Petition — Whittaker v. Whittaker Corp.
Supreme Court brief1981
Ask Donna
What actually matters in this document.
Text
80-1908
IN THE
Office-Supreme Court, U.S.
FILED
MAY 12 1981
ALEXANDER L. STEVAS,
Supreme Court of the United States-
OctToper TERM, 198!
SO stains
Wm. RoBeRT WHITTAKER,
Petitioner,
vz.
WHITTAKER CORPORATION,
Respondent.
PETITION FOR A WRIT OF CERTIORARI
TO THE
UNITED STATES COURT Of APPEALS
FOR THE NINTH CIRCU‘T
WILLIAM THOMPSON BISSET
515 South Flower Street
Los Angeles, California 90071
(213) 489-5140
Attorney for Petitioner
Of Counsel:
HuGuHes HuspparD & REED
Joun J. KRacik, IV
515 South Flower Street
Los Angeles, California 90071
PANDICK PRESS, WEST COAST. 1945 S. FIGUEROA. LOS ANGELES, CALIFORNIA (213) 747-4321
Petitioner Wm. Robert Whittaker respectfully petitions for
a writ of certiorari to review certain portions of the judgment of
the United States Court of Appeals for the Ninth Circuit
entered in this case on February 12, 1981, affirming in part and
reversing in part the judgment of the United States District
Court for the Central District of California entered on April 7,
1977.
QUESTIONS PRESENTED
1. Whether respondent’s notice of appeal filed more than
30 days after entry of judgment but less than 30 days after the
district court’s denial of respondent’s post-judgment motion to
retax costs was untimely and therefore insufficient to confer
jurisdiction on the court of appeals.
2. Whether, on the court of appeals’ “attribution” theory,
petitioner is liable under § 16(b) of the Securities Exchange Act
of 1934 (“§ 16(b)”) for “profit realized” by his mother from
securities transactions that he managed for her.
3. Whether, despite the district court’s finding that re-
spondent was at all times on notice of the facts underlying its
§ 16(b) claim, petitioner’s failure to list his mother’s transac-
tions on forms that he filed with the SEC tolled § 16(b)’s two-
year statute of limitations that, but for tolling, would bar
respondent’s claim.
4. Whether Congress intended § 16(b) to create strict
liability for “profit” calculated according to a “lowest in highest
out” formula.
TABLE OF CONTENTS
PAGE
CO ee FT I cctpiscqsnctsennincenccitsdansnniotcmersaipiiuanilitie i
TR ae Far ee 6 BI waretvsiesetcnscsniscepnisstsinhiinsnciesensinbdinabinant iii
Se EINE OY centitenrantinihienentatincshenctenessecieonccntesttiy neal 1
FU a ccckiescessinisitiiesieiiasntmssticiasinncostnccdnlansnnnitiagiiiadaiibeibintinsliesh 1
CONTROLLING RULES AND STATUTES .....0..0....000:000000000 2
SEA ee Ce. BONE RPE irseeiitdin chcsceintonanticchdetpaenividiledniainala 2
JURISDICTION IN THE DISTRICT COURT ............0.0..0000. 4
REASONS FOR GRANTING THE WRIT ...0.0.......cccccccseeseeees 4
Lack of Appellate Jurisdiction .............sssssssscssssercessessssesees 4
Undue Expansion of Section 16( b).........::.cccscesseseeeseseeeeees 5
I. THE CORPORATION'S NOTICE OF APPEAL WAS
OFECT MMNEES cictnchoremsbienhins’bechetrceteahieceianaisihdocindanaemania 6
Il. CONTRARY TO CONGRESS’ INTENT AND THIS
COURT'S INTERPRETIVE GUIDELINES, THE
DECISION BELOW UNDULY BROADENS
§ 16(b)’S EXTRAORDINARY LIABILITY WITH-
OUT FAULT AND UNDULY NARROWS
§ 16(b)’S RESTRICTIONS ON SUCH LIABILITY.... 9
A. The Court of Appeals’ Decision “Attributing” to
Mr. Whittaker His Mother’s Purchases and Sales
of Securities Departs from the Words of § 16(b)
and Conflicts with Principles Established by this
Court in Blau v. Lehman and Subsequent Cases... 9
B. The Court of Appeals’ Ruling that § 16(b)’s
Two-Year Statute of Limitations Was Tolled
Conflicts Directly with the Holding in Carr-
Consolidated Biscuit Co. v. Moore, with the Legis-
lative Scheme Enacted by Congress in 1934 and
with Principles of Interpretation Set Forth in this
Court’s Recent Opinions Construing the Federal
SORTING FOO cccsenstacininiesivepsecstpniinnnnisnansiniamianaaiin 13
C. Calculating Liability for “Profit Realized” by
Mechanically Applying a Fictional “Lowest In
Highest Out” Formula, Regardless of the Cir-
cumstances, Penalizes Mr. Whittaker and Other
Insiders who Innocently Fall Victim to § 16(b)’s
RR Bar ae NOES cnevissvrinncitsiniisanstinpiniiatiaaintnaniies 16
IA CII siccnceserccsnssneertivinstninintnssitenststteciataaitsatg nian 20
iil
TABLE OF AUTHORITIES
CASES PAGE
Alameda v. Paraffine Cos., 169 F.2d 408 ( 9th Cir. 1948)........... 6
Allis-Chalmers Manufacturing Co. v. Gulf & Western In-
dustries, Inc., 527 F.2d 335 (7th Cir. 1975), cert. denied, 424
U.S. 928 (1976), aff’g in part, rev'g in part 372 F. Supp. 570
EE ES Pm healsceichichdhiachlees icbalaupnescschikanascinibidddiseaserend 16, 17
Altamil Corp. v. Pryor, 405 F, Supp. 1222 (S.D. Ind. 1975)....... 10
American Standard, Inc. v. Crane Co., 510 F.2d 1043 (2d Cir
1974), cert. denied, 421 U.S. 1000 (1975) .occccccccccccccceeeeeeees 13
Anderson v. Commissioner, 480 F.2d 1304 (7th Cir. 1973) ........ 17
Blau v. Lehman, 368 U.S. 403 (1962) .....cccccccccccssceseeeeees 5, 9, 10, 16
Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975).. 15
Carr-Consolidated Biscuit Co. v. Movore, 125 F. Supp. 423
er Nb caceditisincteiineinsicibntiiilnte Dacdmanichintngsasiagenipidaasmamia 13, 15
Codie v. Came, 257 US. BGO (1GB1) cccscercscccsssntecresnivesssiscscocsnens 14
Department of Water & Power v. Allis-Chalmers Manufac-
turing Co., 213 F. Supp. 341 (S.D. Cal. 1963) .......ccccceccsseeee 16
Environmental Defense Fund, Inc., v. Froehlke, 368 F. Supp.
231 (W.D. Mo. 1973), aff'd sub nom. Environmental De-
Sense Fund, Inc. v. Callaway, 497 F.2d 1340 ( 8th Cir. 1974).. 7
Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976) ......ccccccc000 15, 16
Foremost-McKesson, Inc. v. Provident Securities Co., 423 U.S.
ee ee tai hirtids dao in aleandeddatncnadabandebediniaeianscndevasesonen 5, 13, 19
Fowler v. Hamill, 139 U.S. 549 (1891) ........cccccssscsssessssessseeseesees 7
FTC v. Min::capolis-Honeywell Regulator Co., 344 U.S. 206
fe I Ws toda cctiadillanan apdeccaptlansiiiaes sadsesebisocseediniiniovsseblosasheucdnias 8, 9
Heminway v. Commissioner, 44 T.C. No. 96 ( Apr. 23, 1965)..... 11
Be We CAE, Se Wis DOC FO) cckcscrccncnccccsesscvevcestnsctecnencestsess 6
Holmberg v. Armbrecht, 327 U.S. 392 (1946) ...ccccccccsceseesseeseeneees 16
Kern County Land Co. v. Occidental Petroleum Corp., 411 U.S.
$82 (1973)... ee doncseseccnensesionepenesbcieooonecone 5
Knowles v. United States, 260 F.2d 852 (Sth Cir. 1958)......6, 7, 8
iv
CASES PAGE
Korn v. Merrill, 403 F. Supp. 377 (S.D.N.Y. 1975), aff'd, 538
a I Te in Esa iecrenehiingnpemneceniemhonaennnnt 14
Lewis v. Varnes, 505 F.2d 785 (2d Cir. 1974) .....ccccccccceeeeeeeeeees 13
Marquette Cement Manufacturing Co. v. Andreas, 239 F. Supp.
EIRENE: TT 2 WINE I sttrebebencaicepisnsanhicbeontashnsdschanmscupeahabenestinantens 11
Maryland Casualty Co. v. Jacobson, 37 F.R.D. 427 (W.D. Mo.
ali i descncchii tana cab dieteeininahiir eau teasebtneseniiapnatinbnaletadinedibvenned 8
Nichols v. Commissioner, 14 B.T.A. 1347 (1929) ....cccccccccccesceeeeee 11
Portnoy v. Kawecki Berylco Industries, Inc., 607 F.2d 765 (7th
esa VUET cisicccrshdasdh stebteisoisadbadiiabteiiedasadornenseeencteveidenténsnnilananbeinentee 13
Provident Securities Co. v. Foremost-McKesson, Inc., 506 F.2d
601 (9th Cir. 1974), aff'd, 433 U.S. 232 (1976)... ccc 19
Reliance Electric Co. v. Emerson Electric Co., 404 U.S. 418
Usa ib itissaetacd cles distaste dheeadinich seven cetninnncthiniansetedtumeaseapdaads 5,14
Ross v. United States, 122 F. Supp. 642 (D. Mass. 1954)........... 11
eS a CD bicececdicnseessecsidnedititsetaneecnicones 15
United States v. 2,186.63 Acres, 464 F.2d 676 (10th Cir. 1972). 7
Whiting v. Dow Chemical Co., 523 F.2d 680 (2d Cir. 1975),
aff’g 386 F. Supp. 1130 (S.D.N.Y. 1974) voocccccccceeeeeeeeeeeeees 10
STATUTES
Securities Act of 1933, § 5, 15 U.S.C. § 77(€) cneccceccccccceeseeeeeeeees 16
Securities Act of 1933, § 12(1), 15 U.S.C. § 7711) wee 16
Securities Act of 1933, § 13, 15 U.S.C. § 77m... cece cccesseeeee 16
Securities Exchange Act of 1934, § 9(e), 15 U.S.C. § 78i(e) ..... 15
Securities Exchange Act of 1934, § 10(b), 15 U.S.C. § 78j(b)
TE NS SCR: Le AE AE SENET OS Ae TROT OER 10, 19
Securities Exchange Act of 1934, § 16(a), 15 U.S.C. § 78p(a).. 2
Securities Exchange Act of 1934, §16(b), 15 U.S.C.
ea Wiasasssnitldeceinidanadsitainiitnrtdilanighacvensopasteccnitinnssnaiidbineiaten passim
Securities Exchange Act of 1934, § 18(c), 15 U.S.C. § 78r(e)... 15
Securities Exchange Act of 1934, § 27, 15 U.S.C. § 78aa............ 4
28 U.S.C. § 1254(1) eudposcotessgeonadiaatibeanegitesoneoientes l
BE UBC, § USD N ccrcececcicscoercscovosectcobsSpeocccesncnccseeses 4
RULES PAGE
Se A Ee OE i decatnsnicontbusitipibidedonnereatiadneiqesamnannesingpopianl 2,4, 6
UCI UII TIT ITI Tsao o1d a shiccnnecavcehetopsvesadeiunieuienpmeameddinilanens 7
IEEE: 0's, SPIED ons cesnctacucssentincconcechetonsdensesatnesanesiodaihices 2,4,6, 7
EI Ire Wii in cscecnkipnenssiddttedintiadesiapuasasaponentnanashaiuildiebiiguiicsetinn 8
SERENE THEIL TEs UTE UD Pic chsncccsucheesnstdedsencsncnrenentenseshieitienienhaiuibneiies 7
es MEP Io ED P ccoycncdinchancehissovesocceevscssenntocesassniasipounete 2,4,6, 7
Fed. R. Civ. P. 73(a), 335 U.S. 933-34 (1948), replaced by
EL Os RELI E BO Pccncccrcectcorecceesessoteateeneabionneesaiiiacianaes 6
Rule 10b-5, 17 C.F.R. § 240.10b-5 ......ccccssecsssessssecssseessecsnecssneeess 19
LEGISLATIVE HISTORY
§ 15(b) of S. 2642 and H.R. 7852, 73d Cong., 2d Sess. (1934). 17
Hearings on S. 84, 56 and 97 Before the Senate Committee on
Banking and Currency, 73 Cong., 2d Sess. 6557-59 (1934) ... 17
Hearings on H.R. 4344, 5065 and 5832 Before the House
Committee on Interstate and Foreign Commerce, 77 Cong.,
I Wie PUE Unidas ehscencinndsconbesngaasssscawensenninisagsduinunaisanacthteen 19
OTHER AUTHORITIES
12 C. Wright & A. Miller, Federal Practice & Procedure: Civil
CE _ | San sncnseedieiaieahiclagtbiihtahpianscnsnphisosgnanibinaltsodinglnadeieetnenitn 6
J. Munter, Section 16(b) of the Securities Exchange Act of
1934: An Alternative to “Burning Down the Barn in Order to
Kill the Rats”, 52 Cornell L.Q. 69 (1966) .........ccccccceesseeseee 17, 18
W. Painter, The Evolving role of Section. 16(b), 62 Mich. L.
SII TTT D vocd septinulanasieeptbishninntcensidenutataneesipentaneisnannamintiaa 17, 18
Comment, “ Beneficial Ownership” Under Section 16(b) of the
Securities Exchange Act of 1934, 77 Colum. L. Rev. 446
Note, Insider Liability for Short-Swing Profits: The Substance
and Function of the Pragmatic Approach, 72 Mich. L. Rev.
iis trestandieduistbaiataiasesedisinisessctninenviiabiinnasibsaiiienliioaa’ 17,19
Comment, Section 16(b): An Alternative Approach to the Six-
Month Limitation Period, 20 U.C.L.A. L. Rev. 1289 (1973)
IN THE
Supreme Court of the United States
OcTOBER TERM, 1981
a
Wm. ROBERT WHITTAKER,
Petitioner,
v.
WHITTAKER CORPORATION,
Respondent.
PETITION FOR A WRIT OF CERTIORARI
TO THE
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
OPINIONS BELOW
The opinion of the court of appeals is reported at 639 F.2d
516. The unpublished opinion of the district court is reprinted
at [1977-78 Transfer Binder] CCH Fed. Sec. L. Rep. J 96,008.
These opinions are set out in Appendices A and B.
JURISDICTION
The judgment of the court of appeals was entered on
February 12, 1981. This Court has jurisdiction to review the
judgment of the court of appeals by writ of certiorari pursuant
to 28 U.S.C. § 1254(1).
2
CONTROLLING RULES AND STATUTES
The controlling rules on jurisdiction are Fed. R. Civ. P.
54(d) and 59(e) and Fed. R. App. P. 4(a). The controlling
statutes on the merits are §§ 16(a) and (b) of the Securities
Exchange Act of 1934 (15 U.S.C. §§ 78p(a) and (b))
(“§ 16(a)” and “§ 16(b)”). These rules and statutes are set
out in Appendix C.
STATEMENT OF THE CASE
Petitioner Wm. Robert Whittaker (“Mr. Whittaker’)
founded Respondent Whittaker Corporation (“the Corpo-
ration”’) in the 1940’s. His parents lent money to the fledgling
enterprise and became 35% shareholders [| App. at B-2]. By the
end of the 1950’s, the Corporation had prospered, and both Mr.
Whittaker and his mother, by then a widow, had become
independently wealthy through their ownership of the stock of
a predecessor of the Corporation. In 1959, because of the
increased complexity of the task, Mr. Whittaker began manag-
ing his mother’s investment portfolio and handling her financial
affairs pursuant to a general power of attorney [App. at B-4].'
At all relevant times, Mr. Whittaker and his mother maintained
separate households, each paying his or her expenses with his
or her own money.
In March 1965, after a period of rapid growth through a
series of acquisitions and mergers, the officers and directors of
the Corporation first became subject to the insiders’ reporting
requirements of § 16(a). The Corporation delegated responsi-
bility for assuring compliance with such requirements to its
chief legal counsel, who then and thereafter arranged for
appropriate reports for each insider to be prepared and filed
with the SEC and for advisory memoranda to be circulated to
each insider [App. at B-2-3].
1In the early 1960's, Mr. Whittaker acquired a substantial portion of his
mother’s holdings in the predecessor of the Corporation and gave his
promissory notes in return. At the time of trial, Mr. Whittaker’s outstanding
notes to his mother in the amount of $767,436 represented more than half her
net worth [App. at B-5].
3
Throughout the late 1960’s and early 1970’s,2 Mr. Whitta-
ker regularly sold small portions of his own founder’s stock, in
effect using his securities as currency to supplement his cash
flow. Although he bought none of the Corporation’s securities
for himself during the relevant trading period, he did buy and
sell certain such securities ( principally, convertible debentures )
for his mother in transactions that he did not include on the
forms that he filed with the SEC [App. at B-5-6]. The district
court found that he had openly disclosed his mother’s and his
own transactions, orally and in writing, within the Corporation,
and that the Corporation was at all times on notice of its
potential § 16(b) claim [App. at B-16-17].
In January 1971, the Corporation advised Mr. Whittaker
that if his mother’s transactions could be “attributed” to him
and consolidated with his own transactions, he would have
substantial § 16(b) liability. Subject to his reserved right to
bring an action to obtain a judicial declaration of his actual
liability, if any, and to recover whatever had been overpaid
[App. at B-1], Mr. Whittaker paid the Corporation the total
amount of its maximum potential claim—$495,222.
Trial was held in the United States District Court for the
Central District of California in October-November 1976 be-
fore the Honorable Laughlin E. Waters. In an opinion filed
March 22, 1977, the district court broadly interpreted § 16(b)
sO as to cover the transactions that Mr. Whittaker managed for
his mother. The district court also ruled that Mr. Whittaker was
entitled to rely on § 16(b)’s two-year statute of limitations to
bar part of the Corporation’s claim. It found as a fact that the
Corporation was on notice at all times of any potential § 16(b)
claim against Mr. Whittaker and, accordingly, held that the
Corporation could not properly invoke any federal tolling
doctrine. In upholding Mr. Whittaker’s statute-of-limitations
defense, the district court ordered the Corporation to return the
moneys that it had collected from him in respect of transactions
completed more than two years before the Corporation first
made its demand.
2 The transactions at issue in this litigation occurred between December
1, 1965, and December 31, 1970 (“the relevant trading period”).
4
Judgment was entered on April 7, 1977. In contravention
of Fed. R. App. P. 4(a), which allows only 30 days from the
date of entry of judgment within which to appeal, the Corpo-
ration failed to file its notice of appeal until May 18, 1977.
Over Mr. Whittaker’s objection, the district court ordered its
clerk to accept the Corporation’s notice of appeal for filing,
ruling that the Corporation’s post-judgment motion to retax
costs had extended its time for appeal. The United States Court
of Appeals for the Ninth Circuit subsequently denied Mr.
Whittaker’s motion to dismiss the Corporation’s appeal for
want of jurisdiction; and, on the merits of the Corporation's
appeal and Mr. Whittaker’s cross-appeal, affirmed the district
court’s “attribution” theory of § 16(b) liability but reversed its
ruling that Mr. Whittaker could rely on § 16(b)’s two-year
statute of limitations. Mr. Whittaker’s resulting liability is
greater than that imposed on any individual insider in any
reported decision of which we are aware.
JURISDICTION IN THE DISTRICT COURT
Jurisdiction in the district court was premised on § 27 of
the Securities Exchange Act of 1934 (15 U.S.C. § 78aa) and 28
U.S.C. § 1331.
REASONS FOR GRANTING THE WRIT
Lack of Appellate Jurisdiction
At the outset this petition raises the procedural issue
whether the making of a post-judgment motion to retax costs
extends the time to invoke federal appellate jurisdiction. Reso-
lution of the issue requires analysis of the text and policy of
Fed. R. Civ. P. 54(d) and 59(e) and Fed. R. App. P. 4(a).
We respectfully submit that the issue is important enough to
warrant this Court’s review because the basic limits of appellate
jurisdiction and the principle that litigation must end at some
. 5
definite point in time are at stake. We believe that the decision
below conflicts with important principles established by this
Court and with a holding of the United States Court of Appeals
for the Fifth Circuit.
Undue Expansion of Section 16(b)
This petition also raises a group of substantive issues
involving the proper construction of § 16(b). These issues can
broadly but fairly be stated to be whether the words of § 16(b).
interpreted literally, set the outer boundaries of the statute’s
extraordinary liability without fault or whether such liability
extends beyond the statute’s literal terms.
Because customary guidelines of morality and good faith
afford no protection against § 16(b)’s potential for imposing
enormous liability without fault, we submit that insiders should
not have to run the risk that courts will interpret the language of
the statute in light of its general anti-insider purpose so as to
reach transactions not squarely covered. The decision below
creates uncertainty that will touch tens (and probably hun-
dreds) of thousands of individual insiders (officers, directors
and 10% owners ) of the thousands of public companies that are
subject to the federal securities laws and turn § 16(b) into even
more of a trap for the unwary than it already is.
This Court has rendered four opinions on the merits
interpreting § 16(b).3 All were cases limiting the § 16(b)
liability of business enterprises (i.e., partnerships and corpo-
3 Foremost-McKesson, Inc. v. Provident Secs. Co., 423 U.S. 232, 249-52
(1976) (no liability because more-than-10% stockholder literally was not
such “both at the time of the purchase and sale;” held: status must be
determined before, not simultaneously with, the purchase ); Kern County Land
Co. v. Occidental Petroleum Corp., 4\\ U.S. 582 (1973) (no liability because
involuntary exchange was not a “sale”); Reliance Elec. Co. v. Emerson Elec.
Co., 404 US. 418, 422-23 (1972) (no liability because more-than-10%
stockholder literally was not such “both at the time of the purchase and sale;”
held: no liability for sale made after insider reduced his ownership below 10%
in order to avoid § 16(b)); Blau v. Lehman, 368 U.S. 403, 414 (1962) (the
most critical precedent; held: insider potentially liable only for profit realized
by him).
6
rations) that themselves were corporate insiders. Individual
insiders now need guidance from the Court concerning their
potential § 16(b) liability for securities transactions of their
parents, spouses, offspring, relatives, associates and friends.
The decision below conflicts, at least in principle, with this
Court’s decisions requiring strict and literal interpretation of the
federal securities laws generally and § 16(b) particularly. It
also conflicts in important respects with reported decisions of
other federal courts.
L.
THE CORPORATION'S NOTICE
OF APPEAL WAS UNTIMELY
The Corporation filed its notice of appeal more than 30
days after judgment was entered. Nevertheless, the court of
appeals denied Mr. Whittaker’s motion to dismiss on the
ground that the Corporation’s post-judgment motion to retax
costs should be regarded as a motion to “alter or amend the
judgment” under Fed. R. Civ. P. 59(e) for purposes of
extending the time for appeal under Fed. R. App. P. 4(a). In
fact, however, the Corporation’s post-judgment motion, both in
caption and in substance, was a motion to retax costs under
Fed. R. Civ. P. 54(d), the making of which did not extend the
time for appeal.
The court of appeals’ ruling upholding jurisdiction directly
conflicts with the Fifth Circuit Court of Appeals’ decision in
Knowles v. United States, 260 F.2d 852 (Sth Cir. 1958).4 See
4 The court of appeals followed its early decision in Alameda v. Paraffine
Cos., 169 F.2d 408 ( 9th Cir. 1948), a case akin to Hill v. Hawes, 320 U.S. 520
(1944), both of which were overruled by the 1948 amendment to Fed. R.
Civ. P. 73(a) [the predecessor of Fed. R. App. P. 4(a)]. 335 U.S. 933-34
(1948). See the Advisory Committee’s Note, which is reprinted in 12 ©.
Wright & A. Miller, Federal Practice & Procedure: Civil, at 542 (1973).
7
aiso Fowler v. Hamill, 139 U.S. 549 (1891) (entry of second
judgment specifically including amount of costs does not extend
time for filing notice of appeal from original judgment);
Environmental Defense Fund, Inc. v. Froehlke, 368 F. Supp.
231, 251-53 (W.D. Mo. 1973), aff'd sub nom., Environmental
Defense Fund, Inc. v. Callaway, 497 F.2d 1340 (8th Cir. 1974)
(motion to retax costs arises under Fed. R. Civ. P. 54(d) and
not Fed. R. Civ. P. 59(e)). Burt see also United States v.
2,186.63 Acres, 464 F.2d 676, 677 (10th Cir. 1972) (motion to
retax custs was styled “motion to amend judgment”’).
In Knowles, judgment was entered on September 19, 1957.
Appellant moved for a new trial under Rule 59a). for
additional findings of fact and conclusions of law under Rule
52(b) and for vacation of the court’s order directing the clerk to
tax costs against appellant.5 On December 20, 1957, the
district court denied appellant’s Rule 59(a) and Rule 52(b)
motions. On January 28, 1958, the district court denied
appellant’s motion to vacate the order directing taxation of
costs. On February 19, 1958 ( more than 60 days after denial of
appellant’s Rule 59(a) and Rule 52(b) motions but less than
60 days after denial of appellant’s retaxation-of-costs motion ),
appellant filed her notice of appeal from each of the district
court’s rulings. The Fifth Circuit, after having “carefully
considered each of the excuses presented by the appellant and
her asserted grounds for preserving this Court’s jurisdiction,”
dismissed the appeal from the district court’s December 20
5In the case at bar, the court of appeals mistakenly distinguished
Knowles in part on the ground that Ms. Knowles’ motion to retax challenged
only two items of cost. 639 F.2d at 521 n.2. In fact, the post-judgment
motion in Knowles was to vacate the entire award of costs (which happened
to consist of only two items) on the ground that the Fifth Circuit’s local rule
forbade any award of costs for or against the United States. 260 F.2d at 854.
8
rulings as being one day late,® but upheld the timeliness of the
appeal from, and indeed reversed, the district court’s January
28 ruling on costs. 260 F.2d at 854.’
The dual principles underlying the decision in Knowles
were set forth by this Court in FTC v. Minneapolis-Honeywell
Regulator Co.: that “litigation must at some definite point be
brought to an end” and, therefore, that those federal rules of
civil procedure that sometimes extend the time to appeal “are
not to be applied so as to permit tolling because some event
occurred in the lower court after judgment was rendered which
is of no import to the matters to be dealt with on review.” 344
U.S. 206, 213 (1952). In Minneapolis-Honeywell, respondent
appealed to the court of appeals from each of three district
court determinations but then abandoned its appeal from two
of the three. On July 5, the court of appeals reversed the third
determination. On August 21, the FTC by motion asked the
court of appeals to clarify that the other two determinations of
the district court still stood. On September 18, the court of
appeals entered a second order restating its prior reversal of the
one determination and confirming the validity of the other two.
On December 14 (more than 90 days after the July 5 order but
less than 9J days after the September 18 order), the FTC
petitioned for certiorari.
® Since the United States was a party, appellant had 60 days from entry
of judgment within which to notice her appeal.
7 As the court of appeals noted in the case at bar, the motion to retax in
Knowles related to costs assessed in connection with a prior appeal. The
distinction that the court of appeals attempted to draw was that the
challenged costs in Knowles were “separate from” the merits of the judgment
from which appellant appealed. However, it is the very “separateness” of
entry of judgment and award of costs in all cases that clearly shows why no
post-judgment motion to retax costs should affect the finality of a judgment on
the merits or the running of the time to appeal therefrom. See, ¢.g., Fed. R.
Civ. P. 58 (“Entry of judgment shall not be delayed for the taxing of costs.” );
Maryland Cas. Co. v. Jacobson, 37 F.R.D. 427, 430 (W.D. Mo. 1965)
(“questions relating to the taxation of costs . . . are not to (« confused with
questions that relate to the merits of an appeal”).
9
The Court dismissed the petition as untimely:
“| We cannot hold that the time for filing a petition for
certiorari was enlarged simply because this paper [..e., the
FTC’s post-judgment motion] may have prompted the
court below to take some further action which had no
effect on the merits of the decision that we are now asked
to review in the petition for certiorari.”
344 US. at 211.
So too here, the Corporation's post-judgment motion to
retax costs raised a matter clearly collateral to the merits of the
judgment subsequently reviewed by the court of appeals. The
court of appeals’ ruling that the making of the motion to retax
costs extended the Corporation’s time to appeal conflicts with
the principles applied in Minneapolis-Honeywell and therefore
must be overturned.
CONTRARY TO CONGRESS’ INTENT AND THIS
COURT'S INTERPRETIVE GUIDELINES, THE
DECISION BELOW UNDULY BROADENS
§ 16(b)’S EXTRAORDINARY LIABILITY WITHOUT
FAULT AND UNDULY NARROWS § 16(b)’S
RESTRICTIONS ON SUCH LIABILITY
A. The Court of Appeals’ Decision “Attributing” to Mr.
Whittaker His Mother’s Purchases and Sales of Secu-
rities Departs from the Words of § 16(b) and Conflicts
with Principles Established by this Court in Blau vy.
Lehman and Subsequent Cases
The court of appeals held that Mr. Whittaker’s mother’s
securities transactions must be “attributed” to him for § 16(b)
purposes because he was in a position to “benefit” from them.
It further held that profits “realized” by matching either Mrs.
Whittaker’s purchases and sales of stock and convertible deben-
10
tures or by matching Mr. Whittaker’s sales of stock and his
mother’s purchases of stock and convertible debentures are
“profits realized by him” as that phrase is used in § 16(b).
This holding conflicts with principles of interpretation set forth
in Blau v. Lehman, 368 U.S. 403 (1962) (strictly and literally
interpreting “profit realized by him” in the context of a
partnership and disapproving “attribution” of § 16(b) profit),
and subsequent cases construing § 16(b) and other federal
securities laws. As the Coun said in Blau v. Lehman,
“18 16(b)] leaves no rooim for judicial doubt that a director is
to pay to his company only ‘any profit realized by him’ from
short-swing transactions.” 368 U.S. at 414 (emphasis in origi-
nal). The case at bar and two previously-decided cases
involving “attribution” to insiders of their spouses’ profits® have
expanded § 16(b)’s “extraordinary liability” beyond the limits
fixed by Congress and have left insiders and their families,
friends, associates and advisors with insufficient guidance as to
the scope of potential liability. See Comment, “Beneficial
Ownership” Under Section 16(b) of the Securities Exchange Act
of 1934, 77 Colum. L. Rev. 446, 453-60 (1977) (sharply
criticizing the district court decision in this case and the Whiting
and Altamil decisions on which it was based). An insider may
“benefit” in some sense, now or in the future, directly or
indirectly, when someone whom he knows or someone whose
portfolio he manages trades his company’s securities.1° Such
“benefit”, however, is not “profit realized by him” within the
meaning of § 16(b).
® Whiting v. Dow Chem. Co., $23 F.2d 680 (2d Cir. 1975), aff’g 386 F.
Supp. 1130 (S.D.N.Y. 1974); Altamil Corp. v. Pryor, 405 F. Supp. 1222 (S.D.
Ind. 1975). Because the law regards the spousal relationship in many respects
to be sui generis, we submit that the previously-unprecedented extension of
the theory of these spousal cases (assuming arguendo that they are correctly
decided ) to either the parental relationship at issue in the case at bar or any
other relationship is entirely unjustified.
® Blau v. Lehman, 368 U.S. 403, 409 (1962).
‘0 If an insider passes inside information to a tippee, he may be liable
under § 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78j(b));
he is not liable, however, under § 16(b) because the tippee’s profit is not his.
See Blau v. Lehman, 368 U.S. 403, 411-12 (1962) (“| T]his very broadening
of the categories of persons on whom these liabilities are imposed by the
language of § 16(b) was considered and rejected by Congress when it passed
the Aci.”).
The reason that Mr. Whittaker is not liable under § 16(b)
is that he did not own his mother’s securities any more than he
owned her house or any of her other assets.1' When one
family member manages securities transactions as a trustee for
another family member, § 16(b) simply does not apply. See
Marquette Cement Manufacturing Co. v. Andreas, 239 F. Supp.
962, 966-67 (S.D.N.Y. 1965) (trustee of family trusts has no
§ 16(b) “profit realized” except to the extent that he also is the
named beneficiary of one of the trusts).
The rule in § 16(b) cases should be consistent with that in
analogous federal tax cases: Where a trustee or agent, even if he
(like Mr. Whittaker) is related to the person he represents,
receives income in his representative capacity for a beneficiary
or principal, it is only that beneficiary or principal who realizes
profit. See, e.g., Ross v. United Staies, 122 F. Supp. 642 (D.
Mass. 1954) (father acting under power of attorney from his
son realizes no profit from transactions carried on in his own
name but | >r benefit of his son); Heminway v. Commissioner, 44
T.C. No. 96 (Apr. 23, 1965) (brother not taxable on profit
received by him either as agent or trustee for his sister); Nichols
v. Commissioner, \4 B.T.A. 1347, 1350 (1929) (“petitioner
realized no taxable income on the sale by him as trustee for his
brother”). Applying these rules, Mrs. Whittaker duly reported
and paid tax on all of her profits. Mr. Whittaker certainly had
no obligation to report his mother’s transactions on his tax
returns because he realized no profit therefrom.
Here, the facts found by the district court and contested by
neither party on appeal were that with a general power of
attorney, Mr. Whittaker effected discretionary securities trans-
actions for his mother [App. at B-4]; that all purchases were
We do not say that ownership “of record” is determinative. If an
insider buys with his own money and sells for his own account, it does not
matter that his securities are registered in street name or the name of someone
other than himself. This sort of “equitable” as opposed to “legal” or “record”
ownership, however, must be clearly distinguished from the entirely different
notion of “beneficial” ownership on which the court below relied.
12
made with her money and all sales proceeds were deposited
into her bank account [App. at B-4];'!2 that Mrs. Whittaker was
aged and somewhat infirm [ App. at B-11]; that Mr. Whittaker
and his mother maintained separate households and paid none
of each other’s expenses (except that occasionally Mr. Whitta-
ker made short-term loans to his mother because her in-
vestment income was periodic) [App. at B-4]; that before the
relevant trading period, Mrs. Whittaker sold her interest in a
predecessor of the Corporation to her son in return for his
promissory notes [App. at B-5]; that at the time of trial, Mr.
Whittaker had not paid principal or substantial interest on these
promissory notes and owed his mother $767,000 [ App. at B-5]:
that certain of Mrs. Whittaker’s purchases of securities were
financed with bank loans, on which she paid interest from her
own funds, that might have been unnecessary if her son had
repaid his promissory notes [App. at B-11]; that Mr. Whittaker
might have had to forego certain of his own investments had he
repaid his promissory notes [App. at B-11]; and that Mr,
Whittaker was his mother’s heir and the sole beneficiary under
her 1963 will [App. at B-4].'3
If the decision below is not reversed, § 16(b)’s supposedly
bright lines of liability will have been so blurred by inter-
pretation that insiders now will have to guess where they stand.
The only sure results are that § 16(b) litigation will increase as
the now-ambiguous boundaries of liability are explored, that
counsel will use the discovery process to pry into private
relationships among insiders and persons who profit from
transactions in securities issued by the insiders’ corporations
12 For ease of administration by Mr. Whittaker’s secretary, this account
was joint although all deposits were of Mrs. Whittaker’s funds and all
withdrawals were for her personal expenses. On this score the court of
appeals appears to have misinterpreted the district court’s findings [ App. at
A-12].
13 Mrs. Whittaker died seven years after the close of the relevant trading
period, while this case was pending on appeal. Whatever profits she realized
on her transactions during the relevant trading period belonged to her; and
since she was never a statutory insider, her profits do not inure to the
Corporation under § 16(b).
13
and that district courts presented with such new litigation will
have to begin trying numerous, complex issues of fact. These
results clearly contravene the mechanical, objective adminis-
tration of the statute that Congress planned. See Lewis v.
Varnes, 505 F.2d 785, 789 (2d Cir. 1974) (“For courts to use a
flexible approach to cases arising under [§ 16(b)] and, in
effect, to bring within the scope of the statute, persons whose
actions do not fit squarely and literally within its terms, would
actually contravene the congressional purpose and imply ambi-
guities in the statute which do not exist.”). See also Foremost-
McKesson, Inc. v. Provident Securities Co., 423 U.S. 232, 252
(1976) (“When Congress has so recognized the need to limit
carefully the ‘arbitrary and sweeping coverage’ of § 16(b),...
courts should not be quick to determine that, despite an
acknowledged ambiguity, Congress intended the section to
cover a particular transaction.”); Portnoy v. Kawecki Berylco
Industries, Inc., 607 F.2d 765, 768 (7th Cir. 1979) (dis-
approving expansion of § 16(b) by “judicial legislation”);
American Standard, Inc. v. Crane Co., 510 F.2d 1043, 1062 (2d
Cir. 1974), cert. denied, 421 U.S. 1000 (1975) (disapproving
flexible approach to § 16(b) construction problems ).
B. The Court of Appeals’ Ruling that § 16(b)’s Two-Year
Statute of Limitations Was Tolled Conflicts Directly with
the Holding in Carr-Consolidated Biscuit Co. v. Moore,
with the Legislative Scheme Enacted by Congress in 1934
and with Principles of Interpretation Set Forth in this
Court’s Recent Opinions Construing the Federal Secu-
rities Laws
The court of appeals reversed the district court’s ruling that
part of the Corporation’s claim was barred by the portion of
§ 16(b) that provides that “no such suit shall be brought more
than two years after such profit was realized.” It ruled that
even though the district court had specifically found that the
Corporation at all times was on notice of the facts underlying its
claim, Mr. Whittaker’s good-faith failure to list his mother’s
14
securities on the forms that he periodically filed with the SEC
listing his own securities automatically and perpetually tolled
§ 16(b)’s statute of limitations.‘4 The court of appeals thus
has read out of the statute a restriction on liability enacted by
Congress.
The tolling doctrine applied below is alien to federal
procedure in general and to the federal securities laws in
particular. Insiders engage in many activities that their corpo-
rations or their corporations’ shareholders might assert give rise
to liability. Statutes of limitations run on these claims just as
they do on other claims. See, e.g., Curtis v. Connly, 257 U.S.
260, 264 (1921); Korn v. Merrill, 403 F. Supp. 377, 384
(S.D.N.Y. 1975), aff'd, 538 F.2d 310 (2d Cir. 1976). No
tolling doctrine of which we are aware can survive a trial court
finding of fact that the aggrieved party had knowledge (or even
mere notice) at all relevant times of his claim. Yet, the court
below applied such a rule in the context of a strict-liability claim
as to which such application is the least appropriate. "5
Under the court of appeals’ ruling, insiders such as Mr.
Whittaker who in good faith fail to meet the broad and
technical reporting requirements promulgated by the SEC face
§ 16(b) liability unbridled by considerations of fault or
untimeliness of claims. One need not look beyond the SEC’s
releases interpreting § 16(a) to ascertain that the limits of the
obligation to report never can be entirely clear to insiders or
4 Had Mr. Whittaker included his mother’s securities on his forms, as he
did after 1970, he would have noted his disclaimer of beneficial ownership
therein, as the SEC’s reporting regulations specifically authorize. It is
unreasonable to suppose that any shareholder knowing far less than was
“common knowledge” among the Corporation's officers and employees
would have brought suit to test the novel parental “attribution” theory relied
on below.
‘8 Whatever merit the court of appeals’ unrestrained approach to
statutory construction may have in certain types of cases ( perhaps including
securities fraud cases), that approach should not be used to analyze the outer
limits of the sort of strict liability that § 16(b) creates. See, e.g., Reliance
Elec. Co. v. Emerson Elec. Co., 404 U.S. 418, 422-25 (1972).
15
their advisors. Without a doubt, many insiders have filed and
will file incomplete (but innocently incomplete) reports.'®
“When in doubt, report” may be a fair rule of thumb for the
SEC to use in resolving uncertainty under § 16(a); but it will
not support the court of appeals’ harsh corollary that even an
innocent failure to report automatically and indefinitely extends
the period within which an insider must stand ready to defend a
claim under § 16(b). Congress certainly did not expressly
provide for such an unusual tolling rule in § 16(b), and there is
no suggestion in the legislative history that Congress intended
it.17
The court of appeals rejected the reasoning and holding of
Carr-Consolidated Biscuit Co. v. Moore, 125 F. Supp. 423, 431-
32 (M.D. Pa. 1954), in which the court held that the language
of § 16(b), when compared with other limitations provisions
enacted at the same time, indicates that Congress refused to
allow for tolling. The court of appeals acknowledged the
obvious soundness of this “comparison-of-related-provisions”
technique'® but rejected it here because, it said, the related
limitations provisions of the 1934 Act (§§ 9(e) and 18(c), 15
U.S.C. §§ 78i(e) and 78r(c)) are themselves ambiguous.
Whatever ambiquity may be found in particular provisions,
however, Congress’ overall intent in 1934 to restrict the time
within which suits must be brought is very clear. As this Court
6 The doubtful proposition espoused by the court of appeals that tolling
is essential to discourage unscrupulous insiders from withholding reports is no
justification for invoking tolling to punish responsible insiders such as Mr.
Whittaker whose failures to file complete reports are innocent. Whatever
deterrence or punishment is needed to deal with the unscrupulous exception is
amply supplied by the powerful criminal sanctions of § 32(a) of the 1934 Act
(15 U.S.C. § 78ff(a)).
17 The meager evidence of congressional intent relied on by the court of
appeals is the supposedly-overarching, anti-insider animus underlying
§ 16(b) and the “complementary” placement of §§ 16(a) and 16(b) within
the 1934 Act.
18 See, e.g., SEC v. Sloan, 436 U.S. 103, 112-14 (1978) (various notice-
and-hearing provisions must be read together); Ernst & Ernst v. Hochfelder,
425 U.S. 185, 206-09 ( 1976) (various standard-of-liability provisions must be
read together); Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 733-36
(1975) (various standing-to-sue provisions must be read together).
16
noted in Ernst & Ernst v. Hochfelder, 425 U.S. 185, 208-10
(1976), Congress in 1934 amended § 13 of the Securities Act of
1933 (15 U.S.C. § 77m) to tighten such time restrictions.
Significantly, where Congress had created new liability without
fault under § 12(1) of the 1933 Act (15 U.S.C. §77/ (1)
(selling unregistered securities ), it conditioned that new sort of
liability by a one-year time bar in § 13 that cannot be tolled
(for example, by virtue of an inadvertent failure to file a
registration statement under § 5 of the 1933 Act (15 U.S.C.
§ 77e)). Thus, it is fair to conclude that Congress did not mean
by its “silence” to provide for tolling of § 16(b)’s two-year
statute in the event of an inadvertent failure to comply with the
reporting regulations to be promulgated by the SEC pursuant to
§ 16(a). Congress said what it meant: “no such suit shall be
filed more than two years after such profit was realized.” Its
decision in this regard is conclusive. See Holmberg v.
Armbrecht, 327 U.S. 392, 395 (1946); Department of Water &
Power v. Allis-Chalmers Manufacturing Co., 213 F. Supp. 341,
348 (S.D. Cal. 1963).
C. Calculating Liability for “Profit Realized” by Mechani-
cally Applying a Fictional “Lowest In Highest Out”
Formula, Regardless of the Circumstances, Penalizes Mr.
Whittaker and Other Insiders who Innocently Fall Victim
to § 16(b)’s Trap for the Unwary
This Court has withheld decision on the validity of “lowest
in highest out” as a formula for determining § 16(b) “profit”.
See Blau v. Lehman, 368 U.S. 403, 407 n.4 (1962). The
Seventh Circuit Court of Appeals has stated that it will not
apply the formula. See Allis-Chalmers Manufacturing Co. v.
Gulf & Western Industries, Inc., 527 F.2d 335, 356 (7th Cir.
1975) (dictum), cert. denied, 424 U.S. 928 (1976), aff’g in
part, rev’g in part on other grounds 327 F. Supp. 570, 580 (N.D.
Ill. 1974) (“The concept of maximizing profit by using such
theories as ‘lowest in and highest out’ as espoused in the 1943
decision of the 2nd circuit in Smolowe v. Delendo Corporation,
17
136 F.2d 231, 239, is not the law in this (7th) Circuit.”’).19
The court below has now joined the Second and Eighth
Circuits, which have approved “lowest in highest out” as the
proper mechanic for “squeezing all the profit” out of § 16(b)
transactions.2°
The commentators have attacked the formula on the
grounds that it is contrary to the language, legislative history?’
and logical underpinnings of § 16(b) and that it is wickedly
arbitrary and penal. See J. Munter, Section 16(b) of the
Securities Exchange Act of 1934: An Alternative to “Burning
Down the Barn in Order to Kill the Rats”, 52 Cornell L.Q. 69
(1966); W. Painter, The Evolving Role of Section 16(b), 62
Mich. L. Rev. 649 (1964); Note, Jnsider Liability for Short-
Swing Profits: The Substance and Function of the Pragmatic
Approach, 72 Mich. L. Rev. 592 (1974); Comment, Section
16(b): An Alternative Approach to the Six-Month Limitation
Period, 20 U.C.L.A. L. Rev. 1289 (1973).
A simple hypothetical will illustrate the problem facing
insiders who inadvertently run afoul of § 16(b). Suppose that
on Day | an insider purchases one share of his company’s stock
at $1 and on Day 2 sells one share at $2. Then suppose that
over the next five months the market price of the stock rises
steadily and that on Day 160 the insider purchases one share at
19 The court of appeals’ ruling was dictum because the profit-calculation
issue in Allis-Chalmers involved valuation of securities rather than trade-
matching. In prior dictum in a case discussing the tax consequences of an
insider’s payment in satisfaction of § 16(b) liability, Anderson v. Commission-
er, 480 F.2d 1304, 1307 ( 7th Cir. 1973), another panel of the court referred to
“lowest in highest out” with seeming approval.
20 As indicated below, “lowest in highest out” in fact does not always
yield the greatest “profit”.
21 There is absolutely no support in the legislative history for the notion
that Congress intended to force insiders to disgorge more than their actual
profit. See Hearings on S. 84, 56 and 97 Before the Senate Committee on
Banking and Currency, 73 Cong., 2d Sess. 6557-59 (1934), discussed in W.
Painter, The Evolving Role of Section 16(b), 62 Mich. L. Rev. 649, 653
(1964). Indeed, Congress considered but rejected early versions of § 16(b)
that expressly provided for the “lowest in highest out” formula. See § 15(b)
of S. 2642 and H.R. 7852, 73d Cong., 2d Sess. (1934).
18
= $100 and on Day 161 sells one share at $101. Blind application
of “lowest in highest out” would lead a court to match the
“lowest in” purchase on Day | ($1) against the “highest out”
sale within six months on Day 161 ($101) and hold the insider
liable to the issuer for a “profit realized” of $100. We submit
that such an absurd and unjust result can be reached only by
capriciously disregarding the language and legislative history of
§ 16(b) and by frankly abandoning any lingering notion that
the statute should be administered fairly. Plainly, the “profit”
in the hypothetical, under any reasonable construction and
legitimate use of that word, is $1 on the first pair of transactions
and $1 on the second pair of transactions; and any profit-
calculation methad that derives a different result is invalid.
There are alternatives. The alternative most consistent
with the intent of Congress as reflected in the legislative history
is to afford insiders—and especially those insiders who prove
that their violations were inadvertent—an opportunity to prove
what their actual profits really were. See Munter, Section 16(b)
of the Securities Exchange Act of 1934: An Alternative to
“Burning Down the Barn to Kill the Rats”, 52 Cornell L.Q. 69,
83-85 (1966); W. Painter, The Evolving Role of Section 16(b),
62 Mich. L. Rev. 649, 655 & n.19 (1964) (“As Senator Barkley
commented in the hearings already referred to, ‘It seems to me
the simple way would be to charge him [the insider] with the
actual profit.’ This may appear to be a naive over-
simplification, but it seems to be precisely what Congress
attempted to do."’),
A less-flexible alternative, the “time-matching™ rule that
we proposed below, is identical to “lowest in highest out”
except that a sale may not be matched against a purchase if
there is an intervening, unmatched sale. Mechanically, the
proposed procedure is as follows: Against the purchase at the
lowest price, match the sale at the higher price of the two sales
most immediately preceding and following. If the matched sale
involved fewer shares than the matched purchase, match
against the unmatched part of the purchase, the sale at the
higher price of the two unmatched sales most immediately
preceding and following. Repeat the process until all of the
19
shares purchased at the lowest price have been matched against
previously-unmatched sales contiguous in time. Repeat the
process for all other purchases, taking them in order of their
prices from lowest to highest.??
The proposed formula attempts to reflect the limited
purpose of § 16(b), that is, the idea that § 16(b) is intended to
remedy only “short-swing” or “double-transaction” abuses of
non-public information in which the insider does not intend to
change his securities holdings permanently.23 See Provident
Securities Co. v. Foremost-McKesson, Inc,, 506 F.2d 601, 609
(9th Cir, 1974), aff'd, 423 U.S, 232 (1976); Hearings on H.R.
4344, 5065 and 5832 Before the House Committee on Interstate
and Foreign Commerce, 77 Cong., |st Sess. 1255 (1942) (SEC
Commissioner Purcell commending Congress for limiting
§ 16(b) to short-swing abuses of inside information); Note,
Insider Liability for Short-Swing Profits: The Substance and
Function of the Pragmatic Approach, 72 Mich. L. Rev. 592, 598-
99, 602-08 & nn. 41-61 (1974); Comment, Section 16(b); An
Alternative Approach to the Six-Month Limitation Period, 20
U.C.L.A. L. Rev. 1289, 1294-95 (1973). The “lowest in
highest out” formula, on the other hand, encourages matchings
of purchases and sales furthest apart in time, i.e¢., those /east
likely to be related parts of the sort of single-transaction abuse
that Congress intended § 16(b) to remedy.
22 In some circumstances, the time-matching rule “squeezes” more profit
from insiders than does “lowest in highest out”:
One-Share One Share
Dates Purchares Sales
1/1 $10
1/20 $100
1/30 $11
7/10 $9
7/15 $ 99
Under “lowest in highest out” the “profit” is $92 (7/10 v, 1/20 for $91; 1/1 v.
1/30 for $1); under the alternative rule the “profit” is $180 (7/10 v. 7/15 for
$90; 1/1 v. 1/20 for $90). Perhaps a computer could test all of the possible
matchings to “squeeze” the most “profit”, but that surely is not what Congress
intended in 1934.
#3 Other statutory and regulatory provisions (¢.g., § 10(b) of the 1934
Act (15 U.S.C. § 78)(b)) and Rule 10b-5 (17 C.F.R. § 240.10b-5)) are
avilable to remedy “single-transaction” abuses. See Foremost-McKesson, Inc.
v. Provident Secs. Co., 423 U.S. 232, 255 (1976).
20
CONCLUSION
For these reasons, a writ of certiorari should issue to review
the judgment and opinion of the Ninth Circuit Court of
Appeals.
Respectfully submitted,
WILLIAM THOMPSON BiSSET
515 South Flower Street
Los Angeles, California 90071
May 8, 1981,
of tha
7 ry
af
x Pir AAGh
ay Oe AA ¥. >
| Oe Ea
A-|l
United States Court of Appeals
FOR THE NINTH CIRCUIT
WILLIAM R. WHITTAKER,
Plaintiff/ Appellant,
v. DOCKET NOS. 77-2297
WHITTAKER CORPORATION, 77-2550
Defendant/ Appellee.
Appeal from the United States District Court for the
Central District of California.
Before CHAMBERS and TANG, Circuit Judges, and
ORRICK, ”* District Judge.
TANG, Circuit Judge:
This case involves liability under the insider short-swing
trading provisions of the Securities Exchange Act of 1934, § 16,
15 U.S.C. § 78p. The principal questions presented are whether
shares nominally owned by another may be attributed to an
insider for liability under § 16(b) and whether the two-year
limitations period of § 16(b) may be tolled. On demand by the
Whittaker Corporation (Corporation), the putative insider,
William Whittaker (William), paid the amount of alleged
profits from insider transactions between December 1, 1965
and December 31, 1970 (the relevant trading period). He later
sought a declaratory judgment of nonliability under § 16(b)
and return of the monies previously paid. The district court
found William liable but also found that the statute of limtia-
tions of § 16(b) operated to cut off liability for transactions
prior to January 29, 1969. We affirm the district court on the
issue of William’s liability, but we reverse and remand on the
limitations issue.
* Honorable William H. Orrick, Jr., United States District Judge for the
District of Northern California, sitting by designation.
A-2
PRELIMINARY BACKGROUND
The Whittaker Corporation is a corporation in which
William Whittaker and his mother, Beulah Whittaker, owned
substantial percentages of stock. William was a director and
Chairman of the Board of Directors during the relevant trading
period. In 1965, because of amendments broadening § 16, the
Corporation became subject to § 16 of the Securities Exchange
Act of 1934, 15 U.S.C. § 78p (hereinafier § 16).
Briefly, § 16(a) requires “insiders” —any person who is a
10% beneficial owner of a company whose securities are
registered under the Act or a director or an officer of the
company—to file monthly reports with the Securities and
Exchange Commission (SEC) showing any changes in the
person's ownership in the company. Section 16(b) declares
that any profits which such person may realize by any purchase
and sale of the company’s securities within six months shall
inure to and be recoverable by the company. Suits to recover
such profits may be brought by the company or by any
shareholder in a derivative suit if the company fails to do so.
No such suit shall be brought more than two years after the
date such profit was realized.
Since 1959 William had power of attorney from his mother
Beulah to conduct business matters for her. The securities
transactions involved in this case took place between December
1, 1965 and December 31, 1970. William purchased Whittaker
Corporation common stock and convertible debentures for his
mother’s account, and within six months of such purchases, sold
common stock for his own account and convertible debentures
and common stock for his mother’s account. None of the
transactions involving securities for his mother’s account were
reported to the SEC as required by § 16(a). The district court
determined that, because of the relationship between William
and his mother, the control William had over her stock, and the
benefits he realized from it, he must be deemed the beneficial
owner of his mother’s stock, and so should have reported the
A-3
transactions under § 16(a) and was liable to the corporation
under § 16(b) for profits derived from those transactions
involving his mother’s stock which he realized by a purchase
and sale of the Corporation’s securities within six months.
The Corporation asserts it did not learn of the full extent of
William's total control over his mother’s shares until the fall of
1970. It then compiled a list of all William’s transactions in the
securities of the Corporation, determined which were six-month
short-swing insider trades, and computed the profit realized by
William. In January 1971, the Corporation demanded payment
of these realized profits plus interest.
On January 29, 1971, William paid the amount demanded,
denied liability and reserved the right to bring an action to
determine his liability and to seek return of the monies.
William remained with the Corporation as President until
November 1974 and as Chairman of the Board until January
31, 1975. On July 29, 1975, William and his mother com-
menced this action for a declaration of nonliability under § 16
and recovery of the money.
Trial was held before the court without a jury. The district
court found that William was liable as an insider for the
transactions in his mother’s shares, but that the statute of
limitations of § 16(b) barred recovery for all but one year of
the relevant trading period. That is, only profits on transactions
within two years prior to the Corporation’s demand in January
1971 could be recovered. On the transactions for which the
Corporation could recover, the district ourt computed profits
realized according to the rule of “lowest price in, highest price
out” within six months and awarded the Corporation pre-
judgment interest. The Corporation was then orlered to pay
back the balance of the money paid in 1971.
A-4
ISSUES ON APPEAL
1. Was the Corporation’s notice of appeal filed timely?
(Raised by William on motion to dismiss )
2. Was William the beneficial owner of his mother’s
shares, so that profits realized in his transactions in those shares
were “profits realized by him” for § 16(b) liability? ( Raised by
William on cross-appeal )
3. How should the two-year limitations pericd of § 16(b)
be construed? (Raised by the Corporation on appeal )
4. Is the “highest sales price, lowest purchase price”
method for computing profits in insider trading the correct
method? ( Raised by William on cross-appeal )
5. Was the award of prejudgment interest on the amount
of profits recovered by the Corporation incorrectly decided by
the district court? (Raised by William on cross-appeal )
L.
NOTICE OF APPEAL
William has moved to dismiss the Corporation's appeal on
the ground that the notice of appeai was not timely filed. The
judgment of the district court was entered on April 7, 1977.
The judgment included the award of costs to the plaintiffs,
William and Beulah Whittaker, as the prevailing party. On
April 14, 1977 defendant Corporation moved to retax costs,
specifically that all parties “bear their own taxable costs
pending appeal of this action.” The Corporation argued that it,
not the plaintiffs, should be considered the prevailing party.
The motion to retax costs was denied on April 20, 1977.
Having learned that William would oppose any filing of a
notice of appeal as untimely on the ground that the 30-day
period for filing under Fed.R.App.P. 4(a) had begun on April
7, 1977 and so had expired, the Corporation moved the district
A-5
court for either | ) a determination that the motion to retax costs
had extended the time for filing a notice of appeal since it was a
Fed.R.Civ.P. 59(e) motion to alter or amend the judgment or
2) an extension of time for filing the notice of appeal by reason
of “excusable neglect” in learning of the date of entry of
judgment. The district judge rejected the excusable neglect
contention but agreed the motion was a Rule 59(e) motion,
even though it was denied. He ordered the Corporation’s notice
of appeal accepted for filing. It was filed May 18, 1977.
Failure to file a timely notice of appeal is jurisdictional;
and the Court of Appeals would lack jurisdiction to review the
judgment. Browder v. Director, Department of Corrections, 434
U.S. 257, 264, 98 S.Ct. 556, 561, 54 L.Ed.2d 521 (1978):
Rodriguez v. Southern Pacific Transportation Co., 587 F.2d 980,
981 (9th Cir. 1978); Alexander v. Sacha, 439 F.2d 742 (9th
Cir. 1971). The notice of appeal must be filed within 30 days
of the entry of judgment. Fed.R.App.P. 4(a). But the running
of this time is terminated by a timely filed motion under, inter
alia, Fed.R. Civ.P. 59(e) (motion to alter or amend the
judgment), and the 30-day time commences anew from the
date such motion is decided. The Corporation’s motion was
filed within the 10-day time limit for Rule 59(e) motions. Its
notice of apneal was filed more than 30 days from the entry of
judgment, but less than 30 days from the district court’s denial
of its motion to retax costs. The issue then is whether the
Corporation’s motion is a 59(e) motion (which extends the
time for appeal) or a Rule 54(d) motion which reviews the
Clerk’s actions regarding costs (which does not extend the time
for appeal. )
The Corporation styled its motion a motion to retax costs
and did not recite that it was proceeding under Rule 59(e).
“But nomenclature is not controlling.”” What is required is that
the requested relief be “relief which might have been granted
under Fed.R.Civ.P. 59(e).” Sea Ranch Ass'n v. California
Coastal Zone Conservation Comm'n, 537 F.2d 1058, 1061 (9th
A-6
Cir. 1976). Accord Mir v. Fosburg, No. 78-1103, Slip Op., at
1707, .... F.2d ...., at .... (9th Cir. Jan. 22, 1980).
A motion to amend the judgment with respect to costs has
been heard as a 59(e€) motion where the motion was to tax
costs against a different party, United States v. Crawford, 36
F.R.D. 174 (W.D.La. 1964); or to delete the award of costs
altogether, United States v. 2,186.63 Acres of Land, 464 F.2d
676, 677 (10th Cir. 1972); or to add costs where none were in
the judgment before, see Alameda v. Paraffine Companies, Inc.,
169 F.2d 408, 409 (9th Cir. 1948) (prior to Rule 59e).
treating such motion as amending judgment so as to extend
time for filing notice of appeal ).'
On the other hand, Rule 54(d) motions are appropriate
for correcting clerical errors in the bill of costs, disputing
particular items or amounts, or otherwise amending an ac-
cepted award of costs. For substantive challenges as to the
appropriateness of awarding costs at all, especially where such
challenge involves a redetermination of who was the prevailing
party, Rule 59(e) may be appropriate. We do not mean to
imply that these categories are exclusive. It may be that some
motions could be characterized as under both Rules 54(d) and
59(e) motion [sic].
William relies on Environmental Defense Fund, Inc. v.
Froehlke, 368 F.Supp. 231 (W.D.Mo. 1973), aff'd, 497 F.2d
1340 (8th Cir. 1974). But in Froehlke the district judge found
‘Similarly, motions to reconsider the award of attorney’s fees and
motions to add attorney's fees to the judgment have been treated as Rule
59(e) motions. See Hammond v. Public Finance Corp., 568 F.2d '%62 (Sth
Cir. 1978); Stacy v. Williams, 50 F.R.D. 52 (N.D.Miss. 1970), aff'd, 446 F.2d
1366 (Sth Cir. 1971); Farmington Dowel Products Co. v. Forster Mfg. Co.,
421 F.2d 61, 76 n. 39 ( Ist Cir. 1969). Contra Lichtenstein v. Lichtenstein, 55
F.R.D. 535, 537 (E.D.Pa. 1972), rev'd on other grounds, 481 F.2d 682 (3d
Cir. 1973), cert. denied, 414 U.S. 1144, 84 S.Ct. 895, 39 L.Ed.2d 98 (1974)
(motion to amend judgment to add attorney's fees treated as 54(d) motion,
not 59(e¢) motion, but done so in order te avoid dismissa) of motion as
untimely ).
A-7
that the plaintiffs actually were seeking only a review of amount
of costs and a determination of which costs were taxable to
plaintiffs. 368 F.Supp. at 252-53. Moreover, the court appears
to have been led to treat the motion as a 54(d) motion so as to
reach the merits and avoid the untimeliness problem created if
it were treated as a 59(e).2
The Corporation’s motion here was not a motion chal-
lenging any item of cost or amount of any item as assessed by
the Clerk. Rather, it was a challenge as to who should be
entitled to costs, that is, a question of who the prevailing party
was. As the district judge recognized, because of the unusual
procedural circumstances of this case, the roles of plaintiff and
defendant were, in effect, reversed. Normally, the corporation
would be the plaintiff, suing to recover the insider profit.
Although William was technically the prevailing party since he
won a money judgment, the Corporation had prevailed on the
gravamen of its claim. If the suit had been a normal insider
trading case, the Corporation would have “prevailed.” Thus,
the Corporation’s motion went to the heart of how the judg-
ment was to be characterized. The district judge is surely in a
position to understand the ramifications of the motion on the
judgment. Cf. In re Estate of Butler’s Tire & Battery Co., Inc.,
592 F.2d 1028, 1032 (9th Cir. 1979) (district court’s extension
of time for appeal for excusable neglect under Fed.R.App.P.
2 See 368 F. Supp. at 253. William also relies extensively on Knowles v.
United States, 260 F.2d 852 (Sth Cir. 1958). But Knowles does not aid
William. In Knowles, the plaintiff was disputing only two items of cost.
Moreover, those costs had been levied on plaintiff by the district court in
regard to a prior appeal of the case; they were not directly related to the
judgment appealed from. Those costs were treated as a separate matter by
both the district court and the Fifth Circuit. Finally, from the Fifth Circuit's
opinion it is apparent neither that the motion to vacate these costs was made
or treated as a rule 59(€) motion nor that it was even timely filed as a Rule
59(e) motion with respect to the judgment Knowles sought to appeal. If it
were not a timely Rule 59(¢) motion, it could not have extended the time for
appeal.
A-8
4(a) overturned only for abuse of discretion). He thought the
relief requested, if granted, “would have necessarily resulted in
an amendment for that judgment.”
We agree and consider the Corporation’s motion correctly
construed as a Rule 59(e) motion. Since it was timely filed, it
extended the time for filing the notice of appeal under
Fed.R.App.P. 4(a). The Corporation’s appeal is timely.
Il.
BENEFICIAL OWNERSHIP AND
PROFIT REALIZED
A. General Principles for § 16
Section 16(b) declares, in effect, that directors, officers,
and 10% beneficial owners are presumed to have inside infor-
mation and then states the corporation can recover any profits
made by these insiders on transactions within a six-month
period. This recovery rule is virtually automatic. Neither
actual possession of inside information nor use of such informa-
tion need be shown. Even initial good faith intent to hold the
securities for longer than six months is no defense. “In short,
this statute imposes liability without fault within its narrowly
drawn limits.” Foremost-McKesson, Inc. v. Provident Securities
Co., 423 U.S. 232 at 251, 96 S.Ct. 508 at 519, 46 L.Ed.2d 464.
However, “it is an objective rule and does not reach every
transaction in which an investor actually relies on inside
information, or in which the potential for such reliance is
3The problem was only partly that the judgment as signed had
expressly contained an award of costs to William. Even if that were not in the
judgment, and the Clerk had merely awarded costs to William as a matter of
course as the “prevailing party,” a motion challenging the Clerk's action on
the ground that the Corporation should be deemed the true prevailing party
would still be a Rule 59(e) motion insofar as it sought an interpretive
amending of the judgment.
A-9
great.” Lewis v. Varnes, 505 F.2d 785, 787 (2d Cir. 1974).
See Blau v. Max Factor & Co., 342 F.2d 304, 307 (9th Cir. ),
cert. denied, 382 U.S. 892, 86 S.Ct. 180, 15 L.Ed.2d 150 (1965):
Rheem Mfg. Co. v. Rheem, 295 F.2d 473, 475 (9th Cir. 1961).
See generally 2 L. Loss, Securities Regulation (2d ed. 1961) at
1040-44.
In interpreting § 16 for situations which do not fall ob-
viously within its scope, a certain tension is immanent. On the
one hand, “where alternative constructions of the terms
§ 16(b) are possible, those terms are to be given the construc-
tion that best serves the congressional purpose of curbing short-
swing speculation by corporate insiders.” Reliance Electric Co.
v. Emerson Electric Co., 404 U.S. 418 at 424, 92 S.Ct. 596 at
600, 30 L.Ed.2d 575. This “objective approach” goes back to
the earliest cases interpreting the statute. “The statute is
broadly remedial. ... [I]t was intended to be thoroughgoing,
to squeeze all possible profits out of stock transactions, and thus
to establish a standard so high as to prevent any conflict
between the selfish interest of [an insider] and the faithful
performance of his duty.” Smolowe v. Delendo Corp., 136 F.2d
231, 239 (2d Cir.), cert. denied, 320 U.S. 751, 64 S.Ct. 46, 88
L.Ed. 446 (1943). See also Adler v. Klawans, 267 F.2d 840,
846 (2d Cir. 1959) (§ 16 to be interpreted broadly so as to give
full effect to plain congressional intent).
On the other hand, because of the mechanical application
of § 16(b), imposing liability without fault on transactions
within its scope, courts more recently have been hesitant to
bring borderline transactions under that scope by interpretation
where congressional intent was unclear and the transaction in
question was not of a type giving rise to speculative abuse. See,
e.g., Foremost-McKesson, Inc., 423 U.S. at 252, 96 S.Ct. at 520
(person must be 10% owner prior to purchase at issue); Kern
County Land Co. v. Occidental Petroleum Corp., 411 U.S. 582 at
593-95, 93 S.Ct. 1736 at 1744-1745, 36 L.Ed. 2d 503 (sales in
context of blocked tender offer); Reliance Electric Co., 404 U.S.
at 424 n.4, 92 S.Ct. at 600 n.4 (person must be 10% owner at
A-10
time of sale at issue); Blau v. Max Factor & Co., 342 F.2d at
306-09; Lewis v. Varnes, 505 F.2d at 789; Matas v. Siess, 467
F.Supp. 217, 220-21, 224 (S.D.N.Y. 1979).
Under this “subjective” or pragmatic” approach, courts
inquire whether the transaction involved carries a potential for
insider abuse. Only those types of transactions which do are
then found included within the statutory scope. Kern County
Land Co., 411 U.S. at 594-95, 93 S.Ct. at 1744-1745. However.
the pragmatic approach has not ousted the objective view.
Rather, the pragmatic approach is used to determine the
boundaries of the statute’s definitional scope in borderline
situations, especially unorthodox transactions. Jd. For a
garden-variety transaction which cannot be regarded as
unorthodox, the pragmatic approach is not applicable. Mould-
ings, Inc. v. Potter, 465 F.2d 1101, 1104-05 (Sth Cir. 1972),
cert. denied, 410 U.S. 929, 93 S.Ct. 1368, 35 L.Ed.2d 591
(1973); Tyco Laboratories, Inc. v. Cutler-Hammer, Inc., 490
F.Supp. 1, 7 (S.D.N.Y. 1980); Maras v. Siess, 467 F.Supp. at
220. In such cases, if the situation is within the requirements
established by Congress for § 15, then the mechanical, “objec-
tive,” operation of the statute imposes liability.
B. The Question Presented and Factual Background
Under § 16(b), the corporation may recover “any profit
realized by him [the insider]” in covered short-swing transac-
tions. In the present case, the securities in question were in
William’s mother’s name and the profits realized in their
trading went into her accounts. Thus, the question arises
whether these profits were profits “realized by him” and so
recoverable or were realized only by his mother and so not
“More accurately, if the Corporation’s position is correct and these
securities are treated as William’s, then profits would be computed by
comparing purchases and sale of all the securities (both in Beulah’s and
William’s names) and not merely comparing purchases and sales of those
securities in the mother’s name.
A-11
covered by § 16(b). William, relying on the narrow inter-
pretive approach discussed above, argues that the term “by
him” should be read strictly and narrowly and that, so read, it
does not include the profits herein. The Corporation and the
district court below, however, use the concept of “beneficial
ownership” in § 16(a) in order to give content to the term
“realized by him” in § 16(b). Under that analysis William was
found liable under § 16(b).
William raises his issues on cross-appeal as pure questions
of law: he disputes none of the fact findings below. Accord-
ingly, we accept and rely on the facts as found by the district
court. In any event, the district court's findings of fact as to
these issues are not clearly erroneous under Fed.R.Civ.P.
52(a). Pertaining to the ownership issue, the district court
found the following.® In 1959, because of her advancing age.
his mother granted William a broad general power of attorney,
giving him the right to pay her bills, sign checks for her.
manage her financial and business affairs, and purchase and sell
securities for her investments. In 1969, this power was re-
newed. “At all times relevant to this litigation, Mr. Whittaker
made and executed virtually all investment and business deci-
sions for his mother on his own initiative and in his sole
discretion pursuant to this power of attorney.”
A joint bank checking account, bearing Beulah’s and
William’s names, was set up for her expenses. From 1960 and
throughout the relevant trading period, William maintained
and personally signed all checks drawn on this joint account.
During the same period, Beulah's income was deposited to this
account and her expenses paid from it.
The district judge further found that “it is clear that Mr.
Whittaker exercised virtually complete control over his moth-
er’s affairs .. . .” Throughout the relevant trading period,
5 This account is taken principally from pages 4-6 and 12-13 of the
district court’s unpublished opinion, reprinted in [1977-1978 Transfer Binder]
CCH Fed.Sec.L.Rep. 7 96,008 at 91,528-29 & 91,531.
A-12
William received a series of substantial loans from his mother.
His control over her finances enabled William “to freely borrow
large sums of money from her while never having to consider
paying the money back, posting adequate security or even
paying any interest that might accrue.” Moreover, William used
his mother’s assets to fund, through interest-free loans, advan-
tageous investment opportunities he otherwise might have had
to forego. William would borrow from a bank in his mother's
name, and the interest would be paid from her funds.
As the district judge summarized, “[i}n short, the evidence
indicates that Mr. Whittaker felt free to utilize his mother's
assets exactly as if they were his own. It is thus obvious that
Mr. Whittaker stood to gain on any profits he might make for
his mother through the purchase and sale of Whittaker Corpo-
ration securities.®
CG “Profit realized by him”
On this factual basis, the district court concluded that
William was the “beneficial owner” of the securities under the
definition of beneficial owner developed for § 16(a). Insiders
must include in their reports required under § 16(a) those
securities of which they are the “beneficial owner.” See SEC
Securities Exchange Act Release No. 7793 (Jan. 19, 1966)
(discussed at page 526 infra ). Under the applicable principles
William was the beneficial owner and should have included
them in his § 16(a) reports. This determination is uncontested.
The district court then held that, if one is the beneficial owner,
the securities are “his,” and thus one must be chargeable with
the profits under § 16(b), relying on Whiting v. Dow Chemical
Co., 523 F.2d 680 (2d Cir. 1975), aff’g, 386 F.Supp. 1130
(S.D.N.Y. 1974), and on Altamil Corp. v. Pryor, 405 F Supp.
1222 (S.D. Ind. 1975).
® The district court also noted that this was supported further by the fact
that William was the sole beneficiary under his mother's will and would be
her sole intestaté heir, that she was of an advanced age and in poor health,
and that it was unlikely that her will would be changed.
A-13
William contends the district court was in error because
Blau v. Lehman, 368 U.S. 403, 82 S.Ct. 451, 7 L.Ed.2d 403
(1962), requires a narrow reading of “profits realized by him™
in § 16(b) and particularly because the equation of “beneficial
ownership” for § 16(a) reports with profit attribution for
§ 16(b) liability is erroneous as a matter of law. We reject
William's contentions and affirm the district court on this issue.
Our affirmance rests on two distinct grounds.
First, quite apart from any consideration of beneficial
ownership, we hold that on the facts as found by the district
court the profits are profits realized by William under § 16(b).
William controlled his mother's investments. He thus con-
trolled the trading in Corporation securities. He determined the
timing and amount of sales and purchases. William had control
over his mother’s assets and so had control over money received
for the Corporation securities. He could use those assets as
freely as if they were his own. And in fact he did so use them,
in large amounts, on several occasions. On these facts—-control
over the securities and unfettered ability to use the money for
his own benefit—any reasonable interpretation of “profit real-
ized by him” must encompass the instant case. Cf. Mouldings,
Inc. v. Potter, 465 F.2d at 1103-05 (insider designated others to
whom profits would go, profits held attributable to insider for
§ 16(b) liability).
Blau v. Lehman, 368 U.S. 403, 82 S.Ct. 451, 7 L.Ed.2d 403
(1962), on which William relies principally, does not require a
different result. In Lehman, Blau, a shareholder in Tide Water,
brought a § 16(b) claim against Lehman Brothers, an in-
vestment banking house, and Thomas, a partner in Lehman
Brothers and a director of Tide Water. While Thomas was a
director of Tide Water, Lehman Brothers had engaged in short-
swing trading of Tide Water stock for its own account and
realized profits thereon. The Supreme Court held that all the
Lehman Brothers profits were not profits realized by Thomas
personally and so Thomas was not liable for them under
§ 16(b). 368 U.S. at 413-14, 82 S.Ct. at 456-457.
A-14
William argues that, just as the Lehman profits were not
attributable to Thomas, so his mother's profits are not attribut-
able to him. William's reliance is misplaced, Lehman is clearly
distinguishable. One partner in an investment firm has neither
the same control over trading nor the same benefit from profits
in the firm's portfolio that William had over his mother's
securities. Indeed, several of the facts in Lehman underscore
this distinction. Lehman Brothers purchased the Tide Water
securities without consulting Thomas, and, once the purchases
were discovered, Thomas was insulated from financial interest
in them. See 368 U.S. at 406, 82 S.Ct. at 453. While it may
have been “nothing but a fiction to say that Thomas ‘realized’
all of the profits earned by the partnership of which he was a
member,” 368 U.S. at 414, 82 S.Ct. at 457, it would be an equal
fiction here to say these profits are not William's.’
D. “Beneficial ownership” and “profit realized”
Our second rationale for affirmance involves consideration
of the interrelationship between beneficial ownership in
§ 16(a) and profits realized by him in § 16(b). While we agree
with the district court's result and also agree that there is a
strong relationship between these provisions of § 16(a) and
§ 16(b), we do not agree that there is always an automatic
equivalence between the two.
The intent and purpose of § 16 must be gleaned from the
statute as a whole rather than from its isolated parts. Adler v.
Klawans, 267 F.2d 840, 844 (2d Cir. 1959). Sections 16(a)
and 16(b) must also be read together because they are
7 William also cites several cases in which other provisions of § 16(b)
have been construed strictly and argues that “profits realized by him" must be
similarly construed. See Foremost-McKesson, Inc., supra; Kern County Land
Co., supra; Reliance Electric Co., supra. See page 10 supra. See also Lewis v.
Mellon Bank, 513 F.2d 921 (3d Cir. 1975); American Standard, Inc. v. Crane
Co., 510 F.2d 1043 (2d Cir. 1974), cert. denied, 421 U.S. 1000, 95 S.Ct. 2397,
44 L.Ed.2d 667 (1975).
A-15
grammatically related. See American Standard, Inc. v. Crane
Co., 510 F.2d 1043, 1058 (2d Cir. 1974), cert. denied, 421 U.S.
1000, 95 S.Ct. 2397, 44 L.Ed.2d 667 (1975). In particular, the
scope and definition of insider or beneficial owner for § 16(b)
has been determined by reference to § 16(a). See Foremost-
McKesson, Inc., 423 U.S. at 234 n.1, 96 S.Ct. at S11 n.1; Kern
County Land Co., 411 U.S. at 591 0.21, 93 S.Ct. at 1743 0.21;
Reliance Electric Co., 404 U.S. at 419 n.1, 92 S.Ct. at 596 n.1
(second paragraph). Under § 16(a), an insider is required to
report changes in ownership of covered securities “of which he
is the beneficial owner.” Thus, for reporting purposes, stock
ownership is attributed to directors and officers (as well as to
principal— 10%—shareholders) by the concept of beneficial
ownership. Moreover, the identity of some insiders (i. e., those
who are insiders by virtue of 10% beneficial ownership) for
§ 16(b) liability is determined by reference to § 16(a). Thus, it
is not far-fetched similarly to determine by reference to § 16(a)
what stock those insiders own for § 16(b) liability.
The Second Circuit adopted this approach in a similar
situation. In Whiting v. Dow Chemical Co., 523 F.2d 680 (2d
Cir. 1975), aff’g 386 F.Supp. 1130 (S.D.N.Y. 1974), the court
determined that a spouse’s shares were beneficially owned by
the insider and that once the insider is the “ ‘beneficial owner,”
he must be chargeable with all the profits or none.” Whiting,
523 F.2d at 689. In Whiting the shares were owned by the non-
insider wife, and she had predominant control over them.
However, analyzing all the facts, the court determined that the
transactions were part of a jointly managed common in-
vestment plan, that the income was available to both spouses,
and in particular that the proceeds of the sale of the wife’s
shares had been used to finance the husband’s purchases. The
court then concluded these facts made the husband the benefi-
A-16
cial owner of these stocks under the SEC’s definition of
beneficial ownership. See SEC Securities Exchange Act Re-
lease No. 7793 (Jan. 19, 1966) (“Release 7793").®
Essentially, under Release 7793, a person is a beneficial
owner of shares held in another’s name if the person either
obtains benefits substantially equivalent to ownership or has the
power to revest title in himself. However, Release 7793 defined
beneficial ownership only for purposes of the § 16(a) reporting
requirement. A subsequent SEC Release made it clear that the
requirement to report beneficially owned shares was not
coextensive with § 16(b) liability. SEC Securities Exchange
Act Release No. 7824 (Feb. 14, 1966), reprinted in CCH
Fed.Sec.L.Rep. § 26,030 (“Release 7824”). Rather. liability
under § 16(b) for transactions in beneficially owned shares is
“to be determined by the facts of each particular case in an
appropriate action brought by the issuer or its security holders.”
Re'ease 7824. Under Release 7793, “a person ordinarily
should include in his [§ 16(a) reports] securities held in the
name of a spouse or minor children as being beneficially owned
by him.” It is this routine, automatic (“ordinarily”) quality of
§ 16(a) reporting that makes the mere presence of a § 16(a)
reporting requirement, without more, unsuitable as a conclusive
determinant of § 16(b) liability.
The Whiting court recognized this limitation on § 16(a)
beneficial ownership, 523 F.2d at 687, and further recognized
the underlying reason for it—namely, that “[a] definition of
‘beneficial ownership’ may be broad enough to require report-
ing for purposes of public exposure but too broad for the
imposition of liability under § 16(b).” 523 F.2d at 685 n.8.
®SEC Release 7793 is reprinted in CCH Fed.Sec.L.Rep. 49 26,031 &
26,032. It appears in pertinent part in Whiting, 523 F.2d at 686 n.10. For
general discussions of Release 7793, see 5 L. Loss, Securities Regulation (2d
ed. Supp. 1969) at 3063-66; Feldman & Teberg, Beneficial Ownership Under
Section 16 of the Securities Exchange Act of 1934, 17 Case Western Res.L.
Rev. 1054 (1966).
A-17
But, the Whiting court still ended with a general proposition
that, if one is the “beneficial owner,” one is chargeable with the
profits. 523 F.2d at 689. The Whiting court apparently created
an unexpressed new term, “beneficial ownership for § 16(b)
purposes.” The court then took the defining characteristics of
beneficial ownership in Release 7793 and applied them to the
facts of the particular case, as Release 7824 advised. This
application was done not simply to find if beneficial ownership
for § 16(a) reporting was met, but to determine if the actual
rewards of ownership were sufficiently present to warrant
attributing the stock to the insider-spouse for § 16(b) liability.
See 523 F.2d at 688-89. See also 386 F.Supp. 1130, 1136-38
(district court in Whiting). It was this “beneficial ownership
for § 16(b)” which was dispositive in determining what profits
were “realized by him.”
The district court below, relying on Whiting, engaged in a
similar reasoning. Analyzing the facts of William’s control and
benefit over the shares, the court concluded he “must be
deemed the beneficial owner of [his mother’s] securities for
purposes of § 16(b).”
William argues the Whiting analysis equates § 16(a)
reporting and § 16(b) liability and that such an equation
unduly expands § 16(b). While the Whiting analysis is
somewhat ambiguous, we do not read that case as making such
an equation. Rather, the Whiting court engaged in a factual
determination of beneficial ownership specifically for purposes
of § 16(b). Nor, in following Whiting, did the district court in
the case at bar make such an equation. The district court did
not rely on the mere fact that his mother’s shares were
beneficially owned by William for § 16(a) reports. The court
took evidence on the relation between his mother and William,
the extent of William’s involvement in managing her affairs,
and particularly the degree of control William had over the
Corporation securities, and the extent of his ability to enjoy the
benefit therefrom. Only after evaluating this evidence did the
A-18
district court conclude that his mother’s securities should be
attributed to William in computing his profits realized under
§ 16(b).
In affirming the district court finding, we hold that an
insider who trades in shares which he or she beneficially owns
within the meaning of § 16(a) may be subject to the sanctions
of § 16(b). Such liability should be imposed, however, only
following a determination by the trial court not simply that the
requirements of beneficial ownership were met for purposes of
the § 16(a) reporting requirement, but that actual rewards of
ownership were sufficiently present to warrant attributing the
stock to the insider for purposes of § 16(b). In making this
determination, the court should especially consider as key
factors the degree to which the insider exercised control over
the securities and the insider’s ability to use the profits made.
See Note, “Beneficial Ownership” Under 16(b) of the Securities
Exchange Act of 1934, 77 Colum. L.Rev. 446, 460-62 (1977).
Williams also contends that this analysis, like the Whiting
court’s, run contrary to the strict interpretive approach of the
Supreme Court in Foremost-McKesson, Inc., Kern County Land
Co., and Reliance Electric Co. Our reading of § 16(b) is not
expansive. Moreover, in this instance, SEC Releases and an
interrelationship between § 16(a) and § 16(b) are involved;
the cited Supreme Court cases do not deal with interpretations
in a similar context. Similarly, in the instance case, unorthodox
transactions calling for the application of the pragmatic
approach are not present. See discussion at pages 522-523
supra.
Our analysis, though approaching the issue through the
theory of “beneficial ownership”, arrives at the same conclusion
as our analysis of whether “profits were realized” by William.
See discussion at page 524 supra. Thus, the district court’s
finding of liability under § 16(b) must be affirmed.
A-19
Hl.
TWO YEAR LIMITATIONS PERIOD
A. Background
Section 16(b) provides that no suit under the section “shall
be brought more than two years after the date such profit was
realized.”” On demand by the Corporation, William paid the
amount claimed on January 29, 1971. This date became the
applicable date from which the statute of limitations is meas-
ured. If the two year period is applicable, then the Corporation
is limited to recovery of profits realized only after January 29,
1969.
But how is the application of the two year time limit of
§ 16(b) to be construed? The parties present three theories of
interpretation. First, William advances the “strict” inter-
pretation under which the two years run strictly from the time
the profits were realized, without any tolling. Second, there is a
“notice” or “discovery” intrpretation under which the time
period is tolled until the Corporation had sufficient information
to put it on notice of its potential § 16(b) claim. Finally, the
Corporation advances the “disclosure” interpretation under
which the time period is tolled until the insider discloses the
transactions at issue in his mandatory § 16(a) reports.®
The district judge hypothetically applied the notice inter-
pretation. He found that various corporate officers had infor-
mation which put the Corporation on notice throughout the
relevant trading period. It was admitted that William did not
® There is also mention of a fraudulent concealment theory under which
the time limit is tolled as long as the insider conceals the transactions from the
Corporation. But as it has been used in the few prior § 16(b) cases, this is
only a step in the analysis toward the disclosure interpretation. The failure to
disclose in § 16(a) reports, whether intentional or inadvertent, is deemed
concealment, thus triggering the traditional equitable tolling doctrine of
fraudulent concealment. See, e.g., Blau v. Albert, 157 F.Supp. 816, 819
(S.D.N.Y. 1957) (quoting Cook & Feldman, Insider Trading under the
Securities Exchange Act (Part 1), 66 Harv.L.Rev. 385, 413 (1953)).
A-20
disclose the transactions in his mother’s shares on his § 16(a)
reports as he was required to do. But the district court did not
consider the disclosure interpretation separately, perhaps rea-
soning that actual notice would override any failure to report.
Then, since tolling was not available, the district court deter-
mined it need not decide between the notice or strict inter-
pretations.
On appeal, the Corporation renews its disclosure inter-
pretation argument, and William renews the strict inter-
pretation. Secondarily, accepting the notice interpretation, each
side advances arguments that the facts do or do not support the
district court’s conclusion that the Corporation had notice. We
hold the disclosure interpretation is the correct construction of
§ 16 and accordingly reverse the district court. Therefore, we
need not reach the district court’s conclusions based on the
notice interpretation.
B. Tolling and the Reporting Requirement
The ultimate question is one of congressional intent,
“whether tolling the limitation in a given context is consonant
with the legislative scheme.” American Pipe and Construction
Co. v. Utah, 414 U.S. 538, 558, 94 S.Ct. 756, 768, 38 L.Ed.2d
713 (1974). Neither the mere fact that a statute creating a
cause of action also contains a time limitation nor whether a
time limitation is viewed as substantive or procedural forecloses
the question of allowing or disallowing tolling; the determina-
tive factor is whether tolling is not inconsistent with the
legislative purpose. See id. at 556-59, 94 S.Ct. at 767-769.
The bare words of the time provision of § 16(b) do not say
whether tolling is or is not allowed. Normally, we would turn
to the legislative history. But the legislative history of § 16(b)
is silent concerning this provision. See Grossman v. Young, 72
F.Supp. 375, 378 (S.D.N.Y. 1974) (first case construing time
provision of § 16(b)). However, examining the legislative
purpose of § 16 as a whole and considering the place of the
A-21
time provision in that overall legislative scheme, we infer that
tolling of the two year time period is required when the
pertinent § 16(a) reports are not filed.
The legislative history and purpose of § 16, discussed in
Part II-A above, clearly reveal a strong congressional intent to
curb insider trading abuses. This purpose would be thwarted if
insiders could escape liability by not reporting as required
under § 16(a). “[I]t would be a simple matter for the
unscrupulous to avoid the salutary effect of Section 16(b)
which provides a remedy for the recovery of short term profits,
simply by failing to file monthly reports in violation of subdivi-
sion (a) and thereby concealing from prospective plaintiffs the
information they would need to adequately protect their inter-
ests. Such a construction would reward the violation of the
statute and would manifestly frustrate congressional intent.”
Blau v. Albert, 157 F.Supp. 816, 819 (S.D.N.Y. 1957). Accord
Grossman v. Young, 72 F.Supp. at 378-79.
This conclusion is further supported by consideration of
the complementary nature of § 16(a) and § 16(b). As
subdivisions of the same section, they should be read together.
See, e. g., Foremost-McKesson, Inc., 423 U.S. at 234 n.1, 96
S.Ct. at 511 n.1; American Standard, Inc., 510 F.2d at 1058.
See also discussion at pages 525-526 supra. The time limit is
made a part of the section itself rather than incorporated by
reference to another provision. The disclosures and reports of
§ 16(a) are an integral part of the context of § 16 within which
§ 16(b) must be read. The short limitations period is under-
standable only in the context of the insider’s duty to make
prompt disclosure. See Grossman v. Young, 72 F.Supp. at 378.
“Effective operation of Section 16(b) is made possible by
Section 16(a)’s requirement of full and prompt publicity... .”
Note, The Scope of “Purchase and Sale” Under Section 16(b)
of the Exchange Act, 59 Yale L.J. 510, 512 (1950).
Similarly, Congress’ express provision in § 16(b) that
individual security holders may bring suit on behalf of the
corporation to recover insider profits bolsters our interpretation.
A-22
Even if other corporate officers or directors should know of an
insider's transactions, this would not be the disclosure § 16
demands, because security holders can bring suit on the corpo-
ration’s behalf. “Only by full compliance with Section 16(a)
can the security holders be charged with adequate notice of the
transaction.” Cook & Feldman, Insider Trading Under the
Securities Exchange Act (Part 1), 66 Harv.L. Rev. 385, 414
(1953). Such shareholders are likely to be outsiders, minority
holders. Their main source of information for the suits
Congress has empowered them to bring likely will be the
required § 16(a) reports.'° If insiders could insulate their
transactions from the scrutiny of outside shareholders by failing
to file § 16(a) reports and waiting for the two year time limit to
pass, then Congress’ creation of these shareholders’ derivative
suits would be nullified.
This congressional interest in affording individual security
holders the opportunity to sue under § 16 militates in favor of
the disclosure interpretation over the notice interpretation in
another respect. Under the notice interpretation, the question
arises whether the knowledge of corporate officers or directors
should be attributed to the corporation, thus giving it notice and
allowing the limitations period to run. Normally, knowledge of
corporate officers is imputed to the corporation. But in the § 16
context, if corporate officials’ knowledge of another insider's
trading and indeed even the trader insider’s own knowledge
were imputed to the corporation, then the corporation’s right to
recover the profits and especially the ability to bring such suits
would be seriously impaired. Cf. Schur v. Salzman, 365
F.Supp. 725, 733 (S.D.N.Y. 1973); Jefferson Lake Sulphur Co.
v. Walet, 104 F.Supp. 20, 23 (E.D. La. 1952), aff'd, 202 F.2d
©The reports are Available to the public at the SEC and at the
exchanges. 17 C.F.R. § 240.24b-3(a). The information in all the reports is
compiled and published by the SEC in a pamphlet available at SEC offices
and exchanges and widely distributed by subscription. See 2 L. Loss,
Securities Regulation (2d ed. 1961) at 1039 & n.9.
A-23
433 (Sth Cir. ), cert. denied, 346 U.S. 820, 74 S.Ct. 35, 98 L.Ed.
346 (1953) (corporation’s § 16(b) suit is not estopped on
ground that corporation approved of transactions, since corpo-
ration’s action under control of very insiders involved). See
also Cook & Feldman, supra, 66 Harv.L.Rev. at 413-14.
Collusion among insiders and, a more likely occurrence, the
unarticulated acquiescence in or averting of gaze from a
powerful insider’s transactions thus would be rewarded under
the notice interpretation. This problem does not arise under the
disclosure interpretation. Thus, the disclosure interpretation
adopted herein better serves the purposes of the statute.
Finaliy, the purpose of § 16 to impose absolute account-
ability within clearly demarcated boundaries, supports the
disclosure interpretation. This goal of clear boundaries is
served by a limitations period which can be mechanically
calculated from objective facts. The dates on which purchases
and sales are made are such facts, as are the dates on which
§ 16(a) reports are filed with the SEC. By contrast, under the
notice interpretation, the running of the limitations period
would depend on uncertain determinations of what knowledge
should lead a corporation to discover its cause of action. Thus,
the disclosure interpretation better serves the statute’s purpose
than the notice interpretation.
C. Statutory Analysis and Prior Cases
Only a few cases have considered the two year limitation
provision of § 16(b). Three cases from the Southern District of
New York agree with our analysis. See Shattuck Denn Mining
Corp. v. La Morte, [1973-74 Transfer Binder] CCH
Fed.Sec.L.Rep. 1 94,429 at 95,472 (S.D.N.Y. 1974). Blau v.
Albert, 157 F.Supp. 816 (S.D.N.Y. 1957); Grossman v. Young,
72 F.Supp. 375 (S.D.N.Y. 1947). One case from the Middle
District of Pennsylvania rejected this analysis and adopted a
Strict interpretation of the two year limit. See Carr-
A-24
Consolidated Biscuit Co. v. Moore, 125 F.Supp. 423 (M.D. Pa.
1954).11 Grossman v. Young and Blau v. Albert are the better
reasoned decisions, and reference is made to them for more
elaboration of the disclosure interpretation. See also 2 L. Loss.
Securities Regulation (2d ed. 1961) at 1055-58 (discussing the
two year limitation, approving Grossman, and critizing [sic]
Carr-Consolidated Biscuit Co. ).
The court in Carr-Consolidated Biscuit Co. relied on the
discarded theory that substantive statutes of limitations are
entitled to literal application by the courts and may not be
tolled. See 125 F.Supp. at 429-30. But this theory was
effectively renounced by the Supreme Court in American Pipe
and Construction Co. v. Utah, 414 U.S. 538, 556-59, 94 S.Ct.
756, 767-769, 38 L.Ed.2d 713 (1974). The Carr-Consolidated
Biscuit Co., court also relied on a comparision of the limitation
provision in § 16(b) with those in other securities statutes—for
example, §§ 9(e) and 18(c) of the 1934 Act, 15 U.S.C.
§§ 78i(e) and 78r(c), and § 13 of the 1933 Act, 15 U.S.C.
§ 77m. See 125 F.Supp. at 430-31. In those statutes, Congress
expressly provided for the operation of limitations periods in
other than a strict manner. The court surmised that the absence
of an express provision for tolling in § 16(b) necessarily shows
congressional intent of a strict interpretation. Urging the strict
interpretation, William renews this comparison of statutory
provisions argument, citing recent Supreme Court cases in other
securities areas using such an analysis. See Ernst & Ernst v.
Hochfelder, 425 U.S. 185, 206-09, 96 S.Ct. 1375, 1387-1388, 47
L.Ed.2d 668 (1976) (various standard-of-liability provisions of
"1 In four other cases, the two year limit, strictly calculated, was held to
bar suit or was assumed to be the measure, but in these cases the question of
tolling due to failure to file § 16( a) reports was not presented. See Morales v.
Mylan Laboratories, Inc., 443 F.Supp. 778 (W.D. Pa. 1978); Cowsar v.
Regional Recreations, Inc., 65 F.R.D. 394 (M.D.La. 1974); Chambliss v.
Coca-Cola Bottling Corp., 274 F.Supp. 401 (E.D. Tenn. 1967), aff'd, 414
F.2d 256 (6th Cir. 1969), cert. denied, 397 U.S. 916, 90 S.Ct. 921, 25 L.Ed.2d
97 (1970); Blau v. Lamb, 191 F.Supp 906 (S.D.N.Y. 1961).
A-25
the 1934 Act must be read together); Blue Chip Stamps v.
Manor Drugs Stores, 42\ U.S. 723, 733-36, 95 S.Ct. 1917, 1924-
1926, 44 L.Ed.2d 539 (1975) (various standing-to-sue provi-
sions of the 1934 Act must be read together).
As an approach to statutory construction, this comparative
analysis is obviously sound. In this instance, however, the
comparison is not so helpful to William’s position. First, the
light those other provisions may shed on § 16(b) by com-
parison depends on the clarity of the other provisions in their
own right. But the meaning of the other provisions of the 1934
Act, §§ 9(e) and 18(c), is not clear. See, e. g., Jacobson v.
Peat, Marwick, Mitchell & Co., 445 F.Supp. 518, 526-27
(S.D.N.Y. 2977) (construing “accrued” in § 18(c)).
Furthermore, the provisions actually appear silent on the
question of tolling. They each create a three year limitations
period from the time the action accrues but make an additional
shorter limit of one year from actual discovery of the facts
constituting the action. Indeed, these provisions appear to have
a meaning contrary to that advanced by William and Carr-
Consolidated Biscuit Co. William argues these provisions
expressly provide for tolling and therefore the absence of
similar congressional expression in § 16(b) is relevatory. But,
on their face, these provisions appear provide [ sic] an absolute
three-year maximum, beyond which suit may not be brought
regardless of when the facts are discovered. See, e.g., Bader v.
Fleschner, 463 F.Supp. 976, 981 (S.D.N.Y. 1978). Thus, the
absence of similar language creating a maximum time limit in
§ 16(b) shows that Congress contemplated tolling in appropri-
ate circumstances in § 16(b) cases. We do not decide whether
this interpretation of §§ 9(e) and 18(c) is correct. It merely
shows that the comparison analysis argument advanced by
William is unpersuasive.
Moreover, even if the comparison of § 16(b) with the
other provisions were more favorable to William’s position, the
comparison of statutory provisions analysis would not be
A-26
complete until the language of § 16(b)’s limitation provision
had been considered in light of the context of all of § 16. As
discussed earlier, § 16(b) is interrelated with the congression-
ally created reporting requirements of § 16(a). Secticns 9(e)
and 18(c) do not have similar disclosure provisions. Therefore,
comparison with them is unhelpful in determining how a
disclosure provision interacts with a limitations period.
In summary, we hold that an insider’s failure to disclose
covered transactions in the required § 16(a) reports tolls the
two year limitations period for suits under § 16(b) to recover
profits connected with such a non-disclosed transaction.'? The
two-year period for § 16(b) begins to run when the transactions
are disclosed in the insider’s § 1°’) report. See Blau v. Albert,
157 F. Supp. at 819; Shattuck Denn Mining Corp. v. La Morte,
supra. This interpretation is consistent with the legislative
scheme of § 16. It is supported by prior cases construing the
section and by securities commentators. The district court’s
result on the limitations issue is therefore reversed.
IV.
PROFIT COMPUTATION METHOD
In calculating the profit realized as a result of William’s
securities transactions the district court used the “lowest pur-
chase price, highest sale price” method. This method was set
forth long ago by the Second Circuit in Smolowe v. Delendo
Corp., 136 F.2d 231 (2d Cir.), cert. denied, 320 U.S. 751, 64
S.Ct. 56, 88 L.Ed. 446 (1943). Courts appear nearly unani-
mous in approving the Smolowe rule; commentators are also
generally in favor, but there are some critics. See 2 L. Loss,
12 We note that the American Law Institute’s proposed Federal Securities
Code expressly provides for tolling in insider liability recovery while there is
violation of the reporting requirement. See Federal Securities Code (Pro-
posed Official Draft, March 15, 1978) §§ 605(a) (reporting requirements),
1717 (insider liability), & 1727(d) (statute of limitations and tolling).
A-27
Securities Regulation (2d ed. 1961) at 1062-65; 5 L. Loss.
Securities Regulation (2d ed. Supp. 1969) at 3024-25; Cooke &
Feldman, Insider Trading Under the Securities Exchange Act
(Part 11), 66 Harv.L.Rev. 612, 612-14 (1953). The question of
the profit computation method for § 16(b) is one of the first
impression in this circuit. The Corporation urges that we adopt
the longstanding Smolowe rule. William argues the Smolowe
rule is incorrect and proposes a rule matching sales with
purchases closest in time. Persuaded by its merit and its long
continued use in other courts, we adopt the Smolowe rule.
Under the Smolowe rule, the highest sales price is matched
with the lowest purchase price in any given six month period."
In analyzing the legislative history and the remedial nature of
the statute, the court in Smolowe concluded:
The statute is broadly remedial. [citation omitted] Recov-
ery runs not to shareholder, but to the corporation. We
must suppose that the statute was intended to be thorough-
going, to squeeze all possible profits out of stock transac-
tions, and thus to establish a standard so high as to prevent
conflict between the selfish interest of a fiduciary officer,
director, or stockholder and the faithful performance of his
duty. [citations omitted] The only rule whereby all
possible profits can be surely recovered is that of lowest
price in, highest price out—within six months.
Smolowe, 136 F.2d at 239. Eight years later the Second Circuit
again considered the profit computation issue and, after an
independent analysis, affirmatively reasserted the Smolowe
doctrine. Gratz v. Claughton, 187 F.2d 46, 50-52 (2d Cir.),
cert. denied, 341 U.S. 920, 71 S.Ct. 741, 95 L.Ed. 1353 (1951)
(L. Hand, J.).
13 The operation if | sic] the Smolowe rule is explained at, e. g., 2 L. Loss,
Securities Regulation (2d ed. 1961) at 1063 (quoting Rubin & Feldman,
Statutory Inhibitions upon Unfair Use of Corporate Information by Insiders,
95 U.Pa.L.Rev. 468, 482-83 (1947)).
A-28
The Second Circuit continues to adhere to the Smolowe
rule. See Feder v. Martin Marietta Corp., 406 F.2d 260. 269
(2d Cir. 1969), cert. denied, 396 U.S. 1036, 90 S.Ct. 678, 24
L.Ed.2d 281 (1970); Adler v. Klawans, 267 F.2d 840, 847-48
(2d Cir. 1959). Cf. Cummings v. Commissioner, 506 F.2d 449,
452 (2d Cir. 1974), cert. denied, 421 U.S. 913, 95 S.Ct. 1571, 43
L.Ed.2d 779 (1975) (in analysis that insider’s repayment of
§ 16(b) profits is a long term capital loss, court uses Smolowe
approvingly ).
The large majority of profit computation cases expectably
are in the Second Circuit and, particularly, in the Southern
District of New York. A long series of district court cases there
have continued to apply the Smolowe rule. See, e.g., Lewis v.
Levinson, {1978 Transfer Binder} CCH Fed.Sec. L.Rep.
{ 96,430 (S.D.N.Y. 1978); Makofsky v. Ultra Dynamics Corp.,
383 F.Supp. 631, 638-39 (S.D.N.Y. 1974); Schur v. Salzman,
365 F.Supp. 725, 730-731 (S.D.N.Y. 1973); Volk v. Zlotoff,
318 F.Supp. 864, 865 (S.D.N.Y. 1970).
When the question of profit computation in § 16(b) has
arisen in other courts, they too have adopted the Smolowe rule
of lowest price in, highest price out. See Western Auto Supply
Co. v. Gamble-Skogmo, Inc., 348 F.2d 736, 742-43 (8th Cir.
1965), cert. denied, 382 U.S. 987, 86 S.Ct. 556, 15 L.Ed.2d 475
(1966); Morales v. Mylan Laboratories, Inc., 443 F.Supp. 778,
780 (W.D.Pa. 1978); Heli-Coil Corp v. Webster, 222 F.Supp.
831, 837 (D.N.J. 1963), aff'd as modified on other grounds, 352
F.2d 156 (3d Cir. 1965); Arkansas Louisana Gas Co. v. W.R.
Stephens Investment Co., 141 F.Supp. 841, 847 (W.D. Ark.
1956). See also Ohio Drill & Tool Co. v. Johnson, 498 F.2d 186,
194-95 (6th Cir. 1974) (directing Smolowe rule be used in
profit computation under state insider trading statute ).
William cites one case as disapproving the Smolowe rule,
namely, Allis-Chalmers Manufacturing Co. v. Gulf & Western
Industries, Inc., 527 F.2d 335 (7th Cir. 1975), cert. denied, 423
U.S. 1078, 96 S.Ct. 865, 47 L.Ed.2d 89 (1976). In Allis-
A-29
Chalmers, the Seventh Circuit declined to apply the Smolowe
rule in the case before it. But the court in Allis-Chalmers did
not reject the Smolowe rule; indeed it “agree[d] with the
underlying principle of the . . . Smolowe case.” 527 F.2d at 355.
The court distinguished its case from Smolowe on the ground
that Smolowe involved the problem of trade-matching. There
were multiple sales and purchases, and some rule had to be
adopted to determine how they should be matched for comput-
ing profit. But Allis-Chalmers involved a question of valuation
of the shares and was not a trade-matching case, and so the
court did not apply the Smolowe rule. See 527 F.2d at 354-56.
Cf. Anderson v. Commissioner, 480 F.2d 1304, 1307 (7th Cir.
1973) (in holding insider’s repayment of § 16(b) profits a long
term capital loss, Seventh Circuit approvingly cites Smolowe
rule).
William also maintains the Smolowe rule is inconsistent
with the legislative history of § 16(b). That the Smolowe rule
serves the legislative purpose of § 16(b) is amply demonstrated
in the previously discussed Second Circuit casez. William’s
principle argument is a comparison of the original version of
§ 16(b) with the final result. The original Senate and House
versions of what became of § 16(b) provided for a variation of
the “lowest in, highest out” method of profit calculation.'4
This language did not appear in the final version enacted into
law. William argues this shows congressional rejection of such
a method of profit calculation and it is thus improper for the
courts to resurrect it.
4 The pertinent language of the earlier bills provided as follows:
For the purposes of this subsection the profit shall be calculated on
the sale or sales by such person of such security made at the highest price
or prices and on the purchase or purchases made by such person of such
security at the lowest price or prices during the six months’ period,
irrespective of the certificates for such security received or delivered to
such person during such period.
S. 2693, H.R. 7852, 73d Cong., 2d Sess. § 15(b) (1943), reprinted in
Legislative History of the Securities Act of 1933 and Securities Exchange Act
of 1934 (Ellenberger & Mahar ed. 1973).
A-30
This argument is without substance. As William concedes
in his brief, there is no statement anywhere in the legislative
history as to why this language did not appear in the final
version. There is no intimation that Congress disapproved of it.
William's characterization of what occurred as “congressional
rejection” is extreme. If Congress had deleted this language
and replaced it with other language describing another method
of profit calculation, one might infer that Congress disapproved
of the prior language. Cf National Automatic Laundry and
Cleaning Council v. Shultz, 443 F.2d 689, 706 (D.C.Cir. 1971)
( positive congressional action in rejecting amendments, unlike
mere inaction, carries some weight). But all that occurred here
is that certain language did not appear in the final version.
Statutory interpretation cannot rest safely on mere inaction in
Congress; nor can it rest on unexplained changes made in
congressional committees. Federal Trade Commission v. Dean
Foods Co., 384 U.S. 597, 609-10 & n. 11, 86 S.Ct. 1738, 1745 &
n. 11, 16 L.Ed.2d 802 (1966); Trailmobile Co. v. Whirls, 331
U.S. 40, 61, 67 S.Ct. 982, 992, 91 L.Ed. 1328 (1947); United
States v. Imperial Irrigation District, 559 F.2d 509, 535-36 (9th
Cir. 1977), rev'd on other grounds sub nom. Bryant v. Yellen, ....
USS. ...., 100 S.Ct. 2232, 65 L.Ed.2d 184 (1980). Legislative
silence cannot be viewed as an expression of congressional
intent. Without some indication in the legislative history of the
reasons why this change occurred, it is unwise to infer much
from the silence of Congress. Cf. Scripps-Howard Radio, Inc. v.
Federal Communications Commission, 316 U.S. 4, 11, 62 S.Ct.
875, 86 L.Ed. 1229 (1942) (search for significance in Congress’
silence is often the pursuit of a mirage).
Also persuasive is the fact that in the over thirty-five years
since Smolowe was decided and has been applied, Congress has
failed to act to set aside the rule through contrary legislation.
We believe the Smolowe rule is in accord with the absolute and
thoroughgoing nature of liability under § 16(b). This statute is
intended to be a deterrent to a type of activity which Congress
realized was subject to much abuse. In some cases the Smolowe
A-31
rule can be criticized for harshness and artificially. But other
methods would be equally artificial..5 The Smolowe rule
assures full recovery of profits for the corporation. The
Smolowe rule of matching the lowest purchase price and the
highest sale price within six months serves the purpose of
§ 16(b). Following the unbroken acceptance of this method by
other courts, we adopt it as the rule in this circuit. The district
court is affirmed on this issue.
Vv.
PREJUDGMENT INTEREST
Although § 16 says nothing about the recovery of interest
one way or the other, prejudgment interest is generally consid-
ered a part of § 16(b) recovery. However, its award is not
mandatory. See generally 5 L. Loss, Securities Regulation (2d
ed. Supp. 1969) at 3025-27. The allowance of interest is within
the discretion of the trial court, but “the granting of such
allowance should not follow as a matter of course.” Gold v.
Sloan, 486 F.2d 340, 353 (4th Cir. 1973), cert. denied, 419 U.S.
873, 95 S.Ct. 134, 42 L.Ed.2d 112 (1974). Rather, in a § 16(b)
case interest “is given in response to considerations of fairness.
It is denied when its exaction would be inequitable.” Blau v.
Lehman, 368 U.S. 403, 414, 82 S.Ct. 451, 7 L.Ed.2d 403
(1962). “Whether interest will be awarded is a question of
fairness, lying within the court’s sound discretion, to be an-
swered by balancing the equities.” Wessel v. Buhler, 437 F.2d
279, 284 (9th Cir. 1971) (10b-5 case). Accord Western Auto
Supply Co. v. Gamble-Skogmo, Inc., 348 F.2d at 744 (§ 16(b)
case). A reviewing court will upset the district court’s decision
8 William urges a rule whereby purchases are matched against the
immediately preceding or immediately following sales, whichever is higher.
A similar proposal, that the matching of shares to be on a last in-first out
basis, was rejected in Lewis v. Levinson {1978 Transfer Binder} CCH
Fed.Sec.L.Rep § 96,430 (S.D.N.Y. 1978).
A-32
granting or denying prejudgment interest only if it is so unfair
or so inequitable as to require it. Blau v. Lehman, supra; Blau
v. Lamb, 363 F.2d 507, 528 (2d Cir. 1966), cert. denied, 385
U.S. 1002, 87 S.Ct. 707, 17 L.Ed.2d 542 (1967).
Among the factors to be considered in weighing the
equities is whether the insider acted innocently or knowingly.
In many cases, interest had been ‘enied where it was shown the
insider acted in good faith. See, e.g., Gold v. Sloan, supra; Oliff
v. Exchange International Corp., 449 F.Supp. 1277, 1302
(N.D.II. 1978); Morales v. Gould Investors Trust, 445 F.Supp.
1144, 1156 (S.D.N.Y. 1977), aff'd without opinion, 578 F.2d
1369 (2d Cir. 1978); Volk v. Ziotoff, 318 F.Supp. 864, 867
(S.D.N.Y. 1970); Marquette Cement Mfg. Co. v. Andreas, 239
F.Supp. 962, 968 (S.D.N.Y. 1965).
These cases do not mandate a requirement of bad faith or
willful violation for the award of prejudgment interest; rather,
they justify its denial when such factors are absent. In the
balancing of equities in these cases, it is not a one-dimensional
question of subjective good or bad faith. The type and degree
of the insider’s inadvertence, the position of the insider in the
corporation, and other circumstances of each case are consid-
ered. Even when bad faith may have been absent, interest is
still sometimes awarded. See Champion Home Builders Co. v.
Jeffress, 385 F. Supp 245, 250 (E.D.Mich. 1974); Perfect Photo,
Inc. v. Grabb, 205 F.Supp. 569, 573-74 (E.D. Pa. 1962). See
also Magida v. Continental Can Co., 231 F.2d 843, 848 (2d
Cir.), cert. denied, 351 U.S. 972, 76 S.Ct. 1031, 100 L.Ed. 1490
(1956). Cf. B.T. Babbitt, Inc. v. Lachner, 332 F.2d 255, 259
(2d Cir. 1964) (interest awarded without discussion). The
insider must show there is an overriding inequity in allowing
interest in order to overcome the granting of interest. Western
Auto Supply Co., 348 F.2d at 744. The insider’s good faith must
be shown; bare allegations are not sufficient. Gold v. Sloan, 486
F.2d at 353; Lewis v. Realty Equities Corp., 396 F.Supp. 1026,
1034 (S.D.N.Y. 1975).
A-33
When an insider repays the corporation promptly upon
demand, that has been taken as betokening good faith and
justifying denial of interest, especially when the prompt repay-
ment means the corporation has not lost use of the money for a
long time. See Abbe v. Goss, 411 F.Supp. 923, 926 (S.D.N.Y.
1975); Lewis v. Wells, 325 F.Supp. 382, 387 (S.D.N.Y. 1971).
Another factor in balancing the equities is the length of
time involved. When there has been substantial delay between
transactions and complaint or between complaint and judg-
ment, courts consider who was responsible for the delay an
important factor in allowing interest for such periods. See Gold
v. Sloan, supra; Lewis v. Realty Equities Corp., 396 F.Supp. at
1034; Schur v. Salzman, 365 F.Supp. 725, 734-35 (S.D.N.Y.
1973); Blau v. Lamb, 242 F.Supp. 151, 161 (S.D.N.Y. 1965),
aff'd, 363 F.2d 507, 528 (2d Cir. 1966), cert. denied, 385 U.S.
1002, 87 S.Ct. 707, 17 L.Ed.2d 542 (1967). Moreover, a delay
can also be a factor in establishing the date from which interest
accrues. Normally, interest accrues from the time of the
transactions. See, e. g., Western Auto Supply Co., 348 F.2d at
744. But where delay has occurred for which the insider was
not responsible, in accommodating the equities some courts
have awarded interest to run from the commencement of the
suit. See Champion Home Builders Co. v. Jeffress, 385 F.Supp
at 250; Schur, supra. In Schur the court particularly dis-
tinguished between the pre-complaint delay for which the
plaintiff was responsible and the delaying litigation tactics for
which the insider defendant was responsible.
In the case at bar, the district court awarded prejudgment
interest on the profits recoverable, i. e., those not barred by the
district court’s ruling on the limitations issue. William argues
the district court erroneously applied an absolute rule granting
interest instead of weighing the equities. The use of an absolute
rule without regard to the equities would be incorrect. But it is
not apparent that the district court used an absolute rule. The
lower court’s opinion on this point may reflect a decision that,
A-34
after considering the circumstances of this case, the equities did
not tip in favor of departing from the usual objective nature of
§ 16(b) liability.
But we need not decide this today. Our decisions on
liability and the limitations period may result in a larger
amount of profit recovery and a longer period of liability. This
may have an effect on the balance of equities. Thus we remand
the question of prejudgment interest to the district court for
reconsideration in light of the foregoing principles. See Thomas
v. Duralite Co., Inc., 524 F.2d 577, 589 (3d Cir. 1975) (similar
remand of prejudgment interest in 10b-5 case). We express no
opinion on whether prejudgment interest is appropriate here.
The balancing of equities must be done in light of all the facts
and circumstances of the case. In the first instance, that
determination is left to the discretion of the district court.
CONCLUSION
We hold today that William is liable under § 16(b) for
profits realized in transactions connected with William’s trading
of shares held in his mother’s name. In this result we agree with
the district court. However, we also hold that the two-year
limitations period of § 16(b) is tolled as long as the insider has
not disclosed the transactions on the required § 16(a) reports.
Thus, since reports of the transactions in question here were not
filed, William’s liability is not cut off by the limitation period.
We reverse the district court in this regard. Further, we agree
with the district court that the Smolowe rule for trade-matching
to calculate profits is correct. Finally, we remand the award of
prejudgment interest to the district court for reconsideration.
AFFIRMED in part; REVERSED and REMANDED for
proceedings in accordance with this opinion.
APPENDIX B
UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
Bevian WHITTAKER AND
Wruus R. Wuittaker,
Plaintiffs, Civil No.
v. 75-2546-LEW
OPINION
Wuittaker Conporamioy, AND ORDER
a California corporation,
Defendants.
In this action plaintiffs, William R. Whittaker (“Mr.
Whittaker”) and Beulah Whittaker (“Mrs. Whittaker”),
seek a declaratory judgment of nonliability under the
insider trading provisions of §16(b) of the Securities
Exchange Act of 1934, 15 U.S.C. § 78p(b), to the defend-
ant, Whittaker Corporation (“the Corporation”).’ Pro-
cedurally, this action is unique in that plaintiffs have
already voluntarily paid to the Corporation the total
amount for which the Corporation alleged they were
liable, while expressly denying any liability and reserving
their right to challenge in this action the enforceability of
the Corporation’s demand. In an order dated September
10, 1976, the Honorable William Matthew Byrne, Jr., this
judge’s predecessor in this action, determined that this
court did have subject matter jurisdiction over the claims
stated by plaintiffs under both 15 U.S.C. § 78aa and 28
U.S.C. § 1331. A copy of Judge Byrne’s order is attached
as an appendix to this opinion.
B-2
PRELIMINARY FACTS
Plaintiff William R. Whittaker, an engineer and in-
ventor, was the founder of a business which started in his
backyard and eventually grew into what is now Whittaker
Corporation, a New York Stock Exchange Company,
which reported sales during its last fiscal year of $660
million. Initially, the business manufactured valves de-
signed by Mr. Whittaker for use in aircraft systems. In
order to get his business started in 1943, Mr. Whittaker
borrowed $1,800 from his parents for which his parents
agreed to take a 35 per cent interest in the venture in
lieu of repayment. The business was formally incor-
porated in 1946.
The business remained relatively small until it was
merged with Telecomputing Corporation in 1957. The
resulting entity retained the name Telecomputing Corpo-
ration until it was changed to Whittaker Corporation in
1964. The merger did not substantially affect the basic
size of the organization or the makeup of its management
group headed by Mr. Whittaker as President and Chair-
man of the Board of Directors.
The officers and directors of Whittaker Corporation
first became subject to the insiders’ reporting require-
ments of § 16(a) of the Securities Exchange Act of 1934
in March 1965, as a result of the broadening of § 16(a)’s
coverage in the 1964 amendments to the Act.
It was about this time that the Corporation began to
experience a period of rapid growth. Supervision of the
growth activity and of the management reorganization
took up all of Mr. Whittaker’s time and effort. Accord-
ingly, the responsibility of assuring that the Corporation
and its officers and directors complied with the newly
applicable federal reporting requirements was delegated
to the Corporation’s legal counsel, Mr. Bertin Weyl. In
B-3
March 1965, Mr. Weyl prepared the initial reports (re-
ferred to as Forms 3) for signature by each of the
Corporation’s officers and directors, including Mr.
Whittaker. Thereafter, any reports showing subsequent
ownership changes (referred to as Forms 4) were pre-
pared by the Corporation’s legal department. Mr.
Whittaker relied upon the legal department (1) to advise
him when a report was due; (2) to obtain the necessary
information concerning his trading in Whittaker Corpo-
ration securities; (3) to prepare the necessary forms for
his signature; and (4) to see that they were filed on time
with the Securities Exchange Commission. This pro-
cedure was established as part of an overall program by
which the Corporation undertook to keep its officers and
directors advised as to their duties under the federal
securities laws. In connection therewith, the Corpora-
tion’s legal department prepared numerous legal memor-
anda for distribution to all affected personnel to inform
them concerning their responsibilities and any changes
therein.
The instant litigation arises out of certain insider
transactions in the equity securities of defendant by Mr.
Whittaker on behalf of both himself and his mother,
Beulah Whittaker, between December 1, 1965 and Decem-
ber 31, 1970 (“the relevant trading period”). Defendant
asserts that due to the unique relationship between Mr.
Whittaker and his mother, Mr. Whittaker must be con-
sidered the beneficial owner of any Whittaker Corpora-
tion securities he purchased or sold in her behalf. As a
result of this, the defendant asserts that plaintiffs in-
curred liability under § 16(b) of the Securities Exchange
Act of 1934. The concept of beneficial ownership under
the Act will be discussed shortly; however, as a back-
ground, it is first necessary to describe the relationship
between Mr. Whittaker and his mother.
B-4
Mrs. Whittaker was born in 1887 and is presently 89
years of age. At no time has she personally been an
officer or director of the Corporation. In 1959, because
of her advancing age and concern about the management
of her estate, Mrs. Whittaker granted to her son a broad
general power of attorney, giving him the right to pay her
bills, to sign checks on her behalf, to purchase and sel!
securities for her investments, financial and business
affairs. In 1969, that power of attorney was renewed in
identical terms. At all times relevant to this litigation,
Mr. Whittaker made and executed virtually all investment
and business decisions for his mother on his own initiative
and in his sole discretion pursuant to this power of
attorney.
Under the terms of Mrs. Whittaker’s will, executed in
1963 and unrevised since that date, her son is the sole
beneficiary. Should the will be invalid for any reason,
Mr. Whittaker is also his mother’s exclusive legal heir.
Substantially all of Mrs. Whittaker’s bills are paid out
of a joint bank checking account bearing her name and
the name of her son. From approximately the spring of
1960, and throughout the relevant trading period, Mr.
Whittaker maintained and personally signed all checks
drawn on this joint account. During the same relevant
period, all of Mrs. Whittaker’s income was deposited in
the joint account and all of her expenses were paid out
of it.
Since at least 1960, Mr. Whittaker and Mrs. Whittaker
have frequently advanced substantial loans to each other.
Mr. Whittaker has periodically made noninterest bearing
loans of money to his mother which have ranged in
amount from approximately $2,000 to $20,000. These
loans were made to enable Mrs. Whittaker to meet her
regular living expenses while she awaited receipt of
interest and dividend payments from her corporate in-
B-S
vestments. Commencing in January 1962, and throughout
the relevant trading period, Mr. Whittaker received a
series of substantial loans from his mother. Mr.
Whittaker’s present total indebtedness to his mother is
approximately $767,436.00, a figure which represents
more than half of the present market value of Mrs.
Whittaker’s estate. The vast majority of Mr. Whittaker’s
loans from his mother were used to finance Mr.
Whittaker’s purchase of common stock in the Corporation
from Mrs. Whittaker. Although a number of the initial
loans to him were evidenced by interest bearing notes,
Mr. Whittaker actually paid to his mother only a very
small fraction of the interest due under these obligations.
The loans were originally secured by substantial pledges
of common stock owned by Mr. Whittaker, but this
pledged stock was periodically reconveyed to Mr.
Whittaker by his mother without substituting alternative
security.
In November of 1973, Mr. Whittaker consolidated his
indebtedness to his mother by executing a note in her
favor in the amount of $727,436.00. At the time this note
was executed, Mrs. Whittaker was 86 years of age. The
note was payable within ten years, bore no interest and
was subordinated to other secured and unsecured bank
loans owed by Mr. Whittaker. No part of the earned, but
unpaid, interest accrued under previous notes was added
to the principal amount of this November 1973 note. To
date, no part of the principal due under this note, or under
any of its predecessors, has been paid by Mr. Whittaker
to his mother.
The securities transactions which give rise to the in-
stant action took place between December 1, 1965 and
December 31, 1970. During this period, Mr. Whittaker
purchased on his own initiative registered common stock
and convertible debentures of Whittaker Corporation for
B-6
his mother’s account, and within six months of such pur-
chases, he sold common stock for his own account and
convertible debentures for his mother’s account. All of
the transactions on behalf of his mother were effected
in his own initiative pursuant to his power of attorney.
The Corporation asserts that it did not learn of the
existence of Mr. Whittaker’s broad power of attorney
until the fall of 1970. Thereafter, an investigation was
conducted of all transactions entered into by Mr. Whit-
taker in the equity securities of the Corporation pursuant
to this power of attorney. After a schedule of these
transactions and Mr. Whittaker’s personal transactions
in the Corporation's securities was compiled, a liability
was asserted by the Corporation against Mr. Whittaker
and Mrs. Whittaker in the amount of $495,222.12? As
noted at the outset, Mr. Whittaker voluntarily paid this
amount while expressly denying any liability and reserv-
ing the right to bring this action.
THE ISSUE OF BENEFICIAL OWNERSHIP
The threshold issue which this court must determine
is whether Mr. Whittaker exercised control over his
mother’s affairs sufficient to find that he was in fact the
beneficial owner of any securities he purchased on her
behalf. The term “beneficial owner” is defined in § 16(a)
of the Securities Exchange Act of 1934, which section
requires corporate insiders file a statement of beneficial
ownership with the Securities Exchange Commission.
This section provides in pertinent part:
“Every person who is directly or indirectly the bene-
ficial owner of more than 10 per centum of any class of
any equity security (other than an exempted security)
which is registered pursuant to section 781 of this title,
or who is a director or an officer of the issuer of such
security, shall file .. . a statment with the Commission
B-7
... Of the amount of all equity securities of such issuer
of which he is the beneficial owner... .”
In a release dated January 19, 1966, the Securities Ex-
change Commission attempted to clarify the meaning of
“beneficial ownership.” This release provides in relevant
part:
“Generally a person is regarded as the beneficial
owner of securities held in the name of his or her
spouse and their minor children. Absent special cir-
cumstances such relationship ordinarily results in such
person obtaining benefits substantially equivalent to
ownership, e.g., application of the income derived from
such securities to maintain a common home, to meet
expenses which such person otherwise would meet from
other sources, or the ability to exercise a controlling
influence over the purchase, sale, or voting «f such
securities. Accordingly, a person ordinarily should in-
clude in his reports filed pursuant to Section 16(a)
securities held in the name of a spouse or minor chil-
dren as being beneficially owned by him.
“A person also may be regarded as the beneficial
owner of securities held in the name of another person,
if by reason of any contract, understanding, relation-
ship, agreement, or other arrangement, he obtains
therefrom benefits substantially equivalent to those of
ownership.
@ e eo e
“A person is also regarded as the beneficial owner
of securities held in the name of a spouse, minor chil-
dren or other person, even though he does not obtain
therefrom the aforementioned benefits of ownership, if
he can vest or revest title in himself at once, or at some
future time.” Sec. Ex. Act Rel. 7793, 31, F.R. 1005
(1966).
The Commission thus set forth a dual test of beneficial
ownership. First, a person may be regarded as a bene-
ficial owner of another's securities if he obtains “benefits
substantially equivalent to those of ownership,” or sec-
ondly, even though he does not obtain such benefits, “he
can vest or revest title in himself at once, or at some
future time.” It is to be noted, however, that the Com-
mission issued a subsequent release indicating that the
reporting requirements of $16({2) are not coextensive
with liability under § 16(b), which was to be determined
upon the particular facts of each case. Sec. Ex. Act Rel.
7824, 31 F.R. 3175 (1966).
Nevertheless, these alternative tests were recently ap-
plied in a case arising out of the Second Circuit to de-
termine whether a corporate insider had “realized profit”
within the meaning of 4 16(b) as a result of matching his
wife’s sales within the statutory six-month period. Whit-
ing v. Dow Chemical Company, 386 F.Supp. 1130
(S.D.N.Y. 1974), aff'd, 523 F.2d 680 (2nd Cir. 1975). In
affirming the attribution of Mrs. Whiting’s stock trans-
actions to her husband, the Second Circuit specifically
applied the “benefit or control” test noting that “in a
statute (416(b)) intended to be simple and arbitrary
in its application, we confront a situation that cannot be
resolved by legal interpretation but which requires a
determination of questions of fact.” Id at 687.
In the instant action, plaintiffs have argued strenuous-
ly that the language of §16(b), which refers to profits
“realized by him” (i.e. the insider), is to be interpreted
strictly in view of the four Supreme Court decisions that
have dealt with the section. See Blau v. Lehman, 368
U.S. 403, 82 S.Ct. 451 (1962) ; Reliance Electric Company
v. Emerson Electric Company, 404 U.S. 418, 92 S.Ct. 596
(1972) ; Kern County Land Company v. Occidental Petro-
leum Corporation, 411 U.S. 582, 93 S.Ct. 1736 (1973);
B-9
Foremost-McKesson, Inc. v. Provident Securities Com-
pany, 423 U.S. 232, 96 S.Ct. 508 (1976). This court de-
clines to read § 16(b) in such a narrow fashion und is of
the opinion that the above cited Supreme Court decisions
do not dictate such a narrow view, for as noted by one
court “[s]ubdivisions (a) and (b) of Section 16 are
grammatically interrelated and must, therefore, be read
together for coherence.” American Standard, Inc. v.
Crane Co., 510 F.2d 1043, 1058 (2nd Cir. 1974), cert.
denicd, 421 U.S. 1000, 95 S.Ct. 2397 (1975). Similarly,
the Supreme Court noted in Foremost-McK esson, Inc. v.
Provident Securities Company, supra, that the court must
look to § 16(a) of the Act to determine the identity of
corporate “insiders” whose trading is regulated by
§16(b). Id. at 234, fn. 1, 96 S.Ct. at 511.
This court thus accepts the premise that the term
“beneficial owner” as used in §16(b) of the Act must be
read in a broader fashion than as referring merely to a
10 per cent stock owner. This was clearly the position
taken by the Second Circuit in Whiting, supra, wherein
the court noted:
“While in §16(b), the liability section, the term
‘beneficial owner’ apparently refers to a 10% owner
as distinguished from a director or officer, and there
is no further reference in that subsection to ‘beneficial
owner’ as an equitable owner, as well as a 10% owner,
we read ‘such beneficial owner’ to include both mean-
ings.” Id. at 685, fn. 7.
Mr. Whittaker nevertheless argues that he cannot be
held liable under § 16(b) because no profit was realized
“by him.” Once again, this issue was faced squarely in
Whiting, supra, and this court chooses to follow the logic
of that court’s decision. In relevant part, the court
stated :
B-10
“In so interpreting ‘beneficial owner’ we are not
‘adding’ to the prophylactic effect Congress itself clear-
ly prescribed in §16(b). [Citation] Prophylaxis is
meant to prevent rather than to cure what has already
happened.
“If, then, appellant is ‘the beneficial owner’ of his
wife’s securities of the issuer for §16(b) purposes,
how does one interpret the statutory language of
§ 16(b) ‘any profit realized by him’ (emphasis added).
“If we hold that he is a ‘beneficial owner’ he must
be chargeable with all the profits or none, in the ab-
sence of a way to measure benefit. [Citation] It is
fiction, of course, to say that he will get all the profit
for himself, but here the prophylaxis comes in. The
whole profit is ‘his’ profit, ‘realized by him’ because
the shares are ‘his’ by the statutory ‘beneficial owner’
concept as applied, and because he is a person in a
position to obtain inside information.” Id at 689.
In sum, this court adopts the reasoning set forth in
Whiting, swpra, and concludes that “beneficial ownership”
is a factual issue which must be determined in this case.
See also: Altamil Corporation v. Pryor, 405 F.Supp. 1222
(S.D. Ind. 1974).
Turning to the facis in this case, it is clear that Mr.
Whittaker exercised virtually complete control over his
mother’s affairs and must be deemed the beneficial owner
of her Whittaker Corporation securities for purposes of
§ 16(b).
The evidence shows quite clearly that by virtue of the
power of attorney executed by his mother, Mr. Whittaker
exercised complete control over her financial affairs. This
enabled Mr. Whittaker to freely borrow large sums of
money from her while never having to consider paying
the money back, posting adequate security or even paying
B-11
any interest that might accrue. The most recent note
executed by Mr. Whittaker, while outside the relevant
trading period, is proof positive on this point. Executed
in 1973 when Mrs. Whittaker was 86 years old, the note
was executed in the amount of $727,4?C, bore no interest,
was payable within ten years and was not backed by any
pledge of collateral. The record reflects that similar
notes were executed by Mr. Whittaker during the rele-
vant trading period.
Additionally, the record reflects that Mr. Whittaker
employed his mother’s assets to fund, through interest-
free loans, advantageous investment opportunities he
might otherwise have been forced to forego. For ex-
ample, it appears that on at least three occasions Mr.
Whittaker took out loans from Security Pacific National
Bank in his mother’s name. Mrs. Whittaker paid all of
the interest due under these loans from the bank. During
the same period, Mr. Whittaker himself paid no principal
or interest to his mother on the amounts she had loaned
him. In short, the evidence indicates that Mr. Whittaker
felt free to utilize his mother’s assets exactly as if they
were his own. It is thus obvious that Mr. Whittaker
stood to gain on any profits he might make for his
mother through the purchase and sale of Whittaker Cor-
poration securities.
This conclusion is supported further by virtue of the
fact that Mr. Whittaker is the sole beneficiary named in
his mother’s will as well as his mother’s exclusive legal
heir. During the relevant trading period, Mrs. Whittaker
was between 79 and 83 years of age and was in relatively
poor health. She was largely incapable of managing her
own business and household affairs and Mr. Whittaker
testified that by 1964 she was forgetful and suffered
severe lapses of memory. In light of these circumstances,
this court concludes that it was quite unlikely that Mrs.
B-12
Whittaker would have sought to change her will and ques-
tions whether she even had the legal capacity to do so.
All of these factors point sharply to the conclusion
that Mr. Whittaker did in fact enjoy “benefits substan-
tially equivalent to those of ownership.” Within the lan-
guage of Securities Exchange Act Release 7793, supra,
Mr. Whittaker did in fact exercise a controlling influence
over the purchase, sale and voting of his mother’s Whit-
taker Corporation securities. The power of attorney
exercised by Mr. Whittaker allowed him unfettered con-
trol over his mother’s affairs and under these circum-
stances it would be absurd for this court to reach the
conclusion that Mr. Whittaker's trading on behalf of his
mother was not in fact done for his own benefit. Such a
result would in effect sanction the kind of insider trading
Congress so clearly sought to prevent through the en-
actment of §16(b). Accordingly, this court finds that
Mr. Whittaker was in fact the beneficial owner of any
Whittaker Corporation securities he purchased or sold on
behalf of his mother. Hence, plaintiffs are liable under
§ 16(b).
APPLICABLE TRADE-MATCHING RULE
Rather remarkably, the Ninth Circuit has never passed
upon the proper rule to apply in computing the profits
realized under §16(b). Defendant strongly urges this
court to adopt the rule set forth long ago by the Second
Circuit in Smolowe v. Delendo Corporation, 136 F.2d 231
(2nd Cir. 1943), cert. denied, 320 U.S. 751, 64 S.Ct. 56
(1943). Under this rule, the highest sale price is matched
with the lowest purchase price in any given six-month
period. In analyzing the legislative history as well as the
remedial nature of the statute, the court in Smolowe
reached the following conclusion:
B-13
“The staute is broadly remedial. [Citation] Recov-
ery ruus not to the stockholder, but to the corporation.
We must suppose that the statute was intended to be
thoroughgoing, to squeeze all possible profits out of
stock transactions, and thus to establish a standard so
high as to prevent any conflict between the selfish inter-
est of a fiduciary officer, director, or stockholder and the
faithful performance of his duty. [Citations] The only
rule whereby all possible profits can be surely recov-
ered is that of lowest price in, highest price out — with-
in six months —as applied by the district court. We
affirm it here, defendants having failed to suggest an-
other more reasonable rule.” Id. at 239.
Plaintiffs oppose the application of the Smolowe rule
in the present case, asserting that it leads to “illogical and
unfair” results. Plaintiffs instead propose a different rule
which might be referred to as a “contiguous time rule.”
As set out in their Trial Memorandum at 64-65, plain-
tiffs’ proposed rule is stated as follows:
“Against the purchase within the trading period at
the lowest price, match the sale most immediately
either preceding or following it which was at the higher
price. If the matched sale involved a lesser number of
shares than the number purchased, match against the
unmatched part of the purchase, the sale next most im-
mediately preceding or following it which was at the
higher price. Repeat the process until all the shares
purchased at the lowest price have been matched
against sales contiguous in time. Repeat the process
for all other purchases, taking them in order from low-
est to highest price. No sale may be matched against a
purchase unless there were no other sales intervening
in time between such sale and purchase, which inter-
vening sales previously have not been matched against
the purchase. All subsidiary rules applicable under
B-14
Smolowe also pertain: No purchase or sale may be
matched more than once; no sale may be matched
against a purchase unless it preceded or followed such
purchase by less than six months; any purchase which,
if matched against either of the sales contiguous in
time, would produce a loss may be disregarded; and
losses in one matched set of purchase and contiguous
sale or sales may not offset profit in other matched
sets.”
This question being an issue of first impression in this
circuit, this court elects to apply the Smolowe rule in this
case. This rule has been followed for many years in the
Second Circuit and it was reaffirmed in a subsequent case
even though the court recognized that the rule’s applica-
tion could lead to some illogical results. See Gratz v.
Claughton, 187 F.2d 46 (2nd Cir. 1951), cert. denied, 341
U.S. 920, 71 S.Ct. 741 (1951). The rule has additionally
been followed in the Eighth Circuit. See Western Auto
Supply Company v. Gamble-Skogmo, Inc., 348 F.2d 736
(8th Cir. 1965), cert. denied, 382 U.S. 987, 86 S.Ct. 556
(1966). Even more persuasive, however, is the fact that
in the over thirty years since Smolowe was decided,
Congress has failed to act to set aside the rule through
contrary legislation. In short, this court is of the opinion
that the Smolowe rule is in accord with the absolute and
thoroughgoing nature of liability under $16(b). This
statute is intended to be a deterrent to a type of activity
which Congress realized was subject to much abuse, and,
while in some cases the rule’s application might result
in harsh penalties, there does not appear to be any better
way to determine the profits realized. In situations such
as the one at bar, the court is being asked to compare
apples (Mr. Whittaker’s sales) and oranges (Mrs. Whit-
taker’s purchases). In such an instance, there is simply
no unarbitrary way in which to compute the “profit”
realized.
BIS
TOLLING OF THE APPLICABLE STATUTE
OF LIMITATIONS
Section 16(b) specifically provides that no action under
the section “shall be brought more than two years after
the date such profit was realized.” In the instant case,
payment was made voluntarily by Mr. Whittaker on
January 29, 1971. This date thus becomes the applicable
date from which the statute of limitations, if applicable,
is measured. If the two-year period is applicable, then
the Corporation will be limited to recévery of profits
realized only after January 29, 1969.
The Corporation argues that the two-year statute was
tolled by virtue of the fact that Mr. Whittaker failed to
file reports as to his mother’s purchases as required by
§16(a) of the Act. The statute was thus tolled because
defendant had no way of knowing of the mother’s pur-
chases. In support of this tolling proposition, defendant
cites Grossman v. Young, 72 F.Supp. 375 (S.D.N.Y.
1947), wherein the court applied a general statute of
limitations principle enunciated by the Supreme Court in
Holmberg v. Armbrecht, 327 U.S. 392, 66 S.Ct. 582 (1946).
In Holmberg, the court had stated the old equity rule that
where a party is victimized by fraud, the statute of limi-
tations does not begin ‘ run until that party discovers
the fraud. The court then reiterated that the doctrine is
read into every federal statute of limitation. Id. at 397,
66 S.Ct. at 585.
On the other hand, plaintiffs again argue that the
statute is to be read strictly, and that the two-year period
is applicable and cannot be tolled. In support of this
proposition, plaintiffs rely upon Carr-Consolidated Bis-
cuit Company v. Moore, 125 F.Supp. 423 (M.D. Pa. 1954).
In that case, the district court held that the statute means
exactly what it says and strictly applied the statute to
prevent tolling. Id. at 432.
B-16
While this tolling issue is again a question of first im-
pression within this circuit, this court finds that, given the
facts of this case, it need not resolve the issue. Based on
the evidence presented at trial, this court is able to con-
clude that the Corporation was on notice during the
relevant trading period of Mr. Whittaker’s trading in
Whittaker Corporation securities on behalf of both him-
self and his mother. The Corporation was thus on notice
of any potential 4 16(b) claim.
The testimony elicited at trial indicates that Mr.
Whittaker was a man who was very open about his affairs
in general, and it appears to have been common know-
ledge among the corporate officers that he frequently sold
Whittaker Corporation securities.‘ It was additionally
well known that during the relevant trading period Mr.
Whittaker was buying and selling Whittaker equity
securities for his mother.’ Even more telling is the fact
that copies of all trades made by Mr. Whittaker on behalf
of both himself and his mother were sent to Mr. Frank
Buhlman, Treasurer of the Corporation, so that he could
prepare their income tax returns. Mr. Buhlman thus
had direct access to all records pertinent to the trans-
actions of Mr. Whittaker and Mrs. Whittaker.
Farther, the evidence is conclusive that various officers
in the Corporation knew about the complete power of
attorney that Mrs. Whittaker had executed in favor of
her son. Mr. Whittaker himself testified that Mr. Bertin
Weyl, Chief Counsel for the Corporation, knew about the
power of attorney,’ as did Mr. Buhlman, and Mr. Andrew
J. Chitiea, who served as a director of Whittaker Cor-
poration and Vice President of Finance.’ Miss Ellen
Kubo, who was Mr. Whittaker’s secretary, testified that
she believed Messrs. Weyl, Chitiea, and Joseph Kleiman,
a corporate vice president, also knew about the power of
attorney.’ While Mr. Buhlman did not recall knowing
B-17
about the power of attorney,’® and Messrs. Chitiea and
Kleiman testified that they had not known of the power of
attorney prior to the time the Corporation asserted its
§16(b) claim,” the record does show that the Corpora-
tion had sufficient information to put it on notice of a
potential § 16(b) claim.
This conclusion is strengthened by virtue of two addi-
tional facts. First, throughout the trading period Mr.
Whittaker used the power of attorney to sign his mother’s
proxy cards and, at least on some occasions, returned
these cards to the Corporation’s legal department,
occasionally delivering them directly to Mr. Wey] and at
least once to Mr. Alan D. Jacobson who became the
Corporation’s assistant general counsel in 1969 and gen-
eral counsel in 1971."* And secondly, the Corporation
conducted a very careful program for the monitoring of
all filings by its officers and directors as required under
§16(a) of the Act, making sure that the forms were com-
plete and correct.”
All in all, considering the totality of the evidence, this
court must conclude that the corporation possessed suf-
ficient information to put it on notice of any potential
§16(b) claim. Accordingly, this court finds that any
cause of action accruing to defendant prior to January
29, 1969, is barred by the two-year statute of limitations
contained in § 16(b).
PREJUDGMENT INTEREST
The United States Supreme Court considered the issue
of prejudgment interest under § 16(b) for the first time
in Blau v. Lehman, supra. Although the court indicated
that interest was an accepted element of compensatory
damages, its exaction or denial was within the sound
discretion of the court. Id. 368 U.S. at 414, 82 S.Ct. at
457. The opinion contained the following limited state-
ment:
B-18
“Section 16(b) says nothing about interest one way
or the other. This court has said in a kindred situation
that ‘interest is not recovered according to a rigid
theory of compensation for money withheld, but is
given in response to considerations of fairness. It is
denied when its exaction would be inequitable.’ Board
of Commissioners of Jackson County, Kansas v. United
States, 308 U.S. 343, 352, 60 S.Ct. 285, 289 (1932).” Id.
at 414, 82 S.Ct. at 457.
It appears that some courts have denied prejudgment
interest where the insider's violation of the statute was
not willful. See e.g., Lewis v. Realty Equity Corporation
of New York, 396 F.Supp. 1026, 1034 (S.D.N.Y. 1975);
Marquette Cement Manufacturing Company v. Andreas,
239 F.Supp. 962, 968 (S.D.N.Y. 1965). However, this view
does not comport with the objective nature of liability im-
posed under §16(b) and other courts have determined
that the imposition of interest should not depend upon the
subjective intent of the insider. For example, in Perfect
Photo, Inc. v. Grabb, 205 F.Supp. 569 (E.D. Pa. 1962),
the court stated:
“The statutory proscription is absolute, and liability
is fastened on the officer or director without any show-
ing of actual use of inside information. In thus creat-
ing absolute liability on the part of ‘insiders’ for ‘short
swing’ profits and abolishing the need for actual abuse
of trust, Congress surely did not intend that the cor-
poration should be required to enter upon such proof
on the subordinate question of interest.” Id at 573.
See also: Western Auto Supply Company v. Gamble-
Skogmo, Inc., supra, at 744; Champion Home Builders v.
Jeffries, 385 F.Supp. 245, 250 (E.D. Mich. 1974); Schur
v. Salzman, 365 F.Supp. 725, 734 (S.D.N.Y. 1973).
This court is in agreement with the objective standard
expressed in these cases and accordingly holds that the
B-19
award of prejudgment interest under § 16(b) is not de-
pendent upon the subjective interest or innocence of the
insider. Section 16(b) is absolute in its application,
and having previously found that Mr. Whittaker is liable
as the beneficial owner of his mother’s securities, it fol-
lows that the Corporation was denied the use of any
“profits” realized by Mr. Whittaker. The Corporation is
thus entitled to prejudgment interest on these “profits.”
CONCLUSION
Specific findings of fact and conclusions of law are
incorporated herein as authorized by Rule 52, Federal
Rules of Civil Procedure. Judgment is hereby entered
for plaintiffs in a sum to be determined by counsel in
accordance with this opinion. Counsel for plaintiffs are
directed to prepare a form of judgment pursuant to
Rule 7 of the Local Rules of this Court.
DATED: March 22, 1977.
LAUGHLIN E. WATERS
United States District Judge
B-20
FOOTNOTES
Section 16(b), 15 U.S.C. § 78p(b), reads in full:
“For the purpose of preventing the unfair use of information
which may have been obtained by such beneficial owner, direc-
tor, or officer by reason of his relationship to the issuer, any
profit realized I him from any purchase and sale, or any sale
and purchase, 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 con-
nection with a debt previously contracted, 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 od 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 shal] fail or refuse to bring
such suit within sixty days after request or shall fail diligently
to prosecute the same thereafter; but no such suit shall be
brought more than two years after the date such profit was
realized. This subsection shall not be construed to cover any
transaction where such beneficial owner was not such both at
the time of the purchase and sale, or the sale and purchase, of
the security involved, or any transaction or transactions which
the Commission by rules and regulations may exempt as not
comprehended within the purpose of this subsection.
2Of this amount, $62,622.11 represents prejudgment interest on
the “profit” assessed against him. The Corporation apparently
later recalculated the interest due with the result that on Septem-
ber 30, 1976. it refunded to Mr. Whittaker the sum of $4,243.31,
together with interest thereon at the agreed upon rate ($1,796.31).
*In Gratz, supra, liability was imposed even though it was im-
ble to calculate the defendant's profits. In writing the opinion
or the court, Judge Learned Hand observed:
“Although it is impossible in the case at bar to compute the
defendant's profits, except that they must fall between two
limits — the minimum and the maximum —the cause of this
uncertainty is the number of transactions within six months:
that is, the number of defendant's derelictions. The situation
falls within the doctrine which has been law since the days of
the ‘Chimney Sw "s Jewel Case,’ [Armory v. Delamirie, 1
Strange 505 (1722)} that when damages are at some unascer-
tainable amount below an upper limit and when the uncertainty
arises from the defendant's a the upper limit will be taken
as the proper amount.” Id. at 51-52.
B-21
*See testimony of Andrew J. Chitiea, who served as a director
of Whittaker Corporation and was Vice President of Finance,
Reporter's Transcript (“R.T.” ), pp. 300, 306, testimony of Charles
R Collins, Vice President an 7 hanes Counsel, R.T. 604.
*See Chitiea testimony, R.T. 296, 305-06.
*See testimony of William R. Whittaker, R.T. 217; testimony of
wo R.T. 404-406; testimony of Ellen Kubo, R.T. 419-
R.T. 99.
®R.T. 216-17.
°R.T. 454-55.
2R.T. 408.
™R.T. 307, 693.
12See testimony of William R. Whittaker, R.T. 69-70, 350-52,
testimony of Ellen Kubo, R.T. 421-22.
18See testimony of Charles R. Collins, R.T. 593-96.
B-22
APPENDIX
UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
Bevian WHITTAKER and
Wri R. Warttaker,
Plaintiffs,
CV NO. 75-2546-WMB
ORDER
Vs.
Wauittaker CorporaTiox, &
California corporation,
Defendant.
Both plaintiff and defendant have filed motions seek-
ing an affirmative determination as to whether this court
has jurisdiction over the subject matter of the claims
' asserted in the First Amended Complaint. Both parties
submitted memorandum urging that the court has subject
matter jurisdiction.
The first principle of federal jurisdiction is that “the
judicial power of the United States must not be exerted
in a case to which it does not extend, even if both parties
desire to have it exerted.” Mansfield, Coldwater, d Lake
Michigan Ry. v. Swan, 111 U.S. 379 (1884). The parties
cannot waive jurisdictional defect
This text is long and has been trimmed here. Open the source document for the complete record.
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.