Freeman v. Decio

United States Court of Appeals for the Seventh Circuit · 1978 · Corporations

584 F.2d 186 (7th Cir. 1978)

Updated August 22, 2026

CorporationsDerivative suitsInsider tradingSection 16(b)Indiana lawderivative actionfiduciary dutyDiamond v. Oreamuno

Facts

Plaintiff, a Skyline shareholder, alleged that certain Skyline officers and directors sold or gifted Skyline stock while in possession of material nonpublic information about overstated earnings in the quarters ending May 31 and August 31, 1972, and about an anticipated earnings decline in the quarter ending November 30, 1972. After extensive discovery, defendants submitted affidavits and documentary evidence asserting that the earlier financial statements were accurate and that they did not know of any inaccuracy or expect an earnings decline before the public announcement. Plaintiff also claimed Swikert violated Section 16(b) by selling stock within six months after restricted shares became transferable, although he had committed to buy and paid for those shares in 1968 and the restrictions lapsed in 1973.

Issue

Does Indiana law permit a corporation, through a derivative action, to recover profits made by its officers and directors from trading in the corporation's stock on the basis of inside information? Separately, for Section 16(b), is restricted stock purchased when the insider commits to acquire and pays for it, or when the resale restrictions lapse?

Rule

The Seventh Circuit predicted that Indiana would not adopt Diamond v. Oreamuno and therefore would not recognize a derivative corporate claim for disgorgement of insider-trading profits absent such state-law recognition. On summary judgment, once defendants effectively controvert the complaint, the plaintiff must produce significant probative evidence, not mere allegations, to show a genuine dispute of material fact. For Section 16(b), an insider purchases stock when he incurs an irrevocable liability to take and pay for it and his rights and obligations become fixed, not when later restrictions on resale lapse.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Prairie Forge, Inc., an Indiana corporation based in Fort Wayne, is publicly traded. After vice president Nora Benton sold company shares before disappointing results became public, shareholder Eli Navarro filed a derivative action in Indiana federal court seeking to force Nora to disgorge her trading profits to Prairie Forge itself, even though no Indiana statute or precedent expressly creates that corporate cause of action.

How should the court most likely rule on the derivative disgorgement claim under Indiana law?

Explanation. The majority predicted Indiana would refuse to adopt the innovative Diamond-type rule creating a derivative corporate claim for disgorgement of insiders' market-trading profits. The court viewed that theory as judicial securities regulation rather than settled corporate fiduciary doctrine and found the asserted corporate injury too speculative to justify predicting Indiana would adopt it.