# Opposition Brief — Untermeyer v. Valhi, Inc.

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385019_1811%3A2

## Record

- **Collection:** Supreme Court brief
- **Document type:** Opposition Brief
- **Published:** January 1, 1988
- **Citation:** 488 U.S. 868

## Text

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

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385019_1811%3A2. Public record. Not legal advice.