for summary judgment on grounds that no "sale" took place within the terms of Sec. 16(b). Of course, defendants may be able to show at trial that Rita Leone exercised no control over the transaction, but this is a question of fact that cannot be decided at this time.
Finally, defendants argue that plaintiff's common law claims must be dismissed because the state of New Jersey has not yet recognized a compensable claim by a corporation against its directors for trading on inside information. Although defendants correctly assert that no New Jersey statute or state court case provides such a cause of action, Judge Brotman of this court has held that the New Jersey courts would find such a cause of action to exist under state law were they presented with the issue. In re ORFA Securities Litigation, 654 F. Supp. 1449 (D.N.J. 1987). The court's decision was based on an extensive review of New Jersey case law and it concluded that the use of inside information by directors to obtain personal profit was a violation of the directors' fiduciary obligation to the corporation. Stating that the plaintiff should be given the opportunity to prove breach, harm, and causation, the court stated that the plaintiff need not prove damage to the corporation at the summary judgment stage of the proceedings. Id. at 1457.
In the absence of any New Jersey law indicating otherwise, this court finds Judge Brotman's decision in ORFA to be persuasive on the existence of a common law cause of action by the corporation against a corporate director for profits gained from trading on inside information. As in ORFA, the presence or absence of harm to the corporation's goodwill, or any other measurable harm to the corporation, will be left for the parties to debate at trial.
II. Plaintiff's Motion for Partial Summary Judgment
Plaintiff's cross-motion for partial summary judgment against Rita Girolamo Leone under Sec. 16(b) for the short-swing profits resulting from trades in the Ri-Arm Corp account and in her husband's account is premature. Genuine issues of material fact exist which preclude granting partial summary judgment to plaintiff.
There is no dispute that the purchases on August 3 and 4, 1987 and the exchange on February 1, 1988 fell within a six-month period. However, in order for Sec. 16(b) liability to be imposed on the defendant, the exchange must be a "sale" within the intent of the statute and the profits realized must be attributable to the corporate insider. Although plaintiff alleged sufficient facts to overcome defendants' motion for summary judgment on the issue of whether the exchange was a "sale", on plaintiff's motion the facts must be viewed most favorably to defendants. Defendants have alleged that Rita Girloamo Leone exercised no control over the terms and conditions of the merger. There is thus an issue of material fact as to whether or not the exchange transaction was one that presented the possibility of speculative abuse and was therefore a "sale" for the purposes of Sec. 16(b) liability.
Even if the transaction were found to be a "sale", plaintiffs have not alleged sufficient facts to show beyond dispute how much, if any, of the profit in both Armand Leone's account and Ri-Arm Corp.'s account can be attributed to the insider, Rita Leone. Whether or not she held a beneficial interest at all in her husband's account is a question of fact that will depend on the extent to which she had access to and control over the account or whether the account was habitually used to pay for common expenses of the household. See, e.g., Whiting v. Dow Chemical Co., 523 F.2d 680, 686-7 (2d Cir. 1975); Whittaker v. Whittaker Corp., 639 F.2d 516, 526 (9th Cir 1981); CBI Industries Inc. v. Horton, 682 F.2d 643, 646-7 (7th Cir. 1982). These facts are in dispute and thus cannot be resolved on this motion.
Defendant Rita Girolamo Leone's liability for profits made in the Ri-Arm Corp. account will depend on her beneficial interest in the corporation. At present, the extent of her holding of the corporation is at issue. See supra, note 1. Even if her ownership interest in the corporation was certain, there is a question of fact regarding whether the corporate profit of Ri-Arm Corp. flows directly to Ms. Leone as a shareholder of the corporation in this case. See e.g., Blau v. Lehman, 368 U.S. 403, 7 L. Ed. 2d 403, 82 S. Ct. 451 (1962) (partner liable for proportionate share of partnership's profits in 16(b) action against partner); Rattner v. Lehman, 193 F.2d 564 (2d Cir. 1952). If Rita Leone directly profited from a short-swing trade under Sec. 16(b) as a shareholder in Ri-Arm Corp., she will be liable for disgorgement in an amount proportionate to her beneficial interest in the corporation. Also, the attribution of her husband's share of the Ri-Arm Corp. profits will depend on the outcome of the above analysis of whether she, through her status as his wife and access to his profits, has a beneficial interest in any profits realized by him as a shareholder of Ri-Arm Corp. The total amount which would have to be disgorged cannot be determined upon the facts available to the court at this time, even if the exchange were to be deemed a "sale" and liability imposed on Rita Leone.
Defendants' motion for summary judgment is granted in part and denied in part. Defendant's motion is granted in that plaintiff may not recover from defendants any profits already disgorged to the SEC in the prior action, but plaintiff may attempt to prove the insufficiency of the SEC settlement and recover any difference between actual profits and the amount disgorged to the SEC. Defendants have not shown beyond dispute that the exchange pursuant to the merger was not a "sale" under Sec. 16(b), and thus that portion of their motion is denied. Similarly, defendants' motion for dismissal of the pendant state law claims is denied.
Because issues of material fact remain to be resolved, plaintiff's cross-motion for partial summary judgment is denied.
This matter having been opened to the court by Cole, Schotz, Bernstein, Meisel & Forman, P.C., attorneys for defendants (Morrill J. Cole appearing), and by James R. Van Horn, Esq., attorney for plaintiff, on defendants' motion for summary judgment dismissing the complaint and plaintiff's request for partial summary judgment as to its Section 16(b) claim; and the court having considered the papers submitted in support of and in opposition to the motions and having heard oral argument; and for the reasons expressed in the accompanying opinion,
IT IS this 7 day of November, 1988, hereby
ORDERED that the defendants' motion for summary judgment is granted in part, dismissing plaintiff's complaint with respect to its demand for disgorgement of any profits which have already been paid over to the SEC, and it is further,
ORDERED that the defendants' motion for summary judgment is denied in part, permitting plaintiff to show that defendants did not completely disgorge their profits from the trades in question to the SEC, and it is further,
ORDERED that the defendants' motion for summary judgment is denied in all other respects, and it is further,
ORDERED that the plaintiff's cross-motion for partial summary judgment is denied.