Petition — Sax v. Oliff
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Supreme Court, U.S,
80-879 FILED
2EC 1 1980
No.
R., CLERK
In the
Supreme Court of the Anited States
SEYMOUR A. OLIFF,
Plaintiff-Respondent,
VS.
EXCHANGE INTERNATIONAL CORPORATION,
the ISSUER, a Delaware corporation,
Defendant,
and
EDWARD L. SAX, SAMUEL WILLIAM SAX and
THE CONTINENTAL ILLINOIS NATIONAL BANK
AND TRUST COMPANY OF CHICAGO, as Co-Trustees
of the Marital and Residuary Trusts under the Last Will
of George D. Sax,
Defendants-Petitioners.
PETITION FOR WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS FOR
THE SEVENTH CIRCUIT
Kevin M. Forpe
Counsel of Record
Ricuarp J. PRENDERGAST
111 W. Washington Street
Chicago, Illinois 60602
(312) 726-5015
Attorneys for Petitioners.
Of Counsel
KATRINA VEERHUSEN
The Scheffer Press, Inc.—(312) 263-6850
QUESTIONS PRESENTED
1. Whether the rescission of a prior transaction (in-
volving the sale of stock), compelled by the Internal Rev-
enue Service as a correction of the prior transaction un-
der § 4941 (b) (e) (3) and (e) (4) of the Internal Rev-
enue Code, was a “purchase” of securities within the
meaning of Section 16(b) of the Securities Exchange
Act of 1934.
2. Whether a probate court sale of shares of stock
held by an Estate was a “sale” within the meaning of
Section 16 (b) of the Securities Exchange Act of 1984.
ii
TABLE OF CONTENTS
PAGE
SI SIN ooo. cscscscsscascscsescccncocovesssecooncesencceesceccecees i
os... ccssacescesienensovesovemmeeseces 1
Ee 2
ce 2
Rtatement Of the Case ...........cccccsemsscsssssccscssssseseceseceeceeeee +
A. Preliminary Statement ..cccccccsscsccscscesseecsesceees 4
B. Statement of Facts wccccccssccscccesssscssecscscseeees +
I ocscccesenssacsstovsecserescrsscnseresomnecececsoees 5)
a 6
3. Proceedings In The District Court. ........ 7
4. The Opinion of The Court of Appeals... 7
Reasons For Granting Writ v.ccccccccsscccsscscscsssssseseeseseees 8
I. Supreme Court Guidance Is Needed On The
Question Of The Proper Application Of The
“Pragmatic Approach” Under Section 16(b) .... 8
Il, The Rescission Compelled By The Internal
Revenue Service, Which Constituted The Alleged
“Purchase,” Presented No Potential For Specu-
lative Abuse And The Narrow Interpretation
Of Unorthodox Or Borderline Transactions
Adopted By The Lower Courts Prevents The
Courts From Taking Into Account Considera-
tions Such As Voluntariness, Rescission And
Economic Compulsion oo..ccccccccsscssssscsccsccssescecensees 11
A. Voluntariness ooiicccccccsccccssscscsssseseseess 11
I, sacapsvcncsccscccscoccccscccucoscoosceeceesccase 14
iii
PAGE
Ill. The Probate Court “Sale” Presented No
Potential For Speculative Abuse, And Applying
The Pragmatic Approach, Was Not A Sale
Within The Meaning Of Section 16(b) ........... 17
Cometesiem:. cccickcccexsoscatens fe CELA PE PRE PODE OREN AEDST 19
TasBLe Or AUTHORITIES
CasEs
Ferraiolo v. Newman, 259 F.2d 342 (6th Cir. 1958),
cert, dented, 359 U.S. 927 (1959) .....smsrcscccrsesescerrenees 16
Hennesey v. Fein, 184 F.Supp. 86 (S.D.N.Y. 1958) 14
Kahansky v. Emerson Radio and Phonograph Corp.,
184 F.Supp. 90 (S.D.N.Y.) c.ccccccccssseserscsssseeseeesseseesesees 14
Kern County Land Co. v. Occidental Petroleum Corp.,
413 UG, SGD CIGTB) evcceiccscesrniicesseccccsessnsemscnese 8, 9, 10, 11
Lyman v. Livingston, 276 F.Supp. 104 (D. Del. 1967) 16
Makofsky v. Ultra Dynamies Corp., 383 I’.Supp. 631
(S.D.N.Y. 1974) ccscccccrccsssccosssersscccseressessnesssseseessssessssennsenss 11
Morales v. Great American Corp., 445 F.Supp. 869
(M.D. Lid. 1978) cccccssccssccsccrsonessscscseressrecsssssssssseversoeseesees 14, 15
S&S Realty v. Kleer Vu Industries, Inc., Fed. See
L. Rep. 96,056 (S.D.N.Y. 1977), aff'd, 575 F.2d
1040 (2d Cir. 1978) .scccccrsssscceccersssesssesescsessscssseesserers 14
Volk v. Zlotoff, 285 F.Supp. 650 (S.D.N.Y. 1968) ........ 14
STATUTES
Illinois Revised Statutes, 1979, ch. 3 § 209 wee. 6,18
Internal Revenue Code, Section 4941, 26 U.S.C.
§ 4941 ...ccccccsscccscssscerscscessenssserssseasseesesvsssersssssesseasssesseoess passim
Securities Act of 1934, Section 16(b), 15 U.S.C.
§ 7B po (WD) ccsscssccsssercmsssssescerseneessoessesessnsssereesseeseeensseaes passim
Law Reviews
Wentz, Refining A Crude Rule: The Pragmatic
Approach To Section 16(b) Of The Securities
Exchange Act of 1934, 70 Nw. L. Rev. 221 (1979) .... 9
In THE
SUPREME COURT OF THE UNITED STATES
No.
SEYMOUR A. OLIFF,
Plaintiff-Respondent,
vs.
EXCHANGE INTERNATIONAL CORPORATION,
the ISSUER, a Delaware corporation,
Defendant,
and
EDWARD L. SAX, SAMUEL WILLIAM SAX and
THE CONTINENTAL ILLINOIS NATIONAL BANK
AND TRUST COMPANY OF CHICAGO, as Co-Trustees
of the Marital and Residuary Trusts under the Last Will
of George D. Sax,
Defendants-Petitioners.
PETITION FOR WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS FOR
THE SEVENTH CIRCUIT
OPINIONS BELOW
The Opinion of the United States Court of Appeals
for the Seventh Circuit is not yet officially reported and
is reproduced in its entirety in the Appendix to this brief.
The Opinions of the United States District Court for the
Northern District of Illinois are officially reported at 449
F.Supp. 1277, and are reproduced in their entirety in the
Appendix to this brief.
a en
JURISDICTION
The Opinion and Judgment of the United States Court
of Appeals for the Seventh Circuit was entered on Sep-
tember 18, 1980. Jurisdiction of this Court is invoked un-
der 28 U.S.C. § 1254(1).
STATUTES INVOLVED
Section 16(b), Securities Exchange Act of 1934, 15
U.S.C. § 78p(b):
For the purpose of preventing the unfair use of in-
formation 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 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, irrespective of any intention on the part of
such beneficial owner, director, or officer in entering
into such transaction of holding the security pur-
chased or of not repurchasing the security sold for
a period exceeding six months. Suit to recover
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 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 Com-
mission by rules and regulations may exempt as not
comprehended within the purpose of this subsection.
Section 4941, Internal Revenue Code, 26 U.S.C. § 4941:
§ 4941. Taxes on self-dealing.
(b) Additional Taxes.
(1) On self-dealer. In any ease in which an initial
tax is imposed by subsection (a) (1) on an act of
self-dealing by a disqualified person with a private
foundation and the act is not corrected within the
correction period, there is hereby imposed a tax equal
to 200 percent of the amount involved. The tax im-
posed by this paragraph shall be paid by any dis-
qualified person (other than a foundation manager
acting only as such) who participated in the act of
self-dealing.
(e) Other definitions. For purposes of this section—
(3) Correction. The terms ‘‘correction’’ and ‘‘cor-
rect” mean, with respect to any act of self-dealing,
undoing the transaction to the extent possible, but
in any case placing the private foundation in a finan-
cial position not worse than that in which it would
be if the disqualified person were dealing under the
highest fiduciary standards.
(4) Correction period. The term “correction peri-
od” means, with respect to any act of self-dealing,
the period beginning with the date on which the act
of self-dealing occurs and ending 90 days after the
date of mailing of a notice of deficiency with respect
to the tax imposed by subsection (v) (1) under sec-
tion 6212, extended by—
(A) any period in which a deficiency cannot
be assessed under section 6213 (a), and
(B) any other period which the secretary de-
termines is reasonable and necessary to
bring about correction of the act of self-
dealing.
pet yee
STATEMENT OF THE CASE
A. Preliminary Statement
Petitioners here seek a writ of certiorari to the United
States Court of Appeals for the Seventh Circuit which
affirmed a decision of the District Court denying Defen-
dants’ Motion for Summary Judgment and granting
Plaintiff’s Motion for Summary Judgment. Pursuant to
that order the petitioners were found liable for short-
swing profits, allegedly obtained in violation of Section
16(b) of the Securities Exchange Act of 1934.
B. Statement of Facts
Plaintiff Seymour A. Oliff (hereinafter ‘*Plaintiff’’)
brought this shareholders’ derivative suit on behalf of
Defendant Exchange International Corporation (herein-
after ‘“‘EIC’’) and against the Executors of the Estate
of George D. Sax to recover alleged profits and interest
resulting from a ‘‘purchase’”’ and ‘‘sale”’ of EIC stock,
allegedly consummated in violation of Section 16(b) of
the Securities Exchange Act of 1934 (15 U.S.C. §78p
(b)) (hereinafter “Section 16(b)”). The parties do not
dispute that the transactions alleged to be a purchase
and a sale did occur within six months of one another,
and that the Estate of George Sax was a beneficial owner
of over 10 per cent of the common stock of EIC.
——
a ee
1. The “Purchase”
George Sax, deceased, made two transfers of shares
of EIC stock to the Sax Foundation in 1972 and 1973.
George Sax was one of the trustees of the Sax Founda-
tion. Those transfers involved 14,318 shares for which
a total consideration of approximately $150,000 was paid.
After the death of George Sax and during the probate
of his estate, the Internal Revenue Service (hereinafter
‘“‘TRS’’) determined that the stock transfers constituted
taxable acts of ‘‘self-dealing’’ by a disqualified person
with a private foundation, within the meaning of section
4941 of the Internal Revenue Code. 26 U.S.C. § 4941.
On July 28, 1975, the IRS informed the Estate of
George Sax (hereinafter ‘‘the Estate’’) and the Trustees
of the Sax Foundation that a tax assessment of $307,905
(approximately 205 per cent) would be due if the acts
of self-dealing were not ‘‘undone’’ within the correction
period specified in Section 4941(e) (3) and (e)(4) of the
Internal Revenue Code.
On December 22, 1975, the Estate paid the Sax Founda-
tion $150,198, the amount of money paid by the Sax
Foundation for the FIC stock. The conveyance was made
pursuant to Section 4941(e) (3) which defines correction
as ‘‘undoing the transaction to the extent possible, but
in any case placing the private foundation in a financial
position not worse than that in which it would be if the
disqualified person were dealing under the highest fidu-
ciary standards.’’ After the transfer of EIC stock to the
Estate, the IRS abated the proposed tax assessments.
_ yon
2. The “Sale”
In January and February of 1976, Rhoda Sax anid the
majority co-executors of the Estate filed separate peti-
tions for court approval of offers made to purchase the
190,727 shares of EIC stock held by the Estate. The
executors disagreed as to the terms of the subsequent
judicial sale, to whom the sale should be made, and
whether the probate court even had jurisdiction to order
sale of the stock. This disagreement resulted in hearings
in the probate court, two appeals to the Illinois Appellate
Court, one original action in the Illinois Supreme Court
and a suit in the United States District Court for the
Northern District of Illinois. Under Illinois law, such
approval by the probate court is a condition precendent
to the sale of personal property by an estate. Ill. Rev.
Stat., 1979, ch. 3, § 209. On February 9, 1976, the probate
court determined that the shares of EIC stock should be
sold to the highest bidder through a private judicial
sale. On May 7, 1976, the sale of the stock was made
pursuant to secret bids submitted to the probate court.
This transaction is alleged by the plaintiff to be a ‘“‘sale”’
within the terms of Section 16(b).
= ees
3. Proceedings In The District Court
Cross motions for summary judgment were filed in the
district court. The court granted plaintiff’s motion and
denied defendants’ motion. In its opinion, the district
court rejected the arguments that the transfer of stock
to the Estate was not a statutory purchase because it
was involuntary, forced and compelled and because it
merely effected a rescission of an earlier transaction.
It found that the ‘‘mere fact that the estate repurchased
EIC stock from the Sax Foundation to avoid the im-
position of a tax penalty does not make the purchase
involuntary.’’ 449 F.Supp. at 1294; App. 36a.
The district court also rejected petitioners’ argument
that the probate court sale deprived the executors of
the Estate of any control over the timing, method, price
or terms of the sale or the identity of the purchaser.
It also rejected the argument that the probate court
sale was involuntary.
4. The Opinion Of The Court Of Appeals
In affirming the district court’s summary judgment for
plaintiff, the court of appeals ‘‘recognized’’ that eco-
nomic compulsion to repurchase the stock existed. It
concluded, nevertheless, that the acquisition was not so
imvoluntary as to take it out of the definition of a Sec-
tion 16(b) purchase. App. 9a-10a.
In considering the sale of stock by the probate court
the court of appeals concluded that “ [a]lthough the [pro-
bate] court ultimately directed the procedure to be fol-
lowed, and the date, the terms of the sale, and the iden-
tity of the purchaser may have been affected as a result of
the judicial procedure, the court in no sense compelled
the sale and merely prescribed an orderly method of ob-
taining the highest price and incidentally determining
the purchaser.’’ App. 7a-8a.
oie Since
REASONS FOR GRANTING WRIT
I,
SUPREME COURT GUIDANCE IS NEEDED ON THE
PROPER APPLICATION OF THE “PRAGMATIC AP-
PROACH” UNDER SECTION 16 (b)
Although the facts of this case are somewhat unique,
the questions raised are of significant general importance
in determining insider liability for short swing profits
under Section 16(b) of the Securities Exchange Act of
1934.
Section 16(b) applies to officers, directors and beneficial
owners of more than 10 per cent of a class of equity
security of a registered Company. It is a strict liabil'ty
provision which provides that if any of these ‘‘insiders’’
purchases and sells (or sells and purchases) any of the
Company’s securities within a six-month period, any profit
realized from the transaction must be paid over to the
Company. Because of the harsh and unjust results
which may follow from a literal application of the stat-
ute, courts have applied a “pragmatic” approach to cer-
tain transactions to determine whether a challenged trans-
action, which might be within a literal reading of the
Act, actually presents an opportunity for the abuses
Section 16(b) was intended to cure. If no possibility
for such abuse is present, the courts will not impose
liability.
In Kern County Land Co. vy. Occidental Petroleum
Corp., 411 U.S. 582 (1973), this Court acknowledged
that in many cases literal application of Section 16(b)
produced unjust results without necessarily fostering the
goals intended by Congress. To avoid such results, the
ailitalat
Court approved and applied the ‘‘pragmatie approach’”’
in the analysis of certain transactions alleged there to
violate Section 16(b).?
In Kern County the Court had to decide whether a
statutory ‘‘sale’’ occurred either when the target of a
tender offer defended itself by merging into another
company, and the tender offeror then exchanged its stock
for that of the new company, or when the new company
was given an option to purchase stock by the tender
offeror, exercisable outside the six-month period. The
Court concluded that under the cireumstances in that case
there was no ‘‘sale’’ and, therefore, no Section 16(b)
liability.
As is clear from the decisions of the courts below, the
circumstances where the pragmatic approach may be ap-
plied are unclear. In a footnote in the Kern County
Opinion, the Court referred to stock conversions, ex-
changes pursuant to mergers and reorganizations, stock
reclassifications and dealings in options, rights and wer-
rants (411 U.S. at 593 n. 24) as ‘‘unorthodox’’ transac-
tions which permit application of the pragmatie approach.
Elsewhere, it referred to unorthodox transactions as ‘‘bor-
derline’’ transactions. 411 U.S. at 594.
The Opinions of the courts below unduly restrict the
definition of an unorthodox or borderline transaction, and
thus the circumstances where a realistic test can be ap-
*A thorough analysis of the pragmatic approach is
found at Wentz, ‘‘Refining A Crude Rule: The Pragmatic
Approach To Section 16(b) of the Securities Exchange
Act of 1934,’’ 70 Nw. L. Rev. 221 (1975). See also the
extensive compilation of articles critical of the literal
approach and in favor of the pragmatic approach at pp.
221-222, n. 2 of that article.
_ =
plied. The district court read Kern County as limiting
unorthodox transactions to those listed in footnote 24
(499 F.Supp. at 1289; App. 27a) and the court of ap
peals appears to agree with this limitation (App. 6a, fn.
2). The district court also suggested that the term “un-
orthodox transactions” may be further limited to those
few instances where the insider’s proportionate equity
ownership in the subject corporation(s) is not changed
as a result of the transaction. 449 F.Supp. at 1289-90;
App. 28a.
Petitioners respectfully submit that the Opinions of the
courts below unduly restrict the teachings of this Court
in the Kern County case. Their reading results in a too
literal application of the terms purchase and sale under
the Securities Exchange Act. As a result, the ultimate
application of the Act is inconsistent with the con-
gressional intent underlying Section 16(b), which was en-
acted “(flor the purpose of preventing the unfair use of
information which may have been obtained by [a statutory
insider] ... by reason of his relationship to the corpora-
tion.” 411 U.S. at 591.
Following the reasoning of the courts below, many
transactions in which there is no potential for specula-
tive abuse of the kind intended to be prevented by Con-
gress may be unjustly subjected to Section 16(b) lability.
~~
II.
THE RESCISSION COMPELLED BY THE INTERNAL
REVENUE SERVICE, WHICH CONSTITUTED THE
ALLEGED “PURCHASE,” PRESENTED NO POTEN-
TIAL FOR SPECULATIVE ABUSE AND THE NAR-
ROW INTERPRETATION OF “UNORTHODOX” OR
“BORDERLINE” TRANSACTIONS ADOPTED BY THE
LOWER COURTS PREVENTS THE COURTS FROM
TAKING INTO ACCOUNT CONSIDERATIONS SUCH
AS VOLUNTARINESS, RESCISSION AND ECONOMIC
COMPULSION.
If application of the pragmatic approach is limited to
the transactions listed in footnote 24 in the Kern County
Opinion, the courts will not be allowed to consider many
factors relevant to the potential for speculative abuse.
A. Voluntariness
Petitioners argued below that the purchase involved
here was involuntary and thus outside the ambit of See-
tion 16(b). In Makofsky vy. Ultra Dynamics Corp., 383
F.Supp. 631 (S.D.N.Y. 1974). the court noted that the in-
dices of the potential for speculative abuse are (1) access
to inside information and (2) the ability to influence the
timing and circumstances of the transaction in issue.
Petitioners submit the second factor goes to the essence
of “voluntariness” and should, in all cases, be examined
to determine if the potential for speculative abuse is pres-
ent. The executors of the Estate were wholly lacking in
any ability to influence the timing and circumstances of
the purchase involved here; the potential for speculative
abuse was, therefore, not present. and no Section 16(b)
liability should be found.
The alleged statutory “purchase” in this case involved
the “correction” by a decedent’s estate of earlier sales
(by a decedent) which the IRS challenged as acts of
—
“self-dealing” (by the decedent). Under the Internal Rev-
enue Code the Estate was subject to a tax of 205% of the
amount involved or $307,905, unless the decedent’s act of
self-dealing was corrected by the Estate. Correction is
defined in the Code as “undoing the transaction to the
extent possible, but in any case placin,, the private foun-
dation in a financial position not worse than that in
which it would be if the disqualified person were dealing
under the highest fiduciary standards.” 26 U.S.C. §4941
(e)(3). The statute also specifies, as the court of appeals
noted, that the correction be effected within 90 days
after the date of the notice of deficiency. Petitioners
submit that the “purchase” was involuntary because the
transaction would not have occurred at all but for the
IRS involvement, and because both the price and timing
of the transaction were dictated by the IRS,
The Court of Appeals erred in concluding the trans-
action retained sufficient indicia of voluntariness to jus-
tify Section 16(b) liability. The court found significant
the fact that the shares were not repurchased “until over
two years after the first questioned transaction and al-
most six months after it had received the statutory notice
of deficiency.’? App. 10a. The two year period is of no
relevance to Section 16(b) liability because the Estate had
no reason to reacquire the stock until it was told to do
so by the IRS a year and a half after the sales were
initially effected. Furthermore, the six-month period be-
tween the notice of deficiency and the “correction” is of
no significance because the statute allows for extensions
of the 90-day period (26 U.S.C. §4941 (e)(4)(B)) and the
period of time required to effect the correction was ex-
tended in this case due to a protest filed by the coexecu-
tors of the Estate. The court thus had no basis for con-
concluding that “the timing of the purchase was not
totally beyond the estate’s control.” App. 10a.
ditt 9 cme
The court of appeals also erroneously concluded that
the estate “apparently had some control over the price
it paid for the stock” (App. 10a), as the price met with
the approval of the IRS as being adequate to undo the
challenged transaction.”
The effect of involuntariness on potential Section 16(b)
liability has not previously been addressed by this Court.
Petitioners submit the potential for speculative abuse of
inside information is non-existent where the alleged statu-
tory purchase or sale is ‘nitiated avd carried out at the
behest of a third party, particularly where that third
party is a governinent agency required hy statute to in-
sure that the transaction is profitless, and where the Sec-
tion 16(b, defendants have no eontrol over the timing
and circumstances of the transaction. Petitioners urge
this Court to define “unorthodox” or “borderline” trans-
actions broadly enough to allow consideration of whether
the transaction was truly voluntarily initiated.
2The opinion of the court of appeals (App. 10a) sug-
gested that the Estate had “some control” over the price
because it could have paid more for the stock than the
IRS required. But, in fact, the executors could not have
paid more than the IRS required to undo the transaction
without violating their fiduciary obligations to the bene-
ficiaries of the Estate. Both the district court and the
court of appeals found significant the fact that the “cor-
rection” price of $10.49 per share was the same as the
original sale price and that within a few weeks subse-
quent to the “correction,” offers at $14.00 per share were
received by the Estate. 499 F.Supp. at 1295; App. 10a.
The IRS made an implicit finding that the stock had not
appreviated in value at the time of the correction, how-
ever, and the higher offers submitted thereafter are easily
understood in terms of the “eontrol premium” concept.
The “purchase” from the Sax Foundation involved only
14.318 shares; the later “sale” by the probate court in-
volved 190727 shares. The latter represents a substantial
percent of the outstanding stock of the corporation.
_ os
B. Rescission
A number of Section 16(b) eases have involved rescis-
sions and yet the subject has not been addressed by this
Court. In four rescission cases the courts have concluded
that no Section 16(b) liability existed." In the instant
case, as in the other rescission cases where no liability
was found, the rescinding transaction itself constituted
one of the two transactions necessary to create Section
16(b) liability. Factors which the courts considering re-
scission found significant inelude (1) that the defendants
had been “restored to the position they oceupied prior to
[the purchases], with neither profit nor gain aceruing
to them out of the transactions.” Hennesey vy. Fein, 184
F.Supp. 86, 89 (S.D.N.Y. 1958); (2) that the rescission
“was reached at arm’s length and represented a bona fide
compromise of two irreconcilable positions which were
about to be litigated... .” Kahansky v. Emerson Radio
and Phonograph Corp., 184 F.Supp. 90, 94 (S.D.N-Y.
1960); (3) that the rescission produced a “return to the
status quo” S€S Realty v. Kleer Vu Industries, Inc.,
Fed. See. L. Rep. 96,056 (S.D.N.Y. 1977), aff'd, 575 F.2d
1040 (2d Cir 1978); and (4) hecause “[b]oth buyers and
sellers . . . were placed, with respect to each other, in
*Hennesey v. Fein, 184 F.Supp. 86 (S.D.N.Y. 1958);
Kahansky v. Emerson Radio & Phonograph Corp., 184
F.Supp. 90 (S.D.N.Y. 1960): Morales v. Great American
Corp., 445 F.Supp. 869 (M.D. La. 1978); S&S Realty
Corp. v. Kleer Vu Industries, Inc., Fed. See. L. Rep. 96,056
(S.D.N.Y. 1970), aff’d, 575 F.2d 1040 (2d Cir. 1978). In
only one case has a court found Section 16(b) liability
despite a rescission. Volk vy. Zlotoff, 285 F.Supp. 650
(S.D.N.Y. 1968). Volk is clearly distinguishable from the
other four rescission eases because in Volk the Section
16(b) liability already existed when the rescission was
effectuated.
|
exactly the same position that they were immediately
before the sale... .” Morales y. Great American Corp.,
445 F.Supp. 869, 871 (M.D. La. 1978).
Petitioners argued below that the rescission in this
case compels a conclusion of no Section 16(b) liability.
The effect of the rescinding transaction was to return the
petitioners to the status quo. This conclusion eannot be
disputed by virtue of the Internal Revenue Code lan-
guage concerning corrections. The statute requires that
the private foundation be placed “in a financial position
not worse than that in which it would be if the disquali-
fied person were dealing under the highest fiduciary
standards.” 26 U.S.C. §4941(e)(3). In other words, the
Foundation’s financial position must not be adversely af-
fected by the rescission. By approving a rescinding price
of $10.49 per share, the same price as was paid by the
Sax Foundation for the stock, the IRS made an implicit
finding that the stock had not appreciated in value during
the intervening time period. Thus, it must be concluded
that the Estate was returned to the status quo and that
the rescission was profitless. The facts here are even more
compelling than in the eases cited above because this
rescission was required by the IRS; in the other cases
the rescissions were voluntary.
Despite these considerations, the court of appeals re-
jected the argument that the rescission did not constitute
a “purchase”
appeals distinguished the rescission cases, in a footnote,
on the basis that in those cases no profits were retained
following the rescission, App. 9a-n.3. As the petitioners
explained above, the language of the Internal Revenue
Code, which prompted the rescission, compels the con-
clusion that the rescission here was also profitless,
for Section 16(b) purposes. The court of
This Court’s opinion concerning the effect of a rescis-
sion on Section 16(b) liability is needed. Is the reason
for the rescission relevant? Must it be a profitless rescis-
sion which returns the parties to the status quo if See-
tion 16(b) liability is to be avoided? Did the other courts
considering rescission cases err by examining the realities
of the transactions there presented and the potential for
speculative abuse where the rescission generally involved
eash for stock transactions and thus called for an ob-
jective approach?
C. Economic Compulsion
Petitioners submit that where a Section 16(b) transac.
tion is prompted by economic compulsion, this is another
factor relevant to a determination of whether the poten-
tial for speculative abuse exists. This factor has been
found important in other Section 16(b) cases and has not
been addressed by this Court.
In both I’erraiolo v. Newman, 259 F.2d 342 (6th Cir
1958), cert. denied, 359 U.S. 927 (1959), and Lyman v.
Livingston, 276 F.Supp. 104 (D. Del. 1967), the issue
presented was whether the conversion of one class of
stock for another constituted a Section 16(b) ‘*purchase.’’
Both courts found no Section 16(b) liability due to the
economic compulsion involved. The ‘‘choice’’ presented
in Ferraiolo was whether to permit preferred stock to be
redeemed at $27/share or to convert it into common stock
selling at $36/share.*
‘The issue in Ferraiolo and Lyman is now moot. Secu-
rities and Exchange Commission Rule 16(b)-9 now pro-
vides a clear exemption from the application of Section
16(b) for transactions involving conversion of equity secu-
rities.
—
This case presents the Court with an opportunity to
examine the effect of economic compulsion on an alleged
Section 16(b) violation. The economic compulsion here
was presented in the form of defendants’ ‘‘choice’’ be-
tween rescinding the IRS-challenged sale of stock to the
Foundation or, alternatively, paying a tax amounting to
205% of the money involved or $307,905. The court of ap-
peals recognized that ‘‘the proposed assessment by IRS
was economic compulsion to repurchase the shares from
the Foundation.’’ App. 9a; emphasis supplied. It never-
theless concluded that the repurchase came within the
scope of Section 16(b),
The narrow definition of unorthodox or borderline trans-
actions applied by the courts below does not permit courts
to consider the realities of transactions prompted by eco-
nomic compulsion, Petitioners submt that where corporate
insiders are compelled by economie circumstances to carry
out a purchase or sale of stock, the potential for specula-
tive abuse will generally be non-existent, This case
presents the Court with the opportunity to address this
important issue and thereby provide some necessary guid-
ance on the question of insider liability for short swing
profits.
ITI,
THE PROBATE COURT “SALE” PRESENTED NO
POTENTIAL FOR SPECULATIVE ABUSE AND, AP.
PLYING THE PRAGMATIC APPROACH, WAS NOT
A SALE WITHIN THE MEANING OF SECTION 16(b)
The lower courts also rejected the argument that the
sale by the probate court was involuntary and thus out-
side the scope of Section 16(b) liability. As the district
court correctly noted, ‘‘[t]he test for the possibility of
speculative abuse is whether the executors had both access
to inside information and some measure of influence over
_—
the timing and circumstances of the transaction sufficient
to give the possibility of profits based on inside informa-
tion.’’? 449 F.Supp. at 1296; App. 40a. Petitioners submit
the following factors negated the possibility of any ‘‘con-
trol over the timing and circumstances’’ of the sale by
them: (1) leave of court was a condition precedent to the
sale (Ill. Rev. Stat. 1979, ch. 8, § 209; (2) the probate
court’s decision to utilize a sealed bid method of sale
foreclosed any opportunity to control the terms of the
sale or the identity of the buyer; and (3) disputes among
the petitioners negated the ability to exercise any control
over the timing of the sale. The court of appeals concluded
the probate court ‘‘merely prescribed an orderly method
of obtaining the highest price and incidentally determining
the purchaser.’’ App. 89. Petitioners believe the facts
demonstrate that the probate court’s involvement in the
sale far exceeded this description by the court of appeals
and that the sale lacked the potential for speculative
abuse of inside information.
As the district court acknowledged, [linois law requires
court approval as a condition precedent for the sale of
personal property by an estate, 499 F.Supp. at 1299; App.
46a; see Ill, Rev. Stat. 1979 ch. 3, § 209. It therefore fol-
lows that but for the approval of the probate court, the
sale would not have taken place. While this factor alone
may not be sufficient to insulate the sale from Section
16(b) liability, petitioners nevertheless submit that when
the ‘‘but for’? relationship is considered in conjunction
with the other factors which demonstrate petitioners’ lack
of control over the sale, it is clear that no statutory
‘*sale’’ of shares occurred here,
—
Once the executors of the Estate filed their initial peti-
tion with the probate court, control over the subsequent
proceedings and control over all terms of the resulting
sale was exercised exclusively by the probate court and
the other judicial forums which beeame involved in the
dispute, The executors engaged in numerous and lengthy
disputes among themselves concerning the terms of the
sale, to whom the sale should be made, and even whether
the probate court had jurisdiction to order the sale.
The chronology of events relevant to the sale of stock
demonstrates how little potential for speculative abuse
was present: On January 21, 1976, the executors filed
their petition with the probate court; on February 9,
1976, the probate court judge announced he would order
the sale of the stock to the highest bidder, pursuant to
sealed bids; the majority co-executors then filed a notice
of appeal alleging that the probate court lacked juris-
diction; on February 18, 1976, the Illinois Appellate Court
denied the motion of the majority executors to stay the
court’s order; on March 3, 1976, the majority co-exeeutors
petitioned the Illinois Supreme Court in an attempt to
stop the bidding; the Illinois Supreme Court stayed the
sale on March 4, 1976; on Mareh 17, 1976, the Illinois
Supreme Court denied the petition. A suit was also filed
in the United States District Court for the Northern
District of Illinois alleging violations of various federal
securities laws. On March 29, 1976, submission of sealed
bids finally occurred, more than two months after the
initial petitions were filed. On May 7, 1976, more than
three months subsequent to the filing of the petitions, the
sale of the IC shares owned by the Estate was actually
consummated,
The numerous disputes and proceedings detailed above
resulted in a transaction wherein the defendants exercised
no control as to when the sale would actually occur, who
=<
the eventual buyer would be, or how the sale would be
earried out. There was simply no opportunity for the de-
fendants to engage in speculative abuse of inside informa-
tion and the lower courts erred in reaching a contrary
conclusion.
CONCLUSION
This case presents the Court with an excellent oppor-
tunity to address a number of the unanswered questions
involving Section 16(b) liability, The difficulty the courts
are experiencing in identifying ‘‘unorthodox”’ or ‘‘border-
line’’ transactions and in determining when the pragmatie
approach is required is well illustrated by the lower
courts’ opinions in this case. Factors which bear on the
potential for speculative abuse such as involuntariness,
rescission and economic compulsion are also present here
and have not previously been addressed by this Court.
Petitioners believe the district court and the court of ap-
peals ignored the realities of petitioners’ role in the IRS.
mandated rescission of the sale of stock to the Foundation
and the probate court ordered sale of stock at a later
date. We urge this Court to take this opportunity to
clarify these important issues and to find that the defen-
dants incurred no Section 16(b) liability,
Respectfully submitted,
Kevin M. Forpe
Counsel of Record
Ricwarp J. Prenprercasr
111 W. Washington Street
Chicago, Illinois 60602
(812) 726-5015
Attorneys for Petitioners,
Of Counsel
Katrina VEERHUSEN
a= 14 —
APPENDIX
No. 78-1830
Seymour A. Ourrr,
Plaintiff-A ppellee,
Us,
ExcHanace INTERNATIONAL Corporation, the Issuer, a
Delaware corporation,
Defendant,
and
Epwarp L. Sax, SAMuEL WILLIAM Sax and THe CoNnTINEN-
TaL IntiInois Nationa, Bank ANvp Trust Company Ov
Curcaco, as Co-Trustee of George D. Sax,
De ‘endants-Appellants.
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 76-C-4712—Epwin A. Ronson, Judge.
Arcvep Janvary 23, 1979—Dercipep SepremBer 18, 1980
Before Farrcuiup, Chief Judge, Markey, Chief Judge,®
and Baver, Circuit Judge.
Farrcuitp, Chief Judge, This is an appeal from a
judgment that defendants-appellants are liable for short-
swing profits under Section 16(b) of the Securities Ex-
change Act of 1934.1 15 U.S.C. § 78(p)(b). Three issues
"Chief Judge Howard T. Markey of the United States
Court of Customs and Patent Appeals is sitting by desig-
nation.
‘(b) For the purpose of preventing the unfair use of
information which may have been obtained by such benefi-
cial owner, director, or officer by reason of his relation-
ship to the issuer, any profit realized by him from any
oe
are raised on appeal: (1) whether a corrective transaction
undertaken to avoid a penalty for “self-dealing” under
Internal Revenue Code section 4941(b)(e)(3) constituted
a “purchase” within the meaning of section 16(b) of the
Act; (2) whether a sale of shares of stock approved
and supervised by the probate court was a “sale” within
section 16(b); and (3), whether the district court erred
in refusing to reduce the amount of profits awarded on
account of expense incurred in connection with the “pur-
chase” and “sale.” We affirm.
Plaintiff-appellee Oliff brought this shareholder’s de-
rivative suit on behalf of defendant Exchange Interna-
tional Corporation (EIC) against the executors of the
estate of George D. Sax and co-trustees of various trusts
set up by decedent to recover profits resulting from a
‘“‘purchase’’ and ‘‘sale’’ of EIC common stock to which
section 16(b) of the Securities xchange Act of 1934
allegedly applied.
The facts relevant to the “purchase” are as follows:
On December 28, 1972, George Sax donated $75,000 in
cash to the Sax Foundation. On January 4, 1973, Sax
sold 6,818 shares of his much larger holdings of EIC
stock for $74,998 to a registered broker who, that same
day, resold the 6,818 shares to the Sax Foundation for
$75,098,
On November 28, 1973, a similar transaction took place.
Sax sold 7,500 shares of FIC to the same registered
broker for $75,000 which were resold that day to the Sax
* (Continued)
purchase and sale, or any sale and purchase, of any
equity security of such issuer... within any period of
less than six months, .. . 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 security purchased or of
not repurchasing the security sold for a period exceeding
six months,
onlias
Foundation for $75,000. On December 3, 1973, Sax donated
$75,000 in cash to the Foundation, which the Foundation
used to pay for the last stock purchase.
On July 28, 1975, the Internal Revenue Service notified
the estate of George Sax and the trustees of the Sax
Foundation that the two stock transfers by Sax to the
Sax Foundation constituted taxable acts of “self-dealing”
by a disqualified person within the meaning of section
4941 of the Internal Revenue Code. Consequently, tax
assessments of $307,905 (205% of the amount involved)
would be due if the acts of self-dealing were not “undone”
within the ninety-day correction period specified in see-
tions 4941(e)(3) and (e)(4) of Internal Revenue Code.
On advice of accountants and attorneys, the co-executors
of the estate concluded that the IRS position could not
be challenged successfully and as a result on December
22, 1975 the estate repurchased from the Sax Foundation
the 14,318 shares of KIC stock at $10.49 per share (1972-
73 average purchase price). The IRS treated the re-
purchase of the shares as a “correction” of the acts of
self-dealing under section 4941 of the Internal Revenue
Code, and abated the proposed tax assessments. The
estate had owned more than ten percent of the EIC
common before the re-purchase.
In January, 1976 there were offers made for the
190,727 shares held by the estate at $14.00 and $14.25
per share. The executors all favored sale, but seem not
to have agreed on the sale to be made. Rhoda Sax. one of
the executors, petitioned the Probate Division of the
Circuit Court of Cook County for an order directing sale,
and the other two executors petitioned for approval of a
different sale. The court ordered a sale to the highest
bidder on sealed bids. The shares were ultimately sold at
$18.59 per share on May 7, 1976.
The parties agree that the transactions at issue involve
an equity security, occurred within the six-month period
required by statute, and were undertaken by a beneficial
owner of over ten percent of the common stock of EIC
(the estate of George Sax). The dispute centers over the
a eo
legal effect of the stock transactions: whether the “pur-
chase” and “sale” are within the scope ec: section 16(b).
Section 16(b) was designed to prevent speculation in
corporate securities by “insiders” such as directors,
officers, and holders of more than ten percent of the
stock. Congress intended the statute to curb manipulative
and unethical practices resulting from misuse of cor-
porate information for personal enrichment or unfair
profit of the insider, thereby assuring the strict ob-
servance of the insider’s fiduciary duties to outside
shareholders and the corporation by removing the profit
from short-swing dealing in corporate securities. Con-
versely, Congress sought to avoid unduly discouraging
legitimate long-term investments in corporate capital by
confining coverage to a six-month period. See Kern
County Land Co. v, Occidental Corp., 411 U.S. 582, 591-
595 n. 23 (1972); Reliance Electric Co. v. Emerson Electric
Co., 404 U.S. 418, 422 (1972); Bershad v. McDonough, 428
I’.2d 693, 696 (7th Cir. 1970); Blau v. Lamb, 363 F.2d 507,
514-516 (2nd Cir. 1966), cert. denied, 385 U.S. 1002. See
generally, Wentz, Rerintnc A Crupe Rute: THe Prac-
MATIC APPROACE TO SEcTION 16(b) or THE Securities Ex-
CHANGE Act oF 1934, 70 Northwestern University L. Rev.
221 (1975).
To accomplish these goals, a relatively arbitrary rule
eapable of easy administration was enacted. Under its
provisions any insider who purchases and sells, or sells
and purchases the issuer’s equity securities within a six-
month period or less is automatically required to pay
back to the issuing corporation all profits which have
been realized from the transaction. By its terms section
16(b) imposes strict liability upon substantially all pairs
of transactions occurring within the statutory time period,
regardless of the intent of the insider or the use in fact
of inside information. Such broad coverage was considered
necessary to maximize the usefulness of the rule in eradi-
eating abuses of inside information.
oo
Two identiflable analytical frameworks for dealing
with 16(b) issues have been developed by courts. Under
the objective approach, the court, taking into account the
broadly remedial purpose of the provision, will determine
whether the pair of transactions and the individual come
within the literal statutory requirements of 16(b). If so,
the inquiry ends and liability attaches. No actual misuse
of inside information is needed to create liability; fair-
ness of a short-swing transaction or the insider’s good
faith is irrelevant. Smolowe v. Delendo Corp., 136 F.2d
231 (2d Cir.), cert. denied, 320 U.S. 751 (1943); Park €
Tilford, Inc. v. Schulte, 160 F.2d 984 (2d Cir.), cert.
denied, 332 U.S. 761 (1947); Gratz v. Claughton, 187 F.2d
46, 50 (2d Cir. 1951). Beneficial owners of more than
ten percent of the stock of a corporation are presumed
to have access to inside information and to have acted
on the basis of this information by engaging in a short-
swing transaction. Allis-Chalmers Mfg. Co. v. Gulf & W.
Indus, Inc., 527 F.2d 335, 347 (7th Cir. 1975), cert. dented,
423 U.S. 1078 (1976).
The pragmatic, or subjective approach was developed
in reaction to the severity of the objective approach. In
this approach the words “purchase” and “sale” will not
be given their broadest possible meaning. So-called
“unorthodox,” or perhaps a broader class of “borderline”
transactions, will not be deemed a purchase or sale if the
particular situation could not have given rise to an abuse
of insider information. Where any possibility for specu-
lative abuse of inside information exists, liability will
ensue. Kern County Land Co. v. Occidental Corp., 411
U.S. 582 (1973).
In Kern County, purchases within the scope of section
16(b) occurred when defendant acquired more than ten
percent of the stock of a target company as result of a
tender offer. The question before the Court was whether
a statutory “sale” occurred either when the target of the
tender offer defended itself by merging into a third com-
pany and the offeror, as an incident of the merger,
exchanged its stock for that of the survivor, or when the
—
offeror granted an option to the third company to pur-
chase its shares, to be exercised outside of the six-month
period. Kern County at 584. The Court determined that
neither the exchange nor the option agreement constituted
a sale within the meaning of section 16(b). Jd. at 590-91.
The Court stated that the congressional objective under-
lying section 16(b) liability must be considered in ex-
amining unorthodox transactions, such as exchanges re-
sulting from mergers.* The Court concluded that the in-
voluntary nature of the exchange of stock pursuant to a
merger, coupled with the absence of the possibility of
speculative abuse of inside information, excluded this
exchange from a “sale” for the purpose of section 16(b).
Id. at 600. The Court gave weight to the fact that defen-
dant was not an insider under section 16(b) before it
made its purchases, and therefore could not have under-
taken those purchases on the basis of insider status.
With respect to the option agreement, the Court de-
cided that as drafted and executed by the parties it did
not offer measurable possibilities for speculative abuse.
In Allis-Chalmers Mfg. Co. v. Gulf & W. Indus., Ine.,
027 F.2d 335 (7th Cir. 1975), a ease involving the ques-
tion whether section 16(b) applies to an initial purchase
of more than ten percent of the shares by one who was
an outsider until the purchase was completed and to sub-
sequent additional purchases by the same party, this
court had reason to explore the parameters of section
16(b) lability. The court concluded that the pragmatic
approach articulated in the Kern County decision did not
eliminate the objective rule. In fact, the objective rule
of section 16(b) liability would still be applied unless
the Kern County test was met: (1) the purchase or sale
was an unorthodox transaction and (2) an analysis of the
*>Kern County Land Co. vy. Occidental Corp., 411 U.S.
582, 593 n. 24. The Court stated that the term “unortho-
dox” has been applied to “stock conversions, exchanges
pursuant to mergers and other corporate reorganizations,
stock reclassication, and dealings in options, rights, and
warrants.”’
a 7a —
transaction disclosed no possibility of short-term specula-
tive abuse, 7d. at 351. Ordinary and voluntary purchases
and sales would continue to trigger section 16(b) liability.
Relying on this court’s interpretation of Kern County
in Allis-Chalmers, the district court determined that
neither the purchase nor the sale was an unorthodox
transaction and that possibility for speculative abuse of
inside information existed with regard to each,
Defendants argue that the Supreme Court’s rationale
for a finding of no sale in Kern County, the unique or
involuntary nature of the exchange of stock together
with no chance for speculative abuse, is applicable to the
purchase and sale here. Appellants claim that the district
court’s reading of this court’s opinion in Allis-Chalmers
as limiting the teachings of Kern County to certain un-
orthodox transactions was entirely too narrow and sug-
gest that the appropriate application of the pragmatic
approach would be to all “borderline” transactions, (Kern
County at 593-4), in which “the statutory concept of
‘purchase’ and ‘sale’ is blurred... .’’ Gold v. Sloan, 486
F.2d 340, 348 (4th Cir. 1973).
Assuming that Kern County’s test is to be applied to a
broader category of “borderline transactions” than those
listed in Kern County as “unorthodox,” we examine each
of defendants’ transactions for elements which could be
deemed an aberration from purely ordinary purchase and
sale transactions. In either instance are the aberrations
sufficient to trigger the Kern County further test—the
absence of the possibility of speculative abuse of insider
information?
We consider, first, the sale. We have no difficulty in
concluding that the peculiarities of this transaction are
insufficient to take it out of a section 16(b) sale. All
three executors favored a sale. There appeared to be a
disagreement as to the preferred purchaser, a matter
important to the individual executors hecause each had
substantial holdings in EIC. Although the court ulti-
mately directed the procedure to be followed, and the
= 8a —=
date, the terms of the sale, and the identity of the pur-
chaser may have been affected as a result of the judicial
procedure, the court in no sense compelled the sale and
merely prescribed an orderly mwethod of obtaining the
highest price and incidentally determining the purchaser.
Probably it is unnecessary to reach the second Kern
County inquiry. In any event, it is apparent that one in
the position of these executors could well have relied on
inside information in deciding to sell as soon as possible
rather than waiting to a later date.
Kern County involved a voluntary purchase followed
by an involuntary sale. An argument can be made that
the Kern County test is not appropriate in the opposite
situation—an involuntary purchase paired with a subse-
quent voluntary sale—since the dangers of insider abuse
of information are much more evident when the insider
sells voluntarily, regardless of whether or not his earlier
purchase was compelled, than when the purchase is vol-
untary but the sale is compelled. See Mau, INvoLuNTARINESS
AND OTHER ConTeMPoRARY Prosptems Unprer Section 16(b)
OF THE Securities AND Excuance Act or 1934, 27 Hastings
L.J. 679 (1976). But see Ferraiolo vy. Newman, 259 F.2d
342 (6th Cir. 1958), Under this analysis, having concluded
that there was a voluntary sale within six months of
the defendants’ purchase of the shares from the Founda-
tion, we would inquire no further and affirm the judgment
based on a straight-forward application of the Act.
Assuming, however, that both transactions must fulfill
the test of Kern County, we examine the aberrations of
the acquisition from an ordinary purchase. The acquisi-
tion effected a rescission of prior sales. In order to escape
a 205% tax assessment, the estate was required to undo
the decedent’s sale to the extent possible.
“Correction” is defined in section 4941(e)(3) of the
Internal Revenue Code as “undoing the transaction to
the extent possible, but in any case placing the private
foundation in a financial position not worse than that in
which it would be if the disqualified person were dealing
under the highest fiduciary standards,”
ee
If the rescission were viewed as a full undoing or
avoiding of the prior sales, so that it was as if they never
happened, there would be no 16(b) problem, because the
stock would have been held for years before the sale. We
do not subscribe to this theory. One and one-half (14%) to
21% years had elapsed between the original sales and the
rescission, and the reason rescission was compelled by
IRS was impropriety en the part of decedent Sax. The
estate of the wrongdoer should not be allowed to claim,
for its own benefit, that the offending sales should be
treated as if they had never been made. The fact that
the IRS accepted the transaction as an adequate undoing
of the acts of self-dealing for the purpose of the tax
law does not compel the unrealistic conclusion that the
decedent and his estate had continuously owned the shares.
Defendants have cited a number of cases dealing with
rescission in a section 16(b) context. All, however, either
support the position we take here or are clearly distin-
ruishable.’
The most difficult question in the case involves the
acquisition transaction itself. We do reeognize that the
proposed assessment by IRS was economic compulsion to
repurchase the shares from the Foundation, Payment of
a tax of 205% of the sale price was searcely a reasonable
alternative to repurchase of the shares at that price.
°Volk vy. Zlotoff, 285 F.Supp. 650 (S.D. N.Y. 1968)
(liability found even though officers and corporation
wholly rescinded exercise of stock options); Hennessy
v. Fein, 184 F.Supp. 86 (S.D. N.Y. 1958) (judicially ap-
proved rescission given res judicata effect) ; Kahansky
v. Emerson Radio and Phonograph Corp., 184 F.Supp.
96 (S.D. N.Y. 1960) (amount paid for damages incurred
when sale rescinded net profits for § 16(b) purposes) ;
Morales v. Great American Corp., 445 F.Supp. 869 (M.D.
La. 1978) (rescission subsequent to complete accounting
by officers to corporation; officers retained no profits) ;
S & S Realty Corp. v. Klear-Vu Industries, Inc., CCH
Fed. See. L. Rep. 9 96,056 (S.D. N.Y. 1977) (insider
retained no profits after rescission).
=
Nonetheless, we cannot say that the acquisition of the
stock was so involuntary as to take it out of the definition
of “purchase” for 16(b) purposes. Although the estate
was compelled to “undo” the sales, the estate was given
by statute a period of 90 days within which to do so, and
in fact did not repurchase the shares until over two
years after the first questioned transaction and almost
six months after it had received the statutory notice of
deficiency. Thus it appears that the timing of the pur-
chase was not totally beyond the estate’s control. The
estate also apparently had some control over the price it
paid for the stock. Although the estate was compelled
to pay a price deemed an adequate correction, and sat-
isfied the IRS that the original price of $10.49 was ade-
quate under the statutory standard, the facts at least
suggest that the IRS settled too cheap. Offers at $14.00
per share (albeit for a larger block) were received within
a few weeks. The estate may well have had an obligation,
particularly with inside information, to pay more in order
to fulfill the standard of correction imposed by the In-
ternal Revenue Code.
Even assuming that Kern County requires that the
purchase as well as the sale must present the possibility
of abuse of inside information, we are not persuaded
that the acquisition in this case is not a purchase for
section 16(b) purposes.
DEDUCTION OF EXPENSES OF THE PURCHASE
AND SALE COSTS FROM PROFITS AWARDED
CORPORATION
The district court refused to hold a hearing after its
original decision to determine the amount of expenses
incurred in the “purchase” and “sale.” Direct transaction
expenses such as brokerage commissions and transfer
taxes are deductible in computation of short-swing profits.
Blau v. Missions Corp., 212 F.2d 77 (2d Cir. 1954).
Allis-Chalmers Mfg. Co. v. Gulf & W. Indus. Inc., 527
F.2d 335 (7th Cir. 1978).
—lla —
Defendants had presented no evidence of deductible
expenses in response to plaintiff's motion for summary
judgment. There was no direct, properly deductible ex-
pense with regard to the purchase of stock from the
Foundation. The Estate paid precisely $150,198.00 to the
Sax Foundation (the exact amount the Foundation paid
the broker for the EIC stock in 1972-1973) for the 14,318
shares. With regard to the sale, defendants seek “consider-
able attorneys fees incurred in the Probate Court proceed-
ings and directly attributable to the... ‘sale.’” No figures
were presented to the district court, but defendants sug-
gested an evidentiary hearing if the court agreed to make
an allowance. The district court declined.
Under the circumstances, we think there was no error
or abuse of discretion. Apparently a substantial part of
the services rendered in probate court arose from a
dispute over the choice of purchaser, Even if it should
be ascertained what amount was reasonably necessary
as expenses of sale, the sale involved 190,727 shares. It
would be speculative to determine that any particular
amount of fees was generated by the 14,318 shares with
which we are concerned, only 7.5% of the total.
The judgment appealed from is Arrirnmep.
A true Copy:
Teste:
DEPP PPPOE ETO e eee ECO eTeeeeeeerleegy
Clerk of the United States Court of
Appeals for the Seventh Circuit
— 12a —
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
KASTERN DIVISION
SEYMOUR A. OLIFF,
Plaintiff,
v.
EXCHANGE INTERNATIONAL CORPORATION, the
ISSUER, a Delaware corporation, and EDWARD L, SAX,
SAMUEL WM. SAX and THE CONTINENTAL ILLI-
NOIS NATIONAL BANK AND TRUST COMPANY OF
CHICAGO, AS CO-TRUSTEES OF THE MARITAL
AND RESIDUARY TRUSTS UNDER THE LAST
WILL OF GEORGE D, SAX,
Defendants.
No. 76 © 4712
MEMORANDUM AND ORDER
This cause is before the court on the crossmotions of
plaintiff Seymour A. Oliff; defendant Exchange Inter-
national Corporation [hereinafter EIC]; and defendants
Edward L. Sax,’ Samuel Wm. Sax, and the Continental
[Illinois National Bank and Trust Company of Chicago,’
‘On January 30, 1978, the court, pursuant to a motion
by the parties, substituted Edward L. Sax, as successor
co-trustee of the trusts of George D. Sax, as party de-
fendant for Rhoda B. Sax, deceased, co-trustee of the
trusts of George Sax. The suggestion of the death of
Rhoda Sax was filed on January 4, 1978, pursuant to
Fed, R. Civ. P. 25(a)(1). The parties advised the court
that the complaint in this cause was not extinguished by
the death of Rhoda Sax. They further advised the court
that Mdward L. Sax was named as successor co-trustee
under A7.01 and A7.02 of the Last Will of George Sax
and that he had accepted his appointment upon the death
of Rhoda Sax.
?On January 30, 1978, the court substituted the Conti-
nental Illinois National Bank and Trust Company of Chi-
cago, as successor ¢co-trustee of the trusts of George D,
— 13a —
as co-trustees of the trusts of George D. Sax, for sum-
mary judgment.’ For the reasons hereinafter stated, the
motion of the plaintiff is granted, and the motions of the
defendants are denied.
Plaintiff has brought this action against EIC and the
co-trustees of the trusts of George D. Sax — Edward L.
Sax, Samuel Wm. Sax, and the Continental Illinois Na-
tional Bank and Trust Company of Chicago, The juris-
* (Continued)
Sax, as party defendant for the Exchange National Bank
of Chicago, co-trustee of the trusts of George D, Sax. The
court ordered substitution after the parties advised the
court that the Exchange National Bank of Chicago had
resigned as co-trustee of the trusts of George D. Sax and
that the Continental Illinois National Bank and Trust
Company of Chicago had accepted appointment as suc-
cessor co-trustee of the trusts.
*This court entered an order on February 11, 1977, pur-
suant to a motion by the originally named defendants, to
substitute as parties defendant, Samuel Wm. Sax, Rhoda
Sax, and the Exchange National Bank of Chicago, as co-
trustees of the Marital and Residuary Trusts under the
Last Will of George D. Sax for Samuel Wm. Sax, Rhoda
Sax, and the Exchange National Bank of Chicago, as co-
executors of the estate of George Sax. Subsequently, Hd-
ward L. Sax and the Continental Dlinois National Bank
and T'rust Company of Chicago were substituted as sue-
cessor co-trustees of the trusts of George D. Sax for
Rhoda B. Sax and the Exchange National Bank of Chi-
cago. See notes 1 & 2 supra. The attorney for the succes-
sor co-trustees represented to the court on February 13,
1978, that these co-trustees formally adopted the briefs
submitted by their predecessor vo-trustees. Because Rhoda
B, Sax and the Exchange National Bank were co-trustees
at the time of the alleged purchase and sale and were the
co-trustees that answered the complaint and submitted
their motions for summary judgment with accompanying
memoranda, the court will refer to Rhoda B. Sax and
the Exchange National Bank rather than Edward L. Sax
and the Continental Tllinois National Bank and Trust Com-
pany as two of the co-trustees of the trusts of George
D. Sax.
— l4a —
diction of this court is invoked pursuant to section 27 of
the Securities Exchange Act of 1934 (15 U.S.C. § 78aa)
and is not disputed.
Plaintiff’s action is a stockholder derivative suit in the
name of and on behalf of the defendant EIC. Pursuant to
section 16(b) of the Securities Exchange Act of 1934 (15
U.S.C. § 78p(b)) [hereinafter section 16(b)],* he seeks
‘Section 16(b) of the Securities Exchange Act of 1934,
15 U.S.C. § 78p(b), provides:
For the purpose of preventing the unfair use of in-
formation 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 purchuse,
of 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, ir-
respective 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
not repurchasing the security sold for a period ex-
ceeding six months. Suit to recover 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 prosecute the same thereafter; but
no such suit shall be brought more than two years
after the date such profit was realized. This subsec-
tion 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 pur-
chase, of the security involved, or any transaction or
transactions which the Commission by rules and regu-
lations may exempt as not comprehended within the
purpose of this subsection.
— 15a —
to recover profits and interest from an alleged purchase
and sale within six months by the co-executors of the
estate of George D. Sax as 10 percent beneficial owners of
EIC stock. Plaintiff states that he requested defendant
EIC to compel an accounting by the co-executors of the
estate of George D. Sax for the profits. Defendant EIC
responded to plaintiff in a letter of November 23, 1976,
that it would take no action with respect to the estate’s
transactions involving EIC stock. After EIC’s letter,
plaintiff brought his suit. Plaintiff seeks judgment in the
amount of $115,976, the profit from the alleged purchase
and sale, as well as interest and fees.
Plaintiff and defendants have filed crossmotions for
summary judgment with briefs supporting, answering, and
replying. Edward L. Sax and the Continental Illinois Na-
tional Bank and Trust Company of Chicago, having been
substituted as trustees of the trusts of George Sax for
Rhoda Sax and Exchange National Bank of Chicago [here-
ina‘ter ENB], respectively, have formally adopted the
motions and briefs of their predecessor trustees (see notes
1-3 supra).
All parties agree that the transactions alleged to be a
purchase and sale did occur within a six-month period.
The parties further agree that the estate of George Sax
was a beneficial owner of over 10 pereent of the common
stock of EIC. This percentage of stock ownership sub-
jects the estate to the potential for section 16(b) liability.
The only dispute is over whether the legal effect of the
stock transactions, in which the estate of George Sax was
involved, constituted a purehase and sale within the am-
bit of section 16(b). Neither party raises a material is-
sue of fact; their disagreement is over the legal signifi-
cance of the facts. Thus, with a!l parties moving for
summary judgment and conceding no genuine issue of
material fact and the court agreeing, this ease will be de-
cided as a matter of law. [Illinois Migrant Council v.
Campbell Soup Co., 438 F.Supp. 222, 225 (N.D. Il. 1977).
BACKGROUND
Alleged Purchase
George Sax, deceased, made two transfers of shares of
EIC stock to the Sax Foundation in 1972 and 1973, re-
spectively. These transfers were found to be acts of ‘‘self-
dealing” by the Internal Revenue Service. After the Tn-
ternal Revenue Service’s determination, the estate of
George Sax rescinded the acts of self-dealing and obtained
the EIC shares previously transferred from the Sax
Foundation. This transaction is alleged by the plaintiff
to be a purchase within the meaning of section 16(b).
George Sax established the Sax Foundation and prior
to his death on March 12, 1974, was one of the trustees
of the Sax Foundation.’ At all times relevant to this liti-
gation, the trustees, in addition to the estate of George
Sax, were Dr. Harry Benaron, Barnet Hodes, Rhoda B.
Sax, and Samuel Wm. Sax.
On December 28, 1972, George Sax donated $75,000 in
cash to the Sax Foundation. On January 4 1973, he sold
6,818 shares of EIC stock for $74,998 to Langill & Co., a
registered broker-dealer, On the same day, the Founda-
tion bought the 6,818 shares of BIC stock from Langill
& Co. for $75,098,
A similar transaction took place on Nevember 28, 1973,
when George Sax sold 7,500 shares of EIC stock to Lan-
gill & Co. for $75,000. On the same day, the Foundation
purchased 7,500 shares of EIC stock from Langill & Co.
for $75,100, with payment being made on December 4,
1973. On December 8, 1973, George Sax gave $75 000 in
cash to the Foundation.
The Internal Revenue Service determined that the stock
transfers by George Sax to the Sax Foundation consti-
tuted taxable acts of “self-dealing” by a disqualified per-
son with a private foundation, within the meaning of
*The estate of George Sax was substituted as a trust-
ee of the Sax Foundation upon George Sax’s death in
1974.
— 17a —
section 4941 of the Internal Revenue Code. By letter of
July 28, 1975, from the Internal Revenue Service to the
estate of George Sax and the trustees of the Sax Foun-
dation, tax assessments on the estate and the trustees of
the Sax Foundation were proposed. The proposed tax
assessments were due only if the acts of self-dealing
were not “undone” within the correction period specified
in section 4941 (e)(3) and (e)(4) of the Internal Reve-
nue Code (a ninety-day correction period after notice).
An initial protest was filed to the assessment. None-
theless, after an IRS District Conference, Joseph Gol-
man, the certified public accountant for the estate of
George Sax, the co-executors of the estate, and the at-
torneys for the estate concluded that the IRS position
could not be successfully challenged. Aeeordingly, on De-
cember 22, 1975, the estate of George Sax paid the Sax
Foundation $150,198 (the amount of money paid by the
Foundation to Langill & Co. for the FIC stock), and the
Foundation transferred 14,318 shares of EIC stock (the
same number of shares of EIC stock as were sold to it
by Langil!l & Co.) to the estate of George Sax. The
shares were transferred at a price of $10.49 per share
the same price at which they were transferred two to
three years previously. After the transfer of EIC stock
to the estate, the Internal Revenue Service abated the
proposed tax assessments, as the transaction constituted
a correction of George Sax’s acts of self-dealing.
4 {1 gt d Sale
In January and February of 1976, Rhoda Sax and the
majority co-executors of the estate of George Sax filed
separat’ petitions for court approval of offers made to
purchase EIC stock held by the estate. On February 9,
1976, a judee of the Cook County probate court, upor
hearing the parties’ petitions, determined that the shares
of EIC stoek should he solid to the hichest bidade r
through a private judicial sale. On May 7, 1976, the sale
of the shares of FIC stock was made pursuant to secret
bids submitted to the probate court. This transaction 1s
alleged by the plaintiff to be a sale within section 16(b).
— 18a —
The Last Will of George D. Sax was executed on
May 13, 1971, and was admitted to probate on May 15,
1974. By Article A-VII of the will, Rhoda Sax, Samuel
Wm. Sax, and ENB were appointed as executors of the
estate. The same parties were appointed as testamentary
trustees of George Sax’s marital, family, and other
trusts. Edward LL. Sax was named as the successor
trustee to Rhoda Sax and Samuel Wm. Sax. (Section
A7.02). Provision was made for the Exehange National
Bank to resign and appoint a suecessor trustee. (Section
A7.03). Suecessor trustees were vested with the rights
and obligations of the trustees named in the will. (See-
tion A7.03). By the will, the majority of the executors
or trustees were authorized to act on behalf of the
estate. The noneoncurring executor or trustee was re-
lieved of responsibility and liability for any such action
or inaction. (Section A7.05). As the wife of George Sax,
Rhoda Sax was given the power, pursuant to the will,
to determine whether to retain any unproductive prop-
erty. The executor or trustee, upon notice, was directed
to cause this property to become productive by sale
within a reasonable time. (Section A7.11). The trustee
was given complete power to sell personal property at
any time through a public or private sale. (Section
B2.02(B)). The executor was given the same power as
the trustee with respect to the estate. In addition, the
will provided that the executor could exercise its power
without prior approval of any court. (Section B2.03.)
The co-executors—Rhoda Sax, Samuel Wm. Sax, and
KNB—were issued letters testamentay on May 15,
1974. The transactions herein at issue concern the de-
fendants in their capacity as executors of the estate of
George Sax. This action has been brought against the
defendants in their present capacity as testamentary
trustees of the trust of George Sax (see note 3 supra).
The principal asset of the estate of George Sax was
190,727 shares of common stock of the Exchange Inter-
national Corporation, whose principal asset was the Ex-
change National Bank of Chicago. Ineluded in these
— 19a —
shares were the 14,318 shares of EIC stock obtained
by the estate from the Sax Foundation after the Inter-
nal Revenue Service’s determination of acts of self-deal-
ing by George Sax. The administration of the estate of
George Sax was being handled by the Trust Department
of ENB with Michael D. Goodman as the trust officer
in charge. In Michael Goodman’s report for ENB’s Trust
Investment Committee of December 4, 1975, the Com-
mittee recommended that the estate’s shares of EIC
stock should he retained by the estate for ultimate dis-
tribution at a later time to the Family and Marital
Trusts. By letter of December 24, 1975, Rhoda Sax, by
her attorney. Shepard Broad, registered her disagree-
ment with the recommendations made by the Trust Of-
ficer.
Shortly afterwards, on January 8, 1976, an offer to
purchase the EIC shares held by the estate was made
by Ira Kaufman [hereinafter Kaufman offer], through
Rodman & Renshaw as the broker-dealer, at a price of
$14.00 per share. Rhoda sax signed and accepted the of-
fer on the same day. Duplicate originals of the Kaufman
order were delivered to ENB and Samuel Sax as the
other co-executors of the estate of George Sax. The of-
fer was submitted and discussed at a meeting of the
Trust Investment Committee of ENB on January 15,
1976. The Chairman of the Committee, Maurice A. Ris-
kind, “stated that in his opinion there are many SEC
and other legal involments in connection with this offer
and that, therefore, before the Committee discusses it,
Mr. Novak, on behalf of the Trust Department, should
obtain a written opinion from general counsel with re-
spect to such matters in order that the Trust Department
and the Committee he fully advised in acting upon said
offer.” (Minutes of the Trust Investment Committee of
ENB for January 15, 1976). The eourt has not heen ap-
prised whether any written opinion was obtained from
general counsel with respect to SEC or other legal in-
volvements. Ira Kaufman, by his attorney, Robert Dunn
Glick of Schwartz, Cooper, Kolb & Gaynor, by letter of
January 14, 1976, to Byron Miller of D’Ancoma, Pflaum.
— 20a —
Wyatt & Riskind stated: “As counsel for the investors,
we are not aware of any applicable provision of the Se-
eurities Laws which may affect the acceptance of the of-
fer. We are, however, available immediately to meet with
you to discuss this matter.” There is no indication wheth-
er Mr. Glick was aware of the transfer of shares of EIC
stock from the Sax Foundation to the estate in Decem-
ber of 1975.
On January 21, 1976, Rhoda Sax petitioned the Pro-
bate Division of the Cireuit Court of Cook County for
an order directing the executors of the estate of George
Sax to sell the estate’s shares of EIC stock at a private
sale for $14.00 per share based on the Kaufman offer or,
alternatively, “the sale of the Shares for more than $14
if another purchaser ean he found.” She stated in her
petition at paragraph 6:
The question of whether there were any SEC prob-
lems or involvements should not he a reason for de-
ferral, because the persons makine the offer have
through their counsel offered to petitioner’s counsel
to meet any and all conditions required under the
SEC laws and regulations, and this fact has been
communicated to the Bank, and counsel for those
making the offer have offered to meet the Bank on
all such questions, see their letter attached Exhibit
C.
The Exhibit C referred to is the letter, previously ex-
cerpted in relevant part, of Robert Glick to Byron Mil-
ler.
On January 21, 1976, Samuel Sax and ENB. as major-
ity co-executors of the estate of George Sax, petitioned
the Probate Division of the Cireuit Court of Cook Coun-
ty. They sought approval of acceptance on their part of
an offer dated January 20, 1976, from a Swiss bank for
the purchase of the EIC shares held hy the estate for a
price of $14.25 a share [hereinafter Pallas offer). The
majority co-executors stated in their petition that their
acceptance of the offer was valid and binding under the
provisions of the will of George Sax. The majority co-
— 2la—
executors stated that as Rhoda Sax’s petition to the court
asked for as an alternative, the sale of the shares for
more than $14.00 if another purchaser could be found,
its acceptance of an offer at $14.25 per share rendered
Rhoda Sax’s petition moot. They further stated that the
Pallas offer was in full compliance with all federal and
state laws.
The negotiations preceding the Pallas offer were com-
menced subsequent to January 9, 1976, and resulted in
the offer of January 20, 1976. The offer to purchase the
shares was conditioned upon “(a) entry by a court of
competent jurisdiction of a final order approving the sale
of the Shares by the Estate pursuant hereto and (b) re-
ceipt by the Offeror of a satisfactory opinion letter from
counsel for the Estate with respect to the legal aspects
of the transaction.” (Para. 2 of the Pallas offer). Para.
4 provided that “Acceptance of this offer by a majority
of vou shall constitute a representation and warranty by
you and the Fstate to the Offeror that: .... (¢) This
offer has heen duly aecepted on behalf of the Fstate and
is a legal, valid and hinding obligation of the Estate, en-
forceable in accordance with its terms.” The majority
eo-executors did sign and aecept the offer on their behalf
“subject to entry by a court of competent jurisdiction of
a final order approving the sale of the Shares pursuant
hereto.” (Page 6 of the Pallas offer). They state in their
memorandum in support of their motion for summary
judgment that the “subject to” clause was added to satis-
fy conditions of a letter of credit negotiated with the
First National Bank of Chicago.
On February 4, 1976, Rhoda Sax filed an Amendment
to her Petition for an Order directing the Executors to
sell Certain Stock at Private Sale. The relevant sections
of her petition provided:
4. Both Rhoda Sax and the other two executors
have petitioned this Court to sell the 190,727 shares
and therefore there is a unanimity of opinion of the
executors that the Shares should be sold.
— 22a —
). Rhoda Sax has now received an “AMENDED
OFFER” which is attached hereto and marked Ex-
hibit F, and that Offer is for $14.30 a share.
7. In the Petition Rhoda Sax prayed for, amongst
other relief, the following:
“(b) The sale of the Shares for more than $14
if another purchaser ean be found ;”
8. All of the executors having committed them-
selves to the sale of the Shares, and three different
offers having been received within a period of a few
days, the executors are all under an obligation to get
the highest price for the shares. and therefore either
the present highest price ($14.30) for the shares
should be accepted in accordance with the attached
Exhibit F or this Court should hold a sale to the
highest bidder of the Shares.
WHEREFORE Rhoda Sax prays:
(b) The executors be ordered to accept the Of-
fer attached as Exhibit F: or
(c) The sale of the Shares for the best price
above $14.30 obtainable by bidding to be
eonducted by this Honorable Court; and
(d) For such other relief as to the Court shall
seem meet. [sic]
The offer of $14.30 per share was made by the Kaufman
group, the same party that had made an offer to the ex-
ecutors that Rhoda Sax had signed on January 19, 1976.
The respective petitions came up for hearing before
Judge Robert Jerome Dunne of the Probate Division of
the Cireuit Court of Cook County on February 9, 1976.
The court stated that this was a situation where assests
of an estate are to be sold and where a will provides that
the majority of the trustees are given power to sell the
assets, As all the interested parties had petitioned the
court to sell the stock, the court stated that it had nothing
ny
23a —
else to do but to order the stock for sale to the highest
and best bidder. Judge Dunne further stated that sealed
bids was the proper way to make the sale to avoid cut-
throat bidding.
Judge Dunne asked the parties if they had any com-
ments as to his decision. Mr. William Kirby, the at-
torney for Rhoda Sax, responded: “So far as Rhoda Sax
is concerned, the highest price is all she is asking for,
and we are satisfied with your THlonor’s decision.” Mr.
Selwyn Zun, the attorney for ENB and William Sax, re-
sponded that these executors took exception to the Judge’s
ruling on the ground that the Kaufman group should
not have the right to bid for the stock as Rhoda Sax had
entered into a secret, undisclosed agreement with this
group. On the other hand, majority co-exeeutors were
bidding for the Pallas offer with no side agreements for
control. He further stated that EHNB and William Sax
were at least entitled to discovery before a sale of the
shares took place. Judge Dunne responded that, based on
his decision, he considered the motion regarding deposi-
tions as moot. Mr. Kirby added that the undisclosed
agreement was already disclosed and in evidence as an
exhibit attached to Kaufman's deposition.
Judge Dunne entered an order providing that:
|
The Court finds that the executors have all asked for
sale of the stock mentioned in the petitions (1) and
(2) above, and that inereasing prices have been
offered, and that it is in the best interest of the
estate to evt the hiehest eash bid, and that ean best
be accomplished by sealed bids.
The Judge further ordered that bids should he filed by
February 23, 1976, and that the highest bidder would
be sold the stock.
('
9
aa
Rheda Sax’s attorneys brought an emergeney motion,
heard by Judge Dunne on February 11, 1976, to modify
the court’s order to specify that the sale would be pri-
vate. At that time, the attorney for ENB and William
Sax informed the court that the majority eco-exeecutors
had filed a notice of appeal. Their ground for appeal was
— 24a —
that the court lacked jurisdiction to enter any order.
Judge Dunne continued Rhoda Sax’s motion to February
13, 1976. At the hearing, Judge Dunne decided, after the
arguments cf the parties, to revise his order to add that
the sale of the estate’s shares of EIC stock would be by
private sale. The attorney for the majority co-executors
moved for a stay pending appeal. Judge Dunne denied
a stay.
What followed were appeals by the majority co-execu-
tors of Judge Dunne’s determination to sell the shares
of EIC stock of the estate of George Sax at a private
sale to the highest bidder. On February 18, 1976, the
[llinois Appellate Court for the First District denied the
motion of the majority co-executors to stay the eourt’s
order. On February 23, 1976, Judee Dunne reset the date
for sale of the estate shares hy sealed bids to Mareh 1,
1976. On March 1, 1976, the Appellate Court, after exten-
sive briefing, again denied the motion for a stay. On
March 1, 1976, heeause four new bids were made. Judge
Dunne continued the bids until the next day. On Mareh
he reset the date for the sale. On Mareh 3, a draft
order was submitted setting the sale for March 4. On
March 8, the majority co-exeeutors petitioned the Tllinois
Supreme Court for leave to file a petition seeking the
issuance of Writs of Prohibition and Mandamus to stop
the bidding. On the morning of March 4, the Tllinois
Supreme Court stayed the sale pending disposition of
the motion. On March 17, the Tllinois Supreme Court
denied the petition for Mandamus and Prohibition. On
March 22, the majority co-executors filed a petition for
change of venue. Rhoda Sax filed a memorandum in op-
position to the petition on March 23. The court denied
the petition on that date and reset the sale date to
March 29, 1976.
The FIC, ENB, and Samuel Wm. Sax also brought
an action in the Federal Distriet Court for the Northern
District of Ilinois on February 27, 1976, challenging the
Kaufman offer. They alleged violations of the Glas-
— 2a
Steagall Act, the Bank Holding Co. Act, and the Securi-
ties Exchange Act of 1934 by the parties making the
Kaufman offer. Because the Kaufman offer was not the
highest bid received, these proceedings were rendered
moot. Thus, the plaintiffs voluntarily dismissed their
suit on May 21, 1976.
On March 29, 1976. Judge Dunne accepted sealed bids
for the sale of the 190,727 shares of the common stock of
EIC held by the estate of George Sax. The highest
bidder, John S. Samuels, offered to purchase the estate
shares at $18.59 a share with his hid totalling approxi-
mately $3,545,614.90. On May 7, 1976, the sale of the
estate shares was consummated. On May 10, the court
approved the final report of sale filed and prepared by
the co-executors.
On January 7, 1977, the attorneys for Rhoda Sax filed
a verified petition to fix attorneys’ fees with the Probate
Division of the Cireuit Court of Cook County. In the
petition, the attorneys reiterated many of the facts here
stated involving the sale of the estate shares. They stated
that on the basis of the efforts of Rhoda Sax, as ¢co-
executor of the estate of George Sax, the sale resulted
in increased benefit to the estate of, at a minimum, $4.59
per estate share. Their figure represented the difference
between the original offer of $14.00 per share and the
eventual offer of $18.59 per share accepted on the bids
submitted at the time of sale. The award was sought for
“the vast amount of time expended by said counsel,
superlative skill and competency” in connection with the
sale of the estate shares.
APPLICAPLE SECURITIES LAW
Plaintiff predicates his action on the application of
section 16(b) of the Securities Exchange Act of 1934.
Section 16(b) provides for liability of officers, directors,
and beneficial owners of more than 10 pereent of the
listed stock of any company for any profits realized from
any purchase and sale or sale and purchase of stock
oceurring within a six-month period. Beneficial owners
— 26a —
of more than 10 percent of the stock of a corporation
are presumed to have access to inside information and
to have acted on the basis of this information in engaging
in a short-swing transaction prohibited by section 16(b).
Allis-Chalmers Mfg. Co. vy. Gulf & W. Indus., Inc., 527
F.2d 335, 347 (7th Cir. 1975), cert. denied. 423 U.S. 1078
(1976) [hereinafter Allis-Chalmers], Liability is deter-
mined without considering intent, lack of motive, or im-
proper conduct. Reliance Electric Co. vy. Emerson Elec-
tric Co., 404 U.S. 418, 424 n.4 (1972). Thus, section 16(b)
liability is determined objectively as a flat rule to take
profits out of a class of transactions where the possi-
bility of abuse is believed to be great. Id. at 422; Kern
County Land Co. vy. Occidental Petroleum Corp., 411 U.S.
082, 592 (1973) [hereinafter Kern County}.
The parties have devoted a great deal of their argu-
ments to the effect of the Kern County decision on the
vase at bar. In Kern County, one or more purchases with-
in the meaning of section 16()) occurred when the de-
fendant acquired more than 10 percent of the stock of a
target company pusuant to a tender offer, The issue be-
fore the Court was whether a statutory “sale” occurred
either when the target of the tender offer defended it-
self by merging into a third company and the tender
offeror then exchanged its stock for the stock of the
surviving company, or when the tender offeror granted
an option to the third company to purchase its shares
exercisable outside of the statutory six-month period. Jd.
at 584. The Court held that neither the exchange pursuant
to the merger nor the option agreement constituted a
sale within the meaning of section 16(b). Id. at 590-91.
The Court began its consideration of the alleged sales as
unorthodox transactions to be treated differently than
ordinary cash-for-stock transactions. Id. at 593 & n.24.
In examining unorthodox transactions, the Court stated
that the congressional objective underlying section 16(b)
liability had to be considered. The Court found Congress’
objective to be the prevention of speculative abuse through
the realization of short-swine profits based upon access
to inside information. Jd. at 594-95,
— 2/a—
In Kern County, the Court stated that the involuntary
nature of the exchange of stock pursuant to a merger,
coupled with the absence of the possibility of speculative
abuse of inside information, excluded this exchange from
section 16(b) liability. 7d. at 600. The Court found that
the option agreement did not present a sufficient possi-
bility of speculative abuse and an option for the ex-
change of stock outside of the six-month period is not
generally regarded as a sale within the meaning of see-
tion 16(b). 7d. at 601.
The Seventh Cireuit Court of Appeals has interpreted
the Kern County decision as still recognizing that or-
dinary, voluntary transactions commonly recognized as
purchases and sales automatically trigger the application
of section 16(b) as they uniformly have in the past. Allis-
Chalmers, supra at 351. The court stated that the objec-
tive rule for section 16(b) liability would be applied, un-
less the two distinguishing elements of the Kern County
situation were present: 1) either the purchase or the sale
was an unorthodox transaction, and 2) an analysis of the
unorthodox transaction disclosed no possibility of short
term speculative abuse. 7d. at 351. Thus, before the Kern
County test ean be applied here, the court must de-
termine whether either of the transactions alleged to be
a purchase and sale was an unorthodox transaction.
The transfer of stock to the estate of George Sax in
rescission of previous acts of self-dealing was not an
unorthodox transaction. The Court in Kern County, supra
at 593 n.24, defined unorthodox transactions, with ref-
erence to Louis Loss’ treatise on Securities Regulation,
as applying to stock conversions, exchanges pursuant to
mergers and other corporate reorganizations, stock re-
classifications, and dealings in options, rights, and war-
rants.° There is nothing about the transfer of the shares
of FIC stock from the Sax Foundation to the estate of
®Louis Loss identifies “unorthodox” purchase and sale
transactions as transactions pursuant to conversions,
mergers, and reclassifications. L. Loss. Securities Requla-
tion II 1069-70 (2d ed. 1961) [hereinafter L. Loss].
— 28a
George Sax to fit within the narrow classification of un-
orthodox transactions of Kern County. The transfer of
stock to the estate increased the estate’s equity owner-
ship in EIC unlike unorthodox transactions which do not
change proportionate equity ownership. The motivation
of acting pursuant to an internal revenue service ruling
and the potential imposition of a tax penalty may be
relevant to a “forced purchase” defense, as will be dis-
cussed infra. Nonetheless, this type of motivation does
not make the transfer of shares fall within the un-
orthodox transaction classification. Thus, the transfer
of shares from the Sax Foundation to the estate of
George Sax will be viewed as an ordinary cash-for-stock
transaction.
Similarly, the sale of shares of EIC stock, pursuant
to sealed bids through the probate court arrangement,
was not an unorthodox transaction triggering the ap-
plication of the Kern County test. In the transactions
classified as unorthodox, the transactions are either re-
sponses to corporate actions such as a conversion of
stock, a merger, and a reclassification of stock, or op-
tions, rights, and warrants not generally regarded to be
sales as they are usually exercisable outside of the
statutory six-month period. In the transaction here, there
was neither a corporate action as the catalyst for the
transaction nor a transaction exercisable outside of the
six-month period. Instead, the catalyst for the sale of the
shares of FIC stock was the initiation of the proceed-
ings in the probate court hy the executors of the estate
of George Sax, the defendants here, and the transaction
took place within the six-month period after an alleged
purchase. The participation of the probate court, ¢
third party, only after the petitions for sale were filed,
did not make the transaction unorthodox. Whether the
court’s participation made the sale involuntary is a sep-
arate question to he discussed infra. In addition, the
transfer of stock by the estate decreased the estate’s
equity ownership in EIC unlike unorthodox transactions
which do not change proportionate equity ownership
within the six-iuonth period. Thus, the sale of shares of
— 29a —
the estate of George Sax, pursuant to the probate court
arrangement, will be treated as an orthodox eash-for-stock
transaction.
Although the Kern County test is not applicable because
neither the alleged purchase nor the alleged sale consti-
tutes an unorthodox transaction, some federal courts have
still taken a “pragmatie approach” to determine whether
the transactions involved presented the possibility of
speculative abuse. See, e.g., Makofsky, v. Ultra Dynamics
Corp., 383 F. Supp. 631, 638 (S.D.N.Y. 1974) [hereinaf-
ter Makofsky]. A pragmatic approach will be utilized here
so as to take into account the underlying poliey of see-
tion 16(b) of preventing the misuse of inside information
for purposes of speculative abuse. Wentz, Refining A
Crude Rule: The Pragmatic Approach to Section 16(b) of
the Securities Exchange Act of 1934, 70 Nw. L. Rev. 221,
272 (1973) [hereinafter Wentz].
DEFENSES TO THE ALLEGED PURCHASE
Defendants state that the correction of the acts of
self-dealing by George Sax through the transfer of FIC
stock from the Sax Foundation to the estate of George
Sax does not constitute a purchase within the meaning
of section 16(b). They argue that the transfer of shares
of EIC stock from the Sax Foundation to the estate of
George Sax was: 1) a rescission of the acts of self-
dealing that took place in 1973 so that the. transaction
in 1976 was not a purchase; 2) not a purchase as the
acts of self-dealing that took place in 1973 were ultra
vires and voidable under Tllinois law: and 3) an invol-
untary, foreed and compelled transaction made solely to
avoid the imposition of enormous additional taxes on the
estate of George Sax. Plaintiff admits that the trans-
action was a rescission of the previous acts of self-deal-
ing, but counters that the rescission did not take the
transfer of shares hack to the estate of George Sax out
of the ambit of section 16(b). THe also contends that the
defense of voidable and ultra vires acts under Illinois
law does not prevent section 16(b) liability, because that
— 30a —
section is penal as well as remedial. Furthermore, the
defense of a foreed purchase to avoid substantial tax
liability is not supported by the facts because the estate
“maximized its opportunity to profit from this set of
circumstances and also successfully avoided payment to
the Internal Revenue Service of a tax penalty.”
Rescission
The plaintiff admits that the transaction in 1975 re-
sulting in the transfer of stock from the Sax Foundation
to the estate of George Sax constituted a rescission of
the 1972 and 1973 acts of self-dealing by George Sax.
The issue is thus not whether a rescission took place but
whether the particular rescission constituted a purchase
within the meaning of section 16()b).
In Volk v. Zlotoff, 285 F. Supp. 650, 651 (SDNY.
1968) [hereinafter Volk], despite the mutual rescission of
the exercise of a stock purchase option, the court entered
summary judgment for the plaintiff finding a section
16(b) violation. The court held that the subsequent rescis-
sion of the exercise of the stock options did not remove the
rescinded transactions from the reach of section 16(b). Id.
at 657. In the case at bar, the rescinding transaction
rather than the rescinded transaction is the one sought
to be determined a purchase by the plaintiff. Nonetheless,
here, as in Volk, mutual rescission is raised as a defense
to immunize the transfer of shares of EIC stock from
the Sax Foundation to the estate of George Sax from see-
tion 16(b) liability. Here, we find as the court in Volk
similarly found, that the mutual rescission of George
Sax’s acts of self-dealing did not immunize the rescinding
transaction from section 16(b) liability.
In Hennessey vy. Fein, 184 F. Supp. 86 (S.D.N.Y. 1958)
[hereinafter Hennessey], the court held that the subse-
quent rescission of stock transactions alleged to be pur-
chases within section 16(b) by a judicially approved set-
tlement in a sharply contested shareholder’s derivative
suit was a res judicata determination taking the purchases
outside of section 16(b) liability. The determination was
— 3la —
res judicata as all the parties relevant to the section 16(b)
inquiry were parties to the judicially approved settle-
ment. Jd. at 89-90. The court in Volk, supra at 658, held
that the Hennessey rescission defense was limited to the
circumstances of a judicially approved settlement. The
court in Hennessey, supra at 90, itself stated that not all
consummated agreements to rescind constitute a defense
to section 16(b) actions. Thus, the Hennessey defense is
limited to a judicially approved rescission in a sharply
contested proceeding involving all the parties relevant to
a section 16(b) determination. Here, the rescission of the
acts of self-dealing by George Sax was made to avoid
income tax liability. The rescission was not a settlement
agreement of federal securities law claims as was true in
Hennessey. There, the stockholders were parties to the re-
scission so that they were bound by res judicata, which
is not the case here. Accordingly, the approach of Volk
rather than Hennessey is applicable so that the mutual re-
scission is not a defense to this section 16(b) action.
Defendants argue that the decision of Kahansky v.
Emerson Radio & Phonograph Corp., 184 F. Supp. 90
(S.D.N.Y. 1960) [hereinafter Aahansky], is controlling
here. Defendants state that in Aahansky rescission was
by agreement of the parties without a court order, where-
by the rescinding transaction was treated as a nullifica-
tion of the first transaction so that it did not constitute
a transaction subject to section 16(b) liabiliy. Taking this
approach, the 1975 rescission of the 1972 and 1973 acts
of self-dealing constituted a nullification of the earher
transactions and was thus not a purchase for purposes of
section 16(b). Plaintiff counters stating that Nahansky
did not involve two separate transactions as are present
here so that this rescission defense to a_ section 16(b)
action is not applicable. Defendants in their reply memo-
randa argue that Aahansky did involve two separate trans-
actions so that its holding is directly applicable here.
In Kahansky, a written agreement was entered into
whereby the Emerson Corporation, the defendant in the
section 16(b) action, contracted to buy a controlling in-
— 32a —
terest in Webcor, another corporation. Two months later,
pursuant to a furiher agreement, the stock was returned
with Emerson receiving its purchase price back along with
a declared cash dividend and a sum of money representing
damages to Emerson. These transactions were alleged to
be, respectively, a purchase and a sale within section
16(b). Summary judgment was entered for the defendant,
as the second transaction was held to constitute a rescis-
sion of the first transaction. Emerson bought the stock
of Webcor pursuant to a takeover bid. Webeor failed to
complete other conditions of the purchase agreement so
that Emerson was blocked in its takeover bid. Emerson
contended that Webcor’s failvre to fulfill the purchase
agreement meant that its stock acquisition was, at most.
a conditional purchase followed by a complete rescission.
The court found that the failure to obtain the fulfillment
of all the conditions did not constitute a cancellation of
the purchase agreement but gave Emerson the right to
rescind by returning the stock. Nonetheless, it found that
the settlement agreement of the contract breach reached
after arms length negotiations, was not a sale within
section 16(b). Id. at 94.
The courts in Volk and Hennessey stated that the fact
of a rescission does not automatically remove a transac-
tion from section 16(b) liability. Thus, as the Hennessey
defense is inapplicable, rescission will be a defense here
to a section 16(b) violation only if the Kahansky situation
is present. The rescission in Kahansky was a settlement
of a bona fide breach of contract dispute. The rescission
thus did not constitute a transaction with the possibility
of speculative abuse for section 16(b) liability to attach.
Here, the rescission was not a result of a disagreement
and settiement between contracting parties. Instead, the
rescission resulted from the intervention of a third party,
the Internal Revenue Service, to set aside the initial sale
of shares of EIC stock to the Sax Foundation as acts of
self-dealing by George Sax. Instead of the two intimately
related transactions in Kahansky, here there were two
separate fully consummated transactions related only be-
— 33a —
eause of a determination that the first transaction violated
tax laws.
The Kahansky decision is further distinguishable from
the case at bar. First, the rescission in Kahansky, made
two months after the initial transaction, is a substantially
different situation from the two to three year separation
between the initial transaction here and the rescission.
The rescission in Kahansky did not substantially change
the status quo, while the rescission here restored stock
to the estate that had been out of its possession for over
two years and for which the lack of dispute about the
initial transfer between the estate and the Sax Founda-
tion gave the estate no expectation of ever receiving stock
back. The status quo had already changed before the re-
scission took place. This time difference of two years is
especially significant considering that the shares were
returned to the estate at the same price at which they
were transferred, despite the numerous offers to purchase
the shares at a substantially higher price within the six
months subsequent to the rescission. Second, the Kahansky
rescission was held to be outside of section 16(b) because
it was an arms length transaction so that taking the trans-
action outside of section 16(b) did not frustrate the stat-
utory purpose. Taking the transaction here out of section
16(b) would frustrate the statutory purpose of preventing
the possibility of speculative abuse as the rescission was
not an arms length transaction. The insiders sought to be
held liable pursuant to section 16(b) constituted the ma-
jority of the trustees of the Sax Foundation,’ which was
the seller of the stock, and also were the purchasers of
the stock in the rescinding transaction. Where the insiders
7 The Sax Foundation had five trustees at all times
relevant to this litigation. These trustees were George
Sax (the estate was substituted as trustee upon George
Sax’s death in 1974), Rhoda B. Sax, Samuel Wm. Sax,
Dr. Harry Benaron, and Barnet Hodes. The trustees of
the estate of George Sax at the time of the alleged pur-
chase were Samuel Wm. Sax, Rhoda Sax, and the Ex-
change National Bank of Chicago.
— 34a —
are on both ends of the rescinding transaction, the pos-
sibility of speculative abuse is present. L. Loss, supra at
1069-70. Accordingly, the Kahansky defense is not appli-
cable here.
Defendants argue that Landy v. United Fruit Co., 305
F. Supp. 254 (D.N.J. 1969), is directly applicable as a
rescission where a defendant was found not to have vio-
lated section 16(b). The court held that a price adjust-
ment between contracting parties in the purchase of stock
did not constitute a sale within the meaning of section
16(b). The court further stated that the alleged sale was
not a rescission of the earlier transaction but that, if it
was a rescission, it would treat the transaction the same
way as the court in Kahansky. Id. at 257. The facts of
Landy are similar to Kahansky in that both involved a
contract with the rescinding transaction intimately related
to the contractual terms of the initial agreement. As pre-
viously stated, the case here is not a breach of contract
situation. Because the facts are inapposite here, the Landy
dicta’s acceptance of the Kahansky defense in similar cir-
cumstances has no effect on this decision.
In sum, the fact that the purchase of EIC stock by
the estate of George Sax from the Sax Foundation con-
stituted a rescission of George Sax’s acts of self-dealing
for purposes of the tax law does not take this transac-
tion out of the reach of section 16(b). As stated in Volk,
supra at 651, mutual rescission does not immunize a trans-
action from section 16(b) liability. This is especially so
where, as here, the possibility of speculative abuse is
present because the parties sought to be held liable under
section 16(b) are in control of both ends of the rescinding
transaction. A further determinatior of actual speculative
abuse is not necessary for a section 16(b) determination.
Voidable and Ultra Vires under Illinois Law
Defendant majority co-executors argue that, because the
1972 and 1973 acts of self-dealing are voidable and ultra
vires under Illinois law, they were under a duty to re-
— 35a —
scind the previous transactions so that the rescission can-
not be a purchase within the meaning of section 16(b).°
The plaintiff counters that this argument is without merit
because section 16(b) is both penal and remedial and be-
cause defendant’s position is absurd: reliance on one il-
legal act cannot be an affirmative defense to a second i!
legal act.
The court has neither been made aware of, nor has it
found on its own examination, any case dealing with the
rescission of an ultra vires act and the application of
federal securities law. The determination that an act is
illegal under state law and the Internal Revenue Code
does not make the rescission of that act free from federal
securities law problems. The application of section 16(b)
is not subject to the alleged duty of the Sax Foundation
and the estate of George Sax under state law to set aside
their previous illegal transactions. The exercise of the
duty to rescind under Illinois law does not immunize the
rescinding transaction from securities law liability. Fur-
thermore, as plaintiff points out, the application of sec-
tion 16(b) is both penal and remedial. Epstein v. Shindler,
200 F. Supp. 836, 8387 (S.D.N.Y. 1961). Thus, if a violation
of section 16(b) is otherwise shown, the fact that other
state or federal laws may have affected a penalty or
eaused defendants in a section 16(b) proceeding to take
a particular action does not prevent a finding of section
16(b) liability. Accordingly, the defense of acting to re-
scind a voidable and ultra vires act under Illinois law does
not take the transaction here out of the reach of section
16(b).
Involuntary, Forced, and Compelled Transaction
The defendant majority co-trustees argue that the
transfer of stock from the Sax Foundation to the estate
®Tll. Rev. Stat. ch. 148, § 51(1)(a) prohibits a trustee
of a private foundation from engaging in any act of self-
dealing as defined in section 4941(d) of the Internal
Revenue Code.
— 36a —
of George Sax did not constitute a purchase within sec-
tion 16(b) because the transaction was involuntary, forced,
and compelled. They argue that the estate was forced to
purchase the stock of EIC to avoid the imposition of
enormous additional taxes on the estate. The plaintiff
responds that the stock transaction caused no detriment
to the estate, so that the transaction was not involuntary,
forced, or compelled for purposes of the application of
section 16(b).
The Internal Revenue Service informed the estate of
George Sax and the trustees of the Sax Foundation by
letter of July 28, 1975, that tax assessments would be made
on the estate and the Sax Foundation if George Sax’s
acts of self-dealing were not corrected by a retransfer
of the shares of KIC stock to the estate. The tax penalty
to be levied against the estate under section 4941 of the
Internal Revenue Code was 205 percent of the money
paid by the Foundation for the two purchases of the EIC
stock (7.e., $307,805.90). An additional penalty was to be
assessed against the four surviving trustees of the Sax
Foundation of $20,000 each. On December 22, 1975, the
estate paid the Sax Foundation $150,198 and had trans-
ferred to it 14,318 shares of EIC stock. This transaction
abated the proposed tax assessments.
Although the income tax reason for the purchase is here
considered, the income tax rule pursuant to which the
estate decided to ‘‘undo’’ the acts of self-dealing does not
control the determination of liability under section 16(b).
Blau v. Mission Corp., 212 F.2d 77, 80 (2d Cir. 1954),
cert. denied, 347 U.S. 1016 (1954). Thus, the mere fact
that the estate repurchased EIC stock from the Sax Foun-
dation to avoid the imposition of a tax penalty does not
make the purchase involuntary.
Defendants cite Ferraiolo v. Newman, 259 F.2d 342 (6th
Cir. 1958), cert. denied, 359 U.S. 927 (1959), and Lynam
v. Livingston, 276 F. Supp. 104 (D. Del. 1967), in support
of their proposition that the exchange of shares of EIC
between the Sax Foundation and the estate of George
Sax was involuntary, forced, and compelled. Both cases
— 37a —
involved the conversion of preferred stock into common
stock at the time that the stock was called for redemption.
The courts found the conversion situation to be a forced
surrender resulting in no change in the proportional equi-
ty ownership and with no money being paid by the holder
at that time. Neither conversion was held to be a trans-
action subject to section 16(b) liability. Merraiolo v. New-
man, supra at 346; Lynam v. Livingsion, supra at 106.
Plaintiff correctly points out that the issue in both
Ferraiolo v. Newman, supra, and Lynam y. Livingston,
supra, whether conversion of convertible equities into com-
mon stock is within section 16(b) is now moot. Securities
and Exchange Commission Rule 16(b)-9 now provides a
clear exemption from the application of section 16(b) for
transactions involving conversion of equity securities. De-
fendants, nonetheless, argue that the ‘‘economic compul-
sion’’ approach of these cases is applicable here. In both
cases, the holder of the preferred shares would have lost
a substantial amount of money if the shares were redeemed
rather than converted as they had done. I’erraiolo v. New-
man, supra at 346; Lynam v. Livingston, supra at 106.
The court is of the opinion that the economic necessity
approach of these cases is tied to the lack of the possi-
bility of speculative abuse in the conversion situation, a
position which the Securities and Exchange Commission
has acquiesced in since these decisions. With a conversion
situation the actual purchase of the shares takes place a
substantial time prior to the conversion at the time of
redemption. The court in Ferraiolo v. Newman, supra at
346, pointed out that no opportunity for profit was created
by the redemption that had not been present from the
time of the initial purchase. Here the opportunity for
profit was possible only after the shares of EIC stock
were purchased by the estate. The defendants would have
lost a great deal of money if they had not purchased the
shares of EIC stock from the Sax Foundation not because
of their investment but because of a tax penalty. The
transaction here not only freed the estate from substan-
tial tax liability but it also made it possible for the estate
— 38a —
to sell these shares with the other shares held by the
estate at a substantially higher price than the price at
which they were obtained from the Sax Foundation. A
sale was made soon after. Unlike a conversion, the trans-
action here increased the proportional equity ownership
of the estate of George Sax in EIC. In these cireum-
stances, the potential for speculative abuse is present.
Despite the tax reasons for the transfer of EIC stock
from the Sax Foundation to the estate, the defendants
had control over both ends of the transaction. Thus, unlike
the conversion situation, the executor of the estate of
George Sax had the power to determine the price of the
exchange. In fact, rescinding the acts of self-dealing at a
price of $10.49 a share seems to have shortchanged the
Sax Foundation. The stock had been transferred to the
Foundation at the price of $10.49 a share two to three
years earlier, while offers were made to purchase the
same stock for $14 only one month later and the stock
was sold at $18.59 a share within six months of this trans-
action. This court cannot hold that the transfer of stock
was compelled by economic necessity so as to make see-
tion 16(b) inoperative.
The transfer of stock to the estate of George Sax,
made to avoid the imposition of a tax penalty, is similar
to the situation in Whiting v. Dow Chemical Co., 523 F.
2d 680 (2d Cir. 1975). In Whiting, the court found see-
tion 16(b) liability even though the defendant acted to
avoid the threat of a new tax bill with anticipated, in-
creased tax assessments. /d. at 689. Similarly, in the ease
at bar, the possibility of a tax penalty assessment did
not make the purchase of stock by the estate of George
Sax involuntary so as to fall outside of the scope of see-
tion 16(b).
In Western Auto Supply Co. v. Gamble-Skoqmo, Inc.,
348 F.2d 736, 742 (Sth Cir. 1965), cert. denied, 382 U.S.
987 (1966), the defendant argued that its sale of stock
was compelled by the government’s antitrust action. The
defendant had voluntarily entered into a consent decree
— 39a —
with the government that included the sale of stock. The
court held that the pendency of the action did not justify
giving the term “sale” any other than its ordinary mean-
ing so that the transaction was not compelled. Jd. at 742.
Similarly, despite the pendency of the Internal Revenue
Service determination, the transfer of shares of EIC
stock to the estate of George Sax was not compelled so as
to fall outside of the meaning of section 16(b).
In conclusion, the defenses asserted by the defendants
are not applicable to the rescission especially because the
circumstances suggest the possibility of speculative abuse.
Accordingly, the transfer of stock from the Sax Foun-
dation to the estate of George Sax on December 22, 1975,
is a purchase for the purposes of section 16(b).
DEFENSES TO THE ALLEGED SALE
Defendants state that the alleged sale does not con-
stitute a sale within the meaning of section 16(b). They
argue that the sale of stock of the EIC corporation
was involuntary, forced, and compelled. The defendants
state that under T[llinois law the court was actually the
seller, and the executors were merely its agents so that
no sale ean be attributed to the co-exeeutors for purposes
of section 16(b) liability. The majority co-executors state
that they bitterly. vigorously, and unremittingly opposed
the court-ordered sale in every possible legal forum and
that they never conceded the probate court’s jurisdiction
to order the EIC stock sold. They were thus deprived
of any control over the timing, method, price, or terms
of the sale or the identity of the purchaser. Rhoda Sax
adds that there was no possibility of speculative abuse
because the executors were unable to control, or at least
to predict, the certainty of the terms, conditions, timing
and price of both the purchase and sale. Rhoda Sax
further states that she, as minority co-trustee, under the
will of George Sax, was wholly powerless to effectuate
the sale of the estate shares and can thus not be held
liable under section 16(b).
—' |
The plaintiff responds that there was a sale within
section 16(b). The possibility of speculative abuse existed
as the co-executors had access to inside information, and
they initiated and provided the moving force behind the
sale to advance their own personal business interests.
The conflict of interest between the co-executors evidenced
differing personal business interests among the executors,
but it did not negate the possibility of speculative abuse.
Plaintiff states that the prohate judge’s participation in
the sale was ministerial, as neither the will of George
Sax nor IlInois probate law mandate court approval as
a condition precedent to the sale of personalty by an ex-
ecutor under a power given in a will. Plaintiff further
states that the court’s participation did not make the sale
involuntary, forced, and compelled. The court acted only
after all the co-executors affirmatively and voluntarily
sought intervention by the court. This is not the ease of
a court initiating the proceedings, the court ordering di-
vestiture, or a foreclosure sale.
The Possibility of Speculative Abuse
As previously stated herein, an underlying poliey ob-
jective of section 16(b) is to prevent the possibility of
speculative abuse. In determining whether a sale has
taken place within section 16(b), we will examine defen-
dants’ contention that the sale of FIC stock by the es-
tate of George Sax did not present the possibility of
speculative abuse to trigger the application of section
16(b). The test for the possibility of speculative abuse
is whether the executors had both access to inside infor-
mation and some measure of influence over the timing
and circumstances of the transaction sufficient to give the
possibility of profits based on side information. Makof-
sky, supra at 640.
The co-executors were all insiders presumed to have
access to inside information for purposes of the appli-
cation of section 16(b). The estate of George Sax, of
which they were co-executors, had control over more than
10 percent of the stock of EIC at the time of the transac-
— 41a —
tions herein involved. In addition, Rhoda Sax admits in
her answer to the plaintiff’s complaint that she was per-
sonally in possession of more than 10 percent of the stock
of EIC and was a director of EIC. Samuel Wm. Sax,
while denying, in his answer, possession of 10 percent
stock ownership in EIC during the relevant six-month
period, stated, in a federal court proceeding challenging
the Kaufman offer, that he had over 10 percent stock
ownership during the relevant six-month period.’ More-
over, he was an insider by nature of his position as a
director, chairman of the board, and chief executive of-
ficer of EIC. As insiders, the possibility of speculative
abuse was present if the co-executors of the estate of
George Sax could have gained any benefit from their
dealings by nature of their position so as to suggest the
possibility of an advantage over other stockholders and
the public generally. L. Loss, supra at 1069-70; Wentz,
supra at 230 n.24.
On May 7, 1976, the date the sale of the EIC stock
of the estate of George Sax was made, EIC common
stock was trading in the over-the-counter market at $9.50
bid and $11 sale. The estate received $18.59 per share.
Although the disparity between the over-the-counter price
and the price at which the estate’s shares of EIC stock
was [sic] sold may partially reflect a premium given be-
cause of the large percentage of shares of EIC stock sold,
the premium also suggests the possibility of speculative
abuse. The estate received a benefit substantially over
what other stockholders would have received for a sale
of their shares on the same day,
°TIn the complaint filed on February 27, 1976, during
the etree ap period at issue, in 1 achange International
Corp., et al. vy. Rodman d Renshaw, Inc., et al., 76 C 7950
(N.D. Ill.), S ida Wm. Sax stated that he was a benet-
icial owner of 11.7 pe een! of the common stock of KIC.
In the answer of Samucl Wm. Sax file in this action on
February 17, 1977, he denies being a beneficial owner of
more than 10 percent of the common stock of EIC during
the relevant time.
— 42a —
Rhoda Sax contends that speculative abuse eannot be
shown as the co-executors did not act in a coordinated
manner. Their disagreement over the disposition of the
stock concerned the suitability of the purchaser, however,
and not the determination whether a sale should be held
as petitions for sale were filed by all the executors. In-
side information may cause insiders to act in differing
manners to further their own personal interests without
there being any less of a possibility of speculative abuse.
The co-trustees, as insiders, may have taken adversary
positions on the suitability of a purchaser for nonmone-
tary reasons and could have all still wanted a sale for
the possibility of speculative gain without having had to
act in coordination. The adversary stance among the co-
executors thus did not negate the possibility of specula-
tive abuse.
Rhoda Sax further contends that the co-executors could
not have speculated as they did not control and could
not predict the certainty of the terms, conditions, timing,
and price of either the purchase or the sale. Implicit in
any speculation, even if pursued with the use of inside
information, is some uncertainty. Complete certainty of
the terms of a transaction is not required for a finding
of section 16(b) liability. In Booth v. Varian Associates,
334 F.2d 1, 5 (1st Cir. 1964), the court stated that lack
of control over the date of sale did not diminish the Op-
portunity to obtain insider profits. The lack of control
over specific aspects of a transaction does not negate
the fact that the co-trustees were insiders at all relevant
times and could have obtained and possibly abused inside
information. Id. The judicial involvement here did not
negate the possibility of speculative abuse. The crucial
question is, as pointed out by the parties and Wentz,
supra at 251, not the control of the mechanics of the sale
but whether the insider, the estate of George Sax, was
forced to sell by the court. Even though the alleged sale
was not an unorthodox transaction, if the estate was
forced to sell, there is less reason to find section 16(b)
liability.
— 48a —
Apart from the special circumstances presented by
‘‘nnorthodox transactions,’’ the forced seller defense has
been consistently rejected by the courts. See Makofsky,
supra at 642; Western Auto Supply, supra at 742; Alloys
Unlimited, Inc. v. Gilbert, 319 F. Supp. 617, 619 (S.D.N.Y.
1970) [hereinafter Alloys Unlimited]. If the sale alleged
to be forced could have been made outside of the six-month
period, then the possibility of speculative abuse is present
and section 16(b) is applicable. American Standard, Inc.
v. Crane Co., 346 F. Supp. 1153, 1163 (S.D.N.Y. 1971),
rev’d on other grounds, 510 F.2d 1048 (2d Cir. 1974),
cert. denied, 421 U.S. 1000 (1975). Defendants state that
they could not have controlled the timing of the sale of
the EIC shares by secret bids. At the time of the probate
court proceedings, defendants filed no petitions to delay
the sale of EIC shares so that it would take place six
months after the transaction here found to be a purchase.”
Defendants’ arguments concerning a forced sale might
have merit if the defendants had attempted to delay a
sale of the shares of EIC stock for a six-month period
to avoid section 16(b) liability, and the court had refused
a delay. Instead, Rhoda Sax, in her petition for a court
order to sell the EIC shares, stated that ‘‘any SEC prob-
lems or involvements should not be a reason for deferral.’’
In addition, the majority co-executors, in their petition
for a court order to sell the EIC shares, stated that the
offer made was in full compliance with all state and
federal laws. Perhaps the co-executors were not aware of
the possibility of section 16(b) liability. This failure,
however, to be aware of the possible securities implica-
tions of a transaction certainly does not prevent the ap-
The executors of the estate of George Sax may not
have believed that the rescission of George Sax’s acts of
self-dealing was a purchase for purposes of section 16(b).
They might not have believed that there was any_need
to necessitate a delay of the sale of EIC shares. None-
theless, the executors took the risk of a section 16(b)
violation by petitioning for a sale within “six months.”
Their beliefs are irrelevant to a determination of the
legal effect of their transactions.
re
plication of federal securities law. To so hold would under-
mine the securities law.
There is no indication that Judge Dunne would not
have put over the sale of the EIC shares to avoid federal
securities problems. Not being made aware of any secu-
rities problems by the attorneys for the co-executors, he
acted oi their desire to have the estate shares sold by
trying to get the highest price possible through sealed
bids. The timing of the sale remained in the hands of the
co-execiitors as far as section 16(b) liability was con-
cerned. Tie ability to control the timing of the court’s
action allowed for the possibility of speculative abuse in
the transactions engaged in. Jd. at 1163-64; Wentz, supra
at 252.
The possibility of speculative abuse and a finding of
section 16(b) liability is not governed by the form of the
transaction as a sale by sealed bids at a judicial sale.
Instead, the commercial substance of the transaction must
be considered in order to prevent an insider from dis-
guising the effective transfer of stock. Bershad vy. Me-
Donough, 428 F.2d 693, 697 (7th Cir. 1970), cert. denied,
400 U.S. 992 (1971). The commercial substance of the
judicial sale by sealed bids shows a substantial monetary
benefit gained by the estate and an actual sale of stock
within six months of a purchase of the same corporation’s
shares. The benefit gained and the unexercised possibility
of engineering the sale outside of the six-month period
suffice to show that a possibility of speculative abuse was
present. The executors had both access to inside informa-
tion as insiders and sufficient influence over the timing
and circumstances of the sale of the shares of EIC stock
to give the possibility of profits based on inside informa-
tion.
Probate Court’s Participation in the Sale
Defendants further argue that the sale of EIC shares
pursuant to a private judicial sale was not a sale by the
executors within the meaning of section 16(b) because
under Illinois law the court is really the seller and the
— 45a —
executor merely the court’s agent. In Berber v. Hass, 57
Ill. App. 2d 109, 116, 207 N.E.2d 96 (1st Dist. 1965), it
was held that the court, which orders a sale of real estate
held by a decedent’s estate, is actually the seller and the
executor is merely its agent. Sales covered by the Secu-
rities Exchange Act of 1934 are broadly define d to include
*fany contract to sell or otherwise dispose of’’ any secu-
rity. Section 3(a)(14) of the Securities Exe -hange Act of
1934 (15 U.S.C. § 78e(a)(14)). The meaning of the term
“‘sale’’ is a matter of federal law to be broadly construed
to effectuate the purposes of section 16(b) irrespective
of its meaning in other contexts. Bershad v. McDonough,
supra at 696. Accordingly, defendants’ characterization of
the probate court as the seller and the executor as the
court’s agent in the context of probate proceedings is ir-
relevant to the determination whether the executor is the
seller for the purposes of federal securities law.
The transfer of shares by way of a judicial sale may
appear involuntary, but it is sufficiently within the execu-
tors’ control to permit them as insiders to use inside in-
formation unfairly. This is especially so, here. where the
executors initiated the probate court proceedings by filing
petitions for court approval of a sale of the EIC stock.
If executors of an estate were allowed to immunize their
stock transactions involving estate shares from federal
securities law liability by obtaining court approval or
court participation, then the purpose of section 16(b) to
prevent the possibility of speculative abuse would be
frustrated. See Alloys Unlimited, supra at 619. Thus, the
characterization in Illinois law of the court as the vendor
and the executor as the agent in judicial sales of real
property does not preclude the application of section 16(b)
to executors of an estate in a judicial sale of personal
property.
The will of George Sax gives the exeeutors power to
act in their sole discretion to sell any of the property
of the estate. (Sections B2.02 and B2.03). The Seventh
Circuit has interpreted Illinois law to be that in the
course of the administration of an estate a sale of per-
— 46a —
sonal property to a bona fide purchaser for a valuable
consideration is valid without court approval. Equitable
Life Assurance Soc. v. Mallers, 104 F.2d 567, 569 (7th
Cir. 1939) Despite the will and Mallers, supra, [linois
statutory law now provides that an executor, by leave of
court, may sell personal property of the decedent. Ill.
Rev. Stat. ch. 3, §209. The court is of the opinion that
the Illinois statute mandates court approval as a con-
dition precedent for the sale of personal property by an
estate.
The position of the majority co-executors is that they
never conceded the probate court’s jurisdiction to order
the EIC stock sold. Nonetheless, the court had the power
to act, and the majority co-executors voluntarily sub-
mitted to the authority of the probate court. They im-
plieiily escaceded the court’s jurisdiction by filing for
court approval. The decision here is based on what ac-
‘ually oceurred, and there clearly was a sale of shares
of EIC stock after the voluntary filing of petitions for
sale by all of the co-executors. Thus, the issue here is
whether the extent of the court participation made the
sale of estate shares involuntary, forced, and compelled
so that the transaction was not a sale for purposes of
section 16(b).
Involuntary, Forced, and Compelled Transaction
In Makofsky, supra at 636, the beneficial owner of stock
found to have made a sale within the meaning of section
16(b) played only a minor role in the sale that took
place. Another private party, for business reasons, not
only approved the sale but also engaged in direct negotia-
tions in arranging the sale. Nonetheless, the court in
Makofsky found that the need for approval and par-
ticipation in negotiations by a third party in the actual
sale did not prevent a finding of a sale for purposes of
section 16(b) by the beneficial owner of stock only
minimally involved in the sale. Similarly. the approval
by the probate court of a sale of the shares of EIC
stock and the arrangement of bids to be made secretly
— 47a —
does not prevent the application of section 16(b) to
the co-executors. The probate court did not even engage
in any negotiations for the sale of the shares which would
suggest the possibility of an involuntary sale.
The court in Makofsky, supra at 642, stated that al-
though the circumstances of the sale of stock seriously
restricted the control by the beneficial owner of stock held
to have made the sale, the record did not support the
view that this party had no voice whatsoever, The court
applied a “but for” test to determine whether the sale
was forced by a third party so that without the action
by the third party the short-swing sale would not have
taken place. Jd. What has to be determined here is whether
“but for’ the court’s participation the sale of shares of
EIC stock held by the estate of George Sax would not
have taken place within a six-month period so as to be
subject to section 16(b) liability.
First, both Rhoda Sax and the majority co-execu-
tors filed petitions for court approval of offers to pur-
chase shares of EIC stock held by the estate of George
Sax. All of the executors voluntarily put their “own head
in the lion’s mouth.” Jd. at 543. The majority co-execu-
tors state that they sought court approval only of the
Pallas offer and only to satisfy the conditions of the
First National Bank of Chieago. Nonetheless, their peti-
tion was filed voluntarily seeking the court’s participa-
tion in the sale of the estate shares. The failure of the
court to act specifically in the manner the majority co-
executors desired did not negate the possibility of spec-
ulative abuse by the transaction that actually took place.
This was not a compelled transaction, because the execu-
tors were not forced by the court to file their voluntary
petitions for a sale of EIC stock. Thus, the “but for”
was not the court’s participation but the voluntary filings
of the executors. “But for” the exeeutors’ petitions the
sale of stock would not have been held within the six-
month period.
Second, the probate court acted in a ministerial capacity
in ordering the sale of shares of EIC stock that both
—
— 48a —
parties to the proceeding wanted. The petitions came be-
fore the probate court on February 9, 1976. Judge Dunne
stated that with all parties in favor of a sale of the
EIC shares the shares would be sold through secret bids
to the highest bidder. The suggested manner of sale was
made because there was disagreement as to whom the
shares should be sold. The court acted ministerially by
ordering a sale by sealed bids to prevent further cut-
throat bidding. A bidding war was likely as the majority
co-executors made a bid at $14.25 a share to counter
Rhoda Sax’s initial petition to sell at $14.00 a share,
and then Rhoda Sax filed an amended petition to sell at
$14.30 a share or to the highest bidder over $14.00. The
appeals that followed by the majority eo-exeeutors were
not over whether a sale of the shares should be made,
as they had already filed a petition to sell the EIC shares.
They challenged the court’s jurisdiction to order the
sale and the manner in which the sale was to take place.
The probate court decision was upheld in each instance.
Disputes over the mechanics of sale did not make the
sale sought by all interested parties involuntary.
Third, the executors rather than the court remained
the real parties in interest. The court’s action approving
a sale by sealed bids was not the e inpelling force
whereby the sale of the shares of EIC stock had to take
place within a six-month period of the transaction herein
found to be a purchase. There is nothing about the pro-
bate court’s order that would have prevented the delay
of the transaction until after the six-month period had
run. The executors, the real parties in interest, never
sought to delay the sale to avoid the securities law im-
plications. Thus, they retained at least some power to
avoid a section 16(b) violation. Makofsky, supra at 648.
In Alloys Unlimited, supra at 619, the court held that
a defendant had made a sale within the meaning of see-
tion 16(b) when a bank, a third party, sold stock pledged
to it by the defendant. The sale by the bank constituted
a sale by the defendant, irrespective of whether defen-
dant had the freedom to act to obtain refinancing so as to
prevent the sale. The defendant remained the real party
— 49a —
in interest for purposes of section 16(b), just as the
executors remained the real parties in interest in the
sale through sealed bids by the court.
The executors’ initiation of probate court proceedings
for a sale of shares of EIC stock and their retention of
some power to get out of a sale within a six-month period
precludes the application of a foreed seller defense to
the circumstances of this ease. The sale of estate shares
through the private judicial sale was not involuntary,
forced, or compelled. Section 16(b) is thus applicable to
the transaction.
Liability of Rhoda Sax as Minority Covexrecutor
Rhoda Sax states that as a minority co-executor she
was wholly powerless unaer the will of George Sax to
effectuate the sale of estate shares (Section A7.05), so
that she cannot he held liable under section 16(b). The
court’s review of the participation by Rhoda Sax in the
sale of the shares of EIC stock shows that she is equally
liable under section 16(b) with the other executors.
Rhoda Say first petitioned the prohate court for an
order directing the exeeutors of the estate of Ceorge
Sax to sell the estate’s shares of EIC stock through the
Kaufman offer or through a higher offer. After the filing
of the petition of the majority co-exeecutors for court
approval of the Pallas offer, Rhoda Sax filed an amend-
ment to her petition seeking aeceptanee of the Kaufman
offer at $14.30 a share or, alternatively, the holding of a
judicial sale of the shares to the highest bidder. Judge
Dunne of the probate court, acting on the petitions of
both Rhoda Sax and the majority co-executors, followed
the recommendation of Rhoda Sax and ordered a court
sale to the highest bidder. The attorneys for Rhoda Sax
then successfully defended Judge Dunne’s determination
of the manner in whieh the sale should take place from
the challenges of the majority co-executors. At all times
Rhoda Sax sought to have the sale of the shares of EIC
stock made in the manner in which the shares were ac-
tually sold. Even though the will stated that Rhoda Sax
4
—
— 50a —
should be entirely powerless to effectuate the sale of the
estate shares, her actions belie the will’s statement and
her present representations. In fact, in the petition of
Rhoda Sax’s attorneys for fees filed with the probate
court they stated that their efforts on behalf of Rhoda
Sax resulted in increased benefits for the estate so that
they should be awarded fees commensurate with the time
expended in connection with the sale of the estate shares.
These circumstances clearly show that Rhoda Sax’s par-
ticipation in the sale of the shares of the EIC stock was
sufficient to hold her liable under section 16(b).
In Whiting v. Dow Chemical Co., supra at 688-89, the
court held that control need not be exclusive for section
16(b) to be applicable as long as a person is in a posi-
tion to obtain inside information. Rhoda Sax was an in-
sider through her own stock ownership of over 10 percent
of EIC stock and her position as an executor of the
estate of George Sax holding over 10 percent of EIC
stock. While Rhoda Sax did not have exclusive control
over the sale made as she shared control with the
majority co-executors and control over the mechanics
with the court, as an insider she is still liable under sec-
tion 16(b).
The defenses asserted by the defendants are not ap-
plicable to the transaction alleged to be a sale especially
here, where the circumstances suggest the possibility of
speculative abuse. Accordingly, the sale of the shares of
EIC stock to the highest bidder in a private judicial sale
on May 7, 1976, is a sale for the purposes of section
16(b).
CONCLUSION
The court finds that the estate of George Sax, a 10
percent beneficial owner of shares of EIC stock, pur-
chased 14,318 shares of EIC stock at $10.49 a share from
the Sax Foundation on December 22, 1975, and sold
190,727 shares of FIC stock at $18.59 a share on May 7,
1976. The purchase and sale occurred within six months
of each other, The plaintiff need not further show that
the co-executors of the estate of George Sax improperly
— 5la —
used inside information or had actual access to inside in-
formation, as the application of section 16(b) is auto-
matic upon a finding of a purchase and sale within a
six-month period. Allis-Chalmers, supra at 351-52. The
application of section 16(b) is further warranted as the
possibility of speculative abuse was present in relation
to both transactions. As no material issue of fact exists
and the requirements for liability under section 16(b)
of the Securities Exchange Act of 1934 are met, sum-
mary judgment will be entered in favor of the plaintiff
pursuant to Fed. R. Civ. P. 56, Plaintiff is entitled to
recover $115,976 and interest from May 7, 1976, on be-
half of defendant Exchange International Corporation
from defendant co-trustees of the estate of George Sax—
Samuel Wm. Sax, Edward L. Sax and the Continental
Illinois National Bank and Trust Company of Chicago.
For the reasons stated, it is therefore ordered that
plaintiff’s motion for summary judgment shall be, and
the same is hereby, granted, and defendants’ motions for
summary judgment shall be, and the same are hereby,
denied.
It is further ordered that counsel for the plaintiff
prepare and submit an appropriate form of judgment.
April 7, 1978.
-
— 52a —
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
No. 76 C 4712
SEYMOUR A. OLIFF,
Plaintiff,
EXCHANGE INTERNATIONAL CORPORATION, the
ISSUER, a Delaware corporation, and EDWARD IL.
SAX, SAMUEL WM. SAX and THE CONTINENTAL
ILLINOIS NATIONAL BANK AND TRUST COM-
PANY OF CHICAGO, AS CO-TRUSTEES OF THE
MARITAL AND RESIDUARY TRUSTS UNDER THE
LAST WILL OF GEORGE D. SAX,
Defendants.
SUPPLEMENTAL ORDER
This cause is before the court on the motion of defen-
dants for reconsideration of this court’s decision grant-
ing summary judgment to plaintiff and denying summary
judgment to defendants. For the reasons stated. the mo-
tion is granted in part and denied in part.
First, defendants argue that the court’s conclusion,
that the rescission by the estate of George Sax of George
Sax’s acts of self-dealing was a section 16(b) purchase,
should be reconsidered in light of the decisions in S. & S.
Realty Corp. v. Kleer-Vu Industries, Inc., CCH Fed.
See. L. Rep. 96,056 (S.D.N.Y. 1977), and Morales v.
Great America Corporation, CCH Fed. See. L. Rep.
796,339 (M.D. La. 1978). The eases cited raise no new
issues. Furthermore, they are distinguishable from the
case at bar because the possibility of speculative abuse
was present in the rescission of George Sax’s acts of
self-dealing, and the eases relied on by the courts in
S. & S. Realty Corp. and Morales were discussed and dis-
tinguished in the court’s memorandum and order of April
7, 1978.
— 53a —
Second, defendants argue that the amount of the judg-
ment should be reduced by the amount of expenses in-
curred in carrying out the purchase and sale, including
the reasonable attorney’s fees which arose in connection
with the probate court proceedings. Defendants’ argu-
ment is totally without merit. Acceptance of their argu-
ment would severely frustrate the penal and remedial
purposes of section 16(b). Epstein v. Shindler, 200 F.
Supp. 836, 837 (S.D.N.Y. 1961).
Third, defendants argue that the award of interest
on the judgment for the plaintiff should be computed
from the date of judgement rather than from the date
of the last section 16(b) transaction. In a section 16(b)
case an award of interest is discretionary. Blau v. Lehman,
368 U.S. 403, 414 (1962). Because the defendants’ vio-
lation of section 16(b) could have been inadvertent, the
court’s memorandum and order of April 7, 1978, is modi-
fied to award interest from that date rather than from
the date of the sale of EIC stock on May 7, 1976. Of
course, as explained in the memorandum and order of
April 7, 1978, possible inadvertence is no defense to a
finding of section 16(b) liability.
For the reasons stated, it is therefore ordered that
the court’s memorandum and order of April 7, 1978, be
modified to provide for interest to be awarded from the
date of judgment rather than from the date of the last
section 16(b) transaction, and that in all other respects,
defendants’ motion for reconsideration shall be, and the
same is hereby, denied,
May 22, 1978
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.