Court Opinion

ID: 8890130
Source: CourtListenerOpinion
Date Created: 2022-11-26 23:01:35.816552+00
Date Added: 2024-06-11T17:07:09.675770
License: Public Domain

IRVING R. KAUFMAN, Circuit Judge
(dissenting):
In my view, it is no longer debatable that trading on inside information merits universal condemnation.1 The undesirable nature of “insider trading” is reflected in the prophylactic provisions of Section 16(b) of the Securities Exchange Act of 1934 and the more general antifraud principles of Section 10(b) of that Act. I fully agree with Judges Waterman and Smith that one with access to material inside information concerning a corporation’s affairs who knowingly purchases or sells that corporation’s shares before this information has become publicly available takes unfair advantage of unknowledgeable parties to the transaction. Indeed, the factual claims contained in the complaints before us have led to two federal actions —an SEC injunctive action and a private class action under rule 10b-5 — now pending in the District Court for the Southern District of New York. But the adage that hard facts make bad law is about to come true here, despite Judge, later Justice, Cardozo’s warning that judges are not free agents roaming at will to create law to fit the facts. See The Nature of the Judicial Process 141 (1921). In the absence of any viable precedent upon which to base the totally new concept of law espoused by my brothers, it is clear that they announce an extraordinary, expansive, and incorrect reading of New York law solely because of their urge to “provid [e] a disincentive to insider trading.” I agree with their objective but I question the means employed.
The court holds today that a person with no relationship whatsoever — fiduciary or otherwise — to a corporation, who trades its shares on the basis of material inside information becomes, ipso facto, a fiduciary of the corporation whose shares he traded and, accordingly, may be required in a shareholders’ derivative action — not a Section 10(b) or 16(b) action — to pay his profits to the corporation. With all due respect to my brothers, the tortured reasoning to which they are compelled to resort in reaching this conclusion represents a distortion of the law of agency and the law of fiduciary responsibility in which I am unable to join. Accordingly, I dissent.
Stripped of excess verbiage, the complaints in the two consolidated stockholders’ derivative actions before us make the following allegations. In Jan*826uary, 1970, Melvin Chasen, president of Lum’s, learned that an earnings estimate of between $1.00 and $1.10 per share previously released to the financial community was grossly inaccurate. A more realistic figure was $.76 per share. Chasen revealed this information on January 8, during a telephone conversation, to Benjamin Simon, an employee in Lehman Brothers Chicago office. Simon, in turn, disclosed the adverse news to Eugene Sit, portfolio manager of Investors Variable Payment Fund, Inc., who himself conveyed the information to James Jundt, portfolio manager of IDS New Dimensions Fund, Inc. Both Sit and Jundt are employees of Investors Diversified Services, Inc. (IDS), investment adviser to the two mutual funds. During the morning of Friday, January 9, prior to any public disclosure of the reduced earnings figure, the two mutual funds sold a total of 83,000 shares of Lum’s stock on the New York Stock Exchange at a price of approximately $17.-50 per share. Later that day, after the Exchange halted trading in Lum’s shares, Lum’s publicly announced the reduced earnings forecast. Trading did not resume until the following Monday, when the closing price fell to $14.00 per share.
It is important to note at the outset that the plaintiffs in these actions^ shareholders of Lum’s, do not claim to have suffered any damages themselves. Rather, these derivative suits are brought “on behalf of and for the benefit of Lum’s.” They seek to recover for Lum’s treasury the windfall profit garnered by the IDS mutual funds, and assert that all defendants are jointly and severally liable for this amount. Thus, the proper method of analysis is not to focus on the unfairness of the mutual funds’ profit at the expense of their purchasers — who have their own recourse for any wrongdoing — but on the strands of duty running to the corporation from the various individuals involved. The crux of the majority’s holding is that the institutional defendants —Lehman Brothers, IDS, and the two mutual funds — and their employees — Simon, Sit, and Jundt — are within the sweep of fiduciary principles announced in Diamond v. Oreamuno, 24 N.Y.2d 494, 301 N.Y.S.2d 78, 248 N.E.2d 910 (1969). But a careful examination of that case and the principles underlying it demonstrate that Diamond is wholly inapposite to this case.
In Diamond, the New York Court of Appeals dealt with a derivative action brought by a shareholder of Management Assistance, Inc. (MAI) against Or-eamuno, chairman of the board of directors of the corporation, and Gonzalez, its president. The complaint charged that by virtue of their corporate positions, these officers knew that a supplier’s price increase had caused MAI’s earnings to decrease by more than 75% during a one month period. According to the allegations, the two officers sold over 50,000 MAI shares at a price of $28 per share prior to public disclosure of the adverse earnings figures, after which the price per share plummeted to $11. In reviewing the Appellate Division’s refusal to order dismissal of the complaint against Oreamuno and Gonzalez, Chief Judge Fuld stated at the outset that “the question presented — one of first impression in this court — is whether officers and directors may be held accountable to their corporation for gains realized by them from transactions in the company’s stock as a result of their use of material inside information,” 24 N.Y.2d at 496, 301 N.Y.S.2d at 79, 248 N.E.2d at 911 (emphasis added). A careful reading of the Diamond opinion reveals that Oreamuno’s and Gonzalez’s liability in a stockholders’ derivative action was grounded solely in their having breached a fiduciary duty owed by them to MAI as corporate officials.
The inapplicability of these principles to any of the appellees 2 is readily ap*827parent. The complaints here are barren of any allegation that the appellees — or Sit or Jundt — occupied any position, such as officer, director, employee, or agent, which would create fiduciary obligations to Lum’s. Compare Brophy v. Cities Service Co., 31 Del.Ch. 241, 70 A.2d 5 (1949); Quinn v. Phipps, 93 Fla. 805, 113 So. 419 (1927). Liability in Diamond was predicated entirely on such a relationship, and in its absence, the Diamond rationale for liability ceases to exist.
In an effort to bridge this fatal gap, the majority, without any basis in law or fact, reasons that the appellees were involved in a “joint” or “common enterprise” with Chasen, president of Lum’s “to misuse confidential corporate information for their own enrichment.” By use of this interesting, but nevertheless fictional, theory, they seek to foist upon the appellees liability to Lum’s for Chasen’s improper behavior. But the facts alleged in the complaints are a far cry from the “conscious parallelism” cases, drawn from the antitrust field, cited as authority in the majority opinion; the facts simply do not comport with the concept of a joint enterprise, a term which implies the existence of a prior plan to carry out a mutually beneficial project. The complaints, read in the most favorable light to the plaintiffs, disclose nothing more than a seemingly unsolicited and haphazard revelation of certain information which was useful in making investment decisions. There are ample remedies under the federal securities laws to punish this conduct. But, I am unable to understand on what basis the majority transforms the appellees’ spontaneous conduct into a nefarious, prearranged, and ongoing scheme so that “joint” or “common enterprise” principles can make them liable as fiduciaries of a corporation with which they have no relationship.
A primary authority upon which the majority relies, § 312 of the American Law Institute’s Restatement of Agency 2d, exposes the inappropriateness of holding the appellees liable to Lum’s for their conduct. Section 312 provides that “A person who, without being privileged to do so, intentionally causes or assists an agent to violate a duty to his principal is subject to liability to the principal.” Although Comment c to this section speaks generally of receipt of confidential information by a third person from a principal’s agent, the central element of liability is the third party’s active and intentional aiding in the agent’s violation of a duty owed to his principal. In this case, Chasen’s duty to Lum’s was to not disclose confidential corporate information. Yet there is not a word in the complaint charging that the appel-lees actively solicited the disclosure or that they had concocted a prearranged scheme with Chasen.3 We are dealing here with an isolated transaction.
In the absence of any coherent legal theory, I cannot join my brothers in approving the use of the shareholders’ derivative action device merely because, as my brothers candidly admit, to do so possibly may have a deterrent effect on “insider trading.” Although developments in federal securities law indicate an expanding scope of liability for tip-pee traders, see In re Investors Manage*828ment Co., Securities and Exchange Commission Release No. 34-9267 (Jul. 29, 1971) (SEC sanctioning of institutional investors who sold a corporation’s shares after the corporation’s underwriter revealed adverse earnings results to them); cf. SEC v. Texas Gulf Sulphur Co., 446 F.2d 1301, 1308 (2d Cir. 1971), cert. denied, 404 U.S. 1005, 92 S.Ct. 561, 30 L.Ed.2d 558 (1972) (affirming district court order, in SEC injunctive suit, requiring a “tippor” to divest an amount equal to his tippees’ profits), the impetus for developing this expanded federal law liability — whose exact nature and scope remain in a formative stage — is the need to maintain free and honest securities markets. This need appropriately is given great weight when we consider claims under the federal securities law. But it is inapposite in determining whether, under state common law, tippee trading is a breach of a fiduciary duty owed to the corporation whose shares are traded, and if so, whether such a breach is remediable through use of a shareholders’ derivative action.
In these actions, where jurisdiction is grounded solely in diversity of citizenship, the parties and the majority agree that our duty is to apply the law of Florida. Yet because there are no pertinent Florida decisions, the majority focuses on a New York decision, Diamond v. Oreamuno, supra. Thus, liability is founded on the conclusion of two federal judges that the Florida Supreme Court, if the instant case was before it, would look to a New York decision and, in addition, would give an unprecedented expansive reading to that case.
Despite the manner in which the majority opinion con volutes the law and the facts in this case, a view that a tippee is cloaked with state law fiduciary obligations to the corporation whose shares he trades is an unknown and untenable legal concept. Neither Diamond — itself a significant alteration of the common law principles applicable to an officer’s or director’s trading in his corporation’s shares4 — nor the law of agency support such a holding. Nothing in the majority opinion tells us why or on what grounds a New York court would hold a tippee trader liable to the corporation for his profits under common law fiduciary principles, and the court exceeds its authority by substituting its own view of what state law ought to be, for what the state law actually is.
Moreover, since the outcome of this case turns, ultimately, upon Florida law, I fail to comprehend why my brothers refuse to utilize Florida’s certified question statute, Fla.Stat.Ann. § 25.031.5 This enlightened law provides for certification to the Florida Supreme Court by a federal appellate court of an unresolved question of Florida law which is determinative of a case before it and on which there are no clear, controlling Florida Supreme Court precedents. The statute states that the court, by written opinion, then may answer the certified question. See Aldrich v. Aldrich, 375 U.S. 249, 84 S.Ct. 305, 11 L.Ed.2d 304 (1963); Green v. American Tobacco Co., 304 F.2d 70 (5th Cir. 1962). The uncertainty inherent in the majority’s speculation over what the Florida courts would decide if faced with this novel *829question of tippee liability under state common law fiduciary principles in a stockholders’ derivative action would be dispelled authoritatively and finally.
Accordingly, I respectfully dissent.

. But for a contrary view, see H. Manne, Insider Trading and the Stock Market (1966).

. As noted in the majority opinion, the only defendants remaining on appeal are Lehman Brothers, IDS, the two mutual funds, and Simon. The district court dismissed the actions against Chasen for lack of personal jurisdiction, a holding *827not challenged on appeal. Accordingly, this court need not comment on the nature and extent of Chasen’s liability to Lum’s because of his conduct.

. It is of no small significance that in the Diamond litigation, the Appellate Division affirmed dismissal of the complaint against other MAI directors — fiduciaries to the corporation — who allegedly “approved, acquiesced in or ratified” Oreamuno’s and Gonzalez’s transactions. 29 A.D.2d 285, 287 N.Y.S.2d 300 (1968). Despite the majority’s effort in a footnote to “distinguish” this disposition, I believe the Appellate Division’s action is clearly dispositive of the point before us. If the New York courts would not impose liability upon a director — a fiduciary of the corporation — who took no affirmative steps to cause or assist in a breach of a fiduciary duty by the corporation’s president, I fail to see by what logic it can be urged that New York courts would hold liable a non-fiduciary who did not cause or assist in the breach.

. See Note, 1970 Wis.L.Rev. 576, 577. Although not dispositive, this fact augurs against assuming the state courts could make the broad holding so readily attributed to them by the majority.-

. The supreme court of this state may, by rule of court, provide that, when it shall appear to the supreme court of the United States, to any circuit court of appeals of the United States, or to the court of appeals of the District of Columbia, that there are involved in any proceeding before it questions or propositions of the laws of this state, which are determinative of the said cause, and there are no clear controlling precedents in the decisions of the supreme court of this state, such federal appellate court may certify such questions or propositions of the laws of this state to the supreme court of this state for instructions concerning such questions or propositions of state law, which certificate the supreme court of this state, by written opinion, may answer.
This statutory authority has been implemented by Appellate Rule 4.61, 32 F.S.A.