The opinion of the court was delivered by: HIGGINBOTHAM
HIGGINBOTHAM, District Judge.
This shareholder derivative action, alleging violations of Sections 10(b), 12(b)(1), 13(a) and 14(a) of the 1934 Securities and Exchange Acts as well as breach of fiduciary duties, was commenced by Harold Cramer on behalf of the shareholders of General Telephone & Electronics Corp. (GTE) against Leslie H. Warner, Theodore F. Brophy, John G. Douglas and William Bennett, corporate officers,
and Arthur Andersen & Co., GTE's auditors. Jurisdiction is founded under § 27 of the 1934 Act, as amended, 15 U.S.C. § 78aa, 28 U.S.C. § 1332, and pendent jurisdiction.
Presently before the court are the following motions: plaintiff's motion for a Protective Order under Rule 26(c) of the Federal Rules of Civil Procedure; defendants' joint motion to dismiss the complaint for failure to state a claim for which relief can be granted under Fed.R.Civ.P. 12(b)(6); and, as an alternative, defendants' motion for summary judgment on grounds that the complaint is barred by principles of res judicata and collateral estoppel.
For the reasons stated herein, the motion for summary judgment is granted as to Sections 13(a), and 14(a) and the pendent state claims. The claims under Sections 10(b) and Rule 10b-5 and Section 12(a) are dismissed. Finally, plaintiff's motion for protective order is denied.
In view of the diversity and complexity of the claims asserted and the number of legal actions filed pursuant thereto, a review of the factual and legal history of this case is necessary.
Cramer, plaintiff herein, has alleged that the defendants "participated, and/or acquiesced in, and /or aided and abetted and/or failed to discover when in the exercise of due diligence they would have discovered devices, schemes and artifices to defraud . . . GTE." [Complaint, page 4 para. 14]. It is further alleged that: GTE's assets were unlawfully used; that corporate financial records and corporate tax returns were falsified; and that material facts were incompletely and/or inaccurately disclosed to GTE's shareholders. Plaintiff has maintained that GTE's 1976 Annual Report contains all the facts relevant to the claims he has asserted; he has incorporated that report into his complaint.
In November, 1975, GTE's Board of Directors authorized the formation of an Audit Committee composed solely of outside, non-management directors, to conduct an investigation to determine whether between January 1, 1971 and December 31, 1975, GTE or any of its international subsidiaries had made ". . . illegal political contributions, unlawful payments to domestic or foreign government officials or other payments which were otherwise improper or improperly recorded . . . ." [Complaint, Exhibit A, page 13]. The Washington, D.C. law firm of Wilmer, Cutler and Pickering (which had not previously represented GTE) and the accounting firm of Arthur Andersen & Co. were retained to assist this Committee.
The fifty-one page Audit Committee report, dated March 4, 1976, revealed that approximately $8,000,000 was illegally paid to or for the benefit of government officials as commercial kickbacks, rebates or bribes to officials of private foreign customers.
An additional sum, approximately $2,000,000, was paid pursuant to a pre-January 1, 1971 commission arrangement made between GTE officials and officers of a single foreign company, designated simply "The Customer" in the Audit Committee Report; GTE held a "substantial interest" in the company.
This entire audit report was included in the 1976 Proxy Statement and distributed to all GTE shareholders before the Annual shareholder meeting was held on April 21, 1976. Both the report, and the Supplemental Report dated November 4, 1976, were filed with the SEC.
On March 16, 1976, Mr. Auerbach, a GTE shareholder, filed a derivative action against the corporate officials and Arthur Andersen in the Supreme Court of New York in Westchester County. He alleged that the illegal payments constituted a waste of GTE's assets, and that by permitting such payments, defendants breached their fiduciary duty to the corporation. Auerbach v. Bennett, Civil Action No. 572/77, Sup.Ct. of N.Y., Westchester Cty., April 29, 1977, p. 3.
Two weeks after the filing of the Auerbach suit, Mr. Limmer filed a derivative suit in the United States District Court for the Southern District of New York, charging that corporate officials had violated Sections 13(a) and 14(a) of the 1934 Securities and Exchange Act and had breached their fiduciary duty to shareholders. Warner, Brophy, Douglas and Bennett were named as defendants; Arthur Andersen & Co. was not made party to that suit. Limmer v. GTE, No. 76 Civ. 1494 (S.D.N.Y., March 11, 1977). Finally, on June 18, 1976, plaintiff herein commenced the instant litigation in this Court.
In order to assess GTE's position with respect to these actions, GTE's Board of Directors, acting pursuant to § 712 of the Business Corporation Law of New York and § 20 of the Corporate By-Laws, formed a Special Litigation Committee. The Committee was composed of three independent directors who had had no prior connection with GTE; Chief Judge Charles S. Desmond, now retired from the New York Court of Appeals acting as Special Counsel to the Committee. [Defendants' Motion for Summary Judgment, p. 5].
The Committee concluded that the defendants had satisfied their responsibilities under state law and that the three derivative actions were without merit. Moreover, the Committee determined that even if a cause of action could be said to exist, it would not be in GTE's best interests for any of the suits to be pursued by either GTE or the three named litigants. [Defendants' Motion for Summary Judgment, p. 5].
Based on the conclusions of GTE's Special Litigation Committee that the defendants had acted in good faith, that they had satisfied their fiduciary responsibilities, that the claims asserted in each derivative action were without merit, and that prosecution of these claims were not in the best interests of the corporation, GTE moved to dismiss the complaint in each suit. While motions to dismiss were pending in this suit, the complaints in Auerbach v. Bennett and Limmer v. GTE, were dismissed.
This Court will first determine whether plaintiff's federal claims are barred by the res judicata or collateral estoppel effect of the Auerbach and Limmer judgments. Because it appears that there are no viable federal claims, the pendent state law claims will not be reached by this court as the exercise of jurisdiction over pendent state law claims by a federal district court is discretionary. United Mine Workers of America v. Gibbs, 383 U.S. 715, 86 S. Ct. 1130, 16 L. Ed. 2d 218 (1966); Aldens, Ind. v. Packel, 524 F.2d 38 (3d Cir. 1975), cert. denied 425 U.S. 943, 96 S. Ct. 1684, 48 L. Ed. 2d 187 (1976); Robinson v. Penn Central Co., 484 F.2d 553 (3d Cir. 1973). Cf. Hagans v. Lavine, 415 U.S. 528, 549-550, 94 S. Ct. 1372, 1384-1385, 39 L. Ed. 2d 577 (1974).
RES JUDICATA: CLAIMS UNDER §§ 13 AND 14A
The doctrine of res judicata bars repetitious litigation. As the Court of Appeals for this Circuit reasoned in Hubicki v. ACF Industries, Inc., 484 F.2d 519 (3d Cir. 1973):
The rule provides that when a court of competent jurisdiction has entered a final judgment on the merits of a cause of action, the parties to the suit and their privies are thereafter bound not only as to every matter which was offered and received to sustain or defeat the claim on demand, but as to any other admissible matter which might have been offered for that purpose. [ 484 F.2d 519, 524, citing Commissioner v. Sunnen, 333 U.S. 591, 597, 68 S. Ct. 715, 719, 92 L. Ed. 898 (1948).]
As there can be no valid dispute that the Limmer judgment was a final adjudication on the merits of the issues presented, the threshold question for this Court is whether Limmer and Cramer involve the ...