Source: https://supreme.justia.com/cases/federal/us/368/403/case.html
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Matched Legal Cases: ['§ 3', '§ 16', '§ 16', '§ 16', '§ 16', '§ 16', '§ 16', '§ 16', '§ 16', '§ 16', '§ 16', '§ 16', '§ 16', '§ 16', '§ 16', '§ 16', '§ 16', '§ 16', '§ 16', '§ 16', '§ 16', '§ 3', '§ 16', '§ 16', '§ 16']

Blau v. Lehman (full text) :: 368 U.S. 403 (1962) :: Justia U.S. Supreme Court Center Log In
› Blau v. Lehman
Blau v. Lehman 368 U.S. 403 (1962)
U.S. Supreme CourtBlau v. Lehman, 368 U.S. 403 (1962)Blau v. LehmanNo. 66Argued December 12-13, 1961Decided January 22, 1962368 U.S. 403CERTIORARI TO THE UNITED STATES COURT OF APPEALS
(b) The fact that § 3(a)(9) defines "person" as including a partnership does not require that the entire partnership be held liable as an "insider" under § 16(b) merely because one of its members was a director of the corporation. P. 368 U. S. 410. Page 368 U. S. 404
The petitioner Blau, a stockholder in Tide Water Associated Oil Company, brought this action in a United States District Court on behalf of the company under § 16(b) [Footnote 1] of the Securities Exchange Act of 1934 to Page 368 U. S. 405 recover with interest "short swing" profits, that is, profits earned within a six months' period by the purchase and sale of securities, alleged to have been "realized" by respondents in Tide Water securities dealings. Respondents are Lehman Brothers, a partnership engaged in investment banking, the securities brokerage and in securities trading for its own account, and Joseph A. Thomas, a member of Lehman Brothers and a director of Tide Water. The complaint alleged that Lehman Brothers "deputed . . . Thomas, to represent its interests as a director on the Tide Water Board of Directors," and that, within a period of six months in 1954, and 1955 Thomas, while representing the interests of Lehman Brothers as a director of Tide Water and
The case was tried before a district judge without a jury. The evidence showed that Lehman Brothers had in Page 368 U. S. 406 fact earned profits out of short-swing transactions in Tide Water securities while Thomas was a director of that company. But, as to the charges of deputization and wrongful use of "inside" information by Lehman Brothers, the evidence was in conflict.
First, there was testimony that respondent Thomas had succeeded Hertz, another Lehman partner, on the board of Tide Water; that Hertz had "joined Tidewater Company thinking it was going to be in the interests of Lehman Brothers"; and that he had suggested Thomas as his successor partly because it was in the interest of Lehman. There was also testimony, however, that Thomas, aside from having mentioned from time to time to some of his partners and other people that he thought Tide Water was "an attractive investment" and under "good" management, had never discussed the operating details of Tide Water affairs with any member of Lehman Brothers; [Footnote 2] that Lehman had bought the Tide Water securities without consulting Thomas, and wholly on the basis of public announcements by Tide Water that common shareholders could thereafter convert their shares to a new cumulative preferred issue; that Thomas did not know of Lehman's intent to buy Tide Water stock until after the initial purchases had been made; that, upon learning about the purchases, he immediately notified Lehman that he must be excluded from "any risk of the purchase or any profit or loss from the subsequent sale"; and that this disclaimer was accepted by the firm. [Footnote 3] Page 368 U. S. 407
173 F.Supp. 590, 593. Despite its recognition that Thomas had specifically waived his share of the Tide Water transaction profits, the trial court nevertheless held that, within the meaning of § 16(b), Thomas had "realized" $3,893.41, his proportionate share of the profits of Lehman Brothers. The court consequently entered judgment against Thomas for that amount, but refused to allow interest against him. Page 368 U. S. 408 On appeal, taken by both sides, the Court of Appeals for the Second Circuit adhered to the view it had taken in Rattner v. Lehman, 193 F.2d 564, and affirmed the District Court's judgment in all respects, Judge Clark dissenting. 286 F.2d 786. The Securities and Exchange Commission then sought leave from the Court of Appeals en banc to file an amicus curiae petition for rehearing urging the overruling of the Rattner case. The Commission's motion was denied, Judges Clark and Smith dissenting. We granted certiorari on the petition of Blau, filed on behalf of himself, other stockholders and Tide Water, and supported by the Commission. 366 U.S. 902. The questions presented by the petition are whether the courts below erred: (1) in refusing to render a judgment against the Lehman partnership for the $98,686.77 profits they were found to have "realized" from their "short-swing" transactions in Tide Water stock, (2) in refusing to render judgment against Thomas for the full $98,686.77 profits, and (3) in refusing to allow interest on the $3,893.41 recovery allowed against Thomas. [Footnote 5]
Petitioner apparently seeks to have us decide the questions presented as though he had proven the allegations of his complaint that Lehman Brothers actually deputized Thomas to represent its interests as a director of Tide Water, and that it was his advice and counsel based on his special and inside knowledge of Tide Water's affairs that caused Lehman Brothers to buy and sell Tide Water's stock. But the trial court found otherwise, and the Court of Appeals affirmed these findings. Inferences could perhaps Page 368 U. S. 409 have been drawn from the evidence to support petitioner's charges, but examination of the record makes it clear to us that the findings of the two courts below were not clearly erroneous. Moreover, we cannot agree with the Commission that the courts' determinations of the disputed factual issues wee conclusions of law, rather than findings of fact. We must therefore decide whether Lehman Brothers, Thomas, or both have an absolute liability under § 16(b) to pay over all profits made on Lehman's Tide Water stock dealings even though Thomas was not sitting on Tide Water's board to represent Lehman and even though the profits made by the partnership were on its own initiative, independently of any advice or "inside" knowledge given it by director Thomas.
"'director' means any direct or of a corporation or any person performing similar functions with respect to any organization, whether incorporated or unincorporated. "Page 368 U. S. 410
(c) Both the petitioner and the Commission contend on policy grounds that the Lehman partnership should be held liable even though it is neither a director, officer, nor Page 368 U. S. 411 a 10% stockholder. Conceding that such an interpretation is not justified by the literal language of § 16(b), which plainly limits liability to directors, officers, and 10% stockholders, it is argued that we should expand § 16(b) to cover partnerships of which a director is a member in order to carry out the congressionally declared purpose
The argument of petitioner and the Commission seems to go so far as to suggest that § 16(b)'s forfeiture of profits should be extended to include all persons realizing "short-swing" profits who either act on the basis of "inside" information or have the possibility of "inside" information. One may agree that petitioner and the Commission present persuasive policy arguments that the Act should be broadened in this way to prevent "the unfair use of information" more effectively than can be accomplished by leaving the Act so as to require forfeiture of profits only by those specifically designated by Congress to suffer those losses. [Footnote 11] But this very broadening of the categories of persons on whom these liabilities are imposed by the Page 368 U. S. 412 language of § 16(b) was considered and rejected by Congress when it passed the Act. Drafts of provisions that eventually became § 16(b) not only would have made it unlawful for any director, officer, or 10% stockholder to disclose any confidential information regarding registered securities, but also would have made all profits received by anyone, "insider" or not, "to whom such unlawful disclosure" had been made recoverable by the company. [Footnote 12]
Not only did Congress refuse to give § 16(b) the content we are now urged to put into it by interpretation, but, with knowledge that in 1952 the Second Circuit Court of Appeals refused, in the Rattner case, to apply § 16(b) to Lehman Brothers in circumstances substantially like Page 368 U. S. 413 those here, Congress has left the Act as it was. [Footnote 13] And so far as the record shows, this interpretation of § 16(b) was the view of the Commission until it intervened last year in this case. Indeed, in the Rattner case, the Court of Appeals relied in part on Commission Rule X-16A-3(b) which required insider partners to report only the amount of their own holdings, and not the amount of holdings by the partnership. While the Commission has since changed this rule to require disclosure of partnership holdings too, its official release explaining the change stated that the new rule was
Second. The petitioner and the Commission contend that Thomas should be required individually to pay to Tide Water the entire $98,686.77 profit Lehman Brothers realized on the ground that, under partnership law, he is co-owner of the entire undivided amount, and has therefore "realized" it all. "[O]nly by holding the partner director liable for the entire short-swing profits realized by his firm," it is urged, can "an effective prophylactic to the stated statutory policy . . . be fully enforced." But Page 368 U. S. 414 liability under § 16(b) is to be determined neither by general partnership law nor by adding to the "prophylactic" effect Congress itself clearly prescribed in § 16(b). That section leaves no room for judicial doubt that a director is to pay to his company only "any profit realized by him" from short-swing transactions. (Emphasis added.) It would be nothing but a fiction to say that Thomas "realized" all the profits earned by the partnership of which he was a member. It was not error to refuse to hold Thomas liable for profits he did not make.
What the Court does today is substantially to eliminate "the great Wall Street trading firms" from the operation of § 16(b), as Judge Clark stated in his dissent in the Court of Appeals. 286 F.2d 786, 799. This result follows because of the wide dispersion of partners of investment banking firms among our major corporations. Lehman Bros. has partners on 100 boards. Under today's Page 368 U. S. 415 ruling, that firm can make a rich harvest on the "inside information" which § 16 of the Act covers because each partner need account only for his distributive share of the firm's profits on "inside information", the other partners keeping the balance. This is a mutilation of the Act.
If a partnership can be a "director" within the meaning of § 16(a), then "any profit realized by him," as those words are used in § 16(b), includes all the profits, not merely a portion of them, which the partnership realized on the "inside information." There is no basis in reason for saying a partnership cannot be a "director" for purposes of the Act. In Rattner v. Lehman, 193 F.2d 564, 567, [Footnote 2/1] Judge Learned Hand said he was "not prepared to say" that a partnership could not be considered a "director," adding "for some purposes, the common law does treat a firm as a jural person." In his view, a partnership might be a "director" within the meaning of § 16 if it "deputed a partner" to represent its interests. Yet formal designation is no more significant than informal approval. Everyone knows that the investment banking-corporation alliances are consciously constructed so as to increase the profits of the bankers. In partnership law, a debate has long raged over whether a partnership is an Page 368 U. S. 416 entity or an aggregate. Pursuit of that will-o'-the-wisp is not profitable. For even New York, with its aggregate theory, recognizes that a partnership is or may be considered an entity for some purposes. [Footnote 2/2] It is easier to make this partnership a "director" for purposes of § 16 than to hold the opposite. Section 16(a) speaks of every "person" who is a "director." In § 3(a)(9), "person" is defined to include, inter alia, "a partnership." [Footnote 2/3] Thus, the purpose to subject a partnership to the provisions of § 16 need not turn on a strained reading of that section.
"Many forms of conduct permissible in a workaday world for those acting at arm's length, are forbidden to those bound by fiduciary ties. A trustee Page 368 U. S. 417 is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. As to this, there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the 'disintegrating erosion' of particular exceptions (Wendt v. Fischer, 243 N.Y. 439, 444, 154 N.E. 303). Only thus has the level of conduct for fiduciaries been kept at a level higher than that trodden by the crowd. It will not consciously be lowered by any judgment of this court."
"These strict prohibitions would serve little purpose if the trustee were free to authorize others to do what he is forbidden. While there is no charge of it here, it is obvious that this would open up opportunities for devious dealings in the name of others that the trustee could not conduct in his own. The motives of man are too complex for equity to separate in the case of its trustees the motive of acquiring efficient help from motives of favoring help, for any reason at all or from anticipation of counterfavors later to come. We think that which the trustee had no right to do he had no right to authorize, and that Page 368 U. S. 418 the transactions were as forbidden for benefit of others as they would have been on behalf of the trustee himself."
"* * * *" ". . . equity has sought to limit difficult and delicate factfinding tasks concerning its own trustee by precluding such transactions for the reason that their effect is often difficult to trace, and the prohibition is not merely against injuring the estate -- it is against profiting out of the position of trust. That this has occurred, so far as the employees are concerned, is undenied."
It is said that the failure of Congress to take action to remedy the consequences of the Rattner case somehow or other shows a purpose on the part of Congress to infuse § 16 with the meaning that Rattner gave it. We took that course in Toolson v. New York Yankees, 346 U. S. 356, and adhered to a ruling the Court made in 1922 that baseball was not within the scope of the antitrust laws, because the business had been "left for thirty years to develop, on the understanding that it was not subject to" those laws. Id., p. 346 U. S. 357. Even then we had qualms, and two Justices dissented. For what we said in Girouard v. United States, 328 U. S. 61, 328 U. S. 69, represents our usual attitude: "It is at best treacherous to find in congressional silence alone the adoption of a controlling rule of law." [Footnote 2/4] Page 368 U. S. 419 It is ironic to apply the Toolson principle here, and thus sanction, as vested, a practice so notoriously unethical as profiting on inside information.
"Among the most vicious practices unearthed at the hearings before the subcommittee was the flagrant betrayal of their fiduciary duties by directors and officers of corporations who used their positions of trust and the confidential information which came to them in such positions, to aid them in their market activities. Closely allied to this type of abuse was the unscrupulous employment of inside information by large stockholders who, while not Page 368 U. S. 420 directors and officers, exercised sufficient control over the destinies of their companies to enable them to acquire and profit by information not available to others."
What we do today allows all but one partner to share in the feast which the one places on the partnership table. They, in turn, can offer feasts to him in the 99 other companies of which they are directors. [Footnote 2/5] 14 Stan.L.Rev. 192, 198. This result is a dilution of the fiduciary principle that Congress wrote into § 16 of the Act. It is, with all respect, a dilution that is possible only by a strained reading of the law. Until now, the courts have given this fiduciary principle a cordial reception. We should not leave to Congress the task of restoring the edifice that it erected and that we tear down. Page 368 U. S. 421
"Lehman v. Civil Aeronautics Board, supra," "93 U.S.App.D.C. at 85-87, 209 F.2d at 292-294." "Petitioner Lehman is a director of Pan American; petitioner Joseph A. Thomas is a director of National Airlines, Inc., and of American Export Lines, Inc.; petitioner Frederick L. Ehrman is a director of Continental Air Lines, Inc., and Mr. John D. Hertz is a director of Consolidated Vultee Aircraft Corporation. All the companies referred to are in the aeronautic field, and so must have Board approval of the kind of interlocking relationships which are made unlawful unless approved. Messrs. Lehman, Thomas, Ehrman, Hertz, and others, are also members of Lehman Brothers, a partnership which, as previously pointed out, conducts an investment banking business."
"More precisely, the Board concluded that a Lehman Brothers partner who is director of an air carrier has a representative 'who represents such . . . director as . . . a director' in another Section 409(a) company if another Lehman Brothers partner is a director of the latter, coupled with the circumstances that he seeks on behalf of Lehman Brothers the security underwriting and merger negotiation services used by the company of which he is director. The underwriting of security issues and the Page 368 U. S. 422 conduct of merger negotiations constitute a substantial part of the business of Lehman Brothers, who have been employed for these purposes not infrequently by Section 409(a) companies. The partners feel free to solicit this business for their firm."
". . . But we must consider the facts of the case in the light of the purpose of Congress to keep the developing aviation industry free of unhealthy interlocking relationships, though this purpose must be carried out only as the statute provides. The relevant findings which point up the problem are not in dispute. The underwriting activities of Lehman Brothers is a substantial part of its business; substantial fees are also obtained by Lehman Brothers from merger negotiations. Profits from the fees are shared by the partners. Section 409(a) companies, with Lehman Brothers partners as directors, need and use both types of services, and the partner directors seek such business for the partnership. In doing so, they act as representatives of the partnership. It follows that they act as representatives of fellow partners, some of whom are directors of air carriers. Is this representation within the meaning of the statute? Does Mr. Thomas, to use his case as illustrative, who is a Lehman Brothers partner and also a director of National Airlines, represent, as director of National Airlines, Mr. Lehman, another Lehman Brothers partner and director of Pan American? We think that the affirmative answer of the Board should not be disturbed. For the situation comes to more than some community of interest and some sharing of common benefits as partners. The particular common interest and benefits are among directors of the regulated industry with respect to industry matters. The partnership link does not extend merely to a type of business remote from the aeronautical industry in which the partners are directors; it is with respect to business activities of air carriers and other aeronautical companies enumerated in Page 368 U. S. 423 Section 409(a). In these activities, there is not only literal representation by one partner of another in partnership business, but the particular partnership business is as well the business of aeronautical enterprises of which the partners are directors. When Mr. Thomas, again to illustrate, as director of National, seeks to guide that company's underwriting business to Lehman Brothers, he acts in the interest of and for the benefit of Mr. Lehman, who is not only his underwriting partner, but is also a director of an air carrier, Pan American. Mr. Lehman the partner is the same Mr. Lehman the director. The Board is not required to separate him into two personalities, as it were, and to say that Mr. Thomas represents him as a partner but not as a director, if, as is the case here, the representation is in regard to the carrying on of the affairs of Section 409(a) companies. The undoubted representation which grows out of the partnership, we think, follows into the directorships when the transactions engaged in are not only by the partners, but concern companies regulated by the statute of which the partners are directors. This is representation within not only the language, but the meaning, of the statute."