was not designed in any way to disguise or obscure the
transfer and, finally, it is alleged to be the gist of the
purported conspiracy to deceive and defraud. It was,
therefore, a sale of securities of such a nature as to come
within the ambit of the federal securities laws.
For these foregoing reasons, defendant's motion to dismiss
Count I of the complaint for failure to state a federally
cognizable cause of action is denied.
Count II repeats the allegations of Count I, but plaintiff
here sues as an individual, rather than derivatively on behalf
of the Black Company. Defendant's motion to dismiss Count II
is based on the contention that plaintiff has no standing to
sue, not being a purchaser or seller under the Act. Plaintiff
predicates jurisdiction on 15 U.S.C. § 78aa which embodies
the standing to sue question, and additionally on pendant
jurisdiction, which would suggest that if Count I has been
sustained, Count II may stand alone under the doctrine of
This question need not be reached, however, since the relief
plaintiff seeks is claimed under 15 U.S.C. § 78aa, 78j(b)
and Rule 10b-5. Unless plaintiff has standing to sue under
those sections, Count II cannot survive as a cause of action
either federal or state. The crux of the problem is that the
federal jurisdiction over the alleged fraud or deception
requires that it must be in connection with the purchase or
sale of a security. Count I involved a transfer or sale of
Black stock, and the corporation so transferring was
derivatively the plaintiff party. In Count II, plaintiff
Bailey is the claimant, and he has neither bought nor sold
securities. It is the gist of his complaint that he was
defrauded of his right to do so, which merely emphasizes that
he claims neither to be a purchaser nor a seller.
Birnbaum v. Newport Steel Corporation, 193 F.2d 461 (2d Cir.
1952), and cases following it cited by defendant, do stand for
the proposition that stockholders suing derivatively and
charging a breach of fiduciary duty in connection with a sale
of stock to which they were not a party, have no individual
standing to sue as either purchasers or sellers under the act.
The question becomes more complex when we add the fact, not
present in the Birnbaum case, that the plaintiff had a contract
to buy. Since the 1934 Act defines sale to include a contract
to sell, and purchase to include a contract to purchase, it is
necessary to examine whether this broadening of these terms
comes to include plaintiff who alleges a contract to buy, the
exercise of which was thwarted by a fraudulent conspiracy.
We cannot stray too far from the philosophy that the federal
act is designed to regulate and oversee the purchase and sale
of securities, and to give a remedy against fraud in
connection therewith. The definition of purchase and sale to
include contract to purchase or sell cannot be detached or
disassociated from the concept of fraud. To create federal
jurisdiction, fraud or deception must taint the purchase or
sale and, a fortiori, must taint the inducement of the contract
to purchase or sell. A lack of standing to sue, because neither
a purchaser nor a seller, cannot be cured by pleading an
earlier contract to purchase in no way induced by fraud, and in
no way procured by the persons allegedly guilty of the fraud
It is true, then, that the Birnbaum rule has exceptions, but
the facts in the instant case do not bring it within any of
these exceptions. Plaintiff in fact was induced neither to
purchase nor to sell by fraud or deception; nor was he
fraudulently induced to contract to purchase or to sell. As an
individual, therefore, he has no standing to sue under the
federal securities laws or regulations which Count II is based
Plaintiff argues that the matter is academic since, if Count
I pleads a federal cause of action, the Court's jurisdiction
over Count II may depend on the federal jurisdiction
established under Count I.
The matter is not so simple. Count II does not, as plaintiff
suggests, plead a common law wrong. Count II alleges a wrong
which depends entirely for its vitality upon the jurisdiction
created by Title 15, Section 78j(b). A failure of standing to
sue under this statute vitiates the cause of action based
thereon. Nothing survives to enjoy the benefit of the doctrine
of pendant jurisdiction.
The motion to dismiss Count II of the complaint is,
Count III of the complaint alleges a cause of action
normally cognizable in the state courts. It is pendant,
however, to the federally cognizable cause of action alleged
in Count I. The motion to dismiss Count III is denied.
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