by Teledyne to pressure United Fire shareholders into selling
their stock without fair compensation.
The alternative forms of relief sought by the second amended
complaint are essentially remedies for breach of contract. In
Count I, the plaintiffs ask this court to either: (1) order
specific performance of Teledyne's alleged oral promise to
purchase all shares of United Fire at $28 a share;*fn5 or (2)
award damages in the amount of the difference between $28 per
share and the market listing of United Fire at the time of
judgment; and (3) enjoin the defendants from pursuing their
efforts to acquire the business of United Fire without paying
fair value by means of intimidation and litigation. Count II,
predicated upon a theory of breach of contract under state law,
seeks either specific performance or damages for breach of the
identical oral agreement by Teledyne alleged in Count I.*fn6
THE "PROMISE" AND RULE 10b-5
In substance, Hogan and Teschke assert in Count I that they are
entitled to redress under Section 10(b) and Rule 10b-5 for
Teledyne's broken promise to reward them as "cooperative"
insiders of United who, in exchange for the promise to purchase
their stock in a third corporation at a premium price, acted in a
manner totally inconsistent with their fiduciary duties to United
and its shareholders. Viewing the allegations of the second
amended complaint as true for purposes of this motion, Hogan and
Teschke not only breached their fiduciary duties to United by
secretly selling their "support" to an outsider attempting to
acquire control over United, but they also violated Rule 10b-5 by
failing to disclose their true relationship with the tender
offeror and their substantial personal interest in furthering the
success of the second tender offer. Swanson v. American Consumer
Industries, Inc., 415 F.2d 1326 (7th Cir. 1969); Moore v.
Greatamerica Corp., 274 F. Supp. 490 (N.D.Ohio 1967). Thus by its
secretive, deceptive, manipulative, and material nature, the
alleged promise was itself a device to defraud United and its
shareholders in connection with Teledyne's second tender offer.
The alleged secret agreement is therefore void and unenforceable
under Section 29(b) of the Securities Exchange Act of 1934,
15 U.S.C. § 78cc(b), which provides in part as follows:
"Every contract made in violation of any provision
of this chapter or of any rule or regulation
thereunder * * * the performance of which involves
the violation of, or the continuance of any
relationship or practice in violation of, any
provision of this chapter or any rule or regulation
thereunder, shall be void (1) as regards the
rights of any person who, in violation of any such
provision, rule, or regulation, shall have made or
engaged in the performance of any such contract * *
*" 15 U.S.C. § 78cc(b) (Emphasis added).
Whether the plaintiffs describe their alleged secret arrangement
with the defendants as a fraudulent promise (Count I) or as a
contract (Count II), Hogan and Teschke are statutorily barred
from profiting from their own violation of the federal securities
antifraud provisions by seeking to enforce the alleged "bargain."
To utilize Section 10(b) and Rule 10b-5 in the manner suggested
by Hogan and Teschke would in reality protect those perpetrating
a fraud upon the investing public.
Moreover, the alleged secret agreement between the parties is
unenforceable by Hogan and Teschke as a matter of public policy.
By their own allegations and admissions, Hogan and Teschke agreed
to deceive United and its shareholders by secretly accepting a
premium in exchange for support of Teledyne's acquisition of
control over United. As a knowing, culpable party to an illegal
agreement, Hogan and Teschke acted in pari delicto with
Teledyne.*fn8 The transaction alleged is a fraud upon the
investing public and contrary to public policy as codified in the
Securities Exchange Act of 1934. The court therefore must leave
the parties as it finds them and not lend its aid to either.
Crylon Steel Co. v. Globus, 185 F. Supp. 757 (S.D.N.Y. 1960);
Premier Electric Construction Co. v. Miller-Davis Co.,
291 F. Supp. 295 (N.D. Ill. 1968), aff'd 422 F.2d 1132 (7th Cir.
1970); Kaiser-Frazer Corp. v. Otis & Co., 195 F.2d 838 (2nd Cir.
Because of the dispositive nature of the considerations
discussed above, this court need not reach the numerous
contentions raised by the defendants with respect to the validity
or enforceability of the agreement in issue.
THE STATE COURT LITIGATION AND RULE 10b-5
In conclusory terms, the second amended complaint asserts that
a lawsuit which the defendants caused to be filed in the Circuit
Court of Cook County, Illinois, is part of a scheme to defraud
shareholders of United Fire and therefore violates Section 10(b)
and Rule 10b-5. The three-count complaint in the state court
litigation, filed by United on June 11, 1969, charges that Hogan
and Teschke, together with other former directors of United,
breached their fiduciary duties to United by using their dual
positions of control in both corporations to siphon and divert
business and profits from United to United Fire. See United
Insurance Company of America v. United Fire Insurance Company, et
al., No. 69 CH 2058 (Circuit Court of Cook County, Illinois)
attached to the defendants' brief as Appendix "A." The relief
there sought includes rescission of a ten-year agency agreement
between United and United Fire which allegedly was executed by
Teschke without the authorization of United's board of directors
and which allegedly operates as a fraud upon United. Hogan and
Teschke here assert that the state court litigation is without
merit and was filed with the intention of depressing the market
value of United Fire stock This court is asked to enjoin the
state court litigation and award damages to the shareholders of
United Fire to compensate them for the decline in value of their
stock since the state court litigation was commenced.
The foregoing allegations are wholly insufficient to state a
claim under the antifraud provisions of the Securities Exchange
Act of 1934. Issues of bad faith and lack of merit with respect
to the prosecution of the state court litigation should properly
be litigated in the Circuit Court of Cook County, Illinois, and
cannot be the subject of collateral attack in this forum under
the guise of an action brought pursuant to Section 10(b) and Rule
10b-5 of the Securities Exchange Act of 1934. These plaintiffs
have neither purchased nor sold United
Fire Stock in connection with the filing of the state court
litigation. The bald assertion that United Fire shareholders
might be economically "forced" to sell their United Fire stock
should they lose in the state forum hardly places them in a
position comparable to that of the "forced sellers" of Vine v.
Beneficial Finance Co., 374 F.2d 627 (2nd Cir. 1967) or Dasho v.
Susquehanna Corporation, 380 F.2d 262 (7th Cir. 1967). Certainly
these plaintiffs can protect themselves by way of affirmative
defense, counterclaim, or otherwise, against Teledyne's alleged
abuse of process in the state court litigation. In any event,
this court will not and cannot intrude itself into state court
litigation on the speculative and conclusory allegations set
forth in the second amended complaint. Cf., 28 U.S.C. § 2283.
The Securities Exchange Act of 1934 was never intended to license
wholesale scrutiny by the federal courts of state court
litigation which might affect the value of a corporate security.
It is therefore ordered that summary judgment be, and it is
hereby entered for the defendants.
It is further ordered that the cause be, and it is hereby