Reply Brief — Mayer v. Chesapeake Insurance

| FILED

NOV 29° 1949

No. 89-663 JOSEPH F. SPANIOL, UR

<i oe CLERK

a

In The

Supreme Court of the United States

October Term, 1989

+ ——

v

MARY MAYER,

Petitioner,

-against-

CHESAPEAKE INSURANCE COMPANY LIMITED, DWC,

CORPORATION, NVF COMPANY, NATION AI

PROPANE CORPORATION, APL CORPORATION,

CHESAPEAKE FINANCIAL CORPORATION,

SOUTHEASTERN PUBLIC SERVICE COMPANY,

VICTOR POSNER, PEABODY INTERNATIONA!

CORPORATION, THE PULLMAN COMPANY,

and PTC ACQUISITION, INC

Respondent

= —

PETITIONER’S REPLY BRIEF

,

vw

Richtarp M. Mryir

One Penn Plaza

New York, New York 10119-0165

(212) 594-5300

Attorney for Petitioner

Of Counsel:

Mi.Berc Weiss BersHiaAb Serectrikil

& Leraci

One Penn Plaza

New York, New York 10119-0165

COCKLE LAW BRIEF PRINTING CO, (80D) 225 694

OR CALL COLLECT (402) 42-253)

TABLE OF CONTENTS

TABLE OF AUTHORITIES.................-.0-00-.

POINT I. Direct Pecuniary Benefit is Not The Test

of Beneficial Ownership Under Section

WEE BRUNA SKB we CES WA A 6055 kb eseen Kees

POINT II. The Possibility of a New SEC Rule Does

Not Militate Against the Need for This

Court’s Determination of the Issues Pre-

sented by the Petition..................

ee er ee

ii

TABLE OF AUTHORITIES

CASES:

Foremost-McKesson v. Provident Securities Co. 423

RE EE MEOTOE sus cccsscccccncccessccosscesece

STATUTES:

Section 16 of the Exchange Act............... 1,

OTHER AUTHORITIES:

Exchange Act Release No. 26333 [1988-89 Transfer

Binder] Fed. Sec. L. Rep. (CCH) 484,343

ED eo. Sa ec ecee eee be bees

Exchange Act Release No. 34-18114, entited

“Interpretive Release on Rules Applicable to

Insider Reporting and Trading” 4 Fed. Sec. L.

Rep. (CCH) 923,062 (September 23, 1981).....

Exchange Act Release No. 34-7793 4 Fed. Sec. L.

Rep. (CCH) 926,032 (January 19, 1966)........

Exchange Act Release No. 34-1965 [Permanent

Binder 4] Fed. Sec. L. Rep. (CCH) 426,041

i Es ots on gk cchankeusessieeces

Cook and Feldman, Insider Trading Under the Secu-

rities Exchange Act, 66 Harv. L. Rev. 385, 402 n.73

SUUUNOE SS aA vee WANs eh ecctaccusencaseenseasscsece

Page

2, 3, 4

No. 89-663

,

. 4

In The

Supreme Court of the United States

October Term, 1989

sa.

- 2

MARY MAYER,

Petitioner,

-against-

CHESAPEAKE INSURANCE COMPANY LIMITED, DWG

CORPORATION, NVF COMPANY, NATIONAL

PROPANE CORPORATION, APL CORPORATION,

CHESAPEAKE FINANCIAL CORPORATION,

SOUTHEASTERN PUBLIC SERVICE COMPANY,

VICTOR POSNER, PEABODY INTERNATIONAL

CORPORATION, THE PULLMAN COMPANY,

and PTC ACQUISITION, INC.

Respondents.

"=

os

PETITIONER’S REPLY BRIEF

,’

vr

POINT I

DIRECT PECUNIARY BENEFIT IS NOT THE

TEST OF BENEFICIAL OWNERSHIP UNDER

SECTION 16(b)

Respondents contend that “direct pecuniary benefit”

is the indispensable test of beneficial ownership under

Section 16(b). They rely heavily upon two SEC releases 50

years apart. However, the 1938 Release, Exchange Act

Release No. 34-1965 [Permanent Binder 4] Fed. Sec. L.

Rep. (CCH) 426,041 (December 21, 1938), has been super-

seded. And respondents have misstated the contents of

the 1988 release, Exchange Act Release No. 26333 [1988-89

Transfer Binder] Fed. Sec. L. Rep. (CCH) 984,343 (Decem-

ber 2, 1988).

The 1938 release relied upon by respondents (Br. 9)

has been superseded by numerous judicial and SEC pro-

nouncements. (See Pet. 6-8). Exchange Act Release No.

34-18114, entitled “Interpretive Release on Rules Applica-

ble to Insider Reporting and Trading”, 4 Fed. Sec. L. Rep.

(CCH) {23,062 (September 23, 1981), clearly discarded

the requirement of direct pecuniary benefit. In that

release, the SEC posed and answered numerous questions

regarding the interpretation of Section 16 and the rules

promulgated thereunder. One question asked whether the

beneficiary of an irrevocable trust which holds shares of

common stock of a registered company would-be

regarded as the beneficial owner of those shares if he has

the right to vote them but “receives income from them

only in the discretion of an independent trustee.” The

SEC answered as follows:

Answer: Yes. As already noted, the term “benefi-

cial ownership” of securities has not been spe-

cifically defined by the Commission for

purposes of Section 16. It is generally recog-

nized, however, that among the hallmarks of

beneficial ownership are the right to control vot-

ing and transfer; the right to receive or control

the disposition of income; and the right to con-

trol disposition of proceeds upon liquidation.

Not all of these characteristics need be present in

order for beneficial ownership to exist. In this case,

since the insider may receive income from the

trust, and since he does have the right to vote

the trust securities, it appears that he receives

benefits sufficient to constitute him the benefi-

cial owner of securities held in the trust.

id. at 19,063-21-22 (emphasis added).

See also, “Section 16 of the Exchange Act”, Exchange

Act Release No. 34-7793, 4 Fed. Sec. L. Rep. (CCH)

426,032 January 19, 1966).

Nor does the fact that the intermediary companies

conduct business (Resp. Br. 3, 9) insulate the Posner

Group from liability. In 1953, the then SEC chairman

stated: “The primary character of the business of a hold-

ing company is. . . irrelevant if the company is in fact

used as a corporate cloak to hide insider trading.” Cook

and Feldman, Insider Trading Under the Securities Exchange

Act, 66 Harv. L. Rev. 385, 402 n.73 (1953).*

Respondents concede that the SEC has recognized

that beneficial ownership depends upon the potential for

control (Br. 9). They contend, however, that the SEC posi-

tion is an expansion of existing law (Br. 10), quoting

footnote 57 from the 1988 Release. However, the quota-

tion refers not to the definition of beneficial ownership

(which the SEC points out has evolved under case law),

but rather to the determination of which transactions

should be subject to reporting and profit recovery.

* Respondents seek to build upon the opinions of the courts

below by suggesting that the $5,600,000 payment was for

settlement of litigation (Br. 4, 12). However, as the dissent

noted (A. 40), the settled actions were against Posner and

the threatened counterclaims were derivative in nature, so

that sale of the stock terminated his standing to maintain

them.

Indeed, the text to which footnote 57 is appended specifi-

cally refers to Proposed Rule 16a-l(a)(2) which refers to a

number of types of transactions, some of which were not

previously covered by decided cases. Thus, the portion of

the Release quoted by respondents serves to highlight the

fact that direct pecuniary benefit was not a pre-existing

requirement thai the SEC eliminated in 1988, for had it

been the SEC’s belief that it was expanding the law, the

agency would have said so as it did in the case of transac-

tion specification.

POINT II

THE POSSIBILITY OF A NEW SEC RULE

DOES NOT MILITATE AGAINST THE NEED

FOR THIS COURT'S DETERMINATION OF

THE ISSUES PRESENTED BY THE PETITION.

The respondents assert that this Court should refuse

to take this case and do justice because the SEC may

adopt a rule which will be determinative of situations

such as the present one. Putting aside the fact that the

SEC rule proposal was made one year ago and has not yet

been adopted, its adoption (if ever) would hardly resolve

the issues presented by this case. This Court has stated

that it would not afford the SEC’s views “the deference to

which the views of the agency administering a statute are

usually entitled” in cases involving interpretation of Sec-

tion 16(b). Foremost-McKesson v. Provident Securities Co.,

423 U.S. 232, 259 (1976). It was presumably a reliance

upon the apparent divergence between Commission and

court holdings that led the court below to its erroneous

decision. At the time of its decision, the SEC had already

issued its interpretive release and proposed rules, and

— = = | ee

these had been called to the court's attention. Neverthe

less, the Court of Appeals declined to give the agency the

deference which one would expect that it be accorded

Accordingly, it is necessary for this Court to resolve this

conflict and issue an authoritative interpretation of the

statute.

»

~ 4

CONCLUSION

For the reasons set forth above and in the Petition

the Petition for a Writ of Certiorari should be granted

Dated: New York, New York

November 27, 1989

Respectfully submitted,

RicHarp M. Meyer

One Penn Plaza

New York, New York 10119-0165

(212) 594-5300

Attorney for Petitioner

Of Counsel:

Micserc Weiss BersHap Srecturi

& Leracn

One Penn Plaza

New York, New York 10119-0165