The opinion of the court was delivered by: Robson, Chief Judge.
MEMORANDUM AND ORDER ON DEFENDANTS' MOTION TO DISMISS
The defendants move to dismiss the second amended complaint
filed in this action for failure to state a claim under the
federal securities laws or any other basis for federal
jurisdiction. For the reasons set forth below, this court is of
the opinion the motion should be granted.
The plaintiffs O.T. Hogan and Almore H. Teschke purportedly
bring this class action on behalf of the shareholders of United
Fire Insurance Company
(United Fire).*fn1 Count I charges the defendants Teledyne, Inc.
(Teledyne) and Henry E. Singleton with violation of Section 10(b)
of the Securities Exchange Act of 1934, 15 U.S.C. § 78j, and Rule
10b-5 promulgated thereunder. Count II complains of the
defendants' alleged breach of contract under Illinois law arising
from substantially the same conduct and transactions set forth in
Count I. Plaintiffs Hogan and Teschke are substantial
shareholders of United Fire, and were such at all times relevant
to this action. Hogan and Teschke were also major shareholders of
United Insurance Company of America (United) in June, 1967, when
Teledyne instituted negotiations to acquire control of United.
Hogan was chairman of the board of directors, and Teschke was
general counsel, vice-president, and a director of United. The
defendant Singleton was and is chairman of the board and chief
executive officer of Teledyne.
Count I alleges that in the summer of 1967, the defendants
devised a scheme to defraud which consisted of promises to Hogan
and Teschke that Teledyne would purchase their United Fire stock
at a price of $28 per share in exchange for Hogan and Teschke's
"support" of Teledyne's tender offer to the shareholders of
United. Teledyne allegedly agreed to purchase the stock of all
willing United Fire Shareholders at the stated price within a
reasonable time after Teledyne acquired control over United.
This alleged agreement was never reduced to writing, nor were
the shareholders of either United Fire or United, other than
select insiders, informed of its existence.*fn2 Relying on this
secret promise, Hogan and Teschke claim that they did indeed
"support" Teledyne's second tender offer.*fn3 In June, 1968,
Teledyne acquired 52 per cent of United's outstanding stock as a
consequence of that offer.*fn4 After thus acquiring control of
United, Teledyne refused and repudiated the demands of Hogan and
Teschke to purchase their United Fire stock. By refusing to
perform this oral promise, Hogan and Teschke assert that Teledyne
fraudulently induced them to support a tender offer which
impliedly they would not otherwise have done.
Hogan and Teschke further complain that since acquiring control
of United, Teledyne has attempted to acquire the business and
assets of United Fire without fair compensation by means of a
scheme to depress the market value of United Fire's stock. The
"scheme" allegedly centers around a currently pending lawsuit
filed by United against United Fire, Teschke, Hogan, and others,
in the Circuit Court of Cook County, Illinois. The pursuit of the
state litigation is allegedly the device employed
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.*fn7
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 ...