## Facts

- A shareholder of Management Assistance, Inc. (MAI) brought a derivative action on MAI’s behalf against MAI’s chairman (Oreamuno) and president (Gonzalez).
- MAI’s senior officers learned nonpublic information indicating MAI’s earnings would decline substantially due to increased costs affecting its business.
- Before the information became public, Oreamuno and Gonzalez sold roughly 56,500 shares of MAI stock at about $28 per share.
- After public disclosure, MAI’s stock price fell to about $11 per share.
- The complaint alleged the officers used material, nonpublic corporate information to sell at an inflated price and that the resulting profits belonged to MAI.

## Issues

1. Whether corporate officers/directors may be required, in a derivative action, to account to the corporation for profits from trading the corporation’s stock based on material nonpublic information, even absent proof of direct corporate monetary loss.
2. Whether federal securities regulation precludes or limits a state-law fiduciary-duty disgorgement claim, including concerns about overlapping liability.

## Decision

- The Court of Appeals held the complaint stated a cause of action under New York law and allowed the derivative claim to proceed against Oreamuno and Gonzalez.
- The court ruled that officers and directors who trade on material inside information must account to the corporation for the profits realized, even if the corporation cannot show a traditional, measurable financial loss from the trades.
- The court rejected the argument that federal securities law displaced the state fiduciary remedy and held potential overlapping remedies did not bar the action.

## Legal Principles

- Officers and directors owe the corporation duties of loyalty and good faith and may not obtain secret personal profits by exploiting information gained through their corporate positions.
- Material, nonpublic corporate information is treated as a corporate asset; fiduciaries may not appropriate its economic value for personal trading.
- Disgorgement may be ordered for breach of fiduciary duty without proof of specific, direct monetary damages to the corporation.
- Harm sufficient to support equitable relief may include injury to the corporation’s reputation, managerial integrity, and investor confidence caused by insider misuse of corporate information.
- State fiduciary-duty remedies requiring accounting to the corporation may coexist with federal securities regulation; the possibility of overlapping liability does not, by itself, defeat a state-law claim.

## Conclusion

The court recognized a derivative fiduciary-duty claim requiring corporate insiders to disgorge trading profits obtained through use of material nonpublic information, treating such information as a corporate asset and permitting recovery even without proof that the corporation suffered a direct financial loss, while allowing the remedy to operate alongside federal securities law.


Diamond v. Oreamuno, 24 N.Y.2d 494 (N.Y. 1969)