Menora Mivtachim Ins. Ltd. v. Frutarom Indus. Ltd. ( 2022 )

21-1076
Menora Mivtachim Ins. Ltd. v. Frutarom Indus. Ltd.
United States Court of Appeals
for the Second Circuit
August Term 2021
Argued: February 10, 2022
Decided: September 30, 2022
Amended: November 30, 2022
No. 21-1076
MENORA MIVTACHIM INSURANCE LTD., MENORA MIVTACHIM AND THE
FEDERATION OF ENGINEERS PROVIDENT FUND MANAGEMENT LTD.,
CLAL INSURANCE COMPANY LTD., MENORA MIVTACHIM PENSIONS
AND GEMEL LTD., CLAL PENSION AND PROVIDENT LTD., ATUDOT
PENSION FUND FOR EMPLOYEES AND INDEPENDENT WORKERS,
Plaintiffs-Appellants,
v.
FRUTAROM INDUSTRIES LTD., ORI YEHUDAI, ARI ROSENTHAL, ALON
GRANOT, GUY GILL,
Defendants-Appellees. *
On Appeal from the United States District Court
for the Southern District of New York
*The Clerk of Court is respectfully directed to amend the caption
accordingly.
Before: PARK, NARDINI, and PÉREZ, Circuit Judges.
International Flavors & Fragrances Inc. (“IFF”), a U.S.-based
seller of flavoring and fragrance products, acquired Frutarom
Industries Ltd. (“Frutarom”), an Israeli firm in the same industry.
Leading up to the merger, Frutarom allegedly made material
misstatements about its compliance with anti-bribery laws and the
source of its business growth. Plaintiffs, who bought stock in IFF,
sued Frutarom, alleging that those misstatements violated
Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”)
and Rule 10b-5 thereunder. We conclude that Plaintiffs lack
statutory standing to sue. Under the purchaser-seller rule, standing
to bring a claim under Section 10(b) is limited to purchasers or sellers
of securities about which a misstatement was made. See Blue Chip
Stamps v. Manor Drug Stores, 421 U.S. 723 (1975). Plaintiffs here lack
standing to sue based on alleged misstatements about Frutarom
because they never bought or sold shares of Frutarom. AFFIRMED.
Judge Pérez concurs in a separate opinion.
JEREMY A. LIEBERMAN (Emma Gilmore, Marc I. Gross,
Villi A. Shteyn, on the brief), Pomerantz LLP, New York,
NY, for Plaintiffs-Appellants.
ROGER A. COOPER (Lisa Vicens, Thomas S. Kessler, on the
brief), Cleary Gottlieb Steen & Hamilton LLP, New York,
NY, for Defendant-Appellee Frutarom Industries Ltd.
BRUCE G. VANYO, Katten Muchin Rosenman LLP, New
York, NY (Jonathan A. Rotenberg, Thomas M. Artaki,
Katten Muchin Rosenman LLP, New York, NY; Eric T.
Werlinger, Katten Muchin Rosenman LLP, Washington,
DC, on the brief), for Defendants-Appellees Ori Yehudai, Ari
Rosenthal, Alon Granot, and Guy Gill.
2
21-1076
Menora Mivtachim Ins. Ltd. v. Frutarom Indus. Ltd.
PARK, Circuit Judge:
International Flavors & Fragrances Inc. (“IFF”), a U.S.-based
seller of flavoring and fragrance products, acquired Frutarom
Industries Ltd. (“Frutarom”), an Israeli firm in the same industry.
Leading up to the merger, Frutarom allegedly made material
misstatements about its compliance with anti-bribery laws and the
source of its business growth. Plaintiffs, who bought stock in IFF,
sued Frutarom, alleging that those misstatements violated
Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”)
and Rule 10b-5 thereunder. We conclude that Plaintiffs lack
statutory standing to sue. Under the purchaser-seller rule, standing
to bring a claim under Section 10(b) is limited to purchasers or sellers
of securities about which a misstatement was made. See Blue Chip
Stamps v. Manor Drug Stores, 421 U.S. 723 (1975). Plaintiffs here lack
standing to sue based on alleged misstatements about Frutarom
because they never bought or sold shares of Frutarom. We thus
affirm the district court’s dismissal of the complaint.
I. BACKGROUND
A. Factual Background 1
Plaintiffs are a putative class of investors who acquired IFF
securities between May 7, 2018 and August 12, 2019. They allege
1The following facts are taken from Plaintiffs’ Amended Complaint,
Joint App’x at 20–102. In reviewing the district court’s decision on a
motion to dismiss, we accept these facts as true and draw all reasonable
that from 2002 to 2018, Frutarom’s executives engaged in a “long-
running bribery scheme” by which they bribed key employees of
important clients in order to “generate continued and increased
business with the customer[s].” Compl. ¶¶ 10, 66. They also
bribed customs officials and quality assurance officials in Russia and
Ukraine in order to import Frutarom products into those countries
and to pass local certifications of product fitness.
On May 7, 2018, Frutarom and IFF announced an anticipated
merger. Plaintiffs allege that leading up to the consummation of the
merger, Frutarom made materially misleading statements about its
compliance with anti-bribery laws and the sources of its business
growth, most of which were incorporated into IFF’s Form S-4
Registration Statement. For instance, Plaintiffs allege that Frutarom
falsely stated that since December 31, 2014, Frutarom had not
“violated the [Foreign Corrupt Practices Act], the U.K. Bribery Act
2010, the [Organisation for Economic Co-operation and
Development] Convention on Combating Bribery of Foreign Public
Officials in International Business Transactions or any other
applicable Law relating to anti-corruption or anti-bribery.” Id. ¶ 146.
Plaintiffs also allege that Frutarom misled investors by attributing its
financial growth in 2016 and 2017 to factors such as “organic growth,”
“acquisitions,” and “positive currency effects” while failing to
mention growth due to the bribery scheme. Id. ¶¶ 136–37.
IFF’s acquisition of Frutarom closed in October 2018, after
which Frutarom became a wholly-owned subsidiary of IFF. On
August 5, 2019, IFF acknowledged that Frutarom had “made
inferences in Plaintiffs’ favor. See Lively v. WAFRA Inv. Advisory Grp., Inc.,
6 F.4th 293, 299 n.1 (2d Cir. 2021).
4
improper payments to representatives of a number of customers” in
Russia and Ukraine. Id. ¶ 211. The following day, IFF’s share price
dropped nearly 16%.
B. Procedural History
Plaintiffs sued IFF and two of its officers as well as Frutarom
and five of its officers. Plaintiffs alleged that Defendants’ materially
misleading misstatements violated Sections 10(b) and 20(a) of the
Exchange Act, 15 U.S.C. §§ 78j(b), 78t(a); and Securities and Exchange
Commission (“SEC”) Rule 10b-5, 17 C.F.R. § 240.10b-5. 2
The district court granted Defendants’ motion to dismiss for
failure to state a claim, finding that the complaint “fail[ed] to allege
with the requisite particularity that Frutarom’s misconduct continued
into the Class Period” and concluding that, in any case, the allegedly
false statements and omissions of material fact were not actionable or
material. Spec. App’x at 23–24. The district court also concluded
that “plaintiffs lack statutory standing under Section 10(b) to bring
claims against the Frutarom defendants for statements made about
Frutarom.” Id. at 78. Plaintiffs pursue their appeal against only
Frutarom and four of its officers. See Appellants’ Br. at 3.
2 Plaintiffs also asserted a claim under the Israeli Securities Law of
1968. The district court declined to exercise supplemental jurisdiction
over the claim, and Plaintiffs do not challenge that decision on appeal.
5
II. DISCUSSION
A. Standard of Review
“We review a district court’s dismissal of a complaint under
[Federal Rule of Civil Procedure] 12(b)(6) de novo.” Tongue v. Sanofi,
816 F.3d 199, 209 (2d Cir. 2016).
B. The Purchaser-Seller Rule
Neither Section 10(b) of the Exchange Act nor Rule 10b-5
provides an express private right of action, but the Supreme Court
has long held that one is implied. See, e.g., Superintendent of Ins. v.
Bankers Life & Cas. Co., 404 U.S. 6, 13 n.9 (1971). Recognizing the
advantages of limitations to this judicially created private right of
action, the Court in Blue Chip Stamps adopted the rule from Birnbaum
v. Newport Steel Corp., 193 F.2d 461 (2d Cir. 1952), which limited the
class of plaintiffs who could sue under Rule 10b-5 to those who
purchased or sold the securities about which a material misstatement
was made. See Blue Chip Stamps, 421 U.S. at 730 (noting that the
Birnbaum rule limited “the plaintiff class for purposes of a private
damage action under § 10(b) and Rule 10b-5 . . . to actual purchasers
and sellers of securities”); see also id. at 742 (explaining that the
Birnbaum rule “permits exclusion prior to trial of those plaintiffs who
were not themselves purchasers or sellers of the stock in question”);
id. at 747 (“The virtue of the Birnbaum rule, simply stated, in this
situation, is that it limits the class of plaintiffs to those who have at
least dealt in the security to which the prospectus, representation, or
omission relates.”).
The Court observed in Blue Chip Stamps that “[a]vailable
evidence from the texts of the [Securities Act of 1933 and the Exchange
6
Act] . . . supports the result reached by the Birnbaum court.” 3 Id. at
733. It also noted the fact that the purchaser-seller rule had gained
widespread acceptance across the country and that Congress had
“fail[ed] to reject Birnbaum’s reasonable interpretation of the wording
of § 10(b)” despite two attempts to amend the statute. Id. at 732–33;
see also id. at 731–32 (“[V]irtually all lower federal courts facing the
issue in the hundreds of reported cases presenting this question over
the past quarter century have reaffirmed Birnbaum’s conclusion that
the plaintiff class for purposes of § 10(b) and Rule 10b-5 private
damage actions is limited to purchasers and sellers of securities.”).
The Court expressed concern about “the danger of vexatious
litigation which could result from a widely expanded class of
plaintiffs under Rule 10b-5.” Id. at 740. And it warned against an
“endless case-by-case erosion” of the purchaser-seller rule by creating
exceptions, concluding that “such a shifting and highly fact-oriented
disposition” of statutory standing is not a “satisfactory basis for a rule
3 The Court noted, for example, that “[t]he wording of § 10(b)
directed at fraud ‘in connection with the purchase or sale’ of securities
stands in contrast with the parallel antifraud provision of the [Securities]
Act, § 17(a) . . . reaching fraud ‘in the offer or sale’ of securities.” Blue Chip
Stamps, 421 U.S. at 733–34 (citing 15 U.S.C. §§ 77q, 78j(b)). It also observed
that “[t]he principal express nonderivative private civil remedies, created
by Congress contemporaneously with the passage of § 10(b), for violations
of various provisions of the [Securities Act and the Exchange Act] are by
their terms expressly limited to purchasers or sellers of securities.” Id. at
735–36. In light of that observation, it concluded, “It would indeed be
anomalous to impute to Congress an intention to expand the plaintiff class
for a judicially implied cause of action beyond the bounds it delineated for
comparable express causes of action.” Id. at 736.
7
of liability imposed on the conduct of business transactions.” Id. at
755.
We have followed the purchaser-seller rule since first
articulating it in our 1952 Birnbaum decision. See, e.g., Abrahamson v.
Fleschner, 568 F.2d 862, 868 (2d Cir. 1977), abrogated on other grounds by
Transamerica Mortg. Advisors, Inc. (TAMA) v. Lewis, 444 U.S. 11 (1979);
Lawrence v. Cohn, 325 F.3d 141, 152–54 (2d Cir. 2003); Ontario Pub. Serv.
Emps. Union Pension Tr. Fund v. Nortel Networks Corp., 369 F.3d 27, 34
(2d Cir. 2004). And Blue Chip Stamps, which embraced Birnbaum
nearly five decades ago, continues to govern our analysis of statutory
standing for Section 10(b) claims.
C. Application
The purchaser-seller rule requires plaintiffs to have bought or
sold the security about which a misstatement was made in order to
have standing to sue under Section 10(b). Plaintiffs here lack
statutory standing to sue Frutarom based on alleged misstatements
about Frutarom because they bought shares of IFF, not Frutarom.
As IFF shareholders, Plaintiffs argue that they have standing
because there was a sufficiently “direct relationship” between
Frutarom’s misstatements about itself and the price of IFF’s shares.
Appellants’ Br. at 18. This argument is meritless.
First, judicially created private rights of action should be
construed narrowly. Cf. Alexander v. Sandoval, 532 U.S. 275, 287
(2001) (“Raising up causes of action where a statute has not created
them may be a proper function for common-law courts, but not for
8
federal tribunals.” (citation omitted)). 4 Plaintiffs urge us to read
Section 10(b) “flexibly to effectuate its remedial purposes.” Affiliated
Ute Citizens v. United States, 406 U.S. 128, 151 (1972) (quoting SEC v.
Cap. Gains Rsch. Bureau, 375 U.S. 180, 195 (1963)). 5 Blue Chip Stamps,
however, recognized the need to limit this judicially created private
right of action. See 421 U.S. at 749 (“We are dealing with a private
cause of action which has been judicially found to exist, and which
will have to be judicially delimited one way or another . . . .”). And
the Supreme Court has emphasized that “in analyzing . . . Rule 10b-5
. . . we must give narrow dimensions to a right of action Congress did
not authorize.” Janus Cap. Grp., Inc. v. First Derivative Traders,
564 U.S. 135, 142 (2011) (cleaned up); see also Stoneridge Inv. Partners,
LLC v. Sci.-Atlanta, Inc., 552 U.S. 148, 165 (2008) (“Concerns with the
judicial creation of a private cause of action caution against its
expansion. . . . Though it remains the law, the § 10(b) private right
should not be extended beyond its present boundaries.”). We thus
apply the purchaser-seller rule as adopted by the Supreme Court in
Blue Chip Stamps.
4 See also, e.g., Comcast Corp. v. Nat’l Ass’n of Afr. Am.-Owned Media,
140 S. Ct. 1009, 1015 (2020) (referencing Sandoval and Blue Chip Stamps in
narrowly construing a judicially created private cause of action in the civil
rights context); Stoneridge Inv. Partners, LLC v. Sci.-Atlanta, Inc., 552 U.S. 148,
167 (2008) (“This conclusion is consistent with the narrow dimensions we
must give to a right of action Congress did not authorize . . . .”).
5Plaintiffs also argue that Section 10(b)’s language prohibiting “any
person” from making material misstatements entitles them to have
standing to sue Frutarom. 15 U.S.C. § 78j. But this language speaks only
to who may be sued under the statute, not who may bring suit.
9
Second, adopting Plaintiffs’ “direct relationship” test for
standing would begin exactly the “endless case-by-case erosion” of
the purchaser-seller rule about which Blue Chip Stamps warned. 421
U.S. at 755. Under Plaintiffs’ “direct relationship” test, standing
would be a “shifting and highly fact-oriented” inquiry, id., requiring
courts to determine whether there was a sufficiently direct link
between one company’s misstatements and another company’s stock
price. For example, Plaintiffs point to joint press releases, IFF’s SEC
filings and investor presentations, and investment bank reports about
IFF’s acquisition of Frutarom to show a direct relationship between
Frutarom’s misstatements and IFF’s stock. See Appellants’ Br. at 24–
27. But Blue Chip Stamps cautioned against adding further
uncertainty to Section 10(b)’s “rule of liability imposed on the conduct
of business transactions.” 421 U.S. at 755; see also Fin. Sec. Assurance,
Inc. v. Stephens, Inc., 500 F.3d 1276, 1283 (11th Cir. 2007) (concluding
that the purchaser-seller requirement entails a “formal” and not a
“functional” inquiry because “the Court deliberately endorsed a
standing rule that would not be subject to ‘endless case-by-case
erosion’ by courts employing a functional analysis to every new
group of potential plaintiffs” (quoting Blue Chip Stamps, 421 U.S. at
755)).
Third, Plaintiffs’ reliance on dicta in Nortel is misplaced. In
Nortel, JDS Uniphase Corporation (“JDS”) sold one of its business
units to its largest customer, Nortel Networks Corporation (“Nortel”)
in exchange for Nortel stock. 369 F.3d at 29. Plaintiffs, who were
JDS shareholders, sued Nortel for allegedly misleading statements it
made about itself leading up to the transaction. Id. at 29–30. We
held that plaintiffs lacked standing because “[s]tockholders do not
have standing to sue under Section 10(b) and Rule 10b-5 when the
10
company whose stock they purchased is negatively impacted by the
material misstatement of another company, whose stock they do not
purchase.” Id. at 34.
Notwithstanding the holding of the case, Plaintiffs argue that
Nortel would have found standing if there had been a sufficiently
“direct relationship” between Nortel’s statements and JDS’s stock
price. They point to dicta noting that because “a merger creates a far
more significant relationship between two companies than does the
sale of a business unit,” “a potential merger might require a different
outcome.” 6 Id. But we said that was “a question that we leave for
another day and about which we express no opinion.” Id. For the
reasons explained above, we now answer that question by holding
that purchasers of a security of an acquiring company do not have
standing under Section 10(b) to sue the target company for alleged
misstatements the target company made about itself prior to the
merger between the two companies. 7
6 This dicta appears only in the context of distinguishing Nortel from
another case, Semerenko v. Cendant Corp., 223 F.3d 165 (3d Cir. 2000). Nortel
rejected Cendant as persuasive authority, so Plaintiffs’ attempt to invoke
Cendant to argue that other courts have allowed plaintiffs in their
circumstances to sue is unavailing. In any event, as we noted in Nortel,
Cendant did not discuss standing. See Nortel, 369 F.3d at 33 (“[T]he opinion
[in Cendant] never explicitly addressed the standing requirement of
Rule 10b-5, and this limits its persuasiveness. . . . [W]e do not agree with the
plaintiffs that it presents a compelling argument in favor of standing.”).
7 The concurrence states that our opinion “create[s] new law” and
urges that we should simply apply Nortel. Concurrence at 1. We
respectfully disagree. The “direct relationship” test in Nortel is dicta and,
more importantly, is inconsistent with Blue Chip Stamps, as explained
below. See infra at 12.
11
Nor does our subsequent decision In re NYSE Specialists
Securities Litigation, 503 F.3d 89 (2d Cir. 2007) (“NYSE Specialists”),
change this result. In that case, we clarified that Nortel did not
preclude purchasers of a stock from suing “underwriters, brokers,
bankers, and non-issuer sellers” under Rule 10b-5. Id. at 102. That
is entirely consistent with the purchaser-seller rule: Plaintiffs may be
able to sue entities other than the issuer of a security if those entities
made material misstatements about the security, as long as the
plaintiffs purchased or sold the securities about which the
misstatements were made. 8
In short, Section 10(b) standing does not depend on the
significance or directness of the relationship between two companies.
Rather, the question is whether the plaintiff bought or sold the
securities about which the misstatements were made. See Nortel, 369
F.3d at 32 (stating that the plaintiffs’ argument that they had standing
was “entirely at odds with the purchaser-seller requirement in Blue
Chip Stamps that ‘limits the class of plaintiffs to those who have at least
dealt in the security to which the prospectus, representation, or
omission relates.’” (quoting Blue Chip Stamps, 421 U.S. at 747)). Our
conclusion follows directly from our decision in Nortel. In both
cases, a company whose stock the plaintiffs did not purchase made
material misstatements about itself that negatively impacted another
company’s stock, which plaintiffs did purchase. The fact that this
case involved a merger instead of the sale of a business unit and that
8 NYSE Specialists cast the Nortel Court as holding that the
connection between Nortel’s false statements and plaintiffs’ purchase of
JDS stock was “too remote to sustain an action under Rule 10b-5.” NYSE
Specialists, 503 F.3d at 102. But NYSE Specialists did not purport to answer
the question left open in Nortel.
12
IFF incorporated some of Frutarom’s misstatements in its SEC filings
and investor presentations does not change the analysis here.
Plaintiffs did not purchase the securities about which misstatements
were made, so they did not have standing to sue under Section 10(b)
or Rule 10b-5. 9
III. CONCLUSION
For the reasons set forth above, the district court’s judgment is
affirmed.
9 Of course, this does not mean that a target company and its officers
are free to make material misstatements or omissions as long as the
company is acquired. In appropriate circumstances, the acquiring
company or its shareholders may have claims against the target company
and its officers under state law. See, e.g., Capax Discovery, Inc. v. AEP RSD
Invs., LLC, 285 F. Supp. 3d 579, 586–89, 593–95 (W.D.N.Y. 2018); Chase v.
Columbia Nat’l Corp., 832 F. Supp. 654, 660–63 (S.D.N.Y. 1993). Here, the
amended complaint alleges that IFF and Frutarom sued Defendant Yehudai
in Israel for making false statements that were “the same or substantially
similar to the false representations Plaintiffs allege in [their] complaint.”
Joint App’x at 26. Shareholders of the target company may also be able to
bring claims against the officers or the target company itself, if it continues
to exist as a separate legal entity. See, e.g., In re Stillwater Cap. Partners Inc.
Litig., 853 F. Supp. 2d 441, 458–59 (S.D.N.Y. 2012) (allowing investors in a
target company to sue the target company and its directors under Rule 10b-
5 for failure to disclose material facts related to a completed merger). And
nothing about the statutory standing of private plaintiffs forecloses the SEC
from pursuing enforcement actions. See 15 U.S.C. § 78u(d)(3) (giving the
SEC authority to bring an action to impose civil penalties).
13
21-1076
Menora Mivtachim Ins. Ltd. v. Frutarom Indus. Ltd.
PÉREZ, Circuit Judge, concurring in the judgment:
I respectfully submit that this Court need not have created new
law to dispose of this case and could have resolved the question
presented by applying this Circuit’s reasoning in Ontario Public
Service Employees Union Pension Trust Fund v. Nortel Networks Corp.,
369 F.3d 27 (2d Cir. 2004) (“Nortel”). Moreover, the majority opinion
fails to explain how its new “about which” standard is different from
the standard set forth in Blue Chip Stamps v. Manor Drug Stores, 421
U.S. 723, 747 (1975) and applied in Nortel. 1 Compare Op. at 3 (plaintiffs
must have purchased a security “about which a misstatement was
made” (emphasis added)), with Blue Chip Stamps, 421 U.S. at 747(plaintiffs must have “at least dealt in the security to which the
prospectus, representation, or omission relates” (emphasis added)).
Nonetheless, because following this Circuit’s long-standing
precedent leads to the same conclusion as the majority opinion, I
concur in the result.
1 The majority opinion and the parties describe the issue before us as
a statutory standing issue. To be clear, “[t]he Supreme Court has recently
clarified . . . that what has been called ‘statutory standing’ in fact is not a
standing issue, but simply a question of whether the particular plaintiff ‘has
a cause of action under the statute.’” Am. Psychiatric Ass’n v. Anthem Health
Plans, Inc., 821 F.3d 352, 359 (2d Cir. 2016) (quoting Lexmark Int’l, Inc. v.
Static Control Components, Inc., 572 U.S. 118, 128, 128 n.4 (2014)). In any
event, I believe that no confusion exists as to what this Court is being asked
to decide—that is, whether Plaintiffs can bring a claim under Section 10(b)
and Rule 10b-5 against Frutarom and its officers.
1
***
Approximately seventy years ago, this Court announced what
is known as the “purchaser-seller” rule. In Birnbaum v. Newport Steel
Corp., 193 F.2d 461 (2d Cir. 1952), plaintiff stockholders tried to sue
their company and its directors for breach of fiduciary duty by
corporate insiders resulting in fraud. Id. at 462–63. The plaintiffs
claimed that one of the directors made misrepresentations in
connection with his sale of stock. Id. at 462. This Court held that
Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange
Act”) 2 and Rule 10b-5 3 did not apply to these claims, as Section 10(b)
is “directed solely at [the] type of misrepresentation or fraudulent
practice usually associated with the sale or purchase of securities
rather than at fraudulent mismanagement of corporate affairs” and
Rule 10b-5 “extended protection only to the defrauded purchaser or
2 Section 10(b) states that “[i]t shall be unlawful for any person . . .
[t]o use or employ, in connection with the purchase or sale of any security[,]
. . . any manipulative or deceptive device or contrivance in contravention
of such rules and regulations as the [Securities and Exchange Commission
(“SEC”)] may prescribe as necessary or appropriate in the public interest or
for the protection of investors.” 15 U.S.C. § 78j(b).
3 SEC Rule 10b-5 states that “[i]t shall be unlawful for any person . . .
(a) [t]o employ any device, scheme, or artifice to defraud, (b) [t]o make any
untrue statement of a material fact or to omit to state a material fact
necessary in order to make the statements made, in the light of the
circumstances under which they were made, not misleading, or (c) [t]o
engage in any act, practice, or course of business which operates or would
operate as a fraud or deceit upon any person, in connection with the
purchase or sale of any security.” 17 C.F.R. § 240.10b-5.
2
seller.” Id. at 464. About twenty years later, the Supreme Court in
Blue Chip Stamps adopted the Birnbaum purchaser-seller rule. See 421
U.S. at 754–55. In doing so, the Supreme Court limited the class of
plaintiffs who could sue under Section 10(b) and Rule 10b-5 to those
who purchased or sold securities. See id. at 730 (noting that the
Birnbaum rule limited “the plaintiff class for purposes of a private
damage action under [Section] 10(b) and Rule 10b-5 . . . to actual
purchasers and sellers of securities”). Blue Chip Stamps explained
Birnbaum’s holding as limiting plaintiffs to those “who have at least
dealt in the security to which the prospectus, representation, or
omission relates.” Id. at 747.
Almost thirty years later, in Nortel, this Court clarified that
under the Birnbaum rule, even actual purchasers of stock “do not have
standing to sue . . . when the company whose stock they purchased is
negatively impacted by the material misstatement of another
company, whose stock they do not purchase.” 369 F.3d at 34. Nortel’s
reasoning, or what this concurrence refers to as “Nortel’s ‘direct
relationship’ test,” has been applied by this Court to reject certain
claims. 4 A precedential opinion from this Court, In re NYSE Specialists
4 The Nortel decision may be critiqued as discussing statutory
standing and whether a plaintiff has a cause of action as separate inquiries,
but any resulting confusion was later clarified in American Psychiatric Ass’n,
821 F.3d at 359 and Lexmark International, 572 U.S. at 128 n.4, as explained
supra note 1. Nortel’s distinction is of no moment here because its “direct
relationship” test is not inconsistent with Section 10(b) and Rule 10b-5’s
requirement that the fraudulent conduct be made in connection with the
purchase or sale of any security.
3
Securities Litigation, 503 F.3d 89 (2d Cir. 2007) (“NYSE Specialists”),
clarified Nortel’s holding as focusing on the significance of the
relationship between alleged misstatements and plaintiff’s purchase
of the securities. Id. at 102 (“In the particular circumstances of [Nortel],
the connection between Nortel Networks’ false statements about itself
and the plaintiff’s purchase of JDS Uniphase stock was too remote to
sustain an action under Rule 10b-5.”); see also Harbinger Cap. Partners
LLC v. Deere & Co., 632 F. App’x 653, 656 (2d Cir. 2015) (“Harbinger”)
(summary order) (concluding there was “no relevant difference
between Harbinger and the plaintiffs in Nortel Networks” and “the
connection between defendants’ omissions . . . and Harbinger’s
purchase of . . . stock was too remote to sustain an action under
[Section] 10(b) and Rule 10b-5” (internal quotation marks omitted)).
Each case involved a different set of facts. Blue Chip Stamps did
not involve stockholders, only a prospective offeree—neither a
purchaser nor a seller of stock. See 421 U.S. at 754. Nortel, like the case
before us but unlike Blue Chip Stamps, involved stockholders—actual
purchasers—whose stock was negatively impacted by the alleged
misstatements of a company in which they did not purchase stock.
See 369 F.3d at 29. But Nortel, unlike the case before us, did not involve
a merger, but rather the sale of a business unit. Id. at 34 (“[A] merger
creates a far more significant relationship between two companies
than does the sale of a business unit. Thus, while a potential merger
might require a different outcome, [that is] a question that we leave
for another day and about which we express no opinion . . . .”). Each
case required the reviewing court to make a policy choice informed
4
by statutory text and judicial precedent about who could bring claims
under Section 10(b) and Rule 10b-5.
Today, the majority opinion also makes a policy choice by
holding that the ability to bring a claim under Section 10(b) and Rule
10b-5 is limited to “purchasers or sellers of securities about which a
misstatement was made.” The majority opinion provides no
explanation as to why it is now necessary to alter the language that
the Supreme Court and this Circuit have used for decades since
Birnbaum. Nor does the majority opinion provide any clarifying
guidance on how litigants should apply the new standard, except to
say that the “about which” inquiry does not look to the connection, or
relation, between the false statements and the plaintiff’s purchase of
stock, as Nortel’s “direct relationship” test instructs. Op. at 10–12. The
majority opinion’s new standard only adds confusion, given that the
purchaser-seller requirement plainly instructs courts to evaluate
whether plaintiffs “have at least dealt in the security to which the
prospectus, representation, or omission relates.” Blue Chip Stamps,
421 U.S. at 747.
We could have decided this case on an application of Nortel and
NYSE Specialists (as in Harbinger), thus leaving open the question
Nortel raised about a potential merger, Op. at 11, and allowing for
future consideration of other fact patterns by this Court and the trial
courts when the outcome would be dispositive. See NYSE Specialists,
503 F.3d at 102 (clarifying Nortel); see also Harbinger, 632 F. App’x at
656. And as in Nortel and Harbinger, Plaintiffs cannot prevail on their
claim because, under the circumstances of the case, the relationship
5
between material misstatements about one company and Plaintiffs’
purchase of securities in another was “too remote to sustain an
action” under Section 10(b) and Rule 10b-5. NYSE Specialists, 503 F.3d
at 102; Harbinger, 632 F. App’x at 656.
I.
Applying Nortel’s “direct relationship” test, the question is
whether Plaintiffs have demonstrated a sufficient relationship
between Frutarom’s alleged misstatements and IFF’s stock price.
They have not.
First, Plaintiffs have not demonstrated a more direct
relationship than in Nortel—the bare minimum given that “the
connection between Nortel Networks’ false statements about itself
and the plaintiff’s purchase of JDS Uniphase stock was too remote to
sustain an action under Rule 10b-5.” NYSE Specialists, 503 F.3d at 102(emphasis added). Plaintiffs have not demonstrated that Frutarom’s
“representations had a . . . more direct relationship to the value of
[IFF’s] stock than Nortel’s statements did to the value of JDS’s stock.”
Nortel, 369 F.3d at 34. As the majority opinion correctly summarizes,
Plaintiffs point to joint IFF-Frutarom press releases and statements,
IFF’s SEC filings and investor presentations, and third-party reports
to establish this “direct relationship.” See Op. at 10. But these factors
were also present in Nortel. Nortel and JDS Uniphase together
announced the sale, see Nortel, 369 F.3d at 29 (“Nortel and JDS
confirmed that JDS was selling their laser business to Nortel in
exchange for $2.5 billion in Nortel stock and a promise of increased
fiber optic component purchases.”); Nortel based its expected growth
6
and revenue on its purchase from and business relationship with JDS
Uniphase, see id. (“Nortel publically [sic] indicated that it saw strong
demand for its fiber optics products and expected 30% growth in
revenue and earnings for 2001.”); and market analysts tied the value
of Nortel’s stock to JDS Uniphase, see id. (“[M]arket analysts
determined that this transaction would make it more likely that JDS
would meet its 2001 financial projections.”). Thus, as in Nortel, the
false statements about Frutarom and Plaintiffs’ purchase of IFF stock
were “too remote to sustain an action” under Section 10(b) and Rule
10b-5. NYSE Specialists, 503 F.3d at 102.
Second, Plaintiffs have not demonstrated how the IFF-
Frutarom merger itself created a more “direct relationship” between
Frutarom’s misstatements and IFF’s stock price than the sale of a
business unit in Nortel. By focusing on the form of the relationship
between IFF and Frutarom, Plaintiffs—as the majority opinion aptly
notes—rely too heavily on Nortel’s dicta. See Op. at 10–11. While
Nortel left open the possibility that “a potential merger might require
a different outcome,” 369 F.3d at 34, Plaintiffs fail to persuasively
explain how the IFF-Frutarom merger here pushed them over the
threshold.
For these reasons, I agree with my colleagues that we should
affirm the district court’s judgment.
II.
The majority opinion’s broad language about narrowing
judicially created implied private rights of action, see Op. at 8 (citing
7
Alexander v. Sandoval, 532 U.S. 275, 287 (2001)), is outside the scope of
the matter before us, and the relevant cited cases speak only to
concerns in the Section 10(b) and Rule 10b-5 context.
Sandoval’s counsel against the creation of implied private rights
of action, see 532 U.S. at 287 (“Raising up causes of action where a
statute has not created them may be a proper function for common-
law courts, but not for federal tribunals.” (citation omitted)), does not
apply here, where this Court is not asked to create a new right.
Indeed, the Supreme Court has already “implied a private cause of
action from the text and purpose of [Section] 10(b).” Matrixx
Initiatives, Inc. v. Siracusano, 563 U.S. 27, 37 (2011); see also Stoneridge
Inv. Partners, LLC v. Sci.-Atlanta, 552 U.S. 148, 165 (2008) (“[T]he
implied right of action . . . is now a prominent feature of federal
securities regulation.”). Thus, the task of courts, including this Court,
is to define the scope of this right, for “[w]e are dealing with a private
cause of action . . . which will have to be judicially delimited one way
or another unless and until Congress addresses the question.” Blue
Chip Stamps, 421 U.S. at 749 (emphasis added).
By contrast, Blue Chip Stamps, the leading case on the purchaser-
seller rule, does not provide support for any concern with judicially
created implied private rights of action. Quite simply, the Supreme
Court in Blue Chip Stamps concluded that Birnbaum’s purchaser-seller
rule made good policy sense and that nothing in the text of the statute
or rule prevented the Court from adopting that rule. See id. at 748–49
(“[W]e are not dealing here with any private right created by the
express language of [Section] 10(b) or of Rule 10b-5. No language in
8
either of those provisions speaks at all to the contours of a private
cause of action for their violation. However flexibly we may construe
the language of both provisions, nothing in such construction
militates against the Birnbaum rule.”); see also id. at 755 (noting the
“general adoption of the [Birnbaum] rule by other federal courts in the
25 years since it was announced, and the consistency of the rule with
the statutes involved and their legislative history” as grounds for its
adoption).
The other cases the majority opinion cites narrowly concern
private plaintiffs suing under Section 10(b) and Rule 10b-5. 5 See Janus
5 The majority opinion also cites a civil rights case interpreting the
private right of action under 42 U.S.C. § 1981. See Op. at 8 n.4 (citing Comcast
Corp. v. Nat’l Ass’n of Afr. Am.-Owned Media, 140 S. Ct. 1009, 1015 (2020)).
But that case does not support the majority opinion’s proposition. In
Comcast Corp., the Supreme Court relied on the traditional tools of statutory
interpretation to reach its holding, not on any guiding principle on
narrowly construing judicially created implied private rights of action. See
140 S. Ct. at 1013 (looking to “th[e] particular statute’s text and history” to
conclude that a § 1981 plaintiff must establish but-for causation); id. at 1014
(relying on “clues from the statute’s text, its history, and [Supreme Court]
precedent” to reach its conclusion); id. at 1019 (explaining that “[a]ll the
traditional tools of statutory interpretation persuade [the Supreme Court]
that § 1981 follows the usual rules, not any exception”). Indeed, Comcast
Corp. references Sandoval to provide historical context for the judicial
creation of implied private rights of action. See id. at 1015 (citing Sandoval,
532 U.S. at 286–87). Further, Comcast Corp. references Blue Chip Stamps for
the undisputed proposition that, when defining the scope of such rights,
the Supreme Court has looked to other parts of the relevant statutory text,
“insist[ing] on legal elements at least as demanding as those Congress
9
Cap. Grp., Inc. v. First Derivative Traders, 564 U.S. 135, 142 (2011)
(explaining that “in analyzing . . . Rule 10b-5 . . . we must give narrow
dimensions to a right of action Congress did not authorize” (cleaned
up)); Stoneridge Inv. Partners, 552 U.S. at 164 (noting the “history of the
[Section] 10(b) private right and the careful approach the Court has
taken before proceeding without congressional direction”); id. at 165(“Concerns with the judicial creation of a private cause of action
caution against its expansion. The decision to extend the cause of
action is for Congress, not for us. Though it remains the law, the
[Section] 10(b) private right should not be extended beyond its
present boundaries.”).
Nevertheless, “caution against [the] expansion” of a judicially
created implied private right of action does not require courts to limit
the scope of such a right as a matter of course. Stoneridge Inv. Partners,
552 U.S. at 165. Rather, we must focus our task on defining the scope
of these rights in light of the statutory text. See Blue Chip Stamps, 421
U.S. at 755–56 (Powell, J., concurring) (writing separately to
“emphasize the significance of . . . the language of [Section] 10(b) and
Rule 10b-5” and explaining that “[t]he starting point in every case
involving construction of a statute is the language itself”).
specified for analogous causes of action actually found in the statutory
text.” Id. (citing Blue Chip Stamps, 421 U.S. at 736); see also id. (noting that
“[t]he larger structure and history of the Civil Rights Act of 1866 provide
further clues” in support of its interpretation).
10
Any views the majority opinion expresses regarding implied
private rights of actions generally are dicta and go beyond the
question before us.
III.
It is important to acknowledge that today’s holding is an
example of judicial policymaking.
Of course, the Supreme Court has endorsed judicial
policymaking in the securities fraud context. See Blue Chip Stamps, 421
U.S. at 749 (“Given the peculiar blend of legislative, administrative,
and judicial history which now surrounds Rule 10b-5, we believe that
practical factors . . . are entitled to a good deal of weight.”); see also
Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 84 (2006)
(“Unlike the Birnbaum court, which relied on Rule 10b-5’s text in
crafting its purchaser-seller limitation, th[e] [Supreme] Court in Blue
Chip Stamps relied chiefly, and candidly, on policy considerations in
adopting that limitation.” (internal quotation marks omitted)).
Indeed, this Court has previously relied on these “policy
considerations,” among other factors, to define the scope of this
private right of action. See Nortel, 369 F.3d at 31 (“When we deal with
private actions under Rule 10b-5, we deal with a judicial oak which
has grown from little more than a legislative acorn. It is therefore
proper that we consider . . . what may be described as policy
considerations when we come to flesh out the portions of the law with
respect to which neither the congressional enactment nor the
11
administrative regulations offer conclusive guidance.” (cleaned up)
(quoting Blue Chip Stamps, 421 U.S. at 737)); see also id. at 33.
By rejecting Nortel’s “direct relationship” test here in favor of
an “about which” standard, the majority opinion similarly reflects a
policy choice. 6 The advantages of formalism in the law of business
transactions are sensibly described in the majority opinion, see Op. at
10, but, as noted in Blue Chip Stamps, there are disadvantages to such
rigidity, see 421 U.S. at 743 (“The Birnbaum rule undoubtedly excludes
plaintiffs who have in fact been damaged by violations of Rule 10b-5,
and to that extent it is undesirable. But it also separates in a readily
demonstrable manner the group of plaintiffs who actually purchased
or actually sold . . . . [a]nd this fact is one of its advantages.”). Openly
acknowledging the value judgments behind judicial decisions
6 Indeed, the majority opinion’s statement that Nortel’s “direct
relationship” test is inconsistent with Blue Chip Stamps, see Op. at 11 n.7,
overlooks the policy choices that courts have had to make to interpret
standing under Section 10(b) and Rule 10b-5. In any event, Nortel’s “direct
relationship” test, see NYSE Specialists, 503 F.3d at 102, is consistent with
Blue Chip Stamps. Blue Chip Stamps did not define fully the scope of the
purchaser-seller rule, for it involved neither a purchaser nor seller of
securities. See supra at 3. Nortel itself recognized the limits of any
straightforward application of Blue Chip Stamps’s purchaser-seller rule and
rejected its plaintiffs’ argument by invoking legislative intent and policy
considerations. See 369 F.3d at 32–33. So, Blue Chip Stamps did not
predetermine the outcome of this case, nor did it foreclose a “direct
relationship” test. Nortel’s requirement—that the statements at issue have
a sufficient connection to the plaintiff’s purchase of securities—is plainly
consistent with the elements necessary to bring a claim under Section 10(b)
and Rule 10b-5.
12
benefits all stakeholders to the judicial process, including the other
branches of government and the public.
Given the Court’s decision today, Congress can choose to ratify
the majority’s opinion if it has the inclination and occasion to do so.
See Stoneridge Inv. Partners, 552 U.S. at 166 (“It is appropriate for us to
assume that when [the Private Securities Litigation Reform Act
(“PSLRA”)] was enacted, Congress accepted the [Section] 10(b)
private cause of action as then defined but chose to extend it no
further.”); id. at 176 n.11 (Stevens, J., dissenting) (“The Court does
concede that Congress has now ratified the private cause of action in
the PSLRA.”). And Congress also can amend the Exchange Act, if in
its view, this Court erred today.
13