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9 F.3d 405

Docket No. 93-2154.

Kaplan v. Utilicorp United, Inc.

Fifth Circuit Court of Appeals

Decided Dec. 20, 1993.

Fifth Circuit Court of Appeals · decided 1993-12-20

5 counsel of record

Key passage — most relied on by later courts

“To support its contention that the individual defendants’ scienter cannot be imputed to NetSolve because the defendants plotted to harm the company, Netsolve cites [Kaplan]. In Kaplan , the Circuit dismissed a securities fraud complaint against the company, because the two individual defendants had acted to steal money directly from the company for their personal use. See id. (“[T]he knowledge and actions of employees acting adversely to the corporate employer cannot be imputed to the corporation.”). Here,' however, the plaintiffs allege the individual defendants acted to artificially raise Net-Solve’s stock price, not directly steal money from its coffers. An artificial raise in the stock price, in most cases, benefits the company. In addition, the vast majority of securities fraud cases (in this Court, at least) allege that individual defendants misled the market to artificially raise their company’s stock price, and then sold their shares. If the Court were to accept the defendants’ argument, such causes of action would be eliminated. While this is an appealing prospect in terms of the Court’s workload, it is not a valid application of the federal securities laws. This ground for dismissal is overruled.”

quoted by 1 later decision, including Lee v. Active Power, Inc.

“Silence, or omission to state a fact, is proscribed only in certain situations: first, where the defendant has a duty to speak, secondly, where the defendant has revealed some relevant material information even though he had no duty (i.e., a defendant may not deal in half-truths). In determining whether the duty to speak arises, we consider the relationship between the plaintiff and defendant, the parties’ relative access to the information to be disclosed, the benefit derived by the defendant from the purchase or sale, defendant’s awareness of plaintiffs reliance on defendant in making its investment decisions, and defendant’s role in initiating the purchase or sale.”

quoted by 1 later decision, including 610 F. Supp. 2d 600 - In Re Enron Corp. Secur., Deriv. &" Erisa" Lit.

Relies on Blue Chip Stamps v. Manor Drug Stores · Nogueras v. Puerto Rico International Airlines, Inc. · Pharo v. Smith

Good law ✅— No negative treatment on recordhow we know

Decided 1993-12-20

How this case has been cited

Cited by 18 later decisions — most recently August 2017

4 federal appellate · 1 district ·

120199320002010decided

Later decisions citing this case, by decade. The current decade is in progress, and our corpus holds fewer opinions from the most recent years, so the latest bars are undercounted — not a real decline.

View the full empirical analysis of this case →

¶1*406Franci N. Crane, Susman Godfrey, Houston, TX, Edward Grossman, Bernstein, Li-towitz, Berger & Grossman, New York City, for plaintiffs-appellants.

¶2Mark E. Lowes, Bracewell & Patterson, Houston, TX, Michael J. Thompson, Kansas City, MO, for UtiliCorp United, Inc., Aquila Energy Corp., et al.

¶3Robert A. Plessala, Grant Cook, Beverly D. Mason, Keck, Mahin & Cate, Houston, TX, for Marc Petersen.

¶4Richard D. Stegall, pro se.

¶5Vincent F. Marquez, pro se.

¶6Before GOLDBERG, JONES and DUHÉ, Circuit Judges.

¶7DUHÉ, Circuit Judge:

¶8BACKGROUND

¶9Martin and Selma Kaplan and Stanley Heineman, claiming to represent a class of persons who purchased UtiliCorp United, Inc. (“UtiliCorp”) stock, filed this securities fraud case. The following were named as defendants: UtiliCorp; Richard Green (“Green”), Chairman of the Board, President, and Chief Executive Officer of UtiliCorp; Aquila Energy Corporation (“Aquila Energy”), a wholly owned subsidiary of UtiliCorp; Aquila Energy Resources Corporation (“Aquila”), a wholly owned subsidiary of Aquila Energy; Marc Petersen (“Petersen”), President of Aquila; and Richard Stegall (“Stegall”) and Vincent Marquez, Jr. (“Marquez”), two former Vice-Presidents of Aquila.

¶10The facts of the case are simple. Stegall and Marquez, misappropriated millions of dollars from Aquila, a second-tier subsidiary of UtiliCorp. The plaintiffs complain that UtiliCorp commenced an investigation into the activities of Marquez and Stegall in January 1992, but did not publicly announce the material misappropriation until after the investigation had been concluded in June 1992. The plaintiffs contend that because the misappropriation at Aquila was not disclosed until June, certain UtiliCorp financial statements were misleading.

¶11The complaint contains three counts of securities fraud. The first count alleges that all defendants violated Section 10(b) of the Securities Exchange Act of 1934 (the “Act”) and Rule 10b-5 promulgated thereunder. The second count is brought against defendant Green for violation of Section 20(a) of the Act. The last count is brought against all of the defendants for common-law fraud and deceit.

¶12*407The district court dismissed counts one and two with prejudice for failure to state a claim upon which relief could be granted. Having dismissed the federal claims, the court dismissed the pendent state law claims without prejudice. The court also denied as moot the plaintiffs’ motion for certification of the class.

¶13The plaintiffs appealed the district court’s dismissal of their federal claims. After the appeal was filed, Martin and Selma Kaplan withdrew as named plaintiffs. At oral argument, counsel for UtiliCorp argued that Stanley Heineman, the only remaining named plaintiff, lacked standing to bring this suit.

¶14DISCUSSION

¶15Because there was no class certification, we treat this case as one brought by the named plaintiffs individually, not as members of a class. Pharo v. Smith, 621 F.2d 656, 664 (5th Cir.1980).

¶16A. Section 10(b) and Rule 10b-5

¶171. Standing

¶18Heineman’s first complaint is that all of the defendants violated Section 10(b) and Rule 10b-5. Standing to bring a private damages action under Section 10(b) and Rule 10b-5 is limited to persons who are defrauded in connection with the purchase or sale of securities. Blue Chip Stamps v. Manor Drag Stores, 421 U.S. 723, 732, 95 S.Ct. 1917, 1923, 44 L.Ed.2d 539 (1975). This limitation is satisfied by showing “a nexus between the defendant’s actions and plaintiffs purchase or sale.” First Va. Bankshares v. Benson, 559 F.2d 1307, 1315 (5th Cir.1977), cert. denied, 435 U.S. 952, 98 S.Ct. 1580, 55 L.Ed.2d 802 (1978).

¶19There is no nexus between the alleged actions of defendants UtiliCorp, Aquila Energy, Aquila, and Green and plaintiff Heineman because Heineman purchased stock before the alleged fraud began. Heineman purchased his UtiliCorp stock on December 27,1991. UtiliCorp, Aquila, Aquila Energy, and Green could not have committed fraud by failing to disclose the misappropriations until after they became aware of them. According to Heineman’s allegations, Utili-Corp, Aquila, Aquila Energy, and Green became aware of material misappropriations in January 1992.1 Although the misappropriations began before Heineman purchased his stock, the knowledge and actions of employees acting adversely to the corporate employer cannot be imputed to the corporation. See, e.g., Southern Farm Bureau Casualty Ins. Co. v. Allen, 388 F.2d 126, 131 (5th Cir.1967); Crisp v. Southwest Bancshares Leasing Co., 586 S.W.2d 610 (Tex.Civ.App.—Amarillo 1979, writ refd n.r.e.). Therefore, Heineman has no standing to sue UtiliCorp, Aquila, Aquila Energy, or Green. We need not address Heineman’s arguments on appeal regarding these defendants.

¶202. Dismissal for failure to state a claim

¶21The district court properly concluded that the Section 10(b) claim against Petersen, Marquez, and Stegall2 must be dismissed for failure to state a claim upon which relief could be granted. To bring a successful cause of action, Heineman must prove, among other things, that the defendants misstated or failed to state a material fact. Petersen, Marquez, and Stegall could not be held liable for making false statements to Heineman because they were not responsible for the UtiliCorp financial statements, which are the subject of this action.

¶22Furthermore, they can not be held liable for failing to state a material fact. Liability under Rule 10b-5 for nondisclosure arises if there is a duty to speak. See, e.g., First Va. Bankshares, 559 F.2d at 1314. In determining whether there is such a duty, we consider the following factors: (1) the relationship between the plaintiff and defendant; (2) the defendant’s access to the information *408to be disclosed; (3) the benefit derived by the defendant from the purchase or sale; (4) defendant’s awareness of plaintiff’s reliance on defendant in making its investment decisions; and (5) the defendant’s role in initiating the purchase or sale. Id.After considering these factors, we find that the connection between the actions of the Aquila officers and the sale of UtiliCorp stock is too remote to impose a duty to disclose.

¶23B. Section 20

¶24Heineman’s next complaint is that defendant Green is liable as a “controlling person” under Section 20 of the Act. Because Heineman has no standing to bring a primary violation against any of the defendants as discussed above, Heineman has no standing to sue Green as a controlling person under Section 20.

¶25CONCLUSION

¶26For the foregoing reasons, the order of the district court is AFFIRMED.

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