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[W] Newton v. Merrill Lynch

June 19, 1997

KENNETH E. NEWTON; MLPF&S CUST. BRUCE ZAKHEIM IRA FBO BRUCE ZAKHEIM

v.

MERRILL, LYNCH, PIERCE, FENNER & SMITH, INC.; PAINEWEBBER INC.; DEAN WITTER REYNOLDS

(D.C. NO. 94-CV-05343)

JEFFREY PHILLIP KRAVITZ

v.

DEAN WITTER REYNOLDS, INC.

MLPF&S CUST. FPO -- BRUCE ZAKHEIM IRA FBO BRUCE ZAKHEIM, JEFFREY PHILLIP KRAVITZ, AND GLORIA BINDER,

APPELLANTS



ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY (D.C. No. 95-cv-00213)

Before: STAPLETON and NYGAARD, Circuit Judges, and MAZZONE, *fn1 Senior District Judge.

NYGAARD, Circuit Judge.

OPINION WITHDRAWN

KENNETH E. NEWTON; MLPF&S CUST. BRUCE ZAKHEIM IRA FBO BRUCE ZAKHEIM

v.

MERRILL, LYNCH, PIERCE, FENNER & SMITH, INC.; PAINEWEBBER INC.; DEAN WITTER REYNOLDS

(D.C. NO. 94-CV-05343)

JEFFREY PHILLIP KRAVITZ

v.

DEAN WITTER REYNOLDS, INC.

MLPF&S CUST. FPO -- BRUCE ZAKHEIM IRA FBO BRUCE ZAKHEIM, JEFFREY PHILLIP KRAVITZ, AND GLORIA BINDER,

APPELLANTS

ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY (D.C. No. 95-cv-00213)

Before: STAPLETON and NYGAARD, Circuit Judges, and MAZZONE, *fn1 Senior District Judge.

NYGAARD, Circuit Judge.

Filed June 19, 1997

Argued October 24, 1996

OPINION OF THE COURT

The issue on appeal is whether the over-the-counter customer order execution practices of several large stock brokers constituted securities fraud. The district court concluded that these practices were not fraudulent and granted summary judgment in favor of the defendants. We will affirm.

I.

The facts of this case are set forth thoroughly in the district court's opinion, In re Merrill Lynch Securities Litig., 911 F. Supp. 754 (D.N.J. 1995). Succinctly stated, plaintiffs are investors who purchase and sell so-called "over the counter" securities which are traded on a computerized price quotation system known as NASDAQ. They claim that the peculiarities of this market have given securities dealers an opportunity--upon which they have capitalized--to inflate their profit margins at the expense of customers, resulting in inferior execution prices vis-a-vis other dealers who have access to superior, privately quoted prices. These practices, plaintiffs allege, violated the defendants' duty of best execution, but were never disclosed by the dealers, thus amounting to a securities fraud under section 10 of the Securities Exchange Act of 1934, 15 U.S.C. Section(s) 78j(a) and Rule 10-b5 promulgated thereunder, 17 C.F.R. Section(s) 240.10b-5.

The NASDAQ, which is now the second-largest securities market in the United States, is different from the New York and American Stock Exchanges, because it is a dealer-created, rather than an auction, market. In an auction market, buy and sell orders actually "meet" on the exchange floor, with prices being set by the continuous interaction of those orders, under the supervision of ...


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