Opposition — Whittaker v. Whittaker Corp.

Office-Supreme Court, US.

FILED

JUN 9 1981

No. 80-1903 ALEXANDER LL. Stave

ara mrTis Ta)

- ——

IN THE

Supreme Court of the United States

Octoser TERM, 1981

No, 80-1903

Wwe. Ropert WHITTAKER,

Petitioner,

WHITTAKER CORPORATION,

Respondeni.

On Petition For A Writ Of Certiorari To The

United States Court of Appeals

For the Ninth Circuit

RESPONDENT'S BRIEF IN OPPOSITION

Rosert E. COOPER

MARTIN C, WASHTON

G1BsON, DUNN & CRUTCHER

515 South Flower Street

Los Angeles, California 90071

(213) 488-7000

Attorneys for Respondent

ed

PANDICK PRESS, WEST COAST, 1945 S. FIGUEROA, LOS ANGELES, CALIFORNIA (213) 747-4321

i

QUESTIONS PRESENTED

1. Whether the Corporation’s motion to eliminate the

portion of the judgment assessing costs and to require the

parties to bear their own costs was a Rule 59(e€) motion, which

extended its time to file a notice of appeal?

2. Whether the Ninth Circuit’s determination that an

insider who enjoys the “actual rewards of ownership” for

securities of which he is not the recurd owner is subject to

Section 16(b) liability for short-swing trades of those securities

requires review by this Court?

3. Whether the Ninth Circuit’s determination that the

limitations period of Section 16(b) is tolled by an insider's

failure to file the trading information required by Section

16(a), the first court of appeals decision on this point, requires

review by this Court?

4. Whether the decision of the Ninth Circuit to apply the

Smolowe rule of profit calculation, in accord with essentially all

other decisions considering this question, requires review by this

Court?

TABLE OF CONTENTS

PAGE

SG od sces sc bcenencepennacnninunaseboehnoanesuiies i

ee i II viicncecosecnsrecdsccnseaeicutincabeastetnstocstosnetontis iii

STATIRAGIINT GP TER CAB coscsesccccsescesesccecscecsccecsccscecsccsccccescocees 2

REASONS FOR DENYING THE WRIT 0.0...........ccccccccccseeeseseees 2

A REE Rca 2s ee ee ee 2

2. The Ninth Circuit’s Application of Section 16(b) is Entirely

Consistent With All Applicable Authority... 3

I. THE CORPORATION'S NOTICE OF APPEAL WAS

TIMELY, BECAUSE THE FULL TIME FOR AP-

PEAL DID NOT BEGIN TO RUN UNTIL DENIAL

. OF ITS MOTION TO ALTER AND AMEND THE

eT FIRE te UIE OO cnisceccsnnccsnsennscsstptenponsenntinngtcs 3

Il. THE DECISION BELOW APPLIES THE LITERAL

TERMS OF SECTION 16 IN ACCORD WITH ALL

eee EE My IIIT © eccccecocesnressisamscsuaietisebbsoriinwunenss 8

A. The Ninth Circuit's Determination That An In-

sider Who Enjoys The “Actual Rewards Of Own-

ership” For Securities Of Which He Is Not The

Record Owner Is Subject To Section 16(b) Liabil-

ity For Short-Swing Trades Of Those Securities

Provides Clear Guidance As To Applicable Feder-

al Law On This Point And Does Not Require

TS SII cncesensssnsinhcssuhenipievennnennennstenaiene 8

B. The Ninth Circuit’s Determination That The Limi-

tations Period of Section 16(b) Is Tolled By An

Insider's Failure To File The Trading Information

Required By Section 16(a) Provides Clear Guid-

ance As To Applicable Federal Law On This Point

And Does Not Require Review By This Court........ 12

C. The Ninth Circuit’s Adoption Of The Smolowe

Rule Of Matching The Lowest Purchase Price And

Highest Sales Price Within A Given Six-Month

Period In Order To Calculate “Profit Realized” Is

Consistent With the Unanimous Position Of The

Other Federal Courts Which Have Considered The

SERIES 53 ARE HERS EN 16

IIIT such tcielictl Scitech enaeactanganeniipaiaschiiadaaamigimenanieintabionan 19

iii

TABLE OF AUTHORITIES

Cases PAGE

Adler v. Klawans, 267 F.2d 840 (2d Cir. 1959) .....cccccccccccceseeseeseees 17

Alameda v. Paraffine Companies Inc., 169 F.2d 408 (9th Cir.

STII iiciidadindstialircichder eet ieeriaheberiahd sasitintshinteetbansenheinagtanenaaniaiaiedbnnibiiien 6, 7

Allis-Chalmers Mfg. Co. v. Gulf & W. Indus., Inc., 527 F.2d 335

(7th Cir. 1975) cert. denied 423 U.S. 1078, 96 S. Ct. 865, 47

Be a Se INT chs thao ccedeederienenialnsierecesieetbeonistanieaiabahd 9,17, 18

Altamil Corp. v. Pryor, 405 F. Supp. 1222 (S.D. Ind. 1975) ......9, 10

American Pipe and Construction Co. v. Utah, 414 U.S. 538

EIU I ascassceiesiiis dialicdtadcceinnnientbinndaduaitepreinntaaensitsatenlbiediviedeeensessaine 13, 14

Anderson v. C.1.R., 480 F.2d 1304 (7th Cir. 1973) .o.ccccccccccccecsesee 18

Arkansas Louisiana Gas Co. v. W. R. Stephens Invest. Co., 141

he Is SOS 6 We aPS ety BO Paces ccssecccaneceecesnesenntasismnanessennssnscnnte 17

Blau v. Albert, 157 F. Supp. 816 (S.D.N.Y. 1957) ....ccccccccscecseseeees 13

Blau v. Lehman, 368 U.S. 403 (1962) ......cccccccccccceeseseeseeees 8,9, 10, 11

Blau v. Potter, 1973 CCH Fed. Sec. L. Rep. 9 94,115 (S.D.N.Y.

IFO Tat D asihscitnio beenindadinehliniaehiteeinsbaiinplitiphbianeininanhatbassteenennatieniaandniaasion 9

Carr-Consolidated Biscuit Company v. Moore, 125 F. Supp. 423

NG RES Pear ee mena ON oe 13, 15

Cummings v. C.1.R., 506 F.2d 449 (2d Cir. 1974), cert. denied,

421 U.S. 913, 95S. Ct. 1571, 43 L. Ed. 2d 779 (1975)... 17

Feder v. Martin Marietta Corp., 406 F.2d 260 (2d Cir. 1969),

cert. denied, 396 U.S. 1036, 90 S. Ct. 678, 24 L. Ed. 2d 281

a eicnteasctaitatntiteoccithceialcdiiathcciuesiideibeaiatiinteitsiitntinamnesintdiphsaabcgainin tic 17

First National Bank of Greenwich v. National Airlines, Inc., 167

PS, Br Cac ls NEED trrctecinasenisnnticnmnnnaptietalicnnnieecanions 6

FTC v. Minneapolis-Honeywell Regulator Co., 344 U.S. 206

iF ATO UN hnstilinicsiensdahctenssseceacebubnibuilied tuidisdinsnginesionbapunshianipaiatinseentavenct 7

Gratz v. Claughton, 187 F.2d 46 (2d Cir.), cert. denied, 341 U.S.

SAD, 70S. Ce, FEL, SS G, BE. TST CUDS! ) .crccccccsvcscecccceccsessceceseee 17

Grossman v. Young, 72 F. Supp. 375 (S.D.N.Y. 1947) ......cccccceee 13

Heli-Coil Corp. v. Webster, 222 F. Supp. 831 (D.N.J. 1963),

aff'd as modified on other grounds, 352 F.2d 156 (3d Cir.

1965) possevcnceseusesesseosnscacossoeseeesonseoresscesoqresesesceosnonossonscosatesonse 17

iv

CASES PAGE

Heminway v. Commissioner, 44 T.C. 96 (1965 ) .....cccccccccceccseeeeeeeees ll

Hill v. Hawes, 320 U.S. $20 (1944) .......cccccccssscsssessscesseesseeseseeesenses 7

Jefferson Lake Sulphur Co. v. Walet, 104 F. Supp. 20 (E.D. La.

1952) aff'd 202 F.2d 433 (Sth Cir. 1953), cert. denied 346

Aes UNE TEU odeiaadbaciemesndestibendenenaliontndabibinlansanenieatendeebsendante 9,14

Knowles v. United States, 260 F.2d 852 (Sth Cir. 1958) ............ 5, 6

Lewis v. Levinson, {1978 Transfer Binder] CCH Fed. Sec. L.

Ee ee CE) aE ircsetscnictinnqnecendcanessenccnnncnessncsiosnice 17

Makofsky v. Ultra Dynamics Corp., 383 F. Supp. 631 (S.D.N.Y.

SFU cadeisioccahcisukccaneaincntga lappa tatedladtateanscsteianatisbidnaseaneicdnnstadsnnnanuiin 17

Marquette Cement Manufacturing Co. v. Andreas, 239 F. Supp.

es ie ID saetinh deci vsciicsseseisasceicesetqindnsasvenscbanassecinbaanenies 9

Morales v. Mylan Laboratories, Inc., 443 F. Supp. 778 (W.D.

Sa I eich a tictadiahsthicinlstaaeietrseintcuienaeondiietintseaiuenssctinbtmtsianeieetadinies 17

Nichols v. Commissioner, 14 BTA 1347 (1929) mod. 17 BTA 580

(1929)...... dai inciestglldbah einticininetdesiniiatantanastsnateihaiiianentainnabnigaes ll

Ore Carriers of Liberia, Inc. v. Navigen Company, 305 F. Supp.

895 (S.D.N.Y. 1969) aff'd 435 F.2d 549 (2nd Cir. 1970)........ 6

Ross v. United States, 122 F. Supp. 642 (D. Mass. 1954)............. 1}

Schur v. Salzman, 365 F. Supp. 725 (S.D.N.Y. 1973)......... 9, 14,17

Shattuck Denn Mining Corp. v. La Morte, 1973-1974 Transfer

Binder, CCH Fed. Sec. L. Rep. J 94,429 (S.D.N.Y. 1974)....... 13

Smolowe v. Delendo Corporation, 136 F.2d 231 (2d Cir.), cert.

denied, 320 U.S. 751, 64S. Ct. 56, 88 L. Ed. 446 (1943)..........

edinaihsagtaniidinnieemititadhiainieicininbaaaenaal 2, 16, 17, 18

Sean v. Williams, 446 F.2d 1366 (Sth Cir. 1971) occ cccccccceceeees 6

United States v. Crawford, 36 F.R.D 174 (W.D.L.A. 1964)......... 6

United States v. 2186.63 Acres of Land, Wasatch Co., Utah, 464

F.2d 676 (10th Cir. 1972).......... 6

Volk v. Ziotoff, 318 F. Supp. 864 (S.D.N.Y. 1970) .....cccccccceseeeees 17

Western Auto Supply Co. v. Gamble-Skogmo, Inc., 348 F.2d 736

(8th Cir. 1965) cert. denied 382 U.S. 987, 86S. Ct. 556, 15 L.

SENET OTE A EIU D vodnvinanashinienehanntnacsincedeediqeblevsiotvctnteibasnacienians 17, 18

Whiting v. The Dow Chemical Company, 523 F.2d 680 (2d Cir.

——

CASES PAGE

Whittaker v. Whittaker Corp., 639 F.2d 516 (9th Cir. 1981)

Petition Appendix A......... 7 8, 12, 15, 16, 18

Whittaker v. Whittaker Corp., [1977-78 Transfer Binder] CCH

Fed. Sec. L. Rep. § 96,008 (C.D. Cal. 1977), Petition Appen-

SIDI i iacachal ating shag ted taldlabanichalivedldaeannchiecesanecesnveseisonmscniiebintsin 10

STATUTES

Securities Exchange Act of 1934, § 16(a), 15 U.S.C. § 78p(a)

Passim

Securities Exchange Act of 1934, § 16(b), 15 U.S.C. § 78p(b)

Passim

RULES

Fed. R. App. P. 4(a) 2, 4

I ar I cat eeciepeenibeuninbaens 5

Fed. R. Civ. P. 58 : 7

Fed. R. Civ. P. 59(e) 2,3, 4

Fed. R. Civ. P. 73(a), replaced by Fed. R. App. P. 4(a) (1966) 7

IN THE

Supreme Court of the United States

Octoser TERM, 1981

No. 80-1903

Ws. ROBERT WHITTAKER,

Petitioner,

WHITTAKER CORPORATION,

Respondent.

On Petition For A Writ Of Certiorari To The

United States Court of Appeals

For the Ninth Circuit

RESPONDENT’S BRIEF IN OPPOSITION

The respondent Whittaker Corporation (hereinafter the

“Corporation”) respectfully requests that this Court deny the

petition for writ of certiorari seeking review of the Ninth

Circuit’s opinion in this case. That opinion 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.

1 96,008.

2

STATEMENT OF THE CASE

The Respondent respectfully submits that the portion of

Petitioner’s Statement Of The Case dealing with the post-

judgment jurisdictional facts is unfair in its argumentative and

partial description of events. Both courts below properly

determined that the Corporation filed its notice of appeal in a

timely manner under Fed.R.App.P. 4(a). This was because

the thirty-day period for filing the notice of appeal was

extended until after the district court denied the Corporation’s

motion to amend the judgment. See, Fed.R.Civ.P. 59(e) and

Fed.R.App.P. 4(a). The jurisdictional facts are clearly set out

in the opinion of the court of appeals. Petition App. at A-4-5,

639 F.2d 516, 518-9.

Although the Respondent does not have any substantial

criticism of the portion of the Statement of the Case presented

by Petitioner which relates to the merits of the decisions below,

it is respectfully submitted that a more objective and terse

statement of the essential facts of the case is contained in the

findings of fact by the district court. Petition App. at B-2—B-6.

REASONS FOR DENYING THE WRIT

1. Jurisdiction

The Ninth Circuit had jurisdiction to rule on the Corpo-

ration’s appeal, since the time to file its notice of appeal was

extended automatically by its post-judgment motion to alter the

judgment so that all parties “bear their own taxable costs

pending appeal”. The district court and Ninth Circuit both

properly recognized that the Corporation’s post-trial motion

could be categorized only as a Rule 59(e) motion, since the

motion sought to alter the judgment to eliminate any award of

costs on the grounds that the Corporation, and not Mr.

Whittaker, was the prevailing party. Contrary to the assertion

of the Petitioner, the decisions of the trial court and Ninth

Circuit on the timeliness of the appeal were consistent with all

reported decisions of this Court and the circuit courts.

3

2. The Ninth Circuit’s Application of Section 16(b) is

Entirely Consistent With All Applicable Authority.

The court of appeals in this case ruled that: (i) an insider

who himself actually realized profit from trading in securities

beneficially owned by him is subject to liability under Section

16(b) of the Securities Exchange Act of 1934 (“Section

16(b)”) for short-swing trades involving those securities; (ii)

when that insider fails to report his beneficial ownership of

those securities as required by Section 16(a) of the Securities

Exchange Act of 1934 (“Section 16(a)”) the two-year limita-

tions period on actions to recover those short-swing profits is

tolled until such disclosure is made and (iii) the profits made

on such short-swing trades are to be calculated by matching the

lowest purchase price and highest sales price within a given six-

month period according to the rule established in Smolowe v.

Delendo. Every facet of this decision is consistent with appli-

cable federal authority and in furtherance of both the legislative

purpose and the literal language of Section 16(b).'

THE CORPORATION’S NOTICE OF APPEAL WAS

TIMELY, BECAUSE THE FULL TIME FOR APPEAL DID

NOT BEGIN TO RUN UNTIL DENIAL OF ITS MOTION

TO ALTER AND AMEND THE JUDGMENT AS TO

COSTS.

The judgment of the district court was entered on April 7,

1977. The judgment included an award of costs to Mr.

Whittaker as the prevailing party. On April 14, 1977, within 10

days of the entry of judgment as required by Rule 59(e),

‘Petitioner strains to create the impression that the Ninth Circuit's

decision in this case “unduly expands” the scope of Section 16(b) in

contravention of the statute’s literal terms, when in fact it merely confirms that

Section 16 is effectual in curbing insider short-swing trading such as that

engaged in by Mr. Whittaker in this case.

4

Fed.R.Civ.P., the Corporation filed a motion requesting the

district court to alter and amend its judgment by vacating that

portion of the judgment which provided for the award of costs

to Mr. Whittaker and providing instead that the parties bear

their own taxable costs. The Corporation argued that it, not

Mr. Whittaker, should be considered the prevailing party

because of the unusual procedural posture of the case and

because the court’s judgment permitted it to retain all of the

short-swing profits previously paid to the Corporation by Mr.

Whittaker which were not barred by the court’s interpretation

‘of the applicable statute of limitations. The motion to alter or

amend the judgment, styled as a motion to “retax costs”, was

denied on April 20, 1977. When on May 10, 1977 the Clerk

refused to accept the Corporation’s notice of appeal, the notice

was lodged with the Clerk and on May 11 the Corporation

moved the district court for an order directing the Clerk to file

the notice as timely. On May 18, 1977 the district court found

that the Corporation’s notice of appeal was timely and ordered

the Clerk to accept it for filing as of that day. The district court

specifically found that the Corporation’s motion of April 14

necessarily sought an amendment of its judgment, thereby

tolling the period within which the Corporation was bound to

file its notice of appeal.

The Ninth Circuit and all other circuits which have consid-

ered the question have recognized that a motion to provide for

or eliminate an award of costs embodied in a judgment

constitutes a motion to “alter or amend” the judgment within

the meaning of Fed.R.Civ.P. 59(e) and thereby terminates the

running of the time to notice an appeal under Fed.R.App.P.

4(a), which time commences to run anew after the trial court

rules upon the motion. Since the judgment entered by the

district court actually incorporated a provision directing an

award of costs to Mr. Whittaker, the Corporation clearly could

not have asked the Clerk to reverse the court’s judgment. The

Corporation’s only recourse was to ask the court to amend the

5

judgment, a motion authorized only under Rule 59(e). Rule

54(d), Fed.R.Civ.P., only provides for a motion to review “the

action of the Clerk” in taxing costs, and clearly did not

authorize the motion the Corporation had to make.

Petitioner asserts incorrectly that the Ninth Circuit’s ex-

ercise of jurisdiction in this case conflicts with the decision of

the Fifth Circuit Court of Appeals in Knowles v. United States,

260 F.2d 852 (Sth Cir. 1958). In fact, the decision of the Ninth

Circuit properly interpreted and distinguished the decision in

the Knowles case. Petition App. at A-7 n.2, 639 F.2d at 521 n.2.

The court of appeals focused on the procedural history of the

Knowles case and properly recognized that it was manifestly

distinguishable from the case at bar. Unlike the Corporation’s

motion of April 14 which sought to amend a unitary judgment

to eliminate an award of costs, the appellant in Knowles moved

to vacate a separate and subsequent order of the District Court

which had not been included in the original judgment.?

Accordingly, unlike the motion of the Corporation in the

present case which sought an amendment of a judgment that

included an award of costs, the motion in the Knowles case

sought only to vacate a separate and subsequent order awar-

ding costs. After the motion to vacate was denied, the order

providing for the award of costs became a separate and distinct

2 The record before the court of appeals in Knowles indicated that the

trial court’s order denying plaintiff's motions for a new trial and for additional

findings and conclusions was entered on December 20, 1957. Since her notice

of appeal was not filed until February 19, 1958, it was untimely under the

sixty day limitation applicable to litigation in which the United States is a

party. However, the court also had before it a notice of appeal from a

separate order of January 28, 1958, denying plaintiff's motion to vacate an

order directing the clerk to tax costs against her. The description of the

procedural history by the court of appeals in Knowles makes it clear that there

was not a judgment awarding costs prior to January 28, 1958. None of the

prior trial or appellate court decisions made any mention of an award of costs.

Since each of the prior decisions was rendered on the same date that the

resulting judgments were entered, apparently none of the judgments contain-

ed any reference to an award of costs. See prior decisions at 144 F.Supp. 440;

235 F.2d 177; 155 F.Supp. 678; 157 F.Supp. 678.

6

judgment. Furthermore, the costs awarded in that separate

judgment were incurred in connection with a prior appeal in the

case and did not involve any of the costs incurred in the

successive trials in the action. In the present litigation, the

district court’s judgment specifically embodied an award of

costs to Mr. Whittaker as prevailing party. The award of costs

became as much a part of the court’s judgment as the monetary

recovery on the merits. Unlike the unusual procedural posture

which resulted in a separate judgment and appeal on the issue

of costs in the Knowles case, the Ninth Circuit was presented

with an indivisible judgment covering all substantive relief in

the present litigation.

The circuit courts have consistently held that a motion to

amend a judgment with respect to costs is a Rule 59(e) motion,

which extends the party’s time to appeal until after the motion

is determined: United States v. 2186.63 Acres of Land, Wasatch

Co., Utah, 464 F.2d 676, 677-678 (10th Cir. 1972) (court

specifically recognizes that a motion to delete the award of costs

in a judgment constitutes a motion to amend the judgment

under Rule 59(e)); United States v. Crawford, 36 F.R.D. 1974,

1975 (W.D.L.A. 1964) (court recognizes that a motion to tax

costs against a different party is a Rule 59(e) motion); Ore

Carriers of Liberia, Inc. v. Navigen Company, 305 F.Supp. 895,

896 (S.D.N.Y. 1969), aff'd, 435 F.2d 549 (2nd Cir. 1970)

(motion to amend judgment to award costs recognized as

motion under Rule 59(e)); Stracy v. Williams, 446 F.2d 1366,

1367 (Sth Cir. 1971) (same circuit court as decided Knowles

case holds that motion to alter or amend judgment to provide

for an award of costs must be made within ten days after entry

of judgment pursuant to Rule 59(e)); First National Bank of

Greenwich v. National Airlines, Inc., 167 F.Supp. 167, 169

(S.D.N.Y. 1958) (where a judgment submitted by prevailing

parties made no reference to assessment of costs, court could

exercise its discretion to amend judgment pursuant to Rule

59(e)); Alameda v. Paraffine Companies, Inc., 169 F.2d 408,

7

409 (9th Cir. 1948) (court holds that the amendment of a

judgment to award costs triggers anew the running of the time

of appeal from the judgment ).?

Respondent fails to see see any relevance whatsoever in

Petitioners citation to this Court’s decision in FTC v.

Minneapolis-Honeywell Regulator Co., 344 U.S. 206, 213

(1952). That decision merely stands for the proposition that

post-judgment motions addressed to matters beyond the scope

of the issues considered by the lower court cannot extend the

parties’ time to file petitions for certiorari. The post-judgment

motion in this case required the trial court to determine who

was the prevailing party; it did not involve a matter collateral to

the merits of the judgment.

In light of the consistent authorities discussed supra which

were applied correctly by the court of appeals, Respondent fails

to understand Petitioner’s contention that either the case au-

thorities or the court’s application of those authorities are

inconsistent with the principles previously announced by this

Court.

3 Although the penultimate sentence in Fed.R.Civ.P. 58, which provides

for the entry of judgment without waiting for taxation of costs by the clerk,

was not yet effective when the Alameda case was decided, the addition of this

language did not change the substantive effect of the court’s ruling that the

addition of a provision for costs to a judgment, whether or not in a liquidated

amount, constitutes an amendment of the judgment. Rule 58 merely

confirmed the existing case law permitting entry of judgment prior to the time

the clerk performed the ministerial function of calculating costs and taxing

them in accordance with the judgment. Furthermore, Petitioner’s contention

(Petition, p. 6, n.4) that the Alameda case was overtulled by the 1948

amendments to Fed.R.Civ.P. 73(a) is totally without merit. The Advisory

Committee’s Note, referrred to by the Petitioner, does not refer to the

Alameda decision at all and notes that the amendment to Rule 73 allowed the

sort of relief that was brought about in Hill v. Hawes, 320 U.S. 520 (1944),

but avoided the difficulty with an indefinite lack of finality.

8

THE DECISION BELOW APPLIES THE LITERAL

TERMS OF SECTION 16 IN ACCORD WITH ALL RELE-

VANT AUTHORITY

A. The Ninth Circuit’s Determination That An Insider

Who Enjoys The “Actual Rewards of Ownership” For

Securities Of Which He Is Not The Record Owner Is

Subject To Section 16(b) Liability For Short-Swing

Trades Of Those Securities Provides Clear Guidance

As To Applicable Federal Law On This Point And

Does Not Require Review By This Court.

The Ninth Circuit held in this case that:

[A]n 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 benefi-

cial ownership were met for purposes of the § 16(a)

reporting requirement, but that actual rewards of own-

ership 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.

Whittaker v. Whittaker Corp., 639 F.2d 516, 526 (Citations

omitted ), Petition App. at A-18.

Petitioner asserts that this holding conflicts with principles

of interpretation set forth in Blau v. Lehman, 368 U.S. 403

(1962), as well as subsequent cases construing Section 16(b)

and other federal securities laws. Petition at p. 10. To the

contrary, the holding of the Ninth Circuit is entirely consistent

with Blau v. Lehman as well as all applicable lower court

decisions.

9

In every federal case which has considered the issue of

attribution, the lower court has made an initial factual determi-

nation as to whether the insider under scrutiny enjoys sufficient

benefits from securities of which she/he is not the record owner

to hold that beneficial ownership exists for purposes of Section

16(b).4 Where such beneficial ownership was found to exist,

the court went on to impose liability under Section 16(b)5,

while in those cases where there was no determination of

beneficial ownership, no liability was imposed.* The district

court in this case found that Mr. Whittaker in fact did enjoy

“benefits substantially equivalent to those of ownership” and

that

[t]he power of attorney exercised by Mr. Whittaker

allowed him unfettered control over his mother’s affairs

and under these circumstances it would be absurd for this

4 See, e.g., Blau v. Lehman, 368 U.S. 403 (1962) (trial court found that

plaintiff did not prove beneficial ownership); Whiting v. The Dow Chemical

Company, 523 F.2d 680 (2d Cir. 1975) (husband held to “beneficially own”

traded securities held in wife’s name); Allis-Chalmers Mfg. Co. v. Gulf & W.

Indus., Inc., 527 F.2d 335 (7th Cir. 1975), cert. denied 423 U.S. 1078 (1976)

(legally significant relationship between corporations necessary before one

can be deemed beneficial owner of other’s securities ); Altamil Corp. v. Pryor,

405 F. Supp. 1222 (S.D. Ind. 1975) (husband held to “beneficially own”

traded securities held in wife’s name); Schur v. Salzman, 365 F. Supp. 725

(S.D.N.Y. 1973) (absent special circumstances insider is beneficial owner of

stock in spouse’s or child’s name); Blau v. Potter, 1973 CCH Fed. Sec. L.

Rep. 994,115, 94,115 (S.D.N.Y. 1973) (plaintiff failed to prove that

corporate officer was beneficial owner of shares purchased by officer’s

spouse ); Marquette Cement Manufacturing Co. v. Andreas, 239 F. Supp. 962

(S.D.N.Y. 1965) (trustee found to not be beneficial owner of shares in bona

fide trusts, except trust for his benefit); Jefferson Lake Sulphur Co. v. Walet,

104 F. Supp. 20 (E.D. La. 1952), aff'd 202 F.2d 433 (Sth Cir. 1953) cert.

denied 346 U.S. 820 (1953) (insider liable for all short swing profits even

though securities held were community property ).

5 See, e.g., Whiting v. The Dow Chemical Company, 523 F.2d 680 (2d

Cir. 1975).

6 See, e.g., Blau v. Lehman, 368 U.S. 403 (1962).

10

court to reach the conclusion that Mr. Whittaker’s trading

on behalf of his mother was not in fact done for his own

benefit.

Whittaker v. Whittaker Corp., (C.D. Cal. 1977), Petition App.

at B-12.

There has been no speculative supposition of possible

eventual benefit to Mr. Whittaker, as petitioner strives to

persuade the Court (Petition at p. 10), but rather an express

finding of actual, direct benefit to William R. Whittaker. This

imposition of liability upon a finding of direct benefit is merely

the logical corollary of this Court’s refusal in Blau v. Lehman,

368 U.S. 403 (1962) to impose liability in a case in which it

would have been “nothing but a fiction to say that Thomas [the

insider] ‘realized’ all the profits earned by the partnership of

which he was a member.” 368 U.S. at 414.7

Petitioner briefly asserts that the two most relevant lower

court decisions, Whiting v. The Dow Chemical Company, 523

F.2d 680 (2d Cir. 1975) and Altamil Corp v. Pryor, 405 F.

Supp. 1222 (S.D. Ind. 1975),® “expanded § 16(b)’s ‘extra-

7 Petitioner relies primarily on Blau v. Lehman, 368 U.S. 403 (1962) to

support his argument that holding Mr. Whittaker liable for profits which he

realized from himself trading in his mother’s securities is an undue expansion

of Section 16(b) liability. In Blau v. Lehman this Court did decline to impose

liability on Mr. Thomas, a partner in Lehman Brothers who served as a

director of Tide Water, for the entire profit made by Lehman Brothers on its

transactions in the securities of Tide Water since it was found, inter alia, that

Thomas had no influence over investment decisions for Lehman Brothers and

that Thomas disclaimed any interest in profits realized by the partnership’s

trading in Tide Water securities. Contrast those facts with the facts of the

present case, where it was found, inter alia, that Mr. Whittaker made all

investment decisions for his mother and initiated them at his sole discretion

(Petition App. at B-4, B-6) and that Mr. Whittaker stood to gain on any

profits he might make for his mother through the purchase and sale of

Whittaker Corporation securities ( Petition App. at B-11).

®In Whiting and in Altamil each court engaged in a factual determina-

tion of beneficial ownership and concluded in each case that the husband

must be considered the beneficial owner of his wife’s shares and therefore

subject to Section 16(b) liability for short-swing trades of those shares.

ordinary liability’ beyond the limits fixed by Congress . . .”

(Petition at p. 10) and presumably, therefore, should be

disregarded. Instead of looking to relevant Section 16(b)

authority, petitioner instead seeks to refer this Court to three

inapposite decisions involving federa! tax liability? in an

attempt to create the impression that the Ninth Circuit decision

in this case in some way conflicts with a body of federal

decisional authority. By ignoring the considerable body of

relevant decisions with which the Ninth Circuit is consistent, the

petitioner has failed completely to demonstrate that the Ninth

Circuit’s decision conflicts with any applicable federal law on

this point. On the contrary, all relevant federal authority with

regard to Section 16(b) liability for short-swing trading in

beneficially owned securities is consistent with the Ninth Cir-

cuit’s decision in this case.!° The Ninth Circuit in this case has

signified that it is in accord with the Second Circuit on the issue

of insider liability for trading of beneficially owned securities.

These lower federal courts are in accord with the principles

applied by this Court in Blau v. Lehman with regard to

beneficial ownership, and, accordingly, the guidance of this

Court is not necessary at this time.

In Ross v. United States, 122 F. Supp. 642 (D. Mass. 1954) the court

merely concluded that capital gains proceeds were taxable to the son, not the

father, when the father bought an interest in real property acting on behalf of

his son, viewing the transaction as creating a resulting trust in favor of the son

as a matter of state law. In Heminway v. Commissioner, 44 T.C. 96 (1965) the

court held that a sister transferred shares to her brother subject to a retained

interest in herself of the right to receive dividends, therefore those dividends

were taxable to the sister, not the brother. In Nichols v. Commissioner, 14

BTA 1347 (1929) mod. 17 BTA 580 (1929) the Board held that where the

entire sale proceeds were forwarded from the petitioner to his brother, and

the petitioner received no commission or profit of any kind in the transaction,

that the petitioner did not himself realize taxable income on that sale for his

brother.

See footnote 4, supra.

12

B. The Ninth Circuit’s Determination That The Limita-

tions Period Of Section 16(b) Is Tolled By An

Insider’s Failure To File The Trading Information

Required By Section 16(a) Provides Clear Guidance

As To Applicable Federal Luw On This Point And

Does Not Require Review By This Court.

The Ninth Circuit is the first court of appeals to decide the

question of whether the two-year limitations period applicable

to a claim against an insider under Section 16(b) for profits

realized from short-swing trades in a corporation’s securities is

tolled until the insider publicly discloses the existence of the

transactions by reporting the trades as required by Section

16(a). After consideration of the legislative history and

purpose of Section 16 as a whole, revealing a strong congres-

sional intent to curb insider trading abuses, together with the

complimentary nature of Sections 16(a) and 16(b), the court

of appeals reasoned that

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 understandable only in the

context of the insider’s duty to make prompt disclosure.

Whittaker v. Whittaker Corp., 639 F.2d at 528 (citations

omitted), Petition App. at A-21.

Therefore, the court of appeals concluded that failure to

make disclosures as required by Section 16( a) requires that the

two-year limitations period of Section 16(b) be tolled in order

to effectuate the salutory purpose of Section 16(b)’s remedy for

the recovery of short term profits. 639 F.2d at 530, Petition

App. at A-26.

In reaching its conclusion as described above, the court

reviewed existing federal authority on the question. It found

that three cases from the Southern District of New York agreed

13

with this analysis't while one twenty-seven-year-old case from

the Middle District of Pennsylvania rejected that analysis and

adopted a strict interpretation of the two-year limit.'2 The

court of appeals considered Grcssman v. Young and Blau v.

Albert, both from the Southern District of New York, to be the

better reasoned of the existing district court decisions, and

made reference to them for their further elaboration of what it

described as the “disclosure” scheme of Section 16. See 639

F.2d at 529, Petition App. at A-24. The court then reviewed the

only contrary authority on point, Carr-Consolidated Biscuit

Company v. Moore, 125 F. Supp. 423 (M.D. Pa. 1954) at some

length, but noted that the court in that case strictly interpreted

Section 16(b)’s two year time limitation because that court

relied on the theory that substantive statutes of limitations are

entitled to literal application by a court and may not be tolled,

while only procedural statutes of limitation are subject to the

equitable tolling doctrine. As noted by the Ninth Circuit, this

theory with regard to substantive statutes of limitation was

effectively renounced by this Court in American Pipe and

Construction Co. v. Utah, 414 U.S. 538, 556-59 (1974), where

this Court held that the federal courts have the inherent power

to toll the running of any statute of limitations, whether

“substantive” or “procedural.” Mr. Justice Stewart expressed

the holding of the Court therein as follows:

“[ T]he fact that the right and limitation are written into

the same statute does not indicate a legislative intent as to

whether or when the statute of limitations should be

tolled.” 380 U.S. at 427 n.2... The proper test is not

11 Shattuck Denn Mining Corp. v. La Morte, 1973-1974 Transfer Binder,

CCH Fed. Sec. L. Rep. 4 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).

12 Carr-Consolidated Biscuit Company v. Moore, 125 F. Supp. 423 (M.D.

ra. 1954).

14

whether a time limitation is “substantive” or “procedural,”

but whether tolling the limitation in a given context is

consonant with the legislative scheme [footnote omitted }.

American Pipe and Construction Co. v. Utah, 414 U.S. 538,

557-58.

Petitioner asserts that the tolling doctrine applied by the

court of appeals is “alien” to federal procedure in general and

to the federal securities laws in particular. He argues that the

district court’s finding that certain corporate insiders were on

notice of facts sufficient to put the corporation on notice of a

potential Section 16(b) claim (Petition App. at B-17)'? renders

tolling unavailable. This argument was expressly considered

and rejected by the court of appeals, however, which reasoned

as follows:

Under the notice interpretation, the question arises wheth-

er 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, knowl-

edge of corporate officials is imputed to the corporation.

But in the § 16 context, if corporate officials’ knowledge of

another insider’s trading and indeed even the trading

insider’s own knowledge were imputed to the corporation,

then the corporation’s right to recover the profits and

especially the 2\uility of minority shareholders 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 433 (Sth Cir.), cert. denied, 346 U.S. 820,

74 S.Ct. 35, 98 L.Ed. 346 (1953) (corporation’s Section

16(b) suit not estopped on ground that corporation ap-

9 This finding was challenged by the Corporation on appeal, but

because the court of appeals considered the disclosure requirement of Section

16( a) to toll the limitation of Section 16(b) it did not reach the Corporation's

claim that the district court's conclusion as to notice was clearly erroneous.

639 F.2d at 527, Petition App. at A-20.

15

proved of transactions, since corporation’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 unarticu-

lated 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 inter-

pretation adopted herein better serves the purposes of the

statute.

Whittaker v. Whittaker Corp., 639 F.2d at 528-29, Petition App.

at A-22—23.

There is no dilemma with regard to the applicable federal

law on the question of the tolling of the two year limitations

period of Section 16(b) due to the nondisclosure of relevant

trading information by an insider as required under Section

16(a). The Ninth Circuit, after consideration of governing

Supreme Court authority as well as pertinent federal authority

from the district courts of other circuits, concluded that the

legislative intent in drafting Section 16 together with the prior

cases clearly indicated that the better reasoned approach is to

provide for tolling. This decision of the Ninth Circuit is the

only court of appeals decision on point and it is consistent with

all but one of the district court opinions which have addressed

this issue. There is no indication that any other federal court

has been jnclined to apply the Carr-Consolidated Biscuit deci-

sion in the almost thirty years since it was decided. Thus, the

unanimous of district court opinions out of the Second Circuit

and the court of appeals decision in the Ninth Circuit provide

clear guidance to other federal courts that such tolling is

appropriate in order to effectuate the salutory purposes of

Section 16.

16

C. The Ninth Circuit’s Adoption Of The Smolowe Rule

Of Matching The Lowest Purchase Price And Highest

Sales Price Within A Given Six-Month Period In

Order To Calculate “Profit Realized” Is Consistent

With the Unanimous Position Of The Other Federal

Courts Which Have Considered The Question.

The instant case was the first occasion for the Ninth Circuit

to consider the appropriate method of computing profit under

Section 16(b), and it concluded:

Persuaded by its merit and its long ~ontinued 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]

Recovery runs not to the shareholder, but to the

corporation. We must suppose that the statute was

intended to be thoroughgoing, to squeeze all possible

profits out of stock transactions, and thus to establish a

standard so high as to prevent any conflict between

the selfish interest of a fiduciary officer, director, or

stockholder and the faithful performance of his duty.

[citations omitted] The only rule whereby all pos-

sible profits can be surely recovered is that of lowest

price in, highest price out—within six months. [ Smo-

lowe v. Delendo Corp., 136 F.2d 231 (2d Cir.) cert.

denied 320 U.S. 751, 64 S. Ct. 56, 88 L. Ed. 446

(1943)].

Whittaker v. Whittaker Corp., 639 F.2d at 531 (footnote

omitted ), Petition App. at A-27.

17

In reaching its conclusion, the Ninth Circuit considered,

and was persuaded by, the fact that the Smolowe rule has been

almost universally applied in the thirty-eight years since its

publication. '4

The court below also addressed Petitioner’s argument,

which he attempts to raise again before this Court, that the

Seventh Circuit disapproved the Smolowe rule in Allis-Chalmers

Mfg. Co. v. Gulf & W. Indus., Inc., 527 F.2d 335 (7th Cir.

1975) cert. denied 423 U.S. 1078, 96 S. Ct. 865, 47 L. Ed. 2d 89

(1976).*5 As noted by the Ninth Circuit, the Seventh Circuit in

Allis-Chalmers in fact did not disapprove Smolowe, but rather

4 Second Circuit: Smolowe v. Delendo Corporation, 136 F.2d 231 (2d

Cir.), cert. denied, 320 U.S. 751, 64S. Ct. 56, 88 L. Ed. 446 (1943); 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.); 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 681 (1970); Adler v. Klawans, 267 F.2d 840, 847-48 (2d Cir.

1959). Cf. Cummings v. C.1.R., 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 Section 16(b) profits is a long term capital loss,

court uses Smolowe approvingly ).

Southern District of New York: Lewis v. Levinson, {1978 Transfer

Binder} CCH Fed. Sec. L. Rep. 4 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, 730-31 (S.D.N.Y. 1973); Volk v. Zlotoff, 318 F.

Supp. 864, 865 (S.D.N.Y. 1970).

Other Circuits: 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 Louisiana Gas Co. v. W. R. Stephens Invest. Co., 141 F.

Supp. 841, 847 (W.D. Ark. 1956).

‘5 Petitioner also attempts to propose alternate methods of profit calcu-

lation in preference to the Smolowe rule. (Petition at p. 17-19). This same

proposal by Petitioner was considered and rejected by the Ninth Circuit as

being equally artificial as Smolowe without the benefit of assuring full

recovery of profits to the corporation. 639 F.2d at 533, Petition App. at A-31.

18

indeed agreed with its underlying principle. 527 F.2d at 355.

What the Allis-Chalmers court declined to do was apply

Smolowe outside of its trade-matching context as authority for a

proposition that in valuing securities the highest possible value

should be selected. See 527 F.2d at 354-56. The Seventh

Circuit in fact has cited the Smolowe profit calculation rule

approvingly in Anderson v. C.1.R., 480 F.2d 1304, 1307 (7th

Cir. 1973) and so cannot be said to be in conflict with what is

now the rule in the Second,'® Eighth,'? and Ninth Circuits. "8

Throughout his petition Mr. Whittaker has asked this

Court to ignore the considerable body of federal authority

which supports the decision of the Ninth Circuit in this case and

to look instead to dictum and inapposite cases in a vain effort

for an opportunity to re-open litigation of the facts of this case.

There is no basis for asking this Court to review the decision of

the Ninth Circuit. The court of appeals gave careful consid-

eration to all relevant authority and issued an opinion that is

entirely consistent with existing federal authority on each of the

issues addressed.

186 Smolowe v. Delendo Corp., 136 F.2d 231 (2d Cir.) cert. denied 320

U.S. 751 (1943); See also cases cited at n.12, supra.

17 Western Auto Supply Company v. Gamble-Skogmo, Inc., 348 F.2d 736

(8th Cir. 1965) cert. denied 382 U.S. 987 (1966).

18 Whittaker v. Whittaker Corp., 639 F.2d 516, 530-533 (9th Cir. 1981).

19

CONCLUSION

For these reasons the petition for a writ of certiorari to

review the judgment and opinion of the Ninth Circuit Court of

Appeals should be denied.

Respectfully submitted,

ROBERT E. COOPER

MarTIN C. WASHTON

Gipson, DUNN & CRUTCHER

515 South Flower Street

Los Angeles, California 90071

June 6, 1981.