Menora Mivtachim Ins. Ltd. v. Frutarom Indus. Ltd.

• Decision Date: 30 September 2022
• Docket Number: 21-1076,August Term 2021
• Citation: 49 F.4th 790
• Parties: MENORA MIVTACHIM INSURANCE LTD., Menora Mivtachim and the Federation of Engineers Provident Fund Management Ltd., Clal Insurance Company Ltd., Menora Mivtachim Pensions and Gemel Ltd., Clal Pension and Provident Ltd., Atudot Pension Fund for Employees and Independent Workers, Plaintiffs-Appellants, v. FRUTAROM INDUSTRIES LTD., Ori Yehudai, Ari Rosenthal, Alon Granot, Guy Gill, Defendants-Appellees.
• Court: U.S. Court of Appeals — Second Circuit

49 F.4th 790

MENORA MIVTACHIM INSURANCE LTD., Menora Mivtachim and the Federation of Engineers Provident Fund Management Ltd., Clal Insurance Company Ltd., Menora Mivtachim Pensions and Gemel Ltd., Clal Pension and Provident Ltd., Atudot Pension Fund for Employees and Independent Workers, Plaintiffs-Appellants,

v.FRUTAROM INDUSTRIES LTD., Ori Yehudai, Ari Rosenthal, Alon Granot, Guy Gill, Defendants-Appellees.^*

No. 21-1076

August Term 2021

United States Court of Appeals, Second Circuit.

Argued: February 10, 2022

Decided: September 30, 2022

Jeremy A. Lieberman (Emma Gilmore, Marc I. Gross, Villi A. Shteyn, on the brief), Pomerantz LLP, New York, NY, for Plaintiffs-Appellants.

Roger A. Cooper (Lisa Vicens, Thomas S. Kessler, on the brief), Cleary Gottlieb Steen & Hamilton LLP, New York, NY, for Defendant-Appellee Frutarom Industries Ltd.

Bruce G. Vanyo, Katten Muchin Rosenman LLP, New York, NY (Jonathan A. Rotenberg, Thomas M. Artaki, Katten Muchin Rosenman LLP, New York, NY; Eric T. Werlinger, Katten Muchin Rosenman LLP, Washington, DC, on the brief), for Defendants-Appellees Ori Yehudai, Ari Rosenthal, Alon Granot, and Guy Gill.

Before: Park, Nardini, and Pérez, Circuit Judges.

Judge Pérez concurs in a separate opinion.

Park, Circuit Judge:

International Flavors & Fragrances Inc. ("IFF"), a U.S.-based seller of flavoring and fragrance products, acquired Frutarom Industries Ltd. ("Frutarom"), an Israeli firm in the same industry. Leading up to the merger, Frutarom allegedly made material misstatements about its compliance with anti-bribery laws and the source of its business growth. Plaintiffs, who bought stock in IFF, sued Frutarom, alleging that those misstatements violated Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder. We conclude that Plaintiffs lack statutory standing to sue. Under the purchaser-seller rule, standing to bring a claim under Section 10(b) is limited to purchasers or sellers of securities issued by the company about which a misstatement was made. See Blue Chip Stamps v. Manor Drug Stores , 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975). Plaintiffs here lack standing to sue based on alleged misstatements that Frutarom made about itself because they never bought or sold shares of Frutarom. We thus affirm the district court's dismissal of the complaint.

I. BACKGROUND

A. Factual Background ¹

Plaintiffs are a putative class of investors who acquired IFF securities between May 7, 2018 and August 12, 2019. They allege that from 2002 to 2018, Frutarom's executives engaged in a "long-running bribery scheme" by which they bribed key employees of important clients in order to "generate continued and increased business with the customer[s]." Compl. ¶¶ 10, 66. They also bribed customs officials and quality assurance officials in Russia and Ukraine in order to import Frutarom products into those countries and to pass local certifications of product fitness.

On May 7, 2018, Frutarom and IFF announced an anticipated merger. Plaintiffs allege that leading up to the consummation of the merger, Frutarom made materially misleading statements about its compliance with anti-bribery laws and the sources of its business growth, most of which were incorporated into IFF's Form S-4 Registration Statement. For instance, Plaintiffs allege that Frutarom falsely stated that since December 31, 2014, Frutarom had not "violated the [Foreign Corrupt Practices Act], the U.K. Bribery Act 2010, the [Organisation for Economic Co-operation and Development] Convention on Combating Bribery of Foreign Public Officials in International Business Transactions or any other applicable Law relating to anti-corruption or anti-bribery." Id. ¶ 146. Plaintiffs also allege that Frutarom misled investors by attributing its financial growth in 2016 and 2017 to factors such as "organic growth," "acquisitions," and "positive currency effects" while failing to mention growth due to the bribery scheme. Id. ¶¶ 136–37.

IFF's acquisition of Frutarom closed in October 2018, after which Frutarom became a wholly-owned subsidiary of IFF. On August 5, 2019, IFF acknowledged that Frutarom had "made improper payments to representatives of a number of customers" in Russia and Ukraine. Id. ¶ 211. The following day, IFF's share price dropped nearly 16%.

B. Procedural History

Plaintiffs sued IFF and two of its officers as well as Frutarom and five of its officers. Plaintiffs alleged that Defendants’ materially misleading misstatements violated Sections 10(b) and 20(a) of the Exchange Act, 15 U.S.C. §§ 78j(b), 78t(a) ; and Securities and Exchange Commission ("SEC") Rule 10b-5, 17 C.F.R. § 240.10b-5.²

The district court granted Defendants’ motion to dismiss for failure to state a claim, finding that the complaint "fail[ed] to allege with the requisite particularity that Frutarom's misconduct continued into the Class Period" and concluding that, in any case, the allegedly false statements and omissions of material fact were not actionable or material. Spec. App'x at 23–24. The district court also concluded that "plaintiffs lack statutory standing under Section 10(b) to bring claims against the Frutarom defendants for statements made about Frutarom." Id. at 78. Plaintiffs pursue their appeal against only Frutarom and four of its officers. See Appellants’ Br. at 3.

II. DISCUSSION

A. Standard of Review

"We review a district court's dismissal of a complaint under [Federal Rule of Civil Procedure] 12(b)(6) de novo." Tongue v. Sanofi , 816 F.3d 199, 209 (2d Cir. 2016).

B. The Purchaser-Seller Rule

Neither Section 10(b) of the Exchange Act nor Rule 10b-5 provides an express private right of action, but the Supreme Court has long held that one is implied. See, e.g. , Superintendent of Ins. v. Bankers Life & Cas. Co. , 404 U.S. 6, 13 n.9, 92 S.Ct. 165, 30 L.Ed.2d 128 (1971). Recognizing the advantages of limitations to this judicially created private right of action, the Court in Blue Chip Stamps adopted the rule from Birnbaum v. Newport Steel Corp. , 193 F.2d 461 (2d Cir. 1952), which limited the class of plaintiffs who could sue under Rule 10b-5 to those who purchased or sold the securities of an issuer about which a material misstatement was made. See Blue Chip Stamps , 421 U.S. at 730, 95 S.Ct. 1917 (noting that the Birnbaum rule limited "the plaintiff class for purposes of a private damage action under § 10(b) and Rule 10b-5 ... to actual purchasers and sellers of securities"); see also id. at 742, 95 S.Ct. 1917 (explaining that the Birnbaum rule "permits exclusion prior to trial of those plaintiffs who were not themselves purchasers or sellers of the stock in question"); id. at 747, 95 S.Ct. 1917 ("The virtue of the Birnbaum rule, simply stated, in this situation, is that it limits the class of plaintiffs to those who have at least dealt in the security to which the prospectus, representation, or omission relates.").

The Court observed in Blue Chip Stamps that "[a]vailable evidence from the texts of the [Securities Act of 1933 and the Exchange Act] ... supports the result reached by the Birnbaum court."³

Id. at 733, 95 S.Ct. 1917. It also noted the fact that the purchaser-seller rule had gained widespread acceptance across the country and that Congress had "fail[ed] to reject Birnbaum ’s reasonable interpretation of the wording of § 10(b)" despite two attempts to amend the statute. Id. at 732–33, 95 S.Ct. 1917 ; see also id. at 731–32, 95 S.Ct. 1917 ("[V]irtually all lower federal courts facing the issue in the hundreds of reported cases presenting this question over the past quarter century have reaffirmed Birnbaum ’s conclusion that the plaintiff class for purposes of § 10(b) and Rule 10b-5 private damage actions is limited to purchasers and sellers of securities.").

The Court expressed concern about "the danger of vexatious litigation which could result from a widely expanded class of plaintiffs under Rule 10b-5." Id. at 740, 95 S.Ct. 1917. And it warned against an "endless case-by-case erosion" of the purchaser-seller rule by creating exceptions, concluding that "such a shifting and highly fact-oriented disposition" of statutory standing is not a "satisfactory basis for a rule of liability imposed on the conduct of business transactions." Id. at 755, 95 S.Ct. 1917.

We have followed the purchaser-seller rule since first articulating it in our 1952 Birnbaum decision. See, e.g. , Abrahamson v. Fleschner , 568 F.2d 862, 868 (2d Cir. 1977), abrogated on other grounds by Transamerica Mortg. Advisors, Inc. (TAMA) v. Lewis , 444 U.S. 11, 100 S.Ct. 242, 62 L.Ed.2d 146 (1979) ; Lawrence v. Cohn , 325 F.3d 141, 152–54 (2d Cir. 2003) ; Ontario Pub. Serv. Emps. Union Pension Tr. Fund v. Nortel Networks Corp. , 369 F.3d 27, 34 (2d Cir. 2004). And Blue Chip Stamps , which embraced Birnbaum nearly five decades ago, continues to govern our analysis of statutory standing for Section 10(b) claims.

C. Application

The purchaser-seller rule requires plaintiffs to have bought or sold a security of the issuer about which a misstatement was made in order to have standing to sue under Section 10(b). Plaintiffs here lack statutory standing to sue Frutarom based on alleged misstatements that the company made about itself because they bought shares of IFF, not Frutarom.

As IFF shareholders, Plaintiffs argue that they have standing because there was a sufficiently "direct relationship" between Frutarom's misstatements about itself and the price of IFF's shares. Appellants’ Br. at 18. This argument is meritless.

First, judicially created private rights of action should be construed narrowly. Cf. Alexander v. Sandoval , 532 U.S. 275, 287, 121 S.Ct. 1511, 149 L.Ed.2d 517 (2001) ("Raising up causes of action where a statute has not created them may be a proper function for common-law courts, but not for federal tribunals." (citation omitted)).⁴ Plaintiffs urge us to read Section 10(b) "flexibly to effectuate its remedial purposes." Affiliated Ute Citizens v....