Ross v. Bolton

904 F.2d 819 (1990)

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Ross v. Bolton

United States Court of Appeals for the Second Circuit
904 F.2d 819 (1990)

Facts

R.E. Bolton & Company (Bolton) (defendant) was the principal market maker for the stock of Resort and Urban Timeshares (RUTI). In November 1982, Bear, Stearns & Co. (Bear) (defendant), Bolton’s clearing agent, advised Bolton that it was terminating their clearing agreement on December 12. Bear’s action was due to its concern about Bolton’s solvency and was accompanied by other efforts to limit its exposure to Bolton-related risk, including its insistence that Bolton reduce its RUTI holdings. On December 8, Bear sent an invoice to St. Lawrence Securities, Ltd. (St. Lawrence) purportedly reflecting St. Lawrence’s purchase from Bolton of 26,900 RUTI shares at $17.50 per share. However, St. Lawrence did not authorize this purchase and refused to acknowledge it. Donald Ross, a St. Lawrence employee, then received a call from Bolton’s president offering to sell Ross 26,900 units of RUTI securities at $17.50 per share, with the understanding that Ross could resell the shares to Forbes, Walsh, Kelly & Co. (Forbes) at a higher price. Ross agreed. However, Forbes refused to buy the shares from Ross because, in the interim, it learned Bolton would not honor its secret agreement to buy the shares from Forbes at a yet-higher price. At the time, Ross did not know about the Forbes-Bolton agreement and Bear did not know about the Ross-Forbes or Forbes-Bolton agreements. Ross sued Bolton and Bear under § 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission (SEC) Rule 10b-5. Bear argued that it was not liable due to the in pari delecto defense, which provides that a plaintiff that is equally or more at fault than a defendant should not be allowed to recover. The district court dismissed Ross’s complaint on other grounds without deciding whether Bear could assert an in pari delecto defense (though it declined to dismiss the claims against Bolton on that ground). Ross appealed the dismissal of its claim against Bear. In response, Bear argued that it should prevail due to the in pari delecto defense.

Rule of Law

Issue

Holding and Reasoning (Cardamone, J.)

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