On April 10, 2019, Judge Loretta A. Preska of the United States District Court for the Southern District of New York dismissed an action asserting violations of Section 10(b) of the Securities and Exchange Act of 1934 and claims under state law against a broker-dealer (the “Broker-Dealer”) and several individuals who participated in a bond offering facilitated by the Broker-Dealer.  Palm Beach Maritime Museum v. Hapoalim Sec. USA, Inc., 19 Civ. 908 (LAP), 2019 WL 1950139 (S.D.N.Y. Apr. 10, 2019).  Plaintiff, a non-profit corporation approved as a charter school in Florida, alleged that defendants made materially false statements in connection with a bond purchase agreement to finance plaintiff’s purchase and expansion of property.  The Court held that plaintiff lacked standing to pursue its Section 10(b) claim because it was not the buyer or seller of a security. 

Plaintiff entered into a bond purchase agreement facilitated by the Broker-Dealer to finance the purchase and expansion of a property.  Plaintiff was the “borrower,” while the Public Finance Authority, a unit of the government of the State of Wisconsin, was the “issuer” of the bond.  Later, plaintiff sued defendants, alleging it entered into the bond purchase agreement believing that the property’s seller would allocate $2.5 million of the $8 million purchase price for the development of the property, which turned out not to be the case.  Plaintiff alleged that certain individual defendants knew this but concealed it from plaintiff’s Board of Directors when the Board approved the issuance of the bond.  Defendants moved to dismiss.

Noting that only a buyer or a seller of a security has standing to bring a claim under Section 10(b), the Court concluded that plaintiff was neither a seller nor buyer under the terms of the agreement and therefore lacked standing.  Relying on Banco Nacional de Costa Rica v. Bremar Holdings Corp., 492 F. Supp. 364 (S.D.N.Y. 1980), plaintiff argued that it was a guarantor of the bond and therefore a “constructive seller” of securities.  The Court disagreed, observing that Banco National involved a guarantor who contractually “stood in the shoes” of the issuer-seller and provided an unconditional guarantee, whereas plaintiff here did not provide an equivalent guarantee and was simply the borrower.  Arguments that the Public Finance Authority was merely a conduit were also rejected, and the Court further distinguished Banco Nacional because there would have been no interested party with standing to sue had plaintiff in that case been determined to lack standing.  Here, by contrast, the issuer of the underlying bond offering was capable of alleging fraud against the Broker-Dealer.  The Court summarily dismissed the state law claims on the ground that in the absence of the Section 10(b) claims, plaintiff failed to present any viable federal claims for the Court to exercise supplemental jurisdiction over the action.

[View source.]