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withdrawn $15,000 from Charles' account and $19,700 from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.