# Petition — Allis-Chalmers Manufacturing Co. v. Gulf & Western Industries, Inc.

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385003_1201%3A1

## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition
- **Published:** January 1, 1976
- **Citation:** 423 U.S. 1078

## Text

75-580 | i.

-

a
j OCT 4G his,
IN THE MICHAEL RODAK

Supreme Couwt of the United States :

Octrosper TERM, 1975

’ 25
———

Auuis-CHAaLMERS Manuracturine CoMPAny,

Petitioner,

—V.-—

Guutr & Western Inpvustrizs, Inc.,

Respondent.

PETITION FOR WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS
FOR THE SEVENTH CIRCUIT

=

———

S. Hazarp GILLESPIE
Counsel for Allis-Chalmers
Manufacturing Company
1 Chase Manhattan Plaza
New York, New York 10005
Tel. No.: (212) 422-3400

=~ oe eee

TABLE OF CONTENTS

PAGE
Opinions Below 1
Jurisdiction 2
Statute Involved 2
Question Presented 3
Statement of the Case 4
The Decision of the District Court 6

_ The Decision of the Court of Appeals ......... 7
Reasons for Granting a Writ of Certiorari 8
ConcLusIONn 15
APPENDICES:

I i a la
REISER Smee NOME att apo na HOE aI eo Oe 35a
F _ RGRERSIER Res aso fe nto SO Rg OR 75a
TaBLE OF AUTHORITIES
Cases:
Adler v. Klawans, 267 F.2d 840 (2d Cir. 1959) —...00.00...... 11

Kern County Land Co. v. Occidental Petroleum Corp.,

411 U.S. 582 (1973) .............

PAGE

Newmark vy. RKO General, Inc., 425 F.2d 348, cert.
Se ee Se GD cenicciscirteeenccatnieneerainscenicinion 11

Perine vy. William Norton & Co., 509 F.2d 114 (2d Cir.
ERS SRTIR SenAA Ce ey ote hr alin er bree ar OEE 11
Provident Securities Co. v. Foremost-McKesson, Inc.,
506 F.2d 601 (9th Cir. 1974), cert. granted, 420 U.S.
I a ca eens calacieaiiaasaaaanenin 7,9, 12

Reliance Electric Co. vy. Emerson Electric Co., 434
F.2d 918 (8th Cir. 1970), aff'd, 404 U.S. 418 (1972) .. 10,
11-12, 13

Stella v. Graham-Paige Motors Corp., 104 F.Supp. 957
(S.D.N.Y. 1952), aff'd in part, remanded in part,
232 F.2d 299 (2d Cir.), cert. denied, 352 U.S. 831

I dele ia geese ala el Ad 10
Statutes:
Securities Exchange Act of 1934, 15 U.S.C. et seq.
ee ee aa Ss TPO sisstesnhiieicsiacalshetilachhliestichishebalianciaiceiialncsian 4
§16(b), 15 U.S.C. § 78p(b) ...................... 2-3, 6, 7, 9, 10,
12, 13, 14
es Te A TIMI: ‘ciinseshicisescithalemsipinainnibinaniihltaiaiaintabbiats 6
Miscellaneous:
L. Loss, Securities Reauiation (2d ed. 1961) .............. 10

In THE

Supreme Court of the United States

Octoser Term, 1975

No. 75-.

i

Au.is-CHaLMers Manuracturine Company,
Petitioner,
—_—vV—
Gutr & Western Inpvusrtuiss, Inc.,

Respondent.

— >

PETITION FOR WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS
FOR THE SEVENTH CIRCUIT

Petitioner Allis-Chalmers Manufacturing Company
(“Allis-Chalmers”) prays that a writ of certiorari issue
to review the judgment of the United States Court of
Appeals for the Seventh Circuit entered on September 29,
1975.

Opinions Below

The opinion of the United States Court of Appeals for
the Seventh Circuit, rendered on September 29, 1975 and
as yet unreported, is set forth in Appendix A hereto. The
opinion of the United States District Court for the North-
ern District of Illinois is reported at 372 F.Supp. 570 (N.D.
Ill. 1974), and is set forth in Appendix B hereto.

Jurisdiction

The judgment of the Court of Appeals was entered on
September 29, 1975. Prior to the entry of judgment, the
Court of Appeals sua sponte circulated the opinion among
all the active judges of that court because, as was candidly
acknowledged, the court “adopt[ed] a position on an issue
as to which a conflict between circuits exists”. 6a n.5.*
A majority of the active judges did not request rehearing
en banc, Chief Judge Fairchild and Judge Cummings vot-
ing for rehearing. This Court has jurisdiction pursuant to
28 U.S.C. § 1254(1).

Statute Involved

Section 16(b) of the Securities Exchange Act of 1934,
48 Stat. 896, 15 U.S.C. § 78p(b), provides:

“For the purpose of preventing the unfair use of
information which may have been obtained by such
beneficial owner, director, or officer by reason of his
relationship to the issuer, any profit realized by him
from any purchase and sale, or any sale and purchase,
f any equity security of such issuer (other than an
exempted security) within any period of less than six
months, unless such security was acquired in good
faith in connection with a debt previously contracted,
shall inure to and be recoverable by the issuer, irre-
spective of any intention on the part of such bene-
ficial owner, director, or officer in entering into such
transaction of holding the security purchased or of

* Citations to “a” are to the Appendices attached hereto.

not repurchasing the security sold for a period ex-
ceeding six months. Suit to recover such profit may
be instituted at iaw or in equity in any court of com-
petent jurisdiction by the issuer, or by the owner of
any security of the issuer in the name and in behalf
of the issuer if the issuer shall fail or refuse to bring
such suit within sixty days after request or shall fail
diligently to prosecute the same thereafter; but no
such suit shall be brought more than two years after
the date such profit was realized. This subsection shall
not be construed to cover any transaction where such
beneficial owner was not such both at the time of the
purchase and sale, or the sale and purchase of the
security involved, or any transaction or transactions
which the Commission by rules and regulations may
exempt as not comprehended within the purpose of
this subsection.”

Question Presented

Is the purchaser of approximately 29% of the registered
equity securities of an issuer, who prior thereto owned
no such securities but who within six months after the
purchase “voluntarily disposes of” the securities, liable
under Section 16(b) of the Securities Exchange Act of
1934, 48 Stat. 896, 15 U.S.C. §78p(b), to the issuer for
all short-term profits realized?

Statement of the Case

Petitioner Allis-Chalmers is a Delaware corporation
whose common stock was at all relevant times registered
pursuant to the provisions of Section 12 of the Securities
Exchange Act of 1934 (the “1934 Act”), 15 U.S.C. §781.

Respondent Gulf & Western Industries, Inc. (“Gulf &
Western”), also a Delaware corporation, is a conglomerate
which “had bought and sold controlling interests in a
number of corporations” prior to its initial purchase of
Allis-Chalmers stock. 2a n.1.

In May 1968 Gulf & Western was interested in acquiring
a substantial portion of the outstanding common stock of
Allis-Chalmers. Respondent’s chairman, Mr. Bludhorn, and
president, Mr. Judelson, notified the chairman of Allis-
Chalmers, Mr. Stevenson, that respondent was considering
acquiring stock in petitioner by means of an exchange, and
the next day informed petitioner that Gulf & Western
would seek to effect the purchase of 3,000,000 shares of
Allis-Chalmers stock by means of an exchange offer.

On July 1, 1968 respondent formally offered to purchase
3,000,000 shares of Allis-Chalmers common stock for a
package of cash, subordinated debentures and warrants.
These 3,000,000 shares represented approximately 29% of
the then outstanding Allis-Chalmers common stock. The
exchange offer was fully subscribed to on July 19, 1968,
and respondent’s shareholders approved the offer on July
29, 1968. Prior to its purchase of these 3,000,000 shares
of Allis-Chalmers, Gulf & Western owned none of peti-
tioner’s common stock.

5

Subsequent to the purchase of this 29% block of Allis-
Chalmers common stock, respondent entered into an
agreement in August 1968 with Oppenheimer Fund, Inc.
(“Oppenheimer”) whereby respondent would acquire an
additional 248,000 shares of Allis-Chalmers common stock
held by Oppenheimer. Gulf & Western’s purchase of this
block of stock occurred on September 30, 1968.

In the period subsequent to its agreement to acquire
the second block of Allis-Chalmers common stock, respon-
dent underwent a change of heart as to the attractiveness
of owning 3,248,000 shares of Allis-Chalmers stock. The
Court of Appeals wrote:

“On September 13, 1968 Allis-Chalmers chairman
Stevenson had on his own initiative met with Bludhorn
and Judelson of Gulf & Western and had, according
to his recollection at trial, told them that things did
not look good for Allis-Chalmers. He refused to quan-
tify the bad news for the Gulf & Western representa-
tives in response to their specific questions, but he
clearly disclosed to them his personal negative evalu-
ation of the situation at Allis-Chalmers. Stevenson’s
notes for this meeting reflected his belief at that time
that the Gulf & Western people were ‘getting nervous’
about their block of stock in Allis-Chalmers. At trial,
Stevenson testified that he ‘had the feeling right then
[at the September 13, 1968 meeting] that they were
thinking about disposing of it.” 4a n.4.

On the very day of its purchase of the block of Allis-
Chalmers stock from Oppenheimer, Gulf & Western com-
menced negotiations with White Consolidated Industries,
Inc. (“White”) for the sale to White of the entire block
of 3,248,000 Allis-Chalmers shares owned by respondent.

On October 31, 1968 respondent and White reached agree-
ment, and on December 6, 1968 Gulf & Western sold its
entire block of 3,248,000 shares of Allis-Chalmers stock
to White. Therefore, within a period of less than six
months, Gulf & Western had first purchased in two large
blocks and then, after apparently “getting nervous” over
the prospects of Allis-Chalmers, sold in a single transaction
3,248,000 shares of Allis-Chalmers registered common

stock. :

The Decision of the District Court

On January 6, 1969 petitioner commenced suit against
Gulf & Western, pursuant to Section 27 of the 1934 Act,
to recover pursuant to Section 16(b) the short-swing profits
that Gulf & Western realized on the two purchases and
single sale within less than six months of 3,248,000 shares
of Allis-Chalmers common stock. A non-jury trial resulted
in a judgment against Gulf & Western in the amount of
$1,135,858, the amount the District Court calculated to have
been Gulf & Western’s profits on the two purchases and
single sale of all 3,248,000 shares of Allis-Chalmers stock.
The District Court held that respondent was a “beneficial
owner” within the meaning of Section 16(b) when it made
its initial exchange offer purchase of approximately 29%
of petitioner’s common stock, and, in accord with rulings
of the Courts of Appeals for the Second and Eighth Cir-
cuits and decisions of this Court, construed the proviso of
Section 16(b) exempting “any transaction where such bene-
ficial owner was not such both at the time of purchase and
sale” as not applying to Gulf & Western’s initial purchase
of more than 10% of the listed equity securities of Allis-
Chalmers.

The Decision of the Court of Appeals

Both petitioner and respondent appealed to the Court of
Appeals for the Seventh Circuit. Prior to the decision
of the Court of Appeals for the Ninth Circuit in Provident
Securities Co. v. Foremost-McKesson, Inc., 506 F.2d 601
(9th Cir. 1974), cert. granted, 420 U.S. 923 (1975), Gulf
& Western principally argued that Section 16(b) did not
apply to the purchases and sale involved in this case,
relying on the decision of this Court in Kern County Land
Co. v. Occidental Petroleum Corp., 411 U.S. 582 (1973).

After the decision of the Ninth Circuit, Gulf & Western
contended that it was not liable under Section 16(b) for
profits realized on the sale of the initial 3,000,000 shares
of Allis-Chalmers stock it purchased in July and sold in
December 1968. Gulf & Western’s position was that be-
cause it owned no such stock prior to its exchange offer
purchase, it was not a beneficial owner “both at the time
of the purchase and sale” and therefore was exempt under
the proviso of Section 16(b) from liability for the short-
swing profits that it had realized.

The Court of Appeals for the Seventh Circuit relied heav-
ily on the decision of the Ninth Circuit in Provident Securi-
ties Co. v. Foremost-McK esson, Inc., 506 F.2d 601 (9th Cir.
1974), cert. granted, 420 U.S. 923 (1975), as well as the
language of a Senate bill that was left aside in favor of
the present Section 16(b). The Seventh Circuit held that
Section 16(b) only applies to “beneficial owners” who,
after already owning 10% of the securities of an issuer,
thereafter realize profits from the purchase and sale
within six months of additional shares. The Court, as
noted above, candidly acknowledged “that a contrary view

8

has been taken in the Second and Fighth Circuits” and
that “a conflict between circuits exists.” 6a n.5.

Respondent further argued to the Seventh Circuit ‘iat
its second purchase of stock (from Oppenheimer) on Sep-
tember 30, 1968 was such an integral part of the original
exchange offer that the test utilized by this Court in Kern
County Land Co. v. Occidental Petroleum Corp., 411 U.S.
582 (1973), must be applied and that respondent should
not be liable for the short-swing profits realized from the
purchase and sale of that block of stock. The Court of
Appeals rejected this contention, holding that the Oppen-
heimer transaction was neither “an unorthodox transac-
tion” nor devoid of the possibility of speculative abuse.

Petitioner Allis-Chalmers appealed to the Seventh Cir-
cuit on the ground that the District Court had improperly
calculated the extent of respondent’s short-swing profits.
The Court of Appeals agreed, holding after detailed anal-
vsis of the evidence that respondent had in fact realized
profits of $2,465,680.47 from the purchase from Oppen-
heimer and sale to White of the block of 248,000 shares
of Allis-Chalmers stock.

Reasons for Granting a Writ of Certiorari

A writ of certiorari should issue to review the judgment
of the Court of Appeals for the Seventh Circuit because
that court has rendered a decision which conflicts with
decisions of the Courts of Appeals for the Second and
Eighth Cireuits. The importance of this federal question,
concerning the applicability or inapplicability of this re-
medial statute to far from unusual circumstances, cannot
be contested in view of the grant of a writ of certiorari in

9

Foremost-McKesson, Inc. v. Provident Securities, Inc., 420
U.S. 923 (1975).

Prior to the decision of the Court of Appeals herein, both
Allis-Chalmers and Gulf & Western moved for and were
granted leave by this Court to file briefs amici curiae in
support, respectively, of petitioner’s petition for certiorari
and respondent’s opposition thereto in l’oremost-McKesson,
Inc. v. Provident Securities Co., Docket No. 74-742. While
the question presented by the instant petition is likely to be
decided in Foremost-McKesson, that case may involve the
resoiution of additional questions not here presented. Allis-
Chalmers’ motion for leave to file an amicns brief is in-
cluded herein as Appendix C.

The narrow question presented here is the construction
of the phrase “at the time of” in the exemption for “bene-
ficial owners” provided in Section 16(b). Simpiy stated,
the question is whether a person must first own 10% of the
securities of an issuer and then purchase and sell additional
shares within six months before short-swing profits must
be disgorged. The plain statement of this discrete question
completely conceals, however, the profoundly broad prac-
tical impact that its resolution encompasses. Does this “pro-
phylactic” statute preclude an issuer from recovering ap-
proximately $10,000,000 of short-swing profits realized
from the purchase and sale within six months of 29% of
the listed securities for the calculated or fortuitous reason
that the beneficial owner purchased all such stock in one
transaction?

If there is any concern as to what Congress did mean
when it limited the coverage of the statute to situations
- where the beneficial owner is a 10% owner “both at the time
of the purchase and sale, or the sale and purchase”, Allis-
Chalmers suggests that this Court supplied the answer in

10

Reliance Electric Co. v. Emerson Electric Co., 404 U.S. 418,
423 n.3 (1972). There this Court cites with approval 2
L. Loss, Securities Recutation 1060 (2d ed., 1961) with
respect to step sales. Professor Loss’
veluntary nature of Occidental’s ex e, when led
with the absence of the possibility of de ny abuse of inside
information, convinces us that section 16(b) should not apply to
transactions such as this one. 411 US. at 600.

74-1266, 74-1267 24a

unorthodox, and we do not understand Gulf & Western
so to contend. Similarly, the sale of Gulf & Western’s
total interest in Allis-Chalmers to White was a simple,
orthodox sale, albeit involving a rather complicated con-
sideration element. Unlike the situation in Kern, there 1s
nothing in the nature of these transactions which requires
a judicial construction of the terms “purchase” or “sale,”
beyond giving these terms their commonly accepted mean-
ings.

Moreover, even were we to assuinc that these transac-
tions met the “unorthodox” test, nothing in the nature
of these transactions precludes, or even reduces, the possi-
bility of speculative abuse. The purchase from Oppen-
heimer was a planned business transaction, presumabiy
undertaken as a profitable venture. Similarly, the sale
to White was not involuntary, as in the case of a con-
version into shares of another corporation pursuant to
a defensive merger, nor was it conditional in any respect
or tied to the future value of stock in a different cor-
poration. On the contrary, at the time that Gulf & Western
made its decision to purchase the 248,000 shares of Allis-
Chalmers stock from Oppenheimer it was in a position to
anticipate and control its future disposition of those
shares. It voluntarily disposed of the shares within six
months, after obtaining an indication from Allis-Chalmers’
chairman that the future of that company did not look any
too bright. The possibility certainly existed, therefore, that
Gulf & Western’s early disposition of its Allis-Chalmers
shares was an attempt to avoid the effect of the predicted
weakening of Allis-Chalmers’ common stock, a prediction
gained as an insider of that company. The application of
‘section 16(b) is therefore automatic, and not in any way
affected by a failure to prove up actual access to inside
information, or improper use of such information.

Il

Having found Gulf & Western liable for any profits
realized from its purchase and sale within six months of
the 248,000 shares of Allis-Chalmers stock obtained from
. Oppenheimer, we must determine whether the district
court properly evaluated these profits. Allis-Chalmers
contends that the district judge erred in his calculation of
each element of damages thereby greatly reducing the
liability of Gulf & Western.

ee a

A me

eters

25a 74-1266, 74-1267

A

With respect to the acquisition of the shares from
Oppenheimer, the district court determined that the un-
registered Gulf & Western warrants covered by that
transaction should be evaluated at a per unit price of
$15.92. This figure resulted in a total purchase price evalu-
ation of $7,896,520.00 ($15.92 x 496,000 = $7,896,320.00).
Allis-Chalmers points out that experts of both the defen-
dant and the plaintiff evaluated the unregistered warrants
at a much lower figure,’’ and that nothing in the record will
support the $15.92 per share figure used by the district
ju ge. It contends, therefore, that the value determination

y the district court was clearly erroneous and should be
set aside. We agree.

The district court’s evaluation was the result of an
erroneous assumption, namely, that a discount factor of
fifteen percent which was recommended by two of the
three expert witnesses did not reflect a full appraisal
of the market value to be attributed to the guarantce
by Gulf & Western relating to future registration of
the 496,000 warrants. Gulf provided in its agreement
with Oppenheimer that it would file a registration state-
ment for the warrants (and related stock) on or before
April 30, 1969, and in addition, that if it did not make
effective a registration statement for these securities
before December 31, 1968, it would guarantee Oppen-
heimer an average gross price per warrant of $13.50 for
any warrants sold during the ninety days following the
effective date of the registration statement. Also included
in the agreement was a provision that in the event Op-
penheimer should decide to sell the warrants under the
guarantee, Gulf & Western would be given notice of the
proposed sale and an opportunity for three business days
to provide a buyer who would purchase the warrants
from Oppenheimer at a higher price than the price to

1% Plaintiffs’ expert witnesses were Robert N. Hampton and Fred
D. Stone. Hampton testified that considering all factors involved in
the purchase agreement, a valuation per warrant of $14.25 would be
proper, ,-~y- a discount of 95% from the low market trade
on the date for identical registered warrants. Stone, also
ae the entire ent between the parties, testified that a
range of from $12.92 to $13.70 would be accurate, representing a dis-
count from low market of from 13% to 18%. Defendants’ expert, Gabriel
fl Danihel, on a similar basis, testified that a discount of 15% would

proper.

74-1266, 74-1267 26a

be obtained by Oppenheimer in its proposed sale. Each
of the experts who iestified on the subject of valuation
of the unregistered warrants expressly indicated that his
evaluation was based in part on the provisions of this
guarantee. Each also expressed his final valuation in
terms of a discount to be applied to the low market price
for comparable registered Gulf & Western warrants bein

sold on the American Stock Exchange on the date o

closing.

The district judge adopted a discount figure of fifteen
percent as representative of the opinions of the experts
and as realistic,** and applied this discount to the volume-
weighted average price,’® rather than the low price for
registered. warrants on the date of closing as urged by
plaintiffs. Tle thereby arrived at a fair value per un-
registered warrant of $13.69. Ilad the judge adopted
$13.69 as the section 16(b) purchase price we would have
no trouble affirming” as to this element of his calculation
of damages.

18We find no substantial disagreement between the parties as to
the propriety of this figure.
1*The volume-weighted average price is determined for a given day
by breaking the day’s transactions into groups according to the price
at which the security was traded, and then multiplying each price times
the number of shares traded at that price, and dividing the total of
these products by the total number of shares traded for the day. We
the propriety of using the volume-weighted average price in sec-
tion III B, infra, in connection with the valuation of certain unregistered
shares of White Consolidated Industries. That discussion applies to the
use of the volume-weighted average price here, as well, since of a total
of 29,600 warrants traded on the date of closing, only 700 (2.3%)
were traded at the low market figure of $15%.

20 Although Gulf & Western argues that the fact of non-registration
does not or should not affect the cost to it of the warrants, and that the
September 30, 1968 valuation should therefore equal the market value
of registered warrants on that date, this argument ignores the value of
money as a commodity. Gulf & Western elected not to purchase the
Oppenheimer shares in Allis-Chalmers for cash. If it had possessed
496,000 registered warrants on September 30, 1968 it could have used
these warrants and relied on their market value as reflected on the
American Stock Exchange. It apparently had neither cash nor registered
warrants, however, and therefore determined to use unregistered
warrants. To Oppenheimer these warrants represented an allocation
of capital to a non-liquid, speculative investment which would remain
essentially non-liquid until registration on the American Stock Ex-
a. _ oy - the Xo. A. oR. to O
attributable to the fact of non- tion. See W. tcher, lopedia
of the Law o. Private Corporations § 8907, vol. 19, p. 67 (1959 ed.) On
the other hand, Gulf & Western realized an immediate return for the
non-registered warrants in the form of freely marketable Allis-
Chalmers stock without the necessity of waiting the uncertain period

en ee a ee

abs

i

27a 74-1266, 74-1267

The district judge went on, however, to add to this
“fair value” figure an increment of $2.23 as representing
the value of the guarantee to register within three months,
thereby attaining a final per unit valuation of the un-
registered warrants of $15.92, or $.15 more than the low
market transaction for registered warrants on the closing
date and only $.19 less than the volume-weighted average
price for that day for identical registered warrants.
This was clearly error. Aside from the fact that the
experts were nearly unanimous in their lower valuation
of the unregistered warrants with the guarantee “for
16(b) purposes,” and aside from the fact that Oppen-
heimer independently evaluated the warrants at $15.63 per
warrant in a filing with the Securities and Exchange
Commission, the addition of $2.23 to the conceded fair
value of $13.69 per warrant does not withstand logical
examination. ;

The effect of the guarantee as to Oppenheimer was two-
fold. First, it provided an incentive for Gulf & Western to
make its best efforts to attain early registration, thereby
reducing the period of non-liquidity for Oppenheimer. Sec-
ond, it provided a limited hedge against significant loss on
Oppenheimer’s investment in the event Oppenheimer deter-
mined to sell its warrants within a period of ninety days
after the effective date of registration in the event the
December 3), 1968 registration date was not inet. It did
not remove all risk, however, since if the early registration
date was met, no guarantee would he effective, and
sinilarly, if the market in the warrants remained rela-

20 (Continued)

required for registration of its warrants. By doing this Gulf & Western
was able to shift to penheimer and avoid for itself any tie-up of
capital during the period of non-registration. To use an analogy, Gulf &
Western was able to obtain immed’ ‘te payment for an unfinished product
coupled with a promise to complete the production process. By doing so
it avoided the cost of financing the Oppenheimer purchase during the
interim between September 30, 1968 and the date of registration. It can-
not be denied that the true cost of producing a marketable warrant is
less when one is paid early in the production process rather than
after the process is completed. Given an assumed constant market
value for the completed product, one who is paid prior to completion
need only receive an amount sufficient to produce, through investment,
the actual market value of the product as of the date of completion.
A discount for non-registration was therefore appropriate. Cf. Security
— Corp. v. Devilliers Nuclear Corp., 472 F2d 844, 846 (2d Cir.
1972).

74-1266, 74-1267 28a

tively constant or increased from September 30, 1968
through the ninety days after effective registration, Op-

nheimer, if it retained its warrants, would no longer
- protected by the guarantee.

Turning to Gulf & Western, the guarantee has other,
more significant features. On its face, it gave Gulf & West-
ern a choice between early registration and possible lia-
bility under the $13.50 guarantee provision. More impor-
tantly, however, it gave Gulf & Western an opportunity
to limit its own costs in the event the $13.50 guarantee was
invoked, by giving Gulf & Wes*ern a three-day period
during which it could itself repurchase the warrants at the
guarantee price.” If it elected to do so, Gulf & Western
could have effectively converted its stock acquisition to a
cash purchase with the payment of the purchase price de-
layed for a period of several months after delivery of
the Allis-Chalmers stock. If this:were to happen, Gulf’s
“cost” would have been limited to the cost of preparin
the unregistered warrants (negligible), plus the cost 0
registration, plus the purchase price of $13.50 per warrant,
minus the market value of the use of the $13.50 per un-
registered warrant during the interim between the Sep-
tember 30, 1968 closing and the purchase back of the
warrants.

This analysis makes it clear that the guarantee could
not have eliminated the disparity between the market
value of the registered warrants being traded on the
American Stock Iixchange and the fair value of the un-
registered warrants used in the Oppenheimer transaction,
and that far from presenting an additional and costly
risk to Gulf & Western, the guarantee actually presented
a method to limit the “cost” of the warrants to well
below the volume-weighted market value of $16.1144 for
similar registered warrants as reflected on the date of
closing.** ‘The record in this case clearly supports the

71There is no express limitation on sepeaese by a corpora
.

22Gulf & Western voluntarily extended the guarantee period on
March 18, 1969 when Oppenheimer gave notice of its intent to sell its
warrants. The extension did not avoid liability under the guarantee,
however, since during the extension Oppenheimer sold pursuant to
proper notice. Gulf & Western made payment under the guarantee
in the sum of $2,154,437.50 on June 5, 1969. Apparently Gulf & Western
believed this the better alternative to simply purchasing the warrants
themselves at the $13.50 figure.

29a 74-1266, 74-1267

$13.69 figure drawn from the opinions of the experts,
and we therefore adopt this evaluation as properly
reflecting the section 16(b) purchase price of the Allis-
Chalmers shares obtained from Oppenheimer. The full
purchase price of these shares is therefore $6,790,240.00
($13.69 x 496,000).

B

Turning to the December 6, 1968 sale by Gulf & West-
ern of its entire holding 3,248,000 shares of Allis-Chal-
mers common stock to White, we must determine the
section iS({b) vaiue of the total consideration received
from White and the proportional amount of this total
consideration attributable te the 248,000 shares obtained
from Oppenheimer. The total consideration received from
White consisted of $20,000,000 in cash, 250,000 unregis-
tered shares of White common stock, and an unsecured
six month promissory note from White in the face amount
of $93,680,000 at an interest rate of eight and one-half
percent. The district court valued the 250,000 unregis-
tered shares of White stock at seventy-five percent of
the volume-weighted average price of identical registered
shares being traded on the New York Stock Exchange
on December 6, 1968. The White note was valued at
ninety-five percent of its face amount. Allis-Chalmers
says that the district court erred in both determinations.

Regarding the unregistered White common stock, Allis-
Chalmers contends that the twenty-five percent discount,
even if proper in amount, should have been applied to the
high market price for identical registered shares traded on

‘December 6, 1968 rather than to the volume-weighted aver-

age price for that day. The high price was $42.50 while the
volume-weighted average price was $40.3458.”* It is urged

28 Curiously, Allis-Chalmers seems to contend at one point in its
brief that a discount of 28% rather than 25% should have been em-
. Thus, in its table of computations it figures on the basis of

50 discounted by 28% times 250,000 shares. The table shows a
correct product of $7,650,000 for these figures which is then compared
to the district court’s figure of $7,613,493 ‘to arrive at an eged
jw amg diminution in profit of $36,507 as a result of the judge's
to use the $42.50 rather than the volume-weighted average price.

But more significant is the district judge’s use of a discount of 25%
rather than the 28% shown in the Allis-Chalmers table. Had Allis-
Chalmers used the 25% figure in its table, it would have reflected a

74-1266, 74-1267 30a

that use of the higher valuation was required under the
rationale of Bershad v. McDonough, 428 F.2d 693 (7th
Cir. 1970), cert. denied, 400 U.S. 992 (1971), and Srnolowe
v. Delendo Corp., 136 F.2d 231 (2d Cir. 1943), cert. denied,
320 U.S. 751 (1943), in order “to squeeze all possible
profits” from the transaction. 136 F.2d at 239. While we
agree with the underlying principle of the Bershad and
Smolowe cases,** we are unable to agree that use of the
volume-weighted average price in this case offended that
principle.

Smolowe was a case involving the problem of trade-
matching. A section 16 (b) insider had engaged in nuner-
ous purchases and sales within a six month period and the
question there was which purchase to mateh with which
sales in order to compute section 16 (}) profits. After
rejecting the possibility of using an “identity” test or the
related “first-in, first-out’ rule as being ineffective in the
ease of a large stockholder who could choose his oppor-
tunities to sell specific certilicates and avoid section 16 (b)
liability altogether, and after rejecting the notion of aver-
aging all purchases and all sales within a six month period
as effectively allowing a set-off of losses within the period
in contravention of the provision in section 16 (b) that
“any” profit be recovered, the court concluded:

The statute is broadly remedial . . . . Recovery
runs not to the seacihalies. but to the corporation.
We must suppose that the statute was intended to be
thoroughgoing, to squeeze all possible profits out of
stock transactions, and thus to establish a standard so
high as to prevent any conflict between the selfish
interest of a fiduciary officer, director, or stockholder
and the faithful performance of his duty .... The only
rule whereby all possible profits can be surely recov-
ered is that of lowest price in, highest price out—
within six months—as applied by the district court.

23 (Continued)
diminution in “profits realized” resulting from the use of the volume-
weighted average price (rather than the high market price) of $355,257
rather than the $36,507 figure. In the conclusion of its brief Allis-
Chalmers in fact does combine the 25% discount with the $42.50 figure
to reflect the true impact of the court’s use of the volume-weighted

average price.
24 Plaintiffs also cite Anderson v. Commissioner, 480 F.2d 1034, 1037
(ith Cir. 1973), in support of their position, but this tax case adds
ing more than a general citation with approval of the Bershad and

Smolowe cases.

_e

Se eee We ed

he ee Le ee eee

3la 74-1266, 74-1267

We affirm it here, defendants having failed to suggest
another more reasonable rule. 136 F.2d at 239.
(footnote omitted).

Nothing in this language suggests that the “lowest price in,
highest price out” rule was meant to have application in
cases where only one purchase or one sale has taken place
so that trade-matching is not a problem, and the last
sentence of the passage clearly indicates that even in trade-
matching situations the rule is not absolute if a more
reasonable method is suggested.”

Bershad did not involve valuation at all, but revolved
around the question of whether the granting of a certain
“option” to purchase stock amounted to a sale of that stock
for section 16 (b) purposes. In determining that it did, this
court noted the broad purpose of the section:

Section 16 (b) was designed to prevent speculation
in corporate securities by “insiders” such as directors,
officers and large stockholders. Congress intended the
statute to curb manipulative and unethical practices
which result from the misuse of important corporate
information for the personal aggrandizement or unfair
profit of the insider. Congress hoped to insure the
strict observance of the insider’s fiduciary duties to
outside shareholders and the corporation by removing
the profit from short-swing dealings in corporate secu-
rities. Conversely, Congress sought to avoid unduly
discouraging bona fide long-term contributions to cor-

' porate capital....

In order to achieve its goals, Congress chose a rela-
tively arbitrary rule capable of easy administration.
The objective standard of Section 16 (b) imposes strict
liability upon substantially all transactions ocenrring
within the statutory time period, regardless of the
intent of the insider or the existence of actual specu-
lation. This approach maximized the ability of the rule
to eradicate speculative abuses by reducing difficultics

2° Plaintiffs contend that Newmark v. RKO General, Inc., 305 F. Supp.
310, 314 (S.D.N.Y. 1969), aff'd, 425 F.2d 348 (2d Cir. 1970), cert. denied,
400 U.S. 854 (1970), represents an application of the “general rule” in a
non-trade matching situation. While it is true that the rule of “highest
in a — ry it is — pi A ‘Se Lo in” valuation
was not objected on appeal, at 357, extensive anal
of the use of this figure was never urged. =

74-1266, 74-1267 32a

in proof. Such arbitrary and sweeping coverage was
deemed necessary to insure the optimum prophylactic
effect. 428 I°.2d at 696.

Though the court cited Smolowe in support of these state-
ments, it cannot be argued that this general statement of
purpose somehow enshrined in the law of this circuit a flat
rule of lowest price in, highest price out for all valuation
problems under section 16 (b). Valuation simply was not
in issue in Bershad.

In this case, authenticated copies of the Fitch Report for
December 6, 1968 trading in White common stock on the
New York Stock Exchange disclosed that of a market
volume of 31,300 shares traded for the day, only four
hundred shares were traded at the market high price of
$42.50. This represents a scant 1.277 percent of the market
in White shares. By far the largest single sale on De-
cember 6, 1968, a trade of 7600 shares, reflected a price of
$40.00—significantly less than the volume-weighted average
price of $40.3458. In addition, Allis-Chalmers’ own expert
testified that normal accounting procedure was “to figure
... in terms of the average of the high and low price in a

iven day rather than one end or the other,” and that he
had made his discount computations from the high market

figure in this instance only at the instruction of counsel for
Allis-Chalmers.

We have held that the goal of squeezing out all profits
“does not require a court to adopt a completely unrealistic
interpretation of the market.” Mueller v. Korholz, 449 F.2d
82, 87 (7th Cir. 1971), cert. denied, 405 U.S. 922 (1972).
We find no error in the determination of the district court
that it would be unreasonable and unrealistic here to at-
tribute a market value of $42.50 per share to a block of
250,000 shares of White common stock acquired on Decein-
ber 6, 1968. On the basis of the Fitch Report alone it would
be difficult to reach a different conclusion. Section 16 (b),
while it was intended to be thoroughgoing, was surely not
intended to reject accuracy in favor of punitiveness.

Looking finally to the district court’s valuation of the
unsecured White note, we must determine whether the
discount of five percent of the face amount of the note was
properly applied. This discount was intended to account
for the risk factors involved in a note of this size and to

_

tt

Mee at eli nn Sen cba EN bat Bako

Fete 2 sn oe

Se ee ee ee eee)

33a 74-1266, 74-1267

produce a value reflecting what “the disinterested but
available third party investor” would pay for the note on
December 6, 1968. In adopting the ninety-five percent
valuation figure the court rejected undisputed evidence
that the note was in fact paid in full with interest by White
three and one-half months after closing. The question
therefore becomes whether the difference between the
market value of the note and the actual value the note
produced for Gulf & Western falls within the statutory

phrase “any profit realized.” We have no hesitation in hold-
ing that it does.

As we have previously noted, section 16 (b) was designed
to curb misuse of inside information by removing profit
from a class of transactions deemed by Congress to present
an into!erable invitation for such abuse. Reliance Electric
Co. v. Emerson Electric Co., 404 U.S. 418, 422 (1972). All
transactions within the class are tainted with a presump-
tion that inside information has been misused, and the pre-
sumption precludes any defense based on the showing of
a “clean heart” by the section 16 (b) defendant. Jd, at 424
n. 4; Newmark v. RNO General, Inc., 425 F.2d 348, 353
(2d Cir. 1970), cert. denied, 400 U.S. 854 (1970). It should
be noted, however, that the statute does no more than
remove the profit from such transactions. It does not inflict
an affirmative fine or penalty. Thus, one who is forced by
personal circumstances into a section 16 (b) transaction
does not face financia! ruination, but merely the prospect
that his short-term investment of capital has not produced
& positive gain.

_ Given the broad remedial purpose of section 16 ()h), its
limited impact, and the intent of Congress in drafting this
section to “eradicate speculative abuses by reducing dif-
ficultics in proof,” Bershad v. McDonough, 428 F.2d at 696,
we hold that in transactions involving debt obligations of
an amount certain, evidence of payment in full, if avail-
able at the time of trial, should control the determination
of “profit realized.”** We cannot help but wonder whether

76The evidence showed that the prime rate of interest at the time
of this transaction was 6%%. Expert testimony indicated that the
nature of the note and the circumstances surrounding the sale to
White justified the higher 8%% rate agreed to by the parties. There
has mn no contention that the increment over the prime rate was

of the note, P y artifcially reducing the face amount

74-1266, 74-1267 34a : 35a
APPENDIX B

Opinion of the United States District Court
for the Northern District of [Illinois

Gulf & Western's present belief that estimated market
value at the time of closing is the only proper measure of
16 (b) liability could have withstood the strains of a situa-
tion where White had in fact defaulted on the note com-
pletely. In any event, a rule of evaluation which looks to

Fd LD advemd! Meee 2 piel eat:

the realities in such situations will avoid the possibility IN THE

that real profits will escape the reach of the statute or that ;

non-existent profits will he ‘‘recovered.” We believe this to : UNITED STATES DISTRICT COURT

be no more nor less than the language of the section re-

quires. . FoR THE NORTHERN DISTRICT OF ILLINOIS
IV

, , ; ;, , "er EASTERN DIVISION
To summarize, the consideration received from White

Industries is properly evaluated as follows: $20,000,000
in cash, plus $7,564,837.50 in unregistered White comnon

No. 70 C 513 and No. 69 C 627

stock (250,000 x $40,3458 x .75 discount factor), plus +
$93,680,000 in the form of the White promissory note, for |
a total consideration of $121,244,837.50. This figure must ALLIS-CHALMERS MANUFACTURING COMPANY,

be prorated to reflect the portion attributable to the Op-

a oration
penheimer purchase. A simple method of doing this is to a Delaware corp ’

divide the total consideration by the total number of shares | Pisinus,
sold ($121,244,837.50 — 3,248,000 — $37.3291) and then v.

multiply the resulting per-share figure by 248,000. Using

this method a proportional consideration for the 248,000 GULF & WESTERN INDUSTRIES, INC.,

shares of $9,257,616.80 is produced. Substracting tu. »equi-

sition price of $6,790,240.00 from this figure yields a gross a Delaware corporation,

profit allocable to the Oppenheimer transaction of $2,467,- Defendant.
376.80. From this figure must be deducted the stipulated . -

expenses incurred by Gulf in connection with the Op-
penheimer purchase in the amount $1,696.23. The resulting

net profit for section 16 (b) purposes is $2,465,680.47. This action was commenced on January 6, 1969 in the
_ The judgment of the district court is therefore reversed | United States District Court for the Eastern District of
in part and remanded for entry of judgment in favor of | Wisconsin by plaintiff, Allis~-Chalmers Manufacturing Com-
Allis-Chalmers in the amount of $2,465,680.47. Mach party | pany, now Allis-Chalmers Corporation (hereinafter re-
oh ee ee a | ferred to as “Allis”). Plaintiff seeks to recover alleged
A true Copy: ) short-swing profits from Gulf & Western Industries, Inc.

(hereinafter referred to as “G&W”) under Section 16(b)
of the Securities Exchange Act of 1934 (15 U.S.C. § 78
p (b)) alleged by plaintiff to have been realized by G&W

Teste:

Clerk of the United States Court of : as a result of two purchases in July and September of
Appeals for the Seventh Circuit 1968 aggregating 3,248,000 shares of Allis common stock
and the subsequent sale of these shares on December 6,
: 1968.
;

HT OP ae

36a

Pursuant to a motion by G&W under 28 U.S.C. § 1406 (a)
that venue was improper in the Eastern District of Wis-
consin the case was transferred to this District. Allis-
Chalmers Mfg. Co. v. Gulf & Western Industries, Inc., 309
F. Supp. 75 (E.D. Wis. 1970). At the same time G&W
commenced an action in this Court for declaratory judg-
ment. Gulf & Western Industries, Inc. v. Allis-Chalmers
Manufacturing Company, (69 C 627). On March 23, 1970
the two actions were consolidated and this Court ordered
the consolidated action to proceed on the basis of Allis’
Amended Complaint which was originally filed on February
19, 1970 in the Eastern District of Wisconsin.

Allis, a corporation organized under the laws of the State
of Delaware, having its principal office in West Allis, Wis-
consin, is a manufacturing company engaged in the manu-
facture of agricultural, construction, industrial and elec-
trical machinery and related equipment.

G&W, a corporation organized under the laws of Dela-
ware, having its principal office in the City and State of
New York, is a diversified company engaged in a variety
of businesses, including manufacturing, distribution, lei-
sure time operations and the production of minerals, metals
and certain agricultural and consumer products.

During the period June 30, 1968 and December 31, 1968
there were between 10,364,102 and 10,410,292 shares of
Allis common stock issued and outstanding. 3,000,000 of
these shares were purchased by G&W through an Exchange
Offer made to all Allis shareholders, and 248,000 shares
of them were bought from the Oppenheimer Fund, Inc.

On May 7, 1968 G&W publicly announced to all Allis
shareholders that it would make an Exchange Offer in ac-
cordance with a registration statement and prospectus filed
and published as required by the Securities Act of 1933.
G&W proposed to purchase on a pro-rata basis up to

— a
AR Ra cE OOS GAA eb AAD AB AOE NAA ETL ites NAT ls

we ©) See eee

hrf, Bi i Sa haat >.

37a

3,000,000 such shares. Under the proposed offer Allis
shareholders would receive for each share of Allis com-
mon stock: (a) $11.50 in cash, (b) $12.50 principal
amount of a 6% subordinated 20-year nonconvertible de-
benture (“the G&W 6% Debenture”), and (c) 9/10 of a
10-year registered warrant to purchase G&W common
stock at $55 per share (“the G&@W Warrant’).

There is a major dispute as to the date on which the
purchase of the 3,000,000 shares of Allis common stock
occurred. G&W contends that the date was July 29, 1968;
Allis contends the date was July 31, 1968. Both parties
agree that G&W’s purchase of the additional 248,000 shares
of Allis’ common from the Oppenheimer Fund took place
later on September 30, 1968. In exchange for these 248,000
shares G&W gave Oppenheimer 496,000 unregistered G&W
warrants.

On December 6, 1968 G&W sold its entire block of
3,248,000 shares of Allis’ common stock to White Consoli-
dated Industries, Inc. (hereinafter referred to as ““White’’)
in exchange for: (a) 250,000 unregistered shares of White
common stock, (b) White’s unsecured 842% promissory
note in the face amount of $93,680,000 payable in six
months, and (c) $20,000,000 in cash.

Allis now seeks to recover what it alleges are short-swing
profits of $16,305,251 which it contends G&W realized from
its two purchases in July and September 1968 and its subse-
quent sale in December of 1968 of the 3,248,000 shares of
Allis common stock. The total sales price is alleged to have
been $121,330,000. Allis’ position is that the purchases and
the sale both occurred within less than six months. Allis
claims that the amount of the sale together with the divi-
dends received by G&W during this less than six month
period, minus its stipulated cost of acquiring and selling the
3,248,000 shares constitute the amount of profit. Allis also

38a

seeks to recover interest at 6% on G&W’s profits from the
date of sale, December 6, 1968, to the date of entry of judg-
ment.

G&W’s Answer to the Amended Complaint denies all ma-
terial allegations of the Complaint, and specifically alleges,
inter alia, that G&W was not a beneficial owner of more
than 10% of Allis’ stock at the time of its acquiring through
the Exchange Offer the 3,000,000 Allis shares, and that this
is required by Section 16(b). G&W contends that since its
acquisition of the 3,000,000 Allis shares was pursuant to an
Exchange Offer regulated by the Securities Act of 1933 the
transaction would be excluded from the purpose of Section
16(b). G&W further charges that the sale of its 3,248,000
Allis shares was induced by “duress and hostility” to G&W,
originating with Allis and inflamed through Allis’ encour-
agement of Federal Trade Commission proceedings against
G&W. G&W thus denies liability. But then, going further,
G&W claims that even if there is liability, it realized no
profit from the transactions and there would be no money
due to Allis as a result of this action.

LIABILITY

_The jurisdiction of this Court is asserted under Section 27
of the Securities Exchange Act of 1934 (15 U.S.C. 78aa).
Section 16(b) of the Act states as follows:

“For the purpose of preventing the unfair use of
information which may have been obtained by such
beneficial owner, director, or officer by reason of his
relationship to the issuer, any profit realized by him
from any purchase and sale, or any sale and pur-
chase, of any equity security of such issuer (other
than an exempted security) within any period of

6 tetera ene tte Det. tata bie tlc

dacs Ne art Wide’ Cocca fete ata aa ed. GRD 2 eie:.\ ales A hetes nal gees pe Oe bed Read Masti tars

39a

less than six months, unless such security was ac-
quired in good faith in connection with a debt previ-
ously contracted, shall inure to and be recoverable
by the issuer, irrespective of any intention on the
part of such beneficial owner, director, or officer in
entering into such transaction of holding the secu-
rity purchased or of not repurchasing the security
sold for a period exceeding six months. Suit to re-
cover such profit may be instituted at law or in
equity in any court of competent jurisdiction by the
issuer, or by the owner of any security of the issuer
in the name and in behalf of the issuer if the issuer
shall fail or refuse to bring such suit within sixty
days after request or shall fail diligently to prose-
cute the same thereafter; but no such suit shall be
brought more than two years after the date such
profit was realized. This subsection shall not be con-
strued to cover any transaction where such beneficial
owner was not such both at the time of the purchase
and sale, or the sale and purchase of the security
involved, or any transaction or transactions which
the Commission by rules and regulations may exempt
as not comprehended within the purpose of this
subsection.”

Section 16(b), thus, provides that liability attaches to
10% beneficial owners who are such: “. .. both at the time
of the purchase and sale, or the sale and purchase of the
security involved. .. .”

G&W contends in one of its affirmative defenses that as
to the 3,000,000 shares of plaintiff’s common stock acquired
by G&W pursuant to the Exchange Offer, G&W is not liable
to Allis for any profits that may have been realized upon

40a

the sale to White since at that point in time when G&W
acquired the 3,000,000 shares G&W was not a beneficial
owner of more than 10% of Allis’ equity security within
the terms of the statute. This would mean that it then
became the owner of more than 10%, and only a subsequent
acquisition would bring the statute into play.

Allis, however, contends that on an initial purchase of
more than 10% one becomes such a holder of more than
10% of the stock of a company as to trigger the applicabil-
ity of Section 16(b). To bolster its contention that one
becomes subject to Section 16(b) at the time of the purchase
which turns one into a 10% beneficial owner irrespective of
the percentage of his prior holdings, if any, Allis quotes
from the recent decision in Kern County Land Co. v. Occi-
dental Petroleum Corp., 411 U.S. 582, 584 (May 7, 1973):

“Unquestionably, one or more statutory purchases
occurs when one company, seeking to gain control
of another, acquires more than 10% of the stock of
the latter through a tender offer made to its
shareholders.”

In the Kern County case defendant, Occidental Petroleum
Corporation, made a tender offer for shares of the Kern
County Land Company ‘hereinafter referred to as “Old
Kern”). That offer became effective on May 8, 1967 and
by May 10 more than 10% of the shares had been tendered.
The Court found that Occidental became a beneficial owner
within the terms of 16(b) when pursuant to its tender offer
it purchased more than 10% of the outstanding shares of
Old Kern.

G&W relies upon Kern County also. This is because in
that case a tender offer was involved, which like the ex-
change offer here, raised the question of whether or not the

oe iad CY en tlt Te ae

ET ae el het ae tht 7

AIAN cam an toy tht me alts Sain Stree

ee el ee ee

3
i
{
{
;
|
;
%
4

4la

nature of the purchase was reached by the statutory
definition.’

A careful analysis of the case law including Kern County
leads me to the conclusion that G&W by its initial purchase,
became a beneficial owner of more than 10% of Allis’ stock.
In construing the words “at the time” as used in the statute
the Court in Stella v. Graham-Paige Motors Corp., 104
F.Supp. 957 (S.D.N.Y. 1952), aff'd in part, remanded in
part, 232 F.2d 299 (2d. Cir.), cert. denied, 352 U.S. 831
(1956) said as follows at 960:

1 Pertinent language in the decision includes the following from
593-595:

“Although traditional cash-for-stock transactions that result
in a purchase and sale or a sale and purchase within the six
month statutory period are clearly encompassed within the
purview of § 16(b), the courts have wrestled with the question
of inclusion or exclusion of certain ‘unorthodox’ transactions.
The statutory definitions of ‘purchase’ and ‘sale’ are broad
and, at least arguably, reach many transactions not ordinarily
deemed a sale or purchase. In deciding whether borderline
transactions are within the reach of the statute, the courts
have come to inquire whether the transactions may serve as
a vehicle for the evil which Congress sought to prevent—the
realization of short-swing profits based upon access to inside
information—thereby endeavoring to implement congressional
objectives without extending the reach of the statute beyond
its intended limits. The statute requires the inside, short-
swing trader to disgorge all profits realized on all ‘purchases’
and ‘sales’ within the specified time period, without proof of
actual abuse of insider information, and without proof of
intent to profit on the basis of such information. Under these
strict terms, the prevailing view is to apply the statute only
when its application would serve its goals. [W)here alterna-
tive constructions of the terms of §16(b) are possible, those
terms are to be given the construction that best serves the
congressional | mgr of curbing short-swing speculation by
corporate insiders. Reliance Electric Co. v. Emerson Electric
Co., supra, at 424. See Blau v. Lamb, 363 F.2d 507 (CA2
1966), cert. denicd, 383 U.S. 1002 (1967). * * * [Thus]
“{iJn, interpreting the terms ‘purchase’ and ‘sale’, courts have
properly asked whether the particular type of transaction in-
volved is one that gives rise to speculative abuse.”

42a

“. .. if the words ‘at the time’ are construed to mean
‘simultaneously with’ a shareholder would become
subject to the provisions of §16(b) as soon as his
ownership exceeded 10% of the outstanding shares.
This construction wouid be consistent with the de-
clared purpose of the statute to prevent the unfair
use of inside information by officers, directors, or
—— owning more than 10% of the equity
s Oe

Through the years since the Stella decision the Courts
have followed its thinking in construing the words “at the
time of the purchase and sale” to apply to shareholders
immediately upon their acquisition of more than 10% of a
corporation’s securities. In Bershad v. McDonough, 300
F.Supp. 1051 (N.D.IIl. 1969) aff'd, 428 F.2d 698 (7th Cir.
1970), cert. denied, 400 U.S. 992 (1971), asin Kern County,
supra, the Court was concerned with whether the granting
of an option was a sale (the back end of the transaction)
within the confines of Section 16(b). However, it is clear
that the Courts would not have concerned themselves with
that issue had they first not reasoned that Section 16(b)
liability turned on an initial acquisition exceeding 10%
serving to set in motion the 6 month period. In accord with
these cases are the holdings in Emerson Electric Co. v.
Reliance Electric Co., 434 F.2d 918 (8th Cir. 1970), aff'd
on other grounds, 404 U.S. 418 (1972); Blau v. Lamb, 363
F.2d 507 (1966), cert. denied, 385 U.S. 1002 (1967); and
Newmark v. RKO General, Inc., 425 F.2d 348 (1970), cert.
denied, 400 U.S. 854 (1970).

On the facts before me, I conclude that G&W became a
beneficial owner of more than 10% of Allis’ common stock
at the time of its purchase, by tender offer, of the 3,000,000
shares of Allis’ stock. However, G&W argues that even if

7
;
/
:
:

|
j
;
:
:
:

th ne OL Na OP ON et BY tO ee Neg

ee eee ere ae

43a

it became a 10% owner of Allis’ common stock at the time
it acquired by tender offer almost a third of Allis’ equitable
ownership and sold the whole of it within six months, it
is exempt from the operation of Section 16(b) because the
purchase was “unorthodox” and “unorthodox” transactions
do not involve the type of abuse Section 16(b) was enacted
to prevent.

G&W presents a strong argument for the proposition that
its initial acquisition of the Allis shares by an Exchange
Offer was not the traditional cash-for-stock purchase that
Congress considered in passing Section 16(b). Rather,
G&W contends, it was a hybrid type of transaction with
unique characteristics closely resembling a merger. G&W
says that it would be erroneous to consider the legal
consequences of G&W’s acquisition of the stock apart from
the disclosure process with which it alleges “it was inex-
tricably connected.” The argument is that Exchange Offers
(as distinct from cash transactions) are surrounded by
numerous legal safeguards which are designed to guarantee
full disclosure to all shareholders and thus by their very
nature are unsuited to short-swing speculation based on
inside information.

'n effect, the argument is that since the acquisition was
conducted in accordance with the methods established by
the Securities and Exchange Commission and Congress,
i.e, pursuant to a registered Exchange Offer and by a
Prospectus, G&W was not automatically an insider nor was
there any possibility of abuse as a result of the nature
of the transaction. Its offer, G&W contends, was subject
to the prohibition against the use of any Prospectus (or
Registration Statement) which contained “any untrue
statement of fact or omission of a material fact required
to be stated * * * or necessary to make the statements
therein not misleading.” Such prohibition appears in a

44a

number of sections of the Securities Act of 1933, 15 U.S.C.
§§ 77k, 771, 77q, 77x. Accordingly, G&W maintains, it
caused all material information regarding Allis to be
released to the public and placed in the hands of each Allis
shareholder and that these actions afforded all parties to
the proposed exchange an equal informational footing, elimi-
nating thereby any advantage to G&W.

In opposition to this contention Allis ignores certain
words of Kern County, “unorthodox sale—not a sale within
the meaning of 16(b)”, and argues that an unfettered read-
ing of the language of Section 16(b) makes it clear that
the statute does not require any showing that an insider
had inside information in order for liability to attach. The
suggestion that full and truthful disclosure of what is
known is required by some other necessary proceedings,
according to Allis, creates no defense to the charge that
there was an actionable purchase.

It is true that the court in Kern County found that an
unsuccessful takeover bidder who converted shares of the
target company into the merged entity’s shares was not
liable for short-swing profits when it was found that there
had been no opportunity for speculative abuse. The target
corporation, Old Kern, had vigorously opposed Occidental’s
takeover bid and to thwart such a takeover had arranged
a “defensive merger” with Tenneco. Due to the merger
of Old Kern and Tenneco, Occidental was virtually forced
to exchange the Old Kern shares that it had acquired by
its tender offer for those of Tenneco. The successor cor-
poration to Old Kern brought suit to recover the alleged
Section 16(b) profits realized by Occidental. The court
concluded that the transaction having been forced upon
Occidental did not constitute a “sale” within the purview
of Section 16(b). The court noted that the merger left
Occidental with no appraisal rights under California laws;

. aba VAdeae acre ppittebs ally Dow

45a

but that any other sale of Old Kern shares for cash before
the merger closed “‘would have left Occidental with a prima
facie § 16(b) liability.” Supra at 600.

I am convinced that with these words the Supreme Court
recognized that where, for example, a purchase carries suf-
ficent indicia of full disclosure of aii information available
to the purchaser, and its sale is an economically or legally
coerced involuntary act the transaction is not intended
by Congress to be unlawful; but that when the sale is
clearly voluntary a prima facie Section 16(b) violation
would exist. When we on the trial bench try to facilitate
our determination by limiting liability to simple categories,
such as “orthodox” and “unorthodox”, we may easily blind
ourselves to the kinds of abuses to which Congress directed
16(b). The 1934 Senate Report on Stock Exchange Prac-
tices (Senate Comm. on Banking and Currency), Stock
Exchange Practices, S. Rep. No. 1455, 73rd Congress, 73
Cong. 2d Sess. 55 (1934) stated:

“Among the most vicious practices unearthed at the
hearings before this subcommittee was the flagrant
betrayal of their fiduciary duties by directors and
officers of corporations * * *. Closely allied to this
type of abuse was the unscrupulous employment of
inside information by large stockholders who, while
not directors or officers, exercise sufficient control
over the destinies of their companies to enable them
to acquire and profit by information not available
to others.”

Even though Kern County is a clear repudiation of the
“cold turkey” application of statutory liability in 16(b)
cases, nowhere in Kern County does the Supreme Court take
out of 16(b) its application to a short-swing transaction
just because there was in fact no access to inside informa-

46a

tion. It leaves the statute applicable to types of transactions
that give “rise to speculative abuse”. (Kern County at 595. )
Under Kern County (594 fn. 26) the language of this Cir-
cuit in Bershad v. McDonough, 428 F.2d 693 (7th Cir.
1970), was confirmed. Then it went one step further. It
announced a flexible “possibility of abuse” test to be applied
to each case on the facts regarding its questioned transac-
tion. The specific transaction itself must permit the possi-
bility of or potential for abuse. (Kern County at 595.)

The question is whether or not an outsider becoming a
prima facie insider, such as defendant, by virtue of a tender
offer to purchase one third of plaintiff’s common stock,
under the circumstances of this case, engages in that type
of transaction which Congress determined gives rise to the
possibility of or potential for speculative abuses. By virtue
of the nature and amount of the purchase, such purchaser
generally places himself or itself in a position to at least ex-
ercise substantial influence over the decisions of the corpo-
ration, if not control. From this position information can
be acquired not otherwise available to the public. Stock
value changes can be reliably anticipated if not maneuvered.
The desirable speculative character of a free market can be
wrecked by the cumulative effect of a substantial amount of
such piracy. The danger, of course, in each instance, is not
easily established by evidence of actual manipulation or
intent to manipulate.

Some corporations have as their primary occupation deal-
ing in the stock of other corporations. Some buy and sell
units of corporate control for profit. It seems to me that
irrespective of whether the purchase under these circum-
stances is handled in an “orthodox” or an “unorthodox”
manner, it can constitute one of the types of conduct which
Section 16(b) was intended to reach.

;
4
i
|

47a

This does not mean that Congress sought by this !aw to
stop or even dissuade corporations from using their equity
for moving in and out of positions of control or effective
influence in other corporations, either for the purpose of in-
vestment or the purpose of acquiring on a trial and error
basis absorbable corporate operations. The statute does in-
tend to include corporate conduct out of which buying and
selling for profit from an insider’s perspective can occur.
The evidence in the case before me shows defendant, G&W,
as having engaged in a substantial number of transactions
involving the purchase and sale of controlling interests in
other corporations. There is nothing in the evidence to
establish that G&W’s acquisitions and dispositions were for
the purpose of gaining inside information to be used selling
stock positions in corporations for profit, or that it actually
did have inside information when it bought or sold. I am
confident that the greater weight of the evidence presented
to me does not establish that G&W had inside information
of the character contemplated by Section 16(b) either be-
fore or after its purchase of Allis. But I am convinced that
its position both at the time of the purchase and at the time
of the sale was such as would, in many such situations, per-

* Its chief executive officer, when asked to confirm or reject a
Statement appearing in the February 15, 1973 edition of the Wall
Street Journal, stated that he “would not reject the statement.” The
statement was that, from 1958 through 1968:

“* * * G&W acquired about 130 companies, usually using its
own securities or packages of its securities and warrants to
buy the companies. At first the acquisitions were complemen-
tary with G&W’s main lines of business, but later it branched
out in all directions. The big year was 1968 when 23 acquisi-
tions came under G&W’s wing. * * * G&W that year similarly
withdrew from stock positions in other large companies—
Armour and Co., Allis-Chalmers Manfg. Co., and Sinclair
Oil Corp. In fact over the years, G&W has bought in and out
of companies both for investment reasons and for the purpose
of acquisition and complete control.”

48a

mit access to information not otherwise available to the
general public.

Allis failed to establish that G&W did have inside infor-
mation both at the time of the purchase and at the time of
the sale. What was shown was that in May of 1968 G&W’s
president was told by the head of a California investment
firm that he had encouraged an investment firm to seek a
merger with Allis; that Allis had been interested in being a
part of a profitable merger; that the investment company
and Allis had entered into a preliminary agreement to
merge, but that the plan fell through because the investment
firm believed a heavy manufacturing business inherently
risky. This cannot be considered the type of inside informa-
tion to which the statute refers. In addition, what was
shown was that in September of 1968, before G&W sold its
Allis stock, Allis’ president told G&W’s president that Allis’
performance during that quarter of the year was extremely
poor and that its earnings had declined sharply, but the in-
ference to be drawn from this was that Allis sought to dis-
courage G&W’s retention of its stock position in Allis. Other
information given G&W by Allis was almost contemporane-
ously made public.

G&W asserted as an affirmative defense the absence of
inside information; but here again I find the facts insuffi-
cient. A fact does not exist here which is found in other
cases in which this affirmative defense has succeeded. The
missing fact is that plaintiff’s conduct locked the defendant
outside so effectively that the defendant could not have
acquired inside information had it wanted to. This is what
happened in Kern County, and in Gold v. Sloan, 486 F.2d
340 (4th Cir. 1973).

I further find the facts insufficient to establish as an
affirmative defense that G&W was compelled to sell its stock
in Allis before the expiration of the statutory period. Occi-
dental was not only locked out in Kern County, but under

49a

the circumstances was left no realistic alternative to dis-
posing of its stock in Old Kern. Its only alternative would
have left it with a prima facie 16(b) liability. Of the same
order was the circumstance which compelled Scurlock in
Gold v. Sloan to acquire the Susquehanna stock, part of
which he sold within six months. G&W was here not caught
in a merger. The one clear-cut defensive tactic of Allis,
slashing its quarterly dividend in half after G&W had
acquired one third of its common stock, as offensive as G&W
may have felt it, was nevertheless not an act which com-
pelled a sale some fifty odd days before the end of the
statutory period.

VALUATION

Section 16(b) of the Securities Exchange Act of 1934 (15
U.S.C. 78(b) ), provides that “for the purpose of preventing
the unfair use of [inside] information,” the beneficial
owner shall pay over to the complaining corporation any
profit realized by the purchase and sale. What then is the
amount, if any, Allis is entitled to be paid by G&W is the
remaining question. Allis contends that the amount is
$16,305,251, with additional interest to the datc of the entry
of judgment. G&W contends that there was no profit, but
rather a loss, and that Allis would be entitled to nothing.

The issue of the amount of profits to be accounted for
where there is a 16(b) liability calls into play, when the
consideration given or received is other than cash, certain
principles of valuation. Were the consideration given and
received cash only, the problem would be a simple one; but
in most of these cases it usually is not just cash. Most of the
cases under 16(b) cited by the parties in their briefs, in
which liability had been found, involved consideration other
than cash.

50a

In this case the purchases were made with some cash, but
principally with G&W warrants and debentures; and the
sale was made for some cash, but principally for certain un-
registered shares of common stock of White, and an un-
secured six month corporate promissory note. Valuations
of these other-than-cash considerations was the matter te
which both sides were requested to and did direct much of
their attention in testimony, exhibits and argument. The
testimony and opinions of expert witnesses was presented
at great length by both sides. Were the position of the plain-
tiff and its experts accepted completely, the defendant would
be accountable for $12,741,788 in profits, for dividends and
for interest from the date of the sale to the date of this deci-
sion. Were the position of the defendant and its experts
accepted completely, it would be found that the defendant,
through no fault of its own, lost $11,545,566 (if not $13,-
699,993) in the purchase and sale. The differences of more
than 30 million dollars between the positions of the parties
and their experts must be resolved by applying to the facts
basic principles of valuation derived from authorities in the
field of securities and accounting, and from cases interpret-
ing valuations in 16(b) cases.

The Court itself must determine the fair market value or
the fair value (in the absence of a market) of the considera-
tion given up and received in a 16(b) case. Real or actual
values, as in other cases, may require investigation of the
affairs of the corporations and businesses involved; but the
situs of the 16{b) valuation is the actual or presumed mar-
ket place. Park & Tilford, Inc. v. Schulte, 160 F.2d 984,
990 (2nd Cir.) cert. denied 332 U.S. 761 (1947).

Where in determining valuation two or more interpreta-
tions may equally be drawn from the same facts, the Court
may adopt the one least favorable or most favorable to the
defendant as the relative equities of the parties dictate; but

5la

in doing so the Court is not required to adopt a completely
unrealistic interpretation of the market. Mueller v. Korholz,
449 F.2d 82, 87 (7th Cir. 1971). One of the major disagree-
ments between the parties in this case is the plaintiff’s
insistence that in 16(b) cases, valuations always must be
read in the light least favorable to the defendant or most
favorable to the plaintiff.

The concept of maximizing profit by using such theories
as “lowest in and highest out” as espoused in the 1943
decision of the 2nd Circuit in Smolowe v. Delendo Corpora-
tion, 136 F.2d 231, 239, is not the law in this (7th) Circuit.
In Mueller, supra at 87, we are admonished not to adopt
a completely unrealistic interpretation in the name of ad-
vancing the Congressional purpose. In that case the Seventh
Circuit was confronted with the problem of valuing the
defendant Korholz’s holdings of “Gypsum” stock traded in
the over-the-counter market. No evidence was presented
of actual trades on the date in question, but there was
evidence of dealers “making a market” in Gypsum stock.
Their quotations ranged from 6 to 634 on the “bid” side
and from 714 to 74% on the “asked” side. This meant that
the best bid Korholz could have received from his shares
was 634. As the Seventh Circuit explained, the plaintiff
contended :

‘st & *

as a matter of law that the low bid price of
$6.00 was the only acceptable evidence of value
because the policy of § 16(b) requires the Court to
adopt an interpretation of the facts that will
‘squeeze out all possible profit.’ Cf. Smolowe v.
Delendo Corp., 186 F.2d 231 (2 Cir. 1943).”

Then explaining away the language of the Second Circuit,
the court in Mueller went on to say at 87:

52a

“The comment in that case [Smolowe; supra] may
guide a court’s choice between two reasonable inter-
pretations of the facts. Jt does not require a court
to adopt a completely unrealistic interpretation of
the market.” (Emphasis added. )

The court thereafter proceeded to affirm a valuation
based not on $6.00 the low bid, nor even on the $6.75 best
bid, but on a $6.875 “average price or value” on the relevant
date.

There are numerous cases in which courts have chosen
either the high or low figure for what appeared to be
punitive purposes. Blau v. Lamb, 242 F.Supp. 151 (S.D.
N.Y. 1965), rev’d and aff’d in part, 363 F.2d 507 (2 Cir.
1966), cert. denied 385 U.S. 1002 (1967); Marquette
Cement Mfg. Co. v. Andreas, 239 F.Supp. 962 (S.D.N.Y.
1965) ; Gratz v. Claughton, 187 F.2d 46 (2d Cir.), cert.
denied, 341 U.S. 920 (1951); Heli-Coil Corp. v. Webster,
222 F.Supp. 831 (D.N.J. 1963), aff’d as modified, 352 F.2d
156 (3d Cir. 1965); Blaw v. Lehman, 173 F.Supp. 590
(S.D.N.Y. 1959), aff’d 286 F.2d 786 (2 Cir. 1960), aff’d,
368 U.S. 403 (1962). But it appears to me that in those
eases the trial courts must have been without evidence
from which realistic values might have been computed.
As a result of evidentiary default, and faced with a deci-
sional necessity, they resolved the issue through “stop-gap”
application of Congressional purpose. Mueller’s under-
standing of Smolowe would apply also to them. Even so,
Mueller’s admonition to the trier of fact to seek from the
evidence, if at all possible, a basis upon which a realistic
interpretation of fair market value can be made, is to me
a highly responsible mandate.

53a
THE PURCHASE

During the six month period involved in this case there
were between 10,363,102 and 10,410,292 shares of Allis’
common stock issued and outstanding. G&W opened it by
buying 3,000,000 shares through an exchange offer and
later acquired directly from the Oppenheimer Fund, Inc.,
an additional 248,000 shares. Before the end of the period
G&W sold all 3,248,000 to a single purchaser, White Con-
solidated Industries, Inc.

The parties disagree as to the date upon which G&W
acquired the 3,000,000 shares, not because it was the day
that began the six month countdown, but because of the
substantial difference in value of the stock on the different
dates assertec by the parties to be the date of purchase.
The exchange offer was publicly noticed through the press
by G&W on May 7, 1968. There is no evidence as to whether
or not there was any awareness of G&W’s intentions prior
to that date. The offer was to purchase from all Allis
shareholders on a pro-rata basis up to 3,000,000 shares,
offering in exchange for each share: $11.50 in cash; 9/10
of a warrant to expire January 31, 1978 to acquire a share
of G&W common at $55; and a $12.50 principal amount of -
a 6% G&W Subordinate Debenture to be due July 1, 1988.
According to the proxy statement the exchange offer was
conditioned on approval of G&W shareholders on July 29,
1968. If this approval were forthcoming, G&W would ac-
cept all Allis shares tendered up to 3,000,000. If more than
3,000,000 would have been tendered by July 19, 1968, all
would be accepted on a pro-rata basis. If fewer than
3,000,000 would have been tendered by July 19, G&W would
accept all shares tendered after that date in their order
of receipt up to 3,000,000 shares. Ali tenders were
irrevocable.

d4a

Before July 29, 1968, more than 3,000,000 Allis shares
had been tendered, and on that date G&W’s shareholders
approved the Exchange Offer. Thereafter, in the “Initial
Statement of Beneficial Ownership of Securities” required
by Section 16(a) of the Securities Exchange Act of 1934
to be filed with the SEC, it was stated that G&W acquired
3,000,000 shares of Allis’ common on July 31, 1968.
In G&W’s monthly report to the SEC for the month of
July, 1968, it was stated that “Registrant, on July 31,
1968, acquired 3,000,000 shares of common stock of Allis-
Chalmers.” In a document called “Welcome to Gulf &
Western” sent out to the new G&W warrant holders under
the exchange offer, it was stated that “The effective date
of the Exchange was July 31, 1973.”” G&W’s warrant agent
dated all warrants given in exchange for Allis common, on
the date July 31, 1968, and an answer by G&W to one of
Allis’ interrogations filed in these proceedings contained
sufficient reference to July 31, 1968, to generate a con-
tention by Allis that G&W judicially admitted July 31st
to be the acquisition date; but the certainty of that answer
as an admission is clouded by the nature of the answer and
the context within which it was given.

Using July 29, 1968 as the valuation date itself, G&W
comes out with a gross purchase price per Allis share of
$37.93. Using July 31 as a controlling date, Allis comes
out with a gross purchase price per Allis share of $35.37.
This difference, crudely stated, of $2.56 per share, places
- the parties initially seven million dollars apart in their
computations.

Allis contends that the court is bound by the manner in
which G&W handled the exchange offer in its accounting,
public and judicial records, and statements. Allis con-
tends that as far as possible the court must resolve issues
in favor of the plaintiff, because 16(b) is “remedial”. Thus

55a

Allis, by holding G&W to the July 31st date, a day on
which the stock market was closed, acquires August Ist as
the valuation date, a day which, over July 29th, substan-
tially maximizes profit. On August lst nothing happened
between the parties. On July 29th G&W itself became irre-
vocably bound to Allis’ shareholders who in reliance on the
terms of the exchange offer had irrevocably tendered their
stock for securities that in turn had a remote equitable
interest in Allis. To use estoppel here to argue against a
contractually relied upon date as the day for valuation that
will “squeeze out” all possible profit is almost to manufac-
ture profit and to render the statute punitive and not
remedial.

As indicated above, in 16(b) determinations, the manner
in which a corporation handles its financial records and
statements for its own or public purposes, and its state-
ments in courts may, like admissions against interest, weigh
heavily against such corporation, but the court may not
use these facts to abandon its duty of determining the
market value. Estoppel will not intervene to bind a party
to what otherwise under the facts would be an erroneous
determination of artificial profit. Mueller v. Korholz, supra;
Park & Tilford, Inc. v. Schulte, supra; Champion v. Jeffress,
352 F.Supp. 1081, 1084 (E.D.Mich. 1973).

Earlier in this case, when it was before the District
Court for the Eastern District of Wisconsin (the case was
later transferred to this district), Judge Reynolds of that
court announced that the date of purchase is that on which
the “insider” becomes bound and by the act of shareholder
approval entitled to acquire the tendered shares. Allis-
Chalmers Mfg. Co. v. Gulf & Western Industries, Inc., 309
F.Supp. 75, 80-81 (E.D.Wis. 1970). I conclude with him,
from all the evidence that July 29, 1968 was for purposes
of valuation the date of purchase.

56a

Plaintiff contends that the value of 9/10ths of a G&W
warrant expiring in 1978 to acquire a share of G&W’s
common stock at $55 must be merely 9/10ths of the low
at which those warrants were traded on the exchange on
the valuation date. When we use the date Allis chose—
August 1, 1968—and that day’s low—13.875, we come out
with a figure of $37,462,500.° When we use the date of
the rule of this case—July 29, 1968—and that day’s low of
15.0, we come out with a figure of $40,500,000.* I disagree
with both. If an investor is to be ordered to turn over his
“profit”, without proof of wrongdoing, it should be real
and not manufactured profit. The research and reporting
services relied upon by the public in the market recite lows
and highs to reflect trends, but when reflecting an isolated
day in a single figure they use an average. A quick average
is half the sum of the high and low. A refined average
would be the volume-weighted average for the day. We
should use neither the high nor the low if we have the
facts from which to make a realistic determination. Muel-
ler v. Korholz, supra; Volk v. Zlotoff, 318 F.Supp. 864,
866 (S.D.N.Y. 1970).

Defendant contends that as to its warrants, we at least
should consider their volume-weighted average on July
29th. This average was 15.56301. When we use that
average we come out with the figure of $42,020,127.°
With this I agree. But then, the defendant goes further
and urges that a realistic valuation of the warrants would
recognize the effect of arbitrage upon the value of the

°9/i0ths of 13.875 x 3,000,000; or 9/10ths of 3,000,000
(2,700,000) x 13.875. .

‘9/10ths of 15.0 x 3,000,000; or 9/10ths of 3,000,000
(2,700,000) x 15.0.

59/10ths of 15.56301 x 3,000,000; or 9/10ths of 3,000,000
(2,700,000) x 15.56301. Defendant rounded this figure for the
average at 15.56, and came out with the lesser amount of 42,012,000.

57a

warrants. This, according to G&W, would require using
the weighted-average in the trading of the warrants over
the period of May 7, 1968, when public notice was given
of the intent to follow through on the exchange offer, and
July 29, 1968, the acquisition date. This average was
18.93. Were that average used, we would come out with
the figure of $51,120,000; the amount G&W claims to be
the proper valuation. With this I do not agree. I am of
the opinion that to apply arbitrage would be unrealistic and
artificial.

® | learn from the witnesses that quite commonly during exchange
and tender offers specialized ea comes into play and affects the
market price of one or the other of the securities involved, from the
time of a market awareness of a proposed exchange or tender offer
until the consummation of the transaction.

Generally the proponent of the exchange, the seller, in order to
insure the success of his proposal, places in the package he offers
as consideration things that would add up to a higher market value
than that of the securities sought. This, | am taught by the witnesses,
attracts arbitrageurs whose dealing in these securities causes their
market prices to be unrepresentative of what they would be even
when they reflect the offer. Fair market value thus should reflect an
averaging out of the difference between the down pressure of arbitrage
activity and the resistance of the security to that pressure.

The defendant strongly urges that statistics show that arbitrage did
occur here and that the value of the warrants should take it into
account. But the reports of Investment Statistics Laboratory show
no changes in the trading and prices of the warrants, at least during
the first two months of the exchange offer which could not be at-
tributed to the ofier itself. Were arbitrage applicable in this case, it
seems to me that to strike an average over the entire period of
awareness of the offer when no serious drop in the prices of the
warrants occurred until a few weeks before the uisition date,
would give excessive weight to the high as against low. This
indeed would be manufacturing a valuation.

On the other hand, the evidence shows that without any dramatic
increase in warrants outstanding from April through July, there was
a dramatic increase in short interest over the period of the exchange.
The percentage of short interest to outstanding warrants increased
from .4 in April to 13.4 in May, and then to 14.7 in June and 18.9
in July. In August it returned to 8.0, in September to 4.5 i
October and November back to .4. When this fact is placed along
side the daily trading and closings of the warrants over the same

58a

In 16(b) valuations of the consideration given through
exchange offers in payment for the stock of the plaintiff
corporations, making adjustments of market value to
reflect the impact of arbitrage activities upon securities of
one side would deprive the parties of fundamental fairness.
G&W would have a windfall of at least $4,981,500.

I find no case law to guide me on this issue, but when
I analyse carefully the testimony of the expert witnesses
I conclude that in any case in which the purchase is effected
through a security for security exchange offer, adjusting
the market value of the securities given as consideration
for the target securities to reflect the impact upon the
market of arbitrage would be improper. To allow G&W
an additional cost amount reflecting arbitrage, would be
y give G&W compensation for having made the exchange
offer.

The effect of the exchange offer itself on the market
price, as from day to day while it is open and information
and rumors about it change, is as substantial an unknown

period of time, it becomes clear that there was arbit i

this exchange offer. But it becomes equally clear that yn f
effect upon the market of the warrants until on or after July 12th
on which day they traded dramatically low and closed at 19.25.
Prior to then its closings described no pattern. During the 42 market
days from May 7 to July 12, the movements were not unusual.
There was a lowest closing at 17.25 on June 28th, and a highest
closing at 20.75 on July 8th. But after the 19.25 closing of July
hy _ a a} —— decline to an all time low
of 13.875 on August Ist. It is this decline whi i -
“= the ry of thn activity. wahsscetienedes

‘ere I to give a fair value to the im of arbitrage

market price of the warrants on the date as rchase, I would ae
an average between the closing on July 12, 1568, as explained above
and the weighted-average of the trading on July 29, 1968. With that
in mind, | would find the fair market valuation of the G&W warrants
given as part of the consideration for the Allis common at the time
of the purchase to be $46,993.500. (Half the sum of 19.25 and
15.56 is 17.405. 9/10ths of 17.405 x 3,000,000 (or 17.405 x
9 10ths of 3,000,000) (2,700,000) comes out to be $46,993,500. )

59a

as is arbitrage. Both are that speculative in nature that
when the proponent of an exchange offer, as here, puts
together his package of considerations to pay for the
target security, as he is deemed to have placed in it what
will insure the success of the exchange, so he must be
deemed to have withheld from it what he calculates will be
necessary to cover for the aberrations of the market, in-
cluding arbitrage. Were he, hypothetically, buying up his
own package at the time of the exchange, and in the market
place, and were he allowed an adjustment for arbitrage,
he would benefit from it twice. Just as the court will not
construct a valuation to manufacture a higher profit, so
it will not permit considerations which, though perfectly
fair and proper in other valuations, have the effect of
manufacturing an undeserved deduction from profit.

In view of the foregoing, I conclude that the value to be
assessed the warrants given as part consideration for the
3,000,000 Allis common shares on July 29, 1968, is
$42,020,127.

The third item of the consideration given for each of the
3,000,000 shares of Allis’ common stock was a $12.50 prin-
ciple amount of a G&W 6% subordinated debenture.’ The
debentures were issued in denominations of $100 and for
each Allis share one eighth of a debenture was given. There
thus were 375,000 of such debentures issued and all were
given in the 3,000,000 share exchange. They were new
debentures due in 1988. On the date of purchase controlling
in this case, July 29, 1968, none of these debentures were
traded on the stock exchange. As far as that is concerned,
even the August Ist date claimed by Allis to be the proper
date of purchase would not serve to give a fair market value
to them because there were too few traded upon which a

7 The first item was $11.50 cash per share. 3,000,000 x $11.50 =
$34,500,000.

60a

fair valuation could be based. On July 29th there were
outstanding and being traded in substantial amounts sim-
ilar debentures due in 1987. On that day $87,000 of them
were traded with an average between the high and low
of 80.875.

The new debentures were first admitted to trading on the
New York Stock Exchange on August 8, 1968. On that
day, 332 one thousand dollar units were traded. They
opened at 75, closed at 75, had a high of 76, a low of 74,
and a volume-weighted average of 75.15023. Both Allis
and G&W refer to August 8th for a meaningful valuation.
Allis claims the amount should be the low of $74 because,
it asserts, “Section 16(b) case law the lowest price of a
security on the date of purchase governs.” G&W claims
that the amount should be the volume-weighted average
of the August 8th trading, $75.15 each. None of the ex-
perts were able to place a hypothetical or real valuation
on the debentures, either as of July 29th or August lst,
based upon knowledge existing as of that day.

To choose the low of August 8th’s trading, as requested
by Allis, just to “squeeze out all possible profits”, is to
manufacture valuation. Since similar debentures were
trading with a high-low average of 80.875, and since our
debentures themselves finished out the rest of August with
an average closing of 76.47, the volume-weighted average
of the first trading day, August 8th, $75.15 is quite realistic
of what would have been the fair market value on July
29th, had there been a market. Accordingly, I find the
value of the debentures given up in the exchange offer to be
$28,181,336 ($75.15023 x 275,000).

In addition to the 3,000,000 shares of Allis’ common
acquired by G&W through the Exchange Offer, G&W later
purchased 248,000 shares from Oppenheimer Fund, Inc.
Their agreement of August 28, 1968, provided that in

6la

exchange itor the Allis stock Oppenheimer Fund, Inc. would
receive 496,000 G&W warrants. Because the consumma-
tion of this agreement depended upon, among other things,
the listing of the G&W warrants and underlying common
stock to their respective stock exchanges (subject to official
notification of the issuance), the agreement called for a
closing date three days after such listing but not later than
September 30, 1968; and G&W would receive all dividends
paid on the Allis shares after the agreement date, August
28th.

Although the G&W warrants would be listed without
SEC registration and thus were not freely tradable, G&2W
agreed to file a registration on or before April 30, 1969.
G&W also agreed that if the registration statement did not
become effective by December 31, 1968, and if Oppenheimer
chose to sell any warrant in the ninety days following
the effective date of registration, G&W would guarantee
or pay Oppenheimer an average gross price of $13.50 for
each warrant Oppenheimer sold. The agreement was closed
on September 30th. G&W did not cause the registration
statement for the warrants to become effective until Janu-
ary 13, 1969, thus bringing into effect the agreement’s
price guarantee. On March 18, 1969, Oppenheimer in-
formed G&W of its sale of 8,500 warrants and its plan
to sell the remaining warrants beginning after March 21,
1969. The parties however reached an agreement wherein
Oppenheimer would defer the immediate sale of the war-
rants, and G&W would extend the guarantee until October
of 1969. On April 18 Oppenheimer invoked the extended
guarantee and a week later made its demand upon G&W
for $2,154,450. G&W paid it on June 5, 1969.

The parties have agreed that the valuation date of these
496,000 warrants was September 30, 1968. The agreement
is realistic and I approve it. These warrants were un-

62a

registered at the time of purchase and their valuation must
reflect that fact. On that date registered warrants were
traded on a volume-weighted average at $16.11444. The
experts were of the opinion that the discount should be
between 9.5% and 18%. One figured the discount to be
9.5%. Another’s opinion was 15%. Still another chose
generally between 13% and 18%. The 15% was based
upon the average of the trading in the warrants on Sep-
tember 30. I find it thus the most realistic discount. This
would make the fair value of these warrants, there being
no market, $13.69.

Placed upon this discounted price must be a value repre-
senting the guarantee to register within 3 months. If the
warrants were not registered, as agreed, Oppenheimer
could sell at what it could get, and in addition charge back
against G&W the guarantee premium up to $13.50 per
share. Since the guarantee was a penalty obligation, it
seems to me that the guarantee of $13.50 and the discount
of $13.69 would cancel each other, and leave the valuation
to be attributed to the cost to G&W at the market price
of September 30, 1968, less the difference between the
discount and the guarantee, i.e., less 19¢. I therefore place
on this purchase a price of $7,896,320 ($15.92 x 496,000).

From the foregoing, I find that the total purchase price
paid by G&W for its purchase of the Allis common acquired
through the exchange offer to be $104,701,463 and the
purchase price of the total of the 3,248,000 exchange offer
and Oppenheimer shares to be $112,597,783.

THE SALE

When G&W on December 6, 1968, sold all 3,248,000 of
its Allis common to White Consolidated Industries, Inc.,
it took in exchange $20,000,000 in cash, White’s Promissory

63a

Note in the amount of $93,680,000, and 250,000 shares of
White’s common stock.

Between the parties there is no dispute about the
$20,000,000, and little disagreement over the valuation to
be given for the 250,000 shares of unregistered White
Common Stock. Unlike the unregistered G&W warrants
which figured in the contract between G&W and Oppen-
heimer, wherein a guarantee served to offset the discount,
in the receipt by G&W of 250,000 shares of White’s un-
registered common as part of the sale price of the Allis
common stock it had acquired, there was no price guarantee.
One of the experts placed the discount at 15.3%, another
at from 25% to 30%, and a third at 25%. The first of
such expert’s testimony was an “Offer of Proof” permitted
in evidence, but because of his absence on the witness stand
he was not confronted by cross-examination. I agree with
the parties that the expert testimony setting the discount
at 25% is well documented and convincing. Where the
parties differ is whether the discount should be applied
to the high of White’s common selling on December 6, 1968,
or to the volume-weighted average of the stock traded that
day. For reasons already I have given and consistent
therewith I find that the base figure should be that of the
volume-weighted average. On that day there were 111
transactions involving 31,100 shares. The high was 42.50;
the low was 39.25. The stock opened at 39.375 and closed
at 42.00. The volume-weighted average was 40.6053. I
find the fair value to be attributed to the White unregis-
tered common was $7,613,493 ($40.6053 discounted by 25%
x 250,000 shares).

The valuation on which the parties differ most dramatic-
ally is that to be assigned the largest consideration given
G&W by White in its purchase of the 3,248,000 shares
of Allis common, White’s unsecured, six-month, 844%

64a

promissory note in the amount of $93,680,000. The note
must be valued as of the date it was given, December 6,
1968, The note was paid on March 20, 1969, but on Decem-
ber 6th it was impossible to know whether or not it actually
would be paid on or before its due date. 16(b) valuations
cannot be determined by hindsight. There are those who
say that hindsight can test the accuracy of the earlier de-
termination; but I find this test evidentially incompetent.
At most it is a consolation for the one who turned out to
have been right, but it can’t prove that he was. It is evi-
dence of the nature of the risk inherent in the foresight
which is competent to establish the accuracy of the valua-
tion. Of the same non-evidential worthlessness is the fact
that after December 6th, G&W twice tried to sell the note
and was advised that it could not se!l it at anything near
par. G&W had accepted the note on December 6th at
face value.

Allis further contended that G&W is estopped from
claiming any value other than the face amount of $93,-
680,000 of the note, because of the manner in which in its
own and public records it had handled the note. On
December 6th, G&W placed the note on its record books
kept for internal control at its face amount, in its com-
munications with its stockholders reported the note in its
face amount, and did the same thing in its filings with
the SEC.

Allis further argues that as a maiter of law the intent

of the parties to the note as expressed in their contract,

which recited the note at its face value, controls valuation
as it shall be determined by this Court. As authority for
this position Allis cites Kern County, supra, Bershad v.
McDonough, 428 F.2d 693, 698 (7th Cir. 1970), and New-
mark v. RKO General. Inc., 425 F.2d 348, 357 n.9 (2nd
Cir. 1970) ; and states that such an approach is entirely

65a

consistent with the statutory purpose of squeezing all of
the profit out of a short-swing purchase and sale that
violates 16(b).

I find that none of the cases cited by Allis in aid of its
position on this matter supports it. I already have found
that, though a party’s handling of valuations in its private
and public representations may serve as admissions against
interest, estoppel will not serve to relieve the court of its
duty to determine a realistic market value.

G&W argues that the note was “commercial paper” as
differing from “investment paper”, the former marketable
only at a discount. It is apparent that because the short
life and the size of the note on the one hand, and the nature
of its promissor and the size of its interest (two points
abeve the prime bank rate at the time), the note was of
a hybrid nature that kept it from fitting comfortably into
either of these categories. It seems to me that the dis-
interested but available third party investor would con-
sider the note as worth something less than face value but
certainly not as conventionally discountable “commercial
paper”. It seems to me, considering a comprehensive evalu-
ation of the opinions of the experts who testified about it,
he would, in purchasing it, lower it by some b. 2ker-like or
cost for placement coefficient of risk below its face value.
I am convinced that such adjustment would be closer to
half the lowest suggested 10% discount attributed to it
as commercial paper.

I was particularly impressed with the testimony of two
experts, one a Kenneth V. Zweiner, and the other a Lewis
Glucksman. Mr. Zweiner considered the note as “money
good’’, and as a banker, had he been approached on Decem-
ber 6th, would have participated with other banks in
purchasing the note at face value. Mr. Glucksman, head
of the corporate bond department of Lehman Brothers

66a

which had handled commercial paper in excess of 40 billion
dollars during last year, had at the time in question ad-
vised G&W that the note was “non financible” and that it
would have to be factored at 10% to 15% less than its
face amount. During this time Glucksman had personally
reviewed White’s financial condition and found it “un-
healthy”.

Mr. Zweiner considered that White had a substantial cash
throw off in excess of forty million; that White had a good
current ratio (excess of current assets over current lia-
bilities) although it had a heavy debt structure; and that
White had a good equity base behind it. Mr. Glucksman
considered the note as an “unusual” one and too big for
Lehman Bros. There had been telephonic commitments of
banks to share in picking up the note (prior to December
6th) up to 50 millions of its face, but these commitments
were qualified in that additional banks would have to be
retained to handle the balance. The lending market at that
particular time was tight; but that meant even the more
that institutional type investors furnished an available
market for long term interest-bearing secure investments.
The excellent testimony of all of the many expert witnesses
concerning this note considered comprehensively as stated
above, causes me to find the market value of the note on
December 6, 1968 to have been 5% off its face value, i.e.,
$88,99€,000.

It follows from all the above that the market value of the
total consideration G&W received in exchange for its
3,248,000 shares of Allis’ common stock it sold on December
6, 1968 to White Consolidated Industries, Inc. is $116,-
609,493.

67a
Costs, DIVIDENDS AND INTEREST

Certain collateral matters must be considered which bear
upon the question of the amount of profit which the defen-
dant, G&W, must turn over to the plaintiff, Allis: (1)
allowable costs incurred in connection with the acquisition
and disposition of the 3,248,000 shares of Allis’ common
stock within the statutory period; (2) the dividends paid
by Allis while its stock was being held by G&W; and (3)
interest on the profit.

As to the first of these items, the parties have stipulated
that G&W’s expenses incurred in connection with its ex-
change offer were $2,874,175.67, and in connection with its
acquisition of the 248,000 shares acquired from Oppen-
heimer were $1,696.33. No evidence was presented regard-
ing these matters other than the stipulation of the parties.
In light of all the evidence, I find no reason to question these
amounts of expenses presented me by the agreement of the
parties. The total of expenses incurred then is $2,875,872.

As plaintiff admits, case law supports the proposition
that the expenses of a defendant in performing a purchase
or sale are a deduction from profit in 16(b) cases. Blau v.
Mission Corp., 212 F.2d 77, 81 (2nd Cir. 1954) ; Arkansas
Louisiana Gas Co. v. W. R. Stephens Invest. Co., 141 F.
Supp. 841, 845, 847 (W.D. Ark. 1956).

The second of these matters arises from Allis’ claim that
there should be included in G&W’s profit the $406,000 divi-
dends which Allis paid on the 3,248,000 shares of common
stock while they were in the hands of G&W during the
statutory period. Plaintiff relies for this contention on
Western Auto Supply Co. v. Gamble-Skogmo, Inc., 348 F.2d
736, 744 (8th Cir. 1965), cert. denied 382 U.S. 987, and
assumes support for its position in several other cases. I
find it difficult to distinguish our case from Western Auto

on the facts in order that its rule of law not be dealt with.
In neither case was the purpose of the short-swing purchase
and sale the making of a special profit from the dividends.
If it has a legal message to be followed it is that there is no
question about the fact that dividends should be available
to the court to be used in situations where the conduct of the
defendant was reprehensible—where the acquisition of sub-
stantial stock in a company was for the purpose of ma-
neuvering the payment of large dividends—where the
dividend itself was the target of stock manipulation.

Courts often have permitted the recovery of dividends
when it could be inferred that there was some intended con-
nection between the dividends and the short-swing transac-
tion. Blau v. Lamb, 363 F.2d 507, 528 (2nd Cir. 1966) ;
Adler v. Klawans, 267 F.2d 840, 848 (2nd Cir. 1959) ;
Marquette Cement v. Andreas, 239 F.Supp. 962, 968 (S.D.
N.Y. 1965). But any use of Western Auto to go beyond this
approach is to take a backward step from those cases. I find
Western Auto now to be of dubious precedential vitality.
Its holding was reached without any apparent analysis of
any special role which dividends played in the case; and
gracefully it was retreated from by the same court three
years later in Petteys v. Butler, 367 F.2d 528, 535 (8th Cir.
1966), cert. denied 385 U.S. 1006 (1967).

Experts in the field look upon anticipated dividends as
part of the package for which the consideration is paid
when the stock is purchased. In addition, dividends are not
an element of profit in the sense that they do not result from
the purchase and sale of stock, but rather come from the
holding of stock. See 45 Va. L.Rev. 1057, 1060 (1959). In
the language of the statute dividends logically are not
profit. The statute reaches “profit realized from the pur-
chase and sale’. Dividends thus are treated by the statute
like an operational earning or income. This statutory in-

terpretation reads upon the ordinary thinking about divi-
dends in the market place. Except where they are a matter
of special concern, the market price generally is presumed
to cover dividends reasonably anticipated. At least to the
extent that they regularly are paid, they are considered
absorbed in the price paid for the stock.

To permit recovery by Allis of the 1214 cent quarterly
dividend involved here would be unconscionable for a fur-
ther reason. The evidence shows that Allis, in its fighting
back at G&W’s attempt to gain control of it, on August 9,
1968, nine days after the exchange offer was confirmed,
slashed its regular and historic 25¢ quarterly dividend in
half. The prospectus on the exchange offer, in reciting the
dividend history of Allis, mentioned that in each of the first
two quarters of 1968 a cash dividend of 25¢ per share had
been declared. Moody’s Dividend Record showed a continu-
ous dividend record of 25¢ per quarter from and including
the fourth quarter of 1966. It is retributive for Allis to
say to G&W, “When we found that you had succeeded in
acquiring one third of our stock through your exchange
offer, before you could exercise a voice in our control we
slashed our dividend in half. This should discourage you
from any further attempts to divest us of our management
controlled independence. But when you sold short of the
statutory six months and made available to us the use of
Section 16(b) to squeeze out of you every penny’s profit,
you gave us the right to get back as a part of ‘profit’ even
the half dividend we paid you.” For the Court to join Allis
in this retributive approach would be for the Court itself to
offend traditional notions of fair play and substantial
justice.

Of the same vein must be this Court’s response to plain-
tiff’s demand for interest on the amount of the profit from
the date of the sale to the time of this decision. If interest

70a

is added it certainly should not continue to the time of deci-
sion. This causes the total amount of interest to be meas-
ured by periods of time not within the control of the parties.
These would vary from court to court, reflecting the differ-
ent programs of courts in the management of the flow of
cases through them. Not even should attorneys feel respon-
sible for increases or reductions of potential awards to their
clients because of the necessity for the flow of cases also to
reflect necessary adjustments of time to accommodate rea-
sonable uncertainties in professional availability. Litigants
themselves should not be discouraged from participating
fully in statutorily granted causes of action, either as plain-
tiffs or defendants, by knowledge that the size of awards
will be materially affected by the professional affairs of
lawyers and courts.

I am of the further opinion that the concept of interest in
16(b) cases offends logic. Since interest represents “the
wages of money (or money measured values) at work”, it
ought be treated as such. If one wrongfully is deprived of
the use of money in which one has a proprietary right, the
wrongdoer should return it together with the wages it rea-
sonably could have earned throughout the period its owner
could have put it to work. The purchaser of stock of a cor-
poration, issued and outstanding, is not taking from the
corporation itself values which the corporation could itself
have put to work. It is conceivable that the diving in and
out by a short-swing profiteer can injure the corporation. I
find no support for the idea that relating the profit to the
injury would be measuring comparables. A corporation’s
relationship to its issued and outstanding stock is fiduciary.
When a stockholder transfers his stock to another, the cor-
poration’s relationship remains intact. The corporation it-
self has been deprived of nothing. It is my opinion that
Congress in §16(b) did not create in the corporation a new

7la

proprietary right in the stock, as against a stockholder or
his successor, whether or not he is a “statutory insider”. It
created a bounty-like award for the target corporation
which, like a public prosecutor, succeeds in bringing the one
who violates the statute to answer for his wrongdoing. Its
award attaches when it has succeeded. Interest, if any,
should attach when and if this judgment order is entered in
the plaintiff’s favor and against the defendant.

Whether or not this logic is correct and controlling, pre-
judgment interest should not be awarded, in light of case
law. Cases permit interest a: a matter to be determined by
the Court in exercise of equity on!y if the defendant’s con-
duct has been reprehensible. The last case on the matter of
16(b) interest today is Gold v. Sloan, 486 F.2d 300, 353
(4th Cir. 1973).

In Gold v. Sloan both the majority opinion and the dissent
agreed on the issue of interest. They observed that the tria!
court had allowed interest as a matter of course. The trial
court’s order had simply said that “interest on the amount
of profit is a proper item of damage”. Relying upon Blau v.
Lehman, 368 U.S. 403, 414 (1962), the Fourth Circuit
stated that:

“The governing rule is that ‘* * * interest is not
recovered according to a rigid theory of compensa-
tion for money withheld, but is given in response to
considerations of fairness * * *’. This rule has been
followed in recent cases where interest was not
awarded upon the showing of ‘good faith’ on the
part of the defendant. Blau v. Lamb (D.C.N.Y.,
1965) 242 F.Supp. 151, 161; Volk v. Zlotoff (D.C.
N.Y., 1970) 318 F.Supp. 264, 867; Lewis v. Wells
(D.C.8 *., 1971) 325 F.Supp. 382, 387.”

72a

The Fourth Circuit said interest would be inequitable
because it found in Sloan an absence of willfulness in the
violation and ar unavoidably lengthy proceedings. The
Supreme Court in Blau v. Lehman, supra, ruled by analogy
and set by its language the reasoning used by the Fourth
Circuit.

For the same reasons, which I here adopt, as well as for
the reasons I advance above, I hold that interest is not al-
lowable in this case. Here there has been no showing of
wrongdoing by the defendant.

It then appears that only one of these three collateral
matters may figure into the profit. It is the expense amount
of $2,875,872 incurred in the acquisition of Allis stock.
This then would add to the purchase valuations before they
are deducted from what is calculated to be the valuation
assessed the sale to White Industries.

RECAPITULATION AND CONCLUSION

To recapitulate, I have found the sale valuations to total
$116,609,493. This is made up of the $20,000,000 received
in cash by G&W, the $7,613,493 value of the unregistered
White common stock received, and the $88,996,000 valua-
tion of the $93,680,000 White Promissory Note accepted by
G&W. I have found the purchase valuations to total $115,-
473,655, which amount includes the $2,875,872 stipulated
with approval of the Court to represent the cost to G&W of
engaging in its exchange offer and other negotiations. The
total not including the costs, $112,597,783 is made up of
three figures: the $34,500,000 cash given as part payment
for the exchange offer purchase of the 3,000,000 shares of
Allis’ common stock, the $42,020,127 valuation placed upon
the G&W warrants which went into the exchange offer, the
$28,181,336 valuation placed upon the G&W debentures

73a

which also were part of the exchange offer, and the
$7,896,320 valuation placed upon the acquisition by G&W
of the 248,000 shares of Allis stock acquired from the Op-
penheimer Fund. The differences leave a profit by G&W to
be accounted for to Allis in the amount of $1,135,838. This
Court boasts no competency at simple mathematical compu-
tations, wherefore, subject to traditional re-examination of
the arithmetic involved, it respectfully addresses to the par-
ties this fina] determination.

In conclusion, the approach of the Court to this cause has
been with an awareness that the corporate form of business
enterprise increasingly serves the welfare of our modern
society, but that the vitality and the integrity of that form
must be protected against its use as a shield for wrong-
doing. The statute called upon in this case is by legislative
action an attempt on behalf of that society to provide by law
that protection. It is an effort to monitor the conduct of
those in positions of special knowledge of or control over a
corporation’s affairs. The business world has long been
concerned about the statute itself. Some consider it too
loose in its terms because it leaves too broad an area in
which the courts may determine its proscriptions. Others
also desire its repeal or revision because they consider it
too severe. The SEC regards its administration a matter
for the courts. Congress left its enforcement to corporate
investors and provided therefor the exclusive jurisdiction
of the federal courts and their traditional powers in equity.
The courts in turn faithfully have sought to maintain the
Congressional purpose without abandoning their basic
principles of justice and fundamental fairness.

It has been held by the Court that in assessing profit, if
any, it must make determinations of valuations as of the
time of purchase and sale and in terms of fair market value
(or fair value in the absence of market), and that such

T4a

valuations must be realistic—not artificial. It has been
determined that in 16(b) purchases by exchange offers it
would be unfair to take into consideration the fact of arbi-
trage; and that dividends and interest are improper con-
siderations, but that if a defendant’s conduct has been rep-
rehensible, they are available to the Court for consideration
to the end that the result be effectively remedial (never
punitive).

In conclusion, it has been determined that the defendant,
Gulf & Western, considering the size of its purchase, and
the facts of its purchase and sale, became a statutory in-
sider, and liable to turn over to the plaintiff its profit from
the purchase and sale; but that it did nothing wrong, as far
as speculative abuses are concerned. It has been found that
judgment should be entered against the defendant, Gulf &
Western, and in favor of the plaintiff, Allis-Chalmers, in
the amount of $1,135,838.

Accordingly, it is so ordered, adjudged, and decreed.

This Memorandum Opinion and Order shall constitute
my findings of fact and conclusions of law.

ENTER:

/s/ JAMES B. PARSONS
James B. Parsons
United States District Judge

Date: January 30, 1974
Date of Revision: March 4, 1974

75a
APPENDIX C
IN THE

Supreme Court of the United States

OCTOBER TERM 1974

No. 74-742
—®
FOREMOST-MCKESSON, INC.,

Petitioner,
v.

PROVIDENT SECURITIES COMPANY,

Respondent.

ON WRIT OF CERTIORARI TO THE UNITED STATES COURT
OF APPEALS FOR THE NINTH CIRCUIT

>

MOTION OF ALLIS-CHALMERS MANUFACTURING
COMPANY FOR LEAVE TO FILE THE
ACCOMPANYING BRIEF AS AMICUS
CURIAE IN SUPPORT OF THE
POSITION OF THE PETITIONER

Allis-Chalmers Manufacturing Company (“Allis’’)
hereby respectfully moves the Court for leave to file the
accompanying brief amicus curiae. Attorneys for respond-
ent have indicated that they . nsent to the motion. The
consent of the attorneys for the petitioner in whose behalf
this brief is submitted, was refused.

THE DECISION BELOW

The opinion of the Court of Appeals is reported at 506 F.
2d 601 (9th Cir. 1974). The opinion of the District Court
is reported at 331 F. Supp. 787 (N.D. Cal. 1971).

The Court of Appeals held that § 16(b) of the Securities
Exchange Act of 1934, 15 U.S.C. § 78p(b) (the “1934
Act’’) did not apply to a purchase and sale of more than
10% of a class of equity securities of Foremost-McKesson,
Inc. (“Foremost”) which occurred within a period of less
than six months, because Provident Securities Company

76a

(“Provident”) had not been a 10% owner of such securi-
ties prior to its purchase. According to the Court, Provi-
dent was exempted from § 16(b) liability because it was
not the beneficial owner of 10% of the shares of Foremost
“both at the time of the purchase and sale.”

THE INTEREST OF ALLIS-CHALMERS
MANUFACTURING COMPANY

The interest of Allis arises from the fact that it is the
plaintiff-appellant in an action currently pending in the
United States Court of Appeals for the Seventh Circuit,
entitled Allis-Chalmers Mfg. Co. v. Gulf & Western Ind.,
Inc., Nos. 74-1266 and 74-1267 (7th Cir., filed Feb. 12,
1974). In that action the District Court held that Gulf &
Western Industries, Inc. (“G&W”) had violated § 16(b)
of the 1934 Act by reason of the voluntary purchase of
3,000,000 shares or approximately 29% of Allis’ common
stock in July, 1968 and the sale, less than six months
thereafter on December 6, 1968, of that block together
with

[Text truncated at 120,000 characters. The full text is on the page linked above.]

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385003_1201%3A1. Public record. Not legal advice.