## Facts

- Dean Witter Reynolds, Inc. acted as a market maker for Keldon Oil stock in the over-the-counter market and commonly sold such stock to customers as a principal from its own inventory.
- Dr. Sampat S. Shivangi and Dr. Udaya S. Shivangi bought 400 shares of Keldon Oil through Dean Witter after the firm recommended the purchase.
- The Shivangis later suffered substantial losses when Keldon Oil’s price declined.
- The Shivangis alleged that Dean Witter failed to disclose an internal compensation arrangement under which account executives received higher compensation for certain principal trades in OTC stocks for which Dean Witter made a market.
- Evidence indicated the higher pay differential was adopted to restore compensation levels after an SEC rule change reduced compensation for OTC trades.
- At the relevant time, industry practice did not include disclosing internal compensation arrangements to customers; Dean Witter disclosed information required by SEC rules.
- The record contained no proof that the compensation arrangement affected the price paid by the Shivangis or that the recommendation was motivated by the pay differential.

## Issues

1. Whether the Shivangis presented sufficient evidence of scienter to support a private claim under Exchange Act § 10(b) and SEC Rule 10b-5 based on nondisclosure of account-executive compensation differentials.
2. Whether, on these facts and regulatory context, Dean Witter had a duty under Rule 10b-5 to disclose its internal compensation structure to customers.
3. Whether the district court abused its discretion in denying class certification, denying Rule 11 sanctions, and denying leave to amend to add a civil RICO claim.
4. Whether Dean Witter could cross-appeal the district court’s statement that the compensation information was “material” when judgment was entered for Dean Witter.

## Decision

- The Fifth Circuit affirmed the district court’s dismissal of the Rule 10b-5 claims at the close of plaintiffs’ evidence.
- The court held the Shivangis failed to prove scienter (intent to deceive, manipulate, or defraud, or severe recklessness) regarding the nondisclosure and recommendation.
- The court upheld the district court’s discretionary rulings denying class certification, Rule 11 sanctions, and leave to amend to assert RICO.
- The court rejected Dean Witter’s cross-appeal on “materiality,” treating the district court’s materiality discussion as dicta and not an appealable adverse ruling.

## Legal Principles

- A private Rule 10b-5 plaintiff must prove scienter; nondisclosure consistent with prevailing industry practice and absent evidence of deceptive intent or severe recklessness is insufficient.
- Nondisclosure of a broker’s internal compensation structure, without proof it influenced the recommendation or transaction price and without a clearly established disclosure requirement, does not establish Rule 10b-5 liability on this record.
- Decisions on class certification, Rule 11 sanctions, and leave to amend are reviewed for abuse of discretion and will be affirmed absent a clear misuse of that discretion.
- A prevailing party generally cannot appeal nonessential statements that do not form the basis of an adverse judgment; dicta does not create an appealable controversy.

## Conclusion

The Fifth Circuit affirmed judgment for Dean Witter because the Shivangis did not prove scienter or an actionable Rule 10b-5 omission tied to the internal pay differential, and it declined to review the district court’s nonessential remarks on materiality while also upholding the trial court’s procedural rulings.


Shivangi v. Dean Witter Reynolds, Inc., 825 F.2d 885 (5th Cir. 1987)