JACOB SCHEIN AND MARVIN H. SCHEIN, PLAINTIFFS-APPELLANTS, v. MELVIN CHASEN ET AL., DEFENDANTS-APPELLEES. ANTONE F. GREGORIO, PLAINTIFF-APPELLANT, v. LUM’S, INC., ET AL., DEFENDANTS-APPELLEES.

Nos. 81, 82, Dockets 72-1373, 72-1375.United States Court of Appeals, Second Circuit.Submitted April 21, 1975.
Decided May 2, 1975.

Wolf, Popper, Ross, Wolf Jones, New York City (Donald N. Ruby, New York City, of counsel), for plaintiffs-appellants.

Simpson, Thacher Bartlett, New York City (James J. Hagan, New York City, of counsel), for defendants-appellees.

Appeal from the United States District Court for the Southern District of New York.

Before KAUFMAN, Chief Judge, and WATERMAN and SMITH, Circuit Judges.

PER CURIAM:

[1] This case returns to us after an extraordinary journey. In Schein v. Chasen, 478 F.2d 817 (2d Cir. 1973), we reversed the judgment of the trial court dismissing plaintiffs’ shareholder derivative suit. (Kaufman, C. J., dissenting). The majority concluded, under Florida law, that investors who sell stock on the basis of inside information provided by a stockbroker — who in turn received the information from the president of the issuer corporation — may be liable to the corporation in a shareholder derivative action. They also found that the stockbroker who relayed the information could be held liable. The Supreme Court vacated our judgment, Lehman Brothers v. Schein, 416 U.S. 386, 94 S.Ct. 1741, 40

Page 454

L.Ed.2d 215 (1974) so that this court might consider certifying the controlling issues of Florida law to the Supreme Court of Florida for determination.

[2] Pursuant to that direction, we issued the following certificate to the Supreme Court of Florida, see § 25.031, Florida Statutes, and Florida Appellate Rule 4.61:

[3] Statement of Facts:

[4] A complete discussion of the facts as alleged in the two complaints can be found in the opinion of this Court [478 F.2d 817
(2d Cir. 1973)].

[5] Questions to be certified:

1. Are investors, who sell stock on the basis of inside information about the issuer corporation which they received from a stockbroker who in turn received the information from the president of the issuer corporation, liable to the corporation in a shareholder derivative suit under Florida law for the profits realized by the investors on the sale of that stock?
2. Is the stockbroker, who relayed the material information from the president of the issuing corporation to the investors, jointly and severally liable with them for the profits realized on the sale in a shareholder’s derivative suit under Florida law?

[6] The Florida Supreme Court, in a decision appended to this opinion, answered the questions certified as follows:

. . . [W]e find that the rationale of Judge Kaufman in his dissent [478 F.2d at 825-29], and the opinion of the United States District Court [Gildenhorn v. Lum’s Inc., 335 F.Supp. 329 (S.D.N.Y. 1971)] comport with Florida law and we would approve Judge Kaufman’s reasoning as dispositive of the issues presented sub judice which we answer in the negative.

[7] Since the resolution of these issues disposes of the controversy originally before us, we affirm the judgment below.

APPENDIX

Not Final Until Time Expires To File Rehearing Petition and,
If Filed, Determined.

In the Supreme Court of Florida

January Term, A. D. 1975

Case No. 45,803

United States Court of Appeals

Second Circuit No. 72-1373

______

Jacob Schein and Marvin H. Schein,
Plaintiffs-Appellants,

v.

Melvin Chasen, et al.,
Defendants-Appellees.

______

Antone F. Gregorio,
Plaintiff-Appellant,

v.

Lum’s Inc., et al.,
Defendants-Appellees.

______

Opinion filed March 13, 1975

Certified Question from the United States Court of Appeal,

Second Circuit

Sidney B. Silverman of Silverman and Harnes, for
Plaintiffs-Appellants.

Richard Y. Holcomb and James V. Hayes of Donovan, Leisure, Newton
and Irvin; Lindsay A. Lovejoy, Jr., Stephen P. Duggan, James J.
Hagan and John J. Poggi, Jr. of Simpson, Thacher and Bartlett;
and David Hartfield, Jr. and Laura Banfield of White and Case,
for Defendants-Appellees.

ROBERTS, Justice.

This cause is before us for consideration of questions
certified to us by the United States Court of Appeals for the
Second Circuit pursuant to Rule 4.61, Florida Appellate Rules.
The following questions have been certified:

Are investors, who sell stock on the basis of inside
information about the

Page 455

issuer corporation which they received from a
stockbroker who in turn received the information from
the president of the issuer corporation, liable to
the corporation in a shareholder derivative suit
under Florida law for the profits realized by the
investors on the sale of that stock?

Is the stockbroker, who relayed the material
information from the president of the issuing
corporation to the investors, jointly and severally
liable with them for the profits they realized on the
sale in a shareholder’s derivative suit under Florida
law?

As appears from the certificate, the pleadings, the decision of
the United States District Court, S.D. New York, reported as
Gildenhorn v. Lum’s Inc., et al., Gregorio v. Lum’s, Inc., et
al., and Schein v. Chasen, 335 F.Supp. 329 (U.S. D.C., 1971), the
opinion of the United States Court of Appeals, Second Circuit,
reported as Schein v. Chasen, Gregorio v. Lum’s, Inc., et al.,
478 F.2d 817 (U.S.C.A., 2 Cir., 1973), and the United States
Supreme Court decision reported as Lehman Bros. v. Schein, Simon
v. Schein, Investors Diversified Services, Inc., et al. v.
Schein, 416 U.S. 386, 94 S.Ct. 1741, 40 L.Ed.2d 215 (1974),[1]
the nature of the parties, status of the cases, and essential
factual background are hereinafter detailed.

The plaintiffs, appellants, Schein, Schein and Gregorio, are
shareholders of Lum’s, Inc., a Florida corporation (which has
subsequent to the filing of their complaints been renamed
Caesar’s World, Inc.) and sue derivatively on behalf of Lum’s,
Inc. Invoking the diversity jurisdiction of the court, they sued
derivatively in the Southern District of New York alleging that
defendants were jointly and severally liable to Lum’s for
actionable wrongs committed against Lum’s. Lum’s, Inc. is a
nominal defendant in each of the cases. Chasen was, at the time
of the events in issue, the chief operating officer of Lum’s,
Inc. Lehman Brothers (defendant-appellee) was a stock brokerage
firm, and Benjamin Simon (defendant-appellee) was a registered
representative employed by it in its Chicago office. Investors
Diversified Services, Inc. (defendant-appellee) was the
investment advisor for Investors Variable Payment Fund, Inc. and
IDS New Dimensions Fund, Inc., two mutual funds based in
Minneapolis. Eugene Sit was portfolio manager for IDS New
Dimensions Fund, Inc., and James Jundt was portfolio manager for
Investors Variable Payment Fund, Inc. — both were employees of
Investors Diversified Services, Inc. The defendants Chasen, Sit
and Jundt were dismissed by the Federal District Court, Southern
District of New York, for lack of personal jurisdiction. These
dismissals were not appealed and these defendants are no longer
involved in the suit.

The District Court dismissed the complaints in these cases,
holding that they failed to state a claim under Florida law. The
opinion of the District Court is reported sub nom. Gildenhorn v.
Lum’s, Inc. at 335 F.Supp. 329 (S.D.N.Y. 1971). On appeal by the
plaintiffs, the Second Circuit Court of Appeals, in a two to one
decision, reversed in an opinion reported at 478 F.2d 817 (2d
Cir. 1973). The judgment of the Second Circuit Court of Appeals
was vacated by the Supreme Court of the United States on April
29, 1974, in an opinion reported at 416 U.S. 386, 94 S.Ct. 1741,
40 L.Ed.2d 215 (1974). The cases were remanded so that the Second
Circuit Court of Appeals might reconsider whether the controlling
issue of Florida law should be certified to the Supreme Court of
Florida.

The only question before the United States Court of Appeals is
the sufficiency of the complaints to state a cause of action
under Florida law.

The following explication of the factual situation alleged in
the pleadings as

Page 456

the basis for the controversy sub judice is found in the decision
of the Circuit Court of Appeals, 478 F.2d 817:

“In November of 1969 Chasen, who was president and chief
operating officer of Lum’s, addressed a seminar of about sixty
members of the securities industry with reference to Lum’s
earning prospects for its fiscal year ending July 31, 1970. He
informed them that Lum’s earnings would be approximately $1.00 to
$1.10 per share. On January 5, 1970, he learned that his estimate
was too optimistic and that, in fact, Lum’s earnings would be
only approximately $.76 per share. Three days later, prior to
announcing the information to the public, Chasen telephoned Simon
in Chicago and told Simon that Lum’s would not have as profitable
a year as had been expected. He specified to Simon that earnings
would be approximately $.76 per share rather than the $1.00 per
share which he had earlier announced. Simon knew the information
was confidential corporate property which Chasen had not given
out publicly. Simon immediately telephoned this information to
Sit, an employee of defendant Investors Diversified Services,
Inc. (IDS), and Sit immediately telephoned it to Jundt, another
employee of IDS. Sit and Jundt managed the stock portfolios of
defendant mutual funds Investors Variable Payment Fund, Inc.
(Investors) and IDS New Dimensions Fund, Inc. (Dimensions). Upon
receiving the information Sit and Jundt directed the Funds to
sell their entire stock holdings in Lum’s and, on the morning of
January 9, 1970, prior to any public announcement, Investors sold
43,000 shares of Lum’s and Dimensions sold 40,000 shares. The
sales were executed on the New York Stock Exchange at about 10:30
A.M. at a price of approximately $17.50 per share. At 1:30 P.M.
on the same day, the New York Stock Exchange halted further
trading in Lum’s stock pending a company announcement. At 2:45
P.M., Lum’s issued a release which appeared on the Dow Jones News
Wire Service and announced that the corporation’s projected
earnings would be lower than had been anticipated. When trading
in Lum’s was resumed on Monday, January 12, 1970, volume was
heavy and the stock closed at a price of $14.00 per share — $3.50
per share lower than the Funds had realized from the sales of
their shares on the previous Friday.

“The present defendants in this case are Lehman Brothers, Simon
and the two Mutual Funds. Chasen, Sit, and Jundt have been
dismissed as defendants in that they have not been validly served
under the New York State Long Arm Statute. Plaintiffs-appellants’
theory of recovery is that the participants in this chain of
wrongdoing are jointly and severally liable to the corporation
under Florida law for misusing corporate information to their own
advantage in violation of the duty they owed to Lum’s, and that
they must account to Lum’s for the profits realized by the Mutual
Funds. They do not allege in these complaints that defendants
have violated any of the federal securities laws, and they
concede that the substantive law of Florida governs the rights
and liabilities of the parties. They argue, however, that
inasmuch as there are no Florida cases directly in point, the
Florida court, if it were deciding the case, would look to other
jurisdictions and would take a particular and special interest in
the decision of Diamond v. Oreamuno, 29 A.D.2d 285, 287 N.Y.S.2d
300 (1st Dep’t 1968), aff’d 24 N.Y.2d 494, 301 N.Y.S.2d 78,
248 N.E.2d 910 (1969), a case which plaintiffs contend supports the
position they urge on this appeal.”

Defendants moved to dismiss the consolidated actions upon the
ground that the complaints failed to state a claim upon which
relief could be granted. Citing Klaxon v. Stentor Electric Mfg.
Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941) as
authority, the United States District Court looked to the choice
of law rules of the State of New York, and found that New York
follows the general choice of law principle that the law of the
state of incorporation governs the existence and extent of
corporate fiduciary obligations. Hausman v. Buckley, 299 F.2d 696,
703 (2d Cir. 1962); Diamond v. Oreamuno, 24 N.Y.2d 494, 301

Page 457

N.Y.S.2d 78, 248 N.E.2d 910 (1969). The United States District
Court proceeded to examine Florida law and concluded that
although the Florida Supreme Court has not considered the
question presented in the instant cause, several Florida District
Courts of Appeal have indicated that a complaint in a
stockholders’ derivative action which fails to allege both
wrongful acts and damage to the corporation must be dismissed.
Palma v. Zerbey, 189 So.2d 510, 511 (Fla.App.3, 1966), cert.
denied Fla., 200 So.2d 814; Talcott v. McDowell, 148 So.2d 36
(Fla.App.3, 1962); Maronek v. Atlantis Hotel, Inc., 148 So.2d 721
(Fla.App.3, 1963); Citizen’s National Bank of St. Petersburg v.
Peters, 175 So.2d 54 (Fla.App.3, 1965). Specifically, the United
States District Court asserted:

“Under present Florida case law, a plaintiff in a
derivative action must prove that the corporation has
been damaged by the alleged breach of fiduciary
trust.”

The United States District Court considered the possibility
that Florida courts might follow the rationale of the New York
decision in Diamond v. Oreamuno, supra, and therefore considered
whether defendants would be liable under the rationale of
Diamond and concluded, as follows:

“It is clear that the complaints in these actions go
far beyond the narrow holding of Diamond. In that
case, the New York Court of Appeals held that a
corporate fiduciary is liable for profits which he
realizes from a sale of stock motivated by inside
information received by him in his corporate
position. None of the defendants in these actions fit
into this mold. Chasen, as president and chief
operating officer of Lum’s, was certainly a fiduciary
of that corporation. None of the complaints, however,
allege that he did anything more than pass the inside
information to defendant Simon, and there are no
allegations that Chasen sold any of his Lum’s stock
or derived any gain, monetary or otherwise, from the
sales that ultimately occurred. On the other hand,
the mutual fund defendants would have profited if, as
alleged, they sold their 83,000 shares of Lum’s stock
on the basis of Chasen’s inside information. It can
scarcely be maintained, however, that the mutual fund
defendants were officers or directors of Lum’s or
owed any fiduciary duties whatsoever to that
corporation. The broker-dealer defendants fail to
come within either of the Diamond perimeters as
they were not fiduciaries of the corporation and, did
not profit by virtue of the sales.

“. . . As Chief Judge Fuld explained, the purpose of
that derivative action was to allow individual
shareholders to be `. . . “private attorney
General[s]” to . . . enforce proper behavior on the
part of corporate officials.’ Diamond v. Oreamuno,
supra, [24 N.Y.2d] at 503, 301 N.Y.S.2d at 85, 248
N.E.2d at 915. It is implicit that the jurisdiction
of these `private attorney generals’ would be limited
to the corporation in which they are shareholders. It
could not, with any logic, be extended in a
derivative action to cover outside individuals,
corporations, or institutions who are subject to
other private and governmental restraints on their
behavior. Furthermore, in affirming the dismissal of
the Diamond complaint against other board members
who were alleged to have aided the defendants in
concealing their activities, the New York Court of
Appeals made it quite clear that Diamond extends
only to corporate fiduciaries who actually profit by
inside information and does not cover aiders and
abettors and/or conspirators. In view of the fact
that the New York Court of Appeals could not bring
itself to find liability for intercorporate
conspirators, I fail to perceive how this court
could extend Diamond to cover extra-corporate
conspirators and tippees. Accordingly, I conclude
that with regard to all defendants save Chasen, the
complaints herein fail to state a claim for which
relief can be granted.” (emphasis supplied.)

Page 458

With regard to Chasen, the District Court opined that as a
corporate officer, he may come within the holding of Diamond,
but that this question need not be reached because service of
process on him was improper. The Circuit Court of Appeals by
divided vote reversed the District Court and found that although
Florida law was controlling, it could find none that was
decisive, and, therefore, it turned to the law of New York, in
particular Diamond, supra. The Circuit Court of Appeal stated
its objective to be to interpret Diamond as the Florida Court
would probably interpret it and apply it to the facts sub judice.
The Court of Appeals concluded that defendants had engaged with
Chasen to misuse corporate property although the Circuit Court
recognized that there was no allegation in the complaints that a
prior agreement existed between Chasen and the defendants, and
that Diamond, supra, encompassed such a situation, and
determined that such a construction of Diamond would have the
“prophylactic effect of providing a disincentive to insider
trading.” The Circuit Court opined that the cleansing effect of
the Diamond rationale ought to reach third parties who, through
breach of fiduciary relationship, become traders advantageously
possessed of confidential insider knowledge, and declared:

“As a court of equity viewing the case as the Florida
court would probably view it, we cannot agree that
the `stretch’ of Diamond does not reach the
defendants in this case. We find nothing in the
language of Diamond to suggest that coventurers of
the director who breaches his duty should not be
subject to the same liabilities as those of the
director himself for the misuse of corporate
information. Indeed, the general rule has always been
that `one who knowingly participates in or joins in
an enterprise whereby a violation of a fiduciary
obligation is effected is liable jointly and
severally with the recreant fiduciary.’ . . .
Moreover, in the light of the corporate interest
which the Diamond rule is designed to protect, it
is immaterial to the preservation of that interest
whether the director trades on his own account in the
corporation’s stock or whether he passes on the
information to outsiders who then trade in the
corporation’s stock. In either event, so long as the
director is involved, the prestige and good will of
the corporation may be tarnished by the public
revelation that the director has been involved in
unethical conduct. . . Accordingly, it would be
self-defeating to limit the reach of Diamond to
directors and officers of the injured corporation who
have so acted while permitting third-party
coventurers of theirs to escape liability to the
corporation.”

“Judge Kaufman dissented to this decision and explained:

“In my view, it is no longer debatable that trading on inside
information merits universal condemnation. The undesirable nature
of `insider trading’ is reflected in the prophylactic provisions
of Section 16(b) of the Securities Exchange Act of 1934 and the
more general antifraud principles of Section 10(b) of that Act. I
fully agree with Judges Waterman and Smith that one with access
to material inside information concerning a corporation’s affairs
who knowingly purchases or sells that corporation’s shares before
this information has become publicly available takes unfair
advantage of unknowledgeable parties to the transaction. Indeed,
the factual claims contained in the complaints before us have led
to two federal actions — an SEC injunctive action and a private
class action under rule 10b-5 — now pending in the District Court
for the Southern District of New York. But the adage that hard
facts make bad law is about to come true here, despite Judge,
later Justice, Cardozo’s warning that judges are not free agents
roaming at will to create law to fit the facts. See The Nature
of the Judicial Process 141 (1921). In the absence of any viable
precedent upon which to base the totally new concept of law
espoused by my brothers, it is clear

Page 459

that they announce an extraordinary, expansive, and incorrect
reading of New York law solely because of their urge to `provid[e]
a disincentive to insider trading.’ I agree with their objective
but I question the means employed.

“The court holds today that a person with no relationship
whatsoever — fiduciary or otherwise — to a corporation, who
trades its shares on the basis of material inside information
becomes, ipso facto, a fiduciary of the corporation whose shares
he traded and, accordingly, may be required in a shareholders’
derivative action — not a Section 10(b) or 16(b) action — to
pay his profits to the corporation. With all due respect to my
brothers, the tortured reasoning to which they are compelled to
resort in reaching this conclusion represents a distortion of the
law of agency and the law of fiduciary responsibility in which I
am unable to join. . . .

* * * * * *

“It is important to note at the outset that the plaintiffs in
these actions, shareholders of Lum’s, do not claim to have
suffered any damages themselves. Rather, these derivative suits
are brought `on behalf of and for the benefit of Lum’s.’ They
seek to recover for Lum’s treasury the windfall profit garnered
by the IDS mutual funds, and assert that all defendants are
jointly and severally liable for this amount. Thus, the proper
method of analysis is not to focus on the unfairness of the
mutual funds’ profit at the expense of their purchasers — who
have their own recourse for any wrongdoing — but on the strands
of duty running to the corporation from the various individuals
involved. The crux of the majority’s holding is that the
institutional defendants — Lehman Brothers, IDS, and the two
mutual funds — and their employees — Simon, Sit, and Jundt — are
within the sweep of fiduciary principles announced in Diamond v.
Oreamuno, 24 N.Y.2d 494, 301 N.Y.S.2d 78, 248 N.E.2d 910 (1969).
But a careful examination of that case and the principles
underlying it demonstrate that Diamond is wholly inapposite to
this case. “In Diamond, the New York Court of Appeals dealt
with a derivative action brought by a shareholder of Management
Assistance, Inc. (MAI) against Oreamuno, chairman of the board of
directors of the corporation, and Gonzalez, its president. The
complaint charged that by virtue of their corporate positions,
these officers knew that a supplier’s price increase had caused
MAI’s earnings to decrease by more than 75% during a one month
period. According to the allegations, the two officers sold over
50,000 MAI shares at a price of $28 per share prior to public
disclosure of the adverse earnings figures, after which the price
per share plummeted to $11. In reviewing the Appellate Division’s
refusal to order dismissal of the complaint against Oreamuno and
Gonzalez, Chief Judge Fuld stated at the outset that `the
question presented — one of first impression in this court — is
whether officers and directors may be held accountable to their
corporation for gains realized by them from transactions in the
company’s stock as a result of their use of material inside
information,’ 24 N.Y.2d at 496, 301 N.Y.S.2d at 79, 248 N.E.2d at
911 (emphasis added). A careful reading of the Diamond opinion
reveals that Oreamuno’s and Gonzalez’s liability in a
stockholders’ derivative action was grounded solely in their
having breached a fiduciary duty owed by them to MAI as corporate
officials.

“The inapplicability of these principles to any of the appellees
is readily apparent. The complaints here are barren of any
allegation that the appelleesor Sit or Jundtoccupied any
position, such as officer, director, employee, or agent, which
would create fiduciary obligations to Lum’s. Compare Brophy v.
Cities Service Co., 31 Del.Ch. 241, 70 A.2d 5 (1949); Quinn v.
Phipps, 93 Fla. 805, 113 So. 419 (1927). Liability in Diamond
was predicated entirely on such a relationship, and in its
absence, the Diamond rationale for liability ceases to exist.

“In an effort to bridge this fatal gap, the majority, without any
basis in law or fact, reasons that the appellees were involved

Page 460

in a `joint’ or `common enterprise’ with Chasen, president of
Lum’s `to misuse confidential corporate information for their own
enrichment.’ By use of this interesting, but nevertheless
fictional, theory, they seek to foist upon the appellees
liability to Lum’s for Chasen’s improper behavior. But the facts
alleged in the complaints are a far cry from the `conscious
parallelism’ cases, drawn from the antitrust field, cited as
authority in the majority opinion; the facts simply do not
comport with the concept of a joint enterprise, a term which
implies the existence of a prior plan to carry out a mutually
beneficial project. The complaints, read in the most favorable
light to the plaintiffs, disclose nothing more than a seemingly
unsolicited and haphazard revelation of certain information which
was useful in making investment decisions. There are ample
remedies under the federal securities laws to punish this
conduct. But, I am unable to understand on what basis the
majority transforms the appellees’ spontaneous conduct into a
nefarious, prearranged, and ongoing scheme so that `joint’ or
`common enterprise’ principles can make them liable as
fiduciaries of a corporation with which they have no
relationship.

“A primary authority upon which the majority relies, § 312 of the
American Law Institute’s Restatement of Agency 2d, exposes the
inappropriateness of holding the appellees liable to Lum’s for
their conduct. Section 312 provides that `A person who, without
being privileged to do so, intentionally causes or assists an
agent to violate a duty to his principal is subject to liability
to the principal.’ Although Comment c to this section speaks
generally of receipt of confidential information by a third
person from a principal’s agent, the central element of liability
is the third party’s active and intentional aiding in the agent’s
violation of a duty owed to his principal. In this case, Chasen’s
duty to Lum’s was to not disclose confidential corporate
information. Yet there is not a word in the complaint charging
that the appellees actively solicited the disclosure or that they
had concocted a prearranged scheme with Chasen. We are dealing
here with an isolated transaction.

“In the absence of any coherent legal theory, I cannot join my
brothers in approving the use of the shareholders’ derivative
action device merely because, as my brothers candidly admit, to
do so possibly may have a deterrent effect on `insider trading.’
Although developments in federal securities law indicate an
expanding scope of liability for tippee traders, see In re
Investors Management Co., Securities and Exchange Commission
Release No. 34-9267 (Jul. 29, 1971) (SEC sanctioning of
institutional investors who sold a corporation’s shares after the
corporation’s underwriter revealed adverse earnings results to
them); cf. SEC v. Texas Gulf Sulphur Co., 446 F.2d 1301, 1308 (2d
Cir. 1971), cert. denied, 404 U.S. 1005, 92 S.Ct. 561, 30 L.Ed.2d
558 (1972) (affirming district court order, in SEC injunctive
suit, requiring a `tippor’ to divest an amount equal to his
tippees’ profits), the impetus for developing this expanded
federal law liability — whose exact nature and scope remain in a
formative stage — is the need to maintain free and honest
securities markets. This need appropriately is given great weight
when we consider claims under the federal securities law. But it
is inapposite in determining whether, under state common law,
tippee trading is a breach of a fiduciary duty owed to the
corporation whose shares are traded, and if so, whether such a
breach is remediable through use of a shareholders’ derivative
action.

* * * * * *

“Despite the manner in which the majority opinion convolutes the
law and the facts in this case, a view that a tippee is cloaked
with state law fiduciary obligations to the corporation whose
shares he trades is an unknown and untenable legal concept.
Neither Diamonditself a significant alteration of the common
law principles applicable to an officer’s or director’s trading
in his corporation’s sharesnor the law of agency support such
a holding.” (e.s.)

Page 461

We quote with approval the dissent of Judge Kaufman and we hold
it to be responsive and to be dispositive of the controlling
questions posited by the United States Circuit Court of Appeals,
which we answer in the negative. Not only will we not give the
unprecedented expansive reading to Diamond sought by appellants
but furthermore, we do not choose to adopt the innovative ruling
of the New York Court of Appeals in Diamond, supra.[2] We
adhere to previous precedent established by the courts in this
state that actual damage to the corporation must be alleged in
the complaint to substantiate a stockholders’ derivative action.
Palma v. Zerbey, supra, and Citizens National Bank of St.
Petersburg v. Peters. In Talcott v. McDowell, supra, the court
opined:

“Thus, in order for a complaint to state a cause of
action entitling the stockholder to relief, it must
allege two distinct wrongs: the act whereby the
corporation was caused to suffer damage, and a
wrongful refusal by the corporation to seek redress
for such act.”

Cf. Maronek v. Atlantis Hotel, Inc., supra; Orlando Orange Groves
Co., et al. v. Hale, 119 Fla. 159, 161 So. 284 (1935); Seestedt
v. Southern Laundry, Inc. et al., 149 Fla. 402, 5 So.2d 859
(1942); Nelson v. Miller, 212 So.2d 66 (Fla.App.3, 1968); Conlee
Construction Co. v. Cay Construction Co., 221 So.2d 792
(Fla.App.4, 1969). See also, Stone, et al. v. Holly Hill Fruit
Products, Inc., et al., 56 F.2d 553 (5 C.C.A., 1932), Duchaine,
et al. v. Grosco Realty, Inc., 121 So.2d 679 (Fla.App.2, 1960).

We note with interest that the Securities and Exchange
Commission filed a civil complaint for injunction alleging
violation of Section 10(b) of the Securities Exchange Act and
Rule 10b-5 against Lum’s, Inc., Chasen, Lehman Bros., Simon,
Investors Diversified, Sit and Jundt. The United States District
Court, Southern District of New York in Securities and Exchange
Commission v. Lum’s, Inc., et al., 365 F.Supp. 1046 (U.S. D.C.,
SDNY, 1973), determined that Chasen, although apparently through
negligence, breached his duty by transmitting information to
Simon and should be liable for the foreseeable consequences of
the act, and that the chain of acts outlined by the court in its
opinion were sufficient to establish Chasen’s liability as a
nontrading tipper under Section 10(b) and Rule 10b-5. The
District Court concluded that Chasen’s act should be imputed to
Lum’s and held that Lum’s was also liable for violation of
Section 10(b) and Rule 10b-5. However, the court found that
Lehman Bros. was not liable as alleged. Relative to the liability
of Lum’s for violation of Section 10(b) and Rule 10b-5 and the
necessity for an injunction to be directed against Lum’s, the
District Court explained:

“At the same time, Lum’s has no written guidelines
for management’s dealings with the investment
community, or their disclosure of corporation
information. And the principal source of revenue for
the company, Caesar’s Palace, continues to be subject
to the wide swings in casino winnings and thus to the
speculation which it engenders.

“I am inclined to agree with plaintiff that the
precautions and policies described above are
inadequate under

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the circumstances, particularly where there have been
problems with leaks of corporate information on
several occasions and protestations of innocence
concerning the instant violation. In sum, I find that
there is a reasonable likelihood that 10b-5
violations will be repeated, even if only
inadvertently. Lum’s (Caesar’s World) should be
enjoined from violating the securities acts in such
manner in the future, and it should be directed to
establish written guidelines for the dissemination of
corporate information to the investment community.”

Accordingly, we find that the rationale of Judge Kaufman in his
dissent and the opinion of the United States District Court
comport with Florida law and we would approve Judge Kaufman’s
reasoning as dispositive of the issues presented sub judice which
we answer in the negative. Cf. Beach v. Williamson, 78 Fla. 611,
83 So. 860 (1920); Logan, et al. v. Arnold, 82 Fla. 237, 89 So.
551 (1921); Quinn v. Phipps, 93 Fla. 805, 113 So. 419 (1927);
Chipola Valley Realty Co. v. Griffin et al., 94 Fla. 1151, 115
So. 541 (1927); Connelly v. Special Road Bridge Dist. No. 5, 99
Fla. 456, 126 So. 794 (1930); McGregor v. Provident Trust Co. of
Philadelphia, 119 Fla. 718, 162 So. 323 (1935); News Journal
Corp., et al. v. Gore, 147 Fla. 217, 2 So.2d 741 (1941); Pure
Foods, Inc. v. Sir Sirloin, 84 So.2d 51 (Fla. 1955); Pan American
Trading Trapping Inc. v. Crown Paint, Inc., 99 So.2d 705
(Fla. 1958); Flight Equipment and Engineering Corporation v.
Shelton, 103 So.2d 615 (Fla. 1958); Doeg v. Thornton, 174 So.2d 570
(Fla.App.3, 1965); Etheredge v. Barrow, 102 So.2d 660
(Fla.App.2, 1958); Independent Optical Co. of Winter Haven, et al.
v. Elmore, 289 So.2d 24 (Fla.App.2, 1974); Renpak, Inc. v.
Oppenheimer, 104 So.2d 642 (Fla.App.2, 1958). We would not
extend the innovative ruling of the New York Court of Appeals in
Diamond, supra.

We conclude that under the facts alleged in the complaint,
Florida law does not permit the maintenance of shareholders’
derivative suit on behalf of Lum’s.

ADKINS, C. J., and McCAIN and OVERTON, JJ., concur.

ENGLAND, J., concurs specially with opinion.

[1] Rule 4.61(e), Florida Appellate Rules, provides that “The Supreme Court may, in its discretion, require the original or copies of all or any portion of the record before the federal court to be filed with said certificate where, in its opinion, such record may be necessary in the determination of said cause.”
[2] See Sections 517.01 et seq., Florida Statutes, particularly Section 517.301, F.S., and Section 517.23, F.S., Blau v. Lehman, 368 U.S. 403, 411, 82 S.Ct. 451, 7 L.Ed.2d 403. In Reliance Electric Co. v. Emerson Electric Co., 404 U.S. 418, 92 S.Ct. 596, 30 L.Ed.2d 575 (1972), the Supreme Court of the United States expressly stated:

“As we said in Blau v. Lehman, 368 U.S. 403, 411, 82 S.Ct. 451, 456, 7 L.Ed.2d 403, one `may agree that . . . the Commission present[s] persuasive policy arguments that the Act should be broadened . . . to prevent `the unfair use of information’ more effectively than can be accomplished by leaving the Act so as to require forfeiture of profits only by those specifically designated by Congress to suffer those losses.’ But we are not free to adopt a construction that not only strains, but flatly contradicts, the words of the statute.”

See Haberman v. Murchison, 468 F.2d 1305 (U.S.C.A.2d Cir., 1972). Cf. Fordham Law Review, 480 Notes, 1970 Wisconsin Law Review 576 Notes.

[8] ENGLAND, Justice (concurring specially).

[9] I would answer both certified questions in the negative on the narrow grounds (i) that Florida law requires an allegation of corporate damage as a predicate to the maintenance of a shareholder’s derivative suit,[1] and (ii) that an action for civil damages must allege more than merely speculative damages.[2] In this case plaintiffs’ allegation of damage is to the effect that Lum’s, Inc. sustained immeasurable damages as a result of open market transactions in its stock by defendant-tippee investor, acting on inside information furnished by defendant-tipped stockbroker. It is speculative at best to find corporate financial loss in the market price depression occasioned by these transactions.[3]

[1] Decisions of the Florida district courts of appeal are conclusive on questions of Florida law when not in conflict with other decisions of this Court. Fla.Const., art. V, §§ 4(b)(1) and 3(b)(3); Ansin v. Thurston, 101 So.2d 808 (Fla. 1958). There being no decisions of this Court on the elements of a shareholder’s derivative suit, their identification in decisions of the district courts of appeal are determinative. Conlee Constr. Co. v. Cay Constr. Co., 221 So.2d 792 (4th Dist.Ct.App.Fla. 1969) (dictum); Nelson v. Miller, 212 So.2d 66
(3d Dist.Ct.App.Fla. 1968); Palma v. Zerbey, 189 So.2d 510 (3d Dist.Ct.App.Fla. 1966), cert. denied, 200 So.2d 814 (Fla. 1967); Citizens Nat’l Bank v. Peters, 175 So.2d 54 (2d Dist.Ct.App.Fla. 1965); Maronek v. Atlantis Hotel, Inc., 148 So.2d 721
(3d Dist.Ct.App.Fla. 1963); James Talcott, Inc. v. McDowell, 148 So.2d 36 (3d Dist.Ct.App.Fla. 1962).
[2] See Gilliland v. Mercantile Inv. Holding Co., 147 Fla. 613, 3 So.2d 148 (1941).
[3] The speculative nature of possible corporate damage is compounded by the fact that trading in the company’s stock was suspended on the very afternoon of defendant’s sales for a company announcement, which proved to be the “tipped” news of reduced corporate earnings.

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