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ROSEN v. DRISLER

October 21, 1976

Murray Rosen, Plaintiff
v.
William Drisler, Jr., et al., Defendants


Cannella, District Judge.


The opinion of the court was delivered by: CANNELLA

CANNELLA, District Judge:

Moving defendants' (William Drisler, Jr., Edward Whitmore, Robert Lear, Richard Powers and John O'Sullivan) application for an order dismissing the complaint for failure to state a claim upon which relief can be granted and for lack of subject matter jurisdiction, is granted. Plaintiff's cross-motion for summary judgment against these defendants, is denied.

 FACTS

 This is a shareholder's derivative action brought on behalf of Indian Head, Inc. ("Indian Head") by Murray Rosen. Indian Head is a public corporation whose stock is registered and traded on the New York Stock Exchange, a national stock exchange as defined by the Securities Exchange Act of 1934. *fn1" The individual defendants, with the exception of Whitmore and Drisler, are present and former directors of Indian Head. Whitmore and Drisler were employees and officers of the corporation during the occurrence of the transactions which gave rise to the instant litigation.

 The complaint, succinctly setting forth the claimed violations, and the other papers before the Court on these motions set out the following scenario.

 On December 1, 1961, Indian Head granted a stock option to defendant Edward C. Whitmore, then a corporate vice president. The option, issued under Indian Head's restricted option plan, was originally for the purchase of 10,000 shares of common stock at $34.00 per share; later stock splits necessitated an adjustment in the option to 15,000 shares at $22.67 per share. The option extended for a period of ten years.

 Indian Head granted a similar option to defendant William Drisler, Jr., another of Indian Head's vice presidents, on October 18, 1966. This five year option was for the purchase of 15,000 shares of Indian Head common stock at $20.125 per share.

 Robert W. Lear, president and a member of the board of directors of Indian Head, was also granted an option for Indian Head common stock. This option, by agreement dated May 26, 1970, was for a term of five years and covered 10,000 shares at a price of $15.75 per share.

 Apparently, these options were granted as incentives to the named officers, designed to give each employee a personal stake in the success of the corporation. During 1971 and 1972, however, it was determined that these individuals would no longer play a key role in the corporation's management. As a consequence of this decision, Indian Head concluded that their acquisition of a proprietary interest in the firm would no longer serve any corporate purpose. Thus, in August 1971 Whitmore was given the opportunity to surrender his option rights in return for the spread between the option exercise price and the mean market price of Indian Head common stock on the day of approval of the transaction by the Indian Head board of directors. Whitmore accepted this offer, and it was approved by the board at the August 24, 1971 meeting. This resulted in a payment of $147,500 to Whitmore. *fn2" Although the situations surrounding the purchases of the option rights from Drisler and Lear were somewhat more complicated, *fn3" each was likewise offered an opportunity to exchange his option for cash. Drisler agreed to the proposal on August 1, 1971, and later received a payment of $160,000. *fn4" Lear agreed to surrender his option rights in August of 1972 and was paid $128,000 therefor. *fn5"

 Basing his contentions on these undisputed facts, plaintiff argues that the purchases of the option rights were actually devices conceived to conceal simultaneous exercise of the options at the exercise price and sale of the shares thus acquired at the higher market value, thereby thwarting the proscription of Section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b), against short-swing insider trading. As a consequence, the argument goes, defendants Drisler, Lear and Whitmore should be required to account to Indian Head for the 16(b) profits realized as a result of these transactions.

 Plaintiff also alleges that the above described purchase of option rights was in contravention of the terms of the Indian Head option plans under which they were granted. Because the board of directors knowingly permitted such transactions, they are accused of both violating their fiduciary duty to Indian Head and engaging in a scheme to defraud the corporation, a violation of SEC Rule 10b-5. Thus, the directors who authorized the payments to Drisler, Whitmore and Lear are sued herein to indemnify Indian Head for the damages suffered by virtue of these allegedly unlawful acts. *fn6"

 The case is presently before the Court on the motions of defendants Richard J. Powers and John E. O'Sullivan, members of the Indian Head board of directors during the relevant time period, and of Drisler, Lear and Whitmore, to dismiss the complaint for failure to state a claim upon which relief can be granted, Fed. R. Civ. P. 12(b)(6), and for lack of subject matter jurisdiction, Fed. R. Civ. P. 12(b)(1). Plaintiff has cross-moved for summary judgment against the moving defendants. Fed. R. Civ. P. 56.

 DISCUSSION

 The Section 16(b) ...


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