under New York law. The sixth cause of action asserts a claim for breach
of fiduciary duty, also under New York law.
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) runs in favor of both those
who purchase and sell stock at a price affected by a manipulative
transaction." Crane Co. v. American Standard, Inc., 603 F.2d 244, 252 (2d
Cir. 1979) (emphasis added).
The complaint here does not allege that plaintiff purchased or sold his
Nortel securities at a price which was affected by defendants' alleged
activities. Plaintiff alleges only that he "held his Nortel shares to his
detriment," Complaint ¶ 20, because their price per share has declined
while he has continued to hold the shares.
That is not enough to state a claim. It has long been held that §
9(e) does not apply where there is no allegation that the plaintiff has
either bought or sold stock at a price that was affected by defendants'
actions. See, e.g., Chemetron Corp. v. Business Funds, Inc., 682 F.2d 1149,
1161-62 (5th Cir. 1982) (§ 9(a), as enforced through § 9(e),
requires action for the purpose of inducing a sale or purchase of a
security on which the plaintiff relied and which affected the plaintiff's
purchase or selling price), rev'd on other grounds, 460 U.S. 1007 (1983);
Atlantic Fed. Savings & Loan v. Dade Savings & Loan, 592 F. Supp. 1089,
1092 (S.D.Fla. 1984) (§ 9(a) requires a purchaser or seller);
Richardson v. Shearson/American Express Co., 573 F. Supp. 133, 135-36
(S.D.N.Y. 1983) (failure to allege purchase or sale of stock precludes
§ 9 action); Copperweld Corp. v. Imetal, 403 F. Supp. 579, 595
(W.D.Pa. 1975) ("Section 9(e) unequivocally states that one shall
purchase or sell the security before that person can assert the liability
of another under subsection a"); DuPont v. Wyly, 61 F.R.D. 615, 630
(D.Del. 1973) (same).
Here, there is no allegation that plaintiff was induced to buy Nortel
stock because of defendants' actions, or that the price at which he
bought his shares was affected by defendants' activities. There is also
no allegation that plaintiff has ever sold his Nortel shares. The only
allegation, which is repeated throughout the complaint, is that plaintiff
continued to hold shares that he already owned, apparently based on
defendants' reports and advice. See Complaint ¶ 5 ("Plaintiff . . . has
at all times relevant to this complaint held 13,680 shares of Common
Stock of Nortel . . . in an account with defendant Salomon Smith
Barney"); ¶ 10 ("the recommendations of defendant Henderson . . . caused
plaintiff to hold his Nortel shares to his detriment"); ¶ 17 ("Plaintiff
continued to hold his Nortel shares because of [sic] he was advised to do
so by defendants"); ¶ 20 ("As a result of the defendants' dissemination
of the materially false and misleading information and failure to
disclose material facts as alleged herein, plaintiff held his Nortel
shares to his detriment"); see also Complaint ¶ 21 ("Had plaintiff known
the truth of the defendants' fraudulent scheme, plaintiff would have sold
his Nortel shares").
Because the complaint fails to allege that plaintiff ever purchased or
sold any security at a price which was affected by defendants' allegedly
improper conduct, his first cause of action, which asserts a claim under
§ 9, must be dismissed. See Richardson, 573 F. Supp. at 136
("plaintiffs do not claim that they purchased or sold Nucorp stock at a
price that was affected by Von Nessi's alleged violation of section 9.
Rather, they assert that Von Nessi's conduct induced them not to sell the
stock. For this reason alone, Count IV [alleging violations of § 9]
must be dismissed").
III. Claim under § 10(b) of the Act and Rule 10b-5
For similar reasons, plaintiff's claims under § 10(b) and
Rule 10b-5 must be dismissed. Section 10(b) makes it unlawful for and person
"[t]o use or employ, in connection with the purchase or sale of any
security . . ., any manipulative or deceptive device or contrivance in
contravention of such rules and regulations as the Commission may
prescribe as necessary or appropriate in the public interest or for the
protection of investors." 15 U.S.C. § 78j(b). Similarly, Rule 10b-5
makes it unlawful for any person
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or
to omit to state a material fact necessary in order to
make the statements made, in the light of the
circumstances under which they were made, not
(c) To engage in any act, practice, or course of
business which operates or would operate as a fraud or
deceit upon any person, in connection with the
purchase or sale of any security.
17 C.F.R. § 240.10b-5.
Like § 9, then, § 10(b) and Rule 10b-5 require some connection
between the alleged violation and either the purchase or sale of a
security. "It is well established that mere retention of securities in
reliance on material misrepresentations or omissions does not form the
basis for a § 10(b) or Rule 10b-5 claim." Krim v. BancTexas Group,
Inc., 989 F.2d 1435, 1443 (5th Cir. 1993) (citing Blue Chip Stamps v.
Manor Drug Stores, 421 U.S. 723
(1975), and Abrahamson v. Fleschner,
568 F.2d 862, 868 (2d Cir. 1977), cert. denied, 436 U.S. 913 (1978),
disapproved on other grounds, Transamerica Mortgage Advisers, Inc. (TAMA)
v. Lewis, 444 U.S. 11 (1979)); accord Interbrew v. Edperbrascan Corp.,
23 F. Supp.2d 425, 431 (S.D.N.Y. 1998).
In Blue Chip, the Supreme Court held that a plaintiff was not entitled
to sue for a violation of Rule 10b-5 on the theory that it was entitled
to buy certain stock pursuant to an antitrust consent decree to which the
plaintiff was not a party, but was dissuaded from doing so by reason of a
materially misleading, overly pessimistic prospectus. In reaching that
holding, the Court expressed its agreement with the Second Circuit's
earlier ruling in Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2d
Cir.), cert. denied, 343 U.S. 956 (1952), which held that a person who is
neither a purchaser nor a seller of securities may not bring an action
under § 10(b) or Rule 10b-5. The Court also noted that "[t]hree
principal classes of potential plaintiffs are presently barred by the
Birnbaum rule," one of which is "actual shareholders in the issuer who
allege that they decided not to sell their shares because of an unduly
rosy representation or a failure to disclose unfavorable material." 421
U.S. at 737-38.*fn2 Although recognizing that there are some
disadvantages to such a rule, the Court stated that
[t]he virtue of the Birnbaum rule, simply stated, . . .
is that it limits the class of plaintiffs to those
who have at least dealt in the security to which the
prospectus, representation, or omission relates. And
their dealing in the security, whether by way of
purchase or sale, will generally be an objectively
demonstrable fact in an area of the law otherwise very
much dependent upon oral testimony. In the absence of
the Birnbaum doctrine, bystanders to the securities
marketing process could await developments on the
sidelines without risk, claiming that inaccuracies in
disclosure caused nonselling in a falling market and
that unduly pessimistic predictions by the issuer
followed by a rising market caused them to allow
retrospectively golden opportunities to pass.
Id. at 746-47.