Sacks v. Reynolds Securities, Inc., 77-1775

CourtUnited States Courts of Appeals. United States Court of Appeals (District of Columbia)
Citation193 U.S.App.D.C. 80,593 F.2d 1234
Docket NumberNo. 77-1775,77-1775
Parties, Fed. Sec. L. Rep. P 96,715 Pauline SACKS et al., Appellants, v. REYNOLDS SECURITIES, INC., et al.
Decision Date19 December 1978

Page 1234

593 F.2d 1234
193 U.S.App.D.C. 80, Fed. Sec. L. Rep. P 96,715
Pauline SACKS et al., Appellants,
No. 77-1775.
United States Court of Appeals,
District of Columbia Circuit.
Argued May 2, 1978.
Decided Dec. 19, 1978.

S. Churchill Elmore, Washington, D.C., for appellants.

Edward M. Statland, Washington, D.C., with whom Barry A. Zaslav and David W. Buckley, Washington, D.C., were on the brief, for appellees.

Before TAMM and ROBB, Circuit Judges, and RONALD N. DAVIES, Senior United States District Judge for the District of North Dakota. *

Opinion for the court filed by TAMM, Circuit Judge.

TAMM, Circuit Judge:

Appellants, Pauline Sacks, Et al., 1 brought suit in the United States District Court for the District of Columbia to recover compensatory and punitive damages from appellees, Reynolds Securities, Inc. (RSI), Et al., 2 which allegedly resulted from delay in transferring certain of appellants' stock accounts. The district court (Waddy, J.) dismissed the complaint pursuant to Rule 12(b)(1), Federal Rules of Civil Procedure, for lack of subject matter jurisdiction. We find that, although appellants have invoked federal jurisdiction, the factual allegations in their complaint fail to establish a federal cause of action. Accordingly, we affirm the dismissal of the district court.


The facts of this case are, for the most part, uncontroverted. RSI is a securities broker and dealer with offices in the District of Columbia and Virginia. Pauline Sacks, a Virginia resident, is a former RSI account representative and a former customer. In November 1975, Mrs. Sacks left her position at RSI to work as an account representative at Loeb, Rhoades & Co. (Loeb), another securities broker. When she resigned, Mrs. Sacks arranged to have her personal accounts and the accounts of some of the customers she serviced transferred from RSI to Loeb. RSI failed to transfer the accounts within the five-day period provided by New York Stock Exchange (NYSE) Rule 412. 3 Appellants

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claim to have suffered various injuries and damages as a result of this delay. 4 See Sacks v. Reynolds Securities, Inc., 434 F.Supp. 37, 38-39 (D.D.C.1977).

Appellants attempted to establish federal jurisdiction on two grounds diversity of citizenship, See 28 U.S.C. § 1332 (1976), 5 and the existence of a question arising under the Securities and Exchange Act of 1934 (Act), 15 U.S.C. §§ 78a-78kk (1976); See 15 U.S.C. § 78aa (1976). 6 The district court found that because some plaintiffs and defendant Masci were citizens of the same state, diversity jurisdiction was not properly invoked. 434 F.Supp. at 39; See Strawbridge v. Curtiss, 7 U.S. 159, 3 Cranch 267, 2 L.Ed. 435 (1806). Appellants have not appealed that ruling.

Appellants advanced two arguments in support of their contention that the factual allegations in the complaint raise a question under the federal securities laws. First, they asserted that appellees' failure to promptly transfer the accounts amounted to a violation of section 10(b) of the Act, 15 U.S.C. § 78j(b) (1976), 7 and of the Securities and Exchange Commission's (Commission) Rule 10b-5, 17 C.F.R. § 240.10b-5 (1977). 8

Page 1239

Second, they argued that a private federal right of action arose from the alleged violation of NYSE Rule 412. The district court rejected both arguments and granted appellees' motion to dismiss for lack of subject matter jurisdiction. 434 F.Supp. at 38-39.

We agree that neither argument sufficiently establishes a federal cause of action. Subject matter jurisdiction exists, however, when a complaint purports to state a claim under federal law, and the right of recovery will be sustained if the law is given one construction, but defeated if given another. See Wheeldin v. Wheeler, 373 U.S. 647, 649, 83 S.Ct. 1441, 10 L.Ed.2d 605 (1963); Bell v. Hood, 327 U.S. 678, 682-85, 66 S.Ct. 773, 90 L.Ed. 939 (1946). Under these facts, we note that the correct motion for dismissal would have been made pursuant to Rule 12(b)(6), Federal Rules of Civil Procedure, for failure to state a claim upon which relief can be granted.

If material other than the pleadings is considered by the court, a Rule 12(b) (6) motion will be treated as a Rule 56 motion for summary judgment, and both parties must be afforded a reasonable opportunity to submit affidavits and extraneous proofs. 9 Fed.R.Civ.Pro. 12(b). The district court considered extra-pleadings material in this case. 434 F.Supp. at 39. Each side, however, had full and fair opportunity to offer both oral and written evidence in support of their position, and conversion of a Rule 12(b)(6) motion to one for summary judgment would be entirely proper.

The district court's action under Rule 12(b)(1) does not affect our disposition in this case. "The liberality of the . . . Federal Rules is such that erroneous nomenclature does not prevent the court from recognizing the true nature of a motion." Owen v. Kronheim, 113 U.S.App.D.C. 81, 83, 304 F.2d 957, 959 (1962) (per curiam). Despite the invocation of Rule 12(b)(1), the memoranda submitted by both parties adequately discuss the existence of a federal cause of action. Accordingly, we uphold the district court's dismissal on the ground that appellants have failed to establish a federal claim upon which relief can be granted. See Dennis v. Hein, 413 F.Supp. 1137, 1139 (D.S.C.1976); Davis v. Rio Rancho Estates, Inc., 401 F.Supp. 1045, 1047 (S.D.N.Y.1975).


The antifraud provisions of section 10(b) of the Act and Rule 10b-5 prohibit the use of manipulative or deceptive practices in connection with the purchase or sale of any security. By their express terms, See notes 7 & 8 Supra, a transfer of security ownership is necessary in order for an action to lie under either the statute or the rule. The district court found, and we agree, that appellants failed to meet this requirement. 10 434 F.Supp. at 39.

In determining what may be considered a purchase or a sale, we look to the meaning of the words within the context of section 10(b). SEC v. National Securities, Inc., 393 U.S. 453, 466, 89 S.Ct. 564, 21 L.Ed.2d 668 (1969). Congress has provided statutory definitions of the terms "purchase" and "sale": a " purchase . . . include(s) any contract to buy, purchase or otherwise acquire" securities, 15 U.S.C. § 78c(a)(13) (1976); and a " sale . . . include(s) any contract to sell or otherwise dispose of" securities, 15 U.S.C. § 78c(a)(14) (1976). Appellants attempt to show that

Page 1240

the alleged wrongful conduct of appellees was in connection with the purchase or sale of any security by contending that the transfer of accounts between brokers, pursuant to a contract, comes within the meaning of the statutory phrase "otherwise dispose of," 15 U.S.C. § 78c(a)(14). Brief for Appellants at 12. The district court correctly rejected this argument. 434 F.Supp. at 39.

In Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975), the Supreme Court held that only Actual purchasers or sellers of securities may bring a private action for damages under Rule 10b-5. The Court emphasized that "the wording of § 10(b), making fraud In connection with the purchase or sale of a security a violation of the Act, is surely badly strained when construed to provide a cause of action, not to purchasers or sellers of securities, but to the world at large." Id. at 733 n.5, 95 S.Ct. at 1924 (emphasis in original).

Consonant with this purpose, lower federal court interpretations of purchase and sale, although encompassing many transactions that bear little overt resemblance to conventional cash sales, 11 require some surrendering of control, change in ownership, or change in the fundamental nature of an investment before a transfer will be deemed within the ambit of Rule 10b-5. 12 None of these elements is present in this case. Appellants never parted with ownership of the securities, nor was such ownership ever vested in any other party. Moreover, appellants made no showing that their control was alienated, or that RSI appropriated their property. Appellants likewise cannot contend that the transfer changed the nature of their investments, stripped the stock of its value, or converted it into a remote right to receive money. Thus, the custodial transfer of stock from one broker to another while legal ownership remains in the same investor cannot be construed as a sale within Rule 10b-5.

Nevertheless, appellants urge us to hold that the transfer comes within the statutory phrase defining sale as a transaction that "otherwise dispose(s) of" securities. See 15 U.S.C. § 78c(a)(14). The Supreme Court's admonishment in Blue Chip Stamps, along with the plain meaning of the phrase, 13 compels us to reject a definition of "otherwise dispose of" that disregards the traditional elements of a sale under Rule 10b-5.

Appellants also attempt to bring themselves within the purchase and sale requirement of Rule 10b-5 by arguing that appellees' failure to timely transfer their accounts "prevented (appellants) from buying or selling securities for long periods of time." Brief for Appellants at 10. Assuming that the delayed transfer did inhibit trade as appellants contend, this action would still remain without the protective umbrella of Rule 10b-5.

Page 1241

In Blue Chip Stamps, the Court explained that the actual purchaser or seller requirement barred three principal classes of potential plaintiffs from maintaining an action under Rule 10b-5: first, potential purchasers of shares; second, actual shareholders who refrain from selling; and third, shareholders who claim that fraudulent activity decreased the value of their investment. 421 U.S. at 737-38, 95 S.Ct. 1917. Fear of wholly subjective proof and its capacity for distortion and abuse supports the distinction between actual and potential purchasers and sellers. If potential purchasers and sellers could sue under Rule 10b-5,...

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