Thompson v. MERRILL LYNCH, PIERCE, FENNER & S., INC.

• Decision Date: 23 September 1975
• Docket Number: No. CIV-74-593-E.,CIV-74-593-E.
• Citation: 401 F. Supp. 111
• Parties: Berwin THOMPSON, Plaintiff, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., Defendant.
• Court: U.S. District Court — Western District of Oklahoma

401 F. Supp. 111

Berwin THOMPSON, Plaintiff, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., Defendant.

No. CIV-74-593-E.

United States District Court, W. D. Oklahoma.

September 23, 1975.

Dennis C. Roberts, Oklahoma City, Okl., for plaintiff.

John M. Mee and Reid Robison, of McAfee, Taft, Mark, Bond, Rucks & Woodruff, Oklahoma City, Okl., for defendant.

MEMORANDUM OPINION AND ORDER

EUBANKS, District Judge.

The question raised by defendant's motion for summary judgment is whether as a matter of law a plaintiff who alleges he was induced by misrepresentations to hold on to stock declining in value states no claim upon which relief can be granted.

Plaintiff's Complaint, alleging violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934, also asserts a claim for an alleged violation of the "Know your customer Rule" of the National Association of Securities Dealers. Defendant, in support of the motion for summary judgment, argued that it has been repeatedly held that violation of this rule does not give a right of action to a plaintiff in a civil damage action. Plaintiff in response concedes that this is so, but argues that the standard of conduct imposed by that rule is relevant to plaintiff's Section 10(b) claim.

Accordingly, summary judgment will be granted to the extent that the alleged violation of the "Know your customer Rule" was asserted as an independent claim and the Court will proceed to a determination of the motion for summary judgment as it relates to the alleged violations of the Securities Acts.

The defendant, in arguing that no such claim is stated under either Section 17(a) of the Act of 1933 or Section 10(b) of the Act of 1934, relies primarily upon the Supreme Court's recent opinion in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975), in which the Court reaffirmed what has come to be known as the Birnbaum rule. In Blue Chip, as defendant interprets it, the Court held that to have standing to sue for any injury due to an alleged misrepresentation the plaintiff must show that the alleged misrepresentation occurred in connection with the purchase or sale of a security, and necessarily that the plaintiff was the purchaser or seller of a security as a result of the misrepresentation. In Blue Chip the Court held that to expand the implied right of action for damages under Section 10(b) to allow one who never buys a security to have a claim would not only do violence to the language of the Act, but would encourage spurious and vexatious litigation. As alleged by plaintiff in the instant case, the only consequence of the alleged misrepresentation was that plaintiff continued his position in National Patent stock. Such allegation, defendant contends, is obviously not actionable.

Plaintiff's response is to distinguish Blue Chip on the ground no sale or purchase ever occurred on the facts therein. However, this Court believes that, in light of the reasoning of the Court in that opinion, the distinction is one without a difference. From the following pertinent statements by Mr. Justice Rehnquist, the Court concludes this case would fall within the scope of the Blue Chip holding:

"In 1957 and again in 1959, the Securities and Exchange Commission sought from Congress amendment of § 10(b) to change its wording from `in connection with the purchase or sale or sic of any security' to `in connection with the purchase or sale of, or any attempt to purchase or sell, emphasis supplied by Mr. Justice Rehnquist any security.' ... Neither change was adopted by Congress." 421 U.S. at 732, 95 S.Ct. at 1924.

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"We would by no means be understood as suggesting that we are able to divine from the language of § 10(b) the express `intent of Congress' as to the contours of a private cause of action under Rule 10b-5. When we deal with private actions under Rule 10b-5, we deal with a judicial oak which has grown from little more than a legislative acorn.... It is therefore proper that we consider ... what may be described as policy considerations . . .. 421 U.S. at 737, 95 S. Ct. at 1926.

"Three principal classes of potential plaintiffs are presently barred by the Birnbaum rule.... Second are actual shareholders in the issuer who allege that they decided not to sell their shares because of an unduly rosy representation or a failure to disclose unfavorable material. This is the class into which plaintiff herein falls. ... 421 U.S. at 737-738, 95 S.Ct. at 1926.

"Many commentators ... have taken the view that the Birnbaum limitation ... is an arbitrary restriction which unreasonably prevents some deserving plaintiffs from recovering damages which have in fact been caused by violations of Rule 10b-5. ... We have no doubt that this is indeed a disadvantage of the Birnbaum rule .... But we are of the opinion that there are countervailing advantages .... 421 U.S. at 738-739, 95 S.Ct. at 1926.

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"... In the absence of the Birnbaum doctrine, bystanders to the securities marketing process could await developments on the sidelines without risk, claiming that inaccuracies in disclosure caused nonselling in a falling market and that unduly pessimistic predictions by the issuer followed by a rising market caused them to allow retrospectively golden opportunities to pass. Emphasis supplied by this Court. 421 U.S. at 747, 95 S.Ct. at 1931.

". . . . In Ultramares Corp. v. Touche, 255 N.Y. 170, 174 N.E. 441, Chief Judge Cardozo observed with respect to `a liability in an indeterminate amount for an indeterminate time to an indeterminate class' that:

"`The hazards of a business conducted on these terms are so extreme as to enkindle doubt whether a flaw may not exist in the implication of the duty that exposes to these consequences.' 174 N.E., at 444." 421 U.S. at 748, 95 S.Ct. at 1931.

Accordingly, the Court concludes that Blue Chip is controlling here.

It is ordered, That defendant's motion for summary judgment to the extent the same has reference to claims under the Securities Exchange Act of 1934 be and is hereby granted.

There remains the question whether plaintiff may assert a claim under Section 17(a) of the Securities Act of 1933. Defendant argues that the section was intended only to afford a basis for injunctive relief and, on a proper showing, criminal liability, and was not intended to provide a private right of action supplemental to the actions for damages provided by Sections 11 and 12 of that Act. Plaintiff in response has made no reference to the Section 17(a) claim nor attempted to refute defendant's argument. The Court notes that this issue was left open in Blue Chip, Mr. Justice Rehnquist stating in a...