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Just as a trustee has no right to retain for himself the profits yielded by property placed in his possession but must account to his beneficiaries, a corporate fiduciary, who is entrusted with potentially valuable information, may not appropriate that asset for his own use even though, in so doing, he causes no injury to the corporation. There can be no justification for permitting officers and directors to retain for themselves profits which they derived solely from exploiting information gained by virtue of their inside position as corporate officials.
Plaintiff shareholder of Management Assistance, Inc. (“MAI”) filed the present complaint, asserting a derivative action against a number of its officers and directors to compel an accounting for profits allegedly acquired as a result of a breach of fiduciary duty. It charged that two of the defendants -- Oreamuno, chairman of the board of directors, and Gonzalez, its president -- had used inside information, acquired by them solely by virtue of their positions, in order to reap large personal profits from the sale of MAI shares and that these profits rightfully belong to the corporation. Other officers and directors were joined as defendants on the ground that they acquiesced in or ratified the assertedly wrongful transactions. The defendants filed a motion to dismiss the complaint, pursuant to CPLR 3211 (subd. [a], par. 7) for failure to state a cause of action. The court at Special Term granted the defendants’ motion. The Appellate Division modified Special Term's order by reinstating the complaint as to the defendants Oreamuno and Gonzalez. Defendants Oreamuno and Gonzalez appealed.
Could defendant corporate officers be held accountable to their corporation for gains realized by them from transactions in the company's stock as a result of their use of material inside information?
The court held that a person who acquired special knowledge by virtue of a fiduciary relationship with another was not free to exploit that knowledge for his own personal benefit but had to account to his principal for any profits derived therefrom. Further, the court held that an allegation of corporate damages was not required. In view of the practical difficulties inherent in an action under federal law, the desirability of creating an effective common-law remedy through the medium of the derivative action brought in the name of the corporation was manifest. Accordingly, the court affirmed the denial of defendants' motion to dismiss.