The opinion of the court was delivered by: Moran, Senior District Judge.
MEMORANDUM ORDER AND OPINION
In Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975), the
Supreme Court took a somewhat restrictive view of the scope of
Rule 10b-5's requirement that the deception be "in connection with the
purchase or sale of any security." It concluded that it is not enough that
potential purchasers were discouraged from buying or potential sellers
were encouraged to hold on to their shares or that shareholders suffered
loss in the value of their investment due to corporate or insider
activities in connection with the purchase or sale of securities.
But what if a broker represents that she will buy a security but fails
to so and misappropriates the funds? There has
been no purchase of
securities, and, arguably, the potential purchaser defrauded of the funds
has no standing to prosecute a Rule 10b-5 action because the fraud was
not in connection with an actual purchase. That was the position of the
court in Smith v. Chicago Corp., 566 F. Supp. 66 (N.D. Ill. 1983), But
that position was rejected by the Supreme Court in SEC v. Zandford,
535 U.S. 813, 122 S.Ct. 1899 (2002), where it specifically approved the
ruling in In re Bauer, 26 S.E.C. 770, 1947 WL 24474 (1947).
How does that play out here? Plaintiff does not allege that it
furnished funds to defendant Essex, LLC's representative to purchase a
specific security. The allegations are more convoluted than that.
Plaintiff alleges that the representative, defendant Goldberg, touted an
initial public offering of a start up company, Nanovation. According to
plaintiff, Goldberg represented that he had a relationship with a Canadian
company owning 40 per cent of Nanovation's common stock, that the
Canadian company needed to raise an escrow because of "tax issues," that
those who made deposits to the escrow would get preferential pricing for
the Nanovation public offering, and that the deposits could be withdrawn
at any time, Plaintiff deposited $250,000, with Goldberg representing
plaintiff would receive 18,500 shares of the Nanovation public offering,
which would occur in the near future. But there was no public offering,
Nanovation went into bankruptcy, and plaintiff never got its money back.
Defendant Essex, LLC has moved to dismiss, relying upon Blue Chip
Stamps. We deny, for now, that motion. The allegations can be construed
as a scenario in which Goldberg made misrepresentations about
Nanovation, although the substance of those is rather unclear, to induce
plaintiff to deposit funds for ultimate use as payment for 18,500 shares
of Nanovation. Plaintiff does not appear to claim that its deposit was in
connection with the purchase of securities in the Canadian company.
Accordingly, Goldberg's representations about that company would not
appear to provide plaintiff with a federal claim except insofar as they
related to an expected investment in Nanovation. But there may be enough
of a nexus to a Nanovation purchase, and that, for now, keeps plaintiff
in federal court.
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