## Facts

- Warner-Lambert sought to acquire Deseret Pharmaceutical Co. and retained Morgan Stanley to evaluate Deseret and recommend a tender-offer price.
- A Morgan Stanley employee learned of the nonpublic tender-offer plan and tipped a friend, who relayed the information to broker James M. Newman.
- Newman bought Deseret shares (for distribution among the tipper, tippee, and himself) before the tender offer was announced.
- Warner publicly announced a tender offer at $38 per share, and Deseret’s market price rose.
- Michael E. Moss, representing a proposed class of former Deseret shareholders, alleged they sold Deseret shares before the announcement at prices not reflecting the impending offer.
- Moss sued Morgan Stanley and others, alleging insider trading in violation of Exchange Act § 10(b) and Rule 10b-5, and seeking treble damages under civil RICO.

## Issues

1. Whether shareholders who sold Deseret stock in the open market before the tender-offer announcement stated a private damages claim under § 10(b) and Rule 10b-5 against purchasers who traded on material nonpublic information obtained from the bidder’s investment adviser.
2. Whether the same alleged insider-trading conduct could support a civil RICO claim for treble damages based on a purported enterprise and pattern of racketeering activity.

## Decision

- The Second Circuit affirmed dismissal for failure to state a claim.
- The court held Moss did not state a § 10(b)/Rule 10b-5 claim because defendants owed no disclosure duty to Moss or the class as anonymous market sellers.
- The court held Moss did not state a civil RICO claim because the alleged securities-fraud predicates were not actionable by Moss and the RICO allegations were otherwise insufficient.

## Legal Principles

- Under § 10(b) and Rule 10b-5, nondisclosure-based liability requires a duty to disclose arising from a relationship of trust and confidence between the parties to the transaction.
- Duties of confidentiality owed by an investment adviser and its employees to the tender offeror do not, without more, create a disclosure duty to target-company shareholders selling in the open market.
- Advising a bidder about a target and possessing confidential information in that role does not, by itself, make the adviser (or its employees) fiduciaries of the target or its shareholders for private § 10(b) purposes.
- A stockbroker’s ordinary duties run to the broker’s customers, not to anonymous market counterparties; there is no generalized broker-to-market disclosure duty.
- Civil RICO requires adequately pleaded predicate racketeering acts and related elements (enterprise, pattern, and injury); where the asserted predicate securities fraud is not actionable by the plaintiff, it cannot support the plaintiff’s civil RICO recovery.

## Conclusion

The court rejected a market-wide duty theory for private insider-trading damages claims and held that, absent a specific duty owed to the selling shareholders, tippee trading on misused tender-offer information did not create § 10(b)/Rule 10b-5 liability to anonymous market sellers; without actionable securities-fraud predicates, the civil RICO claim also failed.


Moss v. Morgan Stanley Inc., 719 F.2d 5 (2d Cir. 1983)