## Facts

- Banff Oil Ltd. was a Canadian corporation operating in Canada whose common stock was registered under the Securities Exchange Act of 1934 and traded on the American Stock Exchange and the Toronto Stock Exchange.
- Aquitaine Company of Canada, Ltd. obtained control of Banff in 1964 through a tender offer made to shareholders in the United States and Canada.
- Banff and Aquitaine entered oil exploration arrangements in Alberta, including a farmout in the Rainbow Lake area, under which they obtained substantial oil acreage interests in exchange for drilling obligations.
- A shareholder (Schoenbaum) brought a derivative action alleging Banff’s directors possessed material, nonpublic information about Rainbow Lake drilling success and the resulting value of Banff’s shares.
- While allegedly holding that information and before full public disclosure, the directors caused Banff to sell treasury shares in Canada at prices plaintiff alleged were below their true value:
  - 500,000 shares to Aquitaine at $1.35 per share.
  - 270,000 shares to Paribas Corporation of New York at $7.30 per share.
- The transactions were paid for and consummated in Canada; plaintiff alleged the corporation received roughly $10 million less than fair value due to defendants’ undisclosed superior knowledge and a plan to benefit favored purchasers.

## Issues

1. Whether § 10(b) of the Securities Exchange Act and Rule 10b-5 can apply to Canadian treasury-share sales of a foreign issuer whose securities are registered under the Act and traded on a U.S. national exchange.
2. Whether allegations that informed directors caused the corporation to sell treasury shares at an unfairly low price to favored purchasers state a claim for fraud or deception under § 10(b) and Rule 10b-5, rather than only a fiduciary-duty claim.

## Decision

- The Second Circuit held the federal court had subject-matter jurisdiction under the Securities Exchange Act despite the foreign locus of the transactions.
- The court nonetheless affirmed judgment for defendants on the merits, concluding the complaint failed to state a § 10(b)/Rule 10b-5 claim.
- The court characterized the pleaded wrong as corporate mismanagement or breach of fiduciary duty in setting an inadequate price, not actionable federal securities fraud absent deception or manipulation within the statute’s meaning.

## Legal Principles

- The Securities Exchange Act may reach foreign transactions when the issuer’s securities are registered and listed on a U.S. national exchange and the challenged conduct is detrimental to American investors or U.S. market interests.
- Liability under § 10(b) and Rule 10b-5 requires fraud, manipulation, or deception “in connection with” a securities purchase or sale; unfair pricing or self-dealing, without deceptive conduct covered by the rule, is not enough.
- In a derivative claim asserting harm to the corporation from board-approved transactions, the absence of deception practiced on the corporation can defeat a Rule 10b-5 theory where the approving directors possessed the allegedly withheld information and their knowledge is treated as the corporation’s knowledge.

## Conclusion

The court recognized federal jurisdiction to hear a Rule 10b-5 challenge to foreign treasury-share sales by a foreign issuer listed in the United States, but held that allegations of directors’ underpricing based on inside information, without actionable deception within the corporation’s decisionmaking, pleaded fiduciary breach rather than § 10(b) securities fraud.


Schoenbaum v. Firstbrook, 405 F.2d 200 (2d Cir. 1968)