Schein v. Chasen

• Decision Date: 13 March 1975
• Docket Number: No. 45803,45803
• Citation: 313 So.2d 739
• Parties: 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.
• Court: Florida Supreme Court

Page 739

313 So.2d 739

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.

No. 45803.

Supreme Court of Florida.

March 13, 1975.

Sidney B. Silverman of Silverman & Harnes, New York City, for plaintiffs-appellants.

Richard Y. Holcomb and James V. Hayes of Donovan, Leisure, Newton & Irvin, Stephen P. Duggan, Jr., James J. Hagan, Lindsay A. Lovejoy, Jr., of Simpson, Thacher & Bartlett, and David Hartfield, Jr., and Laura Banfield, of White & Case, New York City, for defendants-appelless.

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 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 Ceasar'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 94 S.Ct. 1741 (1974). The cases were remembered 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 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 at 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 this 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 Eund, 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 urge, 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 Co. 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 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 200 So.2d 814 (Fla.); James Talcott, Inc. v. McDowell, 148 So.2d 36 (Fla.App.3d, 162); Maronek v. Atlantis Hotel, Inc., 148 So.2d 721 (Fla.App.3d, 1963); Citizens National Bank of St. Petersburg v. Peters, 175 So.2d 54 (Fla.App.2, 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...