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KARVELAS v. SELLAS

April 30, 1974

SPERO KARVELAS, DERIVATIVELY ON BEHALF OF THE SHAREHOLDERS OF O'HARE RIVIERA, INC., AND FOR HIMSELF, PLAINTIFF,
v.
JOHN SELLAS ET AL., DEFENDANTS.



The opinion of the court was delivered by: Marshall, District Judge.

MEMORANDUM OPINION

Before me is defendants' John Sellas and O'Hare Riviera, Inc. (hereafter "O'Hare") motion to dismiss the complaint pursuant to Rule 12(b)(1) and (6) of the Federal Rules of Civil Procedure.

The complaint is in 3 counts. Count 1 is brought under § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5, promulgated thereunder. Count 2 alleges breaches of defendants John and William Sellas' fiduciary duties owed to defendant O'Hare, in violation of the Illinois common law. Count 3 alleges violations of the Illinois Securities Act of 1953.

Jurisdiction of Count 1 is founded on 15 U.S.C. § 78aa [§ 27 of the Securities Exchange Act of 1934]. Jurisdiction of Counts 2 and 3 is founded on the doctrine of pendent jurisdiction.

Defendants move to dismiss Count 1 for failure to state a claim upon which relief can be granted and Counts 2 and 3 for lack of subject matter jurisdiction.

COUNT 1

Count 1 of the complaint alleges inter alia that defendants John Sellas and William Sellas, directors and officers of defendant O'Hare Riviera, Inc., each owned 1/3 of the outstanding common capital stock of O'Hare; that sometime after December, 1972 defendant John Sellas purchased all the shares of O'Hare's common stock owned by defendant William Sellas for a price of $201,000.00; that said purchase was not submitted to or authorized by the board of directors of O'Hare; that in connection with said purchase defendants John Sellas and William Sellas misappropriated corporate funds to pay for defendant William Sellas' shares of common stock; that said misappropriations were made in the guise of salaries, back wages and loans; that the payments made from the corporate treasury were never revealed to or authorized by the board of directors of O'Hare; that defendants John Sellas and William Sellas represented to plaintiff that personal funds would only be used to effect the purchase of stock by defendant John Sellas; that defendant John Sellas, after purchasing the stock of defendant William Sellas, utilized his shares as collateral for a personal loan, which was used to purchase real estate adjoining the leased premises of O'Hare and that the purpose of said purchase was to divert from O'Hare a corporate opportunity, so that the purchased real estate could be leased to O'Hare for the personal gain of John Sellas.

Essentially, Count 1 of the complaint alleges a scheme to gain a controlling interest of a corporation, to appropriate its assets to cover the purchase price of the controlling interest and to exercise said control of the corporation for the personal gain of defendant John Sellas and to the detriment of the corporation.

Section 10(b) of the Securities Exchange Act of 1934 provides in material part:

  "It shall be unlawful for any person . . . [t]o use
  or employ, in connection with the purchase or sale of
  any security registered on a national securities
  exchange or any security not so registered, any
  manipulative or deceptive device or contrivance in
  contravention of such rules and regulations as the
  [Securities and Exchange] Commission may prescribe as
  necessary or appropriate in the public interest or
  for the protection of investors." 15 U.S.C. § 78j(b).

Securities and Exchange Commission Rule 10b-5 provides:

  "It shall be unlawful for any person, directly or
  indirectly, by the use of any means or
  instrumentality of interstate, or of the mails, or of
  any facility of any national securities exchange:
    "(a) To employ any device, scheme, or artifice to
  defraud,
    "(b) To make any untrue statement of a material
  fact or to omit to state a material fact necessary in
  order to make the statements made, in light of the
  circumstances ...

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