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
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 ...