The opinion of the court was delivered by: TENNEY
The instant action is a "triple derivative" stockholders action on behalf of Gulf & Western Industries ("GWI"), Gulf & Western Land and Development Corporation ("GW Land") (a former subsidiary of GWI), and Madison Square Garden Corporation ("Madison Square") alleging violations of Section 10(b)
of the Securities Exchange Act of 1934 (15 U.S.C. § 78j) and Rule 10b-5
promulgated thereunder. Plaintiff at the time of the acts complained of had been a stockholder of GWI for many years, and in July 1969 received shares of GW Land as part of a distribution by GWI to its shareholders. In 1971 he acquired shares of Madison Square when the successor to GW Land was merged with Madison Square. Defendants Philip J. Levin (succeeded by the estate of Philip J. Levin and referred to hereinafter as "Levin"), Charles Bluhdorn, David N. Judelson, and Don F. Gaston were directors of both GWI and GW Land; defendants Samuel J. Silverman, Martin S. Davis and Frances S. Levien were directors only of GWI; and defendant Marjorie L. Everett was a director only of GW Land. Defendant Sigmund Sommer was a partner of defendant Levin in a private real estate business but was neither an officer nor a director of GWI or GW Land. Defendants Irving Mitchell Felt and George Morton Levy, together with defendants Bluhdorn, Judelson, and Gaston, were also directors of defendant Madison Square in 1971.
Defendant Janice H. Levin is Levin's widow, and defendant The Philip J. and Janice H. Levin Foundation ("Foundation") is a charitable foundation of which Janice H. Levin was a co-trustee with Levin at all times complained of herein.
Plaintiff's Second Supplemental and Amended Complaint ("complaint") asserts four derivative causes of action. The first and second are asserted on behalf of GWI and GW Land and relate to a September 1969 tender offer by GW Land for the stock of Roosevelt Raceway Corporation ("Roosevelt"). The fourth relates to the same incidents and is asserted on behalf of Madison Square, successor to GW Land. The third cause of action is asserted on behalf of Madison Square and relates to the settlement in May 1971 of certain lawsuits in federal district courts in New York and Illinois.
The first and second causes of action charge that in June 1969 Levin, then an officer of GW Land, disclosed material inside information to Janice H. Levin, the Foundation and Sommer ("tippee defendants") about an impending tender offer to be made by GW Land for Roosevelt common stock; that tippee defendants thereupon purchased 79,200 shares of Roosevelt stock on the open market at an average price of $32 per share; that thereafter in September 1969 with full knowledge of said tippee defendants' investments in Roosevelt, Levin participated with the defendant directors of GW Land in publishing a tender offer by GW Land for the purchase of 400,000 shares of Roosevelt at a price of $46.50 per share; that the foregoing resulted in the unjust enrichment of tippee defendants to the extent of at least $14.50 per share, at the expense of GW Land and GWI which were thereby deprived of a valuable corporate opportunity due to the breach of fiduciary duties owed the corporations by defendant directors. These acts are said to amount to a violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The second cause of action repeats the allegations of the first and realleges the breach of fiduciary duties by the defendant officers and directors of GWI and GW Land. It adds nothing to the first cause of action and can fairly be characterized as mere surplusage.
Plaintiff's third cause of action involves a different set of facts, alleging that Everett wrongfully settled several lawsuits she had commenced against many of the same named defendants but rests "on substantially the same grounds" as the first and second causes of action. (Complaint para. 23). It is not alleged that Everett was an officer, director or controlling shareholder of Madison Square, the successor corporation with whom she settled, nor that she owed the corporation any fiduciary duty. Nevertheless, the complaint claims in conclusory fashion that the settlement was wrongful and made without shareholder or court approval. (Id. P 28). The third cause of action further alleges that the directors of Madison Square breached their fiduciary duties to the corporation by transferring a corporate asset to Everett for inadequate consideration in order to settle "lawsuits against themselves and others individually." (Id. PP 30, 31). Plaintiff seeks rescission of the settlement agreement or, in the alternative, damages of $48 million against the defendant directors of Madison Square.
Finally, the fourth cause of action repeats the allegations of the first and second causes of action and additionally claims that the directors of GW Land should have made the tender offer in June 1969, when Roosevelt stock sold at $31 per share, but that they delayed the offer in order to avoid the adverse impact it would have had on GWI, in which such directors had substantial stockholdings. Damages are claimed against GWI and its directors in the sum of $48 million.
Defendants Levin, Janice H. Levin, the Foundation, Sommer, Bluhdorn, Judelson, Gaston, Silverman, Davis, Levien, Felt and Levy have moved to dismiss the complaint pursuant to Rule 12(b)(1) of the Federal Rules of Civil Procedure ("Rules") on the ground that this Court lacks subject matter jurisdiction over this action. Defendant Everett has moved pursuant to Rule 12(b)(6) to dismiss the first, second and third causes of action for failure to state a claim upon which relief can be granted, and has also moved to dismiss the third cause of action pursuant to Rule 12(b)(1). Defendant Everett has moved alternatively for summary judgment pursuant to Rule 56 dismissing the first, second and third causes of action. (Everett is not named in the fourth cause of action.) Plaintiff has purported to move for summary judgment by way of cross-motions.
In determining the motions for relief under Rule 12 the Court has considered evidence outside the pleadings in the form of affidavits and interrogatories and documentary evidence submitted therewith, and, accordingly, treats such motions as ones for summary judgment under Rule 56.
For the reasons hereinafter set forth, the defendants' motions are granted.
THE FIRST CAUSE OF ACTION
Although the general nature of the first cause of action has been alluded to herein-before, it is necessary to restate plaintiff's allegations in greater detail. GW Land was formed in June 1969 as a wholly-owned subsidiary of GWI, which immediately thereafter distributed 28% of GW Land stock in the form of dividends to GWI stockholders. As of September 24, 1969, 31% of GW Land stock was owned by Levin and his wife, either individually or as trustees of the Foundation, 42% was owned by GWI and the remainder by the public (principally GWI shareholders). The complaint charges that from June to September 1969 and on the basis of "material inside information" disclosed by Levin, tippee defendants Sommer and the Foundation (per Janice H. Levin) purchased at least 51,750 shares of Roosevelt stock at an average cost of $32 per share. (Complaint para. 12).
It is further charged that Levin was fully aware of tippee defendants' purchases when he caused GW Land to publish a tender offer for 400,000 shares of Roosevelt at $46.50 per share on September 25, 1969 (id. P 13) and thereby afforded tippee defendants a $14.50 profit per share while depriving GW Land "of the opportunity of purchasing at an average cost of $32.00 a share on the open market those shares of Roosevelt purchased" by tippee defendants. (Id. P 15). Although the material inside information is not particularized in the complaint, it presumably concerns tips of GWI's general interest in acquiring racetracks. Plaintiff concludes that tippee defendants "profited at the expense of GW Land in breach of the fiduciary duties owed by defendant officers and directors of GW Land and GWI, and in violation of the Securities Exchange Act" (id.); "that said corporations were thus deprived of a valuable corporate opportunity" (id. P 16); and that tippee defendants "were thus unjustly enriched at the expense of these corporations." (Id. P 17). Tippee defendants were not officers or directors of the corporations. It is conceded that no other defendants made any profit on these stock transactions.
It is imperative to note that the first cause of action describes not one but two separate and distinct sets of securities transactions. The first one concerns tippee defendants' purchases of Roosevelt stock between June 16 and September 9, 1969, allegedly on the basis of confidential information. It is not alleged that corporate plaintiffs GW Land or GWI participated in these trades as either purchaser or seller. Yet, it is now firmly established law that standing to bring a private damage action under Rule 10b-5 is limited to actual purchasers and sellers of the securities involved in the alleged fraud. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 44 L. Ed. 2d 539, 95 S. Ct. 1917 (1975); Birnbaum v. Newport Steel Corp., 193 F.2d 461, 464 (2d Cir.), cert. denied, 343 U.S. 956, 96 L. Ed. 1356, 72 S. Ct. 1051 (1952); Petersen v. Federated Development Co., 387 F. Supp. 355, 358 (S.D.N.Y. 1974); In re Penn Central Securities Litigation, 62 F.R.D. 181, 185 (E.D. Pa. 1974). Thus, plaintiff, suing derivatively for GW Land and GWI, has no standing to challenge trades between the individual tippee defendants and outside persons. Haberman v. Murchison, 468 F.2d 1305, 1311 (2d Cir. 1972). The corporations were not party to the trades and suffered no trading loss in reliance upon defendant tippers' nondisclosure or defendant tippees' trades during the summer. No hypothetical loss of an opportunity for advantageous trading by the corporation at the time of the trading by tippee defendants will substitute for the purchaser/seller requirement. Blue Chip Stamps v. Manor Drug Stores, supra, 421 U.S. at 737-38. Accordingly, no derivative action on behalf of these corporations will lie under Section 10(b) and Rule 10b-5 based on allegations of fraud in connection with the purchases by tippee defendants.
The second set of transactions described in the first cause of action involves the GW Land tender offer for 400,000 shares of Roosevelt stock at $46.50 per share, announced September 25, 1969. Although GWI was not a participant, it is obvious that GW Land as tender offeror was a purchaser of the stock within the intendment of Rule 10b-5. Defendants are charged with depriving GW Land of a corporate opportunity to purchase the ...