# Petition for Writ of Certiorari — Blau v. Petteys > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385603_0105%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition for Writ of Certiorari - **Published:** January 1, 1967 - **Citation:** 385 U.S. 1006 ## Text pas Bs ae Pe Of. « Supreme Court; US i ier Pond oe eS ot \ we TTeD =] | Nov 7: 986 im oe Super nt ie ind ie _ OCTOBER TERM, 1966, ISADORE BLAU, .a stockholder of Northwest Airlinés, Inc, . +. | suing on behalf of himself and all other stockholders similarly ~ | bigs and ‘ on behalf and in the . — - Northwest Airlines, Bes te 0 BSS ats i are Petitioner, o | agamst” zs ALONZO } PETTEYS and C. FRANK REAVIS, | a] Respondents. _ PETITION FOR WRIT OF CERTIORARI TO. RAS ‘THE UNITED STATES COURT.OF APPEALS =e FOR THE EIGHTH CIRCUIT -. * . a. nx . . . ; ; “ ‘ . . o Morris J..Levy Counsel for. Petitioner, 261 . Broadway, New York, N. Y.. 10007. « ap ae LO SDT ae ee Stee | SHANDELING, Pussimes Gross & AARON, Of Counsel, eee e- an | _ Blau v. Lamb (C. A. 2), unreported; Ratner for writ: Ae Blau v. Lehman’ (C. A 2), 286 F. 2a 786, afd 308 U.S. 408 E - Booth v. Varian sutiatés Ine. Uc. A b, 334. F. * Conclusion ee ee eh eeeee we : 14 * Quistions Presented. Sie Review aie g sith. SuGestt fh. vit 2 | Statutes og BERET DOPE NR Gone fice ES Stateeicat of Meote 0... es. eieesesseetepeen/ B. Reasons Relied on for Granting the Writ'......:...+ S fale f 7. 2 x : és gts Ke ees “The: crt alerw en decided an eae. ques: Se ere tion of Federal law contrary to the express statu- - auc tory language and its, legislative tery. and con- ae , Seay to. or ag eumsragrti decisions . oS ee Na I—The decisis’ by bythe Court’ below in in direct com- one Dey - flict withthe decision rendered by. the _ Court of 5 Appeals for the Third Circuit ae eet See ne Anke % 7 — % A Ta, oe . cet ‘ eee Tanu oF Cases | B. T. Babbitt, Ine, v. Lachner (C. A. 2), 332 F. 2d 255 Bae ‘ of certiorari No. 720 pending before Supreme net ‘Court of the United States ... sete ceene cesses 12... OM PHA WES ih TST ES a Pen au ey Ne eR Tee , - a Sis _ > . ‘ a o ‘ J a 4 ae oo x i “ aaa Soe ii INDEX ee a : - Werbaiolo ¥. ‘Newman (C. A.-6y, 359 F. 12a U2 oo q ee _ * Gratz v Claugh A. 2), 187 F. od 46: a 8,9 ; -‘Heli-Coil ‘ TP. v. Wehster (C.. A. 3); 352 F. ‘2d , a ee at os ieekubetectsbbercosws iecvekeke we 10 og 6y 8, 12, 13 ths Raa NS ae Park & Tilférd, Ine. Schulte (C. A. 2), 160 F. 2d 984 ~ 8. fost Res Gar Smolowe v: Delendo — seit A. 2), 136 F. 2d 231 8 e 4 naa : hk | | Srarures. Sa6 Ts 7 ‘ " Securities ‘Exchange Act ‘of 1934: @ f E Bey (Ri 18a-19a, 70a-72a, 97a-98a).. The district court held that the respondents’ respective acquisitions of the com- = mon stock through their voluntary:.conversions of the - Preferred constituted ‘‘purchases’’ of the common shares .° ** ander the. language and. meaning of ‘Sections 3(a) (13) : -and 16(b) of the Secgrities ‘Exchange. Act of 1934. . It _ further held that since the tesponderits had sold the com- mon sifares of. Airlines less than six months after: their ‘purchases’? of such stock, any profits ‘realized from these | _ transactions were recoverable from the respondents under the applicable provisiens of Section, 16(b) of “the .Act. . Accordingly, the court granted a sumrhary judgment; | against the —— in the aggregate sum + — 56 (R. 114a-125a). ‘ In accordance with the order granting ite Sg the Securities-“‘and Exchange Commission thereafter’ filed. . its amtcus curiae memorandum with the Court of Appeals» in support of the district. court's judgment: . The Court of a dissenting opinion by Judge Blackmun. Instead of applying the literal language of the statute ‘ and its “‘objective’’ approach. with respect to the stock — ex conversio}s, the majority of the Court ‘applied a ‘“‘sub- jective’’ test under which it concluded’ that the respond- e common stock through their con- versions of the Prefe ‘‘purchases’’ of .the common shares because such ‘trans- actions allegedly. ‘‘could not possibly have lent itself to the speculation encompassed within the purposes .of Sec-. tion 16(b) of the Act’’ (R. 18, Appendix, infra, p. 42). » ‘The dissenting opinion held,.on the other hand, that the _ express language of the statute and its ‘‘objectiwe’’ ap-— plication required that the respondents’ acquisitions of the common shares. be construed Section 16(b) ‘ price : rer decisions. - The stated purpose. of ‘Section 16(b) of the Securities Exchange Act of 1934 is ‘‘preventing the unfair use of in- © : * : ; ‘ . Ph 8 EIN eee SE - ‘. > a) 8 ; : side information which may have heen’ ebieanea ‘i. such beneficial owner, director, or officer by reason of his: rela- tionship to.the issuer.’’ The statyte imposes liability upon ’ such ‘‘insider’’ for all profits realized by. him from his - purchases and sales ‘of his issuer’s equity securities within less than six months, ‘‘irrespective of. (his) intention in .. entering into such transaction of holding the security pur- — chased or of not repufchasing the pee e sold for a period exceeding six months.”" : - The statutory einen as ae as its legislative eae: clearly demonstrate that the insider’s liability was.intended” to be predicated solely upon an objective test which would require: no proof that the insider actually obtained any confidential 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 the statute would be so ectaaptinted as to defeat its whole 2 1 The: aie statutory provisions are set forth in the Appa, _ infra, p. 37. -- *The operation of Section 16(b)‘v was explained by Thonias G. Corcoran, the Administration’s spekesman at the bentings ~— led . ~ to its adoption, as follows: . “That is to prevent directors receiving benefits of tau -tenn . Speculative. swings on the securities of their own 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 absolut 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 having. to prove that the director intended, at the time he t, to get out on a short __. swing.” . Stock Exchange Practices, Hearings Before the Senate Committee on Banking and Currency, 73d Cong., ‘1st Sess., pt.. 15 (1934), pp. 6463, 6557. Ne Ferraiolo v. Newman (C.. A. 6), 259 F. ‘2d 342. @o ae a ate 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.’ ‘s 7 TheCéngressional hearings saeaadiiae the enactment of Sectién 16(b) of the Act had disclosed that options, con- versions and similar devices lent themselves quite readily . to abuses’ involving unserupulous short-term trading by, corporate insiders. : In order to close off this avenue against active insider abuse, Congress expressly broadened the ordinary defini- tions ‘of ‘‘purchase’’ and ‘‘sale’’ to include within their scope Mh contract to buy, purchase, or otherwise ac- quire’, and ‘‘any contract to sell or otherwise dispose eee ; In most sosiiaicess where an jaadee has aiaioati con- verted his: issuer’s convertible securities the courts have generally applied such statutory definitions to.the trans- ry -- action involved by construing the conversion to-be-a Sec-— _”_ tion 16(b) “purehase-or a “sale” * By expressly eliminating all considerations with ieapionk.. to-the insider’s, subjective purpose in effecting his short- Swing. minalas i eechau clearly evinced its intention ; Sa ae ” Blaw y. Lehman (C. A. 2), 286 F. 2d 786, aff'd 368 U. S. 403; a T. Babbitt; Inc. v. Lachner (C, A. 2), 332 F. 2d°255; Booth v. Varian Associates, Inc. (C: A. 1), sages; Hel saad Corp. v. Web- ster. (C. A. 3), 2 F, 2d 156. | -o that the provisions of Section 16(b) should be applied automatically to such transaction without prior inquiry as to its fairness or its susceptibility to the statutory evil, ‘*even though it may cover instances where it Ate evil) hal mot present.’ Such purposeful simplicity in the statutory Salitleia was intended to operate as one of its greatest deterrents © in discouraging the insider from engaging in short-term speculation in his issuer’s securities and his possible mis- use of inside information in connection therewith. In order. -not to envelop the execution of the statute in a morass of factual and legal issues which would tend to vitiate ‘the simplicity of its operation and destroy its. effectiveness, the ‘statutory application demanded ‘‘the necessity of hav- - - ing a general rule’”® to be applied alike in all cases, ex-— -cept in those instances where the Commission by rules and regulations may have exempted the transaction as “‘not - comprehended within the urpere of f this subsection ( See- — fon T6b)’. 9 Although in its set opinion nh Court of Appeals seems to have conceded that the. respondents’ acquisitions 7 of their common shares through the.conversions of:the . Preferred constituted Section 16(b) ‘‘purchases’? under . the express statutory definition of that term and ‘‘within - the literal boundaries.of the Act”’, it refused to follow such - an objective and literal ebproach ‘to the. problem, But as Judge Blackmun so aptly pointed out in his’ dis- . senting opinion,” ‘‘* * * either the sainte means what it . a . . Ps ts cs : ae _ * Gratz v, Claughton (C. A. 2), supra, at page 50. * 1©“Yoy thave to have a general rule. In particular transactions it might work a hardship, but those transactions that are a hard- ship represent the sacrifice to the necessity df having a general rule.” Hearings on Stock pagal Practices, supra,, fate » at P. 6558 (testiniony of Corcoran). *: Appendix, infra, p. 33, ° ie eee e a 10° . literally says or that it does not; that ifthe Congress in- _ tended to’ provide additional exceptions (to the statutory ae application), it. would have done so in clear language; and tHat the recognized . purpose and aim ‘of the statute are more egnsistently and: protectively served if the statute is construed literally and objectively rather than posebenelly: and subjectively on a case-by-case application’, —-- dn discarding such an objective atid Literal Giploach : clearly intended by the ‘Congressional mandate, the major- ity of the-Court chose instead to substitute a subjective test to the transactions involved by examining all the- sur- rounding facts to determine whether the respondents’ con- - versions were susceptible to the abuses against which Mw ‘Section 16(b) was designed. It laid down the rule that ‘Seach éase must be examined on its:own facts and the Act ‘ only applied when these facts disclose the possibility of. abuses that the Act were designed to prevent.’*? Applying such a subjective test, the majority concluded that the re- spondents’ acquisitions of the common shares did not con- stitute Section 16(b) ‘‘purchases’’ because their conver- - _ sions of the Preferred stock allegedly were not susceptible . to the statutory abuses. go We believe that’such a narrow, restricted view of the . ~ statute’s application is erroneous, illogieal and completely ‘reptignant to the. legislative intent because the history and ra express language of Section 16(b) clearly indicate that - \| . Congress intended ‘to eliminate such a subjective test on a case-by-case basis.. For under such a test the applicability. _ of ‘Section 16(b) toa particular short-swing transaction / a \as ways remain uncertain and nebulous and dependent - ; proof of factual issues, which would completely . st | t} oy the intended effectiveness of the statute and «its sufe and, speedy’? remedy. . Moreover, if the Courts were permitted to ee a sub- : si test upon a casé-by-case basis to determine whether « é y . * ae . ™ ee 8 ok % eo” * . ry ; P a A ‘ Fs) | = / ‘ : ’ % o / . ’ ° ° e . ° y ’ . 14, 1963, the a had calahailg "449 615 shares of. preferred stock. and 1,388,459 shares of common stock. _ The common and preferred stock were listed and traded on the New York Stock Exchange; and the preferred. stock was protected against dilution: resulting from the issuance’ of additional common stock. The preferred and common stock © each had one vote ‘per-share. Petteys had been a . director since 1945 and Reavis since 1952. The preferred stock was convertible at. any time on-the hasis of $25 for éach: preferred share into common stock at a conversion price of $26. for each common share pine accrued dividends prior to Jan ‘1, 1964. .At.a meeting of the Company’s board of “aikectore on January 14, 1963, it was unanimously decided: that the - . . elimination of the preferred stock was desirable since - ‘.. this would place’ the Company in a‘ more advantageous . position to seek new capital. It was, therefore, unani- mously decided to call for redemption of the preferred ' shares at $26.161815 per share on the entire outstanding issue ($26 redemption price plus accrued dividénd).: Both : =. Petteys and Reavis were present at the directors’ ineeting. - The matket value of the preferred stock on this date was . $34 per share, or about $8 more per share than the re- | demption price. The common: stock of the Company at that time was selling for about $36 per share, which was ; approximately equal -to the conversion rate of 9615 of: common per share of preferred. Due to this ‘wide differ- © ence between the market value of the stock and the re-. demption. price, it was believed that the preferred share- holders. would exercise their rights to convert their pre- — ferred shares into common prior. to the redemption date of February 14, 1963. ‘This jidgment proved to be correct __ in that 99:98% of all the preferred shares were. converted. ae _> Only 70‘shares were not coriverted. _ On January 17, 1963, when its ecik: price was .ap- - ey: $35 per ‘share, sera eonverted his 5, 000 a° .* yp 18 Opinion, — ‘shares of preferred stock for. 4, 808 Dias of common stock. Less than six months .after the conversion (be- tween May 20 and June 18, 1963) | Petteys sold 9,808 shares of .common stock at prices ee from 51 to 55% per share. - Reavis sieiaiee his 1 467° shares of preferted. stock | omJanuary 31, 1963, when the market value was approxi- , mately. $38 per share and received therefor 1,123 shares of ‘common stock. Less than ‘six months later (June Dy 1963) Reavis 8dld 1,600 shares of common stock at prices ranging from 531, to 535@ pershare.. - * On February 25, 1963,’ eleven days after the terminal date of the redemption call, the board of directors in- ~ - ereased the quarterly djvidend on its common stock from .20 cents to 25 cents per share; After the increased divi- * -~-dend,, the market price- “of the common stock increased ae -—-gubstantially.. The Minnesota’ suit, Number 18277, was filed July & 1964, in the District. Court by Petteys and Reavis, seeking a. judgment against the Company. to the effect that these transactions were not proscribed short-term profits making ) them accountable therefor to the Company under :§ 16(a) and (b) of the Securities Exchange Act. On July 8, 1964, Eunice S. Butler, a stockholder, was granted leave to in- tervene to seek judgment on behalf of the Company. On July-14, 1964, the Company filed. an answer, stating, ‘‘It:: is and has been unwilling to institute or prosecute an action against the plaintiffs.”? Qn July 17, 1964, Isadore Blau, another stockholder, instituted an action’ in the United States District Court: for the Southern: District of New. York against Petteys, Reavis and the Company, alleging a §16(b) liability of Petteys and Reavis to the Company. The New York case: was -then transferred to the District of Minnesota. Both cases were combined for ‘s hearing on cross-motions for summary judgment. Sum- i WSs o . ae 19. | Opinion, ‘mary judgment was is apprSpriate as the facts were not in _ dispute. '’- The District Court denied Petteys’ and Reavis? shclhcne’ granted the motions of intervener, Butler and plaintiff Blau, and held, in an opinion reported at 246 F. Supp. 526 ‘ (B. Minn. 1965), that the conversion of the preferred stock into common stock constituted a ‘‘purchase’’ within the meaning of 4 16(b), and therefore Petteys and Reavis were liable to the Company for profits derived from the sale - of the common stock within six months after the date of **purchase’’ or conversion. Petteys and Reavis contend that the conversion of pre- _ ferred stock into common stock under’ the particular facts of this case was not a ‘purchase’? within the meaning of §$16(b). : Petteys and Reavis, as ‘directors, are ‘‘insiders’” under . §16(a) and subject to the requirements of §16(a) and the civil liabilities of § 16(b). The only question remain- ing i ther their- conversion of #preferred stock. into conimon stock constituted a purchase of the common so that the subsequent sale of common within six months . thereafter would make them liable to the Company for ‘any profit realized on the sale transactions. The fact that Petteys and Reavis had other common stock, purchased prior to the periods in question, from which their sales. were, or'could have been, made i is ‘immaterial. . " 'b“Tusiders” ag denoted in’ cases end atticlts ‘dealing with § 16(b) are those who are ogi to report under § 16(a) any sale or pur; -_— of stock, and are subject to the sanctions of § 16(b). They are: “16(a) Every person who is directly or indirectly the beneficial. : seule of more than 10 per centum of any class of equity secur- ity * * * or who is a director or officer: of . the issuer of such security, ogee ® Although it is not clear whether the shares sold were the same ' certificates acquired in the conversion, this point is immaterial. - (Footnote continued on following page) et: Q ae . The reasons for the enactment of the Securities Ex- . "change Act of 1934 and the specific purpose.to be served by $16(b) are fully documented and examined in prior §16(b) cases discussed in this. opinion, and will not be . repeated in. detail here. In summary, congressional in-—— vestigations in the early. 1930s disclosed sed a.number of in- | ; stances in which ‘‘insiders’’ of corporations had abused — their fiduciary positions by using confidential corporate information to aid their pérsonal market, activities. Armed with information not available to ordinary stockholders, these ‘‘insiders’’ brought about artificial, but predictable, — fluctuations in the market and, in so doing, were able to. reap substantial profit with little or no investment risks to themselves—all at the expense of outside stockholders | and the public. This manipulation and ‘‘sure thing’? specu- -— lation discouraged valid investment and contributed “tot the causé and depth of the economic collapse of 1929. >’ Congress, therefore, set out to remedy this particlar evil -. with*$16 of the Securities Exchange Act of 1934.* Section 16(b). of the Act was enacted expressly ‘‘for the purpose of preventing the unfair use of information © which may have been obtained by such beneficial owner, . director, or officer * * *.’”? To implement this statement ( Footnote continued from preceding page) Equity securities ‘are treated as fungible. items. “(S)ince all shares | of a corporation’ s stock are alike and interchangeable, it is of no © * consequence whether . those bought and sold are represented pre- . ferred stock was not readily marketable and was not pro- tected from dilution. Thus, it’ maintained a value ‘inde- ’ pendent of the common. As the.‘‘insiders’’ were able to - get a call date at their will, they were in a position to use + 1965). 23 _ Opinion. | | inside information to determine this call date and to ma- nipulate the independent values of the two securities to their profit. The court, however, in reaching its correct _ decision on the facts, uséd language unnecessarily broad. — - Loss, SECURITIES REGULATION, Vol. II, Ch ~ 6E(8), ~ at page 1067 (2d ed. 1961). This language has gine been: interpreted as meaning that §16(b) must be applied to all stock conversions and the strict terms of the statute are to be applied without regard to the purposes of the _ Act. See, Helt-Coil Corp, v. Webster, 352 F. 2d 156 (3 Cir. Though understandable, this was eachihie: an ‘tenvest interpretation to place on Park & Tilford, in that the Second Circuit, which has more §16(b) cases than any other circuit, has since refused to follow the broad implica- tions of that case. Since Park & Tuford, the Second Cit- cuit has examined each case on an ad hoc basis to, deter- mine whether the transaction came within the ‘purpose of .the Act.’ It specifically refused to be bound by a “‘black- letter rubric’? or a ‘‘rule of thumb’’ as spits & .Tuford supposedly demanded. : In Shaw v. Dreyfus, 172 F. 2d 140 (2 Cir. ‘{949), eert. denied 337 U. S. 907, the Court refused to hold that the — receiving of a stock purchase warrant which was awarded | equally to all shareholders was. a ‘‘purchase’’ within the definition of the Act: The Court based its decision on the fact that; ‘¢ ‘inside’ information which. the directors ‘may have, cannot possibly be used to the detriment of other | stockholders * * *. Nor will the purposes of the statute be defeated * * *.” : Roberts v. Eaton, 212 F. 2d 89 (2 Cir. 1954), a denied - 348 U. S. 827, held that a reclassification of stock was not a ‘‘purchase’’ of the new stock. Judge. Clark, the auther of the Park ¢ Tilford- decision, stated at page 86, ‘‘The _ reclassification at bar could not possibly lend itself to the - Onini speculation sieibieinanel by § 16(b). This being SO, it was not a ‘purchase’ * * *,’? _ Even though ‘the Court; in Blau v. Lana. supra, held that a transfer came. und¢r. the provisions of § 16(b), the _ . Court stated at page 792 that 4, “‘Transaction is a ‘pur- chase’ if in any way it lends itself to the accomplishment _ of whatthe statute was designed to prevent.’’ | Though. establishing a general ‘approach contrary to the — implications in Park ¢ Tilford, these three cited cases did. not involve the sprecise question of the treatment of con- versions. Park ¢ Tilford was still cited for.the proposi- © tion. that conversions must flatly be considered ‘‘pur-. chases’’, without further inquiry. This was true, however, only until the\ recent Second Circuit case of Blau v.-Lamb, . F.2d. (2-Cir. 1966). The Court there was pre- sented with a » problem of whether the conversion of pre- ferred stock into common stock constituted .a ‘‘sale’’ of : - the preferred.’ In. determining the correct approach for : | pened this issue, J page: Waterman, for the Court, stated : te. ‘“ Aside from the settindtons to the site in Park ~ 4 Tilford, our court appears always to have. recog- nized that in deciding whether’a certain transaction _ ‘is a Section 16 (b) ‘purchase’ or ‘sale’ it is relevant -©° to first consider whether the transaction in any way makes possible the ie insider trading that Section s 16 (b) was designed to prevent: * * * The applica- . - - tion of Section 16 (b) depends upon whether the trans- . action in question could tend to eo what the . _ fe st was denigued to prevent.” -In ioiskinig at the particular circumstances of the conver: . sion, the Court concluded : ‘ (The) vonversion afforded the insiders no oppo ss nity to ‘realize a gain by speculative trading in Air- an en ERAN ns nee cee ae oR eee way Preferred. For this reason, we hold ‘that the ‘conversion was not. a Section 16 (b) sale’ of the Pre ferred.’’ rs | With. this casé the viieeill Cirouit limited Park & Tilford _ to its facts and completely destroyed any force found in the particular. language of that decision intimating that a >: completely objective ‘‘role of thumb”’ had, to be applied ,. in all-conversion caseg.. The Lamb opinion relied heavily — upon Ferraiolo v. Newman, 259 F. 2d :342 (6 Cir. 1958), — cert. denied 359 U. S. 927, and Blau v. Max Factor é Com- pany, 342 F. ‘ma 1965), cert? denied 382 U.-S. 892. Judge Wate after reviewing the decisions, con- cluded that: yak gana a ‘The | decided cases in this and other circuits es not. . require us to-hold that, without further analysis, the conversion * * * must be regarded as a Sec, 16 (b) ‘sale’. * * * Instead, most-of the appellate decisions, _.. inefading the more receiit decisions of our court, state _, ’ & that the application of Section 16(b) depends upon. _ whether the transaction in question could tend to ac- — complish what the section. was designed to prevent. th : ilies see J udge Van Oosterhout ’s dissent in part in Western Auto Supply meet v. Gamble-Skogmo, ps 348 F. 2d 736, at 745. é The facts in the Ferrailo case are almost exactly in point ° with the facts.of the case at bar. A non-controlling director held’ convertible preferred stock. While the market was a" high the corporation éalled for a redemption at a price below the market. The director, of course, converted his . preferred into common and, as here, sold the’ common within six months of the conversion. The Court stated, , at page 345, “Every: transaction which can reasonably be . defined as a ’ purchase will be so defined, if the trarisaction — \ mas a , 2 oN oe : $ 1 J 4 jf , ~ ¢} \ . a : ,» : — Opinion. ‘is of a kind which can possibly lend itself. to the speculation’ encompassed by Section 16 (b).’?: In examining the con- - version on its particular facts, the Court concluded, at ~ p. 346 of 259. F..2d, that it was not a purchase because; ‘‘Newman’s conversion of Ashland preferred to Ashland... a _ common had none of the economic indicia of a purchase; it created no opportunity for profit which had not existed since 1948. The transaction is not ene that could have lent | - itself to the practices which Section 16 (b), was enacted to _ / prevent.’’ : 4 Blau v. Maa: Factor, supra, coneorned a situation where ' thé insider held common stock which was in every” way ‘identi@l to Class A stock éxcept the board of directors had the authority to declare less dividend on the common. Each-had the same market value, same voting power and were fully convertible. The.insider, converted his common - for Class A and. sold the Class A, within six: ‘months. The Court held, at pages 307-308 of 342 F. 2d: “¢(A) Transaction is held to be a ‘purchase’ within s - section 16(b) ‘if.in any way it, lends itself to the ac- ~ complishment of what: “the. statute is designed to pre- “ vent.?* * * E . The qachange of Class “A for Common did not, interrupt the continuity of appellees’ investment: it did not increase or decrease the amount’ invested, or alter in. any way the risk assumed * * *, (T)he ex- _ change conferred no opportunity for speculative profit ' which ee did not already enjoy.’’ These bik cases eitined to apply a “rule of ‘hina id ; examined the facts of the case in the light of the purposes ‘of the statute, and in each case. concluded that the par- ticular conversion did not constitute a ‘‘purchase’’ because there'was no opportunity for speculative profit. There 4s no doubt-that the majority in:Heli-Coil Corp. v. Webster, supra, takes = epproa and reaches a result S o é | hi ° a Ppa iter Shon pe J A ae eae et ‘Opinion, | ‘ z ft ; : OO o hess inconsistent with the aforementioned ikek H eli-Coil y pressly holds: ‘“We conclude that Section 16(b). does aut .. up a ‘rule of thumb’ and was intended by Congress to do. | ie precisely that.’’ p. 166 of 352.F. 2d; but that is, however, & at present a minority ruling and is founded almost solély ‘ upon the rationale of Park & Tilford. ‘Since Park & Til- ford has now been severely limited by the later Speond Fe “Circuit decisions on this issue, we cannot refrain {xb ‘belief the Heli-Coil-is likewise weakened. ye. ; ‘Our decision in Western Auto. Supply? ompany Vas . .Gamble-Skogmo, Inc., 348 F. 2d 736 (8 ‘Cir: - 1965), cert. denied 382 U. ‘987, was interpreted by the S.E.C.. as in- - dicating that w adopted the so-called Park & Tilford - objective approach to § 16(b)“problems. Obviously, the facts of the two cases are not analogous, . Even so, we ; ‘find no dictum inconsistent with our holding herein. We held that the statute must. be ‘liberally construed’ tocarry °.-. out the express legislative policy”’ and that the good faith of the insider is no defense. This is a correct statement -of the law that we will continue to. follow. We certainly did not hold in Gamble-Skogmo that the statute must be _ literally applied even when the ‘‘express legislative policy’’ was not applicable to the faétual ateehign under vanarmnnind * tion, bya majority of the circuits, that each case must be ex- amined on its own particular facts. If, from an examina- tion of the particular facts, a transaction ts of a kind that. ; can possibly lend itself to- the speculation encompassed by § 16(b) “and falls within the broad definitions ‘of ‘‘pur- chase’’ and ‘‘sale’’, it will be so defined. However; if an .° - examination of the facts indicates that there is no’ possi- bility-of abuse, there is no need to apply a §16(b) label: to the See: ~~ Comment, 59 Yale L. J. 510 (1950) ; ; ‘Therefore, notwithstanding the broad entenee: in the : ’ Park & Tilford case and the ruling in Heli-Coil Corp. v. Webster, we believe the rule has been clearly established |. a 9 é . _ wr . ' _, Opinion. " “Loss, pare & REGULATION, Vol. TI, Ch. 6C(g), at pages 1069-1070 (2d ed. 1961); Cominent, 45 Va. L. Rev. 124, 126 (1959). ee | A facet to ooneider as ‘milftating against paititing every 7 conceivable conversion. witlt the same broad brush, ‘Te- - gard&ess of the lack of opportunity for short-swing market. ‘manipulation, is the manifestly absurd and unfair result that can flow from such a per se black-letter rubric. As noted by Loss, supra, at 1068: ee a ‘*As a matter of fact, if every conversion involved ; both-a “ purchase’ of common and a ‘sale’ of preferred, - no director or officer. or 10. per cent beneficial owner éould ever buy preferred or sell common. in the market - next six months would subject: nate to liability.” 16 € > The conversion ‘trefenotions nate ‘besa : ‘variously a ferred to as ‘‘statutory purchases,’’ Blau v. Maz Factor, supra, and ‘“uhorthodox ‘purchase and sale’ cases.’? See Loss, supra., They.are not true’ sales but represent a type «| ae of exchange of equivalents that can be read’ ‘into a literal interpretation of the § » 16(b) ‘language of “otherwise ace quire”? and ‘otherwise ¢ dispose of”’. Undoubtedly, Congress realized that with shh all-inclu- sive definitions there would be situations in which the definitions would be applicable’ yet the transactions would be of a nature that was not comprehended as being within Be “the purposes of the Act. : -Congress specifically gave au- * thority to make this determination to the Securities and Exchange - Commission so that an administrative inter- pretation could facilitate enfotcement of the Act and yet. prevent undue hardship on fhose ‘caught in ‘the web of a . vinced that this authofity is the exclusive prerogativ "*.. Gategorically broad proscription. _ We have not been a f | the S:E.C. and is not also subject to. adjudication by the oe courts. Courts have Ate been, and should be, reluctant’ sete ae J $e ce sd, =” be Ay. te 99 Si a Opinion: | _ tovimpose broad stautory rules that-result in ‘gunposslees Ryne and , unnecessary harshness. When the reason-of the law ceases, ‘the law itself ceases (to operate), is a well-known and time-proved rule of construction that is appropriate ’ in this case. Cessante ratione’ legis, cessat et ipsa lex. See Blau v.,Lamb; supra. Since the purposes of the Act ~ are stated clearly ‘and appear side-by-side with the literal demands, we do not believe we haye been: precluded by Congress from pursuing an equitable and historic role by examining the facts of each case herein. The conversion of the securities thus did no{con- . stitute a ‘‘purchase’’ within the meaning. of the statute, and appellants, Petteys and Reavis, consequently are not liable for any profit received by a subsequent sale. The retroactivity of this new rule is thereby rendered a moot question. ~. The preferred stock held by the two directors was-fully marketable and listed on the New York Exchange. It was _ protected against dilution, had equal voting power, was fully convertible and’ at all times maintained a market _ value. equivalent to the common. The conversion did not increase or decrease the amount invested, -change the pro- portion of. ownership, affect voting rights, or substantially _ alter the risk assumed. Blau v. Max Factor, supra. - Thus, .. ‘it appears to us that the common-and preferred are truly _ - “économie equivalents’’ in which speculation from: their | :* | gs he 2 e “31 * Opinion. conversion would be virtually impossible. Ferratolo v. ‘Newman, supra; Roberts v. Eaton, supra. In facing.a call of the preferred, if the directors ound . to maintain their investment, which they had: every right ~ : to do, the only course open to them-was a conversion. Unlike Park & Tilford, where the controlling directors unilaterally decided to_call the preferred and themselves ‘' established the call “date, the directors herein were ae are These causes came on to be heard’ on the sane from’ the United States’ District Court for the District of Min- -- nesota, and were argued by counsel. . Qn Consideration -Whereof, It, is now fete. Ordered - and Adjudged by ‘this Court that the judgment of the said District Court in these causes be“and the same is hereby, _ reversed with costs, and that Alonzo Petteys and C. Frank Reavis have and recover against Eunice S. Butler; North- west Airlines Inc., and Isadore Blau the sum of . ~ ' Dollars for their costs in this behalf expended, and have. execution therefor. - And it is further Ordered by this Court that these "causes be,. and they are hereby, remanded to the said © District - Court with instructions to grant: judgment in ~ favor of appellants, Alonzo Petteys and C. Frank Reavis, in accordance with the weeny opinion of this Court this | aay filed herein. "October 1, 1966. A ot ea AN he are a at ne Rt COMMIT Nt ec i bt aes . > Sections 16(a) and Section \(b) of the Securities Ex- — change Act of 1934, 15 US.CA., Sects. ‘Tp(a). and — T8p(b), provide as follows ; te ~ : (a) Every person who is' diredtly or indirectly 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 registra- tion of such security on a national securities 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) di- rector, or officer, a statement with the Commission — (and, if such security is registered on.a national se-, curities 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 close of each calendar month thereafter, if there has been a change in such ownership during such months shall file with the Commission (and if such | ‘ security is registered on a national securities ex- change, shall also file with the exchange), a statement indicating his ownership at the close of the calendar - month and such changes in his ownership as have occurred during such calendar month.”” .“*(b) For the purpose of preventing the unfair 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 an exempted security) within any period of less than six - months, unless such security was acquired in good | * f Y eee ya tatutes. | faith i in connéction with a debt previottsly contracted, , Shall inure to and be recoverable by the\issuer, irrespec- . tive of any intention ‘on the part of such beneficial - ° , owner, director or offer in entering into such transac- . tion of holding the security purchased or of not repur- chasing 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 juryisdic- — tion by the issuer, or by the owner of any security of the issuer in the name and in behalf of the issuer if the issuer shall fail or refuse to bring such suit within sixty days after request or shall fail diligently to prosecute _ the same thereafter; but no such suit shall be brought more than two years after the date such profit was real- ized. 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 trans- action or transactions which the Commission by rules — and regulations may exempt as not. _—e within the purpose of this subsection. ” “Section 3(a) (13) of the Securities Excienge Act of. _ 1934, 15 U.S.C.A., Sect. 78e(a) (13), provides as follows: «The terms ‘buy’-and ‘purchase’ each include any contract py y; panshase, or otherwise acquire. - ' Section 3(a) (14) of the Securities Exchange © Act of 1934, 15 U.S.C.A., Sect. 78e(a) (14), provides as follows: -‘*The terms ‘sale’ and ‘sell’ each include any’ contract to sell or otherwise agents 'e « he ~ pez --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385603_0105%3A1. Public record. Not legal advice.