Shivangi v. Dean Witter

Dean Witter (Dean) (defendant) was a broker-dealer that served as a market maker for Keldon Oil (Keldon), whose stock was traded over the counter. At Dean’s suggestion, Dr. Sampat S. Shivangi and Dr. Udaya S. Shivangi (plaintiffs) purchased 400 Keldon shares through Dean. Dean typically fulfilled customer orders for Keldon from shares Dean acquired for its own account or already held in inventory (the principal model). That was the case with the Shivangis, who bought Keldon shares directly from Dean rather than trading with a third party with Dean’s assistance. Dean did not tell the Shivangis (or customers generally) that its account executives received higher commissions for principal-model transactions. According to a Dean witness, this disparity was meant to restore compensation to its level before a Securities and Exchange Commission (SEC) rule change incidentally reduced compensation for over-the-counter trades. Industry custom at the relevant time was not to disclose compensation to customers; indeed, neither the SEC nor any court had ruled that such disclosure was required. Dean did, however, disclose all information it was required to disclose by the SEC. There was no evidence that Dean suggested the Keldon purchase for reasons relating to its compensation system or that the compensation system affected the price the Shivangis paid for the stock. Keldon’s stock price declined soon after the Shivangis’ purchase, causing them to suffer a significant loss. The Shivangis brought a putative class-action suit against Dean and others, alleging that Dean’s nondisclosure of its account-executive compensation system violated § 10(b) of the Securities Exchange Act of 1934, SEC Rule 10b-5, and state law. At the bench trial, Dean moved to dismiss the Shivangis’ claims at the close of their case, arguing they failed to adduce evidence that Dean acted with scienter (i.e., an intent to deceive). The Shivangis appealed.