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O'Neill v. Maytag

December 29, 1964

ROBERT J. O'NEILL
v.
LEWIS B. MAYTAG, JR., DUDLEY SWIM, PAN AMERICAN WORLD AIRWAYS, INC., G. T. BAKER, A. G. MCNEESE, JR., ALTON OCHSNER, DAVID PACKARD, G. ROBERT TRUEX, JR., ALBERT C. WEDEMEYER, G. R. WOODY, AND NATIONAL AIRLINES, INC.



Author: Lumbard

Before: LUMBARD, Chief Judge, HAYS and MARSHALL, Circuit Judges.

LUMBARD, Chief Judge: This appeal presents questions of the existence and scope of private remedies under federal law for alleged violation of the provisions of two federal regulatory statutes: § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1958), and § 409(b) of the Federal Aviation Act, 49 U.S.C. § 1379(b). Plaintiff, a shareholder of National Airlines, brought a derivative action in the District Court for the Southern District of New York on behalf of National against a number of its directors and officers and against Pan American World Airways, Inc. He alleged violation of both statutes and of the common law duty of the officers and directors.*fn1 Jurisdiction for the three theories is based respectively on § 27 of the Securities Exchange Act, 15 U.S.C. § 78p(b); the general provision for federal question jurisdiction, 28 U.S.C. § 1331; and on the principle of pendent jurisdiction.

On motions by eight of the nine individual defendants, Judge McLean held that the complaint failed to state a cause of action under either statutory provision and that there was therefore no subject matter jurisdiction with respect to them.*fn2 Accordingly, he held that the court also lacked jurisdiction over the state law claim against them. We agree that no cause of action under § 10(b) or § 409(b) is stated against these defendants, and we affirm the judgment of the district court.*fn3

The transaction complained of under each theory is an exchange of stock between Pan American and National, which is alleged to have been at a ratio unfavorable to National. In 1958 National issued 400,000 shares of its common stock to a trustee for the benefit of Pan American; Pan American in return issued 400,000 of its own shares to a trustee for the benefit of National. This cross-ownership was found by the Civil Aeronautics Board not to be in the public interest, and the Board ordered the companies either to sell or to re-exchange the stock.31 C.A.B. 198 (1960).

In compliance with the CAB directive, there was an initial exchange of 46,400 shares at a one-to-one ratio early in 1963 and then, later in the same year, a second exchange in which National exchanged 353,600 shares of Pan American for 390,000 shares of National.*fn4

Plaintiff concedes that the exchange of the 46,400 shares was fair in view of the then prevailing market values. But he alleges that 353,600 shares of Pan American given up by National in the second exchange were then worth $12,906,400 while the 390,000 shares of its own stock which it received in return were worth only $11,115,000, the value in each instance being based on New York Stock Exchange quotations. In plaintiff's view, the individual defendants caused National to pay this premium because they wished to eliminate the threat which the block of shares held by Pan American, approximately 21 per cent of the outstanding shares, posed to their control of National; the defendants in effect used approximately $1,800,000 of National's assets to purchase a more favorable control position for themselves.

I. Section 10(b) and Rule 10b-5

The allegations obviously state a claim under state law. But, there being no diversity, this state law claim is of no value to plaintiff in a federal district court unless these is also a parallel federal claim of sufficient plausibility at least to survive the opening round of pleadings and motions. Plaintiff's first theory under federal law is that the second exchange of stock violated § 10(b) of the Securities Exchange Act and, more particularly, Rule 10b-5 promulgated thereunder. 17 C.F.R. § 240.10b-5.

Section 10(b) of the Act provides:

"It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility or any national securities exchange - "

"(b) to use or employ, in connection with the purchase or sale of any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors."

Rule 10b-5 expands on the statutory language:

"It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails, or of any ...


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