We are here called upon to determine whether a stockholder who sues on behalf of his corporation to recover 'shortswing' profits of a 'beneficial' owner of stock in the corporation, as authorized under Section 16(b) of the Securities Exchange Act of 1934,1 must allege that he was such stockholder at the time of the transactions complained of as required by Rule 23(b) of the Federal Rules of Civil Procedure, 28 U.S.C.A., in the case of 'an action brought to enforce a secondary right on the part of one or more shareholders * * *.'2

The trial court decided this question in the affirmative and dismissed the complaint which sought recovery of profits allegedly reaped by the individual defendants from purchase and sale of stock in the defendant Kirby Petroleum Company, in which they owned more than 10% of the common stock, the said stock being listed on the American Stock Exchange in New York, a national securities exchange.

Appellant, citing Blau v. Mission Corp., 2 Cir., 1954, 212 F.2d 77, 79, certiorari denied 347 U.S. 1016, 74 S. Ct. 872, 98 L. Ed. 1138; Pellegrino v. Nesbit, 9 Cir., 1953, 203 F.2d 463, 466; and Benisch v. Cameron, D.C.S.D.N.Y.1948, 81 F. Supp. 882, asserts that these are the only court decisions precisely in point, and that they all support his thesis that Rule 23(b) does not apply to an action brought by a security holder under Section 16(b) of the Securities Exchange Act.

Appellees, conceding that these are the only judicial pronouncements on the point in issue, say, first, that these cases are bad law, and they then conclude by characterizing them as an abandonment of 'the morality of which the equity rules and the FRCP were born,' resulting from either 'zeal for social ideology or other misguided motives.' Such extravagance of expression detracts from what is otherwise an excellent exposition of appellees' theory of the law.

The rules of law applicable to this case are neither complicated nor unusual. The statute here involved creates a new cause of action, which, while similar in some respects to a secondary or derivative right, is not such a right at all. It is in reality a primary right. This is so because the statute which creates it makes it so. The only actions referred to in the rules on which appellees so strongly rely are the equitable actions in which a stockholder is permitted to proceed on behalf of himself and others similarly situated to compel a corporation to take action against those who, by reason of their control of the corporate machinery or corporate policies, are abusing their position of trust or are taking advantage of inside knowledge for their own benefit. This type of action, long recognized as a creature of equity, was described by Mr. Justice Jackson in his opinion in Koster v. Lumbermens Mutual Co., 330 U.S. 518, on page 522, 67 S. Ct. 828, on page 830, 91 L. Ed. 1067 where he said:

'The stockholder's derivative action, to which this policyholder's action is analogous, is an invention of equity to supply the want of an adequate remedy at law to redress breaches of fiduciary duty by corporate managers. Usually the wrongdoing officers also possess the control which enables them to suppress any effort by the corporate entity to remedy such wrongs. Equity therefore traditionally entertains the derivative or secondary action by which a single stockholder may sue in the corporation's right when he shows that the corporation on proper demand has refused to pursue a remedy, or shows facts that demonstrate the futility of such a request. With possible rare exceptions, these actions involve only issues of state law and, as in the present case, can get into federal courts only by reason of diversity in citizenship of the parties. Their existence and peculiar character were recognized by this Court in the old Equity Rules. Rule 27, 226 U.S.App., p. 8.'

It should be observed here that the complaint in the case before the court was not brought in the federal court on the diversity of citizenship grounds, but it alleged that jurisdiction was 'invoked under Section 27 of the Securities Exchange Act of 1934.' Such jurisdiction was not challenged by appellees. There being no allegation of diversity of citizenship as between plaintiff and defendants, the only cause of action alleged must, therefore, of necessity have been the statutory right established by the Securities Exchange Act.

That this is an entirely new cause of action created by the statute is further demonstrated by the terms of § 78aa, which provide that the District Courts of the United States shall have exclusive jurisdiction of violations of Section 78, and of all suits 'brought to enforce any liability or duty created' thereby. There is, of course, no such provision as to an ordinary secondary or derivative action by a stockholder, which, as pointed out by Mr. Justice Jackson above, is ordinarily based on state jurisprudence. The plaintiff below, the defendants and the Court all proceeded on the theory that the cause of action sued on was created by the Securities Exchange Act. This being so, we take the same view of it, and find that this law created a right in the plaintiff that is neither derivative nor secondary in the sense in which that term is used in the Rule.

Appellees contend that Rule 23(b), requiring that in secondary actions by stockholders, the complaining party must allege stock ownership at the time of the transaction of which he complains, was adopted with the force of law subsequent to the passage of the Securities Exchange Act and that the repealer section of the Rule-Making Statute struck down any conflicting prior law;3 that there is a conflict between the rule and the prior statute and that the statute must yield to the rule. The fallacy of this argument is that, as we construe the statute and the rule, there is no conflict. This is implicit in the court's opinion in the Pellegrino case, supra.4

In the case of Benisch v. Cameron, supra, the District Court for the Southern District of New York passed on this precise point and held that such a suit is not subject to the procedural requirements of the Rule 23(b).5

In Blau v. Mission Corp., supra,6 also relied on by appellant, the court dealt with this matter. It lightly brushed aside the contention there made that Rule 23(b) was applicable to a situation like the present. The opinion stated:

'The complaint is not defective for failure to allege that plaintiff was a shareholder at the time of the transaction complained of in accordance with Fed.Rules Civ.Proc., rule 23(b), and Del. General Corporation Law, 8 Del.C. § 327; those provisions, directed particularly to the shareholder's derivative action to recover for misdeeds of corporate officials, cannot, even if so perhaps intended, override the direct mandate of § 16(b) that suit may be brought 'by the owner of any security' without qualification. Pellegrino v. Nesbit, 9 Cir., 203 F.2d 463; Park & Tilford, Inc., v. Schulte, 2 Cir., 160 F.2d 984, certiorari denied Schulte v. Park & Tilford, Inc., 332 U.S. 761, 68 S. Ct. 64, 92 L. Ed. 347; Kogan v. Schulte, D.C.S.D.N.Y., 61 F. Supp. 604.'It is not clear whether the court based its decision on the inefficacy of the Rule-Making Statute to repeal the specific provisions of a conflicting statute, or on some other ground. However, we do not reach that question because we hold that there is no conflict between the rule and the law.

Appellant alleged a cause of action under the applicable section of the Securities Exchange Act, and it was error for the court to dismiss his complaint. The judgment is reversed and the case is remanded to the trial court for further proceedings consistent with this opinion.

Reversed and remanded.