Cohen v. Stratosphere Corp., 95-16098

• Decision Date: 06 June 1997
• Docket Number: No. 95-16098,95-16098
• Citation: 115 F.3d 695
• Parties: Fed. Sec. L. Rep. P 99,471, 97 Cal. Daily Op. Serv. 4281, 97 Daily Journal D.A.R. 7165 Harvey COHEN; Dawn Ennis; Robert Buckler; Jeffrey Wexler; Union Equity Partners, Plaintiffs-Appellants, v. STRATOSPHERE CORPORATION, Defendant, and Yaeger Securities, Inc.; Grand Casino Resorts, Inc.; Lyle Berman; Bob Stupak; Bob Stupak Enterprises, Inc.; Andrew S. Blumen, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 695

115 F.3d 695

Fed. Sec. L. Rep. P 99,471, 97 Cal. Daily Op. Serv. 4281,

97 Daily Journal D.A.R. 7165

Harvey COHEN; Dawn Ennis; Robert Buckler; Jeffrey Wexler;

Union Equity Partners, Plaintiffs-Appellants, v. STRATOSPHERE CORPORATION, Defendant, and Yaeger Securities, Inc.; Grand Casino Resorts, Inc.; Lyle

Berman; Bob Stupak; Bob Stupak Enterprises,

Inc.; Andrew S. Blumen, Defendants-Appellees.

No. 95-16098.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Sept. 18, 1996.

Decided June 6, 1997.

Bert M. Brown, Brown & Brown, Las Vegas, NV, Sherrie R. Savett, Todd S. Collins, Berger & Montague, Philadelphia, PA, for plaintiffs-appellants.

Mark G. Krum, Robert J. Shilliday III, Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP, Robert C. Rosen, Rosen & Associates, Los Angeles, CA, for defendants-appellees.

Appeal from the United States District Court for the District of Nevada; David Warner Hagen, District Judge, Presiding. D.C. No. CV-94-00334-DWH.

Before: CHOY, CANBY, and FERNANDEZ, Circuit Judges.

OPINION

CANBY, Circuit Judge.

Harvey Cohen, Union Equity Partners, and other plaintiffs appeal the district court's Fed.R.Civ.P. 12(b)(6) dismissal of their claim against Yaeger Securities, Inc., Bob Stupak, Grand Casino Resorts, Inc., and other defendants, for violations of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5.

Cohen is the class representative of a group of investors ("Investor Class") who attempted to purchase securities ("Units") offered as part of an Initial Public Offering ("IPO") of Stratosphere Corporation. Stratosphere was a defendant in district court and was a party to this appeal, but while the appeal was under submission, Stratosphere filed a Chapter 11 petition in bankruptcy and all further proceedings against it were stayed pursuant to the automatic stay provision of 11 U.S.C. 362(a). We therefore entered an order on April 9, 1997, staying all action in this appeal with regard to Stratosphere Corporation. The order also provided that for all other parties the appeal remained under submission. The automatic stay does not preclude us from deciding this appeal with regard to all parties other than Stratosphere, and we now proceed to do so. See Matter of S.I. Acquisition, Inc., 817 F.2d 1142, 1147 (5th Cir.1987) (automatic stay protects only debtor in Chapter 11 bankruptcy and ordinarily is not available for benefit of nonbankrupt codefendants). The remaining defendants-appellees, to whom our decision today applies, are individuals or corporations that were connected to the offering either as directors, officers or shareholders of Stratosphere, contractors with Stratosphere, or preferred purchasers of the offered securities. References to the "defendants" in this opinion hereafter refer to all defendants other than Stratosphere Corporation.

The Investor Class's claim under § 10(b) and Rule 10b-5 is an unusual one, to put it mildly. They do not complain of having purchased stock, to their loss, because of the defendants' misrepresentations. Instead, they complain that they were improperly denied the opportunity to purchase stock at all, and thus were denied a potential gain when the stock rose in value for a time. They allege that the defendants misrepresented that the Units would be sold on a first-come, first-served basis, and concealed the fact that insiders would take priority if the IPO was oversubscribed.

Union Equity Partners is the class representative for a group of broker-dealer firms ("Dealer Class") that entered into Selected Dealer Agreements with Yaeger Securities, the investment banking firm that acted as Stratosphere's Sales Agent. Union Equity Partners argues that it was denied commissions and Sales Agent Warrants to which it was entitled because the defendants refused to fulfill the subscription agreements that it solicited from the public.

We affirm the district court's dismissal of the plaintiffs' claims. The Investor Class and the Dealer Class both lack standing to sue under § 10(b) or Rule 10b-5 as purchasers of securities.

BACKGROUND

On January 24, 1994, Stratosphere Corporation commenced an initial public offering to raise capital for the construction and operation of the Stratosphere Tower in Las Vegas, Nevada. The IPO involved the offering of "Units"; each Unit was comprised of one share of Stratosphere common stock and one redeemable common-stock purchase warrant.

The IPO required that a minimum of 7,000,050 Units be sold for the offering to go forward ("to close"), and limited to 11,700,000 the maximum number of Units for sale. Prior to the opening date of the IPO, Stratosphere executed an agreement with Grand Casino Resorts, Inc. ("Grand"), which obligated Grand to purchase "4,000,000 Units pursuant to the offering, plus such additional Units as are required to enable the Company to achieve the Minimum Offering." As a result, Stratosphere was guaranteed to achieve the IPO's Minimum Offering.

Stratosphere engaged Yaeger Securities, Inc. to act as the Sales Agent for the IPO on a "best efforts" basis. ¹ As permitted by such an arrangement, Yaeger subsequently executed "Selected Dealer Agreements" with other broker-dealers. These Agreements authorized certain broker-dealers to "find purchasers for the Units acceptable to the Company" "on a best efforts basis only." The Agreement states that all sales of Units "are conditioned upon the receipt and acceptance by the Company of subscriptions for the Minimum Offering" and satisfaction of the other conditions of the Agreement. Finally, the Agreement stated that "no compensation will be paid in respect of subscriptions (or portions thereof) which have been rejected by the Company."

In a separate document, dated January 24, 1994, that Yaeger circulated to members of the Dealer Class regarding subscription procedures, Yaeger stated that, with the exception of a preference of 2,500,000 Units for subscribers to an earlier, unsuccessful offering, "all subscriptions will be accepted on a 'first-come, first-served' basis."

Stratosphere and Yaeger circulated a Prospectus, also dated January 24, 1994, in connection with the IPO. The Prospectus stated that:

Units may be purchased by officers, directors, and employees of the Company and its affiliates (and their respective families) (the "Related Purchasers") ... and the Company will incur no obligation to pay a selling commission to the Sales Agent on account of such sales. There is no limitation on the number of Units which may be purchased by Related Purchasers, and all such purchases will be included for purposes of achieving the Minimum Offering. See "Plan of Distribution."

(emphasis added).

The Prospectus informed potential investors that subscriptions for Units, along with the full payment of the offering price, had to be received by the Escrow Agent on or before February 22, 1994 (the "Termination Date"). The Prospectus also stated, however, that:

[t]he Units are being offered ... subject to prior sale and to the rights of the Original Subscribers described above, receipt and acceptance by the Company, approval of certain matters by counsel and certain other conditions. The Company reserves the right to withdraw or cancel such offer and to reject any subscription in whole or in part.... Pending the Closing, subscription proceeds will be held by the Escrow Agent in an interest-bearing account. Upon acceptance of such subscriptions by the Company and the issuance of the Units, the principal of the escrow account will be remitted to the Company.... If the Closing does not occur by the Termination Date, this offering will be terminated and all subscription funds will be returned promptly to the subscribers, together with interest earned.... Subscriptions deposited in the escrow account may not be withdrawn by investors without the Company's consent. ²

(emphasis added).

The Prospectus contains a section entitled "Plan of Distribution." This section describes Stratosphere's "best efforts" sales arrangement with Yaeger, and notes that Yaeger may offer the Units through other Selected Dealers. The Plan reiterates that "[a]lthough there are no arrangements or understandings for purchases of Units by Related Purchasers, there is no limitation on the number of Units which may be purchased by Related Purchasers and all such purchases will be included for purposes of achieving the Minimum Offering."

Finally, the Plan of Distribution states, in boldface type:

There can be no assurance that if the Minimum Offering is achieved that any additional Units will be sold or that the offering period will not be extended. Subscribers may, therefore, have their subscription funds held in the escrow account for the entire offering period. Subscribers may not withdraw their subscriptions from the escrow account without the written consent of the Company.

(emphasis added).

Subscription Agreements and a page of instructions regarding completion of the Agreement were attached to the back of each Prospectus. The instruction sheet instructs each subscriber to read the Prospectus carefully and then to complete and sign the Subscription Agreement. The Agreement states that "the undersigned, having received the Prospectus, dated January 24, 1994 ... relating to the offer by [Stratosphere] to sell Units ... hereby subscribes for the number of Units indicated below."

The individual plaintiffs (the named representatives of the Investor Class), including Cohen, all sent in signed Subscription Agreements that were dated either January 24 or January 25, 1994, and included full payments for the Units for which they were subscribing. As was explained in the Prospectus, and as is required by Rule 15c2-4, the received payments were placed in escrow pending the closing of the offering.

Stratosphere subsequently issued a First Supplement to the Prospectus, dated January 26, 1994, which informed...