Petition for a Writ of Certiorari — Blau v. Lamb

Supreme Court brief1967

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“LIGRARY

Rr. 1. A

x : IN THERE | |

eurer Court uf the Buited Stites

ie _. * OCTOBER TERM, 1966 ee

No. F

ISADORE BLAU, a i stockholder of Air-Way ene Inc., suing oe Ree aa. i \

| on behalf of himself and all other stockholders similarly situated £3 : a

and on behalf and in the right of Awe Industries, Inc., N

f ie, „ Petitioner, . 5: be

8 EDWARD LAMB and EDWARD LAMB ENTERPRISES, INC, ;

Ba pee 5 1 Responders. |

". PETITION FOR WRIT OF CERTIORARITO IEE

_“.. UNITED, STATES COURT OF ArRA s

Shi — SECOND CIRCUIT arn ae : 7. \

8 ; * ,

, 4 82 * 5 a

* 8 2

Morris J. Levy, | 1

Counsel for Petitioner, *

Isadore Blau, |

261 Broadway,

New, York, New bar 10007.

“a

— daa ne a ee

Opinions Below ee

. , Jurisdiction hh sed Adah chat eaetamnener iomeail ene:

‘Questions Presented for Review. weve ee

Statutes Involved .

Reason Relied on 2 For Grinting the Writ n Penn

Ans T

‘The decision by the Court below is in direct con-

III-kThe Distriet Court’s findings were not ‘‘clearly

erroneous and the Court below, therefore, im-

The Common Stock . — . . :

I—The Court below- — 204150 .

question of Federal law contrary to the express

statutory language and its legislative history

and contrary to. pete Eg decisions

_ TABLE QF CONTENTS

The Preferred Stock Transactions 3

flict with the decision rendered by the Court

ol Appeals for tie Third Girait . . ...

properly reversed them sad ohn elde. 5

IV—The Court below ep exempted from the . |

operation of Section 16(b).the°shares of Air-

Way common stock which the respondent a-

quired from ne

Ped

7 Conelusion — * — 7 % wees * é ee eeeeeee "ent

„

Vie

Toad

H 4

B. T. Babbitt, Ine: v. Lechner (e. A. 2), 382 F. 24.255 *

e e ene,

Ls N De

Ting or Cases Spee, 5 8

v. s. . esses, eee e 8

. Ferraiolo v. Newman (0. 4.60, 250 F. 24 22 fei ah 11

Gratz v. Claughton (G. A. 2), 187 F. 2d 46 11 1

ay Heli-Coil Corporation v. Webster 0. A. 3), 352 . 2d

CC ee ek 2 288 410 19, 18, 16

Park & Tilford, Ine. v. ‘Schulte (C. A. 2), 160 F. ta

— * 984 4 Se e e e l 1 20

Shaw v. Dieyfus (0 4. 2), 172 P. 24 10 eta, ae

| Smolowe vw Delendo Corp. (C. A. 2), 136 F. 2d 231 1 13

United States v. Real Estate Board, 339 U. S. 485 . ä

United States v. Yellow Cab Co, 338 U. 8.338 ..... 18

Srarurrs AND Rous

8 Delaware 3 Corporation toa Sects. 251, 2⁵² pe |

5 Federal Rules of Civil Procedure, Rule ale eee 5885 Sad

Securities Exchange Act of 1934:.

” Beets: 3(a)(13), 3(a) (14), 15 US. CA, Sects. 780

ee, eee 4, 7, 12, 14, 19

Seets. 16 (a), 16(b), 15 vs Sects. 78p(a),

ABD) v acdeentetlecs 4 7 10, U.

Pad Seer. 27, 15 USCA, Sect. Bas „ perce Wea.

Onin: AUTHORITIES .

PAGE

H. R. Report No. 1383, 74 cons 2d Sess. (1984),

Bite) peewee y a rria t 2 57 ¥

oe Insider Trading Under the ‘Beourities Exchange Act,

5 by Cook and Feldman, 66 Harv. L. Rev. 385, p. 624 14

S. Report No. 792, 73d Cong. 2 Sess: (1984), pp. 79 12

ee rae

S. Report No. 1455, 73d Cong. 2d Sess. 930,

pp. 566. FF — 12

Stock Exchange Pisslioss, Hearings before the Sen-

ate Committee on Banking and Currency, 73d

a ad Sess., asa (1934), pp. 6463, — ous? ee

2 a .

* 4 4 ~ 5 | me

2 e iN

| Supreme Gourt af the J Aube States

a! | ocromen meni, 1066

No. PE Ty Pees

Tsapone Mui 8 stockhiobet of Air-Way Industries, Inc,

suing on behalf of himself and all other stogkholders

similarly situated and on behalf and in the nent of Air- Fos

E Industries, Ine., 5

f N „ 8 eet

| eee e

5 was Les en Nas Las Bree ha.

44 ce

—

"PETITION ron WRIT ¢ OF ‘CERTIORARI To THE

_UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

CES To Tax Hamosiasts, Tiki Catan. Jbbr any Assdcries J

vices or Tun Sura Court or Tar Unrrep Srarzs:

Your petitioner, Isadore Blau, a stockholder of Air-Way

Industries, Inc. (Air-Way), ‘acting on behalf of himself

and the · other stockholders: of said corporation, respect-

fully prays that a Writ of Certiorari issue to review the

judgment of the United States Court of Appeals for the

sue Second Cireuit rendered June 27, 1966 which, as amended — :

by order dated September 9, 1966, reversed the judgment —

y- ;

Poe ‘

Cae ee pel

7 of the United States District Court for the Southern Dis-

trict of · New York as to all recoveries except $7,811.40 fies ,

Aus . N 3

Opinions Below

The opinions of the Distriet Court (* 424.440 are

reported in 242 F. Supp. 151. The opinions of the. Court

of Appeals (R. A67-A108, A171, A175), which reversed

the judgment of the District Court and denied petitioner’s

application for a. — en 285 * not yet been

reported. . 75

. *

N — 5

The zmdgtent of the Court of Appeals’ (R. A104) was

entered on June 27, 1966. By orders dated September 9,

1966, respectively (R. A171-A177), the Coutt of ‘Appeals -

denied petitioner’ 8 2 for rehearing and for re-

hearing en banc.-al gh it amended its original opinion

and the judgment by increasing the respondents’ liability -

for damages, by an additional. sum of 85,556.38. ae

Jurisdiction i is conferred upon this Court by 28 U. 8. On .

5 ‘Beetion aT ks

ees 2

. Presented for Review /

1. Where an officer, director or beneficial owner of more

than 10% of an issuer’s listed securities purchases and

: then voluntarily. converts his issuer’s convertible equity

. ee

securities within a period of less than six months, does

such voluntary conversion constitute a ‘‘sale’’ of: the con-

vertible security within the language and meaning of Sec-

tions 3(a)(14) and 16(b) of the Securities Exchange Act’

ot 1934, 15 U.S.C.A., Sects. 78e(a)(14) and 78p(b)?

* . to pagꝭ of record certified to this Court by the

= of the United _— Court at a * the Second Circuit

2. Under Seelen 16(b) of che. Securities Bichange Act

of 1934, 15 U.S. C. A., Sect. 78p(b), does the Court have the

Power, "specifically and exclusively delegated by vn 4

to the Commission alone, to. exempt from the statuto

operation a transaction which is embraced within the ex-

press language and intended meaning of that statute, al-

though the Commission itself has 1dt nn 1

rule granting such an exemption?

3. In onder for an “insider’s”” conversion of his: issner’é

convertible equity security to be construed a ‘‘sale’’ thereof 8

under Section 16 (b) of the Securities Exchange Act of

1934, 15 U. S. C. A., Sect. 78p(b), must the issuer, or a stock- -

holder suing on its behalf, bear the burden of proving

that such conversion afforded the insider“ with some

opport nity to. misuse his inside information !

4. Where there was ample evidence to. 8 the Dis- 5

triet Court's findings that the insiders“' short-swing .

transactions in their issuer's ‘securities were speculative

in nature and the kind sought to be proscribed by Section

16(b) of the Securities Exchange Act of 1934, 15 U. S. C. A,

Séct. 78p(b), was it proper for the Court of Appeals to

reverse such findings because it preferred to draw differ-

ent inferences from the facts, although the appellate court |

did not find such findings to be eleeriy erroneous“ f

5. ‘Dadar Section 16(b) of the Securities Exchange Act

| of. 1934, 15 U.S.C.A., Sect. Br); where an ‘‘insider’’

acquires his listed issuer’s equity securities from a pub-

7 licly-owned corporation; ‘more than a majority of whose’

stock is owned and controlled by him, are such atquisitions

of the listed issuer’s shares exempted from the operation

of Section 16 (bj of the Act solely because they were ac-

‘quired ‘ftom the corporation controlled by the ‘insider,

although the Commission hag, not promulgated any rule

* the transaction from * eee application?

—

3 he een Involved _

Pertinent provisions of the Besuiities Exchange. Act of

1934, Sections 3(a) (13), 3(a)(14), 16(a) and 16(b), 15 aes

U.S. C. A., Sects. 78e (a) (13), 78 (a) (14), 78pl(a) and

78p(b), pp. 235, 322, 62 cum. supp., 8 are set ‘forth in tiga

n infra, at pp. 5859. 0

he action was instituted by. petitioner, Blau, as a stock.

holder of Air-Way, pursuant to the provisions of Section

16(b) of the Securities Exchange Act of 1934, 15 U.S. C. A.,,

Sect. 78p(b), to recover the profits realized by the re-

spondents, Edward Lamb’ (Lamb) and Edward Lamb

Enterprises, Inc. (Enterprises), as a result of their respec-

tive purchases and sales within less than six months of

both Air-Way’s listed common stock and its e con-

wertibje preferred shares.

The basis for jurisdiction of the United States District

Court ‘for the Southern District of New, Vork, where the

action was instituted, is Section 27 of the Securities Ex-

change ‘Act of 1934, 15 U.S. C. A., Sect. 78aa.

During all material times hera involved he common

shares of Air-Way, a Delaware corporation, were listed on

the American: Stock Exchange. The respondent, Lamb,

Air-Way's listed securities (R. Al,

was an officer ‘and director of Air-way; ; the respondent,

Enterprises, was-the beneficial a hs of more than 107 of

2, A4).

Enterprises was at all times the personal holding com-

pany of the respondent, Lamb, who, together with his

family owned all of its outstanding shares (R. A7, A16).

Prior to J ong 30, 1955, the respondents, Enterprises

and Lamb, together with the latter’s family, owned ap-

F -oximately 90% of the outstanding stock of Lamb In-

dustries, Ine. (Industries), although they actually 2

trolled 97 5 of. its shares. Appreximately 10% 0

The Preferred Stock Transactions

: 8

l - a 8 ate : , ae 8 : 1 mi . cee :

Industries’ shares were publicly owned* (R. A129). None

of its securities were ever listed on any national securities

Exchange (R. ADs: 4°: ee

In. February 1955, as the result of a proxy fight with

Air-Wayls management, the respondent, Lamb, obtained

control of Air-Way’s Board (R. A9, A19).

At Lamb's „suggestion“, Air-Way's Board of Directors

adopted a Resolution, which was submitted and approved

at its annual stockholders’, meeting on March 22, 1955,

authorizing an increase in the number of Air-Way’s com-

‘mon shares and authorizing the creation of 100,000 shares

of $50 par value Preferred stock, but deferring the fixation

-of the rights and preferences of such Preferred stock to

a later date. The Proxy Statement “sent to Air-Way’s

stockholders in connection with such annual meeting stated i

that. the Company has no present intention to issue any

of said Preferred stock.“ (Def. Ex. K; R. 478)

On June 9, 1955, at which time the respondent, Lamb,

was in complete control of Air-Way's Board of Directors,

the latter set apart 60,000 shares of such Preferred stock,

designating it as a €onvertible Preferred issue, and au-

. thorized, (a) its conversion at the holder’s option on the

basis Gr 3½ shares of common for each Preferred share

(p) the payment of a 5% quarterly dividend thereon, and

(e) one (1) vote for each Preferred share (R. A13, Al4; -

—

Pl. Ex. 8; R. 52). f

At the same June 9, 1955 meeting Air-Wayes Board

also authorized that an offer be made to the stockholders

of Industries for an exchange of their shares on the basis

* 3% of such shares were owned by 45. public stockholders, and’

an. additional 7.24% of such stock was owned by Edward Lamb ©.

Foundation’, Inc. (Foundation), an eleemosynary corporation which

Lamb controlled. |

„

0 se — e:

Fee Se ee ee PF

aoe 2 i ; mek Pe

6°

of ‘tive (5) shares of Indostites f for each share of Air-

Way Preferred (R. A10). | ® 2

Such exchange offer was Approved * Industries’ stock- .

holders the very next day, i.e., June 10, 1955, and the

transaction was fully. consummated. within the next few

weeks. The approval of such exchange offer by Air-Way 8 8

stockholders, however, was neither sought for nor given

until March 27, 1956, approximately nine (9) months after

such exchange of stock had actually. been consummated, oy

although such transaction materially diluted the equity 7

interests and young rights of Air-Way’ 8 stockholders (R.

Alo). 0

„ Within the less thah six ace period W July 5,

1955 and September 15, 1955, the respondents exchanged

all of their Industries stock for 39,849 convertible Pre-

ferred shares of Air-Way and then voluntarily converted

such Preferred stock into 149,471 shares of Air-Way com-

mon having a much greater market value (R. Ail, Al2,

A7).

Only three (3) ‘days. before the seapondetita’ 0s conversions’.

0 such Preferred stock, Air-Way’s Board declared a 100%%/%c„ —

tock dividend on its common shares payable e October 14, 3 „

1955; four (4) days after such conversions Air-Way’s

‘Board declared a 15 cent per share cash dividend on such

» split common. stock — Wenne 20 1955 (KR. A4).

2 The affect of such exchange and e conversion of the

Air Way Preferred stock actually diluted the Air. Way ‘stockholders’

equity interest by ap ximately 57% and constituted a de Facto

* merger requiring prior approval of 662% of its outstanding

shares. (See, 8 1 General Corporation Law, Sects. 251,

252.) At the time the Industries stockholders accepted the offer toc

exchange their. shares, however, the Lamb interests only owned

. 35%4% of Air-Way’s stock and obviously were unable to muster the

required 34 vote. On March 27, 1956, after the transactions had

been fully. consummated and the Air- Way stockholders were asked

do vote on the matter, the Lamb ‘interests owned W 52%

of Air-Way's wig stock (R. A7. A.

poate

a ;

N 5

* -

We parenthetically note that on June 30, 1955, more than

ten (10) weeks before such 100% common stock dividend J.

was declared by Air-Way's Board, the respondent, Enter- a

prises, borrowed the sum of $816,850 from a 2 i

bank’ and deposited with it as collateral 74,700 shares of ;

Air-Way common. In connection with its deposit of such = © *

collateral the respondent, Enterprises, represented to the ee yr ae

„ bank in writing that the number of Air-Way common 8

shares would be doubled ‘‘upon receipt of 100% stock

dividend on 10/14/55“ (Pl. Ex. 19; R. 71). 3

The district court expressly found after trial without . *

a jury that the speculative nature of the (respondents) 4

preferred stock transactions” and their opportunities for 4

speculation and misuse of inside information in connection 4

therewith had been clearly established. It further ‘found

that the respondents’ acquisitions and voluntary conver- 3

ions of the Air-Way Preferred stock within less than 8 g

months constituted purchases and sales of suen

securities within the express language and intended mean- 3

ing ‘of Sections 3(a) (13), 3(a) (14) and 16(b) of the

— Securities Exchange Act of 1934, 15 U.S. C. A., Sects. 1

780 (a) (13), 78e(a) (14) and 78p(b), and that the respondz.

ents’ had realized recoverahle profits from such transac-

tions in the aggregate sum of $1,138,782.31, for which .

judgment was duly awarded (R. A26, A31, A33, A41, 442).

Although agreeing that respondents’ acquisttions of the

Air-Way Preferred stock constituted Section 16(b)./‘pur-. -

chases’’, the Court of Appeals, nevertheless, overruled

the district court’s findings that their voluntary conver-

Sions of such preferred shares were. statu ry ‘‘sales’’,

and aecordingly,: reversed the judgment with respect to

those transactions (R. A78, A79). F

2 Sl

The Common Stock Transactions ce We

On June 6, 1955, the respondent, Enterprises, acquired

from Industries 68,100 common ‘shares of Air Way. to-

q * 8

82 with $227, 850 worth of e ' in N for

40,002 shares of Industries plus Enterprises’ assumption

of Industries“ bank debt i in the sum of Wale * AB,

Al9).

The district court found that ‘ell exchange nn

2 8Seection 16(b) “purchase by Enterprises of the 68,100

sharés of * common at 13 182 5 share 22 435,

A41, A42).

On October 6, 1955, . . — 801d i

10, 500 shares of Air-Way common to Industries at $19

per share; on October 13; 1955, Enterprises sold an addi-

tional 6, ay common shares (after the 100% stock

se dividend had Hüls effective) at 89% per share (R. A6). ü

The district court. matched Enterprises“ purchase“ of

Air-Way common on June 6, 1955 against its sales on

October 6, 1955 and October 13, 1955 and found that Enter-

prises had realized a recoverable profit from these trans-

hee actions i in the sum of $153,526.50 (R. A41).

The Court of Appeals overruled such dings and re-

5 versed this part of the judgment on the theory that, since _

the Lamb interests controlled 97% of Industries’ outstand-

ing stock,“ Enterprises’ acquisition from Industries of the

68,100 Air-Way common shares allegedly was not a Section

16(b) „purchase“ because such transaction was at most

a token change i in the insider’s investment position“ which

allegedly*did not alter the nature of his investment’? nor

place him in a- position ‘‘whiere he could make any more i

advantageous use of. inside information for speculative

purposes than he could have before the transfer“ (R. A97 ).

Although the district court awarded judgment against

the respondents in the aggregate sum of 651, 297, 419.76

* As we have heretofore shown, the ‘respondents only owned. ap-

proximately 90% of Industries’ outstanding stock, although they con-

trolled. 7% z 10% of Industries’ stock was fublicly owned.

(R. A45-A47), the Court of Aale completely n

such judgment except as to the sum of $2,255.02 which it

fonnd to be recoverable from the respondents in connection

with certain other ne e, not here mate- 725

rial (R. A68).

By ‘order dated J uly , 8, 1986, the Court of 1

5 granted petitioner’s application extending his time to file

a petition for rehearing until August 2, 1966 (R. A117-

A119). ö

3 Augen 1, 1966, petitioner filed his ‘elton for a .

‘rehearing en patie with the Clerk of the Court of Appeals

( R. A125-A152). By order dated August. 3, 1966, the

Court of Appeals granted leave to the Commission to file

its brief as amicus

tion (R.

ing en bane (R. A155-A162).

By decisions and orders dated September 9, 1966, the 2 | af

Court of Appeals denied the petition.for rehearing, al-

though it amended its original opinion and judgment by

increasing the respondents’ liability for damages by the .

: additional sum of 85550 556. 38 155 ä

Re Relied on ro or Granting the Writ

1. The Court of. Apple tor the Second Circuit has

decided an important question of federal law Which has

not, but should be settled by this Court. Its interpretation

of the federal statute finds no sanction in the language of

the statute itself and is in conflict with the stated Congres-

sional purpose and legislative 28 which prompted its

enactment.

2. The opinion 15 the Court of Appeals tor the Second .

Circuit is in 2 22 conflict with the opinion rendered by

in support of the rehearing peti- 10

A153). On ugust 8, 1966, the Commission filed

its brie e of petitioner’s application for a rehear-

* : aes .

= . — bd

. 3 e oe’. 7 *

. * i “

„„ 1 n

* —_ a ee Dee

sepia

10 1 :

eee eee eee eee eee r

10. a

the Court of Appeals for the Third Circuit in 1 -Heli-Coil

Corporation v. Webster (C. A. 3, 1965), 352 F. 2d 156. As

a result of such conflicting decisions, a condition of un-

certainty and confusion has arisen with respect. to the in-

terpretation and application of Section 16 (b) of the Securi-

ties Exchange Act of 1934, which can . OY be resolved » 3

this Court.

tag .

3. Although the district court 8 findings were amply

3 ‘supported: by the evidence and not-‘‘clearly erroneous’’,

the Court of Appeals reversed such findings upon the

2 that it chose to draw different inferences from the

4. The decisions by the Court of Appeals for the 8 .

Circuit, exempting respondents’ purchases of Air-Way

common stock from Industries from the operation of See-

tion 16 (b) of the Act, finds no sanction in the language of

that statute or its legislative history and purpose, and

ednstitutes a usurpation of the function e N

to the Commission alone.

ARGUMENT ©

NA Usa n e eee

of Federal law contrary to the express statutory lan-

FFC —

| interpretative dell

Exchange Act of 1934 is preventing the unfair use of in-

‘formation which may have cheen obtained by such bene-

- ficial owner, director, or 3 reason of his relation-

The stated purpose of Section 16(b) of the Securities

ship to the issuer. The statute imposes. liability upon

8 such insider for all profits realized from his purchases .

and sales of * issuer 's equity securities within less than

Six months, ‘irrespective of (his) intention in entering 5

into such transaction of holding the security purchased or

of not repurchasing the security sold for a period exeeed-

ing six months.“ : 2 ak SN

The statutory language, as well as its legislative history,

clearly demonstrate that the insider’s liability was intended

to be predivated solely upon an objective test which would

require no proof that the insider actually obtained any

q@enfidential information or that he misused it for his per-

sonal benefit in effecting his short-term transaction, Such

considerations were deemed: entirely irrelevant“ upon

‘the theory that / if only those persons were liable who could

be proved to have a bargaining advantage, the execution of

tte statute would be so encumbered as to defeat its whole

purpose. Moreover, it was felt that had Congress in-

tended that only profits from an actual misuse of inside

information should be -recoverable, it would have been

simple enough to say so.’”

The relevant statutory provisions are set forth im the Appendix, ae

infra, pp. 58-59.

d its adoption, as follows:

g ‘ 2

— o re

he operation of Section 16 (b) was explained by Thomas Ci

ing benefits of short-term

Corcoran, the Administration’s

That is to prevent directors rec

lative swings on the securities of their owii companies,

" * because of inside information. The profit on such transaction

under the bill would go to the corporation. You hold the

director, irrespective of any intention or expectation to sell the

security within 6 months after, because it would be absolutely

impossible to prove the existence, of such intention or expecta-

tion, and you have to have this crude rule of thumb, because

you cannot undertake the burden of ving · to prove that the

director intended, at the time he bought, to get out on a short

swing.” Stock Exchange Practices, Hearings Before the Senate

Committee on Banking and Currency, 73d Cong., Ist Sess., pt.

15 (1934); pp. 6463, 6857.

* Ferraiolo v. Newman (C. A. 6), 259 F. 2d 342. |

mais v. Claughton (C. A. 2). 157 F. 24.46/50.

Smolowe v. Delendo Corp. (C. A. 2), 136 F. 2d 231, 239.

2 1 ö 12 : *

; The e eee 1 e the enactment of

Section 16(b) of the Act had disclosed that options, con-

versions and similar devices lent themselves quite readily

_ to abuses involving unscrupulous short-term trading by

4 corporate, insiders.* .

In order to. close. off this avenue against: active sates

abuse, Congress expressly ‘broadened the ordinary defini-

tions of purchase and sale to ‘include within their

scope ‘‘gny contract to buy, purchase, or otherwise ac-

: quire’, and “any oe to sell or otherwise. id

5 of.’”

In most instances where an insider has voluntarily’ con-

ö ‘verted his issuer’s convertible securities the courts have

applied such’ statutory definitions to the transaction and

construed the conversion to be a Section 16(b) ‘‘purchase’”® _

ora sale“. In the case at bar, the district court adhered

to the express language of the statute and its intended

purpose by finding that the respondents’. voluntary con-

3 versions of their Air-Way Preferred stock constituted 5

oe, Section 16(b):: “** gales’? thereof. 55

Although the Court below 1 in its opinion :

(R. A79) that the ‘‘unambiguous legislative history and

‘broad reach of Section 16(b)’* and the. early ‘judicial

declarations that the section embodies an ‘objective’ test

of insider Hability, require the unstinting 3 of

i ect Both v. ‘Varian Associates, Inc. (C. A. 1), 334 F. 15

a . No. 1455, 73d Cong., 2d: Sess. (1954), PP

“Re Rep. No „73d Cong. 2d Sess. (1934), 150 793

; 73d Cong. 2d Sess. (1934), p. 13. ,

See Sections 3(a) (13) and ,t. of. the Act, ‘afro, p. 59.

* Park & Tilford, Inc. v. Schulte (C. A. 2), 160 F. 2d 984;

Blau v. Lehman C. A. 2), 286 F. 2d 786, aff d U. S. 403; B. T.

Babbitt, Inc. v. Lachner (C. A. 2), 332 F. 2d, 255; Booth v. Vorian 5

Associates, Inc. (C. A. HY. supra; atte pric v. Webster (C. A.

3, 352 F..2d ise .

2 sal ee

language in Park. & Tilford, Inc. v.

. supra, ‘‘certainly suggests that every conversion (of pre-

ferred into common stock) should be said to involve a

Seetion 16 (b) ‘puchase’ of the common’’, and that e-

„„

ö 3 5

this section to 5 exchange of shares that can be described

as a ‘purchase’ or a ‘sale’,” and that One can, as a matter

of language, describe the conversion of à company’s con-

vertible preferred stoek into. an equivalent amount of

: common ‘stock as a ‘disposition’ or ‘sale’ of one equity 1 ;

security (the preferred) and an agquisitien Este ue pee

chase’ of another (the common)’ because, under sueen

approach,- the transaction could be considered „without

further inquiry, the type of insider activity that Section

160b) was designed to prevent, — nevertheless, in re-

versing the district court’s findings that the respondents

voluntary conversions of their Air-Way Preferred stock

“constituted statutory ‘‘sales’’, the Court of Appeals com-

pletely rejected: the application of such “‘objective’’ test

and substituted a “‘subjective’’ one instead. Under such a

rationale, the respondents’ conversions of their preferred

stock would bé construed Section 160b) sales only i,

the petitioner were able to prove that the transactions had

some element of unfairness, i.e. that they afforded the

respondents with some opportunity: to misuse their inside

information- „ :

We believe that such a narrow, restricted view of the

. statute’s application is erroneous, illogical and completely

repugnant to the legislative intent because the legislative’

history and express language of Section 16 (b). clearly. —

_, indicate that Congress intended to eliminate such a sub. ‘

.' jective standard of proof requiring a showing of an actual

‘unfair use of inside information.’” ; 3 88

Although the Court below conceded, (R. A880) that the

Schulte (C. A. 2),

Pix See, Smolowe-v. Delendo Corpe (C. A. 2), supra, at p. 236; eas 7

Grate v. Claughton (C. A. 2), supra,zat p. 500.

7 3 y . N

8 25 4

> .

. 5 a) 2 Pe, ~ :

2 . | e 14 2 45 :

’ . “eral courts have read Park 4 Tuford as standing. 105

precisely such a rule“ the Court below, neverthel *

tried to distinguish that case by pointing out that it

plication there dealt specifically only with whether a con-

version should be considered a Section 16(b) ‘purchase’

of the common’’, and not whether it should be bee

a Section 16(b) “sale, of the preferred. N

Such attempted distinction in the application of the

Park & Tilford rule, however, is completely unsound and

logically unjustified i in the light of the statutory definitions

which similarly describe the terms ‘‘purchase’’ and sale?

as including any contract to buy, purchase, or otherwise

acquire“, and any contract to sell or otherwise dispose

of. For it seems quite clear from such definitions that

it the insider’s voluntary conversions of preferred into

comme Stock constitute statutery ,“‘purchasés’’ of the

commoß such conversions must also 28 or as. statu:

tery “ ales of the preferre? stock.

Several authorities have stated that Sty ‘construction 2

5 which did not consider the conversion (of preferred stock

into common) a sale of the preferred would facilitate abuse

of i

information through short-swing trading“, „ thus

Section 16(b) of the Act.

The decision of the Court below in its. pe eie .

of Section 16(b) of the Act now. leaves this important

area of the law almost ludicrously uncertain’’. Unless

‘such uncertainty and £onfusion is settled by this. Court,

(the administration and enforcement of the statute will

be breached to such an extent that its continued existence

will become moaninglees.

n See Sections 300 (13) and 3(a)(14) of the Act, infra, p. 50.

u Insider Trading Under the Ku 1 Act, by Cook

E Rev. 385, at p. 624.

onsidered i

permi ing the insider to evade the ee provisions of.

—

' &

Tue decision by the Court below i is in 5 divert conte:

“with the decision rendered by the Court of oe

for the Third Circuit.

In holding that the respondents’ voluntary conversions ~ 3

of Air-Way Preferred into common stock did not consti-

tute Section 16 (6b) sales of the Preferred, the Court of

Appeals for the Second Cireuit laid doun the rule that,

in wee case involving an insider’s conversion of his

issuer's convertible security, the test as to whether such

conversion constitutes a Section 16 (6b) „purchase or &

‘‘sale’? must only be determined upon the basis of a

‘‘subjective’’, rather than an objective“, evaluation of

the transaction itself, its attendant circumstances and its 7

ultimate tffect. Under such a subjective“ test the i issuer,

or a stockholder suing on its behal@ would be required 20

prove as a sine qua non for the statutory application, that

the insider’s voluntary conversion of his issuer’s convert-

ible security afforded Kim with some opportunity to misuse

his inside information.

The recent decision by. the Court of Appeals for. the

Third Cirenit in Heli- Coil Corp. v. Webster (C. A. 3, 1965),

352 F. 2d 156, conflicts directly with the decision rendered

below by the Court of Appeals for the Second Circuit.

In Heli-Coil the insider had purchased his issuer's con-

vertible securities and then voluntarily converted them into

common stock less than six months later. In holding that

the ingider’s conversions constituted Section 16(b) ‘‘sales’’ ©

of the convertible securities, the Court of Appeals for tlie

Third Circuit laid down the rule that thé proper test for

determining whether an insider's voluntary conversions of

securities constitute Section 16 (b) purchases or sales“

must be predicated upon an objective test, rather than

2 eee, one. It further held that under such an

1 16

objective test, it was entirely immaterial and unneces-

sary for a determination of the issue whether or not the

insider’s voluntary conversion of his. issuer’s securities

_ afforded him with any opportunty to misuse his inside

information. The incidence of hi nen to tlie issuer

was all that the statute er 2

Although the Court below conceded - in its opinion (R.

A80-A81) that Recently, however, the Third Circuit (in

Heli- Coil) has coneluded that precisely the same (objec- N

tiuęe) approach (followed i in Park d Tilford, Iné. v. Schulte,

supra) required an affirmative answer to the question

whether a conversion is a Section 16 (b) ‘sale’ of the pre-

ferred’’, nevertheless, the Second Circuit stated, „We do

not agree” with the, Third Cireuit's decision, and Ger-

tainly we are not . to do 80 by any Second Cireuit :

° precedent. 9912

The obviously conflicting views take by the Second and

Third Cireuits have ereated a chaotic condition of confu-

sion and uncertainty in the proper application of Section

i which can nie be remedied: by this Court. |

u But see the Court’s opinion in Heli-Coil (at p. 164), where

the Third Circuit construed the test in the Park & Tilford case as

“very largely objective”, stating that it “employs the language of

Sections 3(a) (13) and 3(a) (14) in the manner in which we think

Congress intended it - to be used and that is in no sense a subjective

one.”

In an earlier decision in Show v. Dreyfus 1 A. 2, 1949), 172

F. 2d 140, the Second Circuit cited the objective test of Park

& Tilford with appreval, stating (at P. 142):

“* * * But the acquisition there under consideration (in Park &

Tilford): was one similar to a purchase. Schulte exercised an

option to convert his preferred stock into common stock. Simi-

larly, we would hold that the Act applies as well to executed

dispositions as to executory contracts to retary wage the

disposition i is ‘similar to a le. .

III

The District Court’s findings were not “clearly er-

roneous” and the Court below, therefore, improperly

reversed them. N

In laying down its “subj tive“ test for the statutory

ee involving an insider's voluntary conversion of

his issuer’s securities, the Court below stated that the

respondents’. conversions of Air-Way Preferred into com-

mon stock could only be construed Section 16(b) „sales

of the Preferred after an ‘‘initial inquiry“ by the trial

court has convinced: it ‘‘that the transaction in question

held out at least the possibility of abuse’’ (R. 484).

The district court made such . initial inquiry“ and found

„On the basis “of the evidence ‘produced at trial' that the

respondents’ voluntary conversions of Air-Way Preferred

into common stock constituted Section 16(b) ‘‘sales’’ of

the Preferred because they ‘‘were the kind (of trans-

actions) sought to be proscribed by the statute“ and Were

‘rife with opportunities for ‘speculation and misuse of

inside information“ (R. A30-A33). Such“ findings were

not made lightly, but after an exhaustive study of the

entire record consisting of over 2,000 pages, and after

a lengthy trial during which the trial court was able to

property evaluate the „ive“ testimony of witnesses.

Although such findings were amply supported by the

evidence and were not clearly erroneous’’ (R. A143-A146), |

the Court below reversed such findings, because it chose |

to draw different inferences from the facts. |

Rule 52(a) of the Federal Rules of Civil e

provides, however, that Findings of fact shall not be

set aside unless clearly erro sous, and due regard shall

be given to the opportunity (of the trial court to 9

of the eredibility of the witnes 8. :

~ : .

oe 6

It is an elementary proposition of law that where rea-

_ sonable men may draw different inferences from the facts

of a particular transaction or resolve thie ambiguities. dif-

ferently, and where the evidence would support a con-

clusion either way, the appellate court may not substitute

its judgment for the findings by the trial court unless

“clearly erroneous ...

Signifieantly, the Court. . made no .

that the district court’s findings were clearly erronecuss-

Accordingly, since there was evidence in the record to sup

port the district -court’s findings, the reversal of, such

findings by the Court below was . as a matter |

of law. ; | 7

oS Ceed below 8 * from the

operation of Section 16(b) the shares of Air- Way

common stock which the respondent ener from

Industries.

6 @

On June 6, 1955 the respondents - were in control of

97% of. the stock of Industries, an Ohio Corporation, al-

though they actually owned only 90% of its securities.“

On that date, through an exchange of assets, the respondent, |

Enterprises, acquired from Industries 68, 100 shares of Air-

Way common. Less than six months later, Enterprises

sold 17,000 shares of the Air-Way common stock.

The district court found that Enterprises’ aforeania

7 acquisition * 8 Air-Way common stock constituted a

13 United States v. Real Estate Board, 339 U. 8. 485, pp. 405-

; United States v. Yellow Cab Co., 338 U. S. 338, pp. 341-342;

Fedor ere eee Co. v. Smith. (C. A. 10) 11259 F. 2d

™ 3% of Industries shares were. owned by individual public

stockholders ; 7.24% of such shares were owned by Foundation, an

2 eleemosynary corporation controlled by the respondents.

Fe itl

8 „ Ms 5

Section 16(b) “purchase”? within ine statutory ‘definition

of Section 3(a) (13) of the act.“ Matching such purchase

with Enterprises’ sales of such stock less than six months

later, the district court found that the respondents had.

realized recoverable profits from these common stock trans-

actions of an additional sum amounting to $153,526. 50.

Phe Court of Appeals reversed such findings and held a

that Enterprises’ acquisitions of the Air-Way common

from Industries were not Section 16(b). purchases be-

cause the respondents controlled 97% of Industries stock.

Although recognizing that 3% of Industries stock was

owned by individual public stockholders and another 7.24%

of such stock was owned by an eleemosynary Foundation

of which the public was the ultimate beneficiary, the Court-

below held, nevertheless, that such public stock ownership

of Industries was ‘‘not sufficient to affect the unity of

interest between Lamb, Enterprises and Industries“, and

that the respondent’s acquisition of Air-Way. common

from Industries did not put such insider in the position

‘‘where he could make any more advantageous use of

inside information for speculative purposes than he could

‘have beforet the transfer” (R. A97-A98).

We believe that such rationalization and ‘conélusio® ts

contrary to the language of Section 16(b), as welle as its

0 e purpose, for the following reasons.

At the outset, the Court below applied a « subjective”

fae to the transaction involved by predicating its bus

‘upon the basis as to whether or not the acquisition of

Air-Way common stock could afford the respondents with :

a more advantageous opportunity to misuse their inside

information. But we have heretofore shown, however, that

the language arid legislative history, of Section 16(b) re-

The term “purchase” is defined by this section “to include nt

8 5. buy, purchase, or otherwise. . ” See’ Appendix,

infra, p ore ite

aA Nate i:

quires for its application an objective test, rather than

a subjective one. Under such objective“ test an in-

sider's opportunity to misuse his inside information in

a given short-swing transaction is entirely irrelevant.

Secondly, the purpose and effect of the decision by the

. ourt below was to exempt the acquisition of the Air-Way

common stock from the operation of the statute solely

because the respondents controlled 97% of Industriés’

shares.

But site's in the statute or its legislative history dos

tit appear that Congress intended to empower the courts

to exempt transactions from the operation of Section 16(b).

In fact, under the express language of the statute, such

exemptive powers were granted exclusively to the Commis-

sion to whom the administration of the statute was ex-

| : kane entrusted.

(Since the Commission had not promulgated ’ any rule .

exempting the respondent's acquisition of Air-Way com-

mon from Industries, the Cougt- below gvas not entitled to

usurp the Commission 8 function i in this respect:

Furthermore, although the Court below decided to ex- |

-empt the instant acquisition of stock from the statutory

application because the respondents owned 97% of Indus-

tries’ shares, it freely admitted that we have been unable

‘to farmulate a bright-line rule as to how much stock con-

trol (less than 10%) is batts ‘to invoke oe rule“ (R.

408)

We note in passing, . that in Park & Tilford, Inc. i

v. Schulte (C. A. 2), supra, the Court of Appeals held

that the insiders’ conversions of Preferred into common

stock constituted ‘‘purchasées’’ of the common, although

the insiders owned more than 99% of the issuer’s Preferred

Stoch and approximately 92% of its common shares.

See 3

_ CONCLUSION -

For the foregoing reasons, this petition for a writ

of certiorari should be granted.

“46 ne, submitted,

Mona J. Levy,

shits 8 eS Counsel for Petitionér, a

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~ APPENDIX

ON Opinion

UNITED STATES COURT OF APPEALS

ebe ser Saas.

ads 4

. | No. 202—Septembér an 1 1965.

(Argued December 17, 1965 " Decided Ju une 2, 1966. y

\ Docket No. 29940

\ 2

„ Beso, a stockholder of Air-Way Industries, ‘Inc., |

suing on behalf of himself and all other stockholders -

similarly situated and on behalf and in the rien of

Air-Way Industries, Ine.

—.—

Epwarp. 3 par Epwarp Lams 3 Inc. *

f Défendante:Appellante-Appellece.

Before: 2 5

boas Warznuax, Kian and Hars,

—

Derivative stockholder’ 8 suit instituted by Isadore Blau,

a stockholder f Air-Way Industries; Inc., to recover for

Air-Way certain alleged short-swing profits allegedly re-

alized by the defendants Edward Lamb * Biwerd Lamb.

oe Inc.

Circuit Judges.

una annuus Appellant, 5

oak Bi

The district court, United States District Court for the

Southern District of New York, Tyler J., adjudged, in an

_ | opinion reported at.242 F. Supp. 151 (1965), that Air-Way —

should be awarded 6206, 356.45 as against Lamb. and

$1,091,063.31 jointly and severally against Lamb and Enter:

prises. The defendants appealed, seeking reversals of the

awards except for $2,205.04; the plaintiff appealed, seeking

modification of the awards, and for an allowance of interest

on recoveries. ~ ee tape ges. *

Judgment reversed as to all recoveries except $2,255.02,

and affirmed as to the disallowance of any interest thereon.

Monnis J. Levy, New York City, for Plaintiff-- 3

, Appellee-Appellant. ;

: . Atpert R. Con ; Cravath, Swaine & Moore,

: — J. Eugene Farber,

Robert- Rosenman, John S. Gilbert, Ne

York City, for Defendants-Appellants-Ap-

berg, Special Counsel; Gus J. Bennet, At-

8 tornéy, on brief for Securities and Exchange 3

Commission, amicus curiae.

Warerman, Circuit Judge: : 2 AJ

The plaintiff-appellée-appellant, Isadore Blau, a stock-

holder of Air-Way Industries, Inc. (Air-Way), a Delaware

corporation, commenced. this action pursuant to Section

16(b) of the Securities Exchange Act of 1934, 15 U. S. C.

§78p(b), to recover ‘‘short-swing’’ profits allegedly real-

- ized by the defendants-appellants-appellees, Edward Lamb

\ (Lamb) and Edward Lamb Enterprises, Ine. (Enterprises),

an Ohio corporation, as a result of their respective ahort-

Pur A. Loomis, In., Gen. Counsel; Walter P.

North, Assoc. Gen. Counsel; Meyer Eisen-

* OF

„

2 2⁴ 7

f a = | 5 4

term dealings in the convertible preferred stock and com-

mon stock of Air-Way.“ Jurisdiction and venue in the dis-

trict court were proper under Section 27 of the Act, 15

D. S. C. $78aa. Blau v. Lamb, 20 F. R. D. 411 (SDNY -

1957). See 2 Loss, Heourities Regulation 1044-45 (2d ed.

1961).

For reasons 5 to be 3 hereinafter the court below

Has entered a final judgment on June 5, 1965, holding Lamb

liable to Air-Way for ‘‘short-swing’’ profits amounting to

6206, 356.45 and Lamb and Enterprises jointly and severally

liable to Air-Way for ‘‘short-swing’’ profits amounting to

$1,091,063.31. Blau v. Lamb, 242 F. Supp. 151 (SDNY

1965). Lamb and Enterprises have appealed on the ground

that the transactions in which they engaged did not involve

8 or sales or; in any event, that the trans-

actions did not result in any profit realized within the | -

meanings of those three terms as the terms are used in

Section 16(b) of the Act. They contend further that even

Rif all the relevant transactions are within the scope of

Seetion 16(b) the court below grossly overvalued the

profit réalized.’? Blau has appealed on the grounds that

the lower court undervalued the profit realized, that

certain cash dividends for which recovery was denied are

recoverable, and that interest should have been added to the

amount held recoverable. The Securities and Exchange

Commission was granted permission to submit a brief,

amicus curiae, in order to express its views upon certain

of the issues — * the appeal of Lamb and Enter-

prises.

1 It has 93 baie decided deat Blau has sufficient indicia of

December 31, 1958, Air- Way changed its name to

Lamb Industries: In this opinion ‘we will see ae

* were named in 1955. 2

devin dr.

I. The Factual W ,

„ N

* \

ol transactions in the Convertible. Preferred Stock and the

common stock of Air-Way, carried on by Enterprises and

Lamb during 1955. We set forth this series of transactions

The present lawsuit arises out of a complicated series \

chronologically before turning to consider the question of at |

Section 16(b)’s application to any of them. 3.

In June of 1955 and throughout the relevant wer

Lamb was an officer and director of Air-Way. Enterprises,

which was a personal holding company for Lamb interests f

solely owned by Lamb, members of his immediate fami

and corporations controlled by them, was the ben .

owner of more than 10 per cent of the outstandin ymmon -

stock of .Air-Way.? Lamb, members of his family, and.cer- -

tain corporations controlled by them were sufficiently in

control of Air-Way to have elected 5 of that company’s 7

directors. At all relevant times the common stock of Air-

Way was registered. for trading on the American Stock

Exchange and was actively traded. Also, Enterprises and

Lamb, together with members of Lamb’s family, owned ap-

proximately 97 per cent of the outstanding shares of Lamb

Industries, Inc. (Industries), an’ Ohio corporation they

completely controlled. None of Industries’ shares were

‘ever listed on a national securities exchange. i

In June 1955 the Lamb interests decided to merge

Ney Industries into Kir- Way. On June 6, shortly, before the

stock - for-· stock merger was finally approved by the Air Way

Board, Industries transferred to Enterprises 68,100 shares

of Air: Way Common, which Industries had apparently held

for more than six months, plus other os aggregating —

tama glk e ware thus ith ‘ingiders” in their

issuer, Ait-way; Lamb. because he was a director, and

because it was the beneficial owner of more, than 10 per cent of

en stock. See note 6 infra.

° oo

—

e ‘

8 i

— i 5 9

„

. ae

me 4227 850. Industries Recived ! in peter 40, 002 shares of

Industries (its own) Common Stock plus the assumption by |

Enterprises of a $581,250 nots that Industries had ye to

a bank. :

On June 9, 1955, the Air-Way Board ‘approved an. py ae

to the skereholders of Industries to exchange one share of

newly-ereated 5 per cent Cumulative Convertible Preferred

Stock of Air-Way (Air-Way Preferred) for each five shares

of Industries Common. The par value of the Air- Way

Preferred was $50, it had a liquidation value of $52.50 plus

accumulated dividends, and was convertible at any time

into Air- Way Common at a ratio of 35% shares of Air-Way

Common for each share of Air-Way Preferred. In the

event of any stock dividend, or split-up by 8

the number of shares * which the Pini of Air-Way :

Preferred were convertible would be appropriately ad-

justed. Each share. of Air- Way Preferred carried a-divi-

dend of $2. 50. a share per annum and was entitled to one

33 ae

From July through ee 1955, in 5 with ;

Air-Way’s June 9 offer, Lamb exchanged 26,300 shares of

Industries Common for 5,260 shares of ‘Air-Way Preferred,

and Enterprises exchanged 172,945 shares of Industries

Common for 34,589 shares of Air-Way Preferred. On Sep-

gtember 13, 1955 Enterprises converted its recently- acquired

34,589 shares of Air-Way Preferred into $21,061 shares of

Air-Way Common. On September 13, 14, and 15, Lamb -

eonverted his recently-acquired 5,260 shares of Air-Way

Preferred into 18,410 shares of Air-Way Common.

On September 12, 1955 Air-Way declared a 100 per cent

stock dividend on its Common, in the n ture of a stock-

‘split, payable on October: 14, 1955, to stocl olders of record

en September 29, 1955. The conversions by Lamb and En-

N occurred on = 13, ” and 15, 18, aft

U ee

9 Appendix. 5 3 eae

the two-for-one stock dividend had been declared, and Latino

the news of this declaration had been made Public. On

September 19, 1955, four days after the last conversion had

occurred, Air-Way declared a cash dividend of 15 cents

per share on its Common, payable November 1, 1955, to

. stéckholders of record on October 24, 1955.“

On October 6, 1955 Enterprises privately sold 10,500

- shares of Air-Way Common as constituted prior to the stock

split to Industries, on October 13, 1955 Enterprises pri-

vately sold 6,500 shares of new Air-Way Common— that is,

Air. Way Common after the 100 per cent stock dividend

the nature of a stock split — to the Edward Lamb Foun-

dation, Inc., a charjgable foundation, ‘created and con-

trolled by Lamb.“ Other sales by Enterprises during the

relevant period are not at issue on appeal.

Certain facts that do not conveniently fit the foregoing

chronological review of the relevant transactions are never-

theless important and are best stated now. On June 30, 1955

_ Air-Way declared a 30¢ per share dividend on the Air-Way

Common then outstanding. Throughout the period relevant

to this litigation Lamb and e on various ocea-

° The regular 8 dividend for the immediately preceding

quarter was 30¢ per share. The 15¢ per share dividend declared

on September 19, 1955 reflected the 2-for-1 split.

Lamb's wife, and Lamb's secretary. Although the 100 per cent com-

mon stock dividend in the nature of a stock split was declared by

the Air-way Board,on September 12, 1955, and was payable October

Erne September 29, ‘and the sale

Enterprises to the Lamb Foundation on October 13, i

parties treat this sale as if it occurred on ober. 14 or thereafter ;

and was of the new Air-Way 8

6 The. district court found, and Lamb and Enterprises do not

dispute the validity of this finding, that certain of Enterprises’ pur-

. chases and sales of Air-Way Common in 1956 resulted in an in-

ider“ 8 = of $509, recoverable for the benefit of Air-Way.

“7

Alrxpendir V 7

sions, purchased and sold blocks of Air-Way Common on

te American Stock Exchange. Lamb purchased 300 shares

of Air-Way Common between March 18 and March 22, an-

other 100 shares on May 13, and 200 more shares between

September 2 and September 8. On September 15, on the

American Stock Exchange, he sold 300 shares of Air-Way .

Common, as constituted prior to the 100 ver cent stock

dividend. This was the only relevant transaction in which

Lamb disposed of shares of Air-Way Common to a pur-

chaser other than a corporation controlled by him. Lamb

also purchased on a when- issued basis 100 shares of new

Air-Way Common on October 6 on the American Stock

Exchange. Between May 2, 1955 and December 28, 1956,

Enterprises purchased 1, 700 shares of old Air-Way Com-

mon ang 5,200 shares of new Ar. Way Common. |

II. Purpose and Scope 07 * 16 b).

Section 2 of the Securities Exchange Act of 1934, 15

U. S. C. 4 78b, states that the Act was designed, inter alia,

L to insure the maintenance of fair and honest markets

in securities transactions. Section 16 (b) helps to imple-

ment this overriding purpose by making it unprofitable for

insiders'“ to engage in short-swing speculation. ‘‘Prior

to the enactment of the Securities Exchange Act,’’ the SEC

has said, ‘‘nrofits from ‘sure thing’ speculation in the stocks

of their corporations were more or less generally accepted |

by the financial community as part of the emolument for

serving as a corporate officer or director notwithstanding ~

the — EN character of such 1 N

° | Section 16(a) states shed an “insider” i is any “person who is di-

rectly or indirectly the beneficial. owner of more than 10 per centum

of any class of any equity. security of his issuer, or who is a

director or an officer of the issuer.“ 15 U.S.C. §78p(a). Both

Lamb and * were n, in Ae See note 2

supra,

“ es

7 .

«2 pa

” SEC Ann. Rep. 50. (1944). Among the enen short-

swing transactions that prompted the enactment of Section

16(b) were transactions. in which insiders, with advance

knowledge of information that would produce a rise in the

market price of a stock of their company, bought stock at

the then current market prices and sold it when publica-

of the information had caused the anticipated rise to

tion

occur. And, too, there were transactions in which insiders

with advance knowledge of facts that would depress the

market price sold their stock at the then current prices and

purchased stock when publication of the facts had had the

expected depressing effect. Also, on oceasion, the desire

to obtain such profits had even led insiders to manipulate nei

the market price of their corporation’s stock by causing

their corporation to pursue financial. policies calculated to

produce sudden fluctuations in market prices.“

Section 16 (b) was enacted to bring these practices into

disrepute and encourage the voluntary maintenance of

proper fiduciary standards. H. R. Rep. No. 1383, 73d

Cong. 2d Sess. 13 (1934). The section provides that:

For the purpose of preventing the unfair use of in-

formation which may have been obtained by ‘such bene-

ficial owner, director, or officer by reason of his re-

lationship to the issuer, any profit realized by him from

any purchase and sale, or any sale and purchase, of any

equity security of such issuer (other than an exempted

security) within any period of less than six months,

unless such security. was acquired in good faith in

connection with a debt previously contracted, shall in-

ure to and be reéoverable by the issuer, irrespective of

any intention on the part * such beneficial en,

See S. Rep. No. 1435 73d „ 2d Sess. 55-68 (1934) ; 8.

No. 792, 73d Cong., 2d Sess. 7-9 £1994); H. R. Rep. No.

73d Cong, 24 Ses 13-14 (1994). *

director, or officer in entering into such transaction

of holding the security purchased or of not repurchas-

ing the security sold for a period exceeding six months.

Suit to recover such profit may be instituted at law or

in equity in any court of competent jurisdiction by the

issuer, or by the owner of any security of the issuer

in the name of 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 prosecute the

same thereafter; but no such suit shall be brought more

than two years after the date such profit was realized.

This subsection shall not be construed to cover any

transaction where such beneficial owner was not such

both at the time of the purchase and sale, or the sale

and the purchase, of the security involved, or any trans-

action or transactions which the Commission by rules

and regulations may exempt as not comprehended

within the purpose * this subsection. 15 U. S. C.

-§ 78p(b)." , |

Section 16(b), it should be emphasized, embodies a rather

. uncommon regulatory mechanism. The section’s under-

. ‘lying purpose, as set forth in its preamble, is to prevent the

„unfair use“ of. information by insiders. This purpose is

effectuated by means of, what has been termed, a ‘‘crude |

rule of thumb. In order to insure discouragement of un-

fair insider short term trading all inside trading within a

less-than-six- month period is discouraged. The arbitrary,

some might say Draconian, nature of this statute reflects

the view of experts who testified at the hearings leading

to the passage of the 1934 Act that the-unfair use of in-

formation by corporate insiders could only be effectively

_eurbed by a law that mate it 2 for insiders to

73d bie Sess. 6557 (1934).

° n Before Senate Committee on Banking & Currency, 3

381 N

Appendic. nee %. en

wins in any ‘short-term trading, whether fair or unfair.“

It might be said that Congress decided in order to throw

out the bathwater that the baby had to go too. In order

ss to insure that Section 16(b) efficaciously put an end to

unfair insider trading, Congress explicitly made irrelevant

the intent of any insider who engages in a short-term trans-

action, and did not condition the section’?s application on

proof of an insider’s intent to trade on a short swing.

The desire of Congress to prevent unfair insider trading,

regardless of its form, is evident in the act’s inclusive defini-

tions of several of the section’s important terms. Section

-3(a)(11) ‘defines the term ‘‘equity security“ to include

any security convertible, with or without consideration,

into such a security . . % Section 3(a)(13) broadly

defines purchase as including „any contract to buy,

purchase, or otherwise acquire, and ‘‘sale’’ is defined

by Section 3(a) (14) as including ‘‘any contract to sell or

otherwise dispose of.’”* A reasoned elaboration of See-

tion 16(b)’s underlying purpose, plus the recognition that

the section’s success as a deterrent was rooted in its sim-

plicity and relatively ‘automatic operation, prompted our

court to hold in an early case that proof of an actual unfair

use of inside information was not required, saying that

‘the only remedy which its framers, deemed’ effective for

this reform was the imposition of a liability based upon an

objective measure of proof. Smolowe v. Delendo Corp.,

136 F. 2d 231, 235 (2 Cir.), cert. denied, 320 U. S. 751

(1943). In order to insure that unfair use of information

by insiders is prevented, courts have been equally quick

to reject other sisal relevant considerations that would

° Ibid. 1

10 15 U.S.C. § 78 (a) (11).

u 15 U.S. C. § 78c(a) (13).

u 15 U.S. C. § 78 (a) (14).

oft

. |

limit the Werd reach and relatively automatic operation of

that section. See 2 Loss, Securities Regulations, 1041-42

(2d ed. 1961). 8

It is equally important to emphasize that one issue is

not finally resolved by the broad reach of Section 16(b)

and the considerable evidence that Congress intended the

section to deter unfair insider trading by rendering un- |

profitable all insider trading within any less-than-six-month

period. It is quite apparent that because of the broad

definitions of ‘‘purchase’’ and sale imported into Section

_. 16(b), this section may be applied not only to routine cash

purchases and sales.of equity securities but also may be

applied to acquisitions and dispositions of equity securities

in transactions involving conversions, options, stock war-

rants, reclassifications and the like. It is perhaps less

‘apparent but nonetheless true that as a matter of fact some

of these transactions may not lend themselves i in any way

to an unfair use of inside information by corporate in-

siders.'3 Granting that the theory of regulation underlying

Section 16(b) requires the application of this section to

every transaction that might possibly permit an insider

to use inside information unfairly, the unresolved question

is e e s regulatory mechanism also requires the

application of the section to a conversion transaction such

as that involved here, which could not possibly serve as a

vehicle for any of the abuses at which Section 16(b) was

aimed. Put more generally, the unresolved issue is whether

this particular type of regulatory mechanism renders inap-

plicable.a well-known rule of construction: cessante ratione

legis, oe et ipsa lex. | 7 ; a

N u See, e. g., Blau v. Mas. Factor & Co. 342 F. 24 304 (9 Cir),

cert. denied, 382 U. S. 892 (1965). See also Meeker & Cooney, -

The Problem of Defini Insider Liabilities Under

ition in

97525 1605), 45 Va. L. Rer. * ay (1959). — 3

—— —

! ee . 0 ks

are |. Apipendia.

With the background of this far from 3

brief restatement of Section 16 (b) 's underlying purpose

‘=

and of the regulatory mechanism Congréss chose to effec- Be

tuate this purpose, we now examine the section’s applica-

tion to each of the transactions which the court’ below held :

resulted in the short-swing profits for Lamb and Enter-

prises that were recoverable by n e ‘

III. Application of Section 16(b). 3

A. The Purchase and: Conversion’ of Air-Way Preferred

by. Lamb and Enterprises.

I zue district court held, and on appeal W and Enter- 5

prises do not contest the holding, that the exchange witn

Air-Way in-the summer of 1955 of Industries Common for

Air-Way Preferred constituted a Section 16(b) „purchase

by Lamb and Enterprises of the Air-Way Preferred. The

district court also held that the September 1955 conversion

ck the Air-Way Preferred into Air-Way Common con-

stituted a, Section 16(b) „sale“ of the Air-Way Preferred,

and went on to conclude that Lamb and Enterprises had

„realized“ a profit of $1,138,782.31 from this conversion,

which was the difference between what it found to be the

‘cost’? of the Air-Way Preferred (based upon its valua-

tion of the Lamb Industries Common’ exchanged for the

Air-Way Preferred) and the highest market price of the

Air-Way Common on the relevant dates of conversion.

Lamb and Enterprises maintain that this conversion did

not constitute a sale“ resulting in any profit realized’? .

within the intendment of Section 160b). Blau contends the

district court’s only error was in undervaluing the profit

realized that resulted from the sale. For reasons given

hereafter we reverse the-district court and hold that the

| conversion of Air-Way Preferred mee Fe e Common :

5 34 ; : es sos

Appendia. | as

was not a Section 16(b) “gale?? by Lamb or aterprises.

Thus we do not reach the valuation issue raised by Blau.

The question. to be decided is whether a conversion of

preferred stdck into common constitutes a Section 16(b)

„sale of the preferred. It is possible to resolve this ques- ~ -

tion by dee ee broad reach of Section 16 (b), the

unambigusus legislative history stating that Congress in-

tended the section to deter unfair insider trading by render-

ing unprofitable all ‘‘insider trading’’ within any less-than-

six-month period, and early judicial declarations that the

section embodies an ‘‘objective’’ test of insider liability,“

require the unstinting application of this section. to any

exchange of shares that can be described as a purchase

or a ‘‘sale.’’ One can, as a matter of language, describe the

conversion of a company’s convertible preferred stock into.

an equivalent amount of common stock as a ‘‘disposition’’

or ‘‘sale’? of one equity security (the preferred) and an

„acquisition“ or purchase of another (the common).

‘Thus. it follows from this approach to the problem that, if

the conversion can be paired with another ‘‘sale’’ or “pur-

chase, and the paired: transactions occur within a six

month period, the paired transactions are, without further

inquiry, the type of insider activity that Section 16(b)-was

designed to prevent. A 1947 decision of our court, authored.

by Judge Clark, has become the model of this approach

to the problem of the section’s application. Park d Tilford,

Inc. v. Schulte, 160 F. 2d 984 (2 Cir.), cert. denied, 332

D. S. 761 (1947). In Park & Tilford the defendants held

preferred and common representing a ontrolling interest i

in the company. In late 1943 and early 1944 the market

price of the common rose significantly. The company

served notice of redemption of its preferred stock on De-

cember 20, 1943. On January 19, 1944, the defendants

. See Section II supra.

N 2 -

0 \

* °

x + 8 5

4 * des J

converted their preferred into common and within six

months they sold the common. Holding the defendants. .

; * for insider profits, Judge Clark stated, 160 F. 2d

We think a conversion of preferred into eommon

stock followed by a sale within six months is a ( pur-

chase and sale within the statutory language of § 16

(b). Whatever doubt might otherwise exist as to

whether a conversion is a purchase“ is dispelled by

‘definition of purchase“ to include . any contract to

buy, purchase, or otherwise acquire.“ 5 (a) (13). De-

fendants did not own the common stock in question

before they exercised their option to convert; they did

afterward. Therefore they acquired the stock within

the meaning of the Act.

This language certainly suggests that every, conversion ;

should be. said to involve a Section 16(b) „purchase“ off .

the common, subjecting the insider to liability if the con-

version can be paired with a sale“ of common within a

less-than-six- month period and the paired transaction

shows a. profit to the insider. Seyeral courts have read

Park & Tilford as standing for precisely such a rule. E. g.,

Heli- Coil Corp. v. Webster, 352 F. 2d 156 (3 Cir. 1965);

Pettys v. Northwest Airlines, Inc., 246 F. Supp. 526 (D.

Minn. 1965); ef. Blau v. Hodgkinson; 100 F. Supp: . 361

(S DNT 1951). Of course, Park & Tilford dealt specifically

with whether a conversion should be considered a Section.

16(b) ‘‘purchase’’ of the common. Recently, however, the

Third Circuit has concluded that precisely: the same ap-

proach required an affirmative answer to the question

whether .a conversion is a Section 16(b) ‘‘sale’’ of the

. preferred. Heli-Coil v.. Webster, supra. 115

We do not agree that we should, without further inquiry,

so resolve the question of whether a conversion of pre-

= 36

age, 33 | Appendia.

Saved: stock ‘into common sohetituten a Section 16(b)

egale of the preferred. Certainly we are not compelled

to do so by any Second Circuit precedent. Aside from the

intimations to the contrary in Park d Tilford, our court

appears always to have recognized that in deciding cr gold

a certain transaction is a Section 16(b) „purchase o

1 „sale, it is relevant to first consider whether the <i a f

tion in any way makes possible the unfair insider trading

) that Section 16(b) was designed to prevent. For example,

in a 1954 case in this Circuit, insiders owning more than 45

per cent of their company's single class of commion stock

arranged for the company's stock to be reclassified into a

new class of preferred and a new class of common in order

to improve the marketability of their interest in the com-

pany. Within six months of the exchange incident to the

reclassification the insiders sold the new securities at a

profit. In an opinion authored by Judge Clark, our court

held’ that the insider's acquisition of the newly ereated

common and preferred was not a. Section 16 (b) purchase“

of this stock. Roberis v. Eaton, 212 F. 2d 82 (2 Cir.), cert.

denied, 348 U. S. 827 (1954). The court reasoned that the

eumulative effect’? of several factors established that the

‘reclassification at bar could not possibly lend itself to

the speculation encompassed by §16(b). This being so, it.

was not a ‘purchase’. . . 212 F. 2d at 86. See also

_ Shaw-v. Dreyfus, 172 F. 2d 140 (2 Cir.), cert. denied, 337

U. S. 907 (1949); Truncale v. Blumberg, 80 F. Supp. 387

(SDNY 1948). In 1960, Judge Medina, in a considered

dictum, stated that he understood the rule to be that a

transaction is a p chase if in any way it lends itself

to the accomplishment of what the statute is designed

to prevent. Blau v. Lehman, 286 F. 2d 786, 792 (2 Cir.

1900) af d, 368 U. S. 403 (1962). The view that Section

16 (b) ’s purpose can be fully accomplished without subject-

ing to 16(b) sanctions every transaction desoribable in its

terms has also commended itself’ to other United States .

Courts of Appeals. In a case, like Park & Tilford, involv- - -

ing a conversion and subsequent sale of common, the Sixth

of one class of outstanding common into another class tf

Mam Factor d Co., 342 F. 2d 304 (9 Cir.), cert. denied, 382

Circuit held the conversion was not a Section 16(b) ‘‘pur-

chase“ of the common on the ground that, under the ‘cir-

_ cumstances of that case, the conversion was not one that

could have lent itself to the practices which Section 16(b)

was enacted to preveit. Ferraiolo v. Newman, 259 F. 2d

342, 346 (Oir. 1958), cert. denied, 359. U. S. 927 (1959)

And the Ninth-Circuit recently adopted the same approach

when faced with deciding whether an insider 's conversion

outstanding common with different dividend attributes con-

stituted a Section 16(b) ‘‘purchase’’ sof the latter. Blau v.

U. S. 892 (1965). f

Thus far we have only established that the decided eases

in this and other circuits do not require us to hold that,“

without further analysis, the conversion of Air-Way Pre-

ferred into Air-Way Common must be regarded as a Sec-

tion 16(b) ‘‘sale’’ of the Air-Way Preferred. Instead, most

of the appellate decisions, including the more recent deci-

sions of our court, state that. thé application of Section f

16(b) depends upon whether the transaction in question

\ >

In Ferraiolo, as in Park & Tilford, the issuetserved notice of

redemption of the preferred stock and thereafter insider con-

verted. The Sixth. Circuit distinguished Ferraiolo from Park &

Tilford on the ground that the insider did not control the issuer

whereas in Park & Tilford the insider had a voting majority and

Ferraiolo. Ferraiolo instead stands for the proposition that Section

16(b) need not be applied to every single transaction describable

thus absolute power to determine whether the preferred stock should

be called for redemption. -: Insider control may indeed explain Park

& Tilford. See 2 Loss, Securities Regulation 1067 (2d ed. 1961).

But the absence of insider control is not a total explanation -of

in its terms; that is, for the aproach to the section’s application

‘that we are adopting. | | Pup

: 74

—

25 56 could snl to accomplish what the eéction was designed. to

prevent. Contra, Heli-Coil-Corp. v. Webster, supra. It is,

of course, clean that this judicial limitation on the reach

of Section 16 (b) is perfectly consistent with the -séction’s

underlying purpose of preventing the unfair use of inside

5 information by ‘corporate insiders. This underlying pur-

pose Provides no reason for the application of Section

160b) to a transaction that poses no danger whatever of

insider abuse. Nevertheless, it is arguable that the regula-

tory mechanigm chosen by Congress to. effectuate Section

160 b)’s underlying purpose may ‘have removed the power

Ar eourt otherwise would have to hold that this legislative

—. possibly. permit the Mmischief the legislature’ wished. to

in Section 16 (b) Congress, chose to effectuate the section

* underlying Purpose by making it unprofitable for insiders ’

to eng in any, trading at all within any less-than-six-

month period and emphasizes that Congress contemplated *

‘that the section would be applied to transactions that did.

not involve unfair insider trading. In other ‘words, this

ee is based upon the proposition that Congress by

choosing to regulate i in this’ fashion implicitly forbade tge

5 edmmand should net apply to a transaction that could not

_ remedy. The argument for such a position recognizes th at

federal: ‘courts to have recourse to the maxim oessante

-ratjone legis, ‘cessat: “et ipsa lex as a tool of construction. in

close cases. We do not find this argument persuasive. To

7 be sure, the theory of regulation underlying Section 16(b)’s

: a regulatory: mechanism provides a sufficient reason for re-

5 et ‘fugitig to’examine the details of transactions once it has

: been determined that they might possibly have served as

vehicles. for unfair insider trading. But it does not supply

an equally. sufficient reason for applying Section 16(b) in

this same automatic fashion when a -sabstantial weer

is raised Whether a certain conversion transaction et he ove

sweep

a Possibility ay insider abuse. ere mong

—_——

E requires that the section be applied without further in-

duiry. In some cases, however, this initial inquiry will con-

39 | N 5 5 | i

ee Appendir.

ing, arbitrary regulatory mechanism embodięd in Séetion

16 (b) in order to insure that even the possibility of insider 3

abuse was deterred, but it would seem, to follow that in or-

der to avoid ‘“purposeless harshness”’ 4 court should first

7 inquire whether a given transaction could possibly tend to

accomplish: the practices’ Section 16(b) was ‘designed to

__ prevent. Blau v. Max Factor d Co., supra, at 307. Fre- -

quently this initial inquiry will convince a court that the

transaction in question held out at least the possibility of |

abuse; in such cases, Section 16(b)’s regulatory mechanism

vince a court that the conversion transaction in question

could not possibly have lent itself te insider abuse. In such

a case it is not inconsistent with Section 16(b)’s regulatory

‘mechanism to hold that the section does not apply

One further point deserves. brief notice. In Heli- Coil

Corp. v. Webster, supra, a majority of the Third Circuit

concluded that Congress intended Section 16(b) to be en-

tirely objective. 352 F. 2d at 165. The limitation on Sec-

tion 16(b)’s application we here adopt was there rejected

on the ground that decision as to whether a certain trans-

action could possibly lend itself to the abuses Section 16(b) ©

Was designed to prevent must be determined to some de-

gres at least by the minds of the finders of fact,“ 352 F. 2d

at 164, and thus imported an impermissible subjective

consideration into the task of applying the section. We

consider this observation unobjectionable but point out that

it is irrelevant. Of course, the inquiry whether a certain

ae transaction lends itself to the accomplishment of what Sec-

tion 16(b) is. designed to prevent must be decided ‘“‘by the

minds of the finders of fact. This i¥ true of the task of

law application generally. There is no rule s‘‘ objective” .

_ (‘automatic” would be a better word) that it does not re-

quire some mental effort in applying it on the part of the

person or persons entrusted by law with its application.

Appendic.

We thas eur to consider whether the conversion of Air-

Way Preferred into Air-Way Common in September 1955

by Lamb and Enterprises in any way lent itself to the ac-

complishment of what Section 16(b) was designed to pre-

vent. The court below answered this question affirmatively. .

242 F. Supp. at 157. It held that the conversion was a

Section 16(b) „sale“ of the Air-Way Preferred, which,

when matched with the earlier purchase“ of the Preferred

by Lamb and Enterprises, rendered Lamb and Enterprises

liable for insider profits. The district court’s decision ap-

pears to rest on two rather separate grounds. First, the

court said that in view of the circumstances surrounding

the purchase of the Air-Way Preferred and its subsequent

conversion, it requires little imagination to infer... a

corporate milieu rife with opportunities for apiculation

and misuse of inside information.“ 242 F. Supp. at 157. ;

Second, the court seems to have implicitly conceded that

an insider’s conversion of preferred: into common should

not be deemed a Section 16(b) „sale“ if the common is

economically equivalent to the preferred, but it went on to

say that the simple answer“ to this contention in this case

was that by converting the preferred Lamb and Enter-

prises received a totally different security with an attend-

ant alteration in the risks and advantages involved. 242

5 F. Supp. 157-58. We disagree with both grounds the dis- a

trict court’ advanced in support of its decision.

-In support of its contention that the preferred stock n

transaction lent itself to the accomplishment of ‘‘specula-

tion and misuse of insider information“ the district court

noted that Lamb controlled Air- Way and was the guiding

force“ behind the merger: of Industries into Air: Way; that

‘the immediate. purpose of the merger waé to graft onto Air-.

= Way a management team Lamb had previously recruited

for Industries; that Air-Way’s noncontrolling stockholders —

were not asked to approve the merger until that company’s

7 fis

a at

33 5

: Appendia. ae

—

next annual meeting in March 1956; that the conversion

of Air-Way Preferred by Lamb and Enterprises was vol -

untary -; e and that by so converting Lamb was able to in-

erease his holdings. of Air-Way Common, consequently _

_ tightening his grip on that company. After enumerating ~

these facts, without further analysis, the lower court con-

cluded that the situation was rife with opportunities for

speculation and misuse of inside information. We have a

substantial problem with this approach. The factors enu-

. merated do serve to emphasize Lamb’s control of Air,; Way.

He was in a position to direct the stock. for-stock merger

at an exchange ratio apparently favorable t. holders of

Industries Common“ without the formal approval of all

Air-Way shareholders expressed at an annual meeting,

and, when he converted, his position as a controlling insider

became even more secure. As controlling insiders Lamb,

and Enterprises, clearly had the power to misuse inside

information for speculative purposes. ie But the question

By saying that the conversion in the present case was volun-

‘ tary” the court below intended to distinguish Ferraiolo. See note 15

supra, _Wé agree that the conversion was “voluntary.” But we do

not attach determinative consequences to this conclusion. e

*The gravamen of Blau’s complaint sometimes appears to be

that the rate at which Air- Way Preferred shares were exchanged

for Industries Common in the merger was too favorable to owners

of Industries shares.

** There is no suggestion that the accomplishment of this merger

in this fashion violated any applicable corporate law. Lamb might

have put the stock - for- stock merger plan to a vote at an Air- Way

annual meeting, but apparently he was not required to do so.

Even a noncontrolling “insider” has the power to misuse inside

information for speculative purposes by trading in light of the

inside inforgiation to which he is privy. A “controlling insider”

also can manipulate corporate activity in order to create favorable

short-swing trading situations.. But certain types of transactions

may not present any opportunity for the exercise of either non-

controlling” or “controlling” insider power to misuse inside infor-

mation. % e. . *

“Appendia.

remains: Did the conversion present Lamb or Waerpuises N

with even the slightest opportunity to exercise that power?

The facts enumerated by the distriet court, standing alone,

fail to establish that the conversion in any way made it

possible for Lamb either personally, or through Enter-

prises, to reap speculative profits based on insider infor-

mation.“ And we reject the possible suggestion in the

lower court’s opinion that the existence of an opportunity

for speculative profits can be inferred from the fact of con-

trol alone, “ because such a suggestion is inconsistent with

our responsibility to analyze the conversion in order to

determine whether the possibility of unfair speculative

Profits might have existed at all even with full corporate

control. Lamb’s attempt to bolster his control of Air- Way

by acquiring and then converting Air-Way Preferred may

fall short of our aspirations for the conduct of controlling

shareholders. But, to Paraphrase Judge Clark, specula-

tion, actual or potential, is the only vice within the purvießx

of Section 16(b). Other possible corporate abuses that can

possibly arise out of stock conversions do not now concern

us. Blau v. Ogsbury, 210 F. 2d 426, 427 (2 Cir. 1984). See

Smolowe v. Delendo Corp., supra, at 235.

The second ground advanced by the court below in sup-

: port of its decision requires more elaborate analysis. Lamb

and Enterprises maintain that, in general, the purchase

by an insider of his issuer’s convertible securities,

followed in less than six months by their conversion, can-

not facilitate short-swing trading for speculative profits in

the convertible re because normal market activity,

7° See note 24 infra.

: Of course, the activities of diele i in 3 within the

possible ambit of Section.16(b) may take many forms, and in this

opinion we limit the applicability of our observations to situations 4

nr to the one 2 before us.

0 8

—— — —— —— ERS — —

Appendi.

securities have a market price at least equivalent to the

- . aggregate price of the securities into which they are con-

Furthermore, after the conversion, Lamb and Enterprises

retained the investment position in the securities of Air-

Way that they had acquired during the summer of 1955.

The appreciation in the value of this position that had o-

curred since then continued to be at the risk of the market

and could disappear if the market price of the common.

thereafter declined. In view of this situation, it would seem

to be a cold fact of the market that the conversion could

not afford Lamb or Enterprises opportunities to realize a

trading gain: based on speculative judgment exercised when

they purchased the Air-Way Preferred. Indeed, by con-

5 verting, Lamb and Enterprises would appear to have re-

duced their opportunity for speculation. because they sur-

rendered the protection of a senior position and gained

no compensating advantage. Ordinarily an investor would

_ convert in this situation, where the convertible security is

—

1962).

, including arbitrage trading, will insure that the convertible

* See Graham, Dodd & Cottle, Secutity Analysis, 603-04 (4th ed.

„

"ae . against dilution wad has not been called for re-

demption, ‘only because he hoped to gain a long-term benefit

from ‘receiving dividend income in excess of the dividend

payable upon the convertible security. Here the conversion

would appear to have been prompted by Lamb’s desire to

_increase his control of Air-Way. But whatever the motives

that prompted this conversion, we hold that, the economic —

equivalence of the Air-Way Preferred and the Air- Way

Common and the unchanged investment position of Lamb

and Enterprises combined to insure that this conversion

afforded the insiders no opportunity to realize a gain hy

speculative trading in Air-Way Preferred. For this rea-

son, we hold that, the conversion was not a Section 160b)

sale of the Preferred. See Heli Coil Corp. v. Webster,

Supra, at 172-73 (Hastie and Kalodner, JJ., dissenting in

part). See also Blau v. Max Factor d Co., Supra.

The district court implicitly recognized the force af much

changed investment position; yet it held that the Air-Way

Common was not the economic equivalent of the Air-Way

Preferred and that Lamb and Enterprises. had substan-

tially changed their investment position. It reached this

result by noting notre we the Common conferred greater voting

power, pe greater dividends, and was more easily

of this argument based on economic equivalence and un-

; — In the present case we do not find these facts

determinative of the issues posed by Section 16 (b), and

- disagree with the result the district court reached. It is

true that the conversion increased the voting power of

Lamb and Enterprises. Each share of Air-Way Preferred

had one vote and each of the 344 shares of Air-Way Com-

mon (or, after ‘the two-for-one split, 7 shares of Air-Way

Common) obtainable | upon conversion had one vote. How-

ever, the increase in voting power would seem to be irrele-

vant to the central question whether the conversion facili-

tated short-swing trading in the Air-Way Preferred. If

: 45

Appendix.

the voting power of the Air-Way Common had value, that

value would be forthwith reflected. in the value of the Air-

Way Preferred because the Preferred was immediately

convertible into Air-Way Common. In short, the increased

voting power incident to the conversion conferred.no trad-

ing advantage and, therefore, is not relevant to. our

Present problem.“ Hel- Coil Corp. v. Webster, supra at |

172 (Hastie and Kalodner, J., dissenting in part). -Paral-

lel reasoning leads us to the conclusion that the different

' dividend attributes of the Air-Way Preferred and the

Air-Way Common are also irrelevant for present purposes

because this difference did not present Lamb and Enter-

prises with the possibility of reaping a trading advan-

tage.” Cf. Blau v. Max Factor & Co., supra, Finally, we

his issuer, engineer the declaration of dividends on the common and

convert just prior to the public announcement of the dividend. -

The difficulty with this. argument is that this danger exists indepen-

- dently of short-term trading by controlling insiders in their issuer’s

stock. For example, in the stated hypothetical, precisely the same

opportunity for abuse would exist if the insider had held the con-

vertible security for many more than. six months. Furthermore, the

and sale, —

covery Oo

hypothetical

: Appendix. 8

do not m that it ‘was appreciably more difficult to

market Air-Way Preferred than Air-Way Common. Any-

one wishing to sell Air-Way Preferred needed only to con-

vert it into Air-Way Common, which was listed on the

American Stock Exchange. We cannot agree with the dis-

trict court’s conclusion that the relative marketability of

these securities destroyed their otherwise economic equiva- *

8 lence. Ibid.

The limitations inherent in our holding, the 1 it

leaves unresolved, and some general observations on its

scope should be set forth, lest we be misunderstood. We

do not hold that the economic equivalence of that which

an insider surrenders and that which he receives in an

exchange always, or even usually, will suffice to remove the

exchange from the ambit of Section 16(b). To the con-

. trary, sales or “purchases by an insider of his issuer s se-

curities for cash; the securities of a different company, or

other property are within the reach of Section 16(b), even

though, if these are arms-length transactions, each side will

receive what it considers to be at least economically equiva-

lent to what it surrendered. Focus on the factor of eco-

nomic equivalence is only relevant when—as in a conver-

sion or a reclassification—that which the insider surrenders

and that which he receives are simply different forms of

the same participation in his issuer. Second, it should be

oe ( Footnote. continued from preceding page)

vestment position combine. to 1 that a 5 such as this.

cannot afford insiders any opportuni short-swing trading

gains and then conclude that the — of insider-inspired, ex-

_ cessive dividend payouts,. which cannot be ered alone, requires

that the insider’s unrealized gains be recovered by their issuer. Of

course, in the above hypothetical, Section 16(b) might apply if a.

sale of/the common occurred within six months from the purchase

4 1 convertible security. See text accompanying note 25 infra. -

so take pains to point out that what we say here in no way

modif the rule of this Circuit as to when dividends received by

an insider are includable in an otherwise recoverable profit real-

ized.” see Alder v. Kloworis, 267 F. 2d 840, 849 (2 Cir. ——

„

| Arend. |

noted that the ‘‘economic equivalency 1 argument may not

necessarily be of equal relevance in each of the four proto-

type situations in which a conversion may be paired with

another transaction in an attempt to establish a violation”

of Section 16(b).# For reasons previously stated, we find

the argument persuasive in the case of an admitted pur-

chase by an insider of his issuer’s preferred followed less

than six months later by, the preferred’s conversion into

common. For the time being, we leave open the further

ae question, whether this argument is equally persuasive in the

second situation—the conversion by an insider of his issu-

er's preferred, which has been held for more than six

months, followed less than six months later by a new pur-

chase of his issuer’s preferred at a lower price. We also

leave open the relevance of “economic equiyalence’’ in the

third and fourth prototype ‘situations when the question is

whether a conversion is a Section 16(b) purchase by an

insider of his issuer’s common, and, in the one case, an

admitted sale of his issuer’s common at a higher price

precedes that conversion by less than six months, and, in

the other, an admitted sale follows the conversion by less

than six months. We do think it is clear that logic“ does

not require that economic equivalence be equally rele-

vant in each of these four prototype situations; nor does

it follow logically that because one of these four prototype

situations may possibly facilitate short-term, speculative _

trading all do. In: the first two prototype situations the.

speculative trading in the issuer’s preferred. The question

question is whether, the conversion, facilitates short-term

in the latter situations. is whether the conversion facilitates

short-term speculative trading in the. issuer’s common. It |

Of course, more variations can be worked out if conversions

are paired with other conversions reclassifications or the like.. Here

—

common. Therefore, the holder of the convertible security who has

„

+ Append

also may make a difference whether the admitted purehase Pa

or sale precedes the conversion as in the present and in ;

the third situations, or whether it follows the conyersion

as in situations two and four. Third, this analysis should :

serve to emphasize that when a court examines a particular 3

transaction to determine whether it might possibly have

- facilitated unfair insider trading it should first ascertain

whether there existed any possibility of abuse presented by N

the prototype situation the court has before it. Thus, in /

the present case, if we assume for the moment that, despite _ ä

the factor of economic equivalence, a a conversion followed.

by a sale of the common facilitates speculation i in the com-

mon, this is a sufficient reason for considering the eee

sion a Section 16(b) „purchase“ of the common; but it is

not, standing alone, a reason for concluding that the con- 4

version should be considered a Section 16(b) ‘‘sale’’ of the | ree |

preferred. In order to support this latter conclusion it ‘

must be established that the conversion in some way facili-

‘tated short-term speculative trading in the preferred; this

has not been established here.“ — at the risk of

—

* A majority of the Third Circuit i in He ‘Coil Corp. v. Websier,

supra at 165 suggested that an insider with inside information of

the date on which debentures will be called by his issuer p

a trading advantage by converting for when the debentures are

called they are no longer tied to the price of the stock. In advance

of the information respecting the call being made public, if the in-

sider has any knowledge that will affect the future price of the

common stock, such as an increased dividend to be paid after the

senior security has been retired, he would be in a position to profit

by his conversion. Ibid. We disagree. All convertible gęcu

provide for notice, usually of at least 30 days, prior. to redemp-

tion date. During the period after notice and before red i

convertible securities may be converted. In fact, notice off

tion is normally a means of forcing conversions. During,

after the notice of redemption is given and while the sécurity is still

- convertible at any time, it remains the market equivalent of the

(Footnote continued on following page) )

ae |

being obvidus, we simply note that ‘economic equivalence’?

has ‘no relevance in a situation where the éonvertible se-

: curity did not trade at a price at least equivalent to the

Ne aggregate price of the securities into which it was con-

Ss vertible. : 75 510% i

We think that in cases like ‘the present involving the

purchase of a convertible security and its subsequent con-

Version, the issue should be whether the underlying se-

ceurity has been sold within six months from the acquisition

of the convertible security. See Heli-Coil Corp. v. Webster,

supra, at 171-74 (Hastie and Kalodner, JJ., dissenting in

part). Where the convertible security is purchased, con-

verted, and the underlying security sold, all within less

than six ménths, we believe the entire proſit resulting from

the transaction is recoverable, either on the. theory that 8

the acerued profit on the preferred as well as the proſit on g

the common has been realized, within . . [a] W

less than 6 months“ for Purposes of the statute, or else

upon the theory that, under such circumstances, the pur-

(Footnote continued from preceding page) 3

inside knowledge of the redemption is not in be. Ae position

has attempted to demonstrate how Lamb’s and Enterprises’ conver-

in the two - months period, between the time Lamb and Enterprises

acquired and converted the Air- Way Preferred. Blau goes on to

argue that this market increase was caused by the 100 percent stock

dividend and the declaration of the regular quarterly dividend in

September. Blau concludes that Lamb and Enterprise could only

capitalize on this increase in value by converting. We disagree. If

risk. We should always have in mind that a holder bf it-Way Pre.

ferred could choose to convert to Air-Way Common :

wished to do 80. igs : Ss aks 7

25 Me * 55 2 ee

Se 8

. si . 25

J *

N a 43K

5 e aun estas 4 4 . *

e Appen

8 e of 4 red preferred may be treated as a

purchase of common stock, for the statute defines ‘*pur-

chase“ as including ‘‘any ‘contract to buy, purchase or

otherwise acquire, and. the purchase of the convertible

security includes a contractual right to acquire the con-

version security. This view of the statute is reflected in

amended Rule 18b- 9 recently adopted by the Securities &

Exchange Commission, effective February 17, 1966, and

applicable to all ti tions occurring after that date.

Sec ties Exchange Act Release No. 34.7820. (Feb. 17, ie

196% Amended Rule 16b-9 provides an ‘exemption from

‘the ambit of Section 16(b) for the conversion of an equity -

security, which*is convertible into another equity security

of the same issuer, provided that no more than fifteen per

5 coent of the value of the security received at the time of the 1

donversion is received or paid in cash or other property.

Ibid. The stated reason for this: ‘exemption is that, in the .

judgment of the Commission, the conversion of a con-

vertible security into its conversion » curity is not com-

: — within the purpose of Section 16(b) .. . ' Ibid,

We agree. Furthermore, for all of the above reasons, we

hold that the same is true of conversion involved in the

e case.’ ere :

ol 4 5

1 c Between 5 and Other Cor. is

porations Controlled by Lamb.

The dis ict court held that the transaction on ‘fe 6, 8

„1955 in which Enterprises acquired from Industries 68, 100 ö

a * shares of Air-Way Common plus other assets was a Sec-

tion 16 0b) ee by: Enterprises, which the lower ae

.% The Securities sind k ingen. ca leien as amicus urges i that

we reach the result we here The Commission would have us

so hold on the ground that the conversion was a Section 16 b) sale

of the Air-Way Preferred but no profit was realized at that time.

See rian i orp. v. * Supra.

tlie Edward Lamb Foundation; Inc. of 6,500 shares of new

aren. ee

court then matehed-against the October 6, 1955 sale by |

Enterprises to Industries of 10,500 shares of Air-Way

Common and the October 13, 1955 sale by Enterprises to

Air-Way Common.“ Thus the district court held Lamb

and Enterprises jointly liable for short-swing profits total-

ing $153,526.50." Lamb and Enterprises appeal: this deter.

mination, contending inter alia that the June 6, 1955

⸗transaotion was not a Section 16 (b) purchase by Enter-

prises. The Securities and Exchange Commission also

urges that we adopt this view. For reasons given hereafter

we reverse the district. court and hold that the June 6,

1955 transaction was not a „purchase by Enterprises :

within the meaning of Section 16(b): |

It must be recalled that on June 6, 1955 l controlled 4

100 per cent. of the stock of Enterprises and 97. per cent

ok the stock of Industries—the remaining. 3 per cent was 8

owned. by several employees or former @pployees of In-

Adustries. By virtue of Lamb’s pervasive control over

Industries and Enterprises, there was at most a token

change in the insider's investment position when Air- Way

By October 1955 Industries had become a’ subsidiary of Air-

Way as a result of the exchange of Industries Common for Air-Wa

Preferred. Whereas in June 1955 Lamb had owned 97 per cent Of

Industries, in October Lamb's interest in industries was as a_holder

of in excess of 50 per cent of the Air-Way Common. 1

If the amount Enterprises received on the. October 13, 1955

sale is matched against the purchase price it paid on June 6, 1955 for

6,500 shares“ there is no profit on the paired transaction. But the

district court held that, since there was a “short-swing” transaction,

the value of the stock dividend: in the nature of-a 2-for-1 split was

recoverable in its entirety. This totaled $60,937.50; the value of the

8 6,500 shares issued as à stock dividend on the 6,500 acquired on

Our holding that the June 6, 1855 transaction was not a ion

16 (b) “purchase” by Enterprises permits us to avid discussion of

weute lower court’s treatment of a stock dividend as a recoverable.

profit, 7

—

ONS

5 Appendia. |

Ge Was msd from Tnduatiios. 0 Enterprises;

Lamb indirectly owned this stock both before and after

its transfer. Thus Lamb did not place himself where he

Could make any more advantageous use of inside informa- s

tion for speculative purposes than he could have before

thestransfer. Nor did the decision to transfer the Air-Way

Common alter the nature of his investment, increase or

decrease the amount invested, or alter in any way. the a

involved.

The rule announged by Judge Clark i in the first half. of

Blau v. Mission Corp., 212 F. 2d 77 (2 Cir.), cert. denied,

347 U. S. 1016 (1954) seems applicable here. In that case

a parent corporation, which was an insider in Tide Water

ie ‘Anaodiated Oil Company because of stock ownership in ex-

( +5 ss of-10 per cent, transferred a substantial block of Tide

Water stock to its (the parent’s) wholly-owned ‘and newly-

organized subsidiary holding company established for that

purpose. Our court held that this transfer was ‘‘mere

‘ bookkeeping without the reach of the. statute’’ and thus

woas not & Section 16(b) ‘‘sale.”? 212 F. 2d at 81. After

-™ characterizing the transaction as a mere transfer between

s corporate pockets,’’ this court also said, 212 F. 2d at 8.

To hold otherwies would be to place entirely undue’

stress on the corporate fiction reaching harsh and

wooden results quite: unnecessary to achieve the pur-

poses of the act. Until, going beyond the corporate

forins, some new individuals entitled to share in the

. ultimate profits enter the picture there has been no

—— real sale of ‘stock.

— . 0

In the present case the district tetas rejected the anal-

ogy between the first transaction in Mission Corp. and the

transfer of Air-Way to Enterprises. In doing so, the court

below stressed the absence of complete ownership of the

Industries stock by Lamb. It concluded that the rule of

the first half of Mission Corp. should * — only to

‘ d „„

N ; : . ie Gee

: raat Se

cases involving 100 per cent ownership because there were

no precise and generally applicable criteriaX that would

| eee, to know how much control less than 100 per

cent was enough to invoke this rule. 242 F. Supp, at 159.

Me sympathize with this position because we have been

_. unable to formulate a bright. line rule as to how much stocx 1

control is enough to invoke the rule. Nevertheless, we .

agree with the Securities and Exchange Commissibn's con-

elusion that in the present case the mount of Industries

stock not owned by Lainb approximately 6,000 of 196,0 / (ł.

shares —is not sufficient to affect the unity of interest be-

tween Lamb, Enterprises and Industries. The transfer to

Enterprises of the Air-Way Common in no way increased

Lamb's power to make use of inside information, and for

tis reason that transfer was not a Section 16(b) pur-

on September 15, 1955 Lamb)sold 300 shares of Air Wag

shares of Air-Way Common on the American Stock Ex-

change between March 18, 1955 and March 22, 1955 (at a

Area ae

cout éf $4,091. 10) ö which results in a ‘profit ebene

from Lamb by Air-Way amounting to $1, ar 02.“ We

. ‘affirm to. this extent. ’ a

In two instances the court below eee realized

profits“ by comparing the market price of Air. Way Com-

mon prior to the. 100 per cent stock dividend, i in the nature

of a stock split, with the market price of an equal number

of shares after the stock split. In the first instance, the

court matched 100 of the 10,500 shares sold by En-

oti terprises on October 6, 1955 against a „purchase“ by

Enterprises of 100 shares of new Air Way Common on

Oetober 16, 1955. The sale on Oetober 6 was at a price

of $19 per share, resulting in total proceeds of $1,900. The

October 19 purchase of new Air- Way Common, which

reflected the 2-for-1 split, was at a considerably lower

Price, $1, 017. Thus, the profit realized according to the :

district court was $883.00.. In the second instance the lower

court, without any recognition of the intervening stock

split, matched 100 of the shares of Air-Way Common that

Lamb had sold over the American Stock Exchange on

September 15, 1955 against a purchase by Lamb on

_ October 6, 1966 of 100 e of new er Common.“ 10

v Without revealing the basis for + thelr computation counsel for

Lamb and Enterprises state that the p rofit realized” from matching

2 ee gies ten 2 ne

der of shares in March totals only 1,616.04

‘ . 29°The Odeober 6, 1955: disposition of 10,500 shares of Air-Way

Common by Enterprises to Industries would seem to be a Section

16(b) “sale.” At that time Lamb no. fa controlled 97 per cent

of Industries. See note 26 supra. * |

% It should be noted that the district et had sini matched aa

the 300 shares sold on r 15, 1955 against 300 shares, pre-

viously purchased. See text panying note 28 supra: This would

seem to be contrary to well-established Section 16(b) procedures.

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

920 (1951) N & no transaction can wes in more than one

equation“).

We agree with the Securities and Exchiange Commission

that when a. purchase or sale that precedeg a stock dividend

lor stock split) is to be matched against a sale or & pur-

chase made after the record date for the. dividend dis-,

tributiön (or the split) there should be a proportionate

N *

adjustment in the price per share of the stock obtained or

disposed of in the earlier transaction in order to determine

the true measure of profit realized, if any, in the later

transaction. Cf. Kornfeld v. Eaton, 217 F. Supp. 671

ASDNY 1963), af d, 327 F. 24 263 (2 Cir. 1964).

Adopting this approach we must reverse both of the

lower court's computations of „pro t realized here under

: consideration because .of ‘failure to take account of tge

100 per cent stock dividend in the nature of a stock split.

In the first instanee the sales price of one old share df

Air-Way Common was $19; the purchase price plus com-

missions of one new share was $10.17. Two new shares

Pore the equivalent of one old share. Therefore, the cost

of one new: share should have been matched against one.

half of the price of an old share, that is, $9.50. It is a-

parent that once this adjustment is made there is no profit,

d no recovery, because the cost of one new share ex. - °

ceeded the adjusted sales price. Similarly in the second

instance, although the unadjusted sales price exceeded the

Purchase price, thus leading the court: to conclude that a

Tecoverable profit had been realized, once the sales pmice

is adjusted to reflect the split, all profit disappears.

D. The Cash Dividends on Air-Way Common. .

Air-Way Common on J uly 20,-1955 should: have been in.

_ ¢luded us part of the profit realized’? on the following

_ transactions: the 10,500 shares ‘of old Air-Way. Common

purchased“ on June 6, 1955, and sold on October 13, 1955; .

—

— .

by Air- Way on August 1, 1955, to holders of record of

ae me as i ce =e

5 mne 6, 500 s shares of old Al waz Co ~~ purchased”? on 8

June 6, 1955, and the 6,5 res of new Air- Way

Common „sold“ on er 13, 1955; and the 300 shares

of $ld Air-Way-Common ‘“‘pureliased’? on June 6, 1955, and

9 sold

e cash dividends with respect to the first two,transactions

a are not recoverable, because; as ‘we previously have held, 8

the acquisition by Enterprises on June 6, 1955 was not a

Section 16(b) purchase and thus those paired transactions

were not covered by Section 16(b). See note 22 supra. The

_ elaim for recovery: of. the cash dividend of 30% per share

is; nevertheless, relevant to the transaction involving 300

‘shares of Air-Way Common. As to that issue we affirm

the district eourt's conclusion, that the cash dividend was,

“too. ineidental and not 80 inextricably connected’ with

. defendant’s purchase-and-sale transactions to be included

in the amount recoverable.” 242 F. Supp. at 161. See

Adler v. Klawams, 267 F. 2d 840 (2 Cir. 1959). Air-Way.

oe paid regular quarterly dividends since Juné of 1954;

“a ie r share dividend declared on June 30, 1955 was

an increase of only 5¢ per share over these prior quarterly

dividends, In view of this dividend payment. history we

cannot say that the lower court erred in concluding that

the June-1955 dividend was not 9 800 of a scheme of short.

7 swing speculation.

—

E. Interest.

We affirm the distriet court’s discretionary disallowance

of interest on the profit realized recoverable by Air-Way

in this action; we are unable to say that the denial was

_ either so unfair or so inequitable as to require us to upset

3 Blot v. Lehman, = U.S. 403, 414 (1962). 5

2 5 ie e — a

Z g Pls

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ah. 4 : .

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a 22 5 — 7

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5 ° . . .

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8 —

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. a

September 15, 1955. Preliminarily we note that 8

—

in a recoverable: profit of $589. We affirm. We also hold,

285,556.38 results from matching purchases by Enterprises

—

— —

Appendir.

The district court decided, and Lamb and Enterprises dd

not appeal from that decision, that certain purchases and

sales of Air-Way Common in 1956 by Enterprises resulted.

for reasons previously. stated, that the purchase and sale

of 300 shares of Air-Way Common on the American Stock

Exchange in 1955 resulted in a recoverable profit of

$1,666.02. Blau also asserts that an additional liability of

of 1,600 shares on the American Stock Exchange between

. \

May 2 and September 8, 1955, for an aggregate price of

$24,843.62, against the sale by Lamb of 1,600 shares on

October 6; 1955, at $19 per share to Lamb Industries Inc.;

the defendants do not contest this additional liability. Fur-

30% per share cash dividend ‘was no

thermore, we conclude, as did the district court, that the

L 8 4

APPENDIX

8 163) and Section (0) ot the Securities ae

change Act of 1934, 15 U.S. C. A, Sects. pte and T8p(b),.

prose as follows:

2 (a) Every person who is direotly or arge) the

beneficial owner of more than 10 per centum of any

class of any equity security. (other than an exempted

security) which is registered pursuant to section 78

of this title, or who is a director or an officer of the

issuer of such security, shall file, at the time of the

registration of sueh security on a national securities oan

exchange or by the effective date of a registration

statement filed pursuant to section 78 (g) of this title,

or within ten days after he becomes such beneficial

owner, director, or officer, a statement with the Com-

mission (and, if such security is registered on a na-

tional securities. exchange, also with the exchange) of

the amount of all equity securities of. such issuer of

which he is the beneficial owner, and within ten days

after the elose of each calendar month thereafter, if

there has been a change i in such ownership during such

months, shall file with the Commission (and if such

security i is registered on.a national securities exchange,

shall also file with the exchange), a statement indicat-

ing his ownership at the. close of the calendar montn

and such changes in his ownership as have occurred

during such calendar month.“ ? : ;

0b) For the purpose of preventing the 3 use

of information which may have been obtained by such

beneficial owner, director, or officer by reason of his

relationship to the issuer, any profit realized by him

from any purchase and sale, or any sale and purchase,

of any equity security of such issuer (other than ann

55 wa 5 . ao

„5 FEE

. exempted“security) within any period of less than six

months, unless such security was ‘acquired. in good

faith in connection with a debt previously contracted,

Shall inure to and be recoverable by the issuer, irre-

spective of any intention on the part of such beneficial

owner, director or officer in entering into such trans.

action of holding the security purchased or of not

repurchasing the security sold for a rege exceeding

fit may be insti-

tuted at law or in equity in any court of competent 8

— six months. Suit to recover such pr

fe _ Jurisdiction by the issuer, or by the owner of’ any

‘security of the issuer in the name and in belialf of

the issuer if the issuer shall fail or refuse to bring

Such suit within’ sixty days after request or shall fail

. diligently, to prosecute the ‘same ‘thereafter; but no

such suit shall be brought more than two years after

the date such profit was realized. This subsection shall

not be construed to cover any transaction where such

beneficial owner was not such both at the time of the

purchase and sale, or the sale and purchase of the.

security involved, or any transaction or transactions

“whieh the Commission by rules and regulations: max

exempt as not ‘comprehended within the purpose of

„ this subsection”? .

_ Section 3(a) (13) of the Securities Exchange Act of 1934,

15 U.S. C. A., Sect. 786ʃa) (13), provides as follows:

„The terms ‘ buy ö and ‘purchase’ each include any con- Ga

tract to buy, purchase, or otherwise acquire.’’ 2

Section 3(a)(14) of the Securities. Exchange Act of 1934,

15 U.S. C. A., Sect. 780 (a) (14), provides as follows: 855

to sell or otherwise dispose of.:

he terms ‘sale’ and gell“ sach include any contract 5 et

8 > bd 254 5 s : : Ae .

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.