Opposition Brief — Untermeyer v. Valhi, Inc.

No. 87-1962

IN THE

Supreme Court of the United States

OCTOBER TERM, 1987

WALTER UNTERMEYER,

i Petitioner,

VALHI, INC., CSX CORPORATION AND

SEA-LAND CORPORATION,

Respondents.

On Petition for a Writ of Certiorari to the

United States Court of Appeals

for the Second Circuit

BRIEF FOR RESPONDENT VALHI, INC.

IN OPPOSITION

DANIEL F.. ATTRIDGE

(Counsel of Record)

JOHN G. FROEMMING

KIRKLAND & ELLIS

655 Fifteenth St., N.W.

Washington, D.C. 20005

(202) 879-5000

Attorneys for Respondent

Valhi, Ine.

Dated: June 27, 1988

WILSON - EPEsS PRINTING Co., INC. - 789-0096 - WASHINGTON, D.C. 20001

QUESTION PRESENTED

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

15 U.S.C. § 78p(b), authorizes only the “issuer” or an

“owner of any security of the issuer” to bring suit. The

Second Circuit held that petitioner, who owns securities

not of the issuer but of the parent corporation of the

issuer, lacks standing to sue under section 16(b).

The Second Circuit’s holding follows the decisions of

other Courts of Appeals. Lewis v. McAdam, 762 F.2d

800, 803-04 (9th Cir. 1985) (“shareholder of the parent

corporation . . . lacks standing to bring a section 16(b)

action”) ; Portnoy v. Kawecki Berylco Industries, Inc.,

607 F.2d 765, 767-69 (7th Cir. 1979) (shareholder of

the issuer’s corporate grandparent cannot maintain a

section 16(b) suit). The Second Circuit factually

distinguished Blau v. Oppenheim, 250 F. Supp. 881

(S.D.N.Y. 1966), an unreviewed opinion that petitioner

claims to be controlling.

Accordingly, the question presented is: whether the

Second Circuit erred in following the Ninth and Seventh

Circuits’ decisions in Lewis and Portnoy, respectively,

and in distinguishing on its facts a 1966 opinion of a

district judge in its Circuit,

(i)

ii

STATEMENT PURSUANT TO RULE 28.1

This brief in opposition to the petition for a writ of

certiorari is filed on behalf of Valhi, Inc. Valhi’s corpor-

ate parents are Contran Corporation, National City Lines,

Inc., and Valhi Group, Ine. Excluding wholly-owned

subsidiaries, Valhi’s subsidiary is NL Industries, Inc.

Valhi is directly affiliated with Dixie Products, Ince.

Valhi is also indirectly affiliated with the aforementioned

companies’ subsidiaries or affiliates, none of which is

publicly traded with the exception of Keystone Consol-

idated Industries, Inc., Sybra, Ine, and T.I.M.E.-DC,

Ine.

TABLE OF CONTENTS

SENN UNE PROMINENT MED icseicsresicsescnsenceedseccenscarnevernsses-

STATEMENT PURSUANT TO RULE 28.1 ..................

pe Be Nig 6 yy | rae

COUNTER-STATEMENT OF THE CASE ....................

REASONS FOR DENYING THE PETITION .............

I. THE UNANIMOUS SECOND CIRCUIT

PANEL CORRECTLY RULED THAT PETI-

TIONER LACKS STANDING TO BRING ANY

SUIT UNDER SECTION 16(b) CONCERN-

ING SEA-LAND SECURITIES ...........................

A. The Decision Below Follows Well-Settled,

Directly Applicable Federal Precedents........

B. The Decision Below Is Fully Consistent With

This Court’s Guiding Securities Law Prece-

ESRI NE AR A ce

C. The Decision Below Is Supported By The

Legislative History And Purpose Of Section

aT STR Ree SER, 2

II. IN FACTUALLY DISTINGUISHING AN UN-

REVIEWED 1966 DECISION OF ITS DIS-

TRICT COURT, THE SECOND CIRCUIT

RAISED NO IMPORTANT QUESTION OF

FEDERAL LAW REQUIRING THE ATTEN-

I ra nk naliis<anassonteretensinmansuenhes

I land cehisdslacebidieesedianiceasiasnsbbsenshobinescsnectinnnconittis

(iii)

Page

10

iv

TABLE OF AUTHORITIES

Cases: Page

Adler v. Klawans, 267 F.2d 840 (2d Cir. 1959) .... 11

American Standard, Inc. v. Crane Co., 510 F.2d

1043 (2d Cir. 1974), cert. denied, 421 U.S. 1000

PIED -cccicdcnccsennaasesinssvicpncscdanhinteltadcamenrateslansieialijoth passim

Anderson v. Liberty Lobby, Inc., 477 U.S. 242

(| SRS RARER RON Ce LAURE REND Lee me MON ER RTC 2

Blau v. Lehman, 368 U.S. 403 (1962) ...................... 9-10

Blau v. Oppenheim, 250 F. Supp. 881 (S.D.N.Y.

1966) ....... ; Salsalilaiieitiadesthietetinatiedigsialdsctialelincean i, 2, 13

Blue Chip Stamps v. Manor Drug Stores, 421 U.S.

Te SE © cscs siteenihpieieninebbniiienanllp caclenasadapaaeidiinnda 8,9

Celotex Corp. v. Catrett, 477 U.S. 317 (1986)........ 2

Foremost-McKesson, Inc. v. Provident Securities

Cs I is te ID aacini tien tetninsinadicssitnetost 9, 11-12

Kern County Land Co. v. Occidental Petroleum

ee Ee ge RR erat OVO 12

Lee National Corp. v. Segur, 281 F. Supp. 851

DP a 7,11

Lewis v. McAdam, 762 F.2d 800 (9th Cir. 1985) ....passim

Newmark v. RKO General, Inc., 425 F.2d 348 (2d

Cir.), cert. denied, 400 U.S. 854 (1970) ............. 16

Piper v. Chris-Craft Industries, Inc., 480 U.S. 1

GGA ENP Eas LEC Eas ARR 5 eee 8

Portnoy v. Kawecki Berylco Industries, Inc., 607

pe ns ccrailiaee passim

Reliance Electric Co. v. Emerson Electric Co., 404

i Ferenc SRI ca alee acess oe aero 9,11, 12

Santa Fe Industries, Inc. v. Green, 430 U.S. 462

SRR EI LE A ES Rene ROE FEY om Se LOT 9

Untermeyer v. Valhi, Inc., 665 F. Supp. 297

(S.D.N.Y. 1987), aff'd, 841 F.2d 25 (2d Cir.

OS a rea enipieinlansiccleepsahbseeail passim

Statutes & Regulations:

EES GETS re ec ae Be ae Ce 6

I a ee cog ceecnteessemebnenionncinies 4

15 U.S.C. § 78p(b)

¥

TABLE OF AUTHORITIES—Continued

Legislative Materials: Page

H.R. Conf. Rep. No. 1838, 73d Cong., 2d Sess.

COED ki icc centinsicdissindagstncceaciabaamdeiannactenseaentate 10

H.R. Rep. No. 1383, 73d Cong., 2d Sess. (1934)... 11

S. Rep. No. 792, 73d Cong., 2d Sess. (1934)........ 10-11

Other Authorities:

Interpretive Release on Rules Applicable to Insider

Reporting and Trading, Exchange Act Release

No. 18,114, 23 SEC Docket 856 (Sept. 23, 1981) .. 7

Us CIR: Ts. aD incccacensccrcteri co iiacccrisidincsaidcemitadacehontdatadias ahi 3

IN THE

Supreme Court of the United States

OCTOBER TERM, 1987

No. 87-1962

WALTER UNTERMEYER,

Petitioner,

Vv.

VALHI, INc., CSX CORPORATION AND

SEA-LAND CORPORATION,

Respondents.

On Petition for a Writ of Certiorari to the

United States Court of Appeals

for the Second Circuit

BRIEF FOR RESPONDENT VALHI, INC.

IN OPPOSITION

Untermeyer’s petition for a writ of certiorari raises

no issue meriting this Court’s attention. The unanimous

Second Circuit panel properly affirmed the District

Court’s holding that petitioner, a shareholder of the

parent corporation of the issuer, lacks standing to bring

suit under section 16(b) of the Securities Exchange Act

of 1934, 15 U.S.C. § 78p(b). The decision below is en-

tirely consistent with case law from other Circuits,

Lewis v. McAdam, 762 F.2d 800, 803-04 (9th Cir.

1985) ; Portnoy v. Kawecki Berylco Industries, Inc., 607

F.2d 765, 767-69 (7th Cir. 1979), as well as this Court’s

own securities law precedents on standing and section

2

16(b), and the legislative history and purpose of the

statutory provision. The Second Circuit properly distin-

guished Blau v. Oppenheim, 250 F. Supp. 881 (S.D.N.Y.

1966), an uncontrolling opinion that is inapposite here.

The ruling below neither conflicts with the decisions of

this Court nor presents any significant federal question

which calls for this Court to grant certiorari. The peti-

tion, therefore, should be denied.

COUNTER-STATEMENT OF THE CASE

The “facts” Untermeyer presents in his petition are

predicated on allegations of his pleadings, not on any

record evidence. Such a predicate is both improper and

inadequate, for Untermeyer was confronted below with

a summary judgment motion. This Court does not per-

mit “a party opposing summary judgment to resist a

properly made motion by reference only to its pleadings.”

Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986).

The “plaintiff must present affirmative evidence,” Ander-

son v. Liberty Lobby, Inc., 477 U.S. 242, 257 (1986), but

Untermeyer never did.’

In contrast, respondent Valhi presented concrete evi-

dence in support of its summary judgment motion. ( App.

31-119.) That evidence established the following un-

disputed material facts:

1. Untermeyer purports to bring this suit under sec-

tion 16(b) to recover certain profits allegedly received

by predecessors of Valhi from trading in shares of com-

mon stock of Sea-Land Corporation. (App. 118, { 1.)

! Thus, contrary to Untermeyer’s unsubstantiated allegations, the

Court cannot assume that Valhi bought and sold any Sea-Land

shares within six months, that Valhi had access to any inside infor-

mation, or that Valhi was improperly indemnified against any sec-

tion 16(b) liability. No evidence was offered to the District Court

in support of any of these claims.

ee

3

2. Untermeyer allegedly is a stockholder of CSX Cor-

poration. He has never owned any securities of Sea-

Land. (App. 118, { 2.)

3. After the transaction at issue, a CSX subsidiary

was merged into Sea-Land. As a result, CSX became the

owner of all of the shares of Sea-Land common stock.

(App. 118-19, 3; 31-117.)

Based on those evidentiary facts, Valhi moved for sum-

mary judgment against Untermeyer. After briefing and

argument, the motion was granted by Judge Cedarbaum

in a published opinion. Untermeyer v. Valhi, Inc., 665

F. Supp. 297 (S.D.N.Y. 1987). On appeal, the Second

Circuit unanimously affirmed (P.B. 15a-16a) and, on

Untermeyer’s motion for rehearing, issued a published

decision unanimously reaffirming the entry of summary

judgment. Untermeyer v. Valhi, Inc., 841 F.2d 25 (2d

Cir. 1988). The Second Circuit rejected Untermeyer’s

suggestion for rehearing en banc. (P.B. 23a-24a.)

REASONS FOR DENYING THE PETITION

Review by this Court is “not a matter of right” but

“will be granted only when there are special and im-

portant reasons therefor.” Sup. Ct. R. 17.1. Petitioner

does not identify any issue meriting this Court’s atten-

tion. Instead, he repackages the same argument he un-

successfully presented below. Both the District Court

and the Second Circuit carefully considered petitioner's

argument and rejected it as contrary to well-established

federal precedent and without foundation in fact. This

Court should not disturb those rulings.

I. THE UNANIMOUS SECOND CIRCUIT PANEL COR-

RECTLY RULED THAT PETITIONER LACKS

STANDING TO BRING ANY SUIT UNDER SEC-

TION 16(b) CONCERNING SEA-LAND SECURI-

TIES.

Section 16(b) provides that a suit thereunder to re-

cover for trading in an issuer’s securities may be insti-

tuted only “by the issuer, or by the owner of any security

4

of the issuer in the name and in behalf of the issuer if

the issuer shall fail or refuse to bring such suit within

sixty days after request or shall fail diligently to prose-

cute the same thereafter.” 15 U.S.C. § 78p(b).2 The

term “issuer” is specifically defined to mean the “per-

son who issues or proposes to issue any security.” 15

U.S.C. § 78e(a) (8). It is undisputed that the issuer

here is Sea-Land.

Because Untermeyer has neither issued nor owned any

Sea-Land securities, the District Court and the Second

Circuit held that he lacked standing to sue under section

16(b). In so holding, the Courts below rejected peti-

tioner’s request that the statutory definition of “issuer”

be judicially changed to encompass not only Sea-Land but

its parent corporation CSX as well. As a shareholder of

the parent of the issuer—not of the issuer—Untermeyer

cannot bring a section 16(b) suit.

Although he asserts that the Second Circuit’s ruling

“undermines half a century of rich jurisprudence in this

Court and the Courts of Appeals” (P.B. 4), Untermeyer

does not cite a single Supreme Court case in his petition.

Nor does he identify a single case from any Court of

Appeals applying the statutory definition of “issuer”

in the way he proposes. All of this is unsurprising, since

petitioner’s approach is contrary to directly applicable

federal decisions applying the statutory definition, is

inconsistent with this Court’s securities law precedents,

and is unsupported by section 16(b)’s legislative history

and purpose.

A. The Decision Below Follows Well-Settled, Directly

Applicable Federal Precedents.

The Second Circuit’s holding follows all the directly

applicable decisions from other Circuits. The Ninth and

Seventh Circuits, as well as a District Court in the Third

2 All emphasis added unless otherwise indicated.

5

Circuit, have all rejected attempts to broaden the mean-

ing of the term “issuer” beyond its statutory definition.

The cases consistently hold that one must be a share-

holder of the “issuer’—not merely of its corporate par-

ent, grandparent or subsidiary—to have standing to sue

under section 16(b).

In Lewis v. McAdam, 762 F.2d 800 (9th Cir. 1985),

the key issue was precisely the same one addressed below:

whether “a shareholder of the parent may be deemed an

‘owner of a security in the issuer’ for purposes of bring-

ing a section 16(b) action.” Jd. at 803. After analyzing

the text and legislative history of section 16(b), the

Ninth Circuit concluded that Congress did not intend to

permit a shareholder of the issuer’s parent to bring suit:

We find nothing in the legislative history of section

16(b) indicating that the plain meaning of the stat-

utory language is inadequate to effect the congres-

sional purpose of providing an enforcement mech-

anism against insider trading. That a merger may

result in a corporation succeeding to an action form-

erly held by an individual is a consequence dictated

by the statute. We will not confer standing on a

plaintiff who fails outside the class of persons per-

mitted by the language of the statute to bring suit

merely because the only parties falling within the

class choose not to exercise their right to sue.

Congress is well aware of the corporate practice

of parent companies utilizing wholly owned subsidi-

aries in merger transactions. Had Congress wanted

to discourage this practice by conferring standing on

shareholders of a parent corporation whose wholly

owned subsidiary absorbed the original issuing cor-

poration, it knew how to do so. Accordingly, we con-

clude that Congress included in the statutory lan-

quage of section 16(b) all the remedies it deemed

appropriate.

Id. at 804 (citations omitted). Thus, the Ninth Circuit

held:

Id.

In Portnoy v. Kawecki Beryleco Industries, Inc., 607

6

[T]he parent corporation is not an “issuer” within

the meaning of section 16(b). Similarly, a share-

holder of the parent corporation cannot be considered

an “owner of any security of the issuer” and accord-

ingly lacks standing to bring a section 16(b) action.

In the case before us, Sears is not a section 16(b)

“issuer,” and Lewis, who owned stock in neither SDC

nor Coldwell Banker, lacks standing under the

statute.

F.2d 765 (7th Cir. 1979), the critical issue was whether

the plaintiff’s status as a shareholder of Cabot (the par-

ent of the parent of the issuer) gave him standing to sue

under section 16(b). Based on a thorough analysis of

the pertinent statutory provisions and case law, the

Seventh Circuit refused to draft “judicial legislation” to

grant the plaintiff standing:

The statutory language is thus specific that the issuer

is the person who issues the security which is in-

volved in the short-swing trading, in this case, KBI.

The plaintiff asks us to broaden the definition to

encompass Cabot which would make the issuer in-

clude the parent of the parent of the issuer... .

[W]e cannot rewrite the statute to accommodate this

situation. Congress has spoken clearly. When it

wanted a broader definition of issuer, it drafted one.

In §2(a)(11) of the Securities Act of 1933, for

example, “issuer” is defined as including “any person

directly or indirectly controlling or controlled by the

issuer, or any person under direct or indirect com-

mon control with the issuer.” 15 U.S.C. § 77b(11).

In § 16(b), on the other hand, Congress apparently

intended only those with a less tenuous financial in-

terest to have standing and confined standing other

than to the “issuer” itself to “the owner of any se-

curity of the issuer.”

7

... We similarly reject the plaintiff's invitation

to draft “judicial legislation to grant him standing.”

Id. at 767-68 (footnotes omitted). Because Portnoy was

not a shareholder of the issuer, the Seventh Circuit held

that he lacked standing to sue.

Lee National Corp. v. Segur, 281 F. Supp. 851 (E.D.

Pa. 1968), while technically not a standing case, turned

on whether the statutory definition of “issuer” included

a corporation’s wholly-owned subsidiary. Judge Trout-

man held that an officer of a wholly-owned subsidiary is

not an officer of the “issuer” within the meaning of sec-

tion 16(b):

[Plaintiff’s counsel] seeks a judicial broadening of

the specific and express language of the statute... .

[T]he fact is that if it be the congressional intent to

include officers of subsidiary corporations as well as

officers of the “issuer” corporation, this can be

, quickly accomplished by a single amendment to the

' Act. It need not be accomplished by what may be

considered ‘‘judicial legislation.”

Id. at 852. Accordingly, the complaint there was dis-

missed as it sought ‘“‘a broad interpretation of the statute

not warranted and justified by the language of the

statute. Id.

The Second Circuit’s decision below is also consistent

with American Standard, Inc. v. Crane Co., 510 F.2d 10438

(2d Cir. 1974), cert. denied, 421 U.S. 1000 (1975).

There the Second Circuit ruled that “issuer” cannot be

construed to encompass multiple entities, rather than just

the single issuing corporation:

3 The result in Lee National was endorsed by the Seventh Circuit

in Portnoy, 607 F.2d at 768, as well as by the SEC. See Interpretive

Release on Rules Applicable to Insider Reporting and Trading,

Exchange Act Release No. 18,114, 23 SEC Docket 856, 861 (Sept.

23, 1981) (president of a wholly-owned subsidiary ‘would not

ordinarily be considered an officer under Section 16(a) since he is

not an officer of the issuer’’).

8

The statute speaks of “such issuer” in the singu-

lar. There is no room for a grammatical construc-

tion that would convert the singular into a plural.

Nor does the internal construction of the section lend

itself to such a free interpretation.

... The style and substance lead to the conclusion

that Congress was concerned with a single issuer.

Id. at 1058-59 (holding that the purchase of shares of one

issuer cannot be matched against the sale of shares of a

successor issuer).

In short, the decision below raises no conflict with the

well-established, uncontroverted case law from other Cir-

cuits. The results reached by the Ninth Circuit in Lewis,

the Seventh Circuit in Portnoy, the Third Circuit District

Court in Lee National, and the Second Circuit in Unter-

meyer below are all in accord and are all correct.

B. The Decision Below Is Fully Consistent With This

Court’s Guiding Securities Law Precedents.

Untermeyer’s petition makes no mention of any of this

Court’s securities law precedents. This is no wonder given

that these precedents support the decision below and con-

tradict the approach he advocates.

This Court has strictly construed the standing require-

ments of the Securities Exchange Act. See Piper v. Chris-

Craft Industries, Inc., 430 U.S. 1, 24-46 (1977) (tender

offeror lacks standing to sue for damages under section

14(e), 15 U.S.C. § T8n(e), or SEC Rule 10b-5, 17 C.F.R

§ 240.10b-5) ; Blue Chip Stamps v. Manor Drug Stores,

421 U.S. 723, 731-55 (1975) (‘only actual purchasers and

sellers have standing to sue for damages under SEC Rule

10b-5). This restrictive approach avoids the “danger of

vexatious litigation which could result from a widely ex-

panded class of plaintiffs.” 421 U.S. at 740, quoted im

9

Santa Fe Industries, Inc. v. Green, 4380 U.S. 462, 479

(1977) .4

Specifically, this Court has refused to impose liability

under section 16(b) where it would involve a departure

from the statutory language. In Reliance Electric Co. v.

Emerson Electric Co., 404 U.S. 418 (1972), this Court

held that a statutory insider, a “beneficial owner of more

than 10 per centum,” may properly “sell enough shares

to bring his holdings below 10%, and later—but still

within six months—sell additional shares free from lia-

bility under the statute.” Jd. at 423. The language used

by Congress in section 16(b) to limit liability must be

“(rjead literally” and applied with a “mechanical qual-

ity.” Id. at 423, 425. Courts “are not free to adopt a

construction that not only strains, but flatly contradicts,

the words of the statute.” Jd. at 427.

Similarly, in Foremost-McKesson, Inc. v. Provident

Securities Co., 423 U.S. 232, 239-60 (1976), this Court

held that section 16(b) does not apply to a “beneficial

owner of more than 10 per centum” of the issuer’s securi-

ties unless his holdings are above 10% at the time of both

his purchase and sale of securities. Section 16(b) has

“narrowly drawn limits.” Id. at 251. Liability must not

be imposed unless Congress’ statutory language author-

izes it “expressly or by unmistakable inference.” Id. at

252.

And in Blau v. Lehman, 368 U.S. 403, 409-14 (1962),

this Court held that a Lehman Brothers partner sitting

on a company’s board of directors was not a “director”

deputized by Lehman so as to make the partnership liable

for profits it “realized” from short-swing trading in the

*This Court is well aware that “even a complaint which by

objective standards may have very little chance of success at trial

has a settlement value to the plaintiff out of any proportion to its

prospect of success at trial so long as he may prevent the suit from

being resolved against him by dismissal or summary judgment.”

Blue Chip Stamps, 421 U.S. at 740.

10

company’s stock. In so holding, the Court rejected the

SEC’s invitation to rewrite section 16(b)’s terms to the

extent liability was “not justified by the literal language

of §16(b).” Id. at 411. “Congress is the proper agency

to change an interpretation of the Act unbroken since

its passage, if the change is to be made.” Jd. at 413. Lia-

bility cannot be extended “by adding to the ‘prophylactic’

effect Congress itself clearly prescribed in § 16(b).” Id.

at 414.

The decision below is consistent with this Court’s guid-

ing securities law precedents. The Second Circuit cor-

rectly declined to enlarge the scope of section 16(b)

beyond its statutory limitations. Reading the statutory

provision literally and non-expansively, a shareholder of

the parent of the issuer lacks standing to sue.

C. The Decision Below Is Supported By The Legisla-

tive History And Purpose Of Section 16(b).

The legislative history of section 16(b) is devoid of

any suggestion that Congress intended a shareholder of

the parent of the issuer to have standing to sue. As the

Ninth Circuit concluded, there is “nothing in the legis-

lative history of section 16(b) indicating that the plain

meaning of the statutory language is inadequate to effect

the congressional purpose of providing an enforcement

mechanism against insider trading.” Lewis, 762 F.2d at

804. Similarly, the Second Circuit has determined: “In

the legislative history we have observed no omission by

inadvertence.” American Standard, 510 F.2d at 1061.

Rather, the legislative history indicates that Congress

intended recovery of short-swing profits be limited to the

issuer, not extended to its corporate affiliates or their

stockholders. See H.R. Conf. Rep. No. 1838, 73d Cong.,

2d Sess. 35-36 (1934) (provision requires that profits be

yielded “to the issuer”; “authorizes the issuer to recover

such profit by suit”); S. Rep. No. 792, 73d Cong., 2d

ri

11

Sess. 20-21 (1934) (provision makes profits “available to

the issuer”).

The legislative history also demonstrates that Congress

intended section 16(b) to be merely “prophylactic” and

did not intend to address each and every situation in-

volving alleged short-swing trading. The House Report

expressly recognized that section 16’s “requirements are

not air-tight” and that one “may still, within the law,

use inside information for his own advantage.” H.R. Rep.

No. 1383, 73d Cong., 2d Sess. 18 (1934). Thus, as the

District Court below stressed, the “statutory language

may not be strained or distorted to add to the ‘ “prophy-

lactic” effect Congress itself clearly prescribed in

§16(b).’” 665 F. Supp. at 300 (quoting Blau v. Leh-

man, 368 U.S. at 414).°

In light of this legislative history, the reach of section

16(b) must not be expanded beyond the specific statutory

language. Lewis, 762 F.2d at 804 (“Congress included in

the statutory language of section 16(b) all the remedies

it deemed appropriate”) ; Lee National, 281 F. Supp. at

852 (“Courts may not give content to an Act beyond its

language’’).

Nor would a grant of standing to petitioner serve the

legislative purpose of section 16(b). That section

5 The gaps in section 16(b)’s coverage are many and obvious. For

example, Congress limited the provision’s coverage to transactions

occurring within a six-month period. A statutory insider who waits

six months and one day after the purchase to avoid a short-term

gain is unaffected by the provision. Adler v. Klawans, 267 F.2d 840,

845 (2d Cir. 1959). “One can speculate on whether the moral or

ethical values are altered by the passage of 24 hours but the stat-

ute makes an honest if not honorable man out of the insider in that

period.” Jd. In addition, section 16(b) applies only to transactions

of the issuer’s directors or officers or of shareholders who own more

than 10% of its equity securities. It does not affect the trading

practices of 9.9% shareholders. Foremost-McKesson, 423 U.S. at

239-60; Reliance Electric, 404 U.S. at 422-27. Nor does it ordinarily

affect the transactions of directors and officers of the issuer’s wholly-

owned subsidiary. Lee National, 281 F. Supp. at 852.

12

was designed to prevent a corporate director or offi-

cer or “the beneficial owner of more than 10 per cen-

tum” of a corporation from profiteering through

short-swing securities transactions on the basis of in-

side information. It provides that a corporation may

capture for itself the profits realized on a purchase

and sale, or sale and purchase, of its securities within

six months by a director, officer, or beneficial owner.

Foremost-McKesson, 423 U.S. at 234 (footnotes omitted).

The factual circumstances of this case are markedly

removed from this congressional purpose. The transaction

at issue did not involve a purchase and sale of a statutory

insider’s stock. To the contrary, petitioner seeks to chal-

lenge the grant of an option to sell Sea-Land securities

to CSX. (App. 17, 718.) “But the mere execution of an

option to sell is not generally regarded as a ‘sale’” within

the ambit of section 16(b). Kern County Land Co. v.

Occidental Petroleum Corp., 411 U.S. 582, 601 (1973).

Similarly, this case does not fit within the “congres-

sional purpose of curbing short-swing speculation by

corporate insiders.” Reliance Electric, 404 U.S. at 424.

Respondent Valhi is the classic outsider: an unsuccessful

offeror whose bid to acquire Sea-Land was _ hostilely

rebuffed, a position “sui generis in terms of § 16(b)

liability.” American Standard, 510 F.2d at 1053. While

“Congress thought that all short-swing trading by di-

rectors and officers was vulnerable to abuse,” it viewed

trading by mere stockholders as abusive only where

it “afforded the potential for access to corporate in-

formation.” Foremost-McKesson, 423 U.S. at 258.

There was no suggestion below that “Valhi either had

access to or made unfair use of inside information.” 665

F. Supp. at 298. And such access cannot be presumed:

“the status of a defeated tender offeror affords no pre-

sumption of abuse of confidential information by virtue of

relationship to the issuer.” American Standard, 510 F.2d

at 1053.

nei cs iil

13

Finally, the aim of the petitioner’s suit is not to re-

store alleged short-swing profits to the issuer Sea-Land,

but to provide a gigantic bonanza to his own corporation

CSX. This is a misuse of section 16(b). There is nothing

but “sheer windfall” in handing a recovery to CSX, a

corporation that was not in any relationship with Valhi

other than as a competing bidder for Sea-Land. See

American Standard, 510 F.2d at 1061. No such recovery

may be properly allowed.

II. IN FACTUALLY DISTINGUISHING AN UNRE-

VIEWED 1966 DECISION OF ITS DISTRICT COURT,

THE SECOND CIRCUIT RAISED NO IMPORTANT

QUESTION OF FEDERAL LAW REQUIRING THE

ATTENTION OF THIS COURT.

Petitioner cannot demonstrate that the Second Circuit

raised an important question of federal law by distin-

guishing Blau v. Oppenheim, 250 F. Supp. 881 (S.D.N.Y.

1966), on its facts. Both Courts below properly distin-

guished that unreviewed 1966 district court opinion in

accordance with well-settled lines of federal law.

In Blau v. Oppenheim, a shareholder of American Can

Company brought a section 16(b) suit concerning trading

in the securities of Hanson-Van Winkle Mining Com-

pany. After the alleged short-swing trading, Hanson-

Van Winkle sold and transferred all its assets and choses

in action to M & T Chemicals, Inc., a wholly-owned sub-

sidiary of American, and in return the Hanson-Van

Winkle shareholders received shares of American stock.

Hanson-Van Winkle was merged into M & T and ceased

to exist. Blau was allowed to maintain the action as a

shareholder of American.

As the District Court below held, the facts in Blaw v.

Oppenheim are readily distinguishable:

A key fact in Oppenheim was the disappearance of

the issuer and the consequent concern that no person

or entity would have standing to sue under section

14

16(b). 250 F. Supp. at 886. . . . Here, the issuer,

Sea-Land, survives as a corporate entity with CSX

as its shareholder. Sea-Land itself could bring a sec-

tion 16(b) action against Valhi. If Sea-Land chose

not to, CSX, as the shareholder of Sea-Land, could

bring a section 16(b) action against Valhi. If the

agreements between CSX and Valhi improperly de-

terred CSX from bringing such an action, CSX

shareholders are not without a remedy. They could

bring a derivative suit against the directors and

officers of CSX for breach of fiduciary duty, a point

not considered in Oppenheim.

A second significant difference is that in Oppen-

heim the parent corporation was in a real sense the

successor of the defunct issuer. In the absence of a

surviving issuer, the court construed the statutory

term “issuer” to include the substantial successor of

the issuer. Thus, both the parent, as “issuer,” and

the shareholder plaintiff, as an “owner of any secur-

ity of the issuer,” had standing to bring the section

16(b) action. A justification for treating the parent

as the successor issuer was that in the merger of the

issuer into the parent’s wholly owned subsidiary, the

shareholders of the issuer received shares of the par-

ent in exchange for their shares of the issuer. 250 F.

Supp. at 883, 887. Here, however, the transaction

took place without a similar exchange of securities;

the parent’s stock was not exchanged for stock of the

issuer. Stock of the issuer was exchanged for cash.

Thus, there would be no reason to consider CSX as

the successor issuer of Sea-Land.

665 F. Supp. at 300-01.

Affirming the District Court, the Second Circuit held

that these were “important distinctions” that distin-

guished Blau v. Oppenheim from this case. 841 F.2d at

25. Notably, the Seventh Circuit in Portnoy also ruled

the case distinguishable on essentially the same grounds:

Blau is factually distinguishable in that the issuer

no longer existed, whereas in the present case KBI

tion justifies the different result in Blau. because if

the statutory language were applied to allow only

shareholders of the issuer to enforce the violation,

and the issuer were dissolved, the statutory language

would require the absurd result that no party would

exist who had standing to enforce the violation. In

the present case, since KBI still exists, its share-

holder, CSMC, had the right to bring the action re-

gardless of whether it chose to exercise that right.

607 F.2d at 768-69 (footnotes omitted) .*

In an effort to avoid these important factual distinc-

tions, petitioner claims that Blau v. Oppenheim has been

“followed by the lower courts, including the Second Cir-

cuit.” (P.B. 5.) But what Untermeyer fails to point

out is that the case has been followed only for the un-

remarkable proposition—not relevant here—that the suc-

15

still exists as a viable corporate entity. This distinc-

|

|

|

|

* Blau v. Oppenheim is distinguishable on other grounds as well.

That case involved a “sale” of the defendant insider’s stock, a

transaction expressly covered by section 16(b). In contrast, Unter-

meyer wants to attack the grant of an “option” to sell Sea-Land

securities to CSX—a transaction generally regarded as outside the

reach of section 16(b). See Kern County, 411 U.S. at 601. Also,

defendant Oppenheim, a director and officer of Hanson-Van Winkle,

was a true insider. Valhi is the classic outsider, an unsuccessful

offeror who neither “had access to [nlor made unfair use of inside

‘ information.” 665 F. Supp. at 298. As such, no liability may sensi-

4 bly be imposed on Valhi here.

Blau v. Oppenheim was also premised on an incorrect interpreta-

tion of section 16(b). The court there acknowledged that “upon a

strict or literal reading of section 16(b) plaintiff never was ‘the

owner of any security of the issuer,’” but declined to read the

statute in that manner. 250 F. Supp. at 884. This was a mistake.

Under this Court’s precedents, the statutory language used to limit

liability must be “[rJead literally” and non-expansively. Reliance

Electric, 404 U.S. at 423; see Foremost-McKesson, 423 U.S. at 251-

52 (section 16(b) has “narrowly drawn limits”; no liability can be

imposed unless statutorily authorized “expressly or by unmistakable

inference”); Blau v. Lehman, 368 U.S. at 411 (rejecting liability

“not justified by the literal language of § 16(b)”’).

teeta

16

cessor corporation of a defunct issuer inherits the latter’s

choses in action. American Standard, 510 F.2d at 1057

n.22: Newmark v. RKO General, Inc., 425 F.2d 348, 352

n.4 (2d Cir.), cert. denied, 400 U.S. 854 (1970). As the

District Court below concluded, “the Second Circuit has

never held that such standing may be extended to a

shareholder of the parent corporation of a surviving

issuer. The language of section 16(b) does not permit

such a result.” 665 F. Supp. at 301.

From the false premise that Blau v. Oppenheim has

been “followed,” petitioner asserts that the decision below

“further entangles a preexisting conflict among the cir-

cuits.” (P.B. 7.) In fact, however, there is no conflict

at all. The cases cited by petitioner uniformly support

two consistent legal principles: (1) a shareholder of the

corporate parent (or grandparent) of the issuer lacks

standing to sue under section 16(b), Untermeyer, 841

F.2d at 25; Lewis, 762 F.2d at 803-04; Portnoy, 607 F.2d

at 767-69; and (2) where a successor corporation in-

herits a defunct issuer’s choses in action, a shareholder

of the successor has standing to sue, Lewis, 762 F.2d at

802-03; Newmark, 425 F.2d at 352 n.4.

In sum, the Courts below correctly distinguished Blau

v. Uppenhetm. And in all events, the Second Circuit’s

decision to distinguish rather than to overrule that case

raises no issue warranting this Court’s attention.

17

CONCLUSION

For the foregoing reasons, the petition for a writ of

certiorari should be denied.

Respectfully submitted,

DANIEL F.. ATTRIDGE

(Counsel of Record)

JOHN G. FROEM MING

KIRKLAND & ELLIS

655 Fifteenth St., N.W.

Washington, D.C. 20005

(202) 879-5000

Attorneys for Respondent

Valhi, Ince.

Dated: June 27,1988