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June 22, 1984


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


Before the Court is defendant's motion to dismiss the complaint for injunctive relief and defendant's emergency motion requesting a stay pending arbitration.*fn1 Plaintiffs' allege violations of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (hereinafter "the Exchange Act"), and Rules 10b-4 and 10b-5 thereunder, 17 C.F.R. § 240.10b-4, 10b-5. Defendant argues that this Court lacks jurisdiction because the complaint fails to state a federal private cause of action.

For the reasons stated herein, the Court grants defendant's motion to dismiss Counts I and III and grants defendant's motion to stay Counts II and IV.


The following facts are alleged in plaintiffs' amended complaint for injunctive relief. For purposes of this order they are considered to be true.

A. Rule 10b-4 Allegations

On or about May 14, 1984, Teledyne, Inc., (hereinafter "Teledyne") offered to purchase back five million shares of its stock for $200 per share. The proration date was set as May 25, 1984, at 3:00 p.m., Los Angeles time*fn2 and the expiration date was set as June 4, 1984, at 3:00 p.m.

Plaintiffs John Olagues Trading Company (hereinafter "OTC") and M. Blair Hull (hereinafter "Hull") are registered securities brokers/dealers under § 15 of the Exchange Act and are "market-maker members" of the Chicago Board Options Exchange (hereinafter "the Exchange"). Defendant First Options of Chicago, Inc. (hereinafter "First Options") is a broker/dealer, a "clearing member" of the Exchange and at all relevant times "cleared" the accounts of plaintiffs.

On or about May 22, 1984, First Options agreed to assist Hull in avoiding risk or problems with respect to the Teledyne tender offer. On May 25, 1984, between 11:00 a.m. and 1:30 p.m., following a personal review of his account at First Options with respect to his position in Teledyne, Hull requested preparation of a tender notice for approximately 15,000 shares. Hull's review erroneously considered 44 short call options as not being assigned. At 11:45 a.m., Hull's employee was informed by First Options that it had prepared an "exercise notice" for certain of Hull's "long call options contracts" in Teledyne. Hull, based in part on information supplied by First Options, amended the tender notice to First Options to read 24,800 Teledyne shares which became a contract to sell or otherwise dispose of securities.

Hull notified First Options again on May 25 of the erroneous tender based not only on the 4,400 share computer error, but also on First Options' failure to notify Hull of the assignment of certain "call options contracts" in Teledyne. After the "call options contracts" were considered, Hull was at least 19,200 shares short.

On May 25, 1984, plaintiff OTC entered into an oral contract with First Options whereby First Options was to tender, on OTC's behalf, 23,800 Teledyne shares to Teledyne pursuant to Teledyne's tender offer. On or before May 29, 1984, First Options informed Hull that it had notified Teledyne that 24,800 of Teledyne shares for Hull would be delivered pursuant to the tender offer.

Between May 29, 1984 and June 8, 1984, OTC orally informed First Options that the contract was based on a unilateral mistake of fact in that OTC owned, and thus could deliver, only 14,600 "net long" Teledyne shares and not the 23,800 as originally stated. OTC informed First Options that the May 25 contract was illegal in that the contract violated Rule 10b-4 and that therefore no contract existed.

Both Hull and OTC told First Options not to tender any Teledyne shares they did not hold, own or control. First Options, however, continued to state that there was no problem with a "short tender" and that plaintiffs should tender all of their Teledyne shares and thus be "net short" as opposed to failing to tender at least all of the Teledyne shares they owned by rescinding the tender. Plaintiffs relied upon assurances of First Options' employees that the short tender would never be a problem and that they would not be called upon to deliver the extra shares.

On June 12, 1984, Teledyne informed First Options that First Options must deliver 93,000 additional shares of Teledyne, the total amount which First Options had not tendered as of that morning. On June 13, 1984, Hull and OTC were notified by First Options that it intended to buy 19,200 Teledyne shares and 9,200 Teledyne shares respectively for their two accounts after ...

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