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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,
JOHN SELLAS ET AL., DEFENDANTS.
The opinion of the court was delivered by: Marshall, District Judge.
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 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
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
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
"(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
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