Data Controls North v. Financial Corp. of America

• Decision Date: 23 May 1988
• Docket Number: Civ. A. No. HAR 86-745.
• Citation: 688 F. Supp. 1047
• Court: U.S. District Court — District of Maryland
• Parties: DATA CONTROLS NORTH, INC., et al., Plaintiffs, v. FINANCIAL CORPORATION OF AMERICA, INC., et al., Defendants.

688 F. Supp. 1047

DATA CONTROLS NORTH, INC., et al., Plaintiffs, v. FINANCIAL CORPORATION OF AMERICA, INC., et al., Defendants.

Civ. A. No. HAR 86-745.

United States District Court, D. Maryland.

May 23, 1988.

Douglas C. Hollman, Richard I. Kovelant, Goldman, Kruger, Kovelant & Hollman, Laurel, Md., for plaintiffs.

Wesley G. Howell, Jr., Larry L. Simms, Roger W. Pincus, Gibson, Dunn & Crutcher, Washington, D.C., Ward B. Coe, III, Nevett Steele, Jr., Whiteford, Taylor & Preston, Baltimore, Md., for defendants.

MEMORANDUM OPINION

HARGROVE, District Judge.

INTRODUCTION

The plaintiffs in this case are as follows: Data Controls North, Inc. ("DCN"), a Maryland corporation, Descomp, Inc. ("Descomp"), a Delaware corporation, Thomas Ruger ("Ruger"), an officer and director of both aforementioned companies, his wife Patricia Ruger, Descomp Profit Sharing Plan, an unincorporated pension plan owned by employees of Descomp; and John Greenwell, President, director, and shareholder of DCN. They will be collectively referred to as "Plaintiffs."

The Plaintiffs filed this lawsuit on March 7, 1986, in an attempt to recover losses sustained by trading in common stock of the defendant Financial Corporation of America ("FCA"), and in options to purchase its common stock. In addition to FCA, Plaintiffs have sued William Popejoy, Chairman of the Board and Chief Executive Officer of FCA; FCA Board of Directors members Annelise Graebner Anderson, Robert Barton, Merrill Butler, Edward Johnson, Thomas Kemp, Charles Offer, Lawrence Roos, John Rosenwald, Jr., Ralph Stone, Charles Young; American Savings & Loan ("AS & L"), and additional FCA officers Donald Royer, and John Borer, Jr. (collectively the "Defendants").

Plaintiffs have brought this action pursuant to § 10(b) of the Securities Exchange Act of 1934 ("1934 Act"), 15 U.S.C. § 78j(b) (1982), which prohibits "in connection with the purchase or sale of any security ... the use of any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Securities and Exchange Commission may prescribe," as well as Rule 10b-5 promulgated thereto by the Securities and Exchange Commission ("SEC"), 17 C.F.R. § 240.10b-5 (1987). Rule 10b-5 makes it unlawful for any person to "employ any device, scheme, or artifice to defraud," or to "engage in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security." In addition, Plaintiffs have brought claims under § 20(a) of the 1934 Act, 15 U.S.C. 78t(a) (1982), § 17(a) of the Securities Act of 1933 ("1933 Act"), 15 U.S.C. § 77q(a) (1982), and numerous state law and common law counts.

The essence of the Plaintiffs' argument lies in the charge that the Defendants failed to disclose publicly sufficiently precise information on FCA's economic condition for the fourth quarter of 1984 through March of 1985. Plaintiffs allege that Defendants engaged in fraudulent conduct which included, among other allegations, knowingly withholding information about the company in a manner that caused them to suffer losses in connection with their stock and options holdings. They also accuse Defendants of feeding to them (and the public at large) information that did not serve as an accurate indicator of FCA's financial condition, which in turn, caused them to suffer losses in connection with their stock and options holdings. The record indicates that Plaintiffs purchased FCA stock and options in FCA stock from August 17, 1984 to February 22, 1985.

DISCUSSION

Currently pending before this Court is the Defendants' Motion for Summary Judgment, which has been fully briefed. Defendants and Plaintiffs in this case have filed lengthy memoranda in support and opposition, respectively, of this Motion, accompanied by equally voluminous exhibits. The Defendants have based their Motion on five basic arguments:

(1) The Plaintiffs' alleged losses from options trading are not actionable under the federal securities laws (as charged herein: § 10(b) of the 1934 Act, § 20(a) of this same Act, and § 17(a) of the 1933 Act.);

(2) The Plaintiffs' claim under § 17(a) of the 1933 Act must be dismissed because this section does not confer a private right of action for damages;

(3) The Plaintiffs' claims under the Maryland Securities Act infra and the federal securities laws are barred by the Statute of Limitations;

(4) The Plaintiffs' claims must be dismissed because the defendants' statements concerning the company's economic condition were not false or misleading, the defendants did not fail to disclose material information, and the plaintiffs did not rely on these alleged statements, misstatements, and disclosures (or lack thereof);

(5) The Plaintiffs' claim under the Racketeer Influenced and Corrupt Organizations Act ("RICO") (see infra at 1051-52) should be dismissed.

In their first argument, Defendants maintain that the Plaintiffs' alleged losses from options trading are not actionable under the federal securities laws because the Plaintiffs' options trading did not give rise to a relationship of trust and confidence with the Defendants. See Chiarella v. United States, 445 U.S. 222, 230, 100 S.Ct. 1108, 1115, 63 L.Ed.2d 348 (1980). Furthermore, they add, the Plaintiffs cannot establish a "transactional nexus" between their options trading and any trading by the Defendants. See Starkman v. Warner Communications, Inc., 671 F.Supp. 297, 304 (S.D.N.Y.1987) (quoting Laventhall v. General Dynamics Corp., 704 F.2d 407, 412 (8th Cir.1983), cert. denied, 464 U.S. 846, 104 S.Ct. 150, 78 L.Ed.2d 140 (1983)).

Plaintiffs claim that their situation is different because they had not only options to purchase, but had actually purchased stock in the issuing company, therefore giving rise to a connection to the issuer of the stock. While some courts have actually extended to options traders a cause of action under the federal securities laws, they have done so only in cases involving affirmative misrepresentations, e.g., Deutschman v. Beneficial Corp., 841 F.2d 502 (3rd Cir. 1988), which have not been demonstrated here, or insider trading, e.g., Backman v. Polaroid Corp., 540 F.Supp. 667 (D.Mass. 1982), a charge which has been dropped from this case per stipulation of the parties.

Most courts addressing this issue have refused to extend a cause of action under § 10(b) of the 1934 Act and the related Rule 10b-5. See, e.g., Laventhall, 704 F.2d 407 (8th Cir.1983), cert. denied, 464 U.S. 846, 104 S.Ct. 150, 78 L.Ed.2d 140 (1983); Bianco v. Texas Instruments, Inc., 627 F.Supp. 154 (N.D.Ill.1985); In re McDonnell Douglas Corp. Securities Litigation, 567 F.Supp. 126 (E.D.Mo.1983). This Court is in accord with the more widely-held view.

It should be emphasized that there is a "vast difference" between shareholders and options traders:

Shareholders own an equity interest in the corporation; options traders do not. Shareholders are involved in desired capital formation; options traders make no contribution to capital or a contributed so attenuated as to be de minimis. Although both shareholders and options traders are affected by the corporation's performance, the brute fact is the corporation is run only for the benefit of the shareholders, not options traders. The relationship between shareholders and the corporation is one of trust and confidence, giving rise to a duty owed by the corporation. The nonexistence of a relationship between options traders and the corporation precludes such a duty.

Deutschman v. Beneficial Corp., 668 F.Supp. 358, 362 (D.Del.1987), rev'd on other grounds, 841 F.2d 502 (3rd Cir.1988). See Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 747-49, 95 S.Ct. 1917, 1931-32, 44 L.Ed.2d 539 (1975).

While the Plaintiffs' shareholder status entitles them to standing to pursue appropriate remedies available under § 10(b) of the 1934 Act and Rule 10b-5 promulgated thereto for any alleged losses on their trading of common stock in FCA, this Court is not prepared to extend this right to those who engage in risky speculation such as that found in the options trading game. The Defendants' Motion for Summary Judgment will be granted as to Plaintiffs' claims grounded in their options trading activities.

Upon further examination, however, it is evident that Plaintiffs have produced not one example of affirmative misrepresentation on the part of the Defendants that would give rise to a cause of action for Plaintiffs as stockholders, let alone options traders. There was no evidence of such misrepresentation in the pleadings, and the Plaintiffs failed to produce such evidence upon direct examination by this Court. As the Court cannot rely on speculation, such as that advanced by the Plaintiffs in support of their assertions, summary judgment in favor of the Defendants is also appropriate as to Plaintiffs' claims grounded in their shareholder status. See Celotex Corporation v. Catrett, 477 U.S. 317, 323-325, 106 S.Ct. 2548, 2553-2554, 91 L.Ed.2d 265 (1986).

Defendants also claim that Plaintiffs' claim under § 17(a) of the Securities Act of 1933 must be dismissed because § 17(a) provides no explicit authorization for a private right of action. To allow such, they contend, would contravene the intent of Congress as expressed in the structure of the 1933 and 1934 securities acts and the legislative history that preceded their enactment.

Plaintiffs cite a Fourth Circuit case, Newman v. Prior, 518 F.2d 97 (4th Cir. 1975), that arguably allowed a private right of action under § 17(a), however, this has been effectively abrogated by a 1978 opinion of this same court in SEC v. American Realty Trust, 586 F.2d 1001, 1006 (4th Cir. 1978). In any event, the Supreme Court, while apparently recognizing that this is an open question, frowns on the extensive of such a private right of action in the absence of an express authorization thereto. See, e.g., Cort...