Opinion ID: 456274
Heading Depth: 2
Heading Rank: 4

Heading: Pre-billing

Text: 20 Plaintiffs also contend that defendants may have failed to disclose Nucorp's illegal pre-billing practices. The Securities and Exchange Commission filed a complaint against Richard L. Burns and David W. Watt of Nucorp for employing pre-billing of sales to inflate Nucorp's earnings. We agree that this information would have been material if defendants had been aware of this practice. Plaintiffs, however, have presented no evidence that the defendants knew about the illegal pre-billing. 21 We conclude that this case was appropriate for disposition on summary judgment. The district court carefully analyzed each item of information that defendants allegedly concealed at the time of plaintiffs' purchases. SEC v. Seaboard Corp., 677 F.2d at 1306. Plaintiffs failed to make a supportable case that defendants withheld information that in substantial likelihood a reasonable investor would have considered important in making an investment decision. Plaintiffs are attempting to argue in hindsight that the August 1981 inventory levels and the proposal to sell two subsidiaries were material because they signaled Nucorp's financial deterioration. In our view, no jury could properly find that this information would have put a reasonable investor on notice that Nucorp was in serious financial condition. We conclude that the withheld information was not material at the time of plaintiffs' purchases. A trial on materiality is unnecessary because reasonable minds would not disagree. See TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 450, 96 S.Ct. 2126, 2132, 48 L.Ed.2d 757 (1976). We affirm the summary judgment entered in favor of defendants on the insider trading claim. 3. Fiduciary Duty Claim 22 Plaintiffs also contend that defendants violated Sec. 10(b) and Rule 10b-5 by failing to advise plaintiffs of adverse financial information about Nucorp after plaintiffs' investment. As a result, plaintiffs failed to sell their securities. The district court denied further discovery on this claim and entered summary judgment in favor of the defendants. 23 It is not clear how plaintiff's contention would avoid the hurdle of Blue Chip Stamps v. Manor Drugs Stores, 421 U.S. 723, 737-38, 95 S.Ct. 1917, 1926, 44 L.Ed.2d 539 (1975), which precludes a Rule 10b-5 recovery for shareholders who merely decide not to sell their shares because of a misrepresentation or failure to disclose. In any event, plaintiffs' theory is predicated on the existence of a fiduciary relationship between Lehman Brothers and the Caravan trusts. We agree with the district court that there was no showing of such a fiduciary relationship. In the absence of that relationship, Lehman Brothers cannot have been obligated to advise plaintiffs of adverse developments after their purchases that affected their Nucorp securities. See Chiarella v. United States, 445 U.S. 222, 230, 100 S.Ct. 1108, 1115, 63 L.Ed.2d 348 (1980) (liability for nondisclosure is premised on a duty to disclose). 24 A stockbroker is an agent of his client. As an agent he has a duty to give any information relevant to the affairs entrusted to him of which he has notice. Restatement (Second) of Agency Sec. 381 (1958). Caravan, however, had a non-discretionary account with Lehman Brothers. Normally the agency relationship created by a non-discretionary account arises when the client places an order and terminates when the transaction ordered is complete. Robinson v. Merrill Lynch, Pierce, Fennner & Smith, Inc., 337 F.Supp. 107, 111 (N.D.Ala.1971), aff'd, 453 F.2d 417 (5th Cir.1972). The stockbroker assumes no continuing obligation to advise his clients of information that affects their securities. Leib v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 461 F.Supp. 951, 953 (E.D.Mich.1978). 25 The district court denied plaintiffs discovery on the fiduciary duty claims because they failed to offer any proof that Lehman Brothers owed a fiduciary duty to the Caravan trusts after the Nucorp purchases. There was no showing that defendants exercised continuing control over Caravan's account or acted as investment counselors. See Leboce, S.A. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 709 F.2d 605, 607 (9th Cir.1983) (California law imposes a fiduciary duty where the agent 'for all practical purposes' controls the account). Because plaintiffs have offered no evidence that Lehman Brothers owed them a continuing duty to advise them about Nucorp developments, the district court properly held that defendants were entitled to judgment as a matter of law on Caravan's purported federal claim based on breach of fiduciary duty. 26 Finally, plaintiffs make a far-reaching argument that Rule 10b-5 liability should extend to multi-service securities firms whenever they sell the securities of corporations for which they serve as investment bankers or outside directors. They derive this argument from a conflict that they discern between the duty of an insider to disclose material information or abstain from dealing in or recommending a corporation's securities, see SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 848 (2d Cir.1968) (en banc), cert. denied, 394 U.S. 976, 89 S.Ct. 1454, 22 L.Ed.2d 756 (1969), and the fiduciary duty a broker owes to a client, see Black v. Shearson, Hammill & Co., 266 Cal.App.2d 362, 72 Cal.Rptr. 157, 169-61 (1968). Whatever may be said for or against the rule urged by plaintiffs, there is no reason to invoke it in this case. The conflict it purports to address occurs when an insider withholds material information from a shareholder to whom that insider owes a fiduciary duty. For reasons that we have already fully explained, that factual condition never occurred in this case. We therefore are not inclined to apply here the per se rule urged by plaintiffs.