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Blue Chip Stamps v. Manor Drug Stores (full text) :: 421 U.S. 723 (1975) :: Justia U.S. Supreme Court Center Log In
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Blue Chip Stamps v. Manor Drug Stores 421 U.S. 723 (1975)
U.S. Supreme CourtBlue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975)Blue Chip Stamps v. Manor Drug StoresNo. 74-124Argued March 24, 1975Decided June 9, 1975421 U.S. 723CERTIORARI TO THE UNITED STATES COURT OF APPEALS
(a) The longstanding judicial acceptance of the rule, together with Congress' failure to reject its interpretation of § 10(b) Page 421 U. S. 724 argues significantly in favor of this Court's acceptance of the rule. P. 421 U. S. 733.
REHNQUIST, J., delivered the opinion of the Court, in which BURGER, C.J., and STEWART, WHITE, MARSHALL, and POWELL, JJ., joined. POWELL, J., filed a concurring opinion, in which STEWART and MARSHALL, JJ., joined, post, p. 421 U. S. 755. BLACKMUN, J., filed a dissenting opinion, in which DOUGLAS and BRENNAN, JJ., joined, post, p. 421 U. S. 761. Page 421 U. S. 725
In 1963, the United States filed a civil antitrust action against Blue Chip Stamp Co. (Old Blue Chip), a company in the business of providing trading stamps to retailers, and nine retailers who owned 90% of its shares. In 1967, the action was terminated by the entry of a consent decree. United States v. Blue Chip Stamp Co., 272 F.Supp. 432 (CD Cal.), aff'd sub nom. Thrifty Shoppers Scrip Co. v. United States, 389 U. S. 580 (1968). [Footnote 1] The decree contemplated a plan of reorganization Page 421 U. S. 726 whereby Old Blue Chip was to be merged into a newly formed corporation, Blue Chip Stamps (New Blue Chip). The holdings of the majority shareholders of Old Blue Chip were to be reduced, and New Blue Chip, one of the petitioners here, was required under the plan to offer a substantial number of its shares of common stock to retailers who had used the stamp service in the past but who were not shareholders in the old company. Under the terms of the plan, the offering to nonshareholder users was to be proportional to past stamp usage, and the shares were to be offered in units consisting of common stock and debentures.
Respondent's complaint alleged, inter alia, that the prospectus prepared and distributed by Blue Chip in connection with the offering was materially misleading in its overly pessimistic appraisal of Blue Chip's status and future prospects. It alleged that Blue Chip intentionally made the prospectus overly pessimistic in order to discourage respondent and other members of the allegedly large class whom it represents from accepting what was Page 421 U. S. 727 intended to be a bargain offer, so that the rejected shares might later be offered to the public at a higher price. The complaint alleged that class members, because of and in reliance on the false and misleading prospectus, failed to purchase the offered units. Respondent therefore sought on behalf of the alleged class some $21,400,000 in damages representing the lost opportunity to purchase the units; the right to purchase the previously rejected units at the 1968 price; and in addition, it sought some $25,000,000 in exemplary damages.
During the early days of the New Deal, Congress enacted two landmark statutes regulating securities. Page 421 U. S. 728 The 1933 Act was described as an Act to
The "Commission" referred to in the section was the Securities and Exchange Commission Page 421 U. S. 729 created by § 4(a) of the 1934 Act. Section 29 of that Act provided that "[e]very contract made in violation of any provision of this chapter or of any rule or regulation thereunder" should be void.
Section 10(b) of the 1934 Act does not, by its terms, provide an express civil remedy for its violation. Nor does the history of this provision provide any indication that Congress considered the problem of private suits under it at the time of its passage. See, e.g., Note, Implied Liability Under the Securities Exchange Act, 61 Harv.L.Rev. 858, 861 (1948); A. Bromberg, Securities Law: Fraud -- SEC Rule 10b-5 § 2.2 (300)-(340) (1968) (hereinafter Bromberg); S.Rep. No. 792, 73d Cong., 2d Page 421 U. S. 730 Sess., 5-6 (1934). Similarly, there is no indication that the Commission, in adopting Rule 10b-5, considered the question of private civil remedies under this provision. SEC Securities Exchange Act Release No. 3230 (1942); Conference on Codification of the Federal Securities Laws, 22 Bus.Law. 793, 922 (1967); Birnbaum v. Newport Steel Corp., 193 F.2d at 463; 3 L. Loss, Securities Regulation 1469 n. 87 (2d ed.1961).
Within a few years after the seminal Kardon decision, the Court of Appeals for the Second Circuit concluded that the plaintiff class for purposes of a private damage action under § 10(b) and Rule 10b-5 was limited to actual purchasers and sellers of securities. Birnbaum v. Newport Steel Corp., supra. Page 421 U. S. 731
Just as this Court had no occasion to consider the validity of the Kardon holding that there was a private cause of action under Rule 10b-5 until 20-odd years later, nearly the same period of time has gone by between the Birnbaum decision and our consideration of the case now before us. As with Kardon, virtually all lower federal courts facing the issue in the hundreds of reported cases presenting this question over the past quarter century have reaffirmed Birnbaum's conclusion that the plaintiff class for purposes of § 10(b) and Rule 10b-5 private damage actions is limited to purchasers and sellers Page 421 U. S. 732 of securities. See 6 L. Loss, Securities Regulation 3617 (1969). See, e.g., Haterman v. Murchison, 468 F.2d 1305, 1311 (CA2 1972); Landy v. FDIC, 486 F.2d 139, 156-157 (CA3 1973), cert. denied, 416 U.S. 960 (1974); Sargent v. Genesco, Inc., 492 F.2d 750, 763 (CA5 1974); Simmons v. Wolfson, 428 F.2d 455, 456 (CA6 1970), cert. denied, 400 U. S. 99 (1971); City National Bank v. Vanderboom, 422 F.2d 221, 227-228 (CA8), cert. denied, 399 U.S. 905 (1970); Mount Clemens Industries, Inc. v. Bell, supra; Jensen v. Voyles, 393 F.2d 131, 133 (CA10 1968). Compare Eason v. General Motors Acceptance Corp., 490 F.2d 654 (CA7 1973), cert. denied, 416 U.S. 960 (1974), with Dasho v. Susquehanna Corp., 380 F.2d 262 (CA7), cert. denied sub nom. Bard v. Dasho, 389 U.S. 977 (1967).
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 of any security" to "in connection with the purchase or sale of, or any attempt to purchase or sell, any security." 103 Cong.Rec. 11636 (1957) (emphasis added); SEC Legislation, Hearings on S. 1178-1182 before a Subcommittee of the Senate Committee on Banking & Currency, 86th Cong., 1st Sess., 367-368 (1959); S. 2545, 85th Cong., 1st Sess. (1957); S. 1179, 86th Cong., 1st Sess. (1959). In the words of a memorandum submitted by the Commission to a congressional committee, the purpose of the proposed change was "to make section 10(b) also applicable to manipulative activities in connection with any attempt to purchase or sell any security." Hearings on S. 1178-1182, supra, at 331. Opposition to the amendment was based on fears of the extension of civil liability under § 10(b) that it would cause. Id. at 368. Neither change was adopted by Congress. Page 421 U. S. 733
Available evidence from the texts of the 1933 and 1934 Acts as to the congressional scheme in this regard, though not conclusive, supports the result reached by the Birnbaum court. The wording of § 10(b) directed at fraud "in connection with the purchase or sale" of securities stands in contrast with the parallel anti-fraud provision of the 1933 Act, § 17(a), as amended, 68 Stat. 686, 15 U.S.C. § 77q, [Footnote 6] reaching fraud Page 421 U. S. 734 "in the offer or sale" of securities. Cf. § 5 of the 1933 Act, 5 U.S.C. § 77e. When Congress wished to provide a remedy to those who neither purchase nor sell securities, it had little trouble in doing so expressly. Cf. § 16(b) of the 1934 Act, 15 U.S.C. § 78p(b).
Section 28(a) of the 1934 Act, 15 U.S.C. § 78bb(a), which limits recovery in any private damages action brought under the 1934 Act to "actual damages," likewise provides some support for the purchaser-seller rule. See, e.g., Bromberg § 8.8, p. 221. While the damages suffered by purchasers and sellers pursuing a § 10(b) cause of action may on occasion be difficult to ascertain, Affiliated Ute Citizens v. United States, 406 U.S. at 406 U. S. 155, in the main, such purchasers and sellers at least seek to base recovery on a demonstrable number of shares traded. In contrast, a putative plaintiff, who neither purchases nor sells securities but sues instead for intangible economic injury such as loss of a noncontractual opportunity to buy or sell, is more likely to be seeking a Page 421 U. S. 735 largely conjectural and speculative recovery in which the number of shares involved will depend on the plaintiff's subjective hypothesis. Cf. Estate Counseling Service, Inc. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 303 F.2d 527, 533 (CA10 1962); Levine v. Seilon, Inc., 439 F.2d 328, 335 (CA2 1971); Wolf v. Frank, 477 F.2d 467, 478 (CA5 1973).
The principal express nonderivative private civil remedies, Page 421 U. S. 736 created by Congress contemporaneously with the passage of § 10(b), for violations of various provisions of the 1933 and 1934 Acts are, by their terms, expressly limited to purchasers or sellers of securities. Thus, § 11(a) of the 1933 Act confines the cause of action it grants to "any person acquiring such security," while the remedy granted by § 12 of that Act is limited to the "person purchasing such security." Section 9 of the 1934 Act, prohibiting a variety of fraudulent and manipulative devices, limits the express civil remedy provided for its violation to "any person who shall purchase or sell any security" in a transaction affected by a violation of the provision. Section 18 of the 1934 Act, prohibiting false or misleading statements in reports or other documents required to be filed by the 1934 Act, limits the express remedy provided for its violation to "any person . . . who . . . shall have purchased or sold a security at a price which was affected by such statement. . . ." It would indeed be anomalous to impute to Congress an intention to expand the plaintiff class for a judicially implied cause of action beyond the bounds it delineated for comparable express causes of action. [Footnote 8] Page 421 U. S. 737
Three principal classes of potential plaintiffs are presently barred by the Birnbaum rule. First are potential purchasers of shares, either in a new offering or on the Nation's post-distribution trading markets, who allege that they decided not to purchase because of an unduly gloomy representation or the omission of favorable material which made the issuer appear to be a less favorable investment vehicle than it actually was. Second are actual shareholders in the issuer who allege that they decided not to sell their shares because of an Page 421 U. S. 738 unduly rosy representation or a failure to disclose unfavorable material. Third are shareholders, creditors, and perhaps others related to an issuer who suffered loss in the value of their investment due to corporate or insider activities in connection with the purchase or sale of securities which violate Rule 10b-5. It has been held that shareholder members of the second and third of these classes may frequently be able to circumvent the Birnbaum limitation through bringing a derivative action on behalf of the corporate issuer if the latter is itself a purchaser or seller of securities. See, e.g., Schoenbaum v. Firstbrook, 405 F.2d 215, 219 (CA2 1968), cert. denied sub nom. Manley v. Schoenbaum, 395 U.S. 906 (1969). But the first of these classes, of which respondent is a member, cannot claim the benefit of such a rule.
A great majority of the many commentators on the issue before us have taken the view that the Birnbaum limitation on the plaintiff class in a Rule 10b-5 action for damages 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. See, e.g., Lowenfels, The Demise of the Birnbaum Doctrine: A New Era for Rule 10b-5, 54 Va.L.Rev. 268 (1968). The Securities and Exchange Commission has filed an amicus brief in this case espousing that same view. We have no doubt that this is indeed a disadvantage of the Birnbaum rule, [Footnote 9] and if it Page 421 U. S. 739 had no countervailing advantages it would be undesirable as a matter of policy, however much it might be supported by precedent and legislative history. But we are of the opinion that there are countervailing advantages to the Birnbaum rule, purely as a matter of policy, although those advantages are more difficult to articulate than is the disadvantage.
Judge Friendly in commenting on another aspect of Rule 10b-5 litigation has referred to the possibility that unduly expansive imposition of civil liability "will lead to large judgments, payable in the last analysis by innocent investors, for the benefit of speculators and their lawyers. . . ." SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 867 (CA2 1968) (concurring opinion). See also Page 421 U. S. 740 Boone & McGowan, Standing to Sue under SEC Rule 10b-5, 49 Tex.L.Rev. 617, 64649 (1971).
Senator Fletcher, Chairman of the Senate Banking and Finance Committee, in introducing Title II of the 1934 Page 421 U. S. 741 Act on the floor of the Senate, stated in explaining the amendment to § 11(e): "This amendment is the most important of all." 78 Cong.Rec. 8669. Among its purposes was to provide "a defense against blackmail suits." Ibid.
The potential for possible abuse of the liberal discovery provisions of the Federal Rules of Civil Procedure may likewise exist in this type of case to a greater extent than they do in other litigation. The prospect of extensive deposition of the defendant's officers and associates and the concomitant opportunity for extensive discovery of business documents, is a common occurrence in this and similar types of litigation. To the extent that this process eventually produces relevant evidence which is useful in determining the merits of the claims asserted by the parties, it bears the imprimatur of those Rules and of the many cases liberally interpreting them. But, to the extent that it permits a plaintiff with a largely groundless claim to simply take up the time of a number of other people, with the right to do so representing an in terrorem increment of the settlement value, rather than a reasonably founded hope that the process will reveal relevant evidence, it is a social cost, rather than a benefit. Yet to broadly expand the class of plaintiffs who may sue under Rule 10b-5 would appear to encourage the least appealing aspect of the use of the discovery rules. Page 421 U. S. 742
Obviously there is no general legal principle that courts, in fashioning substantive law, should do so in a manner which makes it easier, rather than more difficult, for a defendant to obtain a summary judgment. But in this type of litigation, where the mere existence of an unresolved lawsuit has settlement value to the plaintiff not only because of the possibility that he may prevail on the merits, an entirely legitimate component of settlement value, but because of the threat of extensive discovery Page 421 U. S. 743 and disruption of normal business activities which may accompany a lawsuit which is groundless in any event, but cannot be proved so before trial, such a factor is not to be totally dismissed. The Birnbaum rule undoubtedly excludes plaintiffs who have, in fact, been damaged by violations of Rule 10b-5, and, to that extent, it is undesirable. But it also separates in a readily demonstrable manner the group of plaintiffs who actually purchased or actually sold, and whose version of the facts is therefore more likely to be believed by the trier of fact, from the vastly larger world of potential plaintiffs who might successfully allege a claim but could seldom succeed in proving it. And this fact is one of its advantages.
Brief for the Securities and Exchange Commission as Amicus Curiae 225. The brief also points out that frivolous suits can be brought whatever the rules of standing, and reminds us of this Court's recognition "in a different context" that "the expense and annoyance of litigation is part of the social burden of living under Page 421 U. S. 744 government.'" Id. at 24 n. 30. See Petroleum Exploration, Inc. v. Public Service Comm'n, 304 U. S. 209, 304 U. S. 222 (1938). The Commission suggests that, in particular cases additional requirements of corroboration of testimony and more limited measure of damages would correct the dangers of an expanded class of plaintiffs.
But the typical fact situation in which the classic tort Page 421 U. S. 745 of misrepresentation and deceit evolved was light years away from the world of commercial transactions to which Rule 10b-5 is applicable. The plaintiff in Butler, supra, for example, claimed that he had held off the market a patented machine for tying cotton bales which he had developed by reason of the fraudulent representations of the defendant. But the report of the case leaves no doubt that the plaintiff and defendant met with one another in New Orleans, that one presented a draft agreement to the other, and that letters were exchanged relating to that agreement. Although the claim to damages was based on an allegedly fraudulently induced decision not to put the machines on the market, the plaintiff and the defendant had concededly been engaged in the course of business dealings with one another, and would presumably have recognized one another on the street had they met.
But in the absence of the Birnbaum rule, it would be sufficient for a plaintiff to prove that he had failed to Page 421 U. S. 746 purchase or sell stock by reason of a defendant's violation of Rule 10b-5. The manner in which the defendant's violation caused the plaintiff to fail to act could be as a result of the reading of a prospectus, as respondent claims here, but it could just as easily come as a result of a claimed reading of information contained in the financial pages of a local newspaper. Plaintiff's proof would not be that he purchased or sold stock, a fact which would be capable of documentary verification in most situations, but instead that he decided not to purchase or sell stock. Plaintiff's entire testimony could be dependent upon uncorroborated oral evidence of many of the crucial elements of his claim, and still be sufficient to go to the jury. The jury would not even have the benefit of weighing the plaintiff's version against the defendant's version, since the elements to which the plaintiff would testify would be, in many cases, totally unknown and unknowable to the defendant. The very real risk in permitting those in respondent's position to sue under Rule 10b-5 is that the door will be open to recovery of substantial damages on the part of one who offers only his own testimony to prove that he ever consulted a prospectus of the issuer, that he paid any attention to it, or that the representations contained in it damaged him. [Footnote 10] Page 421 U. S. 747 The virtue of the Birnbaum rule, simply stated, in this situation, is that it limits the class of plaintiffs to those who have at least dealt in the security to which the prospectus, representation, or omission relates. And their dealing in the security, whether by way of purchase or sale, will generally be an objectively demonstrable fact in an area of the law otherwise very much dependent upon oral testimony. 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.
While much of the development of the law of deceit has been the elimination of artificial barriers to recovery on just claims, we are not the first court to express concern that the inexorable broadening of the class of plaintiff Page 421 U. S. 748 who may sue in this area of the law will ultimately result in more harm than good. In Ultramares Corp. v. Touche, 255 N.Y. 170, 174 N.E. 441 (1931), Chief Judge Cardozo observed with respect to "a liability in an indeterminate amount for an indeterminate time to an indeterminate class":
We quite agree that, if Congress had legislated the elements of a private cause of action for damages, the duty of the Judicial Branch would be to administer the law which Congress enacted; the Judiciary may not circumscribe a right which Congress has conferred because of any disagreement it might have with Congress about the wisdom of creating so expansive a liability. But, as we have pointed out, we are not dealing here with Page 421 U. S. 749 any private right created by the express language of § 10(b) or of Rule 10b-5. No language in either of those provisions speaks at all to the contours of a private cause of action for their violation. However flexibly we may construe the language of both provisions, nothing in such construction militates against the Birnbaum rule. We are dealing with a private cause of action which has been judicially found to exist, and which will have to be judicially delimited one way or another unless and until Congress addresses the question. Given the peculiar blend of legislative, administrative, and judicial history which now surrounds Rule 10b-5, we believe that practical factors to which we have adverted, and to which other courts have referred, are entitled to a good deal of weight.
The majority of the Court of Appeals in this case expressed no disagreement with the general proposition that one asserting a claim for damages based on the violation of Rule 10b-5 must be either a purchaser or seller of securities. However, it noted that, prior cases have held that persons owning contractual rights to buy or sell securities are not excluded by the Birnbaum rule. Relying on these cases, it concluded that respondent's status as an offeree pursuant to the terms of the consent decree served the same function, for purposes Page 421 U. S. 750 of delimiting the class of plaintiffs, as is normally performed by the requirement of a contractual relationship. 492 F.2d at 142.
A contract to purchase or sell securities is expressly defined by § 3(a) of the 1934 Act, 15 U.S.C. § 78c(a), [Footnote 13] Page 421 U. S. 751 as a purchase or sale of securities for the purposes of that Act. Unlike respondent, which had no contractual right or duty to purchase Blue Chip's securities, the holders of puts, calls, options, and other contractual rights or duties to purchase or sell securities have been recognized as "purchasers" or "sellers" of securities for purposes of Rule 10b-5 not because of a judicial conclusion that they were similarly situated to "purchasers" or "sellers," but because the definitional provisions of the 1934 Act themselves grant them such a status.
Even if we were to accept the notion that the Birnbaum rule could be circumvented on a case-by-case basis through particularized judicial inquiry into the facts surrounding a complaint, this respondent and the members of its alleged class would be unlikely candidates for such a judicially created exception. While the Birnbaum rule has been flexibly interpreted by lower federal courts, [Footnote 14] we have been unable to locate a single decided case from any court in the 20-odd years of litigation since the Birnbaum decision which would support the right of persons who were in the position of respondent here to bring a private suit under Rule 10b-5. Respondent was not only not a buyer or seller of any security, Page 421 U. S. 752 but it was not even a shareholder of the corporate petitioners.
There is strong evidence that application of the Birnbaum rule to preclude suit by the disappointed offeree of a registered 1933 Act offering under Rule 10b-5 furthers the intention of Congress as expressed in the 1933 Act. [Footnote 15] Congress left little doubt that its purpose in imposing the prospectus and registration requirements of the 1933 Act was to prevent the "[h]igh pressure salesmanship, rather than careful counsel," causing inflated Page 421 U. S. 753 new issues, through direct limitation by the SEC of "the selling arguments hitherto employed." H.R.Rep. No. 85, 73d Cong., 1st Sess., 2, 8 (1933).
H.R.Rep. No. 85, supra, at 9. And in Title II of the 1934 Act, 48 Stat. 905-908, the same Act adopting § 10(b), Congress amended § 11 of the 1933 Act to limit still further the express civil remedy it conferred. See generally James, Amendments to the Securities Act of 1933, 32 Mich.L.Rev. 1130, 1134 (1934). The additional congressional restrictions, Page 421 U. S. 754 contained in Title II of the 1934 Act, on the already limited express civil remedies provided by the 1933 Act for misrepresentations or omissions in a registration statement or prospectus reflected congressional concern over the impact of even these limited remedies on the new issues market. 78 Cong.Rec. 8668-8669 (1934). There is thus ample evidence that Congress did not intend to extend a private cause of action for money damages to the nonpurchasing offeree of a stock offering registered under the 1933 Act for loss of the opportunity to purchase due to an overly pessimistic prospectus.
But respondent and the members of its class are neither "purchasers" nor "sellers," as those terms are defined in the 1934 Act, and therefore, to the extent that their claim of standing to sue were recognized, it would mean that the lesser practical difficulties of corroborating Page 421 U. S. 755 at least some elements of their proof would be regarded as sufficient to avoid the Birnbaum rule. While we have noted that these practical difficulties, particularly in the case of a complete stranger to the corporation, support the retention of that rule, they are by no means the only factor which does so. The general adoption of the rule by other federal courts in the 25 years since it was announced, and the consistency of the rule with the statutes involved and their legislative history, are likewise bases for retaining the rule. Were we to agree with the Court of Appeals in this case, we would leave the Birnbaum rule open to endless case-by-case erosion depending on whether a particular group of plaintiffs was thought by the court in which the issue was being litigated to be sufficiently more discrete than the world of potential purchasers at large to justify an exception. We do not believe that such a shifting and highly fact-oriented disposition of the issue of who may bring a damages claim for violation of Rule 10b-5 is a satisfactory basis for a rule of liability imposed on the conduct of business transactions. Nor is it as consistent as a straightforward application of the Birnbaum rule with the other factors which support the retention of that rule. We therefore hold that respondent was not entitled to sue for violation of Rule 10b-5, and the judgment of the Court of Appeals is
Although I join the opinion of the Court, I write to emphasize the significance of the texts of the Acts of 1933 and 1934 and especially the language of § 10(b) and Rule 10b-5. Page 421 U. S. 756
If further evidence of congressional intent were needed, it may be found in the subsequent history of these Acts. Page 421 U. S. 757 As noted in the Court's opinion, the Securities and Exchange Commission unsuccessfully sought, in 1957 and again in 1959, to persuade Congress to broaden § 10(b) by adding to the critical language: "or any attempt to purchase or sell" any security. See ante at 421 U. S. 732.
The opinion of the Court, and the dissenting opinion of Judge Hufstedler in the Court of Appeals, correctly emphasize the subjective nature of the inevitable inquiry if the term "offer" were read into the Act and some arguable error could be found in an offering prospectus: "Would I have purchased this particular security at the time it was offered if I had known the correct facts?" Apart from the human temptation for the plaintiff to answer this question in a self-serving fashion, the offeror Page 421 U. S. 758 of the securities -- defendant in the suit -- is severely handicapped in challenging the predictable testimony. [Footnote 2/2] The subjective issues would be even more speculative in the class actions that inevitably would follow if we held that offers to sell securities are covered by § 10(b) and Rule 10b-5.
In this case, respondent was clearly identifiable as an offeree, as here the shares were offered to designated persons. [Footnote 2/3] In the more customary public sale of securities, identification of those who, in fact, were bona fide offerees would present severe problems of proof. The 1933 Act requires that offers to sell registered securities be made by means of an effective prospectus. § 5(b), 15 U.S.C. § 77e(b). Issues are usually marketed through underwriters and dealers, often including scores of investment banking and brokerage firms across the country. Copies of the prospectus may be widely distributed through the dealer group, and then passed hand to hand among countless persons whose identities cannot be known. If § 10(b) were extended to embrace offers to sell, the number of persons claiming to have been Page 421 U. S. 759 offerees could be legion with respect to any security that subsequently proved to be a rewarding investment.
We are entitled to assume that the Congress, in enacting § 10(b) and in subsequently declining to extend it, took into account these and similar considerations. The courts already have inferred a private cause of action that was not authorized by the legislation. In doing this, however, it was unnecessary to rewrite the precise language of § 10(b) and Rule 10b-5. This is exactly what respondent -- joined, surprisingly, by the SEC -- sought in this case. [Footnote 2/4] If such a far-reaching change is to Page 421 U. S. 760 be made, with unpredictable consequences for the process of raising capital so necessary to our economic wellbeing, it is a matter for the Congress, not the courts.
The dissenting opinion also charges the Court with paying "no heed to the unremedied wrong" arising from the type of "fraud" that may result from reaffirmance of the Birnbaum rule. If an issue of statutory construction is to be decided on the basis of assuring a federal remedy -- in addition to state remedies -- for every perceived fraud, at least we should strike a balance between the opportunities for fraud presented by the contending views. It may well be conceded that Birnbaum does allow some fraud to go unremedied under the federal securities Acts. But the construction advocated by the dissent could result in wider opportunities for fraud. As the Court's opinion makes plain, abandoning the Birnbaum construction in favor of the rule urged by the dissent would invite any person who failed to purchase a Page 421 U. S. 761 newly offered security that subsequently enjoyed substantial market appreciation to file a claim alleging that the offering prospectus understated the company's potential. The number of possible plaintiffs with respect to a public offering would be virtually unlimited. As noted above (at 421 U. S. 758 n. 2), an honest offeror could be confronted with subjective claims by plaintiffs who had neither purchased its securities nor seriously considered the investment. It frequently would be impossible to refute a plaintiff's assertion that he relied on the prospectus, or even that he made a decision not to buy the offered securities. A rule allowing this type of open-ended litigation would itself be an invitation to fraud. [Footnote 2/5]
Today the Court graves into stone Birnbaum's [Footnote 3/1] arbitrary principle of standing. For this task, the Court, unfortunately, chooses to utilize three blunt chisels: (1) reliance on the legislative history of the 1933 and Page 421 U. S. 762 1934 Securities Acts, conceded as inconclusive in this particular context; (2) acceptance as precedent of two decades of lower court decisions following a doctrine, never before examined here, that was pronounced by a justifiably esteemed panel of that Court of Appeals regarded as the "Mother Court" in this area of the law, [Footnote 3/2] but under entirely different circumstances; and (3) resort to utter pragmaticality and a conjectural assertion of "policy considerations" deemed to arise in distinguishing the meritorious Rule 10b-5 suit from the meretricious one. In so doing, the Court exhibits a preternatural solicitousness for corporate wellbeing and a seeming callousness toward the investing public quite out of keeping, it seems to me, with our own traditions and the intent of the securities laws. See Affiliated Ute Citizens v. United States, 406 U. S. 128, 406 U. S. 151 (1972); Superintendent of Insurance v. Bankers Life & Cas. Co., 404 U. S. 6, 404 U. S. 12 (1971); SEC v. National Securities, Inc., 393 U. S. 453, 393 U. S. 463 (1969); Tcherepnin v. Knight, 389 U. S. 332, 389 U. S. 336 (1967); SEC v. Capital Gains Bureau, 375 U. S. 180, 375 U. S. 195 (1963).
The plaintiff's complaint -- and that is all that is before us now -- raises disturbing claims of fraud. It alleges that the directors of "New Blue Chip" and the majority shareholders of "Old Blue Chip" engaged in a deceptive and manipulative scheme designed to subvert the intent of the 1967 antitrust consent decree and to enhance the value of their own shares in a subsequent offering. Although the complaint is too long to reproduce here, see App. 22, the plaintiff, in short, contends that the much-negotiated plan of reorganization of Old Blue Page 421 U. S. 763 Chip, pursuant to the decree and approved by the District Court, was intended to compensate former retailer-users of Blue Chip stamps for damages suffered as a result of the antitrust violations. Accordingly, the majority shareholders were to be divested of 55% of their interest; Old Blue Chip was to be merged into a new company; and 55% of the common shares of the new company were to be offered to the former users on a pro rata basis, determined by the quantity of stamps issued to each of these nonshareholding users during a designated period. Some 621,000 shares were thus to be offered in units, each consisting of three shares of common and a $100 debenture, in return for $101 cash.
It is the plaintiff's pleaded position that this offer to the former users was intended by the antitrust court and the Government to be a "bargain," since the then reasonable market value of each unit was actually $315. The plaintiff alleged, however, that the offering shareholders had no intention of complying in good faith with the terms of the consent decree and of permitting the former users of Blue Chip stamps to obtain the bargain offering. Rather, they conspired to dissuade the offerees from purchasing the units by including substantially misleading and negative information in the prospectus under the heading "Items of Special Interest." The prospectus contained the following statements, allegedly false and allegedly made to deter the plaintiff and its class from purchasing the units: (1) that "[n]et income for the current fiscal year will be adversely affected by payments aggregating $8,486,000 made since March 2, 1968, in settlement of claims" against New Blue Chip; (2) that net income "would be adversely affected by a substantial decrease in the use of the Company's trading stamp service"; (3) that net income "would be adversely affected by a sale of one-third of the Company's trading stamp Page 421 U. S. 764 business in California"; (4) that "Claims or Causes of Action (as defined) against the Company, including prayers for treble damages, now aggregate approximately $29,000,000"; and (5) that, based upon "statistical evaluations," "the Company presently estimates that 97.5% of all stamps issued will ultimately be redeemed." App. 56, 66.
From a reading of the complaint in relation to the language of § 10(b) of the 1934 Act and of Rule 10b-5, it is manifest that plaintiff has alleged the use of a deceptive scheme "in connection with the purchase or sale of any security." To my mind, the word "sale" ordinarily and naturally may be understood to mean not only a single, individualized act transferring property from one party to another, but also the generalized event of public disposal of property through advertisement, auction, or some other market mechanism. Here, there is an obvious, indeed a court-ordered, "sale" of securities in the special offering of New Blue Chip shares and debentures to former users. Yet the Court denies this Page 421 U. S. 765 plaintiff the right to maintain a suit under Rule 10b-5 because it does not fit into the mechanistic categories of either "purchaser" or "seller." This, surely, is an anomaly, for the very purpose of the alleged scheme was to inhibit this plaintiff from ever acquiring the status of "purchaser." Faced with this abnormal divergence from the usual pattern of securities frauds, the Court pays no heed to the unremedied wrong or to the portmanteau nature of § 10(b).
78 Cong.Rec. 2271 (1934). Page 421 U. S. 766
"* * * *" ". . . Of course, subsection (c) is a catch-all clause to prevent manipulative devices[.] I do not think there is any objection to that kind of a clause. The Commission should have the authority to deal with new manipulative devices."
SEC Release No. 3230 (May 21, 1942). To say specifically that certain types of fraud are within Rule 10b-5, of course, is not to say that others are necessarily excluded. That this Page 421 U. S. 767 is so is confirmed by the apparently casual origins of the Rule, as recalled by a former SEC staff attorney in remarks made at a conference on federal securities laws several years ago:
Remarks of Milton Freeman, Conference on Codification of the Federal Securities Laws, 22 Bus.Law. 793, 922 (1967). Page 421 U. S. 768
Many cases applying the Birnbaum doctrine and continuing critical comments from the academic world [Footnote 3/3] followed Page 421 U. S. 769 in its wake, but, until today, the Court remained serenely above the fray.
To support its decision to adopt the Birnbaum doctrine, the Court points to the "longstanding acceptance by the courts" and to "Congress' failure to reject Birnbaum's reasonable interpretational of the wording of 10(b)." Ante at 421 U. S. 733. In addition, the Court purports to find support in "evidence from the texts of the 1933 and 1934 Acts," although it concedes this to be "not conclusive." Ibid. But the greater portion of the Court's opinion is devoted to its discussion of the "danger of vexatiousness," ante at 421 U. S. 739, that accompanies litigation under Rule 10b-5 and that is said to be "different in degree and in kind from that which accompanies litigation in general." Ibid. It speaks of harm from the "very pendency of the lawsuit," ante at 421 U. S. 740, something like the recognized dilemma of the physician sued for malpractice; of the "disruption of normal business activities which may accompany a lawsuit," ante at 421 U. S. 743; and of "proof . . . which depend[s] almost entirely on oral testimony," ibid., as if all these were unknown to lawsuits taking place in America's courthouses every day. In turning to, and being influenced by, these "policy considerations," ante at 421 U. S. 737, or these "considerations of policy," ante at 421 U. S. 749, the Court, in my view, unfortunately mires itself in speculation and conjecture Page 421 U. S. 770 not usually seen in its opinions. In order to support an interpretation that obviously narrows a provision of the securities laws designed to be a "catch-all," the Court takes alarm at the "practical difficulties," ante at 421 U. S. 754, 421 U. S. 755, that would follow the removal of Birnbaum's barrier.
Instead of the artificiality of Birnbaum, the essential test of a valid Rule 10b-5 claim, it seems to me, must be the showing of a logical nexus between the alleged fraud and the sale or purchase of a security. It is inconceivable that Congress could have intended a broad-ranging anti-fraud provision, such as § 10(b), and, at the same time, have intended to impose, or be deemed to welcome, a mechanical overtone and requirement such as the Birnbaum doctrine. The facts of this case, if proved and accepted by the factfinder, surely are within the conduct that Congress intended to ban. Whether this particular plaintiff, or any plaintiff, will be able eventually to carry the burdens of proving fraud and of proving reliance and damage -- that is, causality and injury -- is a matter that should not be left to speculations Page 421 U. S. 771 of "policy" of the kind now advanced in this forum so far removed from witnesses and evidence.