## Facts

- A GTE shareholder’s custodian filed a shareholder derivative action on behalf of General Telephone & Electronics Corp. (GTE) against GTE, certain officers/directors, and GTE’s outside auditor.
- The complaint alleged corporate injury from unlawful overseas payments by subsidiaries, misuse of corporate assets, falsified financial records and tax returns, and materially incomplete or inaccurate disclosures to shareholders.
- Federal claims were asserted under the Securities Exchange Act of 1934, including § 10(b)/Rule 10b-5, § 12(b)(1), § 13(a), and § 14(a), along with pendent state-law claims for fraud and breach of fiduciary duty.
- Defendants moved to dismiss for failure to state a claim and, alternatively, for summary judgment based on res judicata and collateral estoppel due to prior related litigation; plaintiff sought a Rule 26(c) protective order.

## Issues

1. Whether the § 13(a) and § 14(a) claims and the pendent state-law claims were barred by res judicata and collateral estoppel due to prior litigation arising from the same alleged conduct.
2. Whether the complaint stated a derivative claim under § 10(b) and Rule 10b-5, as opposed to alleging non-federal corporate mismanagement.
3. Whether an independent private right of action could be implied under Exchange Act § 12(b)(1) without satisfying the standing and related requirements of § 18.

## Decision

- Summary judgment was granted for defendants on the § 13(a) and § 14(a) claims and on the pendent state-law claims on preclusion grounds.
- The § 10(b) and Rule 10b-5 claims were dismissed under Rule 12(b)(6) for failure to state a securities fraud claim.
- The § 12(b)(1) claim was dismissed under Rule 12(b)(6); the court rejected an implied private cause of action that would bypass § 18’s limitations.
- Plaintiff’s motion for a protective order was denied.

## Legal Principles

- Res judicata and collateral estoppel can bar later-filed federal reporting/proxy claims and related state-law derivative claims when prior litigation has already resolved disputes arising from the same alleged course of conduct.
- Section 10(b) and Rule 10b-5 require adequately pleaded actionable misrepresentations or omissions in connection with a purchase or sale of securities; allegations of corporate waste, illegal payments, or falsified internal records, without the required securities-transaction nexus, sound in state corporate law rather than federal securities fraud.
- Exchange Act § 12(b)(1) does not support a free-standing implied private right of action that circumvents Congress’s express remedial scheme; claims premised on filing/registration-related misconduct must conform to § 18’s statutory requirements.
- When federal claims are dismissed or otherwise eliminated early, pendent state-law claims may be dismissed for lack of an adequate federal basis to retain jurisdiction.

## Conclusion

The court disposed of the derivative action by applying claim and issue preclusion to the Exchange Act reporting and proxy claims and the state-law claims, and by dismissing the remaining federal theories for failure to plead actionable securities fraud and for attempting to imply a private remedy under § 12(b)(1) inconsistent with the Act’s express enforcement provisions.


Cramer v. Gen. Tel. & Elecs. Corp., 443 F. Supp. 516 (E.D. Pa. 1977)