Summary
This Second Circuit opinion addresses whether a district court had subject matter jurisdiction over a broker's claim against customers who allegedly defrauded it by ordering securities with no intention of paying unless their market value increased. Reversing the district court's dismissal, the appellate court held that Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 prohibit fraudulent schemes in connection with the purchase or sale of securities, regardless of whether the plaintiff is an investor or the fraud relates to investment value. The court concluded that the complaint sufficiently stated a claim under federal securities laws and applicable notice pleading standards.
Topics
Practice areas
Questions Presented
- Whether the complaint alleged a fraudulent scheme in connection with the purchase or sale of securities sufficient to invoke subject matter jurisdiction under section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.
- Whether a Rule 10b-5 claim must involve fraud concerning the investment value of securities or fraud of the type usually associated with securities transactions.
- Whether the complaint was required at the pleading stage to establish that the defendants' failure to pay constituted actionable securities fraud rather than merely a breach of contract.
Holdings
- The complaint sufficiently alleged a fraudulent scheme in connection with the purchase of securities traded on a national exchange, and the district court therefore had subject matter jurisdiction to entertain the action.
- A claim under section 10(b) and Rule 10b-5 is not limited to fraud concerning the investment value of securities or to fraud of a type usually associated with securities transactions; fraudulent schemes of novel or atypical form may also fall within the provisions.
- The complaint was not required to prove that the defendants' failure to pay constituted actionable fraud or to plead detailed facts establishing an ultimate right to recovery. Whether the conduct was fraud or merely breach of contract depended on facts to be developed at trial or on summary judgment.
Key quotations
“We believe that § 10(b) and Rule 10b-5 prohibit all fraudulent schemes in connection with the purchase or sale of securities, whether the artifices employed involve a garden type variety of fraud, or present a unique form of deception.” (¶ 12)
“But, whether there is actionable fraud or a mere breach of contract depends on the facts and circumstances developed at the trial or on motion for summary judgment.” (¶ 15)
“But, accepting Brod's allegations as true, as we have indicated we must on a motion to dismiss the complaint, it is clear that the complaint sufficiently stated a claim grounded in federal jurisdiction.” (¶ 16)
Factual background
The Perlows allegedly placed securities orders with the fraudulent intent to pay only if the securities increased in market value by the payment date. Acting on their order, Brod purchased 100 shares of S-C-M Corporation and 100 shares of General Instrument Corporation on the New York Stock Exchange. When the prices declined, the Perlows allegedly refused to pay, and Brod sold the securities at a loss of $3,330.34.
Procedural history
A. T. Brod & Co. sued Jack and Adele Perlow under section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. Judge Bonsal dismissed the complaint for lack of subject matter jurisdiction, concluding that the complaint did not allege the type of fraud covered by section 10(b) and Rule 10b-5. The Second Circuit held that the allegations were sufficient to invoke federal jurisdiction, vacated and reversed the dismissal, and directed the district court to take the steps necessary to reinstate an order of attachment.
Remand instructions
The dismissal for lack of subject matter jurisdiction was vacated and reversed. Because the attachment order had been vacated solely on the basis of the jurisdictional ruling, the district court was directed to enter whatever order was necessary to reinstate the order of attachment.