The opinion of the court was delivered by: Leighton, District Judge.
This action is brought pursuant to Section 10 of the
Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), Rule
10b-5, promulgated thereunder, and Section 12, Subdivision G of
the Illinois Securities Act, Ill.Rev.Stat. ch. 121 1/2 §
137.12. Plaintiffs Tyrone and Charles Smith opened securities
accounts with the defendant Chicago Corporation in October and
December of 1981, respectively. They allege that defendant's
employee, Jesse Williams, violated Section 10(b) and Rule 10b-5
by failing to make certain purchases for the accounts as
requested by plaintiffs, and by fraudulently withdrawing money
from their accounts. The cause is before the court on the
defendant's motion to dismiss for failure to state a claim,
pursuant to Rule 12(b)(6), Fed.R.Civ.P. Defendant contends that
plaintiffs are not "purchasers" of securities, and therefore
lack standing to sue under Section 10(b) and Rule 10b-5. It
also argues that the alleged acts by Williams cannot form the
basis for a claim under the Securities Exchange Act of 1934.
After consideration of the parties' submissions, the court
concludes that plaintiffs do not have standing to maintain this
action; and more importantly, they fail to state a claim under
Section 10(b) and Rule 10b-5. The facts alleged which for the
purpose of this motion are taken as true, are as follows.
In October 1981, plaintiff Charles Smith opened an account
with the defendant Chicago Corporation in which he deposited
$60,000 worth of cash and securities. In December 1981,
plaintiff Tyrone Smith also opened an account with the
defendant. Jesse Williams was the account executive for both
plaintiffs. On December 18, 1981, Tyrone deposited $35,000 in
his account and directed Williams to invest the money in a
money market fund. In February 1982, Tyrone deposited an
additional $14,000. In March 1982, Tyrone instructed Williams
to purchase $5,000 worth of Kulicke and Soffa common stock and
to place $5,500 in an Individual Retirement Account (IRA). In
early April 1982, Tyrone directed Williams to purchase an
additional $5,000 worth of Kulicke and Soffa common stock.
Williams agreed to follow all of Tyrone's directions.
In March of 1982, plaintiffs became concerned about their
accounts because of irregularities in confirmations they were
receiving; so, they made inquiries of defendant Chicago
Corporation. Defendant conducted an investigation and
discovered that Williams had never invested Tyrone's $35,000
in a money market fund, had never purchased the second order
of Kulicke and Soffa stock, or invested Tyrone's $5,500 in an
IRA. The investigation further disclosed that Williams had
withdrawn $15,000 from Charles' account and $19,700 from
Tyrone's and had converted the funds to his own use.
Plaintiffs brought this action seeking damages in the amount
The motion before the court presents two questions which
have never been addressed by the Seventh Circuit. (1) Whether
a person who maintains a securities investment account and who
requests that certain purchases be made for that account has
standing to bring an action under Section 10(b)*fn1 and Rule
10b-5.*fn2 (2) Whether such a person states a claim under
these sections when purchases he orders are not made and money
is misappropriated from his securities account. There are very
few cases involving facts similar to this one; and all of
them, with one exception, were decided before the Supreme
Court's opinions in Blue Chip Stamps v. Manor Drugs,
421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975) and Santa Fe
Industries v. Green, 430 U.S. 462, 97 S.Ct. 1292, 51 L.Ed.2d
480 (1977),*fn3 two decisions on which
this court relies. The most recent case, Henricksen v.
Henricksen, 486 F. Supp. 622 (E.D.Wis. 1980), aff'd in part and
rev'd in part, 640 F.2d 880 (7th Cir. 1981), cert. denied,
454 U.S. 1097, 102 S.Ct. 669, 70 L.Ed.2d 637 (1981), held that a
broker's conversion of funds in a customer's securities account
constitutes a violation of Section 10(b). However, the court
cites no authority for this proposition. This court's
resolutions of the issues before it are based on an analysis of
the Supreme Court's Blue Chip Stamps, Santa Fe Industries, and
the purposes behind Section 10(b).
In Blue Chip Stamps, the Supreme Court adopted the rationale
of Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2d Cir.
1952), that only purchasers and sellers of securities can
maintain actions for violations of Section 10 and Rule 10b-5.
In so doing, the court noted that the Securities and Exchange
Commission had twice attempted to get Congress to amend Section
10(b) to read "in connection with the purchase or sale of or
any attempt to purchase or sell any securities." (emphasis
added) The Court read Congress' refusal to make this change as
an acceptance of the Birnbaum court's reasonable interpretation
of the language of Section 10(b). The court went on to state
that there were three classes of potential plaintiffs that were
barred by Birnbaum from bringing actions under Section 10(b):
First are potential purchasers of shares . . .
who allege that they decided not to purchase
because of an unduly gloomy representation or the
omission of favorable material which made the
issuer appear to be a less favorable investment
vehicle than it was. Second are actual
shareholders in the issuer who allege that they
decided not to sell their shares because of an
unduly rosy representation or a failure to
disclose unfavorable material. Third are
shareholders, creditors, and perhaps others
related to an issuer who suffered loss in the
value of their investment due to the corporate or
insider activities in connection with the
purchase or sale of securities which violate Rule
Blue Chip Stamps, 421 U.S. at 737-738, 95 S.Ct. at 1926.
Plaintiffs in this action fall into the first category; and
consequently, they do not have standing to bring this action
under Section 10(b) and Rule 10b-5.*fn4 This conclusion is not
based solely on the fact that plaintiffs themselves made no
purchases of securities;*fn5 it is because plaintiffs cannot
allege, on the facts of this case, that anyone purchased or
sold any securities. Therefore, the question whether plaintiffs
state a claim under Section 10 and Rule 10b-5 need not be
addressed. However, because it is an issue which has not been
fully discussed by any court in this circuit, it will be
touched on, briefly.
The trend of the Supreme Court in recent years has been to
limit the scope of the private remedy available under Section
10(b) and Rule 10b-5. Panter v. Marshall Field & Co.,
646 F.2d 271, 286 (7th Cir. 1981), cert. denied, 454 U.S. 1092, 102
S.Ct. 658, 70 L.Ed.2d 631 (1981); O'Brien v. Continental
Illinois National Bank & Trust, 593 F.2d 54, 62-63 (7th Cir.
1979). In Santa Fe, the Court enunciated two factors which must
be considered in determining whether a cause of action should
be implied in a particular case.
First, "a cause of action under the antifraud 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."
430 U.S. at 477, 97 S.Ct. at 1303, quoting from Piper v.
Chris-Craft Industries, Inc., 430 U.S. 1, 41, 97 S.Ct. 926,
949, 51 L.Ed.2d 124. The "fundamental purpose" of the Act is to
insure full and fair disclosure in securities transactions.
Santa Fe, 430 U.S. at 478, 97 S.Ct. at 1303. Thus, a 10b-5
action should not be implied where the wrongs sought to be
addressed in an action "do not fall within § 10(b)'s
fundamental purpose of requiring full and fair disclosure to
participants in securities transactions of the information that
would be useful to them in deciding whether to buy or sell
securities." O'Brien, 593 F.2d at 60. The important question
then, is to which decision did Jesse Williams' alleged
misrepresentations and omissions relate? If they did not relate
to a decision to purchase stock, then this action is outside
the intended purposes of Section 10(b). In this case, Williams'
misrepresentations and omissions were made after the decision
to purchase had been made. The information withheld from
plaintiffs was material to their decision not to terminate
their account with the defendant, but it did not relate to the
decisions to make purchase requests. Accordingly, the wrongs
addressed in this action do not fall within Section 10(b)'s
purpose of assuring full disclosure in securities transactions.
Second, is whether "the cause of action is one traditionally
relegated to state law,. . ." Santa Fe, 430 U.S. at 478, 97
S.Ct. at 1303. Plaintiffs' claim here is essentially one for
conversion. The only connection with federal securities laws is
that the funds were converted from a securities investment
account. However, the allegedly converted funds were not used
to purchase securities and none of the acts complained of by
plaintiffs involved the actual sale or purchase of securities.
In light of the principles enunciated by the Court in Santa Fe
and Blue Chip Stamps, this court is unwilling to imply a cause
of action under Section 10(b) in this case, where the
underlying claim is, in essence, one of state law and where no