Lehman Brothers v. Schein

416 U.S. 386 (1974)

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Nature of the Case

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Facts

Lum's, is a Florida corporation with headquarters in Miami. This case involves three consolidated shareholders' derivative suits naming Lum's and others as defendants, and the basis of federal jurisdiction is diversity of citizenship. 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 told an employee of IDS and the IDS defendants sold 83,000 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. Ps claimed that Chasen was a fiduciary who 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. Ps claimed that Chasen and the other defendants were liable under Diamond v. Oreamuno, 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 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. The highest court in Florida has not considered the question. Several district courts of appeal indicate that a complaint that fails to allege both wrongful acts and damage to the corporation must be dismissed. The court concluded that the 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. It then dismissed the complaints. The Court of Appeals reversed. It held that Florida law was controlling, but found none that was decisive. It then turned to New York law, to see if Florida 'would probably' interpret Diamond to make it applicable here. I held that Ds had engaged with Chasen 'to misuse corporate property,' and that the theory of Diamond reaches that situation. Other Florida decisions hinted that Florida would follow that reading of Diamond. Ds appealed.