Opinion ID: 678811
Heading Depth: 2
Heading Rank: 2

Heading: Boesky's Profits

Text: 31 FMC also claims that it should be able to recover Boesky's illegal profits from Goldman as an aider and abettor of Boesky's insider trading. FMC argues that Goldman's aider and abettor liability results from the passing of confidential information from Brosens in Goldman's arbitrage department to Boesky's underling Lessman and that Goldman is therefore jointly and severally liable in the amount of these profits. FMC's sole asserted basis for recovery of Boesky's profits is its claim under Sec. 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, 15 U.S.C. Sec. 78j(b), 17 C.F.R. Sec. 240.10b-5. However, FMC has failed to state a claim against Goldman under these provisions. 32 FMC's claim is precluded by the Supreme Court's recent ruling that held that there is no private civil remedy against those who aid and abet a violation of Rule 10b-5. Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., --- U.S. ----, 114 S.Ct. 1439, 128 L.Ed.2d 119 (1994). In Central Bank, the holders of defaulted bonds, in addition to their claims against the issuer and others alleging primary liability under Rule 10b-5, sued the indenture trustee on the theory that the trustee aided and abetted the other defendants' violations by recklessly ignoring its oversight duties. In holding that the claim against the trustee could not stand, the Supreme Court found that Sec. 10(b) prohibits only the making of a material misstatement (or omission) or the commission of a manipulative act. The proscription does not include giving aid to a person who commits a manipulative or deceptive act. Id. at ----, 114 S.Ct. at 1448 (citations omitted). Since FMC's claim for Boesky's profits is premised on the theory that Goldman aided and abetted Boesky's Rule 10b-5 violations, recovery is precluded by Central Bank as a matter of law. 33 Not surprisingly, in the wake of Central Bank, FMC asks us to construe its complaint as alleging that Goldman has primary liability for violations of Rule 10b-5. However, paragraph 96 of the second amended complaint reads, Defendants Boesky and the Boesky Entities, with the assistance of Brown, Brosens, Sokolow, and Levine, directly or indirectly, singly, by aiding or abetting, ... employed devices schemes and artifices to defraud ... in violation of Sec. 10(b) and Rule 10b-5. FMC's theory of the case in the complaint is that Boesky and the Boesky entities committed the substantive offense, and Goldman, as a controlling person of Brown and Brosens, aided and abetted that offense. Indeed that is the position FMC has consistently maintained from the filing of the second amended complaint through its brief on appeal (FMC should be able to recover from Goldman, which through Brosens aided and abetted Boesky....). Nowhere in FMC's complaint does it allege any manipulative or deceptive act by Goldman or any of its employees, a prerequisite to primary liability under Sec. 10(b). See Central Bank, --- U.S. at ----, 114 S.Ct. at 1446. No claim has been made that Goldman has primary liability under Rule 10b-5 and it is too late now to assert one. 34 We thus do not decide whether Judge Williams correctly ruled that FMC could not recover under either Rule 10b-5 or Sec. 9(a) of the Exchange Act, 15 U.S.C. Sec. 78i(a), because it was not a purchaser or seller of securities as required by Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975). Boesky, 727 F.Supp. at 1193-96. Central Bank provides an alternative basis for affirming her dismissal of the 10b-5 claim, and FMC does not appeal Judge Williams' dismissal of the Sec. 9(a) claim on the alternative grounds that FMC failed to allege damages compensable under that section, see id. at 1196-97. 35 FMC claims that it may recover as a surrogate for those shareholders who did trade contemporaneously with Boesky, and therefore seeks disgorgement of Boesky's profits on that theory. Cf. Elkind v. Liggett & Myers, Inc., 635 F.2d 156, 172-73 (2d Cir.1980) (discussing the disgorgement measurement of damages). According to FMC, [b]ecause the fiduciary duty is owed to the corporation, the insider's profits are properly disgorged to the corporation, and the corporation is a proper plaintiff in an action against the insider. However, in this case, FMC shareholders who traded with Boesky have initiated a class action suit on their own behalf to recover Boesky's profits. Thus, even assuming that FMC's surrogate plaintiff theory could survive the purchaser/seller limitation of Blue Chip Stamps and is otherwise viable, there is no need for FMC to act as a surrogate in this case. See Freeman v. Decio, 584 F.2d 186, 195 (7th Cir.1978) (When the [investors who were the true victims of the insider trading] in fact bring an action seeking damages from the insiders, ... the need for a surrogate plaintiff disappears....). 36 In sum, FMC has no right under Rule 10b-5--either on its own behalf or as surrogate for its shareholders--to recover the fruits of Boesky's illegal trades. Judge Williams properly dismissed FMC's claim.