Press v. Quick & Reilly
| Decision Date | 27 June 1980 |
| Citation | 218 F.3d 121 |
| Parties | (2nd Cir. 2000) DONALD PRESS, as Trustee of Donald Press, P.C. Employees Profit Sharing Plan & Trust U/A DTD |
| Court | U.S. Court of Appeals — Second Circuit |
Appeal from two judgments entered by the United States District Court for the Southern District of New York (Patterson, J.), dismissing claims that in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rules 10b-5 and 10b-10 promulgated thereunder, the securities broker defendants defrauded their clients, the investor plaintiffs, by failing to disclose their receipt of fees received from money market funds that defendants selected for "automatic sweeps" of plaintiffs' uninvested funds. We hold that dismissal of the complaints was warranted because the disclosures defendants allegedly failed to make are not, as a matter of law, material.
Affirmed.
ANDREA B. BIERSTEIN, Kaufman Malchman Kirby & Squire (Roger W. Kirby, on the brief), New York, NY, for Plaintiff-Appellant Donald Press.
STUART D. WECHSLER, Wechsler Harwood Halebian & Feffer (Gary P. Weinstein and Frederick W. Gerkens, III, on the brief), New York, NY, for Plaintiffs-Appellants Bruce Cohen, Robert Strougo, Glenn Damato, Deborah Damato, Christopher P. Laurenzi, Carol Lassman, Barbara Strougo and Louis I. Lieb.
ROBERT PIETRZAK, Brown & Wood (Judith Welcom, Elizabeth Storch and Maria D. Melendez, Brown & Wood, and Stephen L. Ratner and David A. Florman, Rosenman & Colin LLP, on the brief), New York, NY, for Defendants-Appellees Quick & Reilly, Inc., U.S. Clearing Corp., Quick & Reilly Group, Inc., Bear Stearns & Co., Inc., and Pershing Division of Donaldson Lufkin & Jenrette Securities Corp.
JAMES N. BENEDICT, Rogers & Wells (Mark A. Kirsch, Judith M. Reilly, James P. Masterson, on the brief), New York, NY, for Defendant-Appellee National Financial Services Corp.
Before: OAKES, SACK and SOTOMAYOR, Circuit Judges.
This opinion disposes of two separate appeals, each of which requires us to determine whether the defendants-appellees (the "broker-dealer defendants" or "defendants")1 violated Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. §78j(b) (1994), and Rules 10b-5 and 10b-10 promulgated thereunder, 17 C.F.R. §240.10b-5, -10 (1999), by failing to disclose their receipt of fees from money market funds and advisers for those funds that the defendants select for "automatic sweeps" of their customers' accounts. For the reasons that follow, we affirm the district court's judgments dismissing the complaints in both actions.
Plaintiffs-appellants ("plaintiffs") in the two actions are former and current clients of the broker-dealer defendants who established accounts with one or more of the broker-dealer defendants for the purpose of investing in various securities. When a client's account contains uninvested funds, the broker-dealer defendants invest the uncommitted balances in money market funds. In the brokerage industry, this practice is referred to as an "automatic sweep." Three of the broker-dealer defendants-Quick & Reilly, Inc., Bear Stearns & Company, Inc., and the Pershing Division of Donaldson Lufkin & Jenrette Securities-sweep balances into money markets funds managed by Alliance Capital: (1) the Alliance Money Reserves Fund ("AMR Fund"); (2) the Alliance Prime Portfolio Fund ("APP Fund"); and (3) the Alliance Capital Reserves Fund ("ACR Fund"). The remaining broker-dealer defendant, National Financial Services Corporation, sweeps balances into the Fidelity Daily Money Market Fund ("FDMM Fund"), which is managed by Fidelity Management & Research Company.2 Plaintiffs allege that, while the money market funds selected by the broker-dealer defendants for automatic sweeps are among the poorest performers in the industry, the defendants nonetheless select these funds because the funds and their advisers make certain payments to defendants.
The thrust of plaintiffs' complaints is that defendants have committed securities fraud in violation of Rule 10b-5 by failing to disclose that they receive fees from the money market funds and their advisers. In support of their Rule 10b-5 claim, plaintiffs allege that the broker-dealer defendants intentionally failed to comply with the disclosure requirements of Rule 10b-10, 17 C.F.R. § 240.10b 10, which requires a broker-dealer to disclose to its customers, inter alia, any remuneration it receives from third parties in connection with a customer transaction.3 According to plaintiffs, defendants intentionally failed to make such disclosures in order to conceal their receipt of payments from the poorly performing money markets, and defendants therefore had a conflict of interest.4
Plaintiffs allege that the broker-dealer defendants failed to make adequate disclosures concerning two types of payments: (1) fees paid from the money market fund assets; and (2) fees paid by the fund advisers from their own resources (collectively "the fees").5 The broker-dealer defendants made no disclosure whatsoever to plaintiffs regarding either type of payment. However, some information about the payments can be found in the relevant money market funds' prospectuses and Statements of Additional Information ("SAIs"), all of which are publicly filed with the Securities and Exchange Commission ("SEC"). 6
The relevant AMR Fund prospectus, dated November 1, 1995, states:
Under a Distribution Services Agreement . . . , the Fund makes payments to the Adviser at a maximum annual rate of .25 of 1% of the Fund's aggregate average daily net assets. For the fiscal year ended June 30, 1995, the Fund paid the Adviser at an annual rate of .21 of 1% of the average daily value of the Fund's net assets. Substantially all such monies (together with significant amounts from the Adviser's own resources) are paid . . . to[, among others,] broker-dealers and other financial intermediaries for their distribution assistance . . . .
(Emphasis added). In addition, the AMR Fund prospectus incorporates by reference a November 1, 1995 SAI, which was publicly filed with the SEC and was available upon request from Alliance Capital ("AMR SAI"). The AMR SAI discloses the total dollar amount for the fiscal year ended June 30, 1995, that was "paid by the Adviser and the Fund . . . to broker-dealers and other financial intermediaries for distribution assistance." (Emphasis added).
The relevant ACR Fund Prospectus, dated September 30, 1994, is nearly identical to the AMR Fund prospectus, disclosing that the Fund pays its Adviser at a maximum annual rate of .25 of 1% of the Fund's aggregate average daily net assets and that such payments (combined with "significant amounts" from the Adviser) are paid to broker-dealers and other financial intermediaries for their "distribution assistance." In addition, the ACR Fund prospectus incorporates by reference a September 30, 1994 SAI, which was filed with the SEC and available upon request from Alliance Capital ("ACR SAI"). Like the AMR SAI, the ACR SAI discloses the total dollar amount for the fiscal year ended June 30, 1994 that was "paid by the Adviser and the Fund . . . to . . . broker-dealers and other financial intermediaries for distribution assistance." (Emphasis added).
The relevant APP Fund prospectus, dated April 20, 1995, states:
Under a Distribution Services Agreement . . . , [the] Portfolio pays the Adviser at a maximum annual rate of .45 of 1% of the Portfolio's aggregate average daily net assets. Substantially all such monies (together with significant amounts from the Adviser's own resources) are paid . . . to[, among others,] broker-dealers and other financial intermediaries for their distribution assistance . . . .
(Emphasis added).
The relevant FDMM Fund prospectus, dated June 30, 1994, does not materially differ from the other prospectuses. It provides:
The Distribution and Service Plans (the Plans) require [the Adviser] to make . . . payments from its management fee, its past profits or any other source available. The maximum amount payable is currently at the annual rate of .38% of the average net assets.
The FDMM Fund prospectus further states that "Qualified Recipients [such as broker-dealers] currently are compensated . . . at a maximum rate of up to .38% annually of the average net assets of the . . . Market Portfolio [for] which they provide or have provided shareholder support or distribution services."
On August 11, 1997, the district court (Patterson, J.) issued separate, unpublished decisions dismissing both actions pursuant to Fed. R. Civ. P. 12b(6). See Press v. Quick & Reilly, Inc., No. 96 Civ. 4278, 1997 WL 458666 (S.D.N.Y. Aug. 11, 1997); Strougo v. Bear Stearns & Co., No. 95 Civ. 6532, 1997 WL 458667 (S.D.N.Y. Aug. 11, 1997).
Beginning with plaintiffs' allegations that defendants did not comply with Rule 10b-10, the district court rejected the defendants' argument that Rule 10b 10 did not apply to the fees at issue. The broker-dealer defendants specifically argued that Rule 10b-10 applied only to fees...
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