Source: https://openjurist.org/190/f3d/37
Timestamp: 2018-12-13 09:18:18
Document Index: 754949906

Matched Legal Cases: ['§ 78', '§ 78', '§ 240', '§ 77', '§ 78', '§ 9', '§ 78', '§ 78', '§ 78', '§ 78', '§ 77', '§ 77', '§ 230', '§ 1367']

190 F3d 37 Mordechai Gurary Isaac Winehouse Isaac Winehouse Nu-Tech Bio-Med Inc | OpenJurist
190 F. 3d 37 - Mordechai Gurary Isaac Winehouse Isaac Winehouse Nu-Tech Bio-Med Inc
190 F3d 37 Mordechai Gurary Isaac Winehouse Isaac Winehouse Nu-Tech Bio-Med Inc
190 F.3d 37 (2nd Cir. 1999)
MORDECHAI GURARY, Plaintiff-Appellant-Cross Appellee,
ISAAC WINEHOUSE and ISAAC WINEHOUSE, doing business as Wall & Broad Equities, Defendants-Appellees,
NU-TECH BIO-MED, INC., Defendant-Appellee-Cross-Appellant.
Nos. 98-7239(L), 98-7280(XAP)
Argued: October 16, 1998
Appeal and cross-appeal from a decision of the United States District Court for the Southern District of New York (Louis L. Stanton, Judge), granting defendants' motions for summary judgment dismissing the complaint and denying the motion of defendant Nu-Tech Bio-Med, Inc. for sanctions.
Before: WALKER, Circuit Judge, OAKES, Senior Circuit Judge, and KAPLAN, District Judge.*
Plaintiff appeals from a judgment of the district court (Stanton, J.) to the extent that it dismissed the plaintiff's claims under Section 10(b) of the Securities and Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j, and Rule 10b-5 thereunder on the merits and his pendent state claims for lack of subject matter jurisdiction. One of the defendants cross-appeals from so much of the judgment as denied so much of its motion as sought sanctions under the Private Securities Litigation Reform Act of 1995 (the "PSLRA"). We affirm so much of the judgment as dismissed plaintiff's case. We vacate and remand insofar as it denied the application for sanctions.
* Nu-Tech Bio-Med, Inc.("Nu-Tech") was formed in 1981. Its common stock, which is the security that allegedly was manipulated, is traded on NASDAQ.
Winehouse's Alleged Scheme
The complaint alleges that defendant Isaac Winehouse, doing business as Wall & Broad Equities, organized a "cartel" to purchase a percentage of the Nu-Tech convertible preferred in the names of nominees. He then allegedly arranged for a number of securities firms to become market makers in Nu-Tech common stock and proceeded to sell the common short, allegedly to drive the price of the common stock down.
Gurary claims subsequently to have learned that Winehouse and his associates had continued to short the stock using nominee names, having arranged to "borrow" an unlimited number of shares for that purpose from market makers. On February 18, 1997, Gurary again spoke to Feigenbaum, who told him that he had met that day with Winehouse and others in another attempt to stop the short selling. Feigenbaum told Gurary that Nu-Tech had offered to repurchase the group's preferred shares at cost plus ten percent and to allow it to keep its existing profits from the short sales if the group would stop its activities but that Winehouse had refused. Feigenbaum, however, told Gurary that Nu-Tech would not give in to Winehouse and would refuse to register the short sellers' shares. Later that day, Gurary bought another 8,350 shares of Nu-Tech common at a price of $11.57.
Nu-Tech common stock dropped approximately $6 per share over the next two days. On March 14, 1997, the company issued a press release which stated that the price decline could be attributed to "possible sales by shareholders." No mention was made of the discussions between Nu-Tech and Winehouse, allegedly to avoid disrupting Nu-Tech's efforts to acquire Physicians Clinical Laboratory, Inc. ("PCL") out of bankruptcy.
A few days later, Gurary was approached through an intermediary and spoke with Winehouse, who allegedly admitted to him that he deliberately had shorted the stock to drive the price down, said that he intended to continue, and advised Gurary to sell his shares because the price would drop to "a dollar."
Plaintiff commenced this action against Nu-Tech and Winehouse on May 23, 1997. The complaint contains three relevant claims for relief.5 The first charges Winehouse with manipulation of Nu-Tech's common stock in violation of Section 10(b) of the Exchange Act, 15 U.S.C. § 78j, and Rule 10b-5 thereunder, 17 C.F.R.§ 240.10b-5, by the purchase of the convertible preferred and the shorting of the common.6 The second claim is against Nu-Tech and charges a 10b-5 violation in that Nu-Tech, motivated by a desire to avoid having Winehouse and other short sellers object to its effort to acquire certain debt securities of PCL in a transaction requiring bankruptcy court approval, "failed to reveal the sale to Winehouse and his group through the use of nominees, that there were meetings going on between Winehouse and his group and Nu-Tech; that Nu-Tech was aware of the short-selling by Winehouse and his group; [and] that Nu-Tech would refuse to register certain stocks due to the short-selling activities of Winehouse and his group . . ." In addition, it charges that Nu-Tech's March 14, 1997 press release was misleading for failure to disclose Winehouse's short sales and the discussions between Nu-Tech and Winehouse. The third claim for relief alternatively seeks recovery from both defendants under Section 349 of the New York General Business Law.
Both defendants moved to dismiss the complaint for failure to state a claim upon which relief may be granted. Gurary opposed the motions and submitted a nine page affidavit in which he recounted his conversations with Messrs. Feigenbaum and Winehouse in greater detail than was included in the complaint. His attorney also submitted an argumentative affidavit that claimed no personal knowledge of anything relevant to the case, but that suggested that Winehouse had violated Section 5 of the Securities Act, 15 U.S.C. § 77e.
In disposing of the motions, Judge Stanton specifically relied upon Gurary's affidavit, thus converting them into motions for summary judgment pursuant to Rule 12(b). He noted that the case was based on four purchases of Nu-Tech common stock by Gurary, two of which preceded the alleged commencement of the short selling and the other two of which were made after Gurary learned of the short sales from Feigenbaum. He therefore dismissed the Rule 10b-5 claim against Winehouse with respect the first pair of purchases on the ground that Winehouse's allegedly manipulative short sales were not made "in connection with" those purchases. He dismissed the 10b-5 claim based on the second pair of purchases on the ground that plaintiff's knowledge of the facts defeated any claim "of reliance upon any but the true picture." He dismissed the Rule 10b-5 claim against Nu-Tech because the complaint failed to allege that any of Feigenbaum's statements to plaintiff was false when made. Having held the federal claims insufficient, Judge Stanton dismissed the state law claims for lack of subject matter jurisdiction. Judgment was entered accordingly.
Plaintiff appeals from the judgment. Nu-Tech cross-appeals insofar as the district court failed to grant sanctions against plaintiff pursuant to the PSLRA, 15 U.S.C. § 78u-4 et seq.
"If, on a motion asserting the defense numbered (6) to dismiss for a failure of the pleading to state a claim upon which relief can be granted, matters outside the pleading are presented to and not excluded by the court, the motion shall be treated as one for summary judgment and disposed of as provided in Rule 56, and all parties shall be given reasonable opportunity to present all material made pertinent to such a motion by Rule 56."
We frequently have held that a district court ordinarily must give notice to the parties before converting a motion to dismiss pursuant to Rule 12(b)(6) into one for summary judgment and considering matters outside the pleading. E.g., Kopec v. Coghlin, 922 F.2d 152, 154-55 (2d Cir. 1991). This is simply an application, however, of the principle that parties are entitled to a reasonable opportunity to present material pertinent to a summary judgment motion. Hence, "[c]ompliance . . . is not an end in itself. * * * The essential inquiry is whether the appellant should reasonably have recognized the possibility that the motion might be converted into one for summary judgment or was taken by surprise and deprived of reasonable opportunity to meet facts outside the pleadings." In re G. & A. Books, Inc., 770 F.2d 288, 295 (2d Cir. 1985), cert. denied sub nom. M.J.M. Exhibitors, Inc. v. Stern, 475 U.S. 1015 (1986).
In this case, it was plaintiff who submitted the affidavit relied upon by the district court and who thus invited Judge Stanton to rely not only on the complaint, but upon the more elaborate explication of plaintiff's grievance contained in his affidavit. He certainly cannot be heard to claim that he was surprised when the district court accepted his invitation. Indeed, the district court arguably would have erred in declining to do so. See Freeman v. Marine Midland Bank, 494 F.2d 1334, 1338-39 (2d Cir. 1974) (error to disregard affidavits submitted by plaintiff in opposition to a motion to dismiss). In consequence, the motions properly were converted.
"Should it appear from the affidavits of a party opposing the motion that the party cannot for reasons stated present by affidavit facts essential to justify the party's opposition [to a motion for summary judgment], the court may refuse the application for judgment or may order a continuance to permit affidavits to be obtained or depositions to be taken or discovery to be had or may make such other order as is just."
Thus, as we often have said, a party resisting summary judgment on the ground that it needs discovery in order to defeat the motion must submit an affidavit showing "'(1) what facts are sought [to resist the motion] and how they are to be obtained, (2) how those facts are reasonably expected to create a genuine issue of material fact, (3) what effort affiant has made to obtain them, and (4) why the affiant was unsuccessful in those efforts.'" Meloff v. New York Life Ins. Co., 51 F.3d 372, 375 (2d Cir. 1995) (quoting Hudson River Sloop Clearwater, Inc. v. Department of Navy, 891 F.2d 414, 422 (2d Cir. 1989)); accord, Paddington Partners v. Bouchard, 34 F.3d 1132, 1137-38 (2d Cir. 1994); Burlington Coat Factory Warehouse Corp. v. Esprit De Corp., 769 F.2d 919, 926 (2d Cir. 1985). Indeed, the failure to file such an affidavit is fatal to a claim such as plaintiff makes here even if the party resisting the motion for summary judgment alluded to a claimed need for discovery in a memorandum of law. Paddington Partners, 34 F.3d at 1137.
To begin with, this theory is not the basis of the Rule 10b-5 claim against Nu-Tech set forth in the complaint and in Gurary's affidavits, which in essence was that Nu-Tech had failed to disclose what it knew of Winehouse's activities. While the papers described Gurary's alleged conversations with Feigenbaum, the articulated grievance against Nu-Tech was its alleged concealment of the short-selling activities, allegedly in order to protect its efforts to buy PCL. Having failed to make the present argument to the district court, plaintiff will not be heard to advance it here. E.g., Mycak v. Honeywell, 953 F.2d 798, 803 (2d Cir. 1992); Schmidt v. Polish People's Republic, 742 F.2d 67, 70 (2d Cir. 1984). Even if the argument were properly before us, however, it would lack merit.
In order to state a claim under Rule 10b-5, the plaintiff must "allege material misstatements or omissions indicating an intent to deceive or defraud in connection with the purchase or sale of a security." Luce v. Edelstein, 802 F.2d 49, 55 (2d Cir. 1986) (citing Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976)). "The failure to carry out a promise made in connection with a securities transaction is normally a breach of contract. It does not constitute fraud unless, when the promise was made, the defendant secretly intended not to perform or knew than he could not perform." Mills v. Polar Molecular Corp., 12 F.3d 1170, 1176 (2d Cir. 1993).
The gravamen of manipulation is deception of investors into believing that prices at which they purchase and sell securities are determined by the natural interplay of supply and demand, not rigged by manipulators. Schreiber v. Burlington Northern, Inc., 472 U.S. 1, 12 (1985). In order to make out a 10b-5 claim, moreover, the plaintiff must allege and prove, among other elements, reliance. E.g., Acito v. IMCERA Group, Inc., 47 F.3d 47, 52 (2d Cir. 1995). In consequence, a private plaintiff in such a case must establish that he or she engaged in a securities trade in ignorance of the fact that the price was affected by the alleged manipulation. See Ray v. Lehman Brothers Kuhn Loeb, Inc., 624 F. Supp. 16, 19 (N.D. Ga. 1984) (plaintiff in § 9(e) manipulation case must show reliance on false appearance of actual or apparent trading). By plaintiff's own admission, this requirement is not satisfied with respect to these two purchases. Judge Stanton therefore correctly dismissed his claim based upon them.
Plaintiff's initial purchases of Nu-Tech shares were made on October 31 and November 7, 1996. The alleged manipulation is said to have begun "following [the Winehouse group's] acquisition of a large part of the . . . Series A Convertible Preferred . . ." (Cpt ¶ 24)
The district court's dismissal of the claim based on the first purchase was correct. Gurary concedes that the alleged manipulation did not begin until at least November 6, 1996. In order to make out a claim under Rule 10b-5, however, the plaintiff must allege culpable deception "in connection with the purchase or sale of a security . . ." E.g., Acito, 47 F.3d at 52. Quite clearly, any deception inherent in the execution of a manipulative scheme beginning on or after November 6 was not "in connection with" plaintiff's purchase on October 31. See, e.g., Samuel M. Feinberg Testamentary Trust v. Carter, 652 F. Supp. 1066, 1080 (S.D.N.Y. 1987).
The matter is not so clear with respect to the second purchase. The complaint alleges that the "initial issue date" of the preferred was November 6, 1996 (Cpt ¶ 21), the day prior to plaintiff's second purchase. In consequence, if one were to assume that the Winehouse group acquired its preferred stock on November 6 and, as the complaint alleges, that the manipulation began "following the acquisition" of the preferred, the November 7 purchase might have been made at the very start of the alleged manipulation. Plaintiff therefore argues that the district court erred in dismissing his claim based on the second purchase because there was an issue of fact as to whether the alleged manipulation began after the second purchase. But this contention is insufficient to save the complaint.
If Winehouse actually did depress the price of the shares on November 7, plaintiff benefitted from that price decline by purchasing at a lower price than he otherwise would have paid. As a general matter, a defrauded buyer is entitled under Rule 10b-5 to recover "only the excess of what he paid over the value of what he got." Levine v. Seilon, Inc., 439 F.2d 328, 334 (2d Cir. 1971) (Friendly, J.); accord, e.g., Elkind v. Liggett & Myers, Inc., 635 F.2d 156, 168 (2d Cir. 1980).8 Where, as here, a buyer pays less for a security by reason of a defendant's fraud or manipulation, there is no excess of price over value, so the buyer may not recover. Indeed, that is no more than a common sense application of Section 28(a) of the Exchange Act, which provides that "no person permitted to maintain a suit for damages under the provisions of this chapter shall recover . . . a total amount in excess of his actual damages on account of the act complained of." 15 U.S.C. § 78bb(a). Moreover, it would be anomalous indeed to permit a plaintiff to recover damages where the characteristic that made the conduct complained of unlawful, here the allegedly artificial depression of the price, worked to plaintiff's benefit. See Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477 (1977) (plaintiff claiming injury caused by enhanced competition resulting from merger lacked standing to sue for damages on theory that merger violated antitrust laws because alleged injury not caused by that which allegedly rendered merger unlawful).9
Finally, we turn to Nu-Tech's cross-appeal from the denial of its motion for sanctions pursuant to Section 21D of the Exchange Act, as added and amended by the PSLRA, 15 U.S.C. § 78u-4.
Section 21D(c)(1), 15 U.S.C. § 78u-4(c)(1), provides in relevant part that, upon final adjudication of any private action arising under the Exchange Act, "the court shall include in the record specific findings regarding compliance by each party and each attorney representing any party with each requirement of Rule 11(b) of the Federal Rules of Civil Procedure as to any complaint, responsive pleading, or dispositive motion." If the court finds such a violation, "the court shall impose sanctions," although only after giving the party or attorney involved notice and an opportunity to respond. Id. § 78(c)(2).
The judgment appealed from is affirmed insofar as it granted summary judgment dismissing the complaint10 but vacated insofar as it denied Nu-Tech's motion for sanctions. The case is remanded with respect to sanctions for further proceedings consistent with this opinion.
The complaint alleges that the initial issue date was November 6, 1996. A registration statement for a subsequent sale of common stock states that the placement was completed on December 2, 1996.
In addition, Nu-Tech had the right to force conversion commencing 270 days following the completion of the private placement.
For example, if the common continued to trade at its preconversion price, but at any price below $23.33, the preferred shareholder would gain a constant $333.33 per share by converting and selling the newly issued common.
The conversion price of the lower of $17.50 or 75 percent of the trading price of the common meant that the number of shares into which each share of preferred was convertible could not fall below 57.14.
The fourth claim for relief sought a preliminary injunction barring Nu-Tech from registering the convertible preferred pending the determination of the action. Plaintiff, however, never moved for a preliminary injunction. Moreover, the complaint alleges that the convertible preferred was issued in December 1996 in a private placement subject to Regulation D under the Securities Act of 1933, 15 U.S.C. § 77a et seq. (the "Securities Act"). In consequence, the issuance of the convertible preferred was exempt from registration. 15 U.S.C. § 77d(2); 17 C.F.R. §§ 230.501-08 (1998).
It charges also that "the defendants made numerous misstatements of material facts and omissions to state material facts necessary in order to make statements not misleading." As it does not identify any such misstatements or omissions in the first claim for relief, this aspect of the complaint fails to comply with FED. R. CIV. P. 9(b) and may be disregarded.
Appellant's Brief ("App. Br.") 29-30. He thus has abandoned any other claims against Nu-Tech, including the contention that the March 14, 1997 press release was misleading.
To the extent that it suggested that a defrauded buyer never may recover on a benefit-of-the-bargain theory, Levine was dictum. See e.g., McMahan & Co. v. Wherehouse Entertainment, Inc., 65 F.3d 1044, 1048 (2d Cir. 1995), cert. denied, 517 U.S. 1190 (1996); Commercial Union Assur. Co. v. Milken, 17 F.3d 608, 614-15 (2d Cir.), cert. denied, 513 U.S. 873 (1994); Barrows v. Forest Labs., Inc., 742 F.2d 54, 59-60 (2d Cir. 1984); Osofsky v. Zipf, 645 F.2d 107, 111-12 (2d Cir. 1981). That qualification, however, has no bearing in this case.
Plaintiff alleges also that the price of Nu-Tech common later fell, ultimately to about $2 per share by the time suit was filed in May 1997. It is not entirely clear from the complaint that he seeks to recover for that decline, as his grievance seems to be that he purchased at prices artificially affected by the alleged manipulation. (Cpt ¶ 42) In any case, however, plaintiff may not recover for the decline in the price of his holdings subsequent to his purchases.
Section 10(b) and Rule 10b-5 prohibit fraud only "in connection with" the purchase and sale of securities. Accordingly, only a purchaser or seller may sue thereunder. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975). Plaintiff nowhere alleges that he sold any shares. To whatever extent that he seeks compensation for the decline in the price of Nu-Tech shares caused by allegedly manipulative short sales in the period following his purchases, the loss was not the product of fraud in connection with the purchase or sale of securities by Gurary and therefore is not recoverable. See Blue Chip Stamps, supra, 421 U.S. at 737-38 (decline in value of stock allegedly held in consequence of fraudulent statement not recoverable); Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2d Cir.), cert. denied, 343 U.S. 956 (1952) (same); see also First Equity Corp. v. Standard & Poor's Corp., 869 F.2d 175, 180 n.2 (2d Cir. 1989) (10b-5 plaintiffs "may recover only for losses that result from decisions to buy or sell, not from decisions to hold or refrain from trading"); Elkind, 635 F.2d at 170-71 (defrauded buyer could not recover for subsequent price decline because not "in connection with" the purchase); Abrahamson v. Fleschner, 568 F.2d 862, 868 (2d Cir. 1977), cert. denied, 436 U.S. 905, 913 (1978) ("requirement of fraud in connection with the purchase or sale of a security is not satisfied by an allegation that plaintiffs were induced fraudulently not to sell their securities").
The district court's dismissal of the state law claims for lack of jurisdiction once it correctly dismissed the federal claims was entirely appropriate. See 28 U.S.C. § 1367(c)(3).