Moss v. Morgan Stanley Inc.

• Decision Date: 10 January 1983
• Docket Number: No. 82 Civ. 5182(MP).,82 Civ. 5182(MP).
• Citation: 553 F. Supp. 1347
• Parties: Michael E. MOSS, Plaintiff, v. MORGAN STANLEY INC., E. Jacques Courtois, Jr., Adrian Antoniu, and James M. Newman, Defendants.
• Court: U.S. District Court — Southern District of New York

553 F. Supp. 1347

Michael E. MOSS, Plaintiff, v. MORGAN STANLEY INC., E. Jacques Courtois, Jr., Adrian Antoniu, and James M. Newman, Defendants.

No. 82 Civ. 5182(MP).

United States District Court, S.D. New York.

January 10, 1983.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Kaplan, Kilsheimer & Foley by Robert N. Kaplan, Richard J. Kilsheimer, New York City, Kohn, Milstein, Cohen & Hausfeld by Herbert E. Milstein, Steven J. Toll, Washington, D.C., for plaintiff.

Davis Polk & Wardwell by Henry L. King, Arthur F. Golden, New York City, for defendant Morgan Stanley Inc.

Gordon Hurwitz Butowsky Baker Weitzen & Shalov by Franklin B. Velie, Mathew Hoffman, Robert J. Schechter, New York City, for defendant James M. Newman.

OPINION

MILTON POLLACK, District Judge.

Plaintiff Moss, who seeks to represent the class of all those who sold shares of Deseret Pharmaceutical Company stock on November 30, 1976, brings this suit for damages against Newman, Courtois and Antoniu and Morgan Stanley in the wake of Newman's conviction for securities fraud and mail fraud in connection with a tender offer made for Deseret stock. Moss asserts claims against Newman, Courtois and Antoniu based on Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and the Rules promulgated thereunder, Rule 10b-5 and Rule 14e-3. In addition, Moss claims that Morgan Stanley is derivatively liable for these Securities Act violations. Moss also asserts pendent state law claims of fraud and claims that Morgan Stanley is liable under the doctrine of respondeat superior. Finally, Moss asserts that all of the defendants, including Morgan Stanley have violated the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961, et seq., and that they are therefore liable for treble damages.

Defendant Newman has moved to dismiss the complaint for failure to state a claim on which relief can be granted pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, and Morgan Stanley has moved to dismiss the complaint under Rule 12(b)(6) and for summary judgment under Rule 56(b) and for attorneys' fees and costs pursuant to Rule 11. For the reasons appearing hereafter, the motions to dismiss the amended complaint will be granted.

Summary of Events.

In December 1976, Warner Lambert Company made a cash tender offer for Deseret Pharmaceuticals Company. On or about November 23, 1976, Warner engaged the services of Morgan Stanley, in its capacity as an investment banker, to advise and assist Warner in its effort to acquire control of Deseret. Morgan Stanley was to investigate Deseret, evaluate its stock and recommend a price for Warner to offer Deseret shareholders in a tender offer. The defendant, E. Jacques Courtois, Jr., was employed by Morgan Stanley in its Merger and Acquisition Department. In that capacity, Courtois obtained knowledge of Warner's plan.

On or about November 30, 1976, Courtois disclosed to defendant Adrian Antoniu the information pertaining to Warner's plan to acquire Deseret stock. Antoniu was at the time an employee of Kuhn Loeb & Co., another broker-dealer and investment banker. Antoniu then disclosed the non-public information about the planned Warner offering to defendant James M. Newman, a stockbroker. The latter advised certain of his customers to buy Deseret stock in anticipation of Warner's tender offer, and purchased Deseret stock for his own account and others at prices substantially below the price which Warner offered to Deseret stockholders shortly thereafter.

As a result of these activities, Newman was tried and convicted on 15 counts of fraud. Antoniu pleaded guilty. Courtois was indicted but has not yet been tried as he is presently believed to be living in South America.

Section 10(b) Claim.

A plaintiff claiming damages under Section 10(b) must establish the existence of a special relationship by the defendant with an insider or the plaintiff. Absent this, nondisclosure of nonpublic market information is not actionable. "The essential purpose of Rule 10b-5 ... is to prevent corporate insiders and their tippees from taking unfair advantage of the uninformed outsiders." Shapiro v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 495 F.2d 228, 235 (2d Cir.1974), quoting Radiation Dynamics, Inc. v. Goldmuntz, 464 F.2d 876, 890 (2d Cir.1974). Thus, as stated in Frigitemp Corp. v. Financial Dynamics Fund, 524 F.2d 275, 282 (2d Cir.1975), "the party charged with failing to disclose market information must be under a duty to disclose it to the plaintiff."

In this case, none of the defendants owed plaintiff a duty of disclosure or abstention. None of the defendants had any tie to the issuer, Deseret, in whose stock they traded. As Morgan Stanley was not employed by Deseret but by Warner, neither Morgan Stanley nor its employees were insiders of Deseret. Thus, Newman, even if he is viewed as standing in the shoes of the Morgan Stanley employee, Courtois, when he traded, purchased stock on the basis of information that was obtained from a source outside of the issuer. While the information that led to the purchase was nonpublic, it was outside not inside information.

The argument that defendants did not owe the requisite duty to the plaintiff is based on Chiarella v. United States, 445 U.S. 222, 100 S.Ct. 1108, 63 L.Ed. 348 (1980), where the Supreme Court held that an individual who was not an insider of the issuer in whose stock he traded could not be found to have violated Section 10(b) based on a theory of the breach of a duty to the shareholders of the issuer. In Chiarella, supra, the Court reversed the conviction under Section 10(b) of a printer who had traded in stock on the basis of non-public information that he had obtained in the course of his employment. Like the defendants in the present action, Chiarella was an outsider of the corporations in whose stock he traded. The Court stated:

The element required to make silence fraudulent — a duty to disclose — is absent in this case. No duty could arise from petitioner's relationship with the sellers of the target company's securities, for petitioner had no prior dealings with them. He was not their agent, he was not a fiduciary, he was not a person in whom the sellers had placed their confidence.

Id. at 232, 100 S.Ct. at 1117.

This Supreme Court argument compels a finding that Newman, Courtois and Antoniu cannot be liable to plaintiff for a violation of Section 10(b). As outsiders of Deseret, they did not owe the Deseret shareholders any duty of disclosure before trading. As the Ninth Circuit has recently noted:

A purchaser of stock who has no fiduciary relation to the prospective seller of the stock and who owns less than 5% ... has no duty to disclose circumstances that will insure that the purchaser pays the highest possible price.

Polinsky v. MCA, Inc., 680 F.2d 1286, 1290 (9th Cir.1982). As no duty to disclose or abstain was owed to the Deseret stockholders, they have no standing to sue for damages under Section 10(b) as the essential element of a breach of a duty owed to them is absent.

Recognizing that in order to set out a claim for damages under Section 10(b) one must show that the defendants have breached a duty owed to the plaintiff, Moss attempts to find a source that could create a duty owed to him by defendants. One of these efforts to create a duty to the stockholders of Deseret focuses on the duty that Courtois owed to Morgan Stanley. Plaintiff argues that Courtois owed a fiduciary duty to Morgan Stanley and to Morgan Stanley's client Warner. He claims that this duty to Morgan Stanley and its client Warner gave rise to a separate duty to disclose or abstain that was owed to the shareholders of Deseret. This argument fails.

It is true that a criminal violation of Section 10(b) can be based upon the breach of a duty owed to a party other than the party to the transaction. While the Supreme Court has not yet specifically addressed the question, the Second Circuit has held that a criminal violation of Section 10(b) can be based on the breach of a duty owed to the acquiring corporation or other party even though no duty is owed to the issuer. United States v. Newman, 664 F.2d 12 (2d Cir.1981). In Newman, supra, the Court reversed the dismissal of the Section 10(b) count against the defendant Newman of this present action. It held that Courtois did owe a duty to Morgan Stanley and its client Warner and that Newman, as Courtois' tippee, was subject to this same duty. Thus, as there was a breach of a duty, Section 10(b) liability was possible. It is essential to note, however, that this case did not find any duty owed to the issuer, Deseret, or to its stockholders. As Newman, supra, was a criminal prosecution, this question of the privity of the stockholders of Deseret was not before the Court, and it was not addressed.

Thus, even though there may have been a fiduciary duty to Morgan Stanley and Warner in this case, there is no support for the argument that this duty transformed itself into a duty owed to the stockholders of Deseret, as is necessary for a finding that Moss has a claim for damages under Section 10(b). A holding that the duty owed to Morgan Stanley and Warner gives rise to a duty to the stockholders of Deseret would be wholly inconsistent with the teaching of the Supreme Court in Chiarella, supra, that a duty to disclose under Section 10(b) arises out of a relationship of trust and confidence. Id. 445 U.S. at 230, 100 S.Ct. at 1115. This relationship must be one between the parties themselves. Id. at 231, n. 14, 100 S.Ct. at 1116 n. 14. Thus, plaintiff cannot hope to piggyback upon the duty owed by defendants to Morgan Stanley and Warner. There is no "duty in the air" to which any plaintiff can attach his claim.

Further support for this analysis comes from the following passage in Chiarella, supra:

We know of no rule of law ... that a purchaser of stock, who was not an "insider" and

...