The opinion of the court was delivered by: TENNEY
Plaintiffs Irving Kaplan and Frances Kaplan are suing derivatively on behalf of General Telephone & Electronics Corporation ("GTE"), alleging violations of sections 10(b), 12(b), 13(a) and 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78L (b), 78m(a), 78n(a) ("the Act"), and waste of assets and breach of fiduciary duties under state law.
Plaintiff Robert Soshnick is also suing derivatively and alleging violations of sections 13(a) and 14(a) of the Act and of state law.
Jurisdiction is founded upon section 27 of the Act, 15 U.S.C. § 78aa, and the principles of pendent jurisdiction. These companion motions, jointly made by defendants,
seek a stay of the pending actions or, in the alternative, summary judgment based on principles of res judicata and collateral estoppel or dismissal for failure to state a claim under Fed.R.Civ.P. 12(b)(6).
Generally, the complaints allege that defendants caused and permitted GTE to make improper disbursements of funds and assets to officials and employees of foreign and domestic governments in the form of commercial bribes, kickbacks and rebates. Additionally, they allege that the individual defendants caused and permitted the improper reflection of the transactions on the books and records of GTE and the making of false and misleading statements in filings with the SEC and in annual reports and proxy statements issued to shareholders. Soshnick also alleges that Arthur Andersen & Co. breached its obligation to GTE in the performance of its auditing duties, and the Kaplans assert that the individual defendants defrauded the corporation in connection with the purchase and sale of a security through the illegal transactions.
In opposing these motions, plaintiffs proffer details of allegedly illegal payments to Iranian government officials and the consequent filings of misleading documents with the SEC and Iranian government, and of the sale by GTE of its substantial interest in Philippine Long Distance Telephone Co. ("PLDT") to a group designated by officials of the Philippine government. As to the last transaction, GTE assisted in financing the sale in part through an arrangement whereby GTE would pay a Bahamian company (owned or controlled by the purchasing group) commissions on equipment sales to PLDT. (See infra for a further discussion of the PLDT transaction.)
A preliminary review of the facts and history surrounding these cases is necessary to a consideration of the issues raised in the instant motions. To begin, the March 15, 1976 proxy statement to GTE shareholders disclosed the contents of a special investigative report of the Audit Committee of the GTE Board of Directors ("Audit Committee Report"). The investigation had been conducted to determine whether GTE or its related companies had made improper payments between January 1, 1971 and December 31, 1975. Although the Audit Committee concentrated on the period between 1971 and 1975, "in instances in which a questionable payment, transaction or arrangement during the period was discovered, the Committee's review went back to the inception of that transaction or arrangement even if prior to January 1, 1971." Audit Committee Report, Exh. 1-B to Affidavit of Joel P. Mellis, sworn to June 29, 1977 ("Mellis Affidavit").
The Audit Committee Report revealed that substantial payments had been made improperly to, or for the benefit of, government officials and that payments in the form of commercial kickbacks, rebates or bribes had been made to private foreign customer officials. The Report also described payments under a commission arrangement arising out of the sale by GTE of its substantial interest in a foreign customer, at the behest of a foreign government, to a group of foreign nationals. Audit Committee Report at 25-26. Defendants Warner, Brophy, Douglas and Bennett, in varying degrees, were found to have had knowledge of and to have been involved in the commission and sale transaction. Defendant Bennett was found to have had knowledge of and/or to have been involved in additional transactions. Id. at 43-45. The Report further stated that there was no evidence that the defendants profited personally from the transactions. Id.
Upon disclosure of the Audit Committee Report, three derivative suits were instituted on behalf of GTE. Auerbach v. Bennett, No. 5 72/77 (Sup.Ct. Westchester Co. Apr. 29, 1977),
was commenced against officials of GTE and Arthur Andersen & Co. The complaint charged that the illegal payments were a waste of corporate assets and that in permitting the payments defendants had breached their fiduciary duties to the corporation. Limmer v. General Telephone & Electronics Corp., (1977-1978) Fed.Sec.L.Rep. (CCH) P 96,111 (S.D.N.Y.1977),
and Cramer v. General Telephone & Electronics Corp., 443 F. Supp. 516 (E.D.Pa.1977),
also made state law claims and added claims under the federal securities laws. Limmer alleged that the failure to disclose the transactions in reports filed with the SEC violated section 13(a) of the Act and that the failure to disclose the activities in proxy statements violated section 14(a). Cramer similarly alleged violations of sections 13(a) and 14(a) and additionally alleged violations of sections 10(b) and 12(b).
Purportedly acting pursuant to section 712 of the New York Business Corporation Law (McKinney 1963 & Supp. 1978-1979) (statute authorizing grant of power to the board to create committees to act with authority of the board), the GTE Board of Directors formed a Special Litigation Committee composed of Messrs. Blauvelt and Dunlop (both named as defendants in the instant Soshnick Complaint), and Mr. James R. Barker, assisted by the Hon. Charles S. Desmond, retired Chief Judge of the New York Court of Appeals, as Special Counsel. In a report dated November 22, 1976 the Special Litigation Committee determined that the federal claims in Limmer and Cramer were without merit as were the state law claims in Auerbach, Limmer and Cramer and that prosecution of the claims was not in the best interest of GTE or its shareholders. November 22, 1976 Report of Special Litigation Committee, Exh. 1 to Mellis Affidavit. Pursuant to this determination, motions to dismiss were made in Auerbach, Limmer and Cramer.
Subsequently, in January 1977, the SEC filed a complaint against Philippine Long Distance Telephone Co., Philippine Telecommunications Investment Corp. and Stamford Trading Co., and filed one against GTE. The SEC complaints described in detail the transactions disclosed in the Audit Committee Report. Without admitting or denying the allegations in the SEC complaint, GTE consented to entry of an injunction. Thereafter, additional derivative suits were instituted in federal and state courts, among which suits were the instant Kaplan and Soshnick actions. The Special Litigation Committee undertook to assess the position that GTE should take with respect to these new actions. In a second report, dated April 5, 1977, the Special Litigation Committee again determined that the federal and state claims were without merit and that their prosecution would not be in the best interest of GTE or its shareholders. April 5, 1977 Second Supplemental Report of the Special Litigation Committee, Exh. R to Mellis Affidavit.
In April 1977, summary judgment in favor of defendants was granted in Auerbach based on the court's determination that the Special Litigation Committee's decision not to prosecute was conclusive under the business judgment rule. Auerbach v. Bennett, No. 5 72/77 (Sup.Ct. Westchester Co. Apr. 29, 1977). In August 1978, the Second Department of the Appellate Division reversed, holding that at least prior to discovery concerning the independence of the Committee and the scope of its investigation, summary judgment was improper. 64 App.Div.2d 98, 408 N.Y.S.2d 83 (2d Dep't 1978). The Appellate Division granted leave to appeal to the New York Court of Appeals, certifying a question of law to that court. Order dated October 12, 1978.
In March 1977, Judge Conner dismissed the Limmer section 14(a) claim.
Limmer v. GTE, (1977-1978) Fed.Sec.L.Rep. (CCH) P 96,111 (S.D.N.Y.1977). In August 1977, Judge Higgenbotham granted summary judgment in the Cramer action as to the sections 13(a) and 14(a) and pendent state law claims, and he dismissed the sections 10(b) and 12(a) claims. Cramer v. GTE, 443 F. Supp. 516 (E.D.Pa.1977). The disposition of the sections 10(b), 13(a) and 14(a) claims was appealed to the Court of Appeals for the Third Circuit, which affirmed, although on different grounds. Cramer v. GTE, 582 F.2d 259 (3d Cir. 1978), Cert. denied, 47 U.S.L.W. 3497 (Jan. 23, 1979). Relying on principles of res judicata and collateral estoppel, defendants here assert the Limmer and Cramer judgments as bars to the instant suits.
To effect a bar to a subsequent suit, the principles of res judicata require a judgment on the merits rendered in the prior action by a court of competent jurisdiction, and an identity of parties and causes of action in both suits. Commissioner v. Sunnen, 333 U.S. 591, 597, 68 S. Ct. 715, 92 L. Ed. 898 (1948); Expert Electric, Inc. v. Levine, 554 F.2d 1227, 1232-33 (2d Cir.), Cert. denied, 434 U.S. 903, 98 S. Ct. 300, 54 L. Ed. 2d 190 (1977). Collateral estoppel requires the issue necessarily decided on the merits in the prior suit to be identical to the one in the subsequent suit, and the party against whom the bar is asserted to have been a party to the earlier suit and to have had a full and fair opportunity to litigate the issue. Zdanok v. Glidden Co., Durkee Famous Foods Division, 327 F.2d 944, 955-56 (2d Cir.), Cert. denied, 377 U.S. 934, 84 S. Ct. 1338, 12 L. Ed. 2d 298 (1964);
Schwartz v. Public Administrator, 24 N.Y.2d 65, 71, 298 N.Y.S.2d 955, 960-61, 246 N.E.2d 725 (1969). The party asserting the bar need not have been a party to the prior suit. Id. at 70, 298 N.Y.S.2d at 959, 246 N.E.2d 725. Collateral estoppel effects a bar only as to those matters actually raised and determined in the prior suit. Expert Electric, Inc., supra, 554 F.2d at 1233.
Plaintiffs first contend that the previous actions did not involve the same parties and thus cannot bar the instant suits. However, neither the preclusive effect of Limmer nor that of Cramer can be avoided by claiming that the party against whom the bar is asserted here differs from the party in the prior suits. A derivative action represents prosecution of a claim belonging not to the individual shareholder but to the corporation on whose behalf suit is brought. Ross v. Bernhard, 396 U.S. 531, 538-39, 90 S. Ct. 733, 24 L. Ed. 2d 729 (1970). To determine whether the parties are identical, the court looks to the identity of the real party in interest, the corporation, rather than to the identity of the nominal party seeking to champion the corporate claim. See, e.g., Papilsky v. Berndt, 466 F.2d 251 (2d Cir.), Cert. denied, 409 U.S. 1077, 93 S. Ct. 689, 34 L. Ed. 2d 665 (1972) (prior determination not on the merits); Saylor v. Lindsley, 391 F.2d 965 (2d Cir. ...