Moss v. Morgan Stanley, Inc., 1281

• Decision Date: 09 September 1983
• Docket Number: D,No. 1281,1281
• Citation: 719 F.2d 5
• Parties: , Fed. Sec. L. Rep. P 99,478 Michael E. MOSS, Plaintiff-Appellant, v. MORGAN STANLEY INC., E. Jacques Courtois, Jr., Adrian Antoniu, and James M. Newman, Defendants, Morgan Stanley Inc. and James M. Newman, Defendants-Appellees. ocket 83-7120.
• Court: U.S. Court of Appeals — Second Circuit

Page 5

719 F.2d 5

70 A.L.R.Fed. 511, Fed. Sec. L. Rep. P 99,478

Michael E. MOSS, Plaintiff-Appellant, v. MORGAN STANLEY INC., E. Jacques Courtois, Jr., Adrian

Antoniu, and James M. Newman, Defendants,

Morgan Stanley Inc. and James M. Newman, Defendants-Appellees.

No. 1281, Docket 83-7120.

United States Court of Appeals, Second Circuit.

Argued May 19, 1983.

Decided Sept. 9, 1983.

Richard J. Kilsheimer, New York City (Robert N. Kaplan, Kaplan, Kilsheimer & Foley, New York City, Herbert E. Milstein, Steven J. Toll, Kohn, Milstein, Cohen & Hausfeld, Washington, D.C., of counsel), for plaintiff-appellant.

Arthur F. Mathews, Washington, D.C. (Andrew B. Weissman, Thomas W. White, Wilmer, Cutler & Pickering, Washington, D.C., of counsel), for defendant-appellee James M. Newman.

Henry L. King, New York City (Arthur F. Golden, James L. Kerr, Davis Polk & Wardwell, New York City, of counsel), for defendant-appellee Morgan Stanley Inc.

Daniel L. Goelzer, Gen. Counsel, Jacob H. Stillman, Associate Gen. Counsel, Rosalind C. Cohen, Asst. Gen. Counsel, Paul Gonson, Sol., Robert Mills, Elliot M. Pinta, S.E.C., Washington, D.C., amicus curiae.

Before MANSFIELD, MESKILL and KEARSE, Circuit Judges.

MESKILL, Circuit Judge:

This appeal spotlights two issues of significance for the litigation of federal securities fraud claims: (1) whether a shareholder who unwittingly sold stock of a "target" company on the open market prior to public announcement of a tender offer has a cause of action for damages under section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j(b) (1976) (the 1934 Act), and rule 10b-5, 17 C.F.R. Sec. 240.10b-5 (1982) promulgated thereunder against a person who purchased "target" shares on the basis of material nonpublic information which he acquired from the tender offeror's investment adviser; and (2) whether this same unwitting shareholder can recover treble damages under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. Secs. 1961 et seq. (1976 & Supp. III 1979) (RICO), on the ground that he was injured by an unlawful "enterprise" conducting a "pattern of racketeering activity" comprised of "fraudulent" securities transactions.

The district court held that the shareholder failed to state a cause of action under both the 1934 Act and RICO. We agree for the reasons stated below.

Affirmed.

BACKGROUND

The chain of events that culminated in this action began in the latter months of 1976 with tender offer discussions between Warner-Lambert Company (Warner) and Deseret Pharmaceutical Company (Deseret). On November 23, 1976 Warner retained the investment banking firm of Morgan Stanley & Co. Incorporated, a subsidiary of Morgan Stanley Inc. (Morgan Stanley), to assess the desirability of acquiring Deseret, to evaluate Deseret's stock and to recommend an appropriate price per share for the tender offer.

One of the individual defendants in this action, E. Jacques Courtois, Jr., was then employed by Morgan Stanley in its mergers and acquisitions department. In that capacity Courtois acquired knowledge of Warner's plan to purchase Deseret stock. On November 30, 1976 Courtois informed defendant Adrian Antoniu, an employee of Kuhn Loeb & Co., of the proposed tender offer and urged him to purchase Deseret stock. Antoniu in turn informed James M. Newman, a stockbroker, that Warner intended to bid for Deseret. Pursuant to an agreement with Antoniu and Courtois, Newman purchased 11,700 shares of Deseret stock at approximately $28 per share for his and their accounts. Newman also advised certain of his clients to buy Deseret stock.

Trading was active in Deseret shares on November 30, 1976, with approximately 143,000 shares changing hands. Michael E. Moss, the plaintiff in this action, was among the active traders, having sold 5,000 shares at $28 per share. On the following day, December 1, 1976, the New York Stock Exchange halted trading in Deseret stock pending announcement of the tender offer. Trading remained suspended until December 7, 1976 when Warner publicly announced its tender offer for Deseret stock at $38 per share. Newman and the other defendants tendered their shares to Warner and reaped a substantial profit.

On August 5, 1982 Moss commenced this action on his own behalf and on behalf of the class of investors who sold stock in Deseret on November 30, 1976. ¹ He contended that "members of the class have been substantially damaged in that they sold Deseret stock prior to the public announcement of the Warner tender offer at prices substantially below [those] offered by Warner." J.App. at 11. The amended complaint stated three causes of action: (1) Moss sought to recover damages from Newman for allegedly violating section 10(b) of the 1934 Act and rule 10b-5 thereunder by purchasing Deseret shares with knowledge of the imminent tender offer and without disclosing such information to Deseret shareholders; ² (2) Moss sought to recover damages from Morgan Stanley on the ground that as a "controlling person" under section 20(a) of the 1934 Act, 15 U.S.C. Sec. 78t(a) (1976), Morgan Stanley should be derivatively liable for Courtois' wrongdoing; ³ and (3) pursuant to RICO, 18 U.S.C. Sec. 1964(c) (1976), Moss sought to recover treble damages from Newman on the ground that he engaged in "at least two acts of fraud in connection with the purchase and sale of securities and as such [his actions represented] a pattern of racketeering activity within the meaning of RICO." ⁴ J.App. at 11.

In September 1982 Newman moved pursuant to Fed.R.Civ.P. 12(b)(6) to dismiss the complaint for failure to state a claim upon which relief could be granted. Shortly thereafter, defendant Morgan Stanley filed a rule 12(b)(6) motion to dismiss, alternatively styled as a Fed.R.Civ.P. 56 motion for summary judgment, and also requested attorneys' fees and costs pursuant to Fed.R.Civ.P. 11. The United States District Court for the Southern District of New York, Pollack, J., granted both defendants' motions to dismiss, defendant Morgan Stanley's Rule 56 motion ⁵ and awarded costs to both defendants. Moss v. Morgan Stanley Inc., 553 F.Supp. 1347, 1352 (S.D.N.Y.1983). Although we disagree with several of the reasons advanced by the district court for dismissing plaintiff's RICO claim, we affirm the judgment dismissing the complaint and awarding costs to both defendants. ⁶

DISCUSSION

I. Section 10(b) Liability ⁷

A. Introduction

It is well settled that traditional corporate "insiders"--directors, officers and persons who have access to confidential corporate information ⁸ -- must preserve the confidentiality of nonpublic information that belongs to and emanates from the corporation. ⁹ Consistent with this duty, the "insider" must either disclose nonpublic corporate information or abstain from trading in the securities of that corporation. See SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 848 (2d Cir.1968) (en banc), cert. denied, 404 U.S. 1005, 92 S.Ct. 561, 30 L.Ed.2d 558 (1971); accord Radiation Dynamics, Inc. v. Goldmuntz, 464 F.2d 876, 890 (2d Cir.1972) ("The essential purpose of Rule 10b-5 ... is to prevent corporate insiders and their tippees from taking unfair advantage of the uninformed outsiders."). The individual defendants in this case--Courtois, Antoniu and Newman--having acquired confidential information through Warner's investment adviser and having no direct relationship with Deseret, could not be traditional corporate "insiders."

However, in a number of decisions the Supreme Court has extended the "duty of disclosure" requirement to nontraditional "insiders"--persons who have no special access to corporate information but who do have a special relationship of "trust" and "confidentiality" with the issuer or seller of the securities. See, e.g., Affiliated Ute Citizens v. United States, 406 U.S. 128, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972) (bank employees who purchased shares in a tribal trust fund from mixed-blood Ute Indians without disclosing that there was a secondary market for shares at higher prices among non-Indians); SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 84 S.Ct. 275, 11 L.Ed.2d 237 (1963) (investment adviser who purchased stock for his own account just before publishing a recommendation that his clients buy the stock); see also Zweig v. Hearst Corp., 594 F.2d 1261 (9th Cir.1979) (financial columnist); Lewelling v. First California Co., 564 F.2d 1277 (9th Cir.1977); Frigitemp Corp. v. Financial Dynamics Fund, Inc., 524 F.2d 275 (2d Cir.1975); Flynn v. Bass Brothers Enterprises, 456 F.Supp. 484 (E.D.Pa.1978). Moss sought to include the defendants in this category of nontraditional "insiders" and argued that they necessarily violated section 10(b) and rule 10b-5 by purchasing Deseret stock without publicly disclosing their knowledge of the impending tender offer. After finding that none of the defendants occupied a position of "trust" with respect to Moss, the district court held that none of the defendants owed him such a "duty of disclosure." In light of the Supreme Court's decisions in Chiarella v. United States, 445 U.S. 222, 100 S.Ct. 1108, 63 L.Ed.2d 348 (1980), and Dirks v. SEC, --- U.S. ----, 103 S.Ct. 3255, 77 L.Ed.2d 911 (1983), which recently articulated the standard for analyzing violations of section 10(b) and rule 10b-5, we agree with the district court's dismissal of plaintiff's federal securities law claim.

B. Chiarella v. United States

In Chiarella v. United States, 445 U.S. 222, 100 S.Ct. 1108, 63 L.Ed.2d 348 (1980), an employee of a New York financial printer deduced the identity of corporate takeover targets from the confidential offering documents prepared by his firm. Without disclosing his knowledge of the acquiring company's plans, Chiarella purchased stock in the target companies and sold it at a substantial profit immediately after public announcement of the takeovers. Id. at 224, 100 S.Ct. at 1112. He was indicted and convicted of...