## Facts

- Nationwide Cellular Service, Inc. (Nationwide) agreed to transfer shares of its stock to American Mobile Communications, Inc. (American) in exchange for American’s assets.
- The transaction was completed, and Nationwide issued its stock as the consideration for the acquisition of American’s assets.
- After closing, Nationwide learned that American had significantly overstated the value of the assets it transferred.
- Nationwide alleged that, in deciding to proceed with the exchange and in setting the terms of the deal, it relied on American’s financial statements and American’s warranties that those statements were accurate.
- Nationwide alleged that the financial statements and related warranties were false and that the false information caused Nationwide to suffer injury (because it exchanged stock for assets worth less than represented).
- Nationwide alleged scienter by claiming that American either knew the statements and warranties were false or acted with reckless disregard for their truth.
- Nationwide sued American in federal district court, asserting a securities-fraud claim under § 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5.
- American moved to dismiss, arguing that the alleged misstatements concerned only the value of American’s assets (what Nationwide received) rather than the value of the securities Nationwide issued, and therefore did not satisfy Rule 10b-5.

## Issues

1. Whether alleged misrepresentations and warranties overstating the value of assets transferred to Nationwide, made to induce Nationwide to issue its stock in exchange, are sufficiently connected to a “purchase or sale” of a security to support a § 10(b) and Rule 10b-5 claim.
2. Whether allegations that Nationwide relied on American’s financial statements and warranties, suffered injury, and that American acted knowingly or recklessly are sufficient at the pleading stage to withstand a motion to dismiss.

## Decision

- The court addressed American’s motion to dismiss Nationwide’s § 10(b) and Rule 10b-5 claim.
- The court rejected the argument that Rule 10b-5 is categorically inapplicable merely because the alleged misstatements focused on the value of the assets being acquired rather than directly on the market value of the stock used as consideration.
- Treating the stock-for-assets exchange as involving the purchase or sale of a security (Nationwide’s issuance of its shares), the court concluded that the alleged misstatements and warranties could satisfy the “in connection with” requirement for § 10(b)/Rule 10b-5 when they allegedly induced Nationwide to enter the transaction and issue stock.
- The court found the pleaded allegations of reliance and scienter (knowledge or recklessness) sufficient to allow the Rule 10b-5 claim to proceed past the motion-to-dismiss stage.

## Legal Principles

- A party’s issuance of its own shares as consideration in an acquisition can qualify as a “purchase or sale” of a security for § 10(b) and Rule 10b-5 purposes.
- Misrepresentations about the value or condition of the property or assets exchanged for securities may be “in connection with” the securities transaction when the statements are alleged to have induced the issuance or exchange of stock.
- At the pleading stage, alleging that the defendant knew statements were false, or acted in reckless disregard of their truth, can be sufficient to plead scienter under § 10(b) and Rule 10b-5.
- Allegations that the plaintiff relied on financial statements and contractual warranties when entering the transaction, and suffered resulting injury, can be sufficient to plead reliance and loss for a Rule 10b-5 claim on a motion to dismiss.

## Conclusion

In Nationwide Cellular Service v. American Mobile Communications, the court treated a stock-for-assets exchange as involving a securities transaction and held that alleged overstatements of the assets’ value—supported by allegations of reliance and knowledge or recklessness—could state a § 10(b) and Rule 10b-5 claim sufficient to survive a motion to dismiss.


Nationwide Cellular Service v. American Mobile Communications, 1991 Fed. Sec. L. Rep. ¶ 96,435 (1991)