## Facts

- Robert M. Deutschman purchased call options on Beneficial Corporation stock and sought to represent a class of option purchasers and common-stock purchasers.
- Beneficial’s insurance division allegedly suffered severe losses in 1986 and part of 1987 that adversely affected Beneficial’s financial condition.
- Beneficial’s CEO (Finn M. W. Caspersen) and CFO (Andrew C. Halvorsen) allegedly held Beneficial stock and stock options and faced personal exposure from a decline in Beneficial’s market price.
- Deutschman alleged that, to prevent further price declines, Beneficial and its officers issued public statements they knew were false or misleading, asserting the insurance problems were resolved or covered by reserves and that earnings would rebound.
- Deutschman alleged reliance on these statements when purchasing call options.
- Later disclosures allegedly revealed the true extent of the losses, Beneficial’s stock price fell, and the purchased options declined sharply or became worthless.
- Deutschman alleged the misstatements artificially supported the stock price, inflating the price of related options whose value depended on the underlying stock.

## Issues

1. Whether a purchaser of call options (without buying or selling the issuer’s common stock) has standing to sue under Exchange Act § 10(b) and SEC Rule 10b-5 based on the issuer’s affirmative misrepresentations.
2. Whether an affirmative-misrepresentation § 10(b) claim requires a “transactional nexus” between the defendant’s statement and the particular security traded by the plaintiff.
3. Whether dismissal of a pendent state-law negligent-misrepresentation claim was proper once the federal securities claim was dismissed on standing grounds.

## Decision

- The Third Circuit reversed the Rule 12(b)(6) dismissal and remanded.
- The court held Deutschman had standing under § 10(b) and Rule 10b-5 as an actual purchaser of call options, which are “securities” under the Exchange Act.
- The court rejected limiting private § 10(b) standing to purchasers or sellers of the issuer’s common stock where the plaintiff purchased another covered security (options).
- The court rejected an additional “transactional nexus” requirement in an affirmative-misrepresentation case.
- Because the federal claim was reinstated, the court also reinstated the pendent negligent-misrepresentation claim, which had been dismissed only due to the absence of a federal claim.

## Legal Principles

- Options are “securities” within the Exchange Act’s definition; purchasers or sellers of options may qualify as private plaintiffs under § 10(b) and Rule 10b-5.
- Under Blue Chip Stamps, private Rule 10b-5 plaintiffs must be actual purchasers or sellers; an options purchaser satisfies that requirement when suing over fraud connected to the options transaction.
- In affirmative-misrepresentation cases, when a company voluntarily issues public statements about its financial condition, § 10(b) duties extend to market participants trading securities whose prices are affected by those statements, including derivative instruments tied to the stock price.
- At the pleading stage, allegations that misstatements distorted the underlying stock’s market price can support plausibility that related options prices were also distorted and that the fraud was “in connection with” the options purchase or sale.
- Courts should not deny antifraud protection to a category of covered securities based on a characterization of those instruments as overly speculative.

## Conclusion

The Third Circuit held that purchasers of call options have standing to pursue § 10(b) and Rule 10b-5 claims for an issuer’s affirmative public misrepresentations that plausibly distorted the underlying stock price and, by extension, the value of options, and it revived the related state-law negligent-misrepresentation claim on remand.


Deutschman v. Beneficial Corp., 841 F.2d 502 (3d Cir. 1988)