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LEHMAN BROTHERS v. SCHEIN ET AL.

decided*fn*: April 29, 1974.

LEHMAN BROTHERS
v.
SCHEIN ET AL.



CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT.

Douglas, J., delivered the opinion for a unanimous Court. Rehnquist, J., filed a concurring opinion, post, p. 392.

Author: Douglas

[ 416 U.S. Page 387]

 MR. JUSTICE DOUGLAS delivered the opinion of the Court.

These cases are here on petitions for certiorari and raise one identical question.

These are suits brought in the District Court for the Southern District of New York. Lum's, one of the respondents in the Lehman Bros. petition, is a Florida corporation with headquarters in Miami. Each of the three petitions, which we consolidated for oral argument, involves shareholders' derivative suits naming Lum's and others as defendants; and the basis of federal jurisdiction is diversity of citizenship, 28 U. S. C. ยง 1332 (a)(1), about which there is no dispute.

The complaints allege that Chasen, president of Lum's, called Simon, a representative of Lehman Bros., and told him about disappointing projections of Lum's earnings, estimates that were confidential, not public. Simon is said to have told an employee of IDS*fn1 about them. On the next day, it is alleged that the IDS defendants sold

[ 416 U.S. Page 38883]

     ,000 shares of Lum's on the New York Stock Exchange for about $17.50 per share. Later that day the exchanges halted trading in Lum's stock and on the next trading day it opened at $14 per share, the public being told that the projected earnings would be "substantially lower" than anticipated. The theory of the complaints was that Chasen was a fiduciary but used the inside information along with others for profit and that Chasen and his group are liable to Lum's for their unlawful profits.

Lehman and Simon defended on the ground that the IDS sale was not made through them and that neither one benefited from the sales. Nonetheless plaintiffs claimed that Chasen and the other defendants were liable under Diamond v. Oreamuno, 24 N. Y. 2d 494, 248 N. E. 2d 910 (1969). Diamond proceeds on the theory that "inside" information of an officer or director of a corporation is an asset of the corporation which had been acquired by the insiders as fiduciaries of the company and misappropriated in violation of trust.

The District Court looked to the choice-of-law rules of the State of New York, Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487 (1941), and held that the law of the State of incorporation governs the existence and extent of corporate fiduciary obligations, as well as the liability for violation of them. Diamond did, indeed, so indicate, 24 N. Y. 2d, at 503-504, 248 N. E. 2d, at 915.

The District Court in examining Florida law concluded that, although the highest court in Florida has not considered the question, several district courts of appeal indicate that a complaint which fails to allege both wrongful acts and damage to the corporation must be dismissed.*fn2 The District Court went on to consider whether if Florida followed the Diamond rationale, defendants would be liable. It concluded that the

[ 416 U.S. Page 389]

     present complaints go beyond Diamond, as Chasen, the only fiduciary of Lum's involved in the suits, never sold any of his holdings on the basis of inside information. The other defendants were not fiduciaries of Lum's.*fn3 The District ...


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