Source: https://m.openjurist.org/339/f2d/764
Timestamp: 2019-09-17 14:32:33
Document Index: 371192207

Matched Legal Cases: ['§ 409', '§ 1379', '§ 6', '§ 78', '§ 16', '§ 10']

339 F2d 764 O'Neill v. B Maytag | OpenJurist
339 F. 2d 764 - O'Neill v. B Maytag
339 F.2d 764
Robert J. O'NEILL, Plaintiff-Appellant,
Lewis B. MAYTAG, Jr., Dudley Swim, Pan American World Airways, Inc., G. T. Baker, A. G. McNeese, Jr., Alton Ochsner, David Packard, G. Robert Truex, Jr., Albert C. Wedemeyer, G. R. Woody, and National Airlines, Incorporated, Defendants-Appellees.
We have reached this conclusion despite the contrary position taken by the Securities and Exchange Commission in this case. The Commission has urged that a claim under Rule 10b-5 is stated by allegations that a corporation's "controlling directors caused it to acquire a large block of its own stock at an excessive price for the purpose of removing the threat to the directors' control represented by the stock." Brief of the Securities and Exchange Commission. The Commission's view may be supported to some extent by the broad dictum in McClure v. Borne Chemical Co., 292 F. 2d 824 (3 Cir.), cert. denied, 368 U.S. 939, 82 S.Ct. 382, 7 L.Ed.2d 339 (1961), although the posture of the case as it came to the Third Circuit — an appeal from an order refusing to require the plaintiff to post security — meant that the question of the scope of Rule 10b-5 was not directly involved.5 If such is the import of McClure, however, it seems to stand alone among judicial decisions; a reading of the facts of the cases cited as support by the plaintiff and the Commission reveals that in each, with the possible exception of McClure, the element of deception clearly was present.
There is, of course, no reason why the acts of an agent or corporate officer may not violate both his common law duty and the duty imposed by Rule 10b-5. In Ruckle v. Roto American Corp., 339 F. 2d 24 (2 Cir. 1964), the plaintiff alleged that the defendants, who comprised a majority of the board of directors, secured the board's approval of issuance of securities at an arbitrary value by withholding the most recent financial statements of the corporation. We held that the district court erred in dismissing the complaint; there was a clear allegation of deception in connection with the sale of securities, and the fact that the alleged deception occurred within the corporate structure did not by itself avoid liability under Rule 10b-5.
In addition, deception may take the form of nonverbal acts: In Cochran v. Channing Corp., 211 F.Supp. 239 (S.D. N.Y.1962), it consisted of reducing dividends in order to drive down the price of the corporation's stock. And it need not be deception in any restricted common law sense; one of the central purposes of federal securities legislation would otherwise be seriously vitiated. But, subject to the qualification noted immediately below, there must be allegation of facts amounting to deception in one form or another; conclusory allegations of deception or fraud will not suffice.
Plaintiff's second federal theory is that the transaction violated § 409(b) of the Federal Aviation Act, 49 U.S.C. § 1379 (b), and that a suit on behalf of the corporation may be maintained on the basis of such a violation. Section 409 (b) provides:
The fourth proposed allegation apparently was intended to establish an entirely new theory by claiming that the transaction violated the rules of the New York Stock Exchange. Whether or not such a violation might give rise to a cause of action against the defendants under state law, we do not think that it does so under federal law. The Exchange itself is under a federal duty to enforce its rules, Securities Exchange Act of 1934, § 6(a), 15 U.S.C. § 78f(a), and this duty may be enforceable in a private suit. See Baird v. Franklin, 141 F.2d 238 (2 Cir. 1944); Kroese v. New York Stock Exchange, 227 F.Supp. 519 (S.D.N.Y.1964). It does not follow, however, that a suit against a listed company or its officers based on violation of an Exchange rule arises under federal law, and we see no reason for so holding.
Plaintiff also alleged that defendant Lewis B. Magtag violated § 16(b) of the Securities Exchange Act by engaging in short-swing trading in National stock. This portion of the complaint was not dismissed and is not involved in this appeal
Pan American appears not to have moved for dismissal. The remaining individual defendant, G. T. Baker, did move for dismissal but died before the motion was decided. Judge McLean held that his attorney's authority was thereby revoked, and his motion was deemed withdrawn. Since Judge McLean found that there was no just reason for delay and entered judgment in favor of the appellees with respect to the § 10(b) claim, we have jurisdiction to hear this appeal. Federal Rule of Civil Procedure 54(b)
Since the result in this case is not directly required by precedents of this court or of the Supreme Court, the complaint cannot be considered frivolous, and the proper disposition was to dismiss for failure to state a claim rather than for lack of subject matter jurisdiction. Bell v. Hood, 327 U.S. 678, 66 S.Ct. 773, 90 L.Ed. 939 (1946). Nothing turns on that distinction in the instant case, however. Dismissal of the pendent state law claim was nevertheless proper where the federal claim could be dismissed on a preliminary motion. See Note, 77 Harv. L.Rev. 285, 289 (1963). Of course, if the district court had in fact lacked subject matter jurisdiction, it should have dismissed the complaint as to Pan American and Baker on its own motion if the lack of jurisdiction also appeared with respect to the claims against them. Compare Rules 12(h) (1) and 12(h) (2) of the Federal Rules of Civil Procedure
Because of dividends by National, the second exchange apparently still left some 27,000 shares of National stock not re-exchanged
Whether deception was alleged cannot be determined from the court's brief statement of the facts. There is no indication that the defendants had challenged the sufficiency of the complaint — they moved to require security for costs and did not file an answer — and such a challenge would not have been relevant to the appeal in any event. No security was required, in the Third Circuit's view, if the claim arose under the Securities Exchange Act, and it would do so unless it was so frivolous as to be subject to dismissal under Rule 12(b) (1)