The opinion of the court was delivered by: McLAUGHLIN, Sean J., District J.,
This federal securities fraud action arises from a transaction occurring in 2006 whereby the Plaintiff, Paul Gallup, sold shares of Clarion Sintered Metals, Inc. ("CSM") stock back to the Company. Named as Defendants are CSM and its two controlling shareholders, Howard H. Peterson and Benjamin F. Marzella. In addition to seeking relief under § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and SEC Rule 10(b)-5, 17 C.F.R. § 240.10b-5, Gallup has asserted state law claims of breach of fiduciary duty against the Defendants based on alleged acts of misrepresentation, oppression, and self-dealing. This Court's jurisdiction is premised upon 28 U.S.C. §§ 1331 and 1367.
Presently pending before the Court is the Defendants' motion for summary judgment  on all claims. For the reasons set forth below, this motion will be granted as to the federal securities fraud claim. The remaining state law claims will be dismissed without prejudice so that Plaintiff may pursue them in state court.
Summary judgment is proper only where the moving party has established "there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a). "To demonstrate that no issue is in dispute as to any material fact, the moving party must show that the non-moving party has failed to establish one or more essential elements of its case on which the non-moving party has the burden of proof at trial." McCabe v. Ernst & Young, LLP, 494 F.3d 418, 424 (3d Cir. 2007) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986)). To survive the motion, the non-moving party must show specific facts such that a reasonable jury could find in its favor. Id. (citing former Fed.R.Civ.P. 56(e)). "While the evidence that the non-moving party presents may be either direct or circumstantial, and need not be as great as a preponderance, the evidence must be more than a scintilla." Hugh v. Butler County Family YMCA, 418 F.3d 265, 267 (3d Cir.2005)) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251 (1986)). In adjudicating a Rule 56 motion, we view the underlying facts and all reasonable inferences arising therefrom in the light most favorable to the party opposing the motion -- here, the Plaintiff. McCabe, 494 F.3d at 424; Fasold v. Justice, 409 F.3d 178, 180 (3d Cir.2005). With that standard in mind, we set forth the relevant facts of record.
Gallup is a resident of Ridgway, Pennsylvania. Defendant CSM is a
Pennsylvania corporation engaged in the business of producing structural powered metal components for the automotive, lawn and garden, appliance and industrial markets. The company was formed in 1984 when Defendants Peterson and Marzella, along with three other individuals, purchased the assets formerly owned by International Powdered Metallurgy Company ("IPM"), a division of Thermco Systems, Inc.. Defendants Peterson and Marzella currently own more than eighty percent (80%) of CSM's stock and also serve as officers and directors of the Company.
Since its incorporation in 1984, CSM has maintained two classes of stock. "Class A" shares were sold to members of the public at a price of $10.00 per share. "Class B" shares, on the other hand, were sold to the five founding members of CSM, including Peterson and Marzella, at a price of $1.00 per share.
By early 1997, Peterson and Marzella had become the controlling shareholders of CSM and the only two remaining original holders of Class B shares. At some point that year, they incorporated an entity known as CSM Sales, Inc. (hereinafter, "CSM Sales"), a manufacturing representative firm ostensibly organized for the purpose of promoting the sales of CSM in return for a commission. As controlling shareholders of both companies, Peterson and Marzella caused CSM to enter into a contract with CSM Sales, Inc., pursuant to which CSM would pay as much as 7% of its total annual revenues to CSM Sales. Most of the money received by CSM Sales was distributed directly to Peterson and Marzella.
Although this contractual arrangement was supposedly intended to enhance CSM's sales and control its costs, in reality, Gallup claims, CSM Sales operated as a sham corporation with no business purpose in the sense that its transactions with CSM did not benefit CSM or its Class A shareholders. In this manner, it is alleged, Peterson and Marzella were able to skim revenues from CSM, thereby diminishing the Company's profitability and avoiding the necessity of distributing such profits to minority shareholders. By Gallup's estimate, Peterson and Marzella have diverted more than $9 million of CSM's earnings to themselves since 1997.
Gallup claims that the Defendants perpetrated the foregoing scheme through surreptitious means. In 1997 the Company began to hold its annual shareholders' meeting at a more remote location in Erie, Pennsylvania rather than in Ridgway, where the Company is located. This move, Gallup posits, was intended to discourage the participation of minority shareholders like himself.
That same year, Peterson and Marzella undertook the practice of withholding the annual audited financial statements of CSM from its shareholders. According to Gallup, this was significant because the audited financial statements contained information, under the topic "Related Party Transactions," which would have revealed the amounts of monies that Peterson and Marzella were transferring from the Company to CSM Sales, Inc. each fiscal year.
In lieu of the audited financial statements, CSM in 1997 began to issue "Condensed Financial Statements" to all Class A shareholders at the end of each fiscal year. These Condensed Financial Statements contained a basic balance sheet and income statement, but did not contain any explanation or text from the auditing accountant, and they revealed nothing about the existence of CSM Sales, Inc. or its relationship with CSM. Further, these Condensed Financial Statements were represented as having been prepared in accordance with Generally Accepted Accounting Principles ("GAAP"). According to Gallup, that representation was false because GAAP requires financial notes, such as those that identify "Related Party Transactions," to accompany any representation of the financial performance of the company. In other words, Gallup claims, GAAP required the disclosure on the Condensed Financial Statements of the relationship between CSM and CSM Sales, Inc., which did not occur.
Gallup has presented additional evidence suggesting that the Defendants sought to keep information concerning the relationship between CSM and CSM Sales hidden from its minority shareholders. Both Robert V. Howard, a former general manager and director of CSM, and Scott Gibson, a former controller and chief inside accountant for CSM, stated at depositions that it was their understanding that the existence and workings of CSM Sales were confidential matters not to be discussed.
On or about December 13, 1984, Gallup and his spouse, Ruth Gallup (then an employee of CSM), purchased 1500 shares of Class A common stock in CSM for $15,000.00. As minority shareholders, Gallup and his wife received the Condensed Financial Statements distributed annually by CSM. Gallup acknowledges that he would glance at these statements but he states that he is "not an accountant," so he "didn't really pay much attention to them." (Gallup Depo. [22-1] at p. 37.)
On April 2, 2006, Ruth Gallup died, leaving her husband as the sole owner of the stock. Although he would have preferred to have retained the stock, Gallup believed, based on statements made by his wife, that he was obligated to return the stock to CSM upon his wife's death. Accordingly, on April 6, 2006, Gallup's granddaughter, Rachel King, contacted CSM to inquire about the price CSM would be willing to pay for her grandfather's stock. By way of response to King's inquiry, CSM offered to pay the sum of $89,685.00 for the shares, which represented a price of $59.79 per share. On April 7, 2006, Gallup delivered his stock to CSM in exchange for a check in the amount of $89,685.00.
The stock certificates which were issued to Gallup and his wife in 1984 contained a provision granting the company the right of first refusal in the event the shareholder sought to ...