Chasins v. Smith, Barney & Co.

Abram Chasins (plaintiff) opened a brokerage account with Smith, Barney & Company (Smith) (defendant). At Chasins’s request, Smith provided an analysis strongly recommending that Chasins purchase over-the-counter securities in three companies, and Chasins subsequently purchased the securities according to Smith’s recommendation. Smith informed Chasins that Smith owned the securities and was therefore acting as both stockbroker and principal in the transactions; however, Smith did not disclose the fact that Smith was also acting as a market maker (among several) of the securities. Chasins filed suit in the United States District Court for the Southern District of New York, alleging that Smith, among other things, had violated Securities and Exchange Commission (SEC) Rule 10b-5 by failing to disclose the best price at which Chasins could have purchased the securities on the open market. However, Smith argued that Chasins had purchased the securities at the best price nonetheless. Although Chasins did not specifically allege that Smith had failed to disclose its role as a market maker, the district court held in favor of Chasins and found that Smith’s role as a market maker for the securities was a material fact and that Smith’s failure to disclose that fact was a violation of Rule 10b-5. Smith was never allowed to submit proofs on the question of materiality. Smith appealed.