Opposition Brief — Tristar Corp. v. Freitas

beste

Siew

| NOV 13 1996

No. 96-577 OFFICE OF THE CLERK

— IN THE

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1996

TRISTAR CORPCRATION,

Petitioner.

Vv.

ROSS A. FREITAS and CAROLYN SAFER KENNER,

Respondents.

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

BRIEF IN OPPOSITION OF RESPONDENTS

BRIAN D. GRAIFMAN, Esq

(Counsel of Record)

CHASE A. CARO, Esq.

CARO & GRAIFMAN, P.C.

60 East 42nd Street

Suite 2001

New York, NY 10165

(212) 682-6000

Counsel for Respondents

— Weigh Wik f a, ‘ 3 we 2

Pee ee ge . fa wt iii

CORRECT DENOMINATION OF NAMES

Respondents, defendants below, are Ross A. Freitas and

Carolyn Safer Kenner (incorrectly spelled Caroline Safer

Kenner on the cover of Petitioner’s petition).

Each of the respondents join in this brief in opposition.

Respondents’ attorneys below (following Respondents’ pro-se

representation) were Caro & Graifman, P.C., by Chase A.

Caro and Brian D. Graifman (incorrectly denominated by

Petitioner, compare Pet. App. 2. with 84 F.3d 550, 551 (2d

Cir.), reh'g denied (1996)).

il

TABLE OF CONTENTS

Page

CORRECT DENOMINATION OF NAMES ......... i

TABLE OF GEAVERINUS 5 crs ki sen ae eee ii

FABLE OF ALFTICNREAGe 0s ee cies as Coke ill,iVv

COUNTER-STATEMENT OF THE CASE ......... |

ARGUMENT IN OPPOSITION TO ISSUANCE OF

WRIT OF CEREMAGAE (oho Fe ae des 6s ke 5

I. Tne “OOREIOE” WE CUES oo oe bh ero 5

I]. The issue is not an important issue of federal law that

must be decided by this Court ............. 7

Ill. | The decision below is consistent with congressional

intent and not inconsistent with any decision of this

CONE a AVRO ee ee eee 7

IV. The issue of dates of the matchable purchases and

sales is not properly before this Court because

petitioner failed to raise it before the court below on

appeal, and in any event the issue is irrelevant to the

IIT ok 6.05 6 CERNE OER ee 10

UINCLARGINAS 04 0s 8 a 4K ORES PRESS BO 11

iil

TABLE OF AUTHORITIES

Case Law Page

Cada v. Baxter Healthcare Corp., 920 F.2d 446 (7th Cir.

Seren Faces ons gin eth oy boa ae b ee be aA ae 8

Foremost-McKesson, Inc. v. Provident Secs. Co., 423 U.S.

Pe ee CO ci Sas KEG eee REN RR RUE Cee) ¥S l

Hardin v. City Title, 797 F.2d 1037 (D.C. Cir.) ...... 7

Lampf, Pleva, Lipkind, Prupis, & Petigrow v. Gelbertson,

EE oye 6 bao ae a WS OU Re KA hea 9

Tristar Corp. v. Freitas, 867 F. Supp. 149, E.D.N.Y.

PS eee KK SPA he CARS eke DARED 3

Tristar Corp. v. Freitas, 84 F.3d 550, (2d Cir.), reh'g denied

te ee a ene CaaS bad kD CREE Sf 4.5.10

Whittaker v. Whittaker Corp, 639 F. 2d 516, (9th Cir.), cert

Mme, GS4 GIS. TOS) CIFOR). cw cc secs sn line

Statutes and Rules

Securities Exchange Act of 1934

Section 10(b), 15 U.S.C. § 78j(b) (1994)... 20.0... g

Section 16(a), 15 U.S.C. § 78p(a) (1994) ...... passim

Section 16(b), 15 U.S.C. § 78p(b) (1994) ..... passim

Section 3(a)(14), 15 U.S.C. § 78c(a)(14) (1994) ..... 3

iv

TABLE OF AUTHORITIES - Continued

Case Law Page

SF Pee S DOSS COON Whi we OSs 0 bs ee Oe re ee 4

Scholarly Works and Other Authorities

Black’s Law Dictionary (6th ed. 1990) ............ 9

ABA Committee on Federal Regulation of Securities, Report

of the Task Force on Statute of Limitations for Implied

ee Gee Ce a 4S voce Kan ok s les Se Re s)

]

COUNTER-STATEMENT OF THE CASE

A. Section 16

Section 16(b) of the Securities Exchange Act permits

a shareholder or issuer to maintain action against any

director, officer or beneficial owner of more than 10% of any

class of outstanding shares (a "statutory insider") who profits

from short-swing transactions in that corporation’s securities.

15 U.S.C. 78p(b). A short-swing transaction is "any purchase

and sale, or any sale and purchase, of any equity security of

such issuer . . . within any period of less than six months."

Id. A suit to recover such profits may be brought "by the

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

behalf of the issuer . . . ; but no such suit shall be brought

more than two years after the date such profit was realized."

Id. (emphasis added).

Section 16(a) provides a mechanism for facilitating

the recovery of short-swing profits by requiring statutory

insiders to disclose any change in ownership "within ten days

after the close of each calendar month" in which such change

occurs. /d. § 78p(a). That disclosure is made via a Form 4

or Form 5 (filed with the Commission and made publicly

available). The corporation or shareholder may then use the

Forms to establish liability in an action under section 16(b).

Because the "statute imposes liability without fault within its

narrowly drawn limits," Foremost-McKesson, Inc. v.

Provident Secs. Co., 423 U.S. 232, 251 (1976), recovery in

such actions "is virtually automatic." Whittaker v. Whittaker

Corp, 639 F. 2d 516, 522 (9th Cir.), cert. denied, 454 U.S.

1031 (1981).

Section 16(b), instituted as a strict liability provision,

is necessarily arbitrary. Accordingly, fraudulent minded

2

insiders are treated identically to those with the best

intentions. However, unlike most provisions in the Exchange

Act, section 16(b) is not a criminal provision. It does not

make short-swing trading illegal. Instead, the section merely

provides that the profits from certain trades essentially belong

to the issuer.

B. Brief Factual Background

From 1982 through at least May 31, 1989,

Respondents served as officers and directors of Ross

Cosmetics and were beneficial owners of more than ten

percent of the outstanding shares of the company’s common

stock. In separate transactions occurring in February through

June 1989, the Respondents purchased more than 39,000

shares of Ross Cosmetics at prices ranging from $1.10 to

$4.50 per share.

On May 31, 1989, the Respondents entered into a

binding contract (the "Agreement") to sell to Starion

International Limited ("Starion") a total of 906,594 shares of

Ross Cosmetics common stock, approximately 28 percent of

the company’s outstanding shares. The Agreement required

the Respondents to transfer the shares to Starion in more than

a dozen installments. In return, the Respondents were to

receive "loan disbursements" fixed at between approximately

$4.65 and $7.50 for each share in each installment. Through

this transaction (and others), Starion acquired control of Ross

Cosmetics, which was later re-named Tristar (the Petitioner

herein).

The transaction represented by the May 31, 1989

Agreement’ was required by Section 16(a) to be disclosed

through the Securities Exchange Commission (the

"Commission") on or before June 10, 1989 in a Form 4

3

filing. See 17 C.F.R. § 240.16a-3(a) (1995) (addressing

forms). The Respondents, however, did not file a Form 4

until December 18, 1991. On December 16, 1993, Tristar

filed its complaint pursuant to Section 16(b) of the Securities

Exchange Act to recover the Respondents’ short-swing

profits.

c. Course of Proceedings and Disposition Below

On July 20, 1994, Tristar moved for summary

judgment. In an opinion dated November 9, 1994, the

district court determined that the Agreement constituted a

"sale" of securities as defined by Section 3 of the Securities

Exchange Act, 15 U.S.C. § 78c(a)(14). Tristar Corp. v.

Freitas, 867 F. Supp. 149, 152-53 (E.D.N.Y. 1994) (Pet.

App. 17-19). The court also found that the Respondents had

reaped short-swing profits by entering into the Agreement

with Starion, giving rise to a cause of action that accrued on

May 31, 1989. Jd. But because the two year period of

limitations set forth in Section 16(b) expired on May 31,

1991, the district court found that Tristar’s complaint (filed

on December 16, 1993) would be, absent tolling, "clearly

untimely." Jd. at 153 (Pet. App. 19).

Nevertheless, the district court found that Tristar was

entitled to equitable relief, and tolled the running of the

limitations period for more than two and one half years, since

the Agreement entered into on May 31, 1989 (an agreement

to which the Petitioner is a party) was not disclosed until

December 18, 1991. The district court, relying on the Ninth

Circuit decision in Whittaker, held that Section 16(b)’s two-

year period of limitation was equitably tolled during the

Respondents’ delinquency. The district court thus determined

that the two-year limitations period began to run on the date

that the Respondents filed their Form 4 (Dec. 18, 1991).

4

Accordingly, the Petitioner met the two-year limitations

period by filing its complaint on December 16, 1993, two

days before the limitation expired. /d. at 153-54 (Pet. App.

19-21).

The Second Circuit Court of Appeals reversed, finding

that the Petitioner’s complaint was not filed within the

limitations period. 84 F.3d 550 (2d Cir.), reh'g denied

(1996) (Pet. App. 1-9). Assuming arguendo that equitable

tolling would be appropriate, the court opined that the

limitations period began to run from the time that the short-

swing profits were realized (May 31, 1989), and could not be

tolled until the required Section 16(a) filing became untimely

-- here, on the tenth calendar day of the month following the

transaction, or June 10, 1989. At that point in time, the

limitations period would be tolled until the required

disclosure was made (Dec. 18, 1991). The limitations period

would then continue to run again, after the filing has been

made. Thus, counting from the disclosure (Dec. 18, 1991),

the limitation period would run two years (Dec. 18, 1993),

minus those 10 days between the profit realization date and

the date respondents’ delinquency began and the necessary

form should have been filed, or December 8, 1993. Since

Tristar’s complaint was not filed until December 16, 1993, it

was untimely and correctly was dismissed.

It is important to note that the Second Circuit did not

rule on whether it was appropriate to grant equitable tolling

in this case. As the Second Circuit noted at Footnote 2:

On June 5, 1989, Ross Cosmetics filed

a Form 8-K (which is required to be

filed when a change of control of the

registrant occurs, see 17 C.F.R. §

249.308 (1995)) with the Commission

5

disclosing the Agreement. There is

therefore record evidence that Tristar

-- which, as noted, is controlled by

Starion, the same entity that purchased

the defendant’s shares -- had actual

and contemporaneous notice of the

defendant’s _short-swing profits.

However, because we hold that

Tristar’s complaint would not be

timely even if the limitations period

were tolled, we need not decide

whether Tristar’s putative knowledge

renders the equitable tolling doctrine

inapplicable

84 F.3d at 553-54 n.2 (Pet. App. 8 n.2).

REASONS FOR DENYING THE PETITION

A The "conflict" is illusory.

Although Petitioner postures the decision below as in

direct conflict with Whittaker v. Whittaker Corp., 639 F.2d

516 (9th Cir.), cert. denied, 454 U.S. 1031 (1981) (Pet. App.

35-77), a careful review of the facts of both cases illustrates

that there really is no such conflict. This is so because

applying the rule set forth by the Second Circuit here to the

facts in Whittaker would not change the results there one

iota.

In Whittaker, the relevant trading period was between

December 1, 1965 and December 31, 1970. 639 F.2d a 518

(Pet. App. 37). The district court had cut off liability for

transactions prior to January 29, 1969, two years prior to

6

when demand was made for recovery of short-swing profits.

Id. at 519 (Pet. App. 37).

Significantly, however, reports of the transactions in

question there had never been filed. /d at 534 (Pet. App.

77). For that reason, the Ninth Circuit found that the running

of any limitations period would be tolled (and would not

begin to run until disclosed) and recovery could be had for

the short-swing profits arising from trades in the full relevant

trading period. /d

Using the Second Circuit's Tristar rule, the limitations

period in Whittaker would similarly be tolled (at least under

the rule the Second Circuit accepted arguendo) until the

disclosure (which never occurred in Whittaker). The only

period of Whittaker where the running of the limitations

period would not be tolled under the Second Circuit

interpretation would be that period between each individual

short-swing transaction and the time it should have been

disclosed -- a maximum of 40 days, not enough to exhaust

the two-year limitations period.

Accordingly, there are facts and issues critical here

that were not present in Whittaker, and the Court there did

not have reason to confront the issue that the Second Circuit

confronted here. Any implication that the Petitioner seeks to

extract from Whittaker arises from mere dictum. Cases,

however, are decided on facts, not slogans, and comparing

the facts here to those in Whittaker reveals there is no circuit

conflict.

;

Il. The issue is not an important issue of federal law

that must be decided by this Court.

An additional reason this Court need not consider the

issue is that it is not an important issue of federal law that

must be decided by this Court. Apparently, only two federal

circuits -- the Second and Ninth -- have arguably addressed

this issue. In the over sixty (60) years since the enactment

of Section 16(b), only a handful of cases are relevant to the

issue at hand, and there is no reason to believe that there will

be any material increase in the number of cases confronting

this issue and requiring guidance by this Court.

ill. The decision below is consistent with congressional

intent and not inconsistent with any decision of

this court.

Additionally, the decision of the Second Circuit is

consistent with the intent cf Congress and not inconsistent

with any decision of this Court.

Section 16(b) states quite plainly that "[n]o such suit

shall be brought more than two years after the date such

profit was realized." Not insignificantly, this language occurs

in the same sentence that grants jurisdiction and provides the

authorization for the institution of such suits. Thus, the two-

year limit provided within this clause would seem

jurisdictional in nature. See, e.g. Hardin v. City Title, 797

F.2d 1037 (D.C. Cir.) (unanimous opinion of Scalia, Bork &

MacKinnon, J.J.) (time limitation as integral part of

jurisdictional clause).

In addition, this statute creates a cause of action in

derogation of common law, and therefore must be narrowly

construed. If tolling would apply, it therefore must be

8

done so to the minimal extent possible. Indeed, here, where

Petitioner waited more than four years after the transaction

(of which it had actual knowledge), tolling would be

inequitable. See Cada v. Baxter Healthcare Corp., 920 F.2d

446 (7th Cir. 1990) (Posner, Easterbrook, Wood, JJ.) (where

plaintiffs do not need tolling, not equitable to give it).

Petitioner nevertheless argues that application of the

rule set forth by the Second Circuit would lead to

"confusion," “lack of uniformity" and "anomalous results"

arising out of varying reporting requirements that the court

below overlooked (Pet. 8-12). Petitioner’s parade of

horribles, however, falls flat. There is nothing confusing or

unduly variable about the rule the Second Circuit applies or

the result here. Respondents’ eventual disclosure --even

ignoring the initial disclosure on the Form’ 8K,

contemporaneous with the Agreement constituting the

transaction -- set forth the date of the transaction, following

from which it would be quite simple to determine the date on

which the event should have been disclosed, and therefore to

calculate the date the limitations period would expire should

tolling apply.

The fact that in some limited circumstances reports

may timely be filed until up to 45 days after the issuer's

fiscal year -- which Petitioner argues would effectively

reduce the period in which a party might be able to react to

a short-swing profit -- is no reason to eschew the rule applied

here. If the insider can await that later date /egally without

disclosing the transaction, then there is no good reason why

that period should count against the insider. In such a case,

there is still ample time for a party to seek to recover the

short-swing profits. Petitioner would shamelessly rewrite the

rule so as to directly and drastically vary it from the language

Congress used.

9

Nor is the rule here inconsistent with Lampf, Pleva,

Lipkind, Prupis, & Petigrow v. Gelbertson, 501 U.S. 350

(1991), as Petitioner suggests (Pet. 9 n.1). There is

absolutely nothing in Lampf (which applied a 1-year/3-year

period to Section 10(b) and Rule 10b-5) that compels a result

different from the one here. Lampf involved a statute with

no express limitations period, whereas the statutory provision

at issue here, Section 16(b), does have an express limitations

period.

In fact, a proper reading of Lampf compels affirming

the result here. This Court in Lampf, distinguishing between

discovery periods and periods of repose (such as the |-year/3-

year period found applicable there), referred specifically to

the two-year period in Section 16(b) as a "period of repose."

501 U.S. 350 at 360 n.5. Whereas a statute of limitation

extinguishes a right to prosecute a cause of action from the

time it accrues, a statute of repose confines potential liability

by limiting time during which a cause of action can arise and

terminates the right of action, regardless of the time of

accrual of the cause of action or of notice to plaintiff of the

invasion of legal rights. See Black’s Law Dictionary 927 &

1411 (6th ed. 1990). In other words, the two-year limit is an

outer limit, such as the 3-year portion of the period in Lampf,

and not subject to equitable tolling. See Lampf, 501 U.S. at

363 ("[t]he 3-year limit is a period of repose inconsistent

with tolling"; “an outside limit"; “clearly to serve as a

cutoff"; "tolling principles do not apply").

Moreover, resolving the issue at hand will not change

the result, because equitable tolling is improper in this case

in any event (see discussion, supra). See also ABA

Committee on Federal Regulation of Securities, Report of the

Task Force on Statute of Limitations for Implied Actions

645, 655 (1986) (advancing "the inescapable conclusion that

10

Congress did not intend equitable tolling to apply in actions

under the securities laws"), cited with approval in Lampf, 501

U.S. at 363.

IV. The issue of dates of the matchable purchases and

sales is not properly before this Court because

petitioner failed to raise it before the Court below

on appeal, and in any event the issue is irrelevant

to the analysis.

The Petitioner presents the Court with a “red herring"

argument regarding the Second Circuit’s method of

calculating "matchable" purchases and sale by the insider

(Pet. 14-15). As an initial matter, however, this issue was

not preserved for review. As the Second Circuit noted, "No

appeal is taken from the district court’s finding that short-

swing profits were ‘realized’ on the date that the Agreement

was entered into -- May 31, 1989 -- and therefore that

Tristar’s claim accrued on that date." 84 F.3d at 553 (Pet.

App. 7). The realization date, of course, is the date the

period of limitations would begin to run under Section 16(b),

15 U.S.C. § 78p(b).

In any event, regardless of whether the court uses the

May 31, 1989 Agreement as the profit realization date or the

June 1989 purchases, the outcome would be the same under

the Second Circuit’s method of calculation. Under the

Second Circuit interpretation (assuming arguendo that tolling

is proper), the limitations period would begin running from

the period of the June transaction (depending on the date of

transaction) until July 10, the last day the Form 4 could have

been timely filed for those purchases -- a period of between

10 and 39 days. Hence, between 10 and 39 days (not ten

days as with the May 31, 1989 Agreement) would have

passed and the period would have restarted upon the filing

11

with the Commission on December 18, 1991. Considered

from December 18, 1991 (the date of the Form 4 filing), a

period of two years, minus the ten to thirty-nine days would

have already passed during which the limitations period was

running, resulting in the period expiring prior to December

16, 1993, when Petitioner brought suit.'

Accordingly, the appeals court overlooked nothing on

this issue, and properly decided this case and declined

Petitioner’s request for rehearing or in the alternative for

rehearing in banc.

' Similarly, under the "Ninth Circuit" interpretation

Petitioner presses, there would be no difference in result than

with the May 31, 1989 realization date because (by

Petitioner’s view) under both scenarios the limitations period

would begin running from the December 18, 1981 date of

Form 4 filing.

12

os

CONCLUSION

The writ of certiorari should be denied.

BRIAN D. GRAIFMAN, Esq.

Counsel of Record

for Respondents

CARO & GRAIFMAN, P.C.

60 East 42nd Street

Suite 2001

New York, NY 10165

(212) 682-6000

On the brief:

CHASE A. CARO, Esq.

CHRISTOPHER LANGE