Opinion ID: 291584
Heading Depth: 1
Heading Rank: 4

Heading: Sale of Manhattan's Treasury Bonds

Text: 19 Another thrust of this appeal is that the district court erred in holding that no federal cause of action was stated with respect to the purchase or sale of Treasury bonds from Manhattan's portfolio. Appellant's claim that Manhattan is entitled to federal relief as the defrauded seller of those bonds was presented to the district court only as amendatory allegations presented in open court and not formally set forth in the complaint. 300 F.Supp. at 1098. Moreover, the alleged facts presented in support of the claim on appeal do not appear anywhere in the complaint. See note 3, supra. Assuming that they are properly before us, and also that they are true, Kossick v. United Fruit Co., 365 U.S. 731, 732, 81 S.Ct. 886, 6 L.Ed.2d 56 (1961), we hold that appellant has not made out a claim cognizable under the federal Securities Acts. 20 Briefly stated, appellant's claim is that a majority of the board of directors of Manhattan was deceived by misrepresentations of other members of the board and some of the defendants that the sale of the bonds was intended only to effectuate a substitution of those assets for a certificate of deposit equal in value; that in fact the certificate of deposit so substituted was collateralized to its full face value in favor of an unrelated corporate entity; and that on the basis of the fraudulent representations, the board was deceitfully induced to authorize the sale of the bonds in exchange for a certificate without value to the corporation. 21 What distinguishes the fraud perpetrated on Manhattan in this case from one cognizable under Rule 10b-5 is that its sole object was to obtain possession of Manhattan's government bonds for the personal use of the perpetrators. No doubt the deception was successful, for had the board known that Sweeny and his associates intended to misappropriate the proceeds for their own use it undoubtedly would not have authorized their sale. But that deception did not infect the subsequent sales transaction. With respect to the terms of the sale itself neither the purchaser nor the seller of the bonds was deceived or defrauded. Cf. Ruckle v. Roto Am. Corp., 339 F.2d 24 (2d Cir. 1964); Globus, Inc. v. Jaroff, 266 F. Supp. 524 (S.D.N.Y.1967); Simon v. New Haven Board & Carton Co., 250 F. Supp. 297 (D.Conn.1966). Indeed, it is no part of the liquidator's claim that the full and fair market price was not paid for those bonds by their purchaser. The fraud which harmed the plaintiff consisted of the failure of Sweeny and his associates to account for the proceeds. There is a structural difference between the sale of the corporation's bonds at a concededly fair price and the subsequent fraudulent misappropriation of the proceeds received. 22 Rule 10b-5 was not intended to provide a remedy for schemes amounting to no more than fraudulent mismanagement of corporate affairs. Birnbaum v. Newport Steel Corp., supra, 193 F.2d at 464. The scope of the rule must be assessed in light of the purposes of the legislation from which it derives, which we recently found to be to promote free and open public securities markets and to protect the investing public from suffering inequities in trading   . SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 858 (2d Cir. 1968) (en banc), cert. denied sub nom. Coates v. SEC, 394 U.S. 976, 89 S.Ct. 1454, 22 L.Ed.2d 756 (1969). In that case, we construed the in connection with requirement of Rule 10b-5 as follows: 23 Therefore it seems clear from the legislative purpose Congress expressed in the Act, and the legislative history of Section 10(b) that Congress when it used the phrase `in connection with the purchase or sale of any security' intended only that the device employed, whatever it might be, be of a sort that would cause reasonable investors to rely thereon, and, in connection therewith, so relying, cause them to purchase or sell a corporation's securities. Id. 401 F.2d at 860. 24 See Heit v. Weitzen, 402 F.2d 909, 913 (2d Cir. 1968), cert. denied, 395 U.S. 903, 89 S.Ct. 1740, 23 L.Ed.2d 217 (1969). 25 The fraud alleged in this case in no way affected either the securities markets or the investing public. No stockholders were defrauded, no investor injured. The purity of the security transaction and the purity of the trading process were unsullied. There was no danger that the securities sold would be over-valued on reaching the public markets. Cf. Ruckle v. Roto Am. Corp., supra, 339 F.2d at 28. 26 Despite the power of the Commission to promulgate rules appropriate in the public interest or for the protection of investors, § 78j(b), the scope of the rule in fact promulgated is expressly limited to protection against fraud or deceit in connection with the purchase or sale of any security. Rule 10b-5. Although in the broadest sense the public interest is involved when a corporation which is subject to regulation by the state Superintendent of Insurance is defrauded, the public interest cognizable by § 10(b) is limited to preserving the integrity of the securities markets. The civil liabilities provisions of the federal Securities Acts, beginning in 15 U.S.C. § 77 l were part of a broad integrated program designed to obtain honest dealings in securities, Wilko v. Swan, 127 F.Supp. 55, 58 (S.D.N.Y.1955), not one to create an unlimited federal right of action for damages for all who have been defrauded in any area of economic activity. The condition imposed by Rule 10b-5 that the fraud be in connection with the purchase or sale of a security is wholly consistent with that program. Thus, we do not decide that the creditors of Manhattan do not have any remedy under general state tort law for the fraud practiced on their debtor, but only that the federal Securities Acts have not provided a federal forum for its enforcement.