## Facts

- L. M. Brown, Ivie, and Lightsey each owned one-third of United Power Distributors, Inc.; Brown also served as an employee and officer.
- In 1976, the shareholders executed a buy-sell agreement requiring any shareholder who ceased employment to sell shares back to the corporation at “book value,” but the required restrictive legend was never placed on the stock certificates, rendering the agreement unenforceable.
- In 1979, Ivie and Lightsey decided to remove Brown from the company and sought a new buy-sell agreement that would enable a compelled repurchase of Brown’s shares at book value.
- Ivie and Lightsey allegedly told Brown the new agreement was needed to obtain additional corporate insurance, without disclosing their plan to terminate him and trigger the repurchase provision.
- Brown signed the 1979 agreement in reliance on the stated insurance purpose.
- About a week later, Ivie and Lightsey terminated Brown’s employment and invoked the 1979 agreement to compel the corporation’s repurchase of Brown’s shares at book value, allegedly below fair market value.
- Brown sued under § 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, alleging deception connected to the forced sale of his stock.

## Issues

1. Whether alleged misrepresentations and nondisclosures inducing execution of a buy-sell agreement satisfy the “in connection with the purchase or sale of any security” requirement for a § 10(b)/Rule 10b-5 claim.
2. Whether the dispute was merely an internal corporate or fiduciary-duty matter outside the scope of Rule 10b-5.

## Decision

- The Fifth Circuit reversed the dismissal of Brown’s Rule 10b-5 claim and remanded for further proceedings.
- The court held the complaint adequately alleged deceptive conduct with a sufficient nexus to the compelled stock sale to meet the “in connection with” requirement.
- The court rejected treating the case as only an internal management or employment dispute because the alleged deception concerned the mechanism that governed a securities transaction.
- The court also addressed the defendants’ cross-appeal regarding counterclaims, but the principal disposition was reinstatement of Brown’s federal securities claim.

## Legal Principles

- The “in connection with” requirement under § 10(b) and Rule 10b-5 is applied flexibly and requires a nexus between the alleged fraud and a securities transaction.
- Misrepresentations or nondisclosures that induce a shareholder to enter a buy-sell agreement governing a later compelled stock sale can be sufficiently connected to the purchase or sale of a security.
- A close-corporation setting does not bar Rule 10b-5 coverage when the alleged wrongdoing includes deception tied to a stock transaction, rather than a purely non-deceptive breach of fiduciary duty.
- Conduct is not insulated from federal securities law merely because it overlaps with corporate governance or employment actions, where those actions are alleged to be used to execute a deceptive scheme culminating in a securities sale.

## Conclusion

The Fifth Circuit held that allegations of deception used to secure a buy-sell agreement and then force a below-market repurchase of a shareholder’s stock stated a plausible § 10(b)/Rule 10b-5 claim because the fraud was connected to a securities transaction, not merely internal corporate conduct.


Brown v. Ivie, 661 F.2d 62 (5th Cir. 1981)