The opinion of the court was delivered by: TYLER
Plaintiff Penn Mart Realty Co. ("Penn Mart") sues derivatively for the benefit of Glen Alden Corporation ("Glen Alden") under Section 10(b) of the Securities Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. 240.10b-5, promulgated thereunder.
The defendants are Investors Variable Payment Fund, Inc. ("Variable"), an open-end diversified investment company; Investors Diversified Services, Inc. ("IDS"), the fund's investment manager; Carter, Berlind & Weill, Inc., a securities broker-dealer; and the individuals who comprised the Glen Alden board of directors during the relevant period.
IDS has moved for an order dismissing the complaint pursuant to Rule 12(b) F.R. Civ. P. on the grounds that the first count fails to state a federal claim upon which relief can be granted, and that the court lacks subject matter jurisdiction over the pendent state claim in Count 2 once the federal claim fails.
The complaint alleges the following transactions relating to the common stock of Schenley Industries, Inc. ("Schenley"):
Between February 1, 1968 and February 23, 1968, Glen Alden acquired 92,700 shares of Schenley common in New York Stock Exchange transactions through Carter, Berlind as broker. On February 8, 1968, representatives of Glen Alden had a meeting, which was arranged by Carter, Berlind, with IDS, at which material inside information about Glen Alden affairs was disclosed to IDS in order to assist them in making investment decisions concerning Glen Alden and its related companies. Such information included the fact that Glen Alden intended to make a tender offer in the immediate future to acquire all the outstanding shares of Schenley. On March 14, 1968, Glen Alden sold its 92,700 shares of Schenley common to Variable in a New York Stock Exchange transaction through Carter, Berlind at $63 per share. Prior to March 20, 1968, the Glen Alden board had decided to make the tender offer for Schenley common for a purchase price equivalent to or in excess of $80 per share.
On March 20, 1968, Glen Alden acquired 945,126 shares of Schenley common from Lewis S. Rosenstiel and related persons at a purchase price of $80 per share, and the sale was announced to the investing public.
Plaintiff contends in this suit, therefore, that Glen Alden was injured in the amount of approximately $1,500,000 by the sale of the 92,700 shares of Schenley common to Variable at an allegedly bargain price of $17 per share less than was paid to the Rosenstiel group.
In order to avoid a dismissal of the complaint with prejudice, plaintiff's counsel states in its brief in opposition to this motion that plaintiff could allege certain additional facts which would cure any deficiency in the complaint as it now stands.
Although these facts are somewhat complicated, in summary they amount to an allegation that the reason for the sale of the 92,700 shares of Schenley common to Variable was to enlist the aid of IDS and Variable in accomplishing Glen Alden's imminent take-over attempt on Schenley.
IDS claims that dismissal of this federal claim is required by a recent decision of the Court of Appeals for the Second Circuit, Schoenbaum v. Firstbrook, 405 F.2d 215 (2d Cir. 1968) (en banc) cert. denied sub nom. Manley v. Schoenbaum, No. 1215, 395 U.S. 906, 89 S. Ct. 1747, 23 L. Ed. 2d 219, 37 L.W. 3440 (May 19, 1969), which displaced an earlier three-judge panel decision of the same court, 405 F.2d 200 (2d Cir. 1968). For convenience, I will hereinafter refer to the decision of the three-judge panel as Schoenbaum I, and to the decision of the court sitting en banc as Schoenbaum II.
The factual pattern in Schoenbaum is similar to the case presently before me. Plaintiff, a stockholder of Banff Oil Ltd. ("Banff"), sued derivatively for the benefit of Banff, alleging that the board of directors had sold 500,000 shares of treasury stock to Aquitaine Company of Canada, Ltd. ("Aquitaine") and 270,000 shares of treasury stock to Paribas Corp. ("Paribas") at bargain prices,
both sales having been made while the board and the two purchasers were aware of inside information of oil discoveries made by Paribas. At the time of its purchase, Aquitaine was a controlling shareholder of Banff, while Paribas bought as an unrelated third party.
In addition, Aquitaine had placed three directors on Banff's eight man board, although the Aquitaine directors did not vote when the board passed on the Aquitaine transaction. In that case, as here, defendants argued that because the board of directors of Banff had all information available to the purchasers, the fraud provisions of Section 10(b) and Rule 10b-5 were inapplicable.
In Schoenbaum I, the majority analyzed this question in traditional agency terms. The court stated:
"A corporation can act only through its agents and officers and can know only what its agents and officers know. . . . If the persons entitled in the ordinary course to participate in authorizing a securities transaction on behalf of the corporation have not been fully informed, it may be said that the corporation has not been fully informed. . . . In general, if the corporation's agents have not been deceived, neither has the corporation. However, as in other situations governed by agency principles, knowledge of the corporation's officers and agents is not imputed to it when there is a conflict between the interests of the officers and agents and the interests of the corporate principal. . . . Therefore, a corporation may be defrauded in a stock transaction even when all of its directors know all of the material facts, if the conflict between ...