Source: http://openjurist.org/332/f2d/255/bt-babbitt-inc-v-s-lachner
Timestamp: 2016-12-04 00:38:16
Document Index: 161699569

Matched Legal Cases: ['§ 16', '§ 16', '§ 16', '§ 16', '§ 23', '§ 23']

332 F2d 255 Bt Babbitt Inc v. S Lachner | OpenJurist
332 F. 2d 255 - Bt Babbitt Inc v. S Lachner HomeFederal Reporter, Second Series 332 F.2d.
332 F2d 255 Bt Babbitt Inc v. S Lachner 332 F.2d 255
B.T. BABBITT, INC., Plaintiff-Appellee,v.Marshall S. LACHNER, Defendant-Appellant.
Docket 28756.
In the words of § 16(b), any profit by an officer or director "from any purchase and sale, or any sale and purchase" of his corporation's equity securities "within any period of less than six months * * * shall inure to and be recoverable by" the corporation. As we explained in Smolowe v. Delendo Corp., 136 F.2d 231, 148 A.L.R. 300 (2d Cir.), cert denied, 320 U.S. 751, 64 S.Ct. 56, 88 L.Ed. 446 (1943), the section "was designed to protect the `outside' stockholders against at least short-swing speculation by insiders with advance information." 136 F.2d at 235. The statute is prophylactic in operation; even absent proof that inside information was, in fact, used, the short-term profits of an officer-director dealing in his corporation's securities must be forfeited to the corporation. Smolowe v. Delendo Corp., supra.
I. The Computations in the District Court.
(Sale)      March 6, 1959 .....................  $8.625
(Purchase)  March 13, 1959 ....................  $3.44375
Per share profit ..............................  $5.18125
&#xD7; 4,600 shares
Total profit .................................. $23,833.75
Even Babbitt has conceded that the Court erred in taking the option price of $3.44375 as the purchase price for the purpose of computing Lachner's profits. Under Judge Medina's familiar analysis in Steinberg v. Sharpe, 95 F. Supp. 32 (S.D.N.Y.1950), aff'd on the opinion below, 190 F.2d 82 (2d Cir. 1951), this approach is unduly harsh; while § 16(b) was designed to "squeeze out" only short-term profits, the District Court's computation would, in effect, penalize Lachner for the increment in the value of Babbitt's stock over the long period from December 16, 1957, when the option was granted by the employment agreement, until March 13, 1959, when it was finally exercised. Instead, the Steinberg formula would require in the present case that the purchase price of stock bought pursuant to an option be considered as equivalent to the fair market value of the stock on the date on which the option was first exercisable. In the present case, this date was December 4, 1958. And since Babbitt common sold on December 4 for $9.3125, the pairing of this purchase with a sale at $8.625 obviously results in no recoverable profits.
II.Babbitt's Computations on Appeal.
(Sale)      May 6, 1959 ....................... $9.7945
(Purchase)  March 13, 1959 .................... $9.3125
Per share profit ..............................  $ .482
&#xD7; 5,749 shares
Total profits ................................  $2,771.02
Lachner's contention that he is not even liable for the sum awarded here is similarly without merit. Thus, he argues that SEC Rule X-16B-3, exempting from the reach of § 16(b) the acquisition of stock pursuant to non-transferable employee options, immunized the transactions in question from all liability. Recognizing that the Rule was declared invalid in Perlman v. Timberlake, 172 F. Supp. 246 (S.D.N.Y.1959), he contends that he was unaware of the Perlman decision, and acted in good faith reliance on the terms of the Rule.
While Babbitt does not challenge Lachner's claim that he was ignorant of Perlman, as well as of our decision in Greene v. Dietz, 247 F.2d 689 (2d Cir. 1957), which strongly implied that Rule X-16B-3 was beyond the powers of the commission, this cannot be dispositive here. We have often emphasized that § 16(b) requires no showing of conscious wrong-doing. See, e. g. Smolowe v. Delendo Corp., 136 F.2d 231 (2d Cir.), cert. denied, 64 S.Ct. 56, 88 L.Ed. 446, 320 U.S. 751 (1943); Gratz v. Claughton, 187 F.2d 46 (2d Cir.), cert. denied, 341 U.S. 920, 71 S.Ct. 741, 95 L.Ed. 1353 (1951). And § 23(a) of the Securities Exchange Act, which does protect certain forms of reliance, seems wholly inapplicable to the present case. Thus, that section provides that "[n]o provision of this chapter imposing any liability shall apply to any act done * * * in good faith in conformity with any rule or regulation of the Commission * * * notwithstanding that such rule or regulation may, after such act * * * be amended or rescinded or be determined by judicial or other authority to be invalid for any reason." Since Greene v. Dietz was decided in 1957, Perlman expressly held the Rule invalid in March of 1959, and the sale for which Lachner is now held was consummated in May of 1959, our case is not within the exceptive provisions of § 23. Where as here, an SEC Rule is declared invalid before a defendant commits the act for which liability is imposed, reliance upon the Rule will not shield him from liability — any more than did the failure actually to use inside information in Smolowe v. Delendo Corp., supra.