## Facts

- Skyline Corporation was a publicly traded manufacturer of mobile homes and recreational vehicles that experienced strong growth through the 1960s and into 1972.
- In 1972, Skyline’s reported earnings declined sharply, and the market price of its stock dropped significantly after the downturn became public.
- A shareholder filed a derivative action on Skyline’s behalf against certain officers and directors, alleging that interim 1972 financial information overstated Skyline’s condition and failed to reflect impending earnings deterioration.
- The shareholder alleged the insiders knew adverse, nonpublic information about Skyline’s financial prospects and, during 1972, sold or disposed of substantial amounts of Skyline stock before the downturn was publicly reflected in the stock price.
- The suit sought disgorgement of the alleged insider trading profits to Skyline under Indiana law, asserting breach of fiduciary duty.
- The complaint also asserted a federal claim under § 16(b) of the Securities Exchange Act of 1934, disputing when restricted stock is deemed “purchased” for short-swing profit purposes.
- After discovery, the district court granted summary judgment to defendants on the Indiana-law claim (no recognized cause of action and no triable issue of insider trading on material nonpublic information) and ruled against the shareholder on the § 16(b) timing issue.

## Issues

1. Whether Indiana law recognizes a shareholder derivative action allowing a corporation to recover officers’ and directors’ profits from trading the corporation’s stock on material inside information.
2. Whether the plaintiff produced sufficient evidence to create a genuine issue of material fact that the insiders’ stock transactions were based on material, nonpublic information.
3. For § 16(b), whether an insider “purchased” restricted stock when he became contractually bound and paid for it, or when restrictions later lapsed and certificates were delivered.

## Decision

- The Seventh Circuit affirmed summary judgment for defendants.
- The court held Indiana law did not recognize a corporate right, enforceable derivatively, to recover insiders’ trading profits based solely on alleged insider trading and was unlikely to adopt a rule permitting disgorgement without proof of corporate injury.
- Independently, the court held the evidentiary record did not raise a genuine dispute that defendants traded on material, nonpublic information.
- On the § 16(b) claim, the court held the “purchase” occurred when the insider entered the binding commitment and paid for the restricted shares, not when restrictions lapsed and certificates were issued.

## Legal Principles

- In predicting state law, a federal court will not create a new state corporate cause of action absent a clear indication the state’s courts would recognize it.
- Under Indiana law as applied, a corporation had no derivative disgorgement remedy for insider trading profits by officers and directors based only on alleged trading on inside information.
- To defeat summary judgment on an insider trading-based fiduciary claim, the plaintiff must present specific, probative evidence supporting a reasonable inference of trading on material, nonpublic information.
- For § 16(b), a “purchase” occurs when the insider becomes irrevocably committed and assumes the economic risk of ownership (typically when contracting for and paying for the shares), even if transfer restrictions and certificate delivery occur later.

## Conclusion

The court affirmed judgment for the officers and directors, holding that Indiana law did not provide a derivative disgorgement remedy for alleged insider trading profits and that the record did not support a triable inference of trading on material nonpublic information; it also held that, for § 16(b), restricted stock is “purchased” when the insider commits and pays, not when restrictions later lapse.


Freeman v. Decio, 584 F.2d 186 (7th Cir. 1978)