## Facts

- B&O issued convertible debentures under a 1956 indenture giving holders the right to convert into B&O common stock at a fixed ratio.
- The indenture contemplated that debenture holders would receive notice of certain corporate actions affecting common stock (including dividends) so they could convert in time to protect the value of the conversion privilege.
- B&O’s common stock was listed on the NYSE, subjecting B&O to exchange rules requiring advance public notice of dividend record dates.
- In 1977, B&O planned a pro rata distribution of stock of its subsidiary, Mid-Allegheny Corporation (MAC), to B&O common shareholders as a dividend.
- If debenture holders converted before the dividend record date, they would become common shareholders and participate in the MAC distribution.
- Plaintiffs alleged B&O sought to avoid securities-registration consequences that might follow if additional, newly converted shareholders participated in the distribution.
- B&O set the MAC dividend declaration date and record date as the same day (December 13, 1977), leaving debenture holders no practical opportunity to convert before the record date.
- Debenture holders sued B&O, related entities, and certain insiders, alleging violations of Exchange Act § 10(b) and Rule 10b-5 based on the timing structure and lack of advance notice.

## Issues

1. Whether setting a dividend’s declaration and record dates on the same day, without advance notice to convertible debenture holders, can constitute a manipulative or deceptive device under Exchange Act § 10(b) and Rule 10b-5.
2. Whether B&O owed convertible debenture holders a duty to provide advance notice of the dividend and record date, informed by the indenture, NYSE rules, and relevant state contract and fiduciary principles.
3. Whether the pleaded facts supported a plausible inference of scienter (intent or recklessness) for § 10(b)/Rule 10b-5 liability.

## Decision

- The Third Circuit reversed the district court’s dismissal and remanded for further proceedings.
- The court held the complaint stated a claim under § 10(b) and Rule 10b-5 based on the alleged scheme to deny debenture holders a meaningful chance to convert and receive the MAC distribution.
- The court concluded plaintiffs adequately alleged a duty of advance notice and sufficiently alleged scienter.

## Legal Principles

- Conduct actionable under § 10(b) and Rule 10b-5 is not limited to affirmative misstatements; certain schemes or practices operating as a fraud through timing and nondisclosure may qualify as manipulative or deceptive devices.
- A duty to disclose to holders of convertible securities may arise from the “legal matrix” governing the security relationship, including indenture terms, exchange listing rules, and applicable state contract and fiduciary obligations.
- When a corporate action materially affects conversion rights, intentionally structuring the action to deprive holders of a realistic opportunity to exercise those rights, coupled with nondisclosure of material timing information, can support a federal securities-fraud claim.
- Scienter may be inferred at the pleading stage from allegations that insiders knowingly structured and timed corporate events to defeat investors’ contractual conversion privileges for issuer or control-group benefit.

## Conclusion

The Third Circuit held that convertible debenture holders plausibly alleged that B&O’s same-day declaration and record date for a stock distribution, without advance notice, operated as a deceptive scheme under § 10(b) and Rule 10b-5 by effectively eliminating the practical value of their conversion rights, and it remanded for further proceedings.


Pittsburgh Terminal Corp. v. Balt. & Ohio R.R. Co., 680 F.2d 933 (3d Cir. 1982)