## Facts

- Abram Chasins opened a brokerage account with Smith, Barney & Co., Inc., and sought investment advice from the firm.
- At Chasins’s request, Smith, Barney furnished analyses strongly recommending that he purchase over-the-counter (OTC) securities in three companies, and Chasins bought the securities following those recommendations.
- Smith, Barney told Chasins that it owned the securities it sold him and therefore was acting as a principal (not merely an agent) in the transactions.
- Smith, Barney did not tell Chasins that it was also a market maker (one of several) in the recommended OTC securities.
- Chasins sued in the Southern District of New York asserting federal securities claims (including under Exchange Act § 10(b) and SEC Rule 10b-5) and pendent common-law claims. One theory alleged that Smith, Barney failed to disclose the best price at which Chasins could have purchased the securities in the market, though Smith contended the price charged was the best price.
- After a bench trial, the district court entered a damages judgment for Chasins on the ground that Smith, Barney violated SEC Rules 10b-5 and 15c1-4 by failing to disclose its market-maker status, even though Chasins had not specifically pleaded that nondisclosure theory.
- Smith, Barney appealed the federal securities judgment, arguing (among other things) that market-maker status was not material and that it was not permitted to present proof on materiality; Chasins cross-appealed the rejection of his broader common-law fiduciary-duty theory.

## Issues

1. Whether a broker-dealer’s failure to disclose that it is making a market in OTC securities that it recommends and sells to a customer is a material omission actionable under SEC Rule 10b-5 and violative of SEC Rule 15c1-4.
2. Whether the district court committed reversible error by basing liability on market-maker nondisclosure and not allowing Smith, Barney to submit proof on the question of materiality.
3. Whether Smith, Barney’s conduct also supported a separate common-law breach of fiduciary duty in the handling of Chasins’s account.

## Decision

- The Second Circuit affirmed the damages judgment for Chasins on the federal securities claims.
- The court agreed that Smith, Barney’s undisclosed role as a market maker in the recommended and sold OTC securities was a material fact that should have been disclosed to the customer under Rules 10b-5 and 15c1-4.
- The court rejected Smith, Barney’s challenge based on the asserted lack of opportunity to offer materiality proof, concluding that affirmance was warranted on the record.
- The court also affirmed the district court’s rejection of Chasins’s broader common-law fiduciary-duty claim.

## Legal Principles

- Under Rule 10b-5, a broker-dealer may be liable for omitting a material fact in connection with a securities transaction when the omission makes what was said misleading in context.
- A broker-dealer’s market-maker status in a security it recommends and sells can be material because it signals a meaningful financial stake and a conflict between the firm’s interests and the customer’s interests.
- Rule 15c1-4 (governing certain OTC dealer practices) supports requiring disclosure of a dealer’s significant self-interest in principal transactions; telling a customer only that the firm is acting as principal may be inadequate if additional, distinct interests are not revealed.
- A plaintiff’s inability to show a “bad price” does not necessarily defeat a nondisclosure claim where the actionable misconduct is the failure to disclose a material conflict tied to the recommendation and sale.
- A violation of federal disclosure duties does not automatically establish a broader common-law fiduciary breach; whether a broker owes additional portfolio-management or investment-adviser duties depends on the relationship and duties actually undertaken.

## Conclusion

In *Chasins v. Smith, Barney & Co.*, the Second Circuit affirmed a damages award holding that a broker-dealer that recommends and sells OTC securities while acting as a market maker must disclose that market-maker role because it is material under SEC Rules 10b-5 and 15c1-4, while also affirming that the same record did not support a separate, broader common-law fiduciary-duty claim.


Chasins v. Smith, Barney & Co., 438 F.2d 1167 (1971)