Opinion ID: 425977
Heading Depth: 3
Heading Rank: 3

Heading: Application of Chiarella

Text: 17 In applying Chiarella 's fiduciary standard to this case, Judge Pollack concluded that Newman owed no duty of disclosure to plaintiff Moss and hence could not be liable for a section 10(b) or rule 10b-5 violation. 553 F.Supp. at 1352-53. We agree. Like Chiarella, both Courtois and Newman were complete stranger[s] who dealt with the sellers [of Deseret stock] only through impersonal market transactions. Chiarella v. United States, 445 U.S. at 232-33, 100 S.Ct. at 1117. However, in this appeal plaintiff continues to insist, arguendo, that if civil liability is premised upon a duty to disclose arising from a relationship of trust and confidence between parties to a transaction, then he occupied such a position of trust with respect to the defendants. He suggests three sources for the defendants' duty of disclosure.
18 Moss first argues that because Courtois owed a fiduciary duty to his employer, Morgan Stanley, and to Morgan Stanley's client, Warner, then Newman (standing in Courtois' shoes) owed a separate duty of disclosure to Deseret shareholders. Plaintiff claims that our decision in United States v. Newman, 664 F.2d 12 (2d Cir.1981), aff'd after remand, 722 F.2d 729 (2d Cir.1983) (unpublished order), cert. denied, --- U.S. ----, 104 S.Ct. 193, 78 L.Ed.2d 170 (1983), supports this circuitous linking of liability. We disagree. 19 In Newman we held that Courtois' and Antoniu's securities transactions constituted a breach of their fiduciary duty of confidentiality and loyalty to their employers (Morgan Stanley and Kuhn Loeb & Co., respectively) and thereby provided the basis for criminal prosecution under section 10(b) and rule 10b-5. Indeed, the district court at Newman's trial specifically charged the jury that the law is clear that Mr. Newman had no obligation or duty to the people from whom he bought the stock to disclose what he had learned, and, thus, he could not have defrauded these people as a matter of law. J.App. at 29-30. Nothing in our opinion in Newman suggests that an employee's duty to abstain or disclose with respect to his employer should be stretched to encompass an employee's duty of disclosure to the general public. In fact, we explicitly limited our holding in Newman by stating: 20 In two instances the targets themselves were clients of the investment banking firms. The Government belatedly suggests that the indictment should be construed to allege securities laws violations in these two instances, on the theory that the defendants, by purchasing stock in the target companies, defrauded the shareholders of those companies. Whatever validity that approach might have, it is not fairly within the allegations of the indictment, which allege essentially that the defendants defrauded the investment banking firms and the firms' takeover clients. 21 United States v. Newman, 664 F.2d at 15 n. 1 (emphasis added). Thus, the district court was correct in concluding that plaintiff cannot hope to piggyback upon the duty owed by defendants to Morgan Stanley and Warner. There is no 'duty in the air' to which any plaintiff can attach his claim. 553 F.Supp. at 1353.
22 Plaintiff's next attempt to find a source for Newman's duty to disclose is to argue that Morgan Stanley and its employee Courtois were insiders of Deseret and therefore owed a duty to Deseret shareholders. Moss asserts that Morgan Stanley and Courtois were transformed into insiders upon their receipt of confidential information from Deseret during tender offer negotiations in this friendly takeover. Such an argument fails both as a matter of fact and law. 23 First, the complaint contains no factual assertions that Morgan Stanley or Courtois received any information from Deseret. Nor does it allege that Newman traded on the basis of information derived from the issuer or seller of Deseret stock. Rather, the complaint was premised solely on the theory that Newman traded on the basis of information originating from Warner's plan to acquire Deseret stock. J.App. at 9. 24 Yet, even if we overlook the complaint's facial deficiencies, plaintiff's theory fails as a matter of law. In Walton v. Morgan Stanley & Co., 623 F.2d 796 (2d Cir.1980), we held that an investment banker, representing an acquiring company, does not owe a fiduciary duty to the target simply because it received confidential information during the course of tender offer negotiations. In Walton, Kennecott Copper Corporation retained Morgan Stanley to advise it about the possible acquisition of Olinkraft, Inc. In the course of negotiations, Olinkraft furnished Morgan Stanley with inside information which was to be kept confidential. Although Kennecott ultimately elected not to bid, Morgan Stanley purchased Olinkraft shares for its own account based on the confidential information. In rejecting Olinkraft's claim that Morgan Stanley violated section 10(b) by breaching a fiduciary duty owed to Olinkraft, we held that Morgan Stanley had engaged in arm's length bargaining with the target. Morgan Stanley did not become the target's fiduciary simply upon receipt of confidential information. We noted that we have not found any [cases] that consider[ ] one in Morgan Stanley's position [investment adviser to the shark] to stand in a fiduciary relationship to one in Olinkraft's [the target]. Id. at 799; see Dirks v. SEC, --- U.S. ----, ---- n. 22, 103 S.Ct. 3255, 3265 n. 22, 77 L.Ed.2d 911 (1983) (citing Walton with approval as [a]n example of a case turning on the court's determination that the disclosure did not impose any fiduciary duties on the recipient of the inside information); see generally Frigitemp Corp. v. Financial Dynamics Fund, Inc., 524 F.2d 275, 278-79 (2d Cir.1975) (investment companies that traded on confidential information obtained in the course of negotiations for private placement of debentures owed no duty to the selling corporation). 25 Relying on Walton, Judge Pollack properly concluded that unless plaintiffs can set forth facts that turn the negotiations from arm's length bargaining into a fiduciary relationship, they cannot claim that Morgan Stanley owed them a fiduciary duty. 553 F.Supp. at 1355. We recognize that with only the complaint and the appellee's motion to dismiss, we do not have the benefit of findings of fact about whatever communication occurred between Olinkraft [Deseret], the potential target, and Morgan Stanley, the financial advisor to the potential acquirer: how the communication proceeded, what understandings were reached, what assumptions or expectations the trade's practice would justify. Walton v. Morgan Stanley & Co., 623 F.2d at 798. Yet Moss' complaint is patently deficient. It is barren of any factual allegations that might establish a fiduciary relationship between Morgan Stanley and Deseret. The complaint shows only that Morgan Stanley was retained by Warner and represented Warner's interest in the tender offer negotiations with Deseret. The district court correctly found that the complaint did not allege a section 10(b) or rule 10b-5 claim premised on Morgan Stanley's insider status.
26 Plaintiff's final attempt to establish a cognizable duty between himself and the defendants is to argue that Newman violated rule 10b-5 because as a registered broker-dealer he owed a general duty to the market to disclose material nonpublic information prior to trading. Moss relies on the District of Columbia Circuit's decision in Dirks v. SEC, 681 F.2d 824 (D.C.Cir.1982), rev'd on other grounds --- U.S. ----, 103 S.Ct. 3255, 77 L.Ed.2d 911 (1983), to support his argument. Such reliance is misplaced. In Dirks, the SEC censured a broker-dealer for tipping his clients about irregularities at Equity Funding Corporation of America before he publicly disclosed evidence of corporate fraud. The Circuit Court did not consider whether a broker-dealer's nondisclosure of nonpublic information gives rise to civil liability under section 10(b) or rule 10b-5. In fact, the D.C. Circuit made clear that a private action for damages might raise questions of standing, causation, and appropriate remedy not pertinent [in Dirks ]. 681 F.2d at 839-40 n. 19. Moreover, in the Supreme Court's recent reversal of Dirks, the Court expressly declined to consider Judge Wright's novel theory that Dirks acquired a fiduciary duty by virtue of his position as an employee of a broker-dealer. --- U.S. at ---- n. 26, 103 S.Ct. at 3267 n. 26. Therefore, neither the D.C. Circuit's nor the Supreme Court's decision in Dirks lends any support to the plaintiff's argument. 27 We find nothing in the language or legislative history of section 10(b) or rule 10b-5 to suggest that Congress intended to impose a special duty of disclosure on broker-dealers simply by virtue of their status as market professionals. Cf. Dirks v. SEC, 681 F.2d at 840, 841 & n. 21 (Judge Wright reads the legislative history of the 1934 Act as providing that securities professionals regulated by the Act would owe certain responsibilities to the public at large as well as to their clients.). Indeed, to impose such a duty could have an inhibiting influence on the role of market analysts, which the SEC itself recognizes is necessary to the preservation of a healthy market. Dirks v. SEC, --- U.S. at ---- & n. 17, 103 S.Ct. at 3263 & n. 17. 28 Moreover, in Dirks v. SEC, --- U.S. ----, 103 S.Ct. 3255, 77 L.Ed.2d 911 (1983), the Supreme Court expressly reaffirmed its holding in Chiarella that  '[a] duty [to disclose] arises from the relationship between parties ... and not merely from one's ability to acquire information because of his position in the market.'  Id. at ----, 103 S.Ct. at 3263 (quoting United States v. Chiarella, 445 U.S. at 232-33 & n. 14, 100 S.Ct. at 1116 & n. 14). The Court reexamined this duty of disclosure: 29 Under certain circumstances, such as where corporate information is revealed legitimately to an underwriter, accountant, lawyer, or consultant working for the corporation [Deseret's advisers], these outsiders may become fiduciaries of the shareholders. The basis for recognizing this fiduciary duty is not simply that such persons acquired nonpublic corporate information, but rather that they have entered into a special confidential relationship in the conduct of the business of the enterprise and are given access to information solely for corporate purposes. See SEC v. Monarch Fund, 608 F.2d 938, 942 (CA2 1979); In re Investors Management Co., 44 S.E.C. 633, 645 (1971); In re Van Alstyne, Noel & Co., 43 S.E.C. 1080, 1084-1085 (1969); In re Merrill Lynch, Pierce, Fenner & Smith, Inc., 43 S.E.C. 933, 937 (1968); Cady, Roberts, 40 S.E.C., at 912.... For such a duty to be imposed, however, the corporation must expect the outsider to keep the disclosed nonpublic information confidential, and the relationship at least must imply such a duty. 30 Id. --- U.S. at ---- n. 14, 103 S.Ct. at 3261 n. 14 (emphasis added). 31 The defendants in this case--Courtois and his tippees Antoniu and Newman--owed no duty of disclosure to Moss. In working for Morgan Stanley, neither Courtois nor Newman was a traditional corporate insider, and neither had received any confidential information from the target Deseret. Instead, like Chiarella and Dirks, the defendants were complete stranger[s] who dealt with the sellers [of Deseret stock] only through impersonal market transactions. Chiarella v. United States, 445 U.S. at 232-33, 100 S.Ct. at 1117. 32 Since Moss failed to demonstrate that he was owed a duty by any defendant, he has failed to state a claim for damages under section 10(b) or rule 10b-5.