The opinion of the court was delivered by: HAIGHT
MEMORANDUM OPINION AND ORDER
This is a shareholder's derivative action brought against individuals comprising the Board of Directors of defendant Warner Communications, Inc., and others, alleging violations of § 10(b) of the Securities Exchange Act of 1934 (the Act), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, and breaches of certain fiduciary duties imposed on corporate directors under state law. Jurisdiction is invoked under § 27 of the Act, 15 U.S.C. § 78aa, and principles of pendent jurisdiction. Various of the defendants move to dismiss the complaint for failure to state a federal claim under § 10(b) and Rule 10b-5, and lack of subject matter jurisdiction as to the pendent state law claims. Because plaintiff has submitted and the Court has considered matters outside the pleadings, the motion shall be treated as one for summary judgment under Rule 56, F.R.Civ.P. For the reasons set forth below, summary judgment dismissing the first cause of action for failure to state a claim is granted. With the pre-trial dismissal of the federal claim at the pleading stage, I decline to retain pendent jurisdiction of the state law claims, United Mine Workers v. Gibbs, 383 U.S. 715, 726, 86 S. Ct. 1130, 1139, 16 L. Ed. 2d 218 (1966); there being no independent jurisdictional basis, the state law claims are likewise dismissed.
Accepting the factual allegations of the complaint as true,
the litigation arises out of the following circumstances.
Plaintiff, a New York citizen, is and has been since prior to 1972, the owner of shares of stock of defendant Warner Communications, Inc. ("Warner" or "WCI"). Warner, a Delaware corporation with its principal place of business in New York, is engaged in the entertainment and communications industry; its stock is traded on the New York and American Stock Exchanges.
Until September 1971, National Kinney Corporation (Kinney) had been a wholly-owned subsidiary of Warner. In September 1971, Kinney made a public offering of its common stock, and simultaneously sold to Warner some 140,000 shares of common stock in return for cancellation of $ 2,170,000 of Kinney debt to Warner. As a result of these transactions Warner retained 48.9% ownership of Kinney common stock and 100% ownership of Kinney convertible preferred stock.
In October 1971, Warner sold 140,000 shares of Kinney common stock; 40,000 shares to each of three Kinney officers defendants Frankel, Sweig and Milstein and 20,000 shares to a fourth officer, one Arthur E. O'Donnell. The purchase price was $ 15.50 per share; each of the four officers paid $ .50 per share at the time of sale and gave Warner a promissory note for the balance of the purchase price. The notes were payable on October 1, 1976, or six months after the death of the officer, or 30 days after the termination of his employment with Kinney, whichever event first occurred. The notes bore interest at a rate of 4% per annum; Warner retained the 140,000 shares as collateral.
Between November 1973 and October 1976 each of the four promissory notes fell due; during this time Kinney common stock traded at substantially lower prices than the $ 15.50 per share at which it had been sold to the four Kinney officers. Warner's Board of Directors failed to take legal action to collect the promissory notes; rather, Warner took steps under the Uniform Commercial Code to retain the 20,000 shares representing the collateral on the O'Donnell note and extended to September 30, 1977, allegedly without consideration, the due dates on the Frankel, Sweig and Milstein notes, which represented a.$ 1.8 million debt owed Warner.
The foregoing facts were alleged in a shareholder's derivative action brought by this plaintiff against a virtually identical cast of defendants, alleging violations of § 7 of the 1934 Act, 15 U.S.C. § 78g, various Federal Reserve Board Regulations, and state law. Judge Brieant dismissed the federal causes of action for failure to state a claim, and declined to retain jurisdiction over the pendent claims, essentially because state law provided the traditional remedies for the alleged waste and spoilation of corporate assets. Gluck v. Frankel, 440 F. Supp. 1143 (S.D.N.Y.1977).
Plaintiff thereafter instituted a second derivative action in New York State Supreme Court, in December 1977, alleging breaches of fiduciary duties in connection with the Warner Board's actions respecting the promissory notes. Gluck v. Frankel, et al, Index No. 15546/78 (Sup.Ct.N.Y.Cty.).
The crux of plaintiff's instant allegations of federal securities fraud concern not the transactions recited above, but rather events which transpired subsequently. In the latter part of 1978, Warner owned 47%, or some 3 million shares of Kinney common stock, and 100%, or 1.5 million shares of its convertible preferred stock, the latter convertible into 3 million shares of common stock; these holdings allegedly constituted 57% voting control of Kinney. Sometime in 1978, defendants Frankel and Sweig (Kinney's principal officers and directors) and defendant Milstein (a former Kinney officer and director) formed a general partnership (FMS Associates) to acquire Warner's interest in Kinney. On December 19, 1978 Warner and FMS Associates entered into an agreement for the purchase and sale of Warner's Kinney stock; the transaction was meant to close at the same time the agreement was executed. Two days later, on December 21, 1978, Warner caused the following press release to be published in the Wall Street Journal:
" "NATIONAL KINNEY STAKE IS SOLD BY WARNER COMMUNICATIONS INC.
"NEW YORK Warner Communications Inc. said it sold its 57% interest in National Kinney Corp. for $ 1 million in cash and notes and received an additional $ 7.2 million cash as repayment of debts National Kinney owed Warner.
"Warner is a diversified entertainment company. Kinney has interests in building maintenance, parking ...