United States District Court, S.D. Texas, Houston Division
In Re ENRON CORPORATION SECURITIES, DERIVATIVE & "ERISA" LITIGATION,
UBS PAINEWEBBER, INC. AND UBS WARBURG, LLC, Defendants. KEVIN LAMPKIN, JANICE SCHUETTE, ROBERT FERRELL, AND STEPHEN MILLER, Individually and on Behalf of All Others Similarly Situated, Plaintiffs, Civil Action No. H-02-0851
OPINION AND ORDER
MELINDA HARMON UNITED STATES DISTRICT JUDGE
above referenced putative class action alleges violations of
the following securities fraud statutes through
Defendants' scheme to optimize revenue in investment
banking fees from UBS Securities LLC's corporate client,
Enron Corp. (“Enron”), at the expense and
defrauding of UBS Financial Service's brokerage retail
clients, Lead Plaintiffs Kevin Lampkin, Janice Schuette,
Bobby Ferrell, Stephen Miller, Terry Nelson, Diane Swiber,
Franklin Gittess, and Joe Brown and similarly situated
individuals: §§ 11, 12(a)(2) and 15 of the
Securities Act of 1933 (“the 1933 Act”), 15
U.S.C. §§ 77k, 77l, and 77o, et seq.;
§§ 10(b) and 20 of the Securities Exchange Act of
1934 (“the 1934 Act”), 15 U.S.C. §§
78j(b) and 78(t), et seq., and Rule 10b-5, 17 C.F.R.
§ 240.10b-5; and the Private Securities Litigation
Reform Act (“PSLRA”), 15 U.S.C.§ 78u-4. The
1933 Act claims are brought against UBS Financial Services,
Inc. f/k/a UBS Paine Webber, Inc. (“PW”) only.
#122 ¶¶ 228, 269.
before the Court are (1) a motion to dismiss the Third
Amended Complaint,  filed by Defendants PW and UBS
Securities LLC f/k/a UBS Warburg LLC (Warburg”),
(collectively, “UBS Defendants”) (Notice of
Motion to Dismiss, instrument #125; Memorandum in support,
#126); (2) an alternative motion for leave to amend complaint
from Lead Plaintiffs Kevin Lampkin, Janice Schuette, Bobby
Ferrell, Stephen Miller, Terry Nelson, Diane Swiber, Franklin
Gittess, and Joe Brown; (#164);(3) a motion to certify class
(#166), filed by Lead Plaintiffs; and (4) an opposed motion
for amended scheduling order, for additional briefing, and
for a ruling (#223), filed by Plaintiffs.
in this action have elected to proceed independently of the
complaints in the Newby and Tittle actions
in MDL 1446.
housekeeping matters, given the age of this litigation, the
lengthy discovery period now closed, and the extensive
briefing already filed in this case regarding the claims
against the UBS Defendants, the Court denies the motion for
amended scheduling order and for additional briefing as
unnecessary (#223). In addition because Plaintiffs have
already been permitted to file four complaints (#1, 6, 20,
and 122), the Court denies their alternative motion for leave
to file another (#164). Finally, in light of the issuance of
this Opinion and Order, the Court finds that the remaining
motion for a ruling (also part of #223) is MOOT.
Court leaves aside the name-calling, subjective accusations,
and denigrating remarks in the various documents it reviews
and focuses on the merits of the parties' contentions.
Standards of Review A. Rule 8(a)
Rule of Civil Procedure 8(a) states, A pleading that states a
claim for relief must contain:
(1) a short and plain statement of the grounds for the
court's jurisdiction, unless the court already has
jurisdiction, and the claim needs no new jurisdictional
(2) a short and plain statement of the claim showing that the
pleader is entitled to relief; and
(3) a demand for the relief sought, which may include relief
in the alternative or different types of relief.
the Rule's requirement of notice pleading,
“defendants in all lawsuits must be given notice of
specific claims against them.” Anderson v. U.S.
Dept. of Housing and Urban Development, 554 F.3d 525,
528 (5th Cir. 2008). While a plaintiff need not
plead specific facts, the complaint must provide “the
defendant fair notice of what the . . . claim is and the
grounds upon which it rests.” Bell
Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007).
If the complaint lacks facts necessary to put a defendant on
notice of what conduct supports the plaintiff's claims
against it, the complaint is inadequate to meet the notice
pleading standard. Anderson, 554 at
528. The complaint must not only name the
laws which the defendant has allegedly violated, but also
allege facts about the conduct that violated those laws.
district court reviews a motion to dismiss pursuant to
Fed.R.Civ.P. 12(b)(6), it must construe the complaint in
favor of the plaintiff and take all well-pleaded facts as
true. Randall D. Wolcott, MD, PA v. Sebelius, 635
F.3d 757, 763 (5th Cir. 2011), citing Gonzalez
v. Kay, 577 F.3d 600, 603 (5th Cir. 2009).
The plaintiff's legal conclusions are not entitled to the
same assumption. Ashcroft v. Iqbal, 556 U.S. 662,
678 (2009)(“The tenet that a court must accept as true
all of the allegations contained in a complaint is
inapplicable to legal conclusions.”), citing Bell
Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007);
Hinojosa v. U.S. Bureau of Prisons, 506 Fed.Appx.
280, 283 (5th Cir. Jan. 7, 2012).
a complaint attacked by a Rule 12(b)(6) motion to dismiss
does not need detailed factual allegations, . . . a
plaintiff's obligation to provide the ‘grounds'
of his ‘entitle[ment] to relief' requires more than
labels and conclusions, and a formulaic recitation of the
elements of a cause of action will not do . . . .”
Twombly, 550 U.S. at 555 (citations omitted).
“Factual allegations must be enough to raise a right to
relief above the speculative level.” Id. at
1965, citing 5 C. Wright & A. Miller,
Federal Practice and Procedure § 1216, pp.
235-236 (3d ed. 2004)(“[T]he pleading must contain
something more . . . than . . . a statement of facts that
merely creates a suspicion [of] a legally cognizable right of
action”). “Twombly jettisoned the
minimum notice pleading requirement of Conley v.
Gibson, 355 U.S. 41 . . . (1957)[“a complaint
should not be dismissed for failure to state a claim unless
it appears beyond doubt that the plaintiff can prove no set
of facts in support of his claim which would entitle him to
relief”], and instead required that a complaint allege
enough facts to state a claim that is plausible on its
face.” St. Germain v. Howard, 556 F.3d 261,
263 n.2 (5th Cir. 2009), citing In re Katrina
Canal Breaches Litig., 495 F.3d 191, 205 (5th
Cir. 2007)(“To survive a Rule 12(b)(6) motion to
dismiss, the plaintiff must plead ‘enough facts to
state a claim to relief that is plausible on its
face.'”), citing Twombly, 127 S.Ct. at
1974 [550 U.S. at 570]). “‘A claim has facial
plausibility when the pleaded factual content allows the
court to draw the reasonable inference that the defendant is
liable for the misconduct alleged.'” Montoya v.
FedEx Ground Package System, Inc., 614 F.3d 145, 148
(5th Cir. 2010), quoting Ashcroft v.
Iqbal, 556 U.S. 662, 678 (2009). The plausibility
standard is not akin to a “probability requirement,
” but asks for more than a “possibility that a
defendant has acted unlawfully.” Twombly, 550
U.S. at 556. “[T]hreadbare recitals of the elements of
a cause of action, supported by mere conclusory statements do
not suffice” under Rule 12(b). Iqbal, 556 U.S.
under Rule 12(b)(6) is proper not only where the plaintiff
fails to plead sufficient facts to support a cognizable legal
theory, but also where the plaintiff fails to allege a
cognizable legal theory. Kjellvander v. Citicorp,
156 F.R.D. 138, 140 (S.D. Tex. 1994), citing Garrett v.
Commonwealth Mortgage Corp., 938 F.2d 591, 594
(5th Cir. 1991); ASARCO LLC v. Americas Min.
Corp., 832 B.R. 49, 57 (S.D. Tex. 2007). “A
complaint lacks an ‘arguable basis in law' if it is
based on an indisputedly meritless legal theory' or a
violation of a legal interest that does not exist.”
Ross v. State of Texas, Civ. A. No. H-10-2008, 2011
WL 5978029, at *8 (S.D. Tex. Nov. 29, 2011).
noted, on a Rule 12(b)(6) review, although generally the
court may not look beyond the pleadings, the court may
examine the complaint, documents attached to the complaint,
and documents attached to the motion to dismiss to which the
complaint refers and which are central to the plaintiff's
claim(s), as well as matters of public record. Lone Star
Fund V (U.S.), L.P. v. Barclays Bank PLC, 594 F.3d 383,
387 (5th Cir. 2010), citing Collins, 224
F.3d at 498-99; Cinel v. Connick, 15 F.3d 1338,
1341, 1343 n.6 (5th Cir. 1994). See also
United States ex rel. Willard v. Humana Health Plan of Tex.,
Inc., 336 F.3d 375, 379 (5th Cir.
2003)(“the court may consider . . . matters of which
judicial notice may be taken”). Taking judicial notice
of public records directly relevant to the issue in dispute
is proper on a Rule 12(b)(6) review and does not transform
the motion into one for summary judgment. Funk v. Stryker
Corp., 631 F.3d 777, 780 (5th Cir. 2011).
“A judicially noticed fact must be one not subject to
reasonable dispute in that it is either (1) generally known
within the territorial jurisdiction of the trial court or (2)
capable of accurate and ready determination by resort to
sources whose accuracy cannot reasonably be
questioned.” Fed.R.Evid. 201(b).
object to Defendants' attachment of significant amounts
of extrinsic evidence to their motion and then arguing fact
issues utilizing extrinsic evidence as support, both of which
are inappropriate in a motion to dismiss. The Court finds
this objection to be unfounded.
that a defendant attaches to its motion to dismiss are
considered part of the pleadings if they are referred to in
the plaintiff's complaint and are central to [its]
claim.'” Collins v. Morgan Stanley Dean
Witter, 224 F.3d 496, 498-99 (5thCir. 2000),
quoting Venture Assocs. Corp. v. Zenith Data Sys.
Corp., 987 F.2d 429, 431 (7th Cir. 1993).
“[W]hen a plaintiff does not attach a pertinent
document to the complaint, a ‘defendant may introduce
the exhibit as part of his motion attacking the
pleading.'” Shepard v. Texas Dept. of
Transportation, 158 F.R.D. 592, 595 (E.D. Tex. 1994);
Charles Alan Wright, et al., 5A Federal Practice
and Procedure: Civil § 1327 (3d ed. April 2016
update). All the documents that Defendants attach to their
motion to dismiss were referenced and relied upon by
Plaintiffs in their Third Amended Complaint, and are central
to their claims. Plaintiffs have not questioned the
authenticity of the documents. By such attachments the
defendant simply provides additional notice of the basis of
the suit to the plaintiff and aids the Court in determining
whether a claim has been stated. Id. at 499. The
attachments may also provide the context from which any
quotation or reference in the motion is drawn to aid the
court in correctly construing that quotation or reference.
In re Enron Corp. Securities, Derivative &
“ERISA” Litig., No. H-04-0087, 2005 WL
3504860, at 11 n.20 (S.D. Tex. Dec. 22, 2005). “Where
the allegations in the complaint are contradicted by facts
established by documents attached as exhibits to the
complaint, the court may properly disregard the
allegations.” Martinez v. Reno, No.
3:97-CV-0813-P, 1997 WL 786250, at *2 (N.D. Tex. Dec. 15,
1997), citing Nishimatsu Const. Co. v. Houston Nat'l
Bank, 515 F.2d 1200, 1206 (5th Cir. 1975).
When conclusory allegations and unwarranted deductions of
fact are contradicted by facts disclosed in the appended
exhibit, which is treated as part of the complaint, the
allegations are not admitted as true. Carter v. Target
Corp., 541 Fed.Appx. 413, 417 (5th Cir. Oct.
4, 2013), citing Associated Builders, Inc. v. Alabama
Power Co., 505 F.2d 97, 100 (5th Cir. 1974),
citing Ward v. Hudnell, 366 F.2d 247 (5th
Cir. 1966). See Northern Indiana Gun & Outdoor Shows,
Inc. v. City of South Bend, 163 F.3d 449,
(7th Cir. 1996)(“It is a well settled rule
that when a written instrument contradicts allegations in the
complaint to which it is attached, the exhibit trumps the
allegations.”); Roth v. Jennings, 489 F.3d
499, 509 (2d Cir. 2007)(when attached documents contain
statements that contradict the allegations in the complaint,
the documents control and the court need not accept as true
the allegations contained in the complaint.”).
9(b) supplements but does not supplant Rule 8(a)'s notice
pleading, ” and “requires “only
‘simple, concise, and direct' allegations of the
‘circumstances constituting fraud, ' which after
Twombly must make relief plausible, not merely
conceivable, when taken as true.” U.S. ex rel.
Grubbs v. Kanneganti, 565 F.3d 180, 186 (5th
In all averments of fraud or mistake, the circumstances
constituting fraud or mistake shall be stated with
particularity. Malice, intent, knowledge, and other condition
of mind of a person must be averred generally.
every case based upon fraud, Rule 9(b) requires the plaintiff
to allege as to each individual defendant ‘the nature
of the fraud, some details, a brief sketch of how the
fraudulent scheme operated, when and where it occurred, and
the participants.” Hernandez v. Ciba-Geigy Corp.
USA, 200 F.R.D. 285, 291 (S.D. Tex. 2001). In a
securities fraud suit, the plaintiff must plead with
particularity the circumstances constituting the alleged
fraud: Rule 9(b) requires the plaintiff to
“‘specify the statements contended to be
fraudulent, identify the speaker, state when and where the
statements were made, and explain why the statements were
fraudulent.'” Southland Securities Corp. v.
INspire Ins. Solutions, Inc., 365 F.3d 353, 362
(5th Cir. 2004), quoting Williams v. WMX
Technologies, Inc., 112 F.3d 175, 177-78
(5th Cir. 1997), cert. denied, 522 U.S.
966 (1997). “‘In cases concerning fraudulent
misrepresentation and omission of facts, Rule 9(b) typically
requires the claimant to plead the type of facts omitted, the
place in which the omissions should have appeared, and the
way in which the omitted facts made the representations
misleading.'” Carroll v. Fort James Corp.,
470 F.3d 1171, 1174 (5th Cir. 2006), quoting
United States ex rel. Riley v. St. Luke's Hosp., 355
F.3d 370, 381 (5th Cir. 2004).
the alleged fraud, Rule 9(b) allows a plaintiff to plead
intent to deceive or defraud generally. Nevertheless a mere
conclusory statement that the defendant had the required
intent is insufficient; the plaintiff must set forth specific
facts that raise an inference of fraudulent intent, for
example, facts that show the defendant's motive.
Tuchman v. DSC Communications Corp., 14 F.3d 1061,
1068 (5th Cir. 1994)(“Although scienter may
be averred generally, case law amply demonstrates that
pleading scienter requires more than a simple allegation that
a defendant had fraudulent intent. To plead scienter
adequately, a plaintiff must set forth specific facts that
support an inference of fraud.”); Melder v.
Morris, 27 F.3d 1097, 1102 (5th Cir. 1994).
particularity requirement of Rule 9(b) also governs a
conspiracy to commit fraud. Southwest Louisiana
Healthcare System v. MBIA Ins. Corp., No. 05-1299, 2006
WL 1228903, *5 & n.47 (W.D. La. May 6, 2006);
Hernandez v. Ciba-Geigy Corp. USA, No. Civ. A. B-
00-82, 2000 WL 33187524, *4 (S.D. Tex. Oct. 17,
2000)(“The weight of Fifth Circuit precedent holds that
a civil conspiracy to commit a tort that sounds in fraud must
be pleaded with particularity.”); In re Ford Motor
Co. Vehicle Paint Litigation, No. MDL 1063, 1994 WL
426548, *34 (E.D. La. July 30, 1996); and Castillo v.
First City Bancorporation of Texas, Inc., 43 F.3d 953,
961 (5th Cir. 1994).
dismissal for failure to plead with particularity in
accordance with Rule 9(b) is treated as a Rule 12(b)(6)
dismissal for failure to state a claim. Lovelace v.
Software Spectrum, Inc., 78 F.3d 1015, 1017
(5th Cir. 1996).
The Exchange Act and the PSLRA's Heightened Pleading
10(b) of the Securities Exchange Act of 1934, as amended, 15
U.S.C. § 78j(b), states in relevant part,
It shall be unlawful for any person, directly or indirectly,
by the use of any means or instrumentality of interstate
commerce or of any facility of any national securities
exchange . . .
(b) To use or employ in connection with the purchase or sale
of any security registered on a national securities exchange
or any security not so registered, or any securities-based
swap agreement (as defined in [S]ection 206B of the
Gramm-Leach-Bliley Act), 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.
to the statute, the Securities and Exchange Commission
(“SEC”) promulgated Rule 10b-5, 17 C.F.R. §
240.10b-5, which provides:
It shall be unlawful for any person, directly or indirectly,
by the use of any means or instrumentality of interstate
commerce, or of the mails or of any facility of any national
(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 misleading, or
(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
the statute does not expressly provide for a private cause of
action, the Supreme Court has recognized that the statute and
its implementing regulation imply a private cause of action
for § 10(b) violations. Stoneridge Inv. Partners,
LLC v. Scientific-Atlanta, 552 U.S. 148, 157 (2008),
citing Superintendent of Ins. of N.Y. v. Bankers Life
& Casualty Co., 404 U.S. 6, 13 n.9 (1971).
state a claim under § 10(b) of the 1934 Act and Rule
10b-5, 17 C.F.R. § 240.10b-5, the plaintiff must plead
“(1) a material misrepresentation or omission by the
defendant; (2) scienter; (3) a connection between the
misrepresentation or omission and the purchase or sale of a
security; (4) reliance upon the misrepresentation or
omission; (5) economic loss; and (6) loss causation.”
Stoneridge, 552 U.S. at 157, citing Dura
Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 341-42
(2005). An omission is material for purposes of federal
securities law if there is a “substantial likelihood
that the disclosure of omitted fact would have been viewed by
the reasonable investor as having significantly altered the
‘total mix' of information available.”
TSC Industries, Inc. v. Northway, Inc., 426 U.S.
438, 449 (1976); Basic, Inc. v. Levinson, 485 U.S.
224, 231-32 (1988)(“adopt[ing] TSC Industries
standard of materiality for the § 10(b) and Rule 10b-5
causation, i.e., a causal connection between the
defendant's material misrepresentation or omission (or
other fraudulent conduct) and the economic loss to the
plaintiff for which it seeks to recover, can be proven by
showing that when the relevant truth about the fraud is
disclosed to or leaked into the market place, whether at once
or in a series of events, whether by the defendant's
announcing changes in its accounting treatments, or whistle
blowers, or analysts question financial results, resignations
of key officers, or newspapers and journals, etc., it caused
the price of the stock to decline and thereby proximately
caused the plaintiff's economic injury. Lormand v.
U.S. Unwired, Inc., 565 F.3d 228, 255 (5th
Cir. 2009), citing Dura Pharmaceuticals, Inc. v.
Broudo, 544 U.S. 336, 342 (2005). The Fifth Circuit has
held that Rule 8(a)(2) and Twombly's
plausibility standard govern the pleading of loss causation.
Id. at 256-58.
many years plaintiffs in securities fraud suits brought
claims under § 10(b) and Rule 10b-5 against secondary
actors,  including investment bankers, lawyers, and
accountants, who participated with primary violators in a
scheme to defraud investors. In the last twenty years, the
Supreme Court has greatly limited the reach of a private
right of action against secondary actors under Rule 10b-5(a)
and (c). Despite the fact that for three decades secondary
actors had been found liable under the federal securities
laws as aiders and abettors in lower courts, given the 1934
Act's silence as to aiding and abetting, the Supreme
Court has concluded, “The section 10(b) implied private
right of action does not extend to aiders and
abettors.” Stoneridge, 552 U.S. at 158;
see also Central Bank of Denver, N.A. v. First Interstate
Bank of Denver, N.A., 511 U.S. 164, 177-78
(1994)(for private partiesSection 10(b) “does not itself
reach those who aid and abet” a primary wrongdoer's
violation of the securities laws because while the statute
prohibits the making of a material misstatement or omission
or the commission of a manipulative act,  the
“proscription does not “include giving aid to a
person who commits a manipulative or deceptive act”;
“We cannot amend the statute to create liability for
acts that are not themselves manipulative or deceptive within
the meaning of the statute.” 511 U.S. at 177-78.
Instead, to impose liability, a plaintiff must establish that
each named defendant committed its own primary violation of
the securities laws to be held liable under § 10(b).
Moreover the Supreme Court concluded that in some
circumstances secondary actors, like lawyers, investment
banks, and accountants, “who employ a manipulative
device or make a material misstatement (or omission) on
which a purchaser or seller of securities relies, ” can
be liable as primary violators if “all the
requirements for primary liability under Rule 10b-5 are
met.” Id. at 191. In accord,
Stoneridge, 552 U.S. at 158 (For a secondary actor to be
held liable under § 10(b), that person or entity
“must satisfy each of the elements or preconditions for
liability is premised on a failure to disclose rather than on
a misrepresentation, ‘positive proof of
reliance is not a prerequisite to recovery. All
that is necessary is that the facts withheld be material in
the sense that a reasonable investor might have considered
them important in the making of his decision. . . . This
obligation to disclose and the withholding of a material fact
establish the requisite element of causation in
fact.'” Regents of Univ. of Cal. v. Credit
Suisse First Boston (USA), Inc., 482 F.3d 372, 383-84
(5th Cir. 2007)(quoting Affiliated Ute
Citizens of the State of Utah v. U.S., 406 U.S. 128,
153-54 (1972)), cert. denied sub nom. Regents of Univ. of
Cal. v. Merrill Lynch, Pierce, Fenner & Smith, 552
U.S. 1170 (2008). See also Basic, Inc., 485
U.S. at 243 (“[W]here a duty to disclose material
information had been breached . . . the necessary nexus
between the plaintiffs' injury and the defendants'
wrongful conduct had been established.”).
an allegation of fraud is based upon nondisclosure, there can
be no fraud absent a duty to speak.” Central
Bank, 511 U.S. at 174, quoting Chiarella v.
U.S., 445 U.S. 222, 235 (1980). A duty to disclose
arises only from “a fiduciary or other similar relation
of trust and confidence between [parties]”; it
“does not arise from the mere possession of nonpublic
market information.” Chiarella, 445 U.S. at
228, 235. “Silence, absent a duty to disclose, is not
misleading under Rule 10b-5.” Basic, Inc. v.
Levinson, 485 U.S. 224, 239 n.17 (1988).
omission of a material fact by a defendant with a duty to
disclose establishes a rebuttable presumption of reliance
upon the omission by investors to whom the duty was owed.
Affiliated Ute Citizens of the State of Utah v.
U.S., 406 U.S. 126, 153-54 (1972). “To invoke the
Affiliated Ute presumption of reliance on an
omission, a plaintiff must (1) allege a case primarily based
on omissions or non-disclosure and (2) demonstrate that the
defendant owed him a duty of disclosure.” Regent of
Univ. of Cal., 482 F.3d at 384. “This presumption
is a judicial creature. It responds to the reality that a
person cannot rely upon what he is not told.” Smith
v. Ayres, 845 F.2d 1360, 1363 (5th Cir.
1988). “[A]dministrative and judicial interpretations
have established that silence in connection with the purchase
or sale of securities may operate as a fraud actionable under
§ 10(b)” when there is “a duty to disclose
arising from a relationship of trust and confidence between
parties to a transaction.” Chiarella, 445 U.S.
a fiduciary duty exists is a question of law for the
court's determination.” Stevenson v. Rochdale
Investment Management, Inc., No. Civ. A. 3:97CV1544L,
2000 WL 1278479, at *3 (N.D. Tex. Sept. 7, 2000), citing
Fuqua v. Taylor, 683 S.W.2d 735, 737 (Tex. App.--Dallas
1984, writ ref'd n.r.e.). Nevertheless the factfinder
determines whether the facts give rise to a fiduciary duty.
Kinzbach Tool Co. v. Corbett-Wallace Corp., 138 Tex.
565, 160 S.W.2d 509, 512-13 (Tex. 1942), the Texas Supreme
The term “fiduciary” is derived from the civil
law. It is impossible to give a definition of the term that
is comprehensive enough to cover all cases. Generally
speaking, it applies to any person who occupies a position of
peculiar confidence toward another. It refers to integrity
and fidelity. It contemplates fair dealing and good faith,
rather than legal obligation, as the basis of the
transaction. The term includes those informal relations which
exist whenever one party trusts and relies upon another, as
well as technical fiduciary relations.
See also Fisher v. Roper, 727 S.W.2d 78, 81 (Tex.
App.--San Antonio 1987, writ ref'd n.r.e.):
A fiduciary relationship exists when the parties are under a
duty to act for or give advice for the benefit of another
upon matters within the scope of the relation. It exists
where a special confidence is reposed in another who in
equity and good conscience is bound to act in good faith and
with due regard for the interest of the one reposing
confidence. A fiduciary relationship generally arises over a
long period of time when parties have worked together toward
a mutual goal. To establish a fiduciary relationship, the
evidence must show that the dealings between the parties have
continued for such a period of time that one party is
justified in relying on the other to act in his best
interest. To transform a mere contract into a fiduciary
relationship, the evidence must show that the dealings
between the parties have continued for such a period of time
that one party is justified in relying on the other to act in
his best interest. [citations omitted].
example, because of the relationship of trust and confidence
between the shareholders of a corporation and “those
insiders who have obtained confidential information by reason
of their position with that corporation, ” courts have
imposed a duty to disclose on a corporate insider when the
corporate insider trades on the confidential information
(“intended to be available only for a corporate purpose
and not for the personal benefit of anyone”) and makes
secret profits. Chiarella, 445 U.S. at 227-28.
“Trading on such [material, nonpublic] information
qualifies as a ‘deceptive device' under §
10(b) . . . because ‘a relationship of trust and
confidence [exists] between the shareholders of a corporation
and those insiders who have obtained confidential information
by reason of their position with that
corporation.'” United States v.
O'Hagan, 521 U.S. 642, 651-52 (1997), citing
Chiarella, 445 U.S. at 228. “That relationship . .
. gives rise to a duty to disclose [or to abstain from
trading] because of the ‘necessity of preventing a
corporate insider from . . . tak[ing] unfair advantage of . .
. uninformed shareholders.'” O'Hagan,
521 U.S. at 652, quoting Chiarella, 445 U.S. at
228-29. A corporate insider with material information is
required to disclose it to the investing public or, if he
cannot because he must protect a corporate confidence, or if
he chooses not to disclose, he must abstain from trading in
or recommending securities concerned while the inside
information remains undisclosed. SEC v. Texas Gulf
Sulphur Co., 401 F.2d 833, 848 (2d Cir. 1968)(en
banc)(“[A]nyone in possession of material inside
information must either disclose it to the investing public,
or if he is disabled from disclosing it in order to protect a
corporate confidence, or he chooses not to do so, must
abstain from trading in or recommending the securities
concerned while such inside information remains
undisclosed.”), cert. denied sub nom. Kline v.
SEC, 394 U.S. 976 (1969).
individual or entity that does not fit within the traditional
definition of a corporate insider may become a
“temporary insider” if the person “by
entering into a special confidential relationship in the
conduct of the business of the enterprise is given access to
information solely for corporate purposes.” SEC v.
Cuban, 620 F.3d 551, 554 (5th Cir. 2010),
citing Dirks v. SEC, 463 U.S. 646, 655 n.13 (1983).
The duty to disclose or abstain from trading arises from the
corporate insider's duty to his shareholders, and it
applies not only “to officers, directors and other
permanent insiders of a corporation, ” but also to
“attorneys, accountants, consultants and others who
temporarily become fiduciaries of the corporation.”
O'Hagan, 521 U.S. at 228-29, quoting Dirks
v. SEC, 463 U.S. 646, 655 n.14 (1983).
of Rule 10b-5(a) and (c), which prohibit “employ[ing]
any device, scheme or artifice to defraud” or
“engag[ing] in any act, practice or course of business
which operates . . . as a fraud or deceit upon any
person” in connection with the sale of securities, were
designated by some courts as “scheme liability.”
In Stoneridge (5-3), the Supreme Court addressed the
issue, “when, if ever, an injured investor may rely
upon § 10(b) to recover from a party that neither makes
a public misstatement nor violates a duty to disclose, but
does participate in a scheme to violate § 10(b).”
The high court rejected that scheme liability theory because
a plaintiff cannot rely on a defendant's concealed
deceptive acts. 552 U.S. at 156, 159-60. Justice Kennedy
wrote for the majority,
Reliance by the plaintiff upon the defendant's deceptive
acts is an essential element of the § 10(b) private
cause of action. It ensures that, for liability to arise, the
“requisite causal connection between a defendant's
misrepresentation and a plaintiff's injury” exists
as a predicate for liability. . . . We have found a
rebuttable presumption of reliance in two different
circumstances. First, if there is an omission of a material
fact by one with a duty to disclose, the investor to whom the
duty was owed need not provide specific proof of reliance. .
. . Second, under the fraud-on-the-market doctrine, reliance
is presumed when the statements at issue become public. The
public information is reflected in the market price of the
security. Then it can be assumed that an investor who buys or
sells stock at the market price relies upon the statement. .
Neither presumption applies here. Respondents had no duty to
disclose; and their deceptive acts were not communicated to
the public. No member of the investing public had knowledge,
either actual or presumed, of respondents' deceptive acts
during the relevant times. Petitioner, as a result, cannot
show reliance upon any of respondents' actions except in
an indirect chain that we find too remote for liability.
Id. at 769.
Janus Capital Group, Inc. v. First Derivative
Traders, 564 U.S. 135, 137-38, 142, 167 (2011)(5-4),
examining what it means to “‘make any untrue
statement of material fact' in connection with the
purchase or sale of securities” under Rule 10b-5 and
“mindful that [the Court] must give ‘narrow
dimensions'” to the implied right of action under
§ 10(b) since Congress did not authorize it,
the majority of the United States Supreme Court attempted to
further clarify the distinction between a primary violation
and aiding and abetting by holding, “For purposes of
Rule 10b-5, the maker of a statement is the person with
ultimate authority over the statement, including its content
and whether and how to communicate it. Without control, a
person or entity can merely suggest what to say, not
‘make' a statement in its own right. One who
prepares or publishes a statement on behalf of another is not
its maker.” See also Halliburton Co. v. Erica P.
John Fund, Inc., 134 S.Ct. 2398, 2403 (2014)(Section
10(b) and Rule 10b-5 liability should not be extended
“to entirely new categories of defendants who
themselves had not made any material public
misrepresentation.”). Thus Janus restricts
liability under a § 10(b) private right of action to a
person or entity with ultimate authority over a false
statement on which an investor relied to his detriment in
purchasing or selling a security.
PSLRA “installed both substantive and procedural
controls” that were “[d]esigned to curb perceived
abuses of the § 10(b) private action--nuisance filings,
targeting deep-pocket defendants, vexatious discovery
requests and manipulation by class action lawyers.”
Tellabs, Inc. v. Makor Issues & Rights, Ltd.,
551 U.S. 208, 320 (2007). The PSLRA heightened the
particularity requirements for pleading securities fraud in
two ways: (1) the plaintiff must “specify each
statement alleged to have been misleading and the reason or
reasons why the statement is misleading . . ., ” 15
U.S.C. § 78u-4(B)(1)(B); and (2) for “each act or
omission alleged” to be false or misleading, the
plaintiff must “state with particularity facts giving
rise to a strong inference that the defendant acted with the
required state of mind, ” 15 U.S.C. § 78u-4(b)(2).
Indiana Elec. Workers' Pension Trust Fund IBEW v.
Shaw Group, Inc., 537 F.3d 527, 533 (5th Cir.
2007). As noted, Rule 9(b) requires the plaintiff in a
securities fraud suit to “‘specify the statements
contended to be fraudulent, identify the speaker, state when
and where the statements were made, and explain why the
statements were fraudulent.'” Southland,
365 F.3d at 362, quoting Williams v. WMX Technologies,
Inc., 112 F.3d 175, 177-78 (5th Cir. 1997),
cert. denied, 522 U.S. 966 (1997). See 15
U.S.C. § 78u-4. In other words, “‘[p]leading
fraud with particularity . . . requires ‘time, place
and contents of the false representations, as well as the
identity of the person making the misrepresentation and what
[that person] obtained thereby.'”
Williams, 112 F.3d at 177 (5thCir. 1997),
quoting Tuchman, 14 F.3d at 1068. The PSLRA mandates
that “untrue statements or omissions be set forth with
particularity as to ‘the defendant' and that
scienter be pleaded with regard to ‘each act or
omission' sufficient to give ‘rise to a strong
inference that the defendant acted with the required state of
mind.'” Southland, 365 F.3d at 364. The
PSLRA's use of “the defendant” is reasonably
construed to mean “‘each defendant' in
multiple defendant cases.'” Id. at 365.
Where the defendant is a corporation (as Warburg and PW are),
the plaintiff must plead specific facts giving rise to a
strong inference that a particular defendant's employee
acted with scienter as to each alleged omission; “[a]
defendant corporation is deemed to have the requisite
scienter for fraud only if the individual corporate officer
making the statement has the requisite level of scienter,
i.e., knows the statement is false, or at least deliberately
reckless as to its falsity, at the time he or she makes the
statement.” Southland, 365 F.3d at 366.
“‘The knowledge necessary to form the requisite
fraudulent intent must be possessed by at least one agent [of
the corporation] and cannot be inferred and imputed to a
corporation based on disconnected facts known by different
agents.'” Id. at 367, quoting Gutter
v. E.I. Dupont De Nemours, 124 F.Supp.2d 1291, 1311
(S.D. Fla. 2000); also citing First Equity Corp. v.
Standard & Poor's Corp., 690 F.Supp. 256, 260
(S.D.N.Y. 1988)(“A corporation can be held to have a
particular state of mind only when that state of mind is
possessed by a single individual.”),
aff'd, 869 F.2d 175 (2d Cir. 1989).
cases concerning . . . omission of facts, Rule 9(b) typically
requires the claimant to plead the type of facts omitted, the
place in which the omissions should have appeared, and the
way in which the omitted facts made the representations
misleading.'” Carroll v. Fort James Corp.,
470 F.3d 1171, 1174 (5th Cir. 2006), quoting
United States ex. rel. Riley v. St. Luke's Hosp.,
355 F.3d 370, 381 (5th Cir. 2004). To meet the
requirement of materiality, “there must be a
substantial likelihood that the disclosure of the omitted
fact would have been viewed by the reasonable investor as
having significantly altered the ‘total mix' of
information made available” and would have actually
been significant “in the deliberations of the
reasonable shareholder.” Basic, Inc., 485 U.S.
at 231-32; Southland, 365 F.3d at 362. See also
Lormand v. U.S. Unwired, Inc., 565 F.3d 228, 248-49
(5th Cir. 2009)(“Once the defendants engaged
in public discussion . . ., they had a duty to disclose a
‘mix of information' that is not
misleading.”). Thus the standard for misrepresentation
in this context is whether the information disclosed,
understood as a whole, would mislead a reasonable potential
investor. L.W. Laird v. Integrated Resources, Inc.,
897 F.2d 826, 832 (5th Cir. 1990). The Fifth
Circuit has “long held under Rule 10b-5, a duty to
speak the full truth arises when a defendant undertakes a
duty to say anything. Although such defendant is under no
duty to disclose every fact or assumption underlying a
prediction, he must disclose material, firm-specific adverse
facts that affect the validity or plausibility of that
prediction.” Lormand, 565 F.3d at 249.
“The omission of a known risk, its probability of
materialization, and its anticipated magnitude, are usually
material to any disclosure discussing the prospective result
from a future course of action.” Id. at 248
These facts “must be laid out before access to the
discovery process is granted.” Williams, 112
F.3d at 178.
Fifth Circuit does not permit group pleading of securities
fraud suits. Owens v. Jastrow, 789 F.3d 529, 537
(5thCir. 2015), citing Southland, 365
F.3d at 365 (“[T]he PSLRA requires the plaintiffs to
distinguish among those they sue and enlighten each
defendant as to his or her particular part in the
alleged fraud. . . . [W]e do not construe allegations
contained in the [second amended complaint] against
‘defendants' as a group as properly imputable to
any particular defendant unless the connection between the
individual defendant and the allegedly fraudulent statement
is specifically pleaded.”). “Corporate officers
are not liable for acts solely because they are
officers or where their day-to-day involvement in the
corporation is pleaded.” Financial Acquisition
Partners LP v. Blackwell, 440 F.3d 278, 287
(5th Cir. 2006). A corporate officer may be liable
if plaintiff identifies him and alleges he made materially
misleading statements with scienter at a shareholder meeting
or he signed documents on which statements were made.
Id. Group pleading, or the group publishing
doctrine, fails to satisfy the heightened pleading standards
of the PSLRA. Southland, 365 F.3d at 363
Fifth Circuit further requires that scienter or the requisite
state of mind, which for the PSLRA is ”an intent to
deceive, manipulate, or defraud, ” or
“‘severe recklessness' in which the
‘danger of misleading buyers or sellers . . . is either
known to the defendant or is so obvious that the defendant
must have been aware of it, '” must be
pleaded for each act or omission for each defendant in a
multiple defendant case sufficiently to create “a
strong inference that the defendant acted with the required
state of mind.” Id. at 364-65. See also
Owens v. Jastrow, 789 F.3d at 536 (“Severe
recklessness is limited to those highly unreasonable
omissions or misrepresentations that involve not merely
simple or inexcusable negligence, but an extreme departure
from the standard of ordinary care, and that present a danger
of misleading buyers or sellers which is either known to the
defendant or is so obvious that the defendant must have been
aware of it.”), quoting Abrams v. Baker Hughes,
Inc., 292 F.3d 424, 430 (5th Cir. 2002). To
determine whether a statement made by a corporation was made
with the requisite intent, it is appropriate to look into the
state of mind of the corporate official who made the
statement rather than to the collective knowledge of all of
the corporation's officers and employees acquired in the
course of their employment. Southland, 365 F.3d at
366; Janus Capital Group, Inc. v. First Derivative
Traders, 564 U.S. 135, 142 (2011)(“[T]he maker of
a statement is the person or entity with ultimate authority
over the statement, including its content and whether and how
to communicate it.”). “A defendant corporation is
deemed to have the requisite scienter for fraud only if the
individual corporate officer making the statement has the
requisite level of scienter, i.e., knows that the statement
is false or is at least deliberately reckless as to its
falsity, at the time he or she makes the statement.”
Southland, 365 F.3d at 366.
determining whether the pleaded facts give rise to a
‘strong' inference of scienter, the court must take
into account plausible opposing inferences.”
Tellabs, Inc. v. Makor Issues & Rights, Ltd.,
551 U.S. 308, 323 (2007). Furthermore, the inference of
scienter ultimately must be “‘cogent and
compelling, ' not merely ‘reasonable' or
“permissible.'” “Congress required
plaintiffs to plead with particularity facts that give rise
to a ‘strong'--i.e., a powerful or
cogent--inference.” Id.; Indiana Elec. Workers'
Pension Trust Fund IBEW v. Shaw Group, Inc., 537 F.3d
527, 533 (5thCir. 2008), quoting Tellabs,
Inc., 551 U.S. at 324. “To determine whether the
plaintiff has alleged facts that give rise to the requisite
‘strong inference' of scienter, a court must
consider plausible, nonculpable explanations for the
defendant's conduct, as well as inferences favoring the
plaintiff. The inference that the defendant acted with
scienter need not be irrefutable, i.e., of the
‘smoking-gun' genre, or even the ‘most
plausible of competing inferences.'” Id.
at 323-24. But it must be “at least as compelling as
any opposing inference one could draw from the facts
alleged.” Id. at 324. “[A] tie favors
the plaintiff.” Owens v. Jastrow, 789 F.3d
529, 536 (5th Cir. 2015), quoting Lormand v.
US Unwired, Inc., 565 F.3d 228, 254
(5th Cir. 2009), citing Tellabs, 551 U.S.
at 324. “The inquiry is whether all of the
facts alleged, taken collectively, give rise to a strong
inference of scienter, not whether any individual
allegations, scrutinized in isolation, meet that
standard.” Lormand, 565 F.3d at 251,
citing Tellabs, 551 U.S. at 322-23. While
allegations of motive and opportunity may serve to strengthen
the inference of scienter, such allegations alone are
insufficient to satisfy the requirement. Flaherty &
Crumrine Preferred Income Fund, Inc. v. TXU Corp., 565
F.3d 200, 208 (5thCir. 2009); Owens v.
Jastrow, 789 F.3d at 539.
plaintiff fails to satisfy the pleading requirements for
scienter, “the district court ‘shall, ' on
defendant's motion to dismiss, ‘dismiss the
complaint.'” Nathenson, 267 F.3d at 407,
citing § 78u-4(b)(3).
the PSLRA, 15 U.S.C. § 78u-4(b)(4), a plaintiff must
also allege and ultimately prove “the traditional
elements of causation and loss, ” i.e., “that the
defendant's misrepresentations (or other fraudulent
conduct) proximately caused the plaintiff's economic
loss.” Dura Pharmaceuticals, Inc. v. Broudo,
544 U.S. 336, 346 (2005). The plaintiff must plead economic
loss and loss causation, i.e., a causal connection between
the material misrepresentation or omission and the loss.
Id. at 341-42. “[A]n inflated purchase price
will not itself constitute or proximately cause the relevant
loss.” Id. at 342. To establish proximate
causation, the plaintiff must prove that when the
“relevant truth” about the fraud began to leak
out or otherwise make its way into the marketplace, it caused
the price of the stock to depreciate and thereby proximately
cause the plaintiff's economic injury. Lormand,
565 F.3d at 255 (“[W]e conclude that Rule 8(a)(2)
requires the plaintiff to allege, in respect to loss
causation, a facially ‘plausible' causal
relationship between the fraudulent statements or omissions
and plaintiff's economic loss, including allegations of a
material misrepresentation or omission, followed by the
leaking out of relevant or related truth about the fraud that
caused a significant part of the depreciation of the stock
and plaintiff's economic loss.”), citing
Dura at 342, 346.
the 1933 and the 1934 statutes have a section imposing
liability on persons controlling a primary violator. Section
15, 15 U.S.C. § 77o of the 1933 Act, entitled
“Liability of controlling persons, states in relevant
(a) Controlling persons
Every person who, by or through stock ownership, agency, or
otherwise, or who, pursuant to or in connection with an
agreement or understanding with one or more persons by or
through stock ownership, agency, or otherwise, controls any
person liable under sections 77k or 77l of this title, shall
also be jointly and severally with and to the same extent as
such controlled person to any person to whom such controlled
person is liable, unless the controlling persons had no
knowledge of or reasonable ground to believe in the existence
of the facts by reason of which the liability of the
controlled person is alleged to exist.
(b) Prosecution of persons who aid and abet violations
For purposes of any action brought by the Commission under
subparagraph (b) or (d) of section 77t of this title, any
person that knowingly or recklessly provides substantial
assistance to another person in violation of a provision of
this subchapter, or of any rule or regulation issued under
this subchapter, shall be deemed to be in violation of such
provision to the same extent as the person to whom such
assistance is provided.
term control (including the terms controlling, controlled by
and under common control with) means the possession, direct
or indirect, of the power to direct or cause the direction of
the management and policies of a person, whether through the
ownership of voting securities, by contract, or
otherwise.” 17 C.F.R. § 230.405. To state a claim
for Section 15 control person liability, a plaintiff must
allege that a primary violation under Section 11 or 12 was
committed and the defendant directly or indirectly controlled
the violator. Kapps v. Torch Offshore, Inc., 379
F.3d 207, 221 (5th Cir. 2004). The plaintiff can
show control by alleging facts showing that the defendant
possessed the power to direct or cause the direction of the
management and policies of a person through ownership of
voting securities, by contract, business relationships,
interlocking directors, family relations, or the power to
influence and control the activities of another, but the
plaintiff must allege more than the defendant's position
or title. In re Dynegy, Inc. Sec. Litig., 339
F.Supp.2d 804, 828 (S.D. Tex. 2004). The Fifth Circuit does
not require a plaintiff to allege that the controlling person
actually participated in the underlying primary violation to
state a claim for control person liability.
20(a) of the 1934 Act, 15 U.S.C. §
78(t)(“Liability of controlling persons and persons who
aid and abet”), states,
Every person who, directly or indirectly, controls any person
liable under any provision of this title or of any rule or
regulation thereunder shall also be liable jointly and
severally with and to the same extent as such controlled
person to any person to whom such controlled person is liable
. . ., unless the controlling person acted in good faith and
did not directly or indirectly induce the act of acts
constituting the violation or cause of action.
under section 20(a) are not governed by Rule 9(b)'s
heightened pleading requirements for fraud claims; plaintiffs
need only give the defendant fair notice of the claim and the
grounds for the allegations. In re BP p.l.c. Litig.,
843 F.Supp.2d 712, 791 (S.D. Tex. 2012). Plaintiffs can state
a claim of controlled persons against corporate officers who
did not personally make a misrepresentation or play a
significant role in the preparation of a misrepresentation by
pleading facts that such a person nevertheless “had the
requisite power to directly or indirectly control or
influence corporate policy.” Id. at 792,
quoting G.A. Thompson & Co., 636 F.2d 945, 958
(5th Cir. 1981).
§ 20(a) is a secondary liability provision, if the
Plaintiff fails to state a claim for a primary violation
under § 10(b) and/or Rule 10b-5, Plaintiff also fails to
state a claim for control person liability under §
20(a). Id. at 750.
control person liability provisions of Section 20(a) of the
1934 Act and Section 15 of the 1933 Act, although worded
differently, are interpreted similarly. Dynegy, 339
F.Supp.2d at 828, citing Abbot v. Equity Group,
Inc., 2 F.3d 613, 619 n.15 (5thCir. 1993);
In re Franklin Bank Sec. Litig., 782 F.Supp.2d 364,
380 (S.D. Tex. 2011), aff'd sub nom. Harold Roucher
Trust U/A DTD 9/21/72 v. Nocella, 464 Fed.Appx.
(5th Cir. Mar. 14, 2012).
Securities Act of 1933
1933 Act, 15 U.S.C. §§ 77a et seq.,
governs the content of securities registration statements,
which the SEC requires for the trading and dealing of stock.
Securities Act of 1933 also bars the “offer or
sale” of “securities” unless a registration
statement has been filed with the SEC or an exception to
registration requirements applies. Section 5 of the 1933 Act,
15 U.S.C. § 77e; SEC v. Continental Tobacco
Co., 463 F.2d 137, 155-56 (5th Cir. 1972).
11, 15 U.S.C. § 77k, addressing “Civil liabilities
on account of false registration statement, ” provides
purchasers of registered securities with strict liability
protection for material misstatements or omissions in
registration statements with the SEC by specifically
enumerated parts. It provides in relevant part,
(a) In case any part of the registration statement . . .
contained an untrue statement of a material fact or omitted
to state a material fact required to be stated therein or
necessary to make the statement therein not misleading, any
person acquiring such security (unless it is proved that at
the time of such acquisition he knew of such untruth or
omission) may, either at law or in equity, in any court of
competent jurisdiction, sue
(1) every person who signed the registration statement;
(2) every person who was a director of (or person performing
similar functions) or partner in the issuer at the time of
the filing of the part of the registration statement with
respect to which his liability is asserted;
(3) every person who, with his consent, is named in the
registration statement as being or about to become a
director, person performing similar functions or partner; . .
(5) every underwriter to such security.
(5), under Section 2(11), 15 U.S.C. § 77b(11), a
statutory underwriter is defined functionally on the basis of
its relationship to a particular offering and reaches
“any person who has purchased from an issuer with a
view to, or offers or sells for an issuer in connection with,
the distribution of any security, or participates or has
direct or indirect participation in any such undertaking, or
participates or has a participation in the direct or indirect
underwriting of any such undertaking . . . .”
Furthermore 15 U.S.C. § 77k(a)(5) provides that any
person who purchases a security, which was subject to a
registration statement containing a false statement, may sue
“every under writer with respect to such
12, 15 U.S.C. § 77l, states in relevant part,
(a) in general--Any person who-
(1) offers or sells a security in violation of section 77e of
this title, or
(2) offers or sells a security (whether or not exempted by
the provisions of section 77c of this title, other than
paragraphs (2) and (14) of subsection (a) of said section),
by the use of any means or instruments of transportation or
communication in interstate commerce or of the mails, by
means of a prospectus or oral communication, which includes
an untrue statement of material fact necessary in order to
make the statements, in light of the circumstances under
which they were made, not misleading (the purchaser not
knowing of such untruth or omission), and who shall not
sustain the burden of proof that he did not know, and in the
exercise of reasonable care could not have known, or such
truth or omission,
shall be liable, subject to subsection (b) of this section,
to the person purchasing such security from him, who may sue
either at law or in equity any court of competent
jurisdiction, to recover the consideration paid for such
security with interest thereon, less the amount of any income
received thereon, upon the tender of such security, or for
damages if he no longer owns the security.
11 of the Securities Act of 1933, 15 U.S.C. § 77k,
“applies to registered securities and imposes civil
liability on the signatories to the registration statement
and on the directors of the issuer when the registration
statement is materially misleading or defective.”
Firefighters Pension & Relief Fund of the City of New
Orleans v. Bulmahn, 53 F.Supp.3d 882, 892 (E.D. La.
2014), citing Rosenzweig v. Azurix Corp. 332 F.3d
854, 861 (5th Cir. 2003). To state a claim under
Section 11 of the Securities Act of 1933, 15 U.S.C. §
77k, the plaintiffs must allege that they purchased shares
from a registration statement that contained (1) an omission
or misstatement (2) of a material fact required to be stated
or necessary to make other statements made not misleading.
Krim v. Banc Texas Group, Inc., 989 F.2d 1435, 1445
(5th Cir. 1993)(defining a “material
fact” as “one which a reasonable investor would
consider significant in the decision whether to invest, such
that it alters the ‘total mix' of information
available about the proposed investment”).
section 11, 15 U.S.C. § 77k(a), permits “any
person acquiring such security” to sue, including after
market purchasers of shares issued in a public offering,
while in contrast, under section 12(a)(2), 15 U.S.C. §
77l(a)(2), a seller is only liable “to the person
purchasing such security from him.”
Rosenzweig, 332 F.3d at 872-73, citing inter
alia Joseph v. Wiles, 223 F.3d 1155, 1159
(10th Cir. 2000)(“[T]he natural reading of
‘any person acquiring such security' is simply that
the buyer must have purchased a security issued under the
registration statement at issue, rather than some other
alleged omissions, under § 11 an issuer only has to
disclose information that is required to make other
statements not misleading or information that the securities
laws require to be disclosed; simply possessing material
nonpublic information does not give rise to a duty to
disclose. Firefighters, 53 F.Supp.3d at 892.
Moreover the statute's “‘expansive'
liability provisions create 'virtually absolute
liability' for corporate issuers for even innocent
misstatements.” Id., quoting Krim v. pcOrder.com,
Inc., 402 F.3d 489, 495 (5th Cir. 2205).
Plaintiffs are not required to plead scienter, reliance or
fraud under the statute. Id., citing Rombach v.
Chang, 355 F.3d 164, 169 n.4 (2d Cir. 2004).
grounded in negligence, Section 11 only requires notice
pleading under Federal Rule of Civil Procedure 8, not the
heightened standards of Federal Rule of Civil Procedure 9(b)
or of the PSLRA. In re Dynegy, Inc. Sec. Litig., 339
F.Supp.2d 804, (S.D. Tex. 2004), citing Lone Star
Ladies, 238 F.3d at 369 (averments that defendants made
untrue statements of material facts and omitted to state
material facts in violation of § 11 are not claims that
sound in fraud and cannot be dismissed for failure to satisfy
Rule 9(b)'s heightened pleading requirements), citing
In re Electronic Data Systems Corp. “ERISA”
Litig., 205 F.Supp.2d 658, 677 (E.D. Tex. 2004). Nor is
a plaintiff required to allege and show that the defendant
acted with scienter under § 11 of the Securities Act of
1933, 15 U.S.C. § 77k(a), or that he relied in any way
on the defendant's misrepresentations or omissions.
Collmer, 268 F.Supp.2d at 756 (S.D. Tex. 2003).
Nevertheless, if the allegations are based in fraud, the
heightened standards of Rule 9(b) apply.
Firefighters, 53 F.Supp.3d at 892, citing Lone
Star Ladies Inv. Club, 238 F.3d at 368, citing
Melder, 27 F.3d at 1100 n.6, and Rombach, 355
F.3d at 171.
Securities Act of 1933 imposes strict liability on offerors
and sellers of unregistered securities” and allows
purchasers to recover under Section 12(1) “regardless
of whether they can show any degree of fault, negligent or
intentional, on the seller's part.” Swenson v.
Engelstad, 626 F.2d 421, 424-25 (5thCir.
1980). An issuer's liability to a plaintiff who buys a
security issued pursuant to a registration statement with a
material misstatement or omission under section 12 (as it is
under section 11) of the 1933 Act is “‘virtually
absolute.'” Lone Star Ladies Inv. Club v.
Scholtzsky's Inc., 238 F.3d 263, 369 (5th
Cir. 2001), quoting Herman & MacLean v.
Huddleston, 459 U.S. 375, 382 (1983). In Pinter v.
Dahl, 486 U.S. 622, 644 (1988), the Supreme Court
indicate that in some situations the issuer is immune from
liability in a firm commitment underwriting [where the public
does not purchase from the issuers but from the
underwriters]: “One important consequence of [the
purchaser clause] is that § 12(1) imposes liability on
only the buyer's immediate seller; remote purchasers are
precluded from bringing actions against remote sellers. Thus
a buyer cannot recover against his seller's
seller.” Lone Star Ladies Inv. Club v.
Schlotzsky's, Inc., 238 F.3d 363, 370
(5th Cir. 2001), quoting Pinter, 486 U.S.
at 644 n.21 (emphasis added by Lone Star).
Furthermore § 12(a)(2) applies only to purchases of
stock in initial offerings, and not to aftermarket trading.
Gustafson v. Alloyd Co., Inc., 513 U.S. 561 (1995).
See also Rosenzweig v. Azurix Corp., 332 F.3d 854,
870-71 (5th Cir. 2003)(holding that purchasers who
buy their shares on the secondary market lack standing to
bring § 12(a)(2) claims.).
other than the issuer can avoid liability by pleading and
proving an affirmative defense of due diligence. Id.
12 restricts recovery to purchasers who purchase their shares
from a seller who makes use of false or misleading
statements. 15 U.S.C. § 77l(a)(2)(seller “shall be
liable to the person purchasing such security from
him.”). “Section 2(3) defines ‘sale' or
‘sell' to include ‘every contract of sale or
disposition of a security or interest in a security, for
value, ' and the terms ‘offer to sell, '
‘offer for sale, ' or ‘offer' to include
‘every attempt or offer to dispose of, or solicitation
of an offer to buy, a security or interest in a security, for
value.' 15 U.S.C. § 77(b)(3). Under these
definitions, the range of persons potentially liable under
§ 12(1) is not limited to persons who pass title.”
Pinter v. Dahl, 486 U.S. 622, 643 (1988). While the
purchase requirement limits liability to instances in which a
sale has occurred, the language of the statute extends
statutory seller status and thus liability to some persons
who simply urged the buyer to purchase the security.
Id. at 644.
broker acting as an agent of one of the principles to a
securities purchase successfully solicits a purchase, he is a
person from whom the buyer purchases within the meaning of
§ 12 and is thus liable as a statutory seller.
Pinter, 486 U.S. at 646, citing inter alia Cady
v. Murphy, 113 F.2d 988, 990
(1stCir.)(finding a broker acting as an agent to
be liable as a statutory seller), cert. denied, 311
U.S. 705 (1940). The Supreme Court went on to limit a
solicitor's liability to exclude the solicitor,
“merely to assist the buyer, ”
“gratuitously urges another to make a particular
investment”: “The language [‘buy . . . for
value”] and purpose of § 12(1) suggest that
liability extends only to the person who successfully
solicits the purchase, motivated at least in part by a desire
to serve his own financial interests or those of the
securities owner, ” e.g., a broker. Id. at
§ 11, where § 12(a) claims do constitute fraud, the
plaintiff must plead the circumstances constituting fraud
with Rule 9(b) particularity. Collmer v. U.S. Liquids,
Inc., 268 F.Supp.2d 718, 756 (S.D. Tex. 2003),
citing Melder v. Morris, 27 F.3d 1097, 1100 n.6
(5th Cir. 1994)(“When 1933 Securities Act
claims are grounded in fraud rather than negligence . . .
Rule 9(b) applies.”).
12(a)(2) of the Securities Act of 1933, 15 U.S.C. §
77l(a), states, “Any person who . . . offers or sells a
security . . . by means of a prospectus or oral
communication, which includes an untrue statement of material
fact or omits to state a material fact necessary in order to
make the statements, in light of the circumstances under
which they were made, not misleading (the purchaser not
knowing of such untruth or omission), and who shall not
sustain the burden of proof that he did not know, and in the
exercise of reasonable care could not have known, of such
untruth or omission, shall be liable, subject to subsection
(b) of this section, to the person purchasing such security
from him, who may sue either at law or in equity in any court
of competent jurisdiction, to recover the consideration paid
for such security with interest thereon, less the amount of
any income received therein, upon the tender of such
security, or for damages if he no longer owns the
security.” Under section 12(a)(2) the term
“seller” refers to “either the person who
actually passes title to the buyer, or ‘the person who
successfully solicits the purchase, motivated at least in
part by a desire to serve his own financial interests or
those of the securities owner, ' e.g., a broker.”
Rosenzweig v. Azurix Corp., 332 F.3d 853, 871
(5th Cir. 2003), citing Pinter v. Dahl,
486 U.S. 622, 647 (1988). To constitute a
“solicitation, ” at the very least the seller
must “directly communicate with the buyer.”
Id., citing Litigation v. Kraftsow, 890 F.2d 628,
636 (3d Cir. 1989)(“The purchaser must demonstrate
direct and active participation in the solicitation of the
immediate sale to hold the issuer liable as a §
prevail on a claim under § 12(a)(2), 15 U.S.C. §
77l(a)(2), the plaintiff must allege and prove that the
defendant, as a seller of a security “by means of a
prospectus or oral communication, ” misrepresented or
failed to state material facts to the plaintiff in connection
with the sale and that the plaintiff had no knowledge of
untruth or omission. Collmer, 268 F.Supp.2d at 756,
citing Junker v. Crory, 650 F.2d 1349, 1359
(5th Cir. 1981). As with § 11, “a
‘material' fact is one which a reasonable investor
would consider significant in the decision whether to invest,
such that it alters the ‘total mix' of information
available about the proposed investment.”
Krim, 989 F.2d at 1445.
is no liability under Section 12(a)(2) if there is no duty to
disclose the allegedly false or misleading information.
In re Morgan Stanley Technology Fund Sec. Litig.,
643 F.Supp.2d 366, 381-82 (S.D.N.Y. 2009), citing In re
Time Warner Inc. Sec. Litig., 9 F.3d 259, 267 (2d Cir.
1933)(an actionable claim under the Securities Act or the
Exchange Act must plead a material omission that involves
information that the defendant has a duty to disclose).
Employee Stock Option Plans
standing to sue under the 1933 and 1934 Acts, a plaintiff
must be either a purchaser or a seller of the securities at
issue. Blue Chip Stamps v. Manor Drug Stores, 421
U.S. 723 (1975). Therefore for the securities laws to apply
to a transaction between the employer and the employee, there
must be a “security” and a “sale.” To
determine whether a stock option plan is covered by the
securities laws, the Court first examines whether the
employee's interest in the plan is a “security,
” second, whether it involves an “offer” or
“sale” of securities, and third, whether it falls
within an exemption from either or both of the Acts.
undisputed that a stock option is a security. Section 2(1) of
the Securities Act of 1933, 15 U.S.C. § 77b(a)(1), and
Section 3(a)(1) of the Exchange Act, 15 U.S.C. §
78c(a)(10), define a “security” almost
identically, with the variations being insignificant here, to
include inter alia any note, stock, bond, option,
and participation in an investment contract. SEC v. Glenn
W. Turner Enterprises, Inc., 474 F.2d 476, 480 & n.4
(9th Cir. 1973), cert. denied, 414 U.S.
821 (1973); Hunssinger v. Rockford Business Credits,
Inc., 745 F.2d 484, 487 (7th Cir. 1984);
Daily v. Morgan, 701 F.2d 496. 500 (5th
Cir. 1983)(“‘Stock' is expressly included in
the definition [of ‘security' in the 1933 and 1934
Acts], and represents to many people, both trained and
untrained in business matters, the paradigm of a
security.”); Yoder v. Orthomolecular Nutrition
Institute, Inc., 751 F.2d 555, 558 (2d Cir.
1985)(holding that stock offered as an inducement to accept
employment qualifies as a purchase or sale of securities
under the Securities Exchange Act).
“investment contract” under the federal
securities acts is a contract, transaction or scheme in which
a person invests money in a common enterprise and is led to
expect profits solely from the efforts of the promoter or a
third party. 15 U.S.C. § 77b(1) and § 78c(a)(10).
Because the Securities Acts are remedial in nature and were
enacted to regulate investments in an effort to protect
against abuses in the securities market, the Supreme Court
opined that the broad definition of securities
“encompasses virtually any instrument that might be
sold as an investment” and “embodies a flexible
rather than a static principle, one that is capable of
adaptation to meet the countless and variable schemes devised
by those who seek the use of the money of others on the
premise of profits.” Reves v. Ernst &
Young, 494 U.S. 56, 60-61 (1990); SEC v. W.J. Howey
Co., 328 U.S. 293, 299 (1946).
Howey, the Supreme Court established a test to
determine whether a financial relationship constituted an
“investment contract, ” i.e., “whether a
contract transaction or scheme whereby a person invests his
money in a common enterprise and is led to expect profits
solely from the efforts” of others. Id. at
298-99. In applying the test, courts should disregard form
and focus on the “substance--the economic realities of
the transaction--rather than the names that may have been
employed by the parties.” United Housing
Foundation, Inc. v. Forman, 421 U.S. 837, 848-49 (1975).
In Howey the Supreme Court determined, regarding the
first prong, the investment of money, that the employees
covered under the defined benefit pension plan did not make
an “investment of money, ” unlike other
purchasers who had given up “some tangible and
definable consideration” in return for their
security”; in a pension plan “by contrast, the
purported investment is a relatively insignificant part of an
employee's total and indivisible compensation
package” and “‘[n]o portion of an
employee's compensation other than the potential pension
benefits has any of the characteristics of a security. . .
Only in the most abstract sense may it be said that an
employee ‘exchanges' some portion of his labor in
return for there possible benefits.” Int'l
Brotherhood of Teamsters, Chauffeurs, Warehousemen and
Helpers of America v. Daniel, 439 U.S. 551, 560-61
(1979). Nor was the second prong of the
Howey test met because the pension plan's funds
were mainly employer contributions. Id. at 562
(“[A] far larger portion of its income comes from
employer contributions, ” and not from earnings from
its assets). Because any profit made from the pension
plan's investment of those monies was minimal and the
covered employees would not gain or lose from the choice of
those investments, the high court found that the fund was not
a “common enterprise with profits to come solely from
the efforts of others, ” and thus it was not an
investment contract. Id. at 558, quoting
Howey, 328 U.S. at 301. Finally the Supreme Court found
that ERISA, which specifically regulates pension plans,
undermined any reason for securities regulations of such
pension plans. Id. at 569-70.
Howey, in Daniel the Supreme Court applied
the Howey test to decide whether an employee's
interest in an employee pension plan constituted a
“security” under the 1934 Act. It concluded that
the answer depended on whether the plan is voluntary or
compulsory, individually contributory or
noncontributory. Daniel, 439 U.S. at 559;
Employee Benefit Plans, SEC Release No. 33-6188, 1 Fed. Sec.
Rep. (CCH) P 1051 at 2073-6 n, 19-20, 1980 WL 29482 (Feb. 1,
1980). A “compulsory” benefit indicates the
employer imposed the benefit as a condition of employment
(i.e., all employees were required to participate), while
“noncontributory means that “[t]he employees paid
nothing to the plan themselves, ” and the employer made
all the contributions. Observing that every Supreme Court
decision finding the existence of a security under the 1933
and 1934 Acts also found an investor who “chose to give
up a specific consideration in return for a separable
financial interest with the characteristics of a
security” or a purchaser who “gave up some
tangible and definable consideration for an interest that had
substantially the characteristics of a security, ” the
Supreme Court found that in Daniel's plan the
“purported investment [was] a relatively insignificant
part of an employee's total compensation package.”
439 U.S. at 560. “Only in the most abstract sense may
it be said that an employee ‘exchanges' some
portion of his labor in return for these possible
benefits.” Id. “Looking at the economic
realities, it seems clear that an employee is selling his
labor primarily to obtain a livelihood, not making an
investment.” Id. at 559-60.
Daniel held that an interest in a compulsory,
noncontributory pension plan is not an interest in an
investment contract, and thus not a “security”
under the 1933 and 1934 Acts. Daniel, 439 U.S. at
553; Howey, 328 U.S. at 298. Thus the 1933 and 1934
Securities Acts do not apply to pension plans to which
employees do not contribute and in which employee
participation is compulsory because such a plan does not
require the employee to “give up specific consideration
in return for a separable financial interest with the
characteristics of a security.” Daniel, 439
U.S. at 559, 570.
subsequently expanded Daniel beyond pension plans to
all involuntary and noncontributory employee benefit plans.
SEC Release No. 33-6188 (Feb. 1, 1980); SEC Release No.
33-6281 (Jan. 15, 1981).
actual direct purchaser or seller of securities has standing
to sue under Section 10(b) and Rule 10b-5. Blue Chip
Stamps, 421 U.S. at 749-55, ratifying Birnbaum v.
Newport Steel Corp., 193 F.3d 461, 462-63 (2d Cir.
1952). Section 11(a) of the Securities Act of 1933
“gave a right of action by reason of a false
registration statement to ‘any person acquiring the
security, and § 12 of the Act gave a right to sue the
seller of a security who had engaged in proscribed practices
with respect to prospectuses and communication to ‘the
person purchasing such security from him.'”
Blue Chip Stamps, 421 U.S. at 728. Section 2(3) of
the Securities Act of 1933 states, “The term
‘sale' or ‘sell' shall include every
contract of sale or disposition of a security or interest in
a security for value, ” while section 3(a)(14) of the
Securities Exchange Act of 1934 provides, “The terms
‘sales' and ‘sell' each include any
contract to sell or otherwise dispose of.”
in the wake of Daniel's holding that an interest
in a compulsory, noncontributory pension plan is not a
“security, ” the SEC's “no-sale
doctrine” provides that a grant of securities to
employees pursuant to a stock bonus plan is not a
“purchase or sale” where these employees
“do not individually bargain to contribute cash or
other tangible or definable consideration to such
plans.” SEC Release No. 33-6188, 1980 WL 29482 at
*15 (Feb. 1, 1980). Such plans are
“involuntary [or compulsory], non-contributory
plans.” Id. at *8. Thus compulsory
noncontributory stock option plans where the employees do not
individually bargain to contribute cash or other
consideration are not “sales” under the
definition of the Securities Act of 1933. Id. See also
Compass Group PLC, SEC No-Action Letter, 1999
WL 311797 (May 13, 1999)(finding that registration of stock
options was not required “when an employee does not
give anything of value for stock other than the continuation
of employment nor independently bargains for such stock, as a
stock bonus program that involves the award of stock to
employees at no direct cause.”). When an employee does
not give anything of value for stock other than the
continuation of employment nor independently bargains for . .
. stock, as when the employee receives his stock through a
company-wide stock option plan “there is no
‘purchase or sale' of securities.” Wyatt
v. Cendant Corp. (In re Cendant Corp. Sec.
Litig.), 81 F.Supp.2d 550, 556 (D.N.J. 2000)(internal
quotation omitted); McLaughlin v. Cendant Corp.,
(In re Cendant Corp. Sec. Litig.), 76 F.Supp.2d 539,
550 (D.N.J. 1999)(“Under the SEC's ‘no
sale' doctrine, a grant of securities to an employee
pursuant to a stock bonus plan is not a ‘purchase'
or sale' because these employees ‘do not
individually bargain to contribute cash or other tangible or
definable consideration to such plan . . . [and] employees in
almost all instances would decide to participate if given the
opportunity.”), citing Securities Release No.
33-6188, 1980 WL 29482, and Compass Group
PLC, SEC No-Action Letter, 1999 WL 311797 (May 13,
1999)(finding that no registration of stock options was
required “when an employee does not give anything of
value for stock other than the continuation of employment no
independently bargains for such stock, such as a stock bonus
program that involves the award of stock to employees at no
direct cost.”); Daniel, 439 U.S. at 558-59
(holding that the Exchange Act does not apply to
noncontributory, compulsory pension plan; “An employee
who participates in a noncontributory compulsory pension plan
by definition makes no payment into the pension
reasoning has been applied to employee stock option plans.
Cendant, 76 F.Supp.2d at 545-46, citing Bauman
v. Bish, 571 F.Supp. 1054 (N.D. W.Va. 1983)(concluding
that an employee stock option plan was
“compulsory” where “there [was] no
affirmative investment decision” made by the individual
employee), and Childers v. Northwest Airlines, Inc.,
688 F.Supp. 1357, 1363, 1364 (D. Minn.
1988)(“Plaintiffs' participation was an
incident of employment and their only choice would have been
to forego the receipt of benefits entirely”; “The
notion that the exchange of labor will suffice to constitute
the type of investment which the Securities Acts were
intended to regulate was rejected in Daniel”).
Only “[w]here an employee . . . acquires the right to
[stock] options as part of his or her bargained-for
compensation [will courts] infer that the employee made an
intentional decision to ‘purchase' the
options.” Cendant, 81 F.Supp.2d at 557-58,
citing Yoder v. Orthomolecular Nutrition Inst.,
Inc., 751 F.2d 555, 560 (2d Cir. 1985)(noting that the
definitional sections of the two Acts, § 2 of the 1933
Act and § 2 of the 1934 Act, begin with the proviso,
“When used in this title, unless the context
otherwise requires [emphasis added by this Court], . .
., ” and finding that the promise of a stock
distribution in exchange for an individually bargained
employee contract could be consideration for a
“sale” under the Securities Act); Childers v.
Northwest Airlines, Inc., 688 F.Supp. 1357, 1363 (D.
Minn. 1988)(“Plaintiffs' participation was an
incident of employment and their only choice would have been
to forgo the receipt of benefits
where the plan is noncontributory and involuntary, the stock
awarded to employees is not required to be registered because
there is no “sale” to the employees since they
have not individually bargained to contribute cash or other
consideration to the employee stock ownership plan. 1980 SEC
Release No. 33-6188. These courts and the SEC Release grew
out of Daniel's finding that these stock option
employees that did not directly contribute to the plan failed
to meet the “investment of money” or investment
contract requirement of Howey for a sale/purchase
and the SEC's “no-sale” doctrine.
rely on decision by the Ninth Circuit in Falkowski v.
Imation Corp., 309 F.3d 1123 (2002), amended,
320 F.3d 905 (9th Cir. 2003), that is contrary to
the Cedant cases and to the 1980 SEC Release. The
panel in Falkowski, interpreting SLUSA and its
preemption of class actions that involved charges of fraud
”in connection with the purchase and sale of a covered
security, ” grounded in California state law, dealt
with a class action comprised of employees and contractors of
Cemax who had received stock options through a company plan
from their original employer, Cemax-Icon
(“Cemax”), which was subsequently acquired by
Imation and their options were converted to Imation stock
options. Id. at 1126-27. A year later Imation sold
Cemax to Eastman Kodak Company, and in connection with that
sale, according to the plaintiffs in their class action,
induced the employees to remain with Cemax-Imation merged
company by misrepresenting the value of their stock and
options and exaggerating the length of time they would have
to exercise their options. Id. at 1127. Instead of
basing their decision on the concept of an “investment
contract” to which the employees had failed to
contribute anything in Daniel, the Ninth Circuit
panel observed that SLUSA's language was very like that
of § 10(b), which bars securities fraud “in
connection with the purchase or sale of any security.”
Id. at 1129. Moreover, emphasizing that the Supreme
Court in SEC v. Zandford, 535 U.S. 813 (2002), found
that § 10b “should be construed not technically
and restrictively, but flexibly to effectuate its remedial
purposes” and “be viewed as part of the remedial
package of federal securities laws, ” the Ninth Circuit
panel focused on the fact that “the 1933 and 1934 Acts
define the purchase or sale of a security to include any
contract to buy or sell a security.” 15 U.S.C.
§§ 77b(a)(3). 78c(a)(13)-(14).” Id.
at 1129. They further reasoned that “if a person
contracts to sell a security, that contract is a
‘sale' even if the sale is never
consummated.” Id. The panel determined,
“The grant of an employee stock option on a covered
security is therefore a ‘sale' of the covered
security. The option is a contractual duty to sell a security
at a later date for a sum of money, should the employee
choose to buy it. Whether or not the employee ever exercises
the option, it is a ‘sale' under Congress's
definition.” Id. at 1129-30. They concluded,
“Whether or not an option grant is a sale in the lay
sense, it is a sale under the securities laws because it is a
contract to sell a security when the option is exercised. We
reject the contrary holding of” the Cedant
cases. Id. at 1130.
Court observes that Falkowski relied on a statement
in Blue Chip Stamps v. Manor Drug Stores, 421 U.S.
723, 750-51 (1975): “A contract to purchase or sell
securities is expressly defined by section 3(a) of the 1934
Act, 15 U.S.C. section 78c(a), as a purchase or sale of
securities for the purposes of the Act. . . . [T]he holders
of . . . options and other contractual rights or duties to
purchase or sell securities have been recognized as
‘purchasers' or ‘sellers' of securities
for purposes of Rule 10b-5, not because of a judicial
conclusion that they were similarly situated to
‘purchasers' or ‘sellers, ' but because
the definitional provisions of the 1934 Act themselves grant
them such a status.” In deciding to follow the
Cedant cases and rejecting Falkowski, this
Court would emphasize that Blue Chip Stamps was
issued before Daniel (1979) and before the SEC 1980
Release. Moreover in the 1980 Release, the SEC changed its
prior position to accord with Daniel's and its
progeny's reasoning. Additional reasons for not following
Falkowski are highlighted in McKissick v.
Gemstar-TV Guide, Intern., Inc., 415 F.Supp.2d
1240, 1244-45 (N.D. Okla. 2005).
Congress, in enacting the Securities and Exchange Act,
provided definitions to help in the interpretation and
application of the statutes. See 15 U.S.C. 78c. But,
as the Supreme Court has stated, “The relevant
definitional section of the 1934 Act are for the most part
unhelpful; they only declare generally that the terms
“purchase” and “sale” shall include
contracts to purchase or sell. SEC v. Natl. Sec.,
Inc., 393 U.S. 453, 466 . . . (1969). Thus, the Court
must look to other courts to discern boundaries for standing
under a Rule 10b-5 cause of action to determine if the
holding of stock options by the Plaintiff constitutes a
contract to purchase or sell stocks. . . .
[T]he Supreme Court's language in the Blue Chip
Stamps decision was nothing more than dicta that alone
cannot serve as the basis for standing under 10(b) or Rule
10b-5. . . . To allow the Plaintiff, who simply held her
stock options, to qualify as a purchaser or seller of stock
under Rule 10b-5 under these facts would destroy the Supreme
Court's reasoning for adopting the Birnbaum
Rule. As the Court stated, “In the
absence of the Birnbaum doctrine, bystanders to the
securities marketing process could await developments on the
sidelines without risk.” Blue Chip Stamps, 421
U.S. at 747. . . .Here, the Plaintiff is exactly the person
described by the Court, a “bystander to the securities
market.” Id. Moreover, as the Fifth Circuit
has noted, “It is well established that the mere
retention of securities in reliance on material
misrepresentations or omissions does not form the basis for a
section 10(b) or Rule 10b-5 claim.” Krim v.
BancTexas Group, Inc., 989 F.2d 1435, 1443 n. 7
(5th Cir. 1993)(citing Blue Chip Stamps,
421 U.S. 723 . . . .
Disregarding the Corporate Form
contend that the three Defendant UBS entities (PW, Warburg,
and nonparty UBS AG) form a single enterprise which is liable
to Plaintiffs for some or all of their alleged violations of
the Securities Exchange Act. When an entity's corporate
form is at issue, courts standardly hold that the law of the
state of incorporation of that entity applies to determine
whether its corporate form should be disregarded, i.e.,
whether one can pierce the corporate veil. Ace American
Ins. Co. v. Huntsman Corp., 255 F.R.D. 179, 195 (S.D.
Tex. 2008)(and cases cited therein). PW and Warburg were
incorporated in Delaware; thus the Court applies
Delaware's law to determine if their corporate forms
should be disregarded and UBS should be treated as a single
stated in the complaint, PW and Warburg are subsidiaries of
UBS AG. Contrary to Plaintiffs' insistence that in a Rule
12(b)(6) review the Court must accept their conclusory claim
that “UBS” is a single entity and not three
separate corporations as suggested by their names and
corporate histories, under Delaware law a corporate entity
“may be disregarded ‘only in the interest of
justice, when such matters as fraud, contravention of law or
contract, public wrong, or equitable considerations among
members of the corporation require it, are involved.”
In re Phillips Petroleum Sec. Litig., 738
F.Supp. 824, 838 (D. Del. 1990). A conclusory statement that
three entities are one is not sufficient without specific
facts supporting such an allegation. The separate corporate
forms will not be disregarded “merely upon a showing of
common management or whole ownership.” Id.
“A subsidiary corporation may be deemed the alter ego
of its corporate parentwhere there is a lack of attention to
corporate formalities, such as where the assets of two
entities are commingled and their operations
intertwined” or “where a corporate parent
exercises complete domination over its subsidiary.”
Mobil Oil Corp v. Linear Films, Inc., 718 F.Supp.
260, 266 (D. Del. 1989). To pierce the corporate veil under
an alter ego theory, Delaware law requires a showing of fraud
or similar injustice. Ace American, 255 F.R.D. at
196 (and cases cited therein). While the “general
principle of corporate law ‘deeply ingrained in our
economic and legal systems” is that “a parent
corporation . . . is not liable for the acts of its
subsidiaries, ” in exceptional circumstances plaintiffs
may allege and ultimately prove that an alter ego
relationship exists, in which a corporate parent exercises
total domination and control over its subsidiary, that the
corporation and its subsidiary “operated as a single
economic entity” so that “the corporation is
little more than a legal fiction, '” and the parent
company has fraudulent intent Blair v. Infineon
Technologies AG, 720 F.Supp. 462, 469 (D. Del. 2010),
quoting United States v. Bestfoods, 524 U.S. 51, 61
(1998), and citing Bd. of Tr. of Teamsters Local 863
Pensions Fund v. Foodtown, Inc., 296 F.3d 164, 171 (3d
Cir. 2002); Pearson v. Component Tech. Corp, 247
F.3d 471, 485 (3d Cir. 2001); and Mobil Oil Corp. v.
Linear Films, Inc., 718 F.Supp. 260, 266 (D. Del.
1989)(“A subsidiary corporation may be deemed the alter
ego of its corporate parent where there is a lack of
attention to corporate formalities, such as where the assets
of two entities are commingled and their operations
intertwined. An alter ego relationship might also lie where a
corporate parent exercises complete domination and control
over its subsidiary.”). As a tool of equity, under
Delaware law “[t]he corporate fiction may be
disregarded to prevent fraud, ” and a wholly-owned
subsidiary may sometimes be treated as an instrumentality of
the parent. Buechner v. Farbenfabriken Bayer
Aktiengesellschaft, 38 Del. Ch. 490, 493 (Del. Ch.
Third Circuit applies a “single entity test” that
considers seven factors in deciding generally whether two or
more corporations operated as a single economic entity: (1) a
corporation is grossly undercapitalized for the purposes of
the corporate undertaking; (2) a failure to observe corporate
formalities; (3) the non-payment of dividends; (4) the
insolvency of the debtor corporation at the time; (5) the
siphoning of the corporation's funds by the dominant
stockholder; (6) the nonfunctioning of other officers or
directors; (7) the absence of corporate records; and (8) the
fact that the corporation is merely a facade for the
operations of the dominant stockholder(s). Blair,
720 F.Supp.2d at 470-71, citing United States v.
Pisani, 646 F.2d 83, 88 (3d Cir. 1981)(approving the
federal alter ego factors used by the Fourth Circuit in
DeWitt Truck Brokers, Inc. v. W. Ray Fleming Fruit
Co., 540 F.2d 681, 686-87 (4th Cir. 1976) to
determine whether it was appropriate to pierce the corporate
veil). “While no single factor justifies a decision to
disregard the corporate entity, ” some combination of
these factors is necessary and “an overall element of
injustice or unfairness must always be present as
well.” U.S. v. Golden Acres, Inc., 702 F.Supp.
1097, 1104 (D. Del. 1988), aff'd sub nom. Golden
Acres, Inc. v. Sutton Place Corp., 879 F.2d 857 (3d Cir.
1989)(piercing the corporate veil where a subsidiary was
undercapitalized, corporate formalities were not observed,
the subsidiary was insolvent, the subsidiary did not pay
dividends, and defendants were siphoning funds from the
subsidiary, using it as “an incorporated
pocketbook”). Some of these seven factors may be
sufficient to show the requisite unfairness. Pisani,
646 F.2d at 88. The test does not require evidence of actual
fraud as a prerequisite for piercing the corporate veil.
Trustees of Nat. Elevator Industry Pension, Health
Benefit and Educational Funds v. Lutyk, 332 F.3d 88, 194
(3d Cir. 2003).
narrowed application of the alter ego theory, under Delaware
law a court may “pierce the corporate veil of a company
where . . . it in fact is a mere instrumentality or alter ego
of its owner” and the two operate as a “single
entity.” Fletcher v. Atex, Inc., 68 F.3d 1451,
1457 (2d Cir. 1995). To prevail on an alter ego claim,
“a plaintiff must show (1) that the parent and the
subsidiary operated as a single economic entity and (2) that
an overall element of injustice or unfairness is
present.” Id. For the first element, the
plaintiff must allege “exclusive domination and control
. . . to the point that [the subsidiary] no longer has legal
or independent significance of its own.” Id.,
citing Wallace ex rel. Cencom Cable Income Partners II, LP v.
Wood, 752 A.2d 1175, 1183-84 (Del. Ch. 1999). That
element incorporates the list of typical factors in the
general corporate veil-piercing analysis: “whether the
corporation was adequately capitalized for the corporate
undertaking; whether the corporation was solvent; whether
dividends were paid, corporate records kept, officers and
directors functioned properly, and other corporate
formalities were observed; whether the dominant shareholder
siphoned corporate funds; and whether, in general, the
corporation simply functioned as a facade for the dominant
shareholder. In re Foxmeyer Corp., 290 B.R. 229, 235
(Bankr. D. Del. 2003), citing Harco National Ins. Co. v.
Green Farms, Inc., CIV. A. No. 1131, 1989 WL
110537, at *4 (Del. Ch. Sept. 19, 1989), quoting Golden
Acres, 702 F.Supp. at 1104. To satisfy the second
element the plaintiff must show fraud or injustice inherent
“in the defendant's use of the corporate
form”; however “[t]he underlying cause of action,
at least by itself, does not supply the necessary fraud or
injustice, ” but is distinct from the tort alleged in
the suit. Id., citing In re Foxmeyer Corp., 290 B.R.
229, 236 (Bankr. D. Del. 2003); Sears, Roebuck & Co.
v. Sears plc, 744 F.Supp. 1297, 1305 (D. Del. 1990).
“‘To hold otherwise would render the fraud or
injustice element meaningless, and would sanction
bootstrapping.'” Id., citing Mobil Oil,
718 F.Supp. at 268. To pierce the corporate veil, the
corporate structure must cause the fraud, and the fraud or
injustice must be found in the defendants' use of the
corporate form; the corporation must be a fraud or a sham
existing only for the purpose of serving as a vehicle for
fraud. Foxmeyer, 290 B.R. at 236 (cases not
have failed to allege any of these kinds of facts to warrant
disregarding the corporate forms of PW and Warburg.
Stock Broker Standards
issue in this case is whether PW, in its brokerage
relationship with the investor participants in the Enron
Stock Option program, had a fiduciary duty to disclose
material information about Enron's fraudulent activities
and financial decline to its investor retail clients
purchasing or holding Enron securities or debt.
in the securities market operate in three main capacities:
broker, broker-dealer, and investment advisor. Thomas
controlled and their affairs are so conducted as to make them
adjuncts or instrumentalities of the defendant company,
” and it listed factors that might be considered in
determining whether a parent corporation is liable for the
wrongdoing of a subsidiary because they operated as a single
economic unit, including whether Lee Hazen, “Are
Existing Stock Broker Standards Sufficient?, ” 2010
Colum. Bus. L. Rev. 710, 730 (2010).
“broker” is defined in Black's Law
Dictionary (6th ed. West 1990) as, “An
agent employed to make bargains and contracts for
compensation. A dealer in securities issued by others. . . .
An agent of a buyer or seller who buys or sells stocks,
bonds, commodities, or services, usually on a commission
basis.” See also Rauscher Pierce Refsnes, Inc. v.
Great Southwest Sav., F.A., 923 S.W.2d 112, 115 (Tex.
App.--Houston [14th Dist.] 1996)(“The
relationship between a broker and its customer is that of
principal and agent.”). Under the Exchange Act, 15
U.S.C. § 78c(a)(4)(A), a broker is “any person
engaged in the business of effecting transactions in
securities for the account of others.” A
“broker-dealer” is defined as a “securities
brokerage firm, usually registered with the S.E.C. and with
the state in which it does business, engaging in the business
of buying and selling securities to or for customers.”
Black's Law Dictionary (6th ed. West
1990). There is no explicit fiduciary standard
applicable to broker-dealers under the Exchange Act,
but when they do more than act as order takers for their
clients' transactions, they must meet other standards,
including of suitability in making investment recommendations
to their clients, and they must satisfy the rules of the
self-regulatory organizations (“SROs”), including
national securities exchanges and the Financial Industry
Regulatory Authority (“FINRA, ” the
self-regulatory body for broker-dealers) that oversee them.
Thomas Lee Hazen, “Fiduciary Obligations of Securities
Brokers, ” 5 Law Sec. Reg. § 14:133 (March 2016
while a broker owes his investor-client a fiduciary duty,
that duty varies in scope with the nature of their
relationship, and determining that nature requires a
fact-based analysis. Romano v. Merrill Lynch, Pierce,
Fenner & Smith, 834 F.2d 523, 520 (5th
Cir. 1987), cert. denied, 487 U.S. 1205 (1988). The
nature of the account, whether nondiscretionary or
discretionary, is one factor to be considered, as are the
degree of trust placed in the broker and the intelligence and
qualities of the customer. Id. A broker's duty
is usually restricted to executing the investor's order
when “the investor controls a nondiscretionary account
and retains the ability to make investment
decisions.” Romano, 834 F.2d at 530;
Martinez Tapia v. Chase Manhattan Bank,
N.A., 149 F.3d 404, 412 (5th Cir. 1998).
investors “lack the time, capacity, or know-how to
supervise investment decisions” and “delegate
authority to a broker who will make decisions in their best
interests without prior approval” in a discretionary
account, however, there well may be a duty to disclose.
Town North Bank, N.A. v. Shay Financial Services,
Inc., Civ. A. No. 3:11-CV-3125-L, 2014 WL 4851558,
at *17 (N.D. Tex. Sept. 30, 2014), citing Martinez
Tapia, 149 F.3d at 412,  and SEC v.
Zandford, 535 U.S. 813, 823 (2002). Under Texas law,
In a non-discretionary account, the agency relationship
begins when the customer places the order and ends when the
broker executes it because the broker's duties in this
type of account, unlike those of an investment advisor or
those of a manager of a discretionary account, are
“only to fulfill the mechanical, ministerial
requirements of the purchase or sale of the security . . .
.” As a general proposition, a broker's duty in
relation to a nondiscretionary account is complete, and his
authority ceases, when the sale or purchase is made and the
receipts therefrom accounted for. Thus, each new order is a
new request that the proposed agent consents to act for the
principal. There is no on-going agency relationship as there
would be with a financial advisor or manager of a
Hand v. Dean Witter Reynolds, Inc., 889 S.W.2d 483,
493-94 (Tex. App.--Houston [14th Dist.] 1994, writ
discretionary investment account, in contrast to a
nondiscretionary account, a broker is a “fiduciary of
his customer in a broad sense” and is required to
(1) manage the account in a manner directly
comporting with the needs and objectives of the customer as
stated in the authorization papers or as apparent from the
customer's investment and trading history; (2) keep
informed regarding the changes in the market which
affect his customer's interest and act responsively to
protect these interests; (3) keep his customer informed as to
each completed transaction; and (4) explain
forthrightly the practical impact and potential risks of the
course of dealing in which the broker is engaged.
Anton v. Merrill Lynch, 36 S.W.3d 251, 257-58 (Tex.
App.--Austin 2001, rev. denied)(citations omitted, emphases
added in Anton), quoting Leib v. Merrill Lynch,
Fenner & Smith, Inc., 461 F.Supp. 951, 953 (E.D.
Mich. 1978), aff'd, 647 F.2d 165 (6th
there is no statutorily mandated heightened pleading of
fiduciary duty for brokers, Thomas Lee Hazen, a noted scholar
in the field, points out that “there is plenty of
authority under the existing law that recognizes heightened
obligations of securities broker-dealers, at least when they
are acting in a capacity beyond that of mere order taker. . .
. The law, regulations, and regulatory interpretations to
date make clear that broker-dealers have fiduciary or
fiduciary-like obligations when they provide services beyond
executing customer orders.” Hazen, “Are Existing
Stock Broker Standards Sufficient?, ” 2010 Colum. Bus.
L. Rev. 710, 713-14 (2010). These legal sources include the
Investment Advisers Act of 1940, regarding which the Supreme
Court has held that, even though the word
“fiduciary” does not appear in the statute,
investment advisers are fiduciaries to their clients and must
meet the fiduciary duties of care and loyalty, i.e., they
must “must fully disclose material facts about
prospective investments . . . [and] all conflicts of
interests when giving advice.” Id. at 716,
citing SEC v. Capital Gains Research Bureau, 375
U.S. 180, 191-92 (1963). A fundamental purpose common to a
number of statutes enacted in the 1930's, including the
Investment Advisers Act and the 1934 Act, “was to
substitute a philosophy of full disclosure for the philosophy
of caveat emptor and thus to achieve a high standard of
business ethics in the securities industry.” SEC v.
Capital Gains Research Bureau, 375 U.S. at 186.
Investment Advisers Act of 1940, 15 U.S.C. §
80b-2(a)(11), however, defines “investment
adviser” in relevant part as follows:
“Investment adviser” means any person who, for
compensation, engages in the business of advising others,
either directly or through publications or writings, as to
the value of securities or as to the advisability of
investing in, purchasing, or selling securities, or who, for
compensation and as part of a regular business, issues or
promulgates analyses or reports concerning securities, but
does not include . . . (C) any broker or dealer whose
performances of such services is solely incidental to the
conduct of his business as a broker or dealer and who
receives no special compensation therefor . . . .
Court concludes from the allegations in the complaint and the
lack of mention of any special compensation for PW's
advice to its retail clients that PW does not qualify as an
investment advisor under subsection (C). See, e.g., Banca
Cremi, S.A. v. Alex. Brown & Sons, Inc.,
132 F.3d 1017, 1039 (4th Cir. 1997)(“In this
case, it is clear that, to the extent that Epley and Alex.
Brown provided ‘investment advisory services, '
such services were “‘solely incidental to the
conduct of business as a broker dealer'” and
“the Bank was not an ‘advisory client' of the
defendants.”). The complaint states that PW did not
charge Enron any fee to administer the Employee Stock Option
program, and charged the employees merely six cents per share
to exercise their options, apparently an administrative
charge for effecting the transaction. #122 ¶ 67.
the Supreme Court has held that private rights of action
under the Investment Advisers Act of 1940 are restricted to
suits for equitable relief for rescission of investment
adviser contracts and restitution under section 215; damages
are not available. Transamerica Mortg. Advisors, Inc. v.
Lewis, 444 U.S. 11 (1979). “‘[T]he
rescinding party may have restitution of the consideration
given under the contract, less any value conferred by the
other party.'” Douglass v. Beakley, 900
F.Supp.2d 736, 745 (N.D. Tex. 2012), citing Transamerica
Mortg. Advisors, 444 U.S. at 18-24. The SEC may enforce
the Act by obtaining an injunction mandating that a
registered investment adviser disclose to his clients any of
the adviser's violations of his duties under the Act.
Capital Gains, 375 U.S. at 181.
to the determination whether broker-dealers have fiduciary or
fiduciary-like obligations when they provide services beyond
executing customer orders are SEC rules, particularly those
addressing “(a) conflicts between the firm's
obligations to its customers and its own financial interests,
and (b) trading in or recommending securities in the absence
of adequate information about the issuer, ” made
pursuant to the general anti-fraud provisions of sections
10(b), 15 U.S.C. § 78j(b), and 15(c), 15 U.S.C.
§78o(c), of the 1934 Act, section 17(a) of the
Securities Act of 1933, 15 U.S.C. § 77q(a),
and section 206 of the Investment Advisers Act, described
supra. Hazen, “Are Existing Stock Broker
Standards Sufficient?, ” 2010 Colum. Bus. L. Rev. at
late 1930's, Congress amended the Exchange Act to
authorize self-regulatory organizations for broker dealers.
See, e.g., Andrew F. Tuch, The Self-Regulation
of Investment Bankers, 83 Geo. Wash.L.Rev. 101, 112
& n.50 (December 2014), citing Securities
Exchange Act of 1934, Pub. L. No. 73-291, 48 Stat. 8881
(codified as amended at 15 U.S.C. §§ 78a-78pp
(2012)). Hazen particularly highlights the SEC and FINRA
[formed in 2007 to replace the National Association of
Securities Dealers (“NASD”)]
regulations as sources of fiduciary-like duties.
Id. at 733-55. Sections 6(b)(5) and 15A(b)(6) of the
Securities Exchange Act require stock exchanges and
associations of brokers and securities dealers to establish
rules to protect the investing public from fraudulent and
manipulative practices in the securities market. 15 U.S.C.
§ 78o-3(b)(6). In response, a number of national
exchanges and SROs have adopted “suitability
rules” for brokers. The NASD adopted Rule 2310(a),
In recommending to a customer the purchase, sale or exchange
of any security, a member shall have reasonable grounds for
believing that the recommendation is suitable for such
customer upon the basis of the facts, if any, disclosed by
such customer as to his other security holdings and as to his
financial situation and needs.” This is the so-called
“suitability rule, ” and its purpose is to
protect unsophisticated investors of publicly-held
corporations from the sometimes devious practices of
unscrupulous securities transactions experts.
NYSE adopted a similar, “know your customer rule,
” NYSE Rule 405(a), which requires the officers of
member organizations to “use diligence to learn
essential facts relative to every customer, every order,
every cash or margin account accepted or carried by such
organization.” Generally regulatory rules of conduct do
not provide a private right of action for individual
investors, but are for actions brought by the SEC or state
regulatory investors. As a result, aggrieved individual
investors must frame their securities complaints as claims
under § 10(b) of the Exchange Act and Rule 10b-5. Steven
D. Irwin, Scott A. Lane, and Carolyn W. Mendelson,
Wasn't My Brother Always Looking Out For My Best
Interests? The Road to Become a Fiduciary, 12 Duquesne
Bus. L. J. 41, 44-45 (Winter 2009)(“In itself, the
regulatory violation does not state an independent claim for
economic relief in a civil proceeding for the investor who
suffered a loss at the hands of a broker who has made an
unsuitable trade recommendation. Instead, the aggrieved
investor must state a valid claim under Rule 10b-5. The
plaintiff must allege, in connection with the purchase or
sale of securities, the misstatement or omission of a
material fact, made with scienter, upon which the plaintiff
justifiably relied and which proximately caused the
comments regarding violations of NYSE, FINRA or NASD rules
that “it is generally held that violation of a rule or
a self regulatory organization will not, by itself, support a
private right of action. However, a violation of an exchange
or FINRA rule can form the basis of a 10b-5 action, provided
of course, that all of the elements of a 10b-5 claim can be
established.” “Market Regulation: Broker-Dealer
Regulation; Credit Rating agencies, ” 5 Law Sec. Reg.
§ 14:175 (updated March 2016). The courts are split in a
variety of ways over whether a private right of action exists
for violations of such rules and regulations.
Fifth Circuit has deliberately chosen not to decide whether
rules for brokers established by national exchanges and SROs,
such as the NASD suitability rule or the NYSE “know
your customer rule, ” provide a private cause of action
for individual investors, but has found that they may be used
as evidence of industry standards and practices. Miley v.
Oppenheimer & Co., Inc., 637 F.2d 318, 333
(5th Cir. 1981)(en banc)(in a churning
case “NYSE and NASD rules are excellent tools against
which to assess in part the reasonableness or excessiveness
of a broker's handling of an investor's account,
” the other five factors being the nature and
objectives of the account, the turnover rate, in-and-out
trading, the holding period of the respective securities, and
the broker's profit), abrogated on other
grounds, 470 U.S. 213 (1985).
Securities Exchange Act has no express civil remedy for a
violation of an exchange or association rule. In a seminal
opinion in Colonial Realty v. Bache and Co., 358
F.2d 178, 181 (2d Cir. 1965), cert. denied, 385 U.S.
817 (1966), in which a client sued his broker-dealer for
failure to conduct its dealings in accordance with just and
equitable principles of trade in violation of NYSE and NASD
rules, Judge Henry J. Friendly opined that since a private
remedy is not expressly stated in the 1934 Act, the finding
of an implied private cause of action should be based on the
court's duty to effect Congress's purpose in the
statute and the federal policy it has adopted. A court may
find an implied right of action under the Securities Exchange
Act where there is explicit condemnation of certain conduct
in the statute and when the statute provides a general grant
of jurisdiction to enforce liability. Id. Judge
Friendly concluded that there could be no general rule as to
when a private claim can be maintained for a violation of
NYSE and NASD rules because “the effect and
significance of particular rules may vary with the manner of
their adoption and their relationship to provisions and
purpose of the statute and SEC regulations thereunder.”
An implied action may arise from the protection intended by
the legislature and the ineffectiveness of existing
administrative and judicial remedies to accomplish. The court
must examine the nature of the specific rule and its role in
the regulatory scheme, with the party seeking to impose
liability bearing a heavier burden of persuasion than the
violation of the statute or of an SEC regulation would
require. Id. at 182. Judge Friendly concluded,
“The case for implication of liability would be
strongest when the rule imposes an explicit ...