166 F.3d 529 (2nd Cir. 1999), 98-7123, Press v. Chemical Investment Services Corp.

Docket Nº:Docket No. 98-7123.
Citation:166 F.3d 529
Party Name:Donald PRESS, on behalf of himself and all others similarly situated, Plaintiff-Appellant, v. CHEMICAL INVESTMENT SERVICES CORP., Chase Manhattan Corporation, Pershing, a Corporate Division of Donaldson, Lufkin & Jenrette Securities Corporation, and Donaldson, Lufkin & Jenrette Securities Corporation, Defendants-Appellees.
Case Date:February 04, 1999
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit

Page 529

166 F.3d 529 (2nd Cir. 1999)

Donald PRESS, on behalf of himself and all others similarly

situated, Plaintiff-Appellant,



Corporation, Pershing, a Corporate Division of Donaldson,

Lufkin & Jenrette Securities Corporation, and Donaldson,

Lufkin & Jenrette Securities Corporation, Defendants-Appellees.

Docket No. 98-7123.

United States Court of Appeals, Second Circuit

February 4, 1999

Argued Oct. 20, 1998.

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Roger W. Kirby, New York, N.Y. (Alice McInerney, Kaufman, Malchman, Kirby & Squire, LLP, of counsel), for Plaintiff-Appellant.

Ahuva Genack, New York, N.Y. (Matthew G. Leonard, Chase Manhattan Legal Department, of counsel), for Defendants-Appellees Chemical Investment Services Corp. and Chase Manhattan Corporation.

Stephen L. Ratner, New York, N.Y. (Joseph Zuckerman, Rosenman & Colin LLP, of counsel), for Defendants-Appellees Pershing, a Corporate Division of Donaldson, Lufkin & Jenrette Securities Corporation, and Donaldson, Lufkin & Jenrette Securities Corporation.

(Jonathan I. Blackman, Giovanni P. Prezioso, Jean E. Kalicki, Onnig H. Dombalagian, Cleary, Gottlieb, Steen & Hamilton; Paul Saltzman, Sarah M. Starkweather, The Bond Market Association, New York, NY), for The Bond Market Association as Amicus Curiae.

(Paul Gonson, Solicitor, Colleen P. Mahoney, Acting General Counsel, Jacob H. Stillman, Associate General Counsel, Susan S. McDonald, Senior Litigation Counsel, Luis de la Torre, Attorney, Securities and Exchange Commission, Washington, DC), for The Securities and Exchange Commission, Amicus Curiae.

Before: OAKES and WALKER, Circuit Judges, and KNAPP, District Judge. [*]

OAKES, Senior Circuit Judge:


Plaintiff-Appellant Donald Press, on behalf of himself and all others similarly situated, appeals the District Court's dismissal of his claims for relief. The dismissal of Press's claims by the District Court for the Southern District of New York (Denise Cote, Judge ) is affirmed.


Plaintiff-Appellant Donald Press 1 purchased a Treasury bill ("T-bill") in November 1995 through Defendant-Appellee Chemical Investment Services Corp., a registered securities broker-dealer, that is wholly owned by Defendant-Appellee Chase Manhattan Corporation. The trade was cleared through Defendant-Appellee Pershing, a division of Defendant-Appellee Donaldson, Lufkin & Jenrette Securities Corporation. Pershing and Donaldson, Lufkin are both registered securities broker-dealers. Press purchased the T-bill for $99,488.42, to mature in 6 months at $102,000.

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After purchasing the T-bill, he had discussions with the appellees, requesting that the proceeds of the bill at maturity be express mailed to him or that he be able to pick up the proceeds on the day of maturity at one of the New York City Pershing or Chemical locations. (He purchased the bill through a New York City location.) He was told that he could not pick up a check for the proceeds in New York City, though they could be express mailed or wired for an additional fee. Otherwise he would have to wait for the check for the proceeds to arrive via regular mail. He opted to have the check express mailed to him at maturity for an additional fee. Four days (including a weekend) after the maturity date, he received a check for $101,985.

He maintains that the appellees fraudulently did not disclose that the funds at maturity would not be immediately available. Therefore, the period over which the yield should have been calculated was longer than the appellees represented, so the yield advertised was, he claims, fraudulently inaccurate. He contends that the appellees structured the transaction in this manner to allow themselves more time to use his funds.

Press was also not told that the appellees were taking a $158.86 markup 2 from the transaction. This, he argues, is an excessive fee relative to the bill's yield, such that the appellees had the obligation under the federal securities laws to disclose it. Moreover, he maintains that the appellees also had a fiduciary obligation to Press to disclose the fee.

Press brought suit in the Southern District of New York, contending that the appellees' actions violated the federal securities laws, including Section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78j(b)) and Rules 10b-5 and 10b-10 (17 C.F.R. §§ 240.10b-5 and 240.10b-10) promulgated thereunder.

The defendants moved to dismiss the Amended Complaint for failure to state a claim under Fed.R.Civ.P. 12(b)(6). The district court granted the defendants' motion in full, and Press's federal claims were dismissed in their entirety.

In the supporting opinion, the district court assessed Press's claims as falling into three categories: (1) the "markup" he paid in purchasing the security through the defendants; (2) the yield figures reported on his trade confirmation form; and (3) the delay he experienced in receiving the trade proceeds. See Press v. Chem. Inv. Servs. Corp., 988 F.Supp. 375, 380 (S.D.N.Y.1997). The court held that none of the assertions presented a viable claim under the federal securities laws.

As a matter of law, the court held that the markup was not excessive, so the appellees had no obligation to disclose it. See id. at 384-86. Alternatively, the court held that the appellees were not fiduciaries of the appellant and therefore had no additional disclosure obligations. See id. at 386-76.

As to the misrepresentation of yield claim, the court held that no rational juror could conclude that the difference in yield as calculated over a 178-day period versus the 180-day period would have actual significance in the deliberation of the rational investor. See id. at 388. The yield claim was therefore dismissed.

Finally, the court held that Press's claim that he purchased the bill in reliance on the fact that he would receive the proceeds on May 9, 1996, the maturity date, failed as a matter of law because he could not show that (1) the delay in receipt of the proceeds would have been a material factor in his decision to purchase the bill; (2) the fraud alleged occurred "in connection with" the sale of a

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security as required under 10(b); and (3) the special pleading requirements for scienter under Rule 9(b) were met. See id. at 388-90.


Press maintains that he did plead all of the elements of fraud under the securities law sufficient to present to a jury, and the defendants' non-disclosure and denial of prompt access to the proceeds violated Section 10(b) and Rules 10b-5 and 10b-10. He argues that the district court applied an inappropriately narrow interpretation of the "in connection with" language of the relevant statute; incorrectly ruled as a matter of law that the yield differential due to the time period expansion was immaterial; overlooked the facts he pleaded to satisfy the scienter requirements of the federal securities laws; improperly deemed appellee Chemical a principal; incorrectly failed to recognize a fiduciary relationship between the appellees and the appellant; and erroneously determined that, as a matter of law, the markup was not excessive.

Standard of Review

Dismissal of a complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) is reviewed de novo. See, e.g., Grandon v. Merrill Lynch & Co., 147 F.3d 184, 188 (2d Cir.1998). Factual allegations made in the complaint are assumed to be true, and all inferences are drawn in favor of the plaintiff. Id. Only if it appears to a certainty that a plaintiff could have proved no set of facts to sustain a claim for relief should the claim have been dismissed. Id.

Federal Securities Laws

Section 10(b) of the Securities Act of 1934, 15 U.S.C. § 78j(b), and Rules 10b-5 and 10b-10, 17 C.F.R. 240.10b-5 and 240.10b-10, promulgated thereunder prohibit fraudulent activities in connection with the purchase or sale of securities. Section 10(b) provides that:

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 securities exchanges-

(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, 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.

SEC Rule 10b-5, promulgated pursuant to section 10(b), more specifically delineates what constitutes a manipulative or deceptive device or contrivance. See 17 C.F.R. § 240.10b-5. To state a claim for relief under Rule 10b-5, a plaintiff must allege that,

in connection with the purchase or sale of securities, the defendant, acting with scienter, made a false material representation or omitted to disclose material information and that plaintiff's reliance on defendant's action caused [plaintiff] injury.

In re Time Warner Inc. Secs. Litig., 9 F.3d 259, 264 (2d Cir.1993) (internal quotations omitted).

Rule 10b-10 specifies information that broker-dealers are required to disclose in writing to the customers at or before completion of a transaction. Included are the requirements that the broker or dealer disclose the date, time, and price of the transaction; the broker's or dealer's role as either agent or principal; and other information based on whether the broker or dealer is an agent or principal. See 17 C.F.R. § 240.10b-10.

A. Markup Disclosure

A seller such as the defendant only has a duty to disclose the specifics of a markup--under the rubric of the obligation under Section 10(b) to "disclose material information"--when there is either a fiduciary relationship with the complaining...

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