## Facts

- Jean Ettinger bought and later sold zero-coupon Treasury securities marketed by Merrill Lynch as “Treasury Investment Growth Receipts” (TIGRs) in May and June 1984.
- TIGRs were sold at a discount, paid no periodic interest, and paid a single amount at maturity reflecting principal plus accrued interest.
- Merrill Lynch acted as a market maker in TIGRs and executed the challenged transactions as principal rather than as an agent charging a stated commission.
- Ettinger alleged Merrill Lynch charged excessive and unconscionable markups and failed to disclose that compensation.
- She sued under § 10(b) of the Securities Exchange Act and SEC Rule 10b-5, and also asserted Pennsylvania contract and fiduciary-duty claims under pendent jurisdiction.
- Merrill Lynch asserted it provided trade confirmations that complied with SEC Rule 10b-10 and that no additional markup disclosure was required on these principal trades.

## Issues

1. Whether a market-making broker-dealer that complies with SEC Rule 10b-10 nonetheless has a duty under § 10(b) and Rule 10b-5 to disclose the amount or alleged excessiveness of its markups on principal transactions.
2. Whether Rule 10b-10 compliance effectively forecloses Rule 10b-5 liability premised solely on nondisclosure of markups in the circumstances presented.
3. Whether, after dismissal of all federal claims on summary judgment, the district court properly dismissed pendent Pennsylvania law claims without prejudice.

## Decision

- The Third Circuit affirmed summary judgment for Merrill Lynch on the § 10(b) and Rule 10b-5 claims.
- The court held that, on this record, nondisclosure of the dealer’s markup (or its alleged excessiveness) in market-maker principal trades did not establish a federal securities-fraud violation where confirmations complied with Rule 10b-10 and there was no additional deceptive conduct.
- The court affirmed dismissal without prejudice of the pendent state-law claims after the federal claims were resolved.
- The denial of class certification was left undisturbed given the disposition of the merits.

## Legal Principles

- Rule 10b-5 liability for “fraudulently excessive” markups generally requires more than a bare theory of nondisclosure; the plaintiff must show deceptive conduct or facts supporting an inference of fraud under the governing standards.
- In market-maker principal transactions, a dealer’s profit component is not automatically subject to itemized disclosure under § 10(b) and Rule 10b-5 beyond the disclosures required by Rule 10b-10, absent special circumstances or additional misleading conduct.
- Compliance with SEC Rule 10b-10 is strong evidence that confirmation disclosures were adequate for the transaction type and weighs against imposing extra disclosure duties through Rule 10b-5 on the same facts.
- Summary judgment is appropriate where the record lacks specific evidence from which a reasonable factfinder could conclude that the markup was so egregious, or the conduct so misleading, as to constitute securities fraud.
- Once all federal claims are dismissed, a federal court may, in its discretion, decline to retain pendent jurisdiction over state-law claims and dismiss them without prejudice.

## Conclusion

The Third Circuit held that a broker-dealer acting as a market maker in principal trades did not violate § 10(b) or Rule 10b-5 merely by failing to disclose allegedly excessive markups when it provided Rule 10b-10-compliant confirmations and the plaintiff produced no concrete evidence of additional deceptive conduct or an independently actionable markup.


Ettinger v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 835 F.2d 1031 (3d Cir. 1987)