This action arises from defendant McKesson’s sale of the stock of its wholly owned subsidiary, C.F. Mueller Corporation, a leading producer of pasta, to plaintiff CPC International. Plaintiff has sued McKesson Corporation,
The Appellate Division modified and granted the motions to dismiss in their entirety with the exception of the causes of action alleging breach of warranty and common-law fraud against McKesson. The Appellate Division added that it agreed with Supreme Court’s denial of Blattman’s and Merrick’s motions to dismiss for lack of personal jurisdiction.
This appeal presents four questions: (1) whether plaintiff has a cause of action for violations of section 352-c of the Martin Act; (2) whether plaintiff has a cause of action for
The Complaint
The crux of plaintiff’s complaint is that the defendants deliberately and fraudulently prepared false projections of revenues, operating expenses and profits of Mueller and intentionally withheld other accurate projections for the purpose of selling Mueller for more than it was worth. Plaintiff alleges that, as part of a review of Mueller’s expected economic performance in early June 1983, Mueller’s executives made a presentation to McKesson’s executives predicting a sharp decline in Mueller’s profitability; that following this prediction the individual defendants and others attended a conference on June 27 and 28, 1983 at the New York offices of Morgan Stanley to formulate a program for the sale of Mueller at an inflated price; that at McKesson’s and Blattman’s direction defendants Merrick and Brounstein, a Mueller vice-president, and others, from June 30, 1983 through July 1, 1983, created fictitious projections overstating Mueller’s business prospects which they knew were at odds with the unfavorable projections of future business prepared by Mueller’s executives approximately two weeks earlier; that Morgan Stanley knowingly incorporated such fictitious projections into a confidential addendum to a memorandum offering Mueller to interested buyers; that Morgan Stanley distributed the offering memorandum and the confidential addendum containing these overstated projections in soliciting bids from CPC and others for purchase of the Mueller stock; that although the offering memorandum prepared by Morgan Stanley contained a disclaimer of any express or implied warranties, it also contained the statement, "Morgan Stanley believe[s] that the financial and other information contained herein is accurate”; that the confidential addendum prepared by Morgan Stanley stated that the projections were "based on estimates of Mueller’s management, which in the opinion of management, are reasonable in light of historical results and present trends”; that the defendants concealed from plaintiff the facts that the projections incorporated in the confidential memorandum had been especially prepared for use by Morgan Stanley and
The Holdings
For reasons which will appear, the court holds in part I that there is no implied private cause of action for violations of the antifraud provisions of the Martin Act (General Business Law § 352-c); in part II that there is no implied private cause of action under section 17 (a) of the Securities Act of 1933 (15 USC § 77q); and in part III that plaintiff has sufficiently pleaded a cause of action for common-law fraud. Additionally, in part IV, we reject Blattman and Merrick’s argument that we should affirm the dismissal of the complaint as to them on the alternative ground that New York courts do not have personal jurisdiction. The order of the Appellate Division should be modified accordingly.
I
General Business Law § 352-c prohibits various fraudulent and deceitful practices in the distribution, exchange, sale and purchase of securities.
The rules for determining when a violation of a statutory provision gives rise to an implied private cause of action for damages have evolved in the decisional law of this State over more than 100 years. (See, e.g., Atkin v Hill, Darlington & Grimm,
Recently, in Burns Jackson Miller Summit & Spitzer v Lindner (
The majority of this court holds that an implied private
Judge Simons and I have a different view. We believe that the underlying purpose of section 352-c is not to grant various powers to the Attorney-General. Rather, as we see it, the ultimate aim to be achieved by the statute is the deterrence of fraudulent practices in the offering and sale of securities and the protection of investors damaged by such practices (see, People v Lexington Sixty-First Assocs.,
Inasmuch as the court does now decide that the particular purpose of section 352-c is the creation of an enforcement mechanism within which a private action is not implied, further elaboration of our respective positions on the application of settled rules to this specific statute is unnecessary.
Notwithstanding these differences, the court unanimously recognizes that there are reasons which suggest that the Legislature consider the merits of a statutorily expressed cause of action. By reducing the expectancy of reaping illicit profits from fraudulent securities practices, a private cause of action would act as a further deterrent (see, Fratt v Robinson, 203 F2d 627, 632 [9th Cir]; Mem of Attorney-General in
II
To determine if plaintiff has a cause of action for alleged violations of section 17 (a) of the Securities Act of 1933 (15 USC § 77q),
In discussing whether section 17 (a) gives rise to a private
Until the late 1970’s, the prevailing view was that a private cause of action existed. The Second, Fourth, Seventh, and Ninth Circuit Courts of Appeals so held (see, Stephenson v Calpine Conifers II, 652 F2d 808, 815 [9th Cir]; Lincoln Natl. Bank v Herber, 604 F2d 1038, 1040, n 2 [7th Cir]; Kirshner v United States, 603 F2d 234, 241 [2d Cir], cert denied sub nom. Goldberg v Kirshner,
In view of recent decisions of the Supreme Court, many courts have now recognized that section 17 (a) and section 10 (b) are not nearly identical as previously assumed
With this background, we turn to an analysis of section 17 (a), applying the four-part test established by the Supreme Court in Cort v Ash (
As to the first Cort v Ash inquiry — whether plaintiff is " 'one of the class for whose especial benefit the statute was enacted’ ” — we note that there is a split of authority even among those courts that hold there is no private cause of action (compare, Kimmel v Peterson,
A more difficult analytical problem is presented by the second Cort v Ash inquiry: whether there is "any indication of legislative intent, explicit or implicit, either to create such a remedy or to deny one” under section 17 (a). The legislative history and the structure of the Securities Act of 1933, however, require us to conclude that Congress did not intend to do so.
We find the legislative history of section 17 (a) particularly persuasive. There are explicit indications that it was not intended to create a private cause of action. The House Committee report specified sections 11 and 12, but not section 17 (a), as the sections creating and defining the civil liabilities under the Securities Act (see, HR Rep No. 85, 73d Cong, 1st Sess 9-10; see also, Landry v All Am. Assur. Co., supra, at 389, n 34; Securities & Exch. Commn. v Texas Gulf Sulphur Co., 401 F2d 833, 867 [2d Cir, Friendly, J., concurring]). The report explained that the reason for limiting the civil remedies was that "[t]o impose greater responsibility * * * would unnecessarily restrain the conscientious administration of honest business with no compensating advantage to the public” (HR Rep No. 85, 73d Cong, 1st Sess 9-10; see, Citizens State Bank v Continental Assur. Co.,
Moreover, the structure of the Securities Act of 1933, when analyzed, confirms our conclusion that Congress did not intend to provide a private cause of action under section 17 (a). The Securities Act contains express civil remedies (see, §§ 11, 12 [15 USC §§ 77k, 77/]) and, from the inclusion of these remedies in specific sections, it can be logically inferred that if Congress had intended that there also should be a private cause of action under section 17 (a), it would have said so (see, Passenger Corp. v Passengers Assn.,
Plaintiff argues, however, that it follows from the Supreme Court’s decision in Herman & MacLean v Huddleston (
In Herman & MacLean v Huddleston (supra, at 381-383), the Supreme Court noted that while section 10 (b) and section 11 have some overlap, they "address different types of wrongdoing” and "a § 10 (b) plaintiff carries a heavier burden than a § 11 plaintiff”. It concluded that since section 11 and section 10 (b) have different purposes and describe different substantive wrongs, it could not logically be inferred that by providing for express civil remedies in one section Congress must
Plaintiff also argues that because Congress made an extensive overhaul of the securities laws in 1975 and left intact the rule from a nearly unanimous line of judicial decisions permitting plaintiffs to sue under section 17 (a), that by its silence, it approved the rule (see, Herman & MacLean v Huddleston, supra, at 384-386). Again, we disagree.
When Congress amended the securities laws in 1975 there were at least 11 recent cases precluding a cause of action under section 17 (a).
Likewise, the third Cort v Ash factor — whether implying a private cause of action would be consistent with the underlying purposes of the legislative scheme — suggests that no cause of action was intended. Because Congress has explicitly given express civil remedies in Other parts of the statute with precise procedural requirements and safeguards, it would be anomalous to find that Congress intended, at the same time, to grant a civil remedy under section 17 (a) which has no such procedural protections, thereby encouraging plaintiffs to bypass the other sections (see, Landry v All Am. Assur. Co., supra, at 390).
Finally, under the fourth Cort v Ash factor, a private cause of action will not be implied under a Federal statute for matters traditionally relegated solely to State courts. Although this prohibition clearly does not apply to matters within the scope of section 17 (a), application of the second and third factors is, nevertheless, sufficient to compel the result reached here (see, In re Washington Pub. Power Supply Sys. Sec. Litig., supra).
Since we agree with the Appellate Division that there is no cognizable civil cause of action under section 17 (a), questions pertaining to whether the actions alleged constitute a violation of that statute need not be addressed.
Ill
We now turn to plaintiff’s claim for common-law fraud against Morgan Stanley and the individual defendants. Applying the rule that on a motion to dismiss (CPLR 3211 [a] [7]), "the allegations of a complaint, supplemented by a plaintiffs additional submissions, if any, must be given their most favorable intendment” (Arrington v New York Times Co., 55
In order to state a cause of action for common-law fraud, it is sufficient for plaintiff to allege that "defendant knowingly uttered a falsehood intending to deprive the plaintiff of a benefit and that the plaintiff was thereby deceived and damaged” (Channel Master Corp. v Aluminum Ltd. Sales, 4 NY2d 403, 406-407).
Concededly, the complaint alleges that Morgan Stanley and the individual defendants knowingly participated in the preparation and distribution of projections which materially misrepresented Mueller’s financial condition. The dispute centers on (1) whether plaintiff reasonably relied on these projections or whether, on the other hand, plaintiff relied solely on the contractual warranties made by McKesson in the purchase and sale agreement, and (2) if plaintiff relied only on the contractual warranties given by McKesson, whether that fact absolves the other defendants from liability. Morgan Stanley and the individual defendants argue, and the lower courts agree, that the complaint and the evidentiary submissions show that plaintiff, in contracting to purchase Mueller, relied solely on the warranties, and that the contractual warranties were not contemplated at the time of Morgan Stanley’s and the individual defendants’ participation in the preparation and distribution of the false financial projections. Thus, the Appellate Division determined that these defendants, "like other agents, can be held liable for aiding and abetting their principal in the commission of a fraud, but not when the fraud committed is different from the one they may have believed they were participating in” (
The complaint includes allegations that the defendants knowingly engaged in a scheme to provide "substantial assistance” to McKesson in presenting an "enhanced financial picture” of Mueller in order to "raise the price that McKesson would ultimately receive for the Mueller stock”; that in furtherance of this scheme, Morgan Stanley and the individual defendants prepared and distributed a set of false and
Given its "most favorable intendment”, the complaint, read as a whole, describes a scheme — involving all the defendants — devised and executed for the specific purpose of defrauding the prospective purchaser by selling it the Mueller stock for more than it was worth. Whether the giving of the contractual warranties was part of this scheme, as plaintiff claims, is a factual question which cannot be determined at the pleading stage. Moreover, even if the warranties were not contemplated as part of the original fraudulent scheme, but given solely as a result of McKesson’s unilateral decision, Morgan Stanley and the individual defendants, as parties to the underlying fraudulent conspiracy, could, nonetheless, be liable for McKesson’s independent actions done in furtherance of it (see, Dewey v Moyer,
Finally, we reject the contention that the financial projections were mere opinions which could not be the basis for common-law fraud (
IV
We find no merit in the argument of defendants Blattman and Merrick that their motions to dismiss for lack of personal jurisdiction (CPLR 3211 [a] [8]) should have been granted. In the complaint, defendants Blattman and Merrick are charged with tortious actions which, if established, would
We reject defendants’ contentions that, because all the acts within the State were committed while they were on the business of their respective employers, the acts did not subject them to personal jurisdiction under the "fiduciary shield doctrine”. This doctrine, which has been applied as an equitable rule in some Federal courts (see, e.g., CutCo Indus. v Naughton, 806 F2d 361 [2d Cir]; Marine Midland Bank v Miller, 664 F2d 899 [2d Cir]; Wilshire Oil Co. v Riffe, 409 F2d 1277 [10th Cir]; Koenig, Personal Jurisdiction and the Corporate Employee: Minimum Contacts Meet the Fiduciary Shield, 38 Stan L Rev 813, 819-828) and by some of our appellate divisions (see, Kreutter v McFadden Oil Corp.,
This court has not adopted the fiduciary shield doctrine as the law in this State. We note that when the doctrine is applied, it is on the basis of the particular facts of the case and in consideration of the equities (see, Marine Midland Bank v Miller, supra, at 902-903). Whether we would find the rule applicable in other circumstances we do not now decide. Suffice to say, we find it inapplicable, where, as here, there is
The order of the Appellate Division should be modified, with costs, in accordance herewith, and, as modified, affirmed.
Order insofar as appealed from modified, with costs to plaintiff, by reinstating the cause of action for common-law fraud as against defendant Morgan Stanley & Co., Incorporated and the individual defendants, and, as so modified, affirmed. Opinion by Judge Hancock, Jr. Chief Judge Wachtler and Judges Simons, Alexander, Titone and Bellacosa concur; Judges Simons and Hancock, Jr., dissenting in part and voting to further modify by reinstating the cause of action alleging violations of section 352-c of the Martin Act for reasons incorporated in part "I” of the opinion; Judge Kaye taking no part.
Notes
. Plaintiff has also sued McKesson’s wholly owned subsidiary Corporation of America which held the Mueller stock and was, along with McKesson Corporation, one of the selling parties. For the purpose of this opinion the name McKesson will be used to refer to both McKesson Corporation and Corporation of America.
. The order appealed from is final as to Morgan Stanley and the individual defendants since the action was finally determined as to them, and because they are separate and distinct entities from McKesson (see, We’re Assocs. Co. v Cohen Stracher & Bloom,
. Section 352-c (1), in pertinent part, prohibits and makes it illegal for any persons, agent, or employee to engage in
"(a) Any fraud, deception, concealment, suppression, false pretense or fictitious or pretended purchase or sale;
"(b) Any promise or representation as to the future which is beyond reasonablé expectation or unwarranted by existing circumstances;
"(c) Any representation or statement which is false, where the person who made such representation or statement: (i) knew the truth; or (ii) with
. Section 17 (a) of the Securities Act of 1933 provides:
"(a) It shall be unlawful for any person in the offer or sale of any securities by the use of any means or instruments of transportation or communication in interstate commerce or by the use of the mails, directly or indirectly—
"(1) to employ any device, scheme, or artifice to defraud, or "(2) to obtain money or property by means of any untrue statement of a material fact or any omission 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
"(3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.”
. In Ernst & Ernst v Hochfelder (
. See, Greater Iowa Corp. v McLendon, 378 F2d 783 (8th Cir) (interpreted as holding no private § 17 [a] action exists in Shull v Dain, Kalman & Quail, 561 F2d 152, 155 [8th Cir], cert denied