Opposition Brief — Blau v. Lamb

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‘In THE.

* Supreme Court uf the Hnited States

Octoser TERM, 1966 _

os eae ee a No. 720 Sie

a)

ISADORE BLAU, a stockholder of AIR-WAY INDUS-

TRIES, INC., suing on behalf of himself and all other

stockholders similarly’ situated and on cae and i in the

- right of atthe page, Inc.,

US.

* EDWARD LAMB and EDWARD LAMB

"ENTERPRISES, INC,

Respondents.

On PETITION FOR A’ Wart’ OF CERTIORARI TO THE Unrrep

STATES Court OF APPEALS. FOR THE SECOND Circuit |

&

BRIEF FOR RESPONDENTS IN OPPOSITION :

. . 4 e

ALBERT R. ;CONNELLY |

‘RoBERT RosENMAN |

Counsel for Resbenieas. :

‘One Chase Manhattan Plaza

~ New York, New York 10005

: CRAVATH, SWAINE & MoorE

Of Counsel.

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November 7, 1966.

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JOHN F. DAVIS, CLERK

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Petitioner,

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INDEX

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4 PAGE

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COUNTERSTATEMENT OF Questions Priisknrep cove. :

SUMMARY OF Bases FOR DENIAL OF PETITION aie a7 5a

“Tae Facrs . Ge ee te OC a Th, Rete ao = ‘

(1) The Gaiters ee eer ae oy

(2) The Transfer ‘Between Corporate Pockets

° ae ath Ae sue eaens eh euseer 5

ARGUMENT “9... a: aha oe eens

I..No Conrticr or- Decisions parte. votes Ss

IT. THE Question or Lrasitity WITH RESPECT a

, TO THE .CONVERSION TRANSACTION Is oF |

LiMiTED .IMPoRTANCE. BECAUSE SucH ate

’ Transactions Have Now Breen EXEMPTED e

_ From Section 16(b) By Rute’ ae g

JI. Tue DECISION ON THE TRANSFER BETWEEN f

Corporate Pockets TRANSACTION Is Lim- - ee ae

ITED TO THE Facts oF Tus CASE AND > Does tee :

Not’ HAVE BroaD SIGNIFICANCE reteeeees 8 vA

os

IV. THE Decision “BELow as To Bor. TRANs-

AcTIoNs Was CorRECT .. prieqyenenraine oA :

ConcLusIoNn Peete ee ve 10:

RIPON AGS eo Oh RS

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: Peake Ee ie es PAGE

Basalt Rock Co. v. Cominissioner, 180°F. 2d 281 (of ~~~

Cir, 1950), cert, dénied, 339 U. S.966-v:.....-.. 8°

. Beal v. United States, 182. F-24565 (6th Cir. 1950),

"Gert, Ugned, WOU. S: B26... ees ce eee vi

Blau v. Mission Corp.; 212 F. 2d 77 (2d Cir, 1954),

cert. denied, 347 VU. = ET EE eeo mane

Heli-Coil: Lon. v. Webster, 352 F. 2d 156 eA ae

gs 1965)/....0:06.5 ee ee ee ty ef

United States v. Abrams; 197 F. 2d 803 (6th Cir. Ge

1952), cert. denied, 344 U. S; 855 cmiceu Ss eee ae

United Statés v. Community Servs., Inc., 189 F. 2d ye

421 (4th Cir. 3 cert. denied, 342 U. S.932'. 8

a

.

Statutes -—_ — :

Section . 16(b), Samui Ricca: Act of. 1934, 48

Stat. 896, 15 U. S. C. 78 p(bJ (1964) ........ 46. | passim

31Ged. Reg. 3391 ee, amending 17 C.F. RR.

240. 16b-9 (1964) EER SON eee D 8; 11

~~

Stira, Denial of Certionsvi® Despite* a. Conflict, 66

Harv. L. Rev. 465 if ois Ea dee ere me Gurwees : 8

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a jae ek CS

+

In THE’ -

* Supreme Court of the Buited States

- Ocrpner TERM, 1966

Tsabore. BLauv, a stockholder of Atr-Way

. InvusTRIES, INC., suing on behalf of him-

self. and all other stockholders ” similarly

‘situated. and on behalf and in the right of J. -

Air-Way Industries, ee , hee s

. ees Gititioner, » No. 720

a US. :

Epwarp Lams and Epwarp LAMB

ENTERPRISES, INC.,

Respondents.

ON PETITION FOR A Waar ¢ OF ie cea, TO THE : Unive)

STATES CourT OF APPEALS FOR THE SECOND CrrcuItT ©

| ®

BRIEF FOR RESPONDENTS IN OPPOSITION -

rf COUNTERSTATEMENT OF QUESTIONS PRESENTED

+ ape

The questions presented by the Petition, although stated

by the Petitioner in the form of five questions, are in aie

. stance only two:

aa (1) Js there any liability wale Section 16¢b) of the ne

_ Securities Exchange Act of 1934 for a-“profit realized”

_ by an insider by reason of the acquisition of -a convertible

security and the conversion thereof within six months where

the convertible security and the security into which ‘it is.

coriverted aré’economic equivalents i in terms of their oppor- :

é - for appreciation in market. valet as

. } 2 |

*(2), Does the acquisition of pecurities mee an issuer, by

_ an insider corporation constitute a “purchase” of the secu-

- rities within the meaning of Section 16(b) of the Secu-—

rities Exchange Act of 1934 where the owners. of 100%

of the acquiring insider corporation. own 97 % of the trans-

. ferring: nent aN :

‘SUMMARY wd BASES FOR OR DENIAL OF: PETITION

-Q) Withyrespect to. ‘the first question, no decision of a -

United States Court of Appeals conflicts with the decision -

in this case. In a similar fact situation, the Court of Ap-

peals for the Third Circuit relied upon a different rationale

in coming to the identical conclusion that-no liability exists. .

Moreover, the decision. below is of limited importance be, .

-- cause the Securities. and. Exchange Commission has now .

.adopted a rule exempting from Section 16(b) all similar, |

, transactions after. the effective date of the rule.

. (2) With respect to the second question, no clean 3

of «a Court of Appeals conflicts with the decision in this

case, and Petitioner does not assert. that a conflict exists.

The decision is limited to the facts of this case and does

not have any broad significance. i

e (3) The decision below as to both transactions was cor-

THE FACTS Sle Pueaek

aN

Petitioner ‘seeks review of the decision of the Court

of ‘\Kapeale for the Second Circuit (a copy of which is at- _

tached to the Petition) to the extent that it held that two’

. transactions (referred to herein as the “Conversion Trans-.

. action” ‘and the! “Transfer Between Corporate Pockets

- — er nyo

2 - a

} 3°

Transaction”) did 1 not aay in any liability under Section

16(b) of the Securities Excharige Act of 1934." . :

1) TH Cunciidiien, Transaction. >

In June 1955 the decision was made. to. ‘combine. Air-

Way indusfies, Inc. (““Air-Way”) with Lamb Industries,

Inc. (“Lamb Industries”). At the time, Edward Lamb -

(“Lamb”),-members of his family, and corporations con-

trolled by them. owned at least 3514% of the outstanding °

_ shares of Common Stock of Air-Way and had five of their

nominees among the seven directors of Air-Way (R. |

A7, 9).” Lamb, members of his family, and corporations

controlled by them owned = %.. of Lamb Industries (R.

A7).

On June 9, 1955, the’ Board. of Directors of Air-Way

approved an offer to the shareholders.of Lamb Industries to

exchange one share of 5% Cumulative Convertible Pre- -

. ferred Stock-of Air-Way for each five shares of Common’ ©

Stock of Lamb Industries (R. A10). The Air-Way Pre-

ferred was convertible at any time into Air-Way Common |

at a rate of 314.shares of"Air-Way Common for each share.

- of Air-Way Prefered. In the event of any stock dividend —

or split-up by reclassification or other method of the shares

‘of Air-Way Common; the number of shares of Air-Way

- Common - into ‘which the shares of Air-Way, Preferred’ |

were convertible would be appropyiately adjusted (R. A49- .-

2).

In ceils with ‘Air-Way’ s offer, Lamb and Edward

Lamb Bate prises, Inc. (“Lamp Enterprises ”), @ corpora- -

< IThe dectaidt below scicied the ‘jeune: of the District Court

‘on all questions: not conceded by Respondents. Petitioner doés not . —

seek review with respect to transactions: other than the two herein

described.

2References are to. pages of the Record certified to. this Court by ;

the Clerk of the United a Court of AO for the Second a3

Circuit. 7 { 5 7 <

-&

OP

es

~ tion 100%’ owned. by Lamb; members of his’ family, and.

_. eorporations controlled by them, exchanged an aggrégate of

- 199,245 shares of Lamb Industries Common for an aggre-

gate of 39, 849 shares of Air-Way Preferred during the

period of July through September 1955.(R. All-12). On

- September 13, 14, and 15, 1955,.Lamb,and Lamb Enter-

prises converted. those 39,849 shares of Air-Way Frere

into Air-Way Common (R. A12).

Petitioner asserted; and Respelidents conceded, that the -

acquisition of the Air-Way Preferred constituted a “pur-' —

_ chase” within the. meaning of Section 16(b): . Petitioner .

asserted that the conversion of the Air-Way Preferred.

constituted a “sale” within the meaning of Section 16(b)

and that a “profit” had been “realized” by Respondents ° :

_. ftom those transactions equivalent to the-difference in the ~

.. value of the Lamb Industries Common’ given in Sedna

for the Air-Way Prefgrred and. the value of the Ai

Common issued upon‘ conversion of the Air-Way Pref tind ms

.The. District Court adopted Petitioner’s theory and held .. -

_. Respondents liable fora “Profit realized” of $1,138, 782. 31.

€R. A41-42). :

On appeal, Respondents pam ye that the conversion

_ did not: give.rise to any liability, on the alternative ~-

— either that there was no “sale” or_that there was. °

o “profit realized”... Becatise ‘the Air-Way ‘Preferred and

ae Air-Way Common were economic equivalents and’Respon- —

dents’ investment was subject to at least as great a’market «

. risk following conversion as prior to conversion,’ there

r

8In the context of Section 16(b),’securities are “ecoriomic equi- °

-valents” when their market vdlués fluctuate on an equivalént basis. —-

The market value of a convertible security; such as. the Air-Way |

Preferred, will fluctuate in direct relationship with the market value -

of the security into which it is eonvertible, except that the market

value of the convertible s will not. fall below. the value of that

security, without the convetsion feature. Thus: the” opportunities for

appreciation are the-same repuilese of which security is‘ held ;. the® - .

on & risk of 1d8s is somewhat ‘greater _ conversion. heen

*% . af . ite ois - ‘ : : ae

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was no opportunity to ootome frei use ff inside inforiaation |

and hence rio basis for: cohistruing the definition of “sale” ..

in, Section 16(b) to covér the conversion transaction; and, .

in any event, since Respondents’ investment position was‘.

identical (except for a{-somewhat ‘greater downside risk)

bef re and after conversion, no “profit” was “realized”. The -

Securities and Exchange Commission if.its amicus brief

in the court below supported Respondents’ alternative ee.

tion that there was no “profit realized”. -

The Court of Appeals reversed the decision of the Dis-

trict Court on the ground | that the conversion of the Air"

) Way Preferred did -not constitute a: “sale”. withip the mean-

ing of Section 16(b): |

uf WwW] e hold that the « economic ae ESB cof the Air-

Way Preferred and the Air-Way Commotiand the .

unchanged investment position of Larfib and. Enter- -

' prises. cornbined to insure that this cofiversion

; - Sonded the insiders no opportunity to réglize a gain

“by. speculative trading in Air-Way Preferred. For-

this reason, we hold that the conversion was not a

Section 16(h), sale of the Preferred.” (R. she

: ey: s Court of ig ne explicitly limited its’ decteion to. the

type of transactions here involved—a purchase of-a convert-

ible genuttcnl and a conversion of that security (R. A92-93)..

P o

ong e ® The Transfer Between 1 Corporate Pockets. ‘Trane

. ae june 6; 1985, Lamb ladustries tranaired to Lamb

' , Enterprises 68,100 shares of Air-Way. €Commofi as part of an

exchange of assets’ (R. A18-19).:The'transfer was treated

: by! the District Court as a “purchase” by Lamb Enterprises

OF the 68, :100 shares, open en though the Lamb interests owned

a J a ae 6

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ey

of

100% of Lamb Seiternitnie and 197% of Said lndosiries.

‘.. The District Court held. Respondents liable for-profits total--

ing $156,229.02 based in part 0 oni or Fal (R, A41-

Pacer near vs

Respondents ‘appealed frdcia that pibeiiestitarion on the

ground, among others, that the transfer. from Lamb. Indus- ,

' tries‘t6-Lamb-Enterprises was-not a “purcHase” by Lamb

Enterprises ‘within ‘the meanjng of Section 16(b). The :

Securities and Exchange Commission in: its amicus brief

'. supported Respondents’ position. The Court of Appeals

. F

teversed and held that the transaction was not a “purchase” |

by Lamb Enriterprises: — yates

“By' virtue of: Lait De pewvasive control 6verIndus-

, -~tries and Enterprises; there was at mast a toker

change in the insider’ S: investment position’ when °

. ‘Air-Way Common: was transferred from Industries ~

_ to Enterprises; Lamb indirectly owned this stock,

‘ ~ Both before'an er its transfer. .Thus Lamb did

- not place hims vhefe he could make any more

tive purposes than he could have before the transfer.

‘Nor did the decision to transfer the Air:Way Com-

mon alter the nature of, his investment, increase or

decrease the amount invested, or piter in any way

_ the risks re ” <a, AF}

“The transfer to Enterprises of the Air-Way Com- pias

mon in no way increased Lamb’s power to make use

of inside information, and for this reason that trans-~ oa

. ° fer was not a Section 16(b) ‘purchage’ -of the

Common. ” set Are) :

6 o Bee: ‘,

advantageous use of inside information for specula- -

.

| ARGUMENT

; L NO CONFLICT, 0 ’ DECISIONS EXISTS. kal

Ae t ‘te the Transfer Between i ae

aysaction. Although Petitioner asserts that the

decision ip Heli-Coil Corp. v. Webster, 352 F. 2d 156

(3d Cir/1965) “conflicts directly with the gape to

the C; aversion Transaction] rendeted below . - .” (Petition,

pag¢ 15), no such conflict exists.

/Heli-Coil involved two separate alleged ‘ ie saeeis® and ‘

fee sles”: (i) the acqui8ition of convertible “debentures and

ye conversion-of the debenturés into common stock within

sfx months and (ii) the acquisition of commori stock upon

-fonversion of the debentures and the sale of the: common

/stock for cash within six months. The first pair of transac-

__f tions in. eh-C oil presented the same question raised by the.

/ Conversion Transaction in this case: The Court of Appeals.

for the b actroend held that no liability existed with re-

spect to the acquisition of the debentures and their conver-

sion within six months. A majority of the Court of Appeals

.for the Third Circuit held that there was no liability on the |

-ground that there was no “‘pgofit realized” (352 F.2d at ~~

167-68), while Judges Hastte. and Kalodner reached the -

_ same result on the Around that the conversion was not a ‘_

“sale” (352 F. 2d at 171-74). The second pair of transac- _

~ tions in H eli-C oul does not have any counterpart in this case.

I. THE QUESTION OF LIABILITY WITH RESPECT To

. THE CONVERSION TRANSACTION IS OF LIMITED ..

IMPORTANCE BECAUSE SUCH TRANSACTIONS HAVE

NOW BEEN EXEMPTED FROM SECTION | 16(b): BY

RULE 16b-9.

The decision of the Court of ao with respect to the |

| Conversion Transaction is of fented importance because

¢

8

the Securitiés:and Exchange Commission has now specifi-

cally exempted from the scope of Section 16(b) all such

_ transactions. Under the last sentence of Section 16(b), the

- Sécurities and Exchange Commission has the power to

_exempt transactions “not compreltended within the'purpose .

of” Section 16(b). Pursuant to that authority, the Com- .

mission adopted Rule 16b-9, 31 Fed. Reg. 3391 (1966), -

“amending 17 C. F. R, 240. 16b-9 (1964), a copy:of which

* is annexed as an Appéndix. That Rule,, effective Febru-

ary 17, 1966, exempts (with certain exceptions not relevant ”

to the Conversion Transaction) ‘any acquisition: or disposi-

-gion of an equity: security upon the conversion of an equity

security into another equity security of the same issuer.

This Court has frequently refused to grant a writ of ©

‘certiorari where-because of a change in the applicable law |

~~ the question involved was no longer significant. United - -

Fie be Statesv. Abrams, 197 F. 2d 803 (6th Cir. 1952), cert. de-

- nied, 344 U> 855; United States v. Community Servs.,

Inc., 189-F. 2d 421 (4th Cir. 1951), cert. denied, 342 U. S.

. 932: Basalt Rock Co. v. Commissioner, 180 F. 2d 281 (9th

Cir. 1950), cert. denied, 339 U. S, 966; Beal v. United

States, 182 F. 2d 565 (6th Cir. 1950), cert. denied,340

U.S. 852;.see Stern, Denial of Certiorari Despite a Con- aes

flict, 66 Harv. L. Rev, 465-(1953) (describing. the above

‘ cases). Those cases all involved clear conflicts’ among.cir--

cuits and several involved : questions applicable to a large

number of pending claims arising” prior to the change of

’ law; neither factor i is present in this case.

IIL. THE DECISION ON THE TRANSFER BETWEEN 1 COR:

_. PORATE POCKETS TRANSACTION IS LIMITED TO THE ~

a _ FACTS OF THIS CASE AND DOES NOT HAVE BROAD

. + SIGNIFICANCE. |

: The decision that the teanider-of shares between Lamb

"Industries (97% owned by Lamb interests) and Lamb

- Enterprises (100% ownéd by Lamb interests) did got con-

BS

stitute a “putchase”’ under Section 16(b) is timited to the

particular fact situation. -The Court of Appeals explicitly

' dined to formulate a general rule (R>A98). Therefore,

there is no “special and important: “reason” pF. this. Couirt

“ee review that decision. 7 °

cy ae THE DEGISION BELOW AS TO. BOTH TRANSACTIONS .

5 WAS CORRECT.

The decision was ‘correct. -In accordance with clear ,

Congressional intent, and contrary to Petitioner’s.conten-

tion (Petition, page 13), the decision below does not require

'. proof in each case that the insider obtained or misused con® .

_fidential information in ordet to establish liability under

Section 16(b). The Court of Appeals held that in deter-

mining whether a conversion is a “sale” within the mean-

ing of Section 16(b) “the question is whether the conver-

- sion facilitates short-term. speculative trading in the issuer’s

. preferred. ” (R. A93) “It coricluded that, because tHe

conversion did not alter the insider’s investment position,

- the purchase and conversion within six months could not

be-used by an insider to facilitate short-term speculation.

The Court of Appeals held therefore that the conversion =~

was not |a “sdle” within the meaning of Section 16(b). :

- Ina rat situation, the Third Circuit in Heli-Coil C orp.

_v-Webster, supra, also held that there was no liability, but |

on the basis that there was no “profit realized”. The Secu-

rities and Exchange ission in its amicus brief sup-

ported the latter rationale. Un er rationale, the :

“result in so far as Respondents are concerne

there is no liability under Section 16(b).* .

The Court of Appeals’ holding that the transfer of an

equity security from a company 97% controlled by Respon-

dents to another company 100% controlled by Respondents

‘Petitioner incorrectly states (Petition, page 12 and footnote 6)

that the Congressional history: shows an intention to include conver-

sions as “sales”, None of the authorities cited. in footnote 6 of the

Petition supports that statement. : aoe

10

“a not a “purchase” is in Seacied with the only other deci-

sién in point, Blau v. ‘Mission Corp., 212 F. 2d 77 (2d Cir.

1954), cert. denied, 347 U. S. 1016, and with the position

taken by the’ Securities and Exchange Commission in its

amicus brief. ney

| ‘CONCLUSION B Mts eee:

Pb.

| The Petition seeks review ; of a decision that (i) is not in .

conflict with a decision of the Court of Appeals of anyother _

* circuit, (ii) in so far as it relates to the Conversion Trans-_

action is of very limited significatice because of the adoption,

* by the Securities and Exchange Commission of Rule 16b-9,

and (iii) in-so far as it relates to the Transfer Between ’

. Corporate Pockets Transaction is of limited significance —

because it-is applicable, only to the facts of this case.

| Furthermore, the decision below on both transactions is.

Clearly correct. Accordingly, the petition for. a writ of

certiorari should be denied.

Respectfully submitted,

ALBERT R. CONNELLY

- RoBERT ROSENMAN

Counsel for Respondents

- Qne Chase Manhattan Plaza ;

New York, New York 10005

. CRAVATH, Swatne: & i

oer ' Of 4 ounsel.

November 7, 1966.

. »

ani

‘ : ‘ S 11 :

Rule 16b-9 Under the Securities: or Act of 1934 sa) Se cE

, (Effective February 17, 1966) .

_ Exemption from section 16( b) of transactions

involving the conversion of equity spourtiiee.

(a) -Any acquisition or disposition of an equity security

‘involved i in the conversion of an equity. security which, by |

its terms or pursuant to the terms of the corporate charter

or other governing instruments, is convertible immediately

or after a stated period of time into another equity security

of the same issuer, shall be exempt. from the operation: of

- section 16(b) of the Act:. Provided, however, That this

section shall not apply to the extent that there shall have

been either (1) a purchase of any equity security of the

class convertible (including a any acquisition of or change in

a conversion privilege) and a sale of any equity security of

_ the class issuable upon conversion, -or (2) a sale of any

'. equity security of .the class convertible and any purchase

of any equity’ security issuable upon coniversion (otherwise

than in a transaction involved in such conversion,or in a

transaction exempted by any other rule under section 16(b) )

within a period -of less than 6 ee a includes the

- date of conversion.

'(b) For the purpose. of this section, an ‘equity neaites

“shall not be deemed to be acquired or disposed of upon con-

version of an equity security if the terms of the equity se-

‘curity converted require the payment or entail the receipt, in

_ connection with such conversion, of cash or. other property

(other than equity securities involved in the conversion)

' equal in value at the time of conversion to more than 15 per-

‘cent of the value of the equity security. issued upon con-

version.

(c) For the purpose ot this section, an equity security

shall be deemed convertible if it is convertible at the option

of the holder or of some other person or by operation of

_ the terms of the security or the governing instruments.

»

3