The opinion of the court was delivered by: MOTLEY
Plaintiff joins two causes of actions in this suit against defendants. The first alleges violations of the Securities Exchange Act of 1934 and regulations under it: Section 10(b), 15 U.S.C. § 78j(b); Rule 10b-5, 17 C.F.R. § 240.10b-5; § 13(d)(1), 15 U.S.C. § 78m(d)(1); Rule 13d-1, 17 C.F.R. § 240.13d-1, § 14(a), 15 U.S.C. § 78n(a); Rule 14a-9, 17 C.F.R. § 240.14a-9; § 14(d)(4), 15 U.S.C. § 78n(d)(4); Rule 14d-4, 17 C.F.R. § 240.14d-4 and § 14(e), 15 U.S.C. § 78n(e). This first cause of action is brought by plaintiff, a purchaser and holder of stock in Madison Square Garden Corporation (Madison), representatively on behalf of all purchasers of shares of common stock of Madison who are similarly situated to plaintiff (Complaint P26). Jurisdiction is based on § 27 of the Securities Exchange Act, 15 U.S.C. § 78aa.
The second cause of action asserts a claim under common law for corporate waste and breach of fiduciary duty by the defendant directors of Madison. This cause is brought derivatively for the benefit of Madison. Jurisdiction is based on the doctrine of pendent jurisdiction with the federal claim in the first cause of action.
Those defendants who thus far have been served with the complaint now move pursuant to Rule 12(b), Fed. R. Civ. P., to dismiss the complaint for failure to state a claim. They also move to dismiss for lack of jurisdiction, for should the federal claim fall, this court would no longer have jurisdiction of the common law derivative suit embodied in plaintiff's second cause of action. For the reasons given below, we find that plaintiff's complaint fails to state a claim under the federal securities laws. We therefore dismiss the entire complaint.
The activities alleged in the complaint center around a battle for control and ownership of Roosevelt Raceway, Inc. (Roosevelt). In September 1969 a wholly-owned subsidiary of Madison, Eastern International Corporation (Eastern), owned 348,200 shares of Roosevelt stock. G & W Land and Development Corp. (G & W) began a tender offer to purchase 400,000 shares of Roosevelt at a net cash price of $46.50 a share on September 22, 1969. At the close of trading on Friday, September 19, 1962 a share of Roosevelt common stock was selling at $37.50, and on September 18 was $42.50.
In response to the tender offer, Madison began purchasing and "inducing others to purchase shares of common stock of Roosevelt" to drive the market price of Roosevelt over the tender price for the period of the offer. Madison's subsidiary, Eastern, purchased 20,000 shares of Roosevelt and purchased options for another 5,000 shares on September 22 and 23, 1969. "These acquisitions exhausted most of the working capital available to Madison." (Complaint P42(b).)
On September 24, 1969, Madison made an arrangement with Goldman-Sachs & Co. (Goldman) under which Goldman would buy up to 120,000 shares of Roosevelt on the market at any price. It would then hold the shares for one year, after which it would have the right to sell the shares to Madison for 120% of their purchase price. In a press release issued September 26, 1969, Madison reaffirmed its previously announced intention to acquire 100% ownership of Roosevelt and announced its agreement with Goldman.
Goldman purchased 25,000 shares of Roosevelt for its own account and 71,000 shares for the accounts of investors between September 24 and October 1, 1969. Harbill Associates (Harbill) also made substantial purchases under a similar plan. These purchases, plaintiff contends, eliminated the normal incentive for Goldman and Harbill to purchase at the lowest available price and served artificially to inflate the market price of Roosevelt common stock above the tender offer price of G & W. Investors in Roosevelt common stock were thus dissuaded from tendering their shares to G & W and "may be injured thereby."
The complaint goes on to allege that the cost of the Roosevelt stock to Madison exceeded its value. In July 1970, six of Madison's directors were elected directors of Roosevelt. In late 1970 and early 1971 Madison reached an agreement to purchase outstanding Roosevelt common shares at a set price.
Plaintiff claims that these facts amount to violations of the various security law provisions noted above. He seeks an accounting by the individual defendants to Madison, an injunction against continuation of the alleged acts and practices, compensatory damages for members of the class, punitive damages from the individual defendants, and attorneys' fees and expenses. We shall address the claims under the different securities provisions individually.
II. Section 10(b) and Rule 10b-5
These well known provisions in essence outlaw fraudulent devices and practices and untrue statements or omissions of material facts. Plaintiff's claim under ...