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The only standing limitation recognized by the Supreme Court with respect to § 10(b) of the Securities Exchange Act of 1934 damage actions is the requirement that the plaintiff be a purchaser or seller of a security.
Robert M. Deutschman alleged that in 1986 and part of 1987 Beneficial Corporation’s (Beneficial) insurance division suffered severe losses which had an adverse impact on Beneficial's financial condition; Finn M. W. Caspersen, Beneficial's Chairman and Chief Executive Officer, and Andrew C. Halvorsen, its Chief Financial Officer held stock and stock options in Beneficial which would be adversely affected by a decline in the market price of that stock; that disclosures were made about the losses in Beneficial's insurance division which caused declines in that market price; that in order to prevent further declines Caspersen and Halvorsen, on Beneficial's behalf, issued statements about the problems in the insurance division, which they knew to be false and misleading, to the effect that those problems were behind it and were covered by sufficient reserves; that these misleading statements placed an artificial floor under the market price of Beneficial stock; that purchasers of Beneficial stock and purchasers of call options in Beneficial stock made purchases at prices which were artificially inflated by the market's reliance on defendants' misstatements, and that both purchasers of Beneficial stock and purchasers of Beneficial call options suffered losses as a consequence. Beneficial stock is traded on the New York Stock Exchange and on other national stock exchanges. Options on Beneficial stock are traded on the Pacific Stock Exchange. The complaint did not allege that Beneficial, Caspersen, or Halvorsen, during the time period complained of, traded in Beneficial stock or in put or call options on Beneficial stock. It alleged that Deutschman suffered losses when, upon disclosure of the facts, call options on Beneficial's stock that he had purchased in reliance on the market price created by defendants' misstatements, became worthless. It did not allege that Deutschman purchased Beneficial stock. The district court held that option traders who suffered losses as a result of intentional misstatements by the management of a corporation, the stock of which is the subject of those options, lack standing to assert a cause of action for damages under section 10(b) of the 1934 Act, 15 U.S.C. § 78j(b), and Rule 10b-5 of the Securities and Exchange Commission, 17 C.F.R. § 240.10b-5. The court reasoned that in the absence of an allegation that Deutschman bought or sold Beneficial stock, or of an allegation that the defendants bought or sold options, there was no duty owed to him to refrain even from affirmative misstatements which would affect the market price of Beneficial stock. Deutschman appealed from a Fed. R. Civ. P. 12(b)(6) dismissal of his amended class action complaint against Beneficial, Caspersen and Halvorsen.
Did the district court err in holding that the purchaser of a call option lacks standing to sue under the Securities Exchange Act, and is thus not an appropriate class representative for purchasers of Beneficial stock?
The court held that Deutschman’s complaint appeared to satisfy every requirement of a § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.S. § 78j(b) damage action which dealt with affirmative misrepresentations which affected the market price of a security. The court was not willing to construe § 10(b) as inapplicable to option contracts on the basis of speculation about the relationship between option contracts, market liquidity, and capital formation. The court held that plaintiff had standing as a purchaser of an option contract to seek damages under § 10(b) for the affirmative misrepresentation defendants allegedly made. The court reversed the dismissal of plaintiff's § 10(b) and pendent law claim.