The seller of a convertible note sued the issuer-purchaser under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, claiming that the issuer committed fraud by repurchasing the note at a negotiated discount price without revealing its plan to raise funds through a new private placement to fund the redemption of all outstanding convertible notes at a premium price. The defendant moved to dismiss, arguing that (i) the undisclosed information was not material because it was contingent on the company’s ability to successfully conclude the private placement, and (ii) because it had no duty to disclose the omitted information to the plaintiff.

The court first ruled that the omitted information was material, finding that it was something that a reasonable investor would have wanted to know: “It is unlikely that an investor seeking to liquidate [convertible notes] would be uninterested” in the company’s plans relating to its potential re-purchase of the convertible notes at a premium.

Notwithstanding this ruling, the court proceeded to dismiss the plaintiff’s claims, ruling that the issuer owed no duty of disclosure to the convertible noteholder-seller. While recognizing that a fiduciary relationship triggers a duty of disclosure, the Court ruled that no such duty arose from the convertible noteholder – issuer relationship. Despite there being no direct New York precedent, the Court drew support for its ruling from the well-settled rule that corporations owe no fiduciary duty to their unsecured creditors (including debt security holders) and from cases from other jurisdictions, including Delaware, rejecting the argument that a fiduciary relationship triggering a duty to disclose exists between a convertible noteholder and the issuer of the note. (Alexandra Global Master Fund, Ltd. v. IKON Office Solutions, Inc., No. 06 Civ. 5383(JGK), 2007 WL 2077153 (S.D.N.Y. July 20, 2007))