Court Opinion

ID: 8917835
Source: CourtListenerOpinion
Date Created: 2022-11-27 05:50:46.902071+00
Date Added: 2024-06-11T17:09:09.452219
License: Public Domain

BAUER, Circuit Judge,
dissenting.
The majority opinion is so persuasive that, but for one important factual disagreement, I could have written it myself. Nevertheless, I must dissent because in my opinion the plaintiff did not have the power to control the trustee’s investment decisions necessary to create federal jurisdiction under the Securities Exchange Act.
The difficulty in sustaining a cause of action in this case, as recognized by the district court, is that the plaintiff in fact had no power to control or even influence the defendant-trustee’s decision to sell the securities. The will establishing the trust states: “The Trustee shall have full power to ... sell, exchange or pledge any or all of the trust property as he deems proper ... for such purposes as the Trustee deems advisable.” The will also states: “[T]he decision and judgment of my said Trustee shall be conclusive, binding and final and no present or future income beneficiary shall question the decision or good faith of such Trustee.” (R. 17, Ex. A at 8-10.) Similar statements grant the executors uncompromised power to administer the estate as a whole. Thus, the will clearly bars the plaintiff from influencing or challenging the trustee’s decisions.
Because the plaintiff had no input into the decision to sell the stock, the defendants’ misrepresentations to her were not made “in connection with the purchase or sale of any security.” O’Brien v. Continental Illinois National Bank & Trust Co., 593 F.2d 54, 60 (7th Cir.1979). See Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 477, 97 S.Ct. 1292, 1303, 51 L.Ed.2d 480 (1977) (“[A] private cause of action under the anti-fraud provisions of the Securities Exchange Act should not be implied where it is ‘unnecessary to ensure the fulfillment of' Congress’ purposes’ in adopting the Act.”).
The plaintiff argues in opposition to this conclusion that it is enough to state a cause of action that the plaintiff would have petitioned the probate court to disapprove the stock transaction. In O’Brien, this court discussed and rejected the argument that the plaintiffs’ power to terminate an existing fiduciary relationship with the defendant who was charged with fraud was enough to state a cause of action under Section 10(b) and Rule 10b-5. Similarly, the ability to persuade a court to disapprove a proposed transaction is not encompassed by the concept “in connection with the purchase or sale of any security.” See O’Brien, 593 F.2d at 60; cf. Gurley v. Documation Inc., 674 F.2d 253 (4th Cir.1982) (plaintiffs’ allegation that they were prevented from piggybacking on a public offering does not involve sale of securities).
The plaintiff also argues that the will in fact granted her the power of approval because the defendant-trustee actually sold the trust’s stock to himself. The will states: “Nothing herein contained shall be construed to prevent the individual Trustee ... from becoming a purchaser of any of such securities ... provided he has the approval of the income beneficiaries .... ” (R. 17, Ex. A at 11.) In this case, the closely-held corporations, and not the trustees, purchased the stock. The plaintiff correctly notes, however, that trust law recognizes that when a trustee sells trust as*262sets to a corporation of which he owns a substantial part of the stock, he may have breached his fiduciary duty of loyalty. Nevertheless, because that breach of duty arises when the securities were sold, the breach does not bestow on the plaintiff the power to control the sale itself, which is required for the fraud to be “in connection with the sale” of securities. In other words, the plaintiff must show that the completed transaction violated trust law; then the plaintiff may recover any gains made by the trustee at the expense of the trust. The plaintiff does not gain the power to affect the long-completed securities transaction. Additionally, I cannot subscribe to the majority’s broad interpretation of the will as applying to all instances of apparent self-dealing.
This type of case is far better left to state courts. Federal securities law does not contemplate the exercise of federal jurisdiction in cases requiring resolution of purely state trust law issues as a prelude to deciding whether fraud existed in a transaction which the plaintiff, at the time, could not control. Accordingly, I respectfully dissent.