## Facts

- Nortel Networks Corp. was a major telecommunications supplier and a key customer of JDS Uniphase Corp., accounting for roughly 10–15% of JDS revenue.
- Market reports in early 2001 indicated Nortel would acquire JDS’s laser business in exchange for Nortel stock and increase purchases from JDS.
- On February 6, 2001, Nortel and JDS announced Nortel would acquire JDS’s laser business for approximately $2.5 billion in Nortel stock; JDS’s stock price rose, and the deal closed on February 12, 2001.
- Between January 18 and February 15, 2001, Nortel made optimistic public statements projecting strong demand and revenue growth in its fiber-optics business for 2001.
- On February 15, 2001, Nortel announced a significant downward revision of its fiber-optics revenue and growth projections; Nortel’s and JDS’s stock prices fell sharply.
- Plaintiffs were purchasers of JDS stock (not Nortel stock) who alleged Nortel’s statements were false or misleading and inflated JDS’s stock price due to Nortel’s importance to JDS.
- Plaintiffs sued Nortel and certain officers under Exchange Act § 10(b) and SEC Rule 10b-5; the district court dismissed with prejudice under Rule 12(b)(6), and plaintiffs appealed.

## Issues

1. Whether purchasers of JDS stock have standing under § 10(b) and Rule 10b-5 to sue Nortel for alleged misstatements about Nortel’s own business when plaintiffs did not purchase or sell Nortel securities.
2. Whether alleged misstatements about Nortel that purportedly affected JDS’s stock price satisfy the “in connection with the purchase or sale of any security” requirement for a private § 10(b) action brought by JDS purchasers.

## Decision

- The Second Circuit affirmed the dismissal with prejudice.
- The court held plaintiffs lacked standing because they did not purchase or sell Nortel securities, the securities to which the alleged misstatements related.
- The court rejected a theory that a defendant’s statements about its own business can support § 10(b) standing for purchasers of a different company’s stock merely because the statements allegedly affected that other company’s market price.
- The court concluded that the “in connection with” language, though broad, does not expand the class of private plaintiffs beyond actual purchasers or sellers of the security at issue.

## Legal Principles

- A private damages action under § 10(b) and Rule 10b-5 is limited to actual purchasers or sellers of the securities about which the alleged misstatements were made (Birnbaum/Blue Chip purchaser-seller rule).
- The statutory phrase “in connection with the purchase or sale of any security” is not a substitute for purchaser-seller standing and cannot be used to avoid that limitation.
- Alleged foreseeability that misstatements by one issuer will move the stock price of a related company (e.g., a supplier or customer) does not create § 10(b) standing for investors in the related company.
- Courts will not expand § 10(b) standing to avoid open-ended and difficult-to-limit liability to investors in an indeterminate set of economically connected firms.

## Conclusion

Because the plaintiffs bought and sold only JDS shares, they could not pursue a § 10(b)/Rule 10b-5 damages claim against Nortel for statements about Nortel’s business, even if those statements allegedly inflated JDS’s stock price; the complaint was properly dismissed with prejudice.


Ontario Pub. Serv. Emps. Union Pension Tr. Fund v. Nortel Networks Corp., 369 F.3d 27 (2d Cir. 2004)