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LOWE v. SALOMON SMITH BARNEY

June 3, 2002

JOHN P. LOWE, JR., PLAINTIFF,
V.
SALOMON SMITH BARNEY, INC., DEFENDANT.



The opinion of the court was delivered by: David G. Larimer, Chief Judge.

DECISION AND ORDER

Plaintiff, John P. Lowe, appearing pro se,*fn1 filed the complaint in this action on September 1, 2001, alleging claims under federal and New York law for securities fraud. Defendants, Salomon Smith Barney, Inc. ("SSB") and B. Alex Henderson ("Henderson"), have moved to dismiss the complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure.

BACKGROUND

The complaint alleges the following facts, which must be accepted as true for the purposes of deciding the motion to dismiss. At all times relevant to the complaint, plaintiff held 13,680 shares of common stock of Nortel Networks Corp. ("Nortel"), in an account with SSB. Defendant Henderson has been employed by SSB as a Managing Director in equity research since June 29, 2000, and is an analyst in the telecommunications equipment sector. As part of his duties, Henderson assumed coverage of Nortel for SSB in July 2000. Complaint ¶ 7.

Plaintiff alleges that Henderson's recommendations, articulated through his own research reports and the advice of Alfred F. Kelly, Jr., the SSB broker on plaintiff's account, caused plaintiff to hold his Nortel shares to his detriment. Plaintiff alleges that defendants knowingly misrepresented that the outlook for Nortel stock was favorable, and that they were motivated to do so by a desire to obtain investment banking fees from Nortel and to "condition the market" to accept Nortel securities that SSB was planning to underwrite. In January 2001, SSB acted as co-lead underwriter of a $2.5 billion debt and equity offering for Nortel.

Plaintiff further alleges that SSB failed to inform plaintiff that, contrary to traditional practice in the brokerage industry, SSB no longer maintained an "ethical screen" or "Chinese wall" between its research analysts and its investment bankers, in order to ensure that its analysts' recommendations would not be influenced by SSB's own business interests.

Because of these acts and omissions on the part of defendants, plaintiff alleges, he continued to hold his Nortel shares, the value of which declined from $86 a share on July 26, 2000 to $6 a share on September 4, 2001. The total value of plaintiff's Nortel shares declined by over $1 million.

Based on these allegations, plaintiff asserts six causes of action, all based on plaintiff's allegation that Henderson knowingly made false and misleading statements about Nortel's prospects, which led plaintiff to hold rather than sell his Nortel shares. The first four causes of action allege violations of, respectively, § 9(e) of the Securities Exchange Act of 1934 ("the Act"), 15 U.S.C. § 78i; § 10(b) of the Act and Rule 10b-5, 17 C.F.R. § 240.10b-5; § 15(c) of the Act, 15 U.S.C. § 78o; and § 20(a) of the Exchange Act, 15 U.S.C. § 78t(a). The fifth cause of action asserts a claim for fraud and misrepresentation under New York law. The sixth cause of action asserts a claim for breach of fiduciary duty, also under New York law.

DISCUSSION

I. Claim under § 15(c) of the Act

Plaintiff's third cause of action asserts a claim under § 15(c) of the Act, 15 U.S.C. § 78o. The Second Circuit, however "has held that there is no private right of action under § 15(c)(1)." Boguslavsky v. Kaplan, 159 F.3d 715, 722 n. 6 (2d Cir. 1998) (citing Asch v. Philips, Appel & Walden, Inc., 867 F.2d 776, 777 (2d Cir.) (per curiam), cert. denied, 493 U.S. 835 (1989)). Plaintiff himself apparently concedes that Asch bars his claim, since he contends that "the holding of Asch should be reconsidered in this Circuit." Plaintiff's Memorandum of Law at 9. This Court, however, is bound to follow Second Circuit precedent, and I have no discretion to "reconsider" decisions of the Court of Appeals. Plaintiff's third cause of action must therefore be dismissed.

II. Claim under § 9 of the Act

Defendant contends that plaintiff lacks standing to assert claims under §§ 9(e) and 10(b) of the Act, and under Rule 10b-5, because plaintiff does not allege that defendants' alleged misrepresentations were connected with the purchase or sale of any security by plaintiff. Defendant maintains that plaintiff's allegation that he continued to hold securities that he already owned is not enough to give rise to a claim under any of these provisions.

Section 9(a) of the Act, 15 U.S.C. § 78i(a), makes it "unlawful for any person, . . . [f]or the purpose of creating a false or misleading appearance of active trading in any security registered on a national securities exchange, or a false or misleading appearance with respect to the market for any such security," to engage in certain deceptive practices, in order to "induce the purchase or sale of any security. . . ." Section 9(e), 15 U.S.C. § 78i(e), creates a private right of action, making any person who violates § 9 "liable to any person who shall purchase or sell any security at a price which was affected by such act or transaction . . ." on the part of the defendant. Thus, "the cause of action expressly established by § 9(e) ...


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