Appeal from the United States District Court for the Northern District of Indiana, South Bend Division. Civ. No. 74 S 103 - Allen Sharp, Judge.
Before Pell and Wood, Circuit Judges, and Harper, Senior District Judge.*fn*
The principal question presented by this case is whether under Indiana law the plaintiff may sustain a derivative action against certain officers and directors of the Skyline Corporation for allegedly trading in the stock of the corporation on the basis of material inside information. The district court granted summary judgment for the defendants on the ground that in light of the defendants' affidavits and documentary evidence, the plaintiff had failed to create a genuine dispute as to whether the defendants' sales of stock were based on material inside information. Alternatively, the court held that the plaintiff had failed to state a cause of action in that Indiana law has never recognized a right in a corporation to recover profits from insider trading and is not likely to follow the lead of the New York Court of Appeals in Diamond v. Oreamuno, 24 N.Y.2d 494, 301 N.Y.S.2d 78, 248 N.E.2d 910 (1969), in creating such a cause of action. We affirm. The second issue presented here is whether an insider "purchased" restricted stock within the meaning of Section 16(b) of the Securities Exchange Act of 1934 at the time that he made the commitment to acquire the stock and paid for it or at the time that the restrictions lapsed. We agree with the district court's conclusion that the former date was the one to consider.
Plaintiff-appellant Marcia Freeman is a stockholder of the Skyline Corporation, a major producer of mobile homes and recreational vehicles. Skyline is a publicly owned corporation whose stock is traded on the New York Stock Exchange (NYSE). Defendant Arthur J. Decio is the largest shareholder of Skyline, the chairman of its board of directors, and until September 25, 1972, was also the president of the company. Defendant Dale Swikert is a director of Skyline and prior to assuming the presidency from Decio in 1972 was Skyline's executive vice president and chief operating officer. Defendants Samuel P. Mandell and Ira J. Kaufman are outside directors of Skyline.
Throughout the 1960's and into 1972 Skyline experienced continual growth in sales and earnings. At the end of fiscal 1971 the company was able to report to its shareholders that over the previous five years sales had increased at a 40% Average compound rate and that net income had grown at a 64% Rate. This enormous success was reflected in increases in the price of Skyline stock. By April of 1972 Skyline common had reached a high of $72.00 per share, representing a price/earnings ratio of greater than 50 times earnings. Then, on December 22, 1972, Skyline reported that earnings for the quarter ending November 30, 1972, declined from $4,569,007 to $3,713,545 compared to the comparable period of the preceding year, rather than increasing substantially as they had done in the past. The NYSE immediately suspended trading in the stock. Trading was resumed on December 26 at $34.00 per share, down $13.50 from the preannouncement price. This represented a drop in value of almost 30%.
Plaintiff alleges that the defendants sold Skyline stock on the basis of material inside information during two distinct periods. Firstly, it is alleged that the financial results reported by Skyline for the quarters ending May 31 and August 31, 1972, significantly understated material costs and overstated earnings. It is further alleged that Decio, Kaufman and Mandell made various sales of Skyline stock totalling nearly $10 million during the quarters in question, knowing that earnings were overstated. Secondly, plaintiff asserts that during the quarter ending November 30 and up to December 22, 1972, Decio and Mandell made gifts and sales of Skyline stock totalling nearly $4 million while knowing that reported earnings for the November 30 quarter would decline. The complaint also alleged that certain of Mandell's and Kaufman's transactions in Skyline stock violated Section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b).*fn1
After three years of extensive discovery both sides moved for summary judgment. The district court granted the defendants' Fed.R.Civ.P. 56 motions on the insider trading counts on the ground that Indiana law does not provide for a derivative cause of action on behalf of a corporation to recover profits from insider trading. Alternatively, the court found that, in view of the defendants' affidavits and depositions, the plaintiff had not succeeded in creating a genuine dispute as to whether the defendants' stock sales were made on the basis of material inside information.
Plaintiff's amended complaint also accused Mandell and Swikert of violating Section 16(b) of the 1934 Act by making both purchases and sales of Skyline stock within a six-month period. In Swikert's case the shares allegedly purchased consisted of restricted stock acquired under Skyline's Management Incentive Plan. On summary judgment, the district court rejected plaintiff's arguments that these shares were "purchased" by Swikert within the meaning of Section 16(b) at the time the restrictions lapsed, in favor of the view that they were purchased at the time that Swikert committed himself to acquire them and made payment for them. The 16(b) claim against Swikert was accordingly dismissed since the earlier date was more than six months before any of Swikert's sales. The 16(b) claim against Mandell was not ruled on by the district court in the judgment that has been appealed to this court, so we need not consider the issues there presented.*fn2
The plaintiff now contends that the district court erred in granting the defendants' motions for summary judgment and in denying her own. We have jurisdiction of the appeal pursuant to 28 U.S.C. § 1291.
Diamond v. Oreamuno and Indiana Law
Both parties agree that there is no Indiana precedent directly dealing with the question of whether a corporation may recover the profits of corporate officials who trade in the corporation's securities on the basis of inside information. However, the plaintiff suggests that were the question to be presented to the Indiana courts, they would adopt the holding of the New York Court of Appeals in Diamond v. Oreamuno, 24 N.Y.2d 494, 301 N.Y.S.2d 78, 248 N.E.2d 910 (1969).*fn3 There, building on the Delaware case of Brophy v. Cities Service Co., 31 Del.Ch. 241, 70 A.2d 5 (1949),*fn4 the court held that the officers and directors of a corporation breached their fiduciary duties owed to the corporation by trading in its stock on the basis of material non-public information acquired by virtue of their official positions and that they should account to the corporation for their profits from those transactions. Since Diamond was decided, few courts have had an opportunity to consider the problem there presented. In fact, only one case has been brought to our attention which raised the question of whether Diamond would be followed in another jurisdiction. In Schein v. Chasen, 478 F.2d 817 (2d Cir. 1973),*fn5 Vacated and remanded sub nom., Lehman Bros. v. Schein, 416 U.S. 386, 94 S. Ct. 1741, 40 L. Ed. 2d 215 (1974), On certification to the Fla.Sup.Ct., 313 So.2d 739 (Fla.1975), the Second Circuit, sitting in diversity, considered whether the Florida courts would permit a Diamond -type action to be brought on behalf of a corporation. The majority not only tacitly concluded that Florida would adopt Diamond, but that the Diamond cause of action should be extended so as to permit recovery of the profits of non-insiders who traded in the corporation's stock on the basis of inside information received as tips from insiders.*fn6 Judge Kaufman, dissenting, agreed with the policies underlying a Diamond -type cause of action, but disagreed with the extension of liability to outsiders. He also failed to understand why the panel was not willing to utilize Florida's certified question statute so as to bring the question of law before the Florida Supreme Court. Granting Certiorari, the United States Supreme Court agreed with the dissent on this last point and on remand the case was certified to the Florida Supreme Court. That court not only stated that it would not "give the unprecedented expansive reading to Diamond sought by appellants" but that, furthermore, it did not "choose to adopt the innovative ruling of the New York Court of Appeals in Diamond (itself)."*fn7 313 So.2d 739, 746 (Fla.1975). Thus, the question here is whether the Indiana courts are more likely to follow the New York Court of Appeals or to join the Florida Supreme Court in refusing to undertake such a change from existing law.*fn8
It appears that from a policy point of view it is widely accepted that insider trading should be deterred because it is unfair to other investors who do not enjoy the benefits of access to inside information. The goal is not one of equality of possession of information since some traders will always be better "informed" than others by dint of greater expenditures of time and resources, greater experience, or greater analytical abilities but rather equality of access to information.*fn9 Thus, in Cady, Roberts & Co., 40 S.E.C. 907, 912 (1961), the SEC gave the following explanation of its view of the obligation of corporate insiders to disclose material inside information when trading in the corporation's stock:*fn10
Analytically, the obligation rests on two principal elements: first, the existence of a relationship giving access, directly or indirectly, to information intended to be available only for a corporate purpose and not for the personal benefit of anyone, and second, the inherent unfairness involved where a party takes advantage of such information knowing it is unavailable to those with whom he is dealing.
Yet, a growing body of commentary suggests that pursuit of this goal of "market egalitarianism"*fn11 may be costly. In addition to the costs associated with enforcement of the laws prohibiting insider trading, there may be a loss in the efficiency of the securities markets in their capital allocation function.*fn12 The basic insight of economic analysis here is that securities prices act as signals helping to route capital to its most productive uses and that insider trading helps assure that those prices will reflect the best information available (i.e., inside information) as to where the best opportunities lie.*fn13 However, even when confronted with the ...