddux and Eileen
Leung sue TD Waterhouse Investor Services, Inc. and John H. Chapel, the
company's president, on behalf of themselves and a class of investors who
maintained on-line trading accounts with TD Waterhouse. Plaintiffs allege
violations of the Securities and Exchange Act of 1934 § 10(b),
15 U.S.C. § 78j(1997), and Rules 10b-3 and 10b-5 promulgated
thereunder. They also allege violations of § 20(a) of the Securities
and Exchange Act, 15 U.S.C. § 78t(a)(1997) and New York state law.
Pursuant to Fed.R.Civ.Pro. 12(b)(6), defendants move to dismiss the
complaint. For the reasons stated below, the motion is granted.
TD Waterhouse maintained an Internet site through which the company
executed securities trades for its customers (Comp. ¶ 13) John H.
Chapel was TD Waterhouse's president (Id. at ¶ 14) Plaintiff Hoffman used
TD Waterhouse's Internet site to place a buy order. (Id. at ¶ 39)
Hoffman canceled the order four minutes later because the price was
declining. (Id. at ¶ 40) TD Waterhouse confirmed on-screen that
Hoffman's order was canceled. (Id. at ¶ 40) In addition TD
Waterhouse's "account order status screen" had deleted the purchase order
from its list of pending orders. (Id. at ¶ 44) More than two hours
after confirming cancellation of the purchase order, however, TD
Waterhouse executed that trade. (Id. at ¶ 45) The other named
plaintiffs similarly allege that TD Waterhouse executed their trades after
the company had previously confirmed plaintiffs' orders to cancel those
trades. (Id. at ¶¶ 54-69)
Section 10(b) prohibits fraud "in connection with the purchase or sale
of any security." 15 U.S.C. § 78j. Defendants argue that their
alleged misrepresentations were not "in connection with" the purchase or
sale of any securities. For the defendants' misrepresentations to be "in
connection with" a purchase or sale, they must concern the value of the
securities purchased or sold, or the consideration received in return.
See Saxe v. E.F. Hutton & Co., 789 F.2d 105, 108 (2d Cir. 1986)
("Plaintiff did not allege that appellees misled him concerning the value
of the securities he sold or the consideration he received in return.")
Here, plaintiffs allege that defendants misled them about whether their
buy and sell orders had been effectively canceled. Plaintiffs argue that
these misrepresentations pertain to the securities
traded after the ineffective cancellation order. (Pl. Mem. at 14) However,
for securities purchased after the ineffective cancellation, the
misrepresentation does not concern their value. For securities sold after
the ineffective cancellation, the misrepresentation does not concern the
consideration received. Thus, defendants' misrepresentations do not satisfy
§ 10(b)'s "in connection with" requirement. Because TD Waterhouse is not
liable under § 10(b), plaintiffs also fail to state a claim under
§ 20(a) of "controlling person" liability against Chapel.
Accordingly, those claims are dismissed.
Plaintiffs devote much of their argument contesting the position
— which they attribute incorrectly to defendants*fn1 — that
to satisfy the "in connection with" requirement, a misrepresentation must
concern the value of the security traded. (Id. at 12) Plaintiffs argue
for an even broader standard which would encompass misrepresentations
that "pertained" to the securities purchased or sold — whether or
not they related to the securities' value. (Id. at 14) Plaintiffs cite a
line in Superintendent of Ins. v. Bankers Life & Casualty Corp.,
404 U.S. 6, 12-13(1971) in which the Court said that the "crux of the
present case is that Manhattan suffered an injury as a result of deceptive
practices touching its sale of securities. . . ." (emphasis added). (Id.
at 10) Plaintiffs then argue that Bankers Life cited A.T. Brod & Co. v.
Perlow, 375 F.2d 393 (2d Cir. 1967) to reject, the proposition that
"there can be no violation of Rule 10(b) where `no fraud is alleged as to
the investment value of the securities.'" (Id.) Bankers Life did not cite
A.T. Brod & Co. for that proposition*fn2 nevertheless, that case did
reject the proposition that the misrepresentation must concern the
securities' value, stating that a "10b-5 action will survive even though
the fraudulent scheme or device is unrelated to `investment value.'"
A.T. Brod & Co., 375 F.2d at 397.
However, neither Bankers Life nor A.T. Brod & Co. is inconsistent with
the "in connection with" requirement as it subsequently developed in the
Second Circuit, limiting Section 10(b) to misrepresentations concerning
either the value of the security or the consideration received, because
in both cases the misrepresentation related to the value of the
consideration. Bankers Life described the misrepresentation as a
"deceptive device which deprived [the seller] of any compensation for the
sale of its valuable block of securities." Bankers Life, 404 U.S. at 10.
A.T. Brod & Co. described the misrepresentation as placing orders "with
the fraudulent intent of paying for the securities only if their market
value had increased by the date payment was due." A.T. Brod & Co., 375
F.2d at 395. The misrepresentations in both cases, therefore, fall within
the Second Circuit's requirement that the misrepresentation concern
either the value of the security or the consideration received.*fn3
Again, no misrepresentation
or either the value of a security or the consideration received is present
Because I have dismissed plaintiffs' federal law claims, only their
state law claims remain. "In general, where the federal law claims are
dismissed before trial, the state law claims should be dismissed." Marcus
v. AT&T Corp., 138 F.3d 46, 57. Accordingly, I decline to exercise
jurisdiction over plaintiffs' state law claims.
For the reasons stated above, the complaint is dismissed.