Allan F. Conwill: At the close yesterday, I was discussing Section 249 of the Bankruptcy Act which has an underlying statutory purpose comparable to that of Section 16 (b) of the Securities Exchange Act. In that connection, I would like to mention briefly two cases which are cited at page 23 of our brief. Neither of these cases involves the phrase “other person acting in the proceedings in a representative or fiduciary capacity,” which Mr. Justice Frankfurter regards as a catch-all and I do not. In the first of these cases, the Midland United case, Chief Judge Biggs in the Third Circuit, although he was there sitting on the District Court for the State of Delaware, held that a protective committee member could not receive an allowance because a corporation which he was president bought and sold the debtor's securities. And, the court made this holding notwithstanding the fact that the committee member, as president of the corporation, had no interest therein which would entitle him to share the profits. And in the Los Angeles Lumber Products Company case, the court there held that a partnership was not entitled to an allowance for its services to the estate because a partner unconnected with the Chapter 10 reorganization proceedings there concerned had traded in the debtor's securities. And, it is interesting to note that the court in that case observed that its application of Section 249 may seem harsh and may work a hardship on innocent persons, but the court held that the rule must be severe in order to be effective and we urge upon this Court that the application of Section 16 (b) must be severe in order to be effective.
Potter Stewart: Mr. Conwill, what if Lehman Brothers, instead of being a partnership, were a corporation and an officer of the corporation were in the position of Mr. Thomas, the director here, would all the stockholders of Lehman Brothers be directors of the Tide Water Associated Oil Company under 16 (b)?
Allan F. Conwill: I would answer that this way, Mr. Justice Stewart. If Lehman Brothers Incorporated, as you know some investment banking firms have --
Potter Stewart: Yes.
Allan F. Conwill: And operated in the same way that it now operates as a partnership, the Commission would urge upon this Court that the stockholders of that corporation who would hold interest comparable to the partnership interest should be held liable.
John M. Harlan II: All in the -- what? (Inaudible)
Allan F. Conwill: The corporation would be a director, as would they.
John M. Harlan II: Directors without portfolio, so to speak.
Allan F. Conwill: I think that's a good way of putting it, Mr. Justice Harlan. I want to observe -- excuse me, Mr. --
Felix Frankfurter: Mr. Conwill, the claim procedure that's not -- have talked about whether the thing is a catch-all or not, but under your Bankruptcy Act, there was a phrase less restrictive -- there was a phrase that isn't as restrictive as direct inference. Is that true?
Allan F. Conwill: Well, the phrases are, sir --
Felix Frankfurter: What is the phrase in the statute?
Allan F. Conwill: “Committee or attorney or other person acting in the proceedings in a representative or a fiduciary capacity.” Now, that --
Felix Frankfurter: You know very well that -- who is and who isn't a fiduciary in the subject matter that your Commission has had to deal with and this Court has had to deal with. In the (Inaudible) case we indicated, if the Commission at least, were clear to me, if the Commission as a matter of its own cumulative experience could say that a protective committee is in a fiduciary relation, that gave it scope -- that should gave it scope so to hold. What I want to know is what -- it was a very different thing. In the first (Inaudible) case, they say that it's established by a credible principle. What I want to know is what there is in this statute that gives that leeway of construction that you have in phrase like “in a fiduciary relation” or “a fiduciary transaction.” Now, when Congress uses words like “director,” it doesn't mean “or anybody else having a fiduciary relation,” does it?
Allan F. Conwill: No, sir.
Felix Frankfurter: I don't suppose you're contending that. You contended that Lehman Brothers, on partnership, what shall I say, speculation -- partnership notions or the -- is that the partnership was a director. But, you're not contending that there's anything comparable, in turn, a category in 16 (b) comparable to the concept of a fiduciary relation. There are instances of fiduciary, but is there a category of fiduciary?
Allan F. Conwill: I believe that the absolute liability imposed by Section 16 (b), in effect, makes a director a fiduciary.
Felix Frankfurter: A director, of course, is a fiduciary, but is every fiduciary a director?
Allan F. Conwill: Not the reverse but, in this case, I believe that Joseph Thomas, being a partner of Lehman Brothers, has the effect of making the partners of Lehman Brothers and Lehman Brothers, the partnership. We'll say, fiduciaries without portfolio, perhaps.
William O. Douglas: This is the same position I gather with Learned Hand took in his concurring opinion in the Rattner case.
Allan F. Conwill: Not precisely. Learned Hand, in the Rattner case, had reservations because he felt that if it were shown that Lehman Brothers deputized John Hertz, deputized him to go on the Board of Directors, he might reach a different result. Our position here today is that deputisi -- deputization makes no difference. We say the mere fact that he is a director and is a partner brings the partnership within the scope of liability.
Felix Frankfurter: Do you say that that is the consequence to the legal relation of partners intercede? Is that what you're saying?
Allan F. Conwill: I'm saying that and I'm also referring to the fact that 16 (a) of the Exchange Act refers to any person who is a director and Section 3 (a) (9) defines “person” to embrace partnership.
Felix Frankfurter: But there is the word “person.” It doesn't exist in 16 (b). How do you bring six -- how do you bring the definition of “person” into 16 (b) unless they're in corporation by reference?
Allan F. Conwill: Because Section 16 (b) refers to such beneficial owner, director, or officer and the “such” relates back to every person who is a director in Section 16 (a).
Felix Frankfurter: And there is no particularization required in 16 (b). If “person,” as defined above, include almost everybody --
William O. Douglas: 16 (b) wouldn't be broader than 16 (a)?
Allan F. Conwill: No, sir, it would not be broader. It's coextensive with 16 (a), but “person” obviously has to mean something more than an individual because, for example, in Magida against Continental Can, Continental Can, a corporation, was a beneficial owner of more than 10% of the capital stock of Vulcan Detinning Company. And the Second Circuit there had no difficulty holding Continental Can a person for purposes of Section 16 (b).
Felix Frankfurter: I gather, you do not contend that on this record, there was a deputizing effect.
Allan F. Conwill: To --
Felix Frankfurter: The deputizing has any meaning other than people of partners, and then you don't have to talk about deputizing. There wasn't that something difference, was there, here?
Allan F. Conwill: Two courts below have concluded that there was no deputizing and, while I think that conclusion is somewhat unrealistic, we are willing to accept it because we don't think it's necessary. May I say this, that we're not here concerned with the concepts of who is or is not a director within the meaning of traditional state corporation law. What we're here concerned with is who can properly be included within the term “director” for the purpose of carrying out the statutory purpose of a provision of what might be regarded as federal incorporation law because I believe the Court --
Felix Frankfurter: I don't know what that means --
Allan F. Conwill: -- is aware --
Felix Frankfurter: I don't know what that means, federal incorporation law.
Allan F. Conwill: Well, I believe the Court is aware that it has been judicially observed that the several Securities laws have, in effect, created a sweeping body of federal statutory corporation law which brings into being managerial duties and liabilities wholly unknown to the common law. And we say, in order to interpret this statute properly, in order to carry out its obvious purpose, that it is proper to consider Lehman Brothers the partnership as a director. It does seem to us also that basic principles of fairness would demand that, in this type of situation, a partner who is a director and his partnership should abstain from trading when he is in this position. And, we believe the essence of this basic principle of fairness has been codified in Section 16 (b).
Earl Warren: Now, Mr. Seymour, I think we are ready for your argument.
Whitney North Seymour: Mr. Chief Justice and may it please the Court. I think the problem presented by this case is a simple one and I shall not take much of the Court's time. The question posed is whether the Court should extend the language of Section 16 (b) of the 1934 Act so as to embrace the partners of a director and make them directors so that the profits on a short-swing transaction are recoverable in this kind of an action. Now, the decision below was, I think, in accord with the -- both the judicial and administrative construction of the Act prior to that time. The position taken by my friend from the Securities and Exchange Commission today is very much more extreme than any position taken before and I think inconsistent with the administrative construction which the Commission has followed before. Indeed, I think it's inconsistent with the position that was taken by the Commission in its brief amicus in support of the petition here because, there, they said it is not necessary to urge that the partners become a director and, yet, that is the key of their position today. Now, the court below followed a decision in the Second Circuit rendered in 1952 in Rattner against Lehman, a decision by a strong court composed of Hand and Judge Swan. Prior to that decision, the regulation of the Commission under this statute provided that partnerships owning securities might file either, in effect, a --
Felix Frankfurter: Mr. Seymour
Whitney North Seymour: They might file either the --
Felix Frankfurter: Well, I --
Whitney North Seymour: The director might file either on the basis of the partnership interest or his interest in the partnership, and the Rattner case was, in part, predicated upon that regulation. After the Rattner case, the regulation was modified to the extent that the partner was required to show the partnership interest. He might, if he liked to, show his own interest in the partnership but in a release issued contemporaneously with the regulation. The Commission indicated that it was not departing from the principles in Rattner against Lehman and, therefore, until the Commission participated below or sought to participate below, the Commission then adhered to an acceptance of the principle of Rattner against Lehman, or at least I think that's a fair construction of their administrative procedure. Now, below, Judge Clark in his dissent strongly invited the Commission to participate, although they hadn't participated before, and they sought to participate on rehearing and were denied that opportunity, and then joined in the application for certiorari here.
Felix Frankfurter: Can I ask you this question, which you can deal with whenever it fits into your -- the architecture of your argument. Could the Commission explicitly formulate into a regulation, under implementing powers of issuing regulations, a prohibition that would explicitly take care of this situation -- this kind of a situation?
Whitney North Seymour: I should now --
Felix Frankfurter: And, by “kind,” I mean a class of precisely this type of situation.
Whitney North Seymour: I should very much doubt if the Commission, by regulation, could extend the terms of the statute.
Felix Frankfurter: Well, I know it can't do that, but would it be -- in other words, would that be extending the term?
Whitney North Seymour: I would think so. But the Congress, in a penal statute which was a web of presumptions, laid it down that certain people should be absolutely liable for short-swing profits, directors, officers, and stockholders of 10%.
William O. Douglas: Because I understand it, Mr. Seymour, the Commission has nothing -- no function to perform here, has it, except the filing --
Whitney North Seymour: Sir, to lay down the regulations about filing and public --
William O. Douglas: Filing --
Whitney North Seymour: -- disclosure.
William O. Douglas: -- and public disclosure.
Whitney North Seymour: But, it was in that connection that the Commission, in my view, accepted the decision in Rattner against Lehman.
William O. Douglas: But the -- the sanction of 16 (a) and 16 (b) were -- lies in suits by it.
Whitney North Seymour: That's quite correct. Now --
William O. Douglas: But they did, however -- the Commission couldn't start the suit.
Whitney North Seymour: That's right, but the Commission did have a function about the -- those who must disclose, in the manner of disclosure, and was in that connection that they adopted Rattner against Lehman, I submit.
Felix Frankfurter: But, the Commission had general powers of regu -- of issuing regulations consistent with the scope of the statute.
Whitney North Seymour: Yes, sir.
Felix Frankfurter: And, therefore, I should think, within limits, I'm speaking quite irresponsible in sense, but I don't know. Within limits, I should think they could define -- they couldn't say that the counsel for the -- for a firm is a director of the firm and he isn't a director, but I should think they'd have a little leeway of who is a director if within certain corporate relationships, some directors can't vote, for instance, nonvoting directors. I should think they could define who are directors without offending the general concept of what a director is, wouldn't you think so?
Whitney North Seymour: Well, perhaps so, but the statute defines who is a director.
Felix Frankfurter: Are you --
Whitney North Seymour: I'll come to that in a moment.
Felix Frankfurter: Alright.
Whitney North Seymour: Now, let me --
Earl Warren: Mr. Seymour, is that statement that was contemporaneous with the regulation in the record?
Whitney North Seymour: It's in our brief, if Your Honor pleases, and --
Earl Warren: Well, don't bother to find it.
Whitney North Seymour: I have it -- I have it here.
Earl Warren: I'll find it.
Whitney North Seymour: I'll give you the page in just a second. Page -- the statement appears at page 23 of our brief. Yesterday, Mr. Levy, I thought, was a little over exuberant in his statement of the facts here and he made no reference to the fact that there were findings by the two courts below, and I'm not going to take up what I think are some errors in the facts that he made because I think the findings were -- the things the Court will be concerned with here and my friend from the Commission has correctly said that among those findings was a finding that there was no deputization to Mr. Thomas. The other findings -- the other main findings are that Thomas became a director at the instance of Tide Water. While his name had been originally suggested by Mr. Hertz, the retiring director, the choice was made by Tide Water. Furthermore, the transaction which gave rise to these profits was one with which Mr. Thomas had no connection whatever. The Investment Committee of Lehman Brothers of which he was not a member, reading in the Wall Street Journal of the fact that Tide Water propose to have an exchange of common stock for preferred stock, decided to buy some of the common stock with the objective of exchanging it and selling the preferred stock to institutional investors. It's found that no confidential information was passed on by Thomas to his partners, that he had nothing to do with the decision to enter into this transaction and did not know of it until the purchases began and, as soon as he learned of it, he disassociated himself entirely from the transaction. So that, the case before the Court involves none of the evils at which this statute was aimed.
Charles E. Whittaker: May I ask you, Mr. Seymour, are those findings challenged here in any way by either the Government or Blau?
Whitney North Seymour: Well, I don't know quite how to answer you, Mr. Justice. The petitioner pays no attention whatever to the findings and quotes from the record sometimes correctly and sometimes incorrectly without regard to the findings. The Commission says that some of the findings include conclusions, and they're not finding on the court, although the conclusions that they refer to include the alleged conclusion that there was no deputies -- deputization and now they accept that finding.
Charles E. Whittaker: I don't know what that means.
Whitney North Seymour: Well, I don't either.
Charles E. Whittaker: Can you enlighten us?
Whitney North Seymour: I don't either. May I come to that because, at the end of my argument, I want to discuss the Learned Hand dictum in the Rattner case?
William O. Douglas: At this point, Mister, can I ask you a question? Of course, this whole scheme, 16 (a) and 16 (b), is pretty arbitrary in many respects --
Whitney North Seymour: Yes.
William O. Douglas: Starting it off at 9.9% and so on. In terms of the body of law, either at the administrative level or at the Court level, is it necessary to show that -- to prove that the inside information was used? Isn't there or is there a presumption or a conclusive presumption?
Whitney North Seymour: There's a conclusive presumption under the statute that if you got the right person, if you're suing the right person, if he's a director or an officer or a 10%-stockholder and he made short-swing profits, he's liable without regard to whether there was any use of confidential information. The reason I mentioned the finding --
William O. Douglas: Even though he got the -- made the purchase as a result of a ouija boards?
Whitney North Seymour: Right, but the reason I mentioned it is to satisfy the Court that this is not a case where they should extend the statute, unless the statute requires extension by its plain terms. Now --
Charles E. Whittaker: Are we deciding, if I'm quite clear of my thinking, that even though Mr. Thomas is the new director and he had inside information in the past, he makes a deal or one is made by his agents or his principals, that it's tainted only to the extent of his participation?
Whitney North Seymour: Well, when you say his principals, I think you get into a problem of whether or not there was a particular circumstance which should give rise to some liability on an agency theory. We don't have anything of that kind here.
Charles E. Whittaker: Even though it was as a general partnership?
Whitney North Seymour: It's a general partnership and the partner is the agent of the partnership for certain partnership purposes, but not, I submit, as a director of a corporation. And --
Charles E. Whittaker: That gets back to these findings?
Whitney North Seymour: Yes, yes. And the findings are that he was not a representative of Lehman Brothers, not a deputy of Lehman Brothers as a director. He was not chosen that way.
Charles E. Whittaker: Are you going to discuss that later when you get there?
Whitney North Seymour: I am. Now, counsel for the Commission, I submit, is quite right in saying that the only way liability can be imposed on Lehman Brothers is to treat it as a director, and I want to say a few words about why that could not be done. First, it's very odd indeed, whatever body of federal corporate law there may be, to treat a partnership for any purpose as a director and so we start with a proposition that it's a very odd result. And then, you look at the statute, Section 7 -- subdivision 7 of Section 3 (a), appearing at page 2 of our brief and we find this definition. The term “director” means any director of a corporation or any person performing similar functions with respect to any organization, whether incorporated or unincorporated. So, to make Lehman Brothers a -- or its other partners a director, would require proof that they were performing similar functions with respect to Tide Water. Now, there's no such proof in this record. There's the kind of proof, one would think, that would be required to accomplish even that rather odd result would be proof that the director was, in effect, the dummy director carrying out instructions or at least consulting as to corporate decisions with those whom he was representing. Now, there's nothing of that kind in this record. There's absolutely no basis for concluding that Lehman Brothers was performing -- or any of its other partners were performing any similar function to that of a director and, therefore --
Charles E. Whittaker: Is it part of -- is it part of their business to serve one director? I hope it's in the record, the statement -- rather, approximately 100 directorates are filled by these partners.
Whitney North Seymour: Well, it's not --
Charles E. Whittaker: Is that part of their business?
Whitney North Seymour: It's not quite in the record, I think, if Your Honors pleases. It's something that counsel, and I believe the Commission, have referred to as something from the Commission's record. Lehman Brothers are an investment banking firm. They provide investment banking services. Their partners served on many Board of Directors and the companies on whose boards they served often have Lehman Brothers do underwriting business for them. But I submit that that does not make Lehman Brothers a director, and that's the point that's before Your Honors. Now, it's perfectly clear --
Potter Stewart: Mr. Seymour, is Lehman Brothers all -- are Lehman Brothers also investment advisers?
Whitney North Seymour: Yes.
Potter Stewart: That's the same.
Whitney North Seymour: Yes.
Potter Stewart: And the Lehman Corporation is something quite different.
Whitney North Seymour: That's entirely different, yes.
Potter Stewart: Although it does have the same -- it could mean the same personnel, I suppose.
Whitney North Seymour: Yes, but it's a quite separate organization. Now, it's clear from this record that it was Thomas' view that it would've been quite improper for him to discuss with his partners the detail of the corporate business of the corporation of which he was a director and that he did not do so. Now, counsel on the other side, yesterday, made a brief reference to the legislative history of this provision. It's clear that it was aimed at eliminating the evil of insider manipulation, but Congress considered quite carefully how to do that. And, there was a proposal to reach way beyond what the present statute reaches and reach those who got unused confidential information and that proposal was eliminated after consideration of the difficulties of its enforcement. Now, I don't think it makes any difference whether it was eliminated because of its difficulties or for other reasons. There was a proposal that, in order to recover, there should be proof and the proof was regarded as a difficulty. And, if I understand my friend from the Commission, he argues that when Congress eliminates such a provision because of difficulty of enforcement, the court ought to expand the construction of what Congress left where there is no problem of proof. In other words, expand the area of conclusive presumption because Congress decided it ought not to include a provision where proof was required, and I submit that's an extraordinary result of the elimination by Congress of that provision. In Rattner, the court considered the legislative history and, on that ground among others, decided that partners had been excluded as a result of the congressional determination. Now, my friend on the other side says on Mr. Justice Stewart's question I think, suggests this problem, that a partnership ought to be regarded as a director but if, instead of doing business as a partnership, the banking organization decided to do it as a corporation and one of its officers was a director, then all the stockholders would become directors. Well, that's a pretty extraordinary result. It's very unusual to have a corporation act as a director and still more unusual to have that kind of an attribution. But, what about the case of the wife and the brother that Mr. Justice Stewart put yesterday? If the Court ought to try to remedy an evil here by extending the statute, why not wives and brothers and uncles and everybody else? They're all the people that Congress excluded, and I submit that there's no stopping. And, here, Congress passed a penal statute with a conclusive presumption, selected those who were to be liable, and I submit, there's no basis for extending it beyond that.
William O. Douglas: How do you deal with Justice Jackson's opinion in the -- was it the Mosser case?
Whitney North Seymour: Well, I don't know that I'm prepared to deal with the result. I don't -- it hasn't been --
William O. Douglas: Well, it was a case, I think, as I remember, that arose under the Bankruptcy Act where a trustee did just -- just that.
Whitney North Seymour: Well, I'm afraid I would not like to discuss that case with Your Honors (Inaudible) because I'm not prepared to it. Now, the --
Earl Warren: Mr. Seymour, while we're on that general --
Whitney North Seymour: Yes?
Earl Warren: -- subject, may I ask this question. Counsel, yesterday, suggested that in this case, the director-partner did not return to the corporation the share that he would be liable for, but he put it into partnership funds and all the rest of the partners profited from his action, concededly, as in violation of the -- of the law. Now, there being 100 directors in other corporations, as is suggested, and that each of them does the same thing and that money is always distributed between the partners other than the single one who you concede is liable for his part that, in the end, they're doing exactly what the -- what the law prohibits and all of them, including the director-partner in this case, would be obtaining a benefit.
Whitney North Seymour: Well, I was planning to come to that in a moment --
Earl Warren: Oh, wait.
Whitney North Seymour: -- but I'll come to it now, Mr. Chief Justice.
Earl Warren: Do it in your own time. I'm in no hurry.
Whitney North Seymour: I'll come to it right now. Counsel -- Mr. Levy said, in effect, that these waivers were going on all the time and the result of that was that everybody could fill their nest. Counsel for the Commission indicated that this was a very grave evil that Mr. Robert Lehman and others were always back-scratching in getting money this way, and so on. Now, there's not anything in this record to sustain anything of that kind. The only reference to any other waiver is a reference to financing for airlines where, under the CAB, the director is not entitled to participate in underwriting fees, which is a very different thing. There's no evidence in this record of any general waiver of profits made by insider's transactions. The only other case that is before the Court, perhaps, is the Rattner case where Mr. Hertz had a profit of some $900. In this case, the profit of Mr. Thomas was some $3,000 or thereabouts. And, Mr. Hertz turned over that money to the corporation. There's no evidence of such general violation and I submit that for a court, in the teeth of these findings or even for counsel in the teeth of these findings, to suggest anything to the contrary is quite wrong. Furthermore, the SEC has regularly filed with it, monthly, statements of all such transactions and if there was such any horrendous evil, as counsel has suggested to Your Honors, the Commission is charged with the duty of seeking legislation and they should do it. And, I submit the fact that, since 1952 when Rattner was decided, they have seen no occasion to go to Congress for a relief. It shows on its face that there's no such evil and the fact is, as I said at the beginning, that in my view, they accepted Rattner and I want to come to that.
Earl Warren: My question was not directed at what was in the record, but we were discussing what such an interpretation would lead to under certain circumstances. You said suppose it's a husband and wife, suppose it's a brother and a sister, suppose it's some other relationship, and my question was only to this. Suppose this practice was done, as they say, would that not give some substance to the --
Whitney North Seymour: I would submit, if Your Honor pleases, that if since 1952, with monthly filings, the Commission is unable to show and the plaintiff was unable to show, having access to the Commission's public records, that there was such any evil, the evil is wholly imaginary and if there is an evil, it's for Congress to cure and not to be cured by distorting the language of the statute. Now, I want to come --
Tom C. Clark: Mr. Seymour, may I ask you --
Whitney North Seymour: Yes, sir.
Tom C. Clark: (Inaudible)
Whitney North Seymour: My recollection is that those paragraphs of the notice to admit which were rejected as an offer of proof by the court below and I don't understand that that's one of the grounds on which certiorari was sought here. Those paragraphs concern other episodes in which Lehman Brothers' partners became directors of other corporations. And, the court below correctly rejected that as wholly irrelevant to this case.
Tom C. Clark: I wonder if they have vindicated any scheme (Inaudible) in their argument?
Whitney North Seymour: I shouldn't -- I don't think so, Your Honor. Now, as to Rattner, very briefly and I'm almost through. As I told Your Honors, prior to Rattner, the regulation contemplate -- the regulation published by the Commission contemplated that the partner could file showing the partners -- the partnerships, as investments, or his own investments and the court adopted that regulation as one of the grounds of its decision. Perhaps I better read the precise regulation to Your Honor because I'm going to read the next one. This is the regulation that was in effect at the time of Rattner and is taken from the Rattner opinion. “A partner who is required to report in respect of any equity security owned by the partnership may include in his report the entire amount of such equity security owned by the partnership and state that he has an interest in such equity security by reason of his membership in the partnership without disclosing the extent of such interest, or such partner may file a report only as to that amount of such equity security which represents his proportion of interest in the partnership indicating that the report covers only such interest.” Now, that was surely a recognition by the Commission of the appropriateness of treating the partner as only “only his own interest” and the Court regarded that as an interpretation of the statute and placed some reliance on it.
Felix Frankfurter: These -- are these merely financial partnerships? Do they -- would this cover legal partnerships?
Whitney North Seymour: Well I --
Felix Frankfurter: They are members of the law firm or directors of a corporation?
Whitney North Seymour: Well, I suppose so. I suppose so.
Felix Frankfurter: And that is not a unique phenomenon, is it?
Whitney North Seymour: No, and it's not a unique phenomenon to have a law firm partners as directors of corporations.
Felix Frankfurter: That's what I mean.
Whitney North Seymour: Now the regulation after Rattner, I submit, really in effect was -- it can be fairly regarded as an adoption of the Commission -- of the principle of the Rattner case or at least an indication that the Commission did not propose to quarrel with them, and the release is -- the release with reference to Rattner is in the brief at page 21, as I refer to the Chief Justice, and that new regulation is stated to be a regulation in the interest of disclosure. And, the Commission in the contemporaneous release, which has never been withdrawn so far as I know, said it is not intended as a modification of the principles governing liability for short-swing transactions under Section 16 (b) as set forth in the case of Rattner against Lehman. But it is based upon the belief that full disclosure requires a report of all partnership transactions when an officer, director, or a 10%-stockholder of the issuer is a partner. Now, I submit that the reason the Commission didn't ask Congress to change the result in Rattner is because they were content with it and were content with it indeed until Judge Clark stirred them up to participate in this case. And, if they had any quarrel with that decision, if they thought there was any evil, they should have gone to Congress to correct it. Now --
Felix Frankfurter: What was the date of that regulation, Mr. Seymour?
Whitney North Seymour: That regulation is September -- that release is September 24, 1952. 1952, so that, until the decision of the court below when the Commission first busied itself in getting into this litigation, it did not busy itself about it when Judge Dawson decided the case against the petitioner, but only after the dissent in the court below.
Hugo L. Black: Where is that in your brief?
Whitney North Seymour: I beg your pardon?
Hugo L. Black: Where is that regulation in your brief?
Whitney North Seymour: Page 21.
Hugo L. Black: 21? Thank you.
Whitney North Seymour: I beg your pardon, page 24.
William O. Douglas: Just as a matter of curiosity, Mr. Seymour.
Whitney North Seymour: Yes, sir?
William O. Douglas: Your answer to Mr. Justice Frankfurter -- I might have to assume that law firms these days are taking short-swing profits?
Whitney North Seymour: No, I don't. I don't. Well now, I'm almost through and I'll --
Felix Frankfurter: But -- but would there be any difference in the consideration between a law firm director or all the --
Whitney North Seymour: I wouldn't think so.
Felix Frankfurter: -- legal, all the legal implications of a partnership, would there be any difference --
Whitney North Seymour: No.
Felix Frankfurter: -- in a case of a partner, in one of the many various New York law firms who have hold directorship?
Whitney North Seymour: I wouldn't think so, and the obligations to the corporation and the obligation to the partnership would be the same, I should think.
Hugo L. Black: It doesn't matter to have an effect, either good or bad, I wouldn't say --
Whitney North Seymour: Yes, but I --
Hugo L. Black: But I can assume I can (Inaudible)
Whitney North Seymour: I think -- I think the Bar would be very much surprised to learn that it had an obligation, as Mr. Levy suggested, to disclose to the partners everything that any member of a Board learn as a director.
Felix Frankfurter: But --
Whitney North Seymour: -- and there's no such basis -- no basis to furnish those things.
Felix Frankfurter: The suggestion was it would be his duty --
Whitney North Seymour: Yes.
Felix Frankfurter: That all partnership -- all firm-partnership business.
Whitney North Seymour: Perfectly obvious and I -- I should submit --
Felix Frankfurter: I didn't mean to --
Whitney North Seymour: -- that that isn't so.
William O. Douglas: Well, a partner -- law partners, I assume, keep the $50-fee for directors and they keep it themselves, so the --
Whitney North Seymour: Mr. Justice, you're a survivor of a day which is a happier day.
Felix Frankfurter: Mr. Seymour, that was (Inaudible) element in view of Justice Black's interventions, I hope I did not imply that I regard that as the most desirable aspects of their legal profession.
Whitney North Seymour: No, I --
Felix Frankfurter: I didn't mean to make any such implications.
Whitney North Seymour: I think, in view of --
Felix Frankfurter: If it's irrelevant to say something, I could.
Whitney North Seymour: I think, in view of a number of stockholder suits in the last 25 years, most lawyers would feel that way, too.
Felix Frankfurter: Yes.
Whitney North Seymour: Now finally, there are references in the briefs to Judge Medina's decision in the banker's case, a very long opinion in which he deals with various aspects of banking in New York and petitioner seeks to incorporate by reference some of the things in that opinion and this case as if they've been proved in this record, and Judge Medina correctly said below that that was irrelevant to anything here. They refer to a CAB statute and the fact that, under the CAB statute, a Lehman Brothers partner has, for certain purposes, been regarded as a representative of the partnership. Now, this merely points out the fact that when Congress wanted to use a word to describe something, it knew how to do it and if it wanted to include partners or representatives or anything of that kind, there are statutes in our brief which show that they could do it.
Felix Frankfurter: This is as such that at all.
Whitney North Seymour: Such, of course, doesn't do anything except to refer to 16 (a) and it doesn't expand the group as I think Mr. Justice Douglas pointed out in the question he asked.
Hugo L. Black: You may have said, a moment ago, just so -- I'm sorry, I didn't understand. Have this regulation on page 24 ever been expressly revoked by the Commission?
Whitney North Seymour: Well, my understanding is that, early in 1961, the Commission passed over into a series of instructions about the filing of reports and, whether that resulted in a revocation, I'm not quite sure.
Felix Frankfurter: Are those instructions in conflict with this regulation?
Whitney North Seymour: No, sir, I think not. I think they're in accord with the regulation and there's a reference to them in our brief. And certainly, down to 1961, when the Commission began to busy itself with this litigation, there wasn't any departure from the principles of those regulations in anything I know of that the Commission said it did. Now --
Speaker: (Inaudible)
Whitney North Seymour: I beg your pardon?
Speaker: (Inaudible)
Whitney North Seymour: It was a release in connection with the regulation which, I take it, states the basis on which the regulation was made. And I take it, it's an explication of the regulation. Certainly, it's an official act of the Commission. Now, my friend Mr. Levy has reserved a rather more than usual time for rebuttal, and I want to anticipate two points which he may refer to on rebuttal in the course of this extended time of which have not heretofore been mentioned, I think. First, there was some suggestion in Judge Clark's dissent that maybe the -- Thomas -- Thomas could be held liable for all of Lehman profits, all the other partners' profits because he was a co-owner of partnership property. Now, I don't think we need to get into the complication of partnership law here, but it's perfectly clear that there's a distinction between ownership in specific property and an interest in the partnership and the partner, under the Uniform Partnership Act which is in effect in New York, is a co-owner of specific partnership property but he can't dispose of it. It is not subject to the claims of his creditors and obviously, the profits of the partnership are not on that category -- they're in the category of interest in the partnership. And, his interest in the partnership is his right to share in the profits. The statute refers to profits realized by him. It cannot refer then to something that he couldn't possibly deal with. It must be when the profit has been realized by him. Second, Mr. Justice Whittaker, I want to come to the deputization point which you and Mr. Justice Douglas asked me about. In the concurring opinion in Rattner, Judge Learned Hand, recognizing that, in the circumstances of that case, there wasn't any possible ground for holding Lehman Brothers reserved for a future consideration the situation which might exist if there was deputization of a director to represent the partnership interest, and he didn't define what he meant by that at all. The court below, Judge Medina and Judge Swan, said there wasn't any room in this statute for any conception -- such conception as that. The statue doesn't refer to deputies, but the directors, officers, and stockholders. But there's a specific finding of fact by both court below that there wasn't any deputization. So whatever it means, it didn't exist here. Now, I suppose, what it must mean, if the doctrine is over, is a case where a stockholder designates somebody to represent him on the Board and directs his conduct in that event. Judge Hand suggests that you might get a different result. I don't see any basis for it under the statute but, in any event, that was not the situation here and that's dispositive of the -- of the case on that point. Now, I submit, the --
John M. Harlan II: The judgment against Thomas is not involved here.
Whitney North Seymour: No, sir. The judgment against Thomas --
John M. Harlan II: Swan dissented on -- Judge Swan dissented.
Whitney North Seymour: Yes, Judge Swann thought that the judgment was somewhat larger than it should've been and we haven't sought certiorari. I have just one other point. The court below denied interest. Both courts below denied interest upon the ground that Thomas was being charged more than he actually realized by way of profit and the question was a difficult one, and fairness did not require that interest should be imposed, we think that was right.
Earl Warren: Mr. Levy.
Morris J. Levy: Mr. Chief Justice and may it please the Court. The question, as I see it here -- the issue, as I see it here, is the interpretation which this Court must give to a statutory purpose and inherent in the Act. Congress specifically stated that the purpose of the Act was to prevent the use of inside information in specifying the three categories of persons who are in such relationship to an issuer. That they would, in the course or the nature of their duties, have access to inside information. Congress, by no means, meant merely to stupefy or merely to limit the liability under that section to those three types of persons mentioned. It would seem from the purpose -- from the statutory purpose that any person who has access, who was so close to the issuer, that he would have access to inside information would be one of those persons against whom the statute would apply. Now, I believe that a partnership, a member of which is on the Board of an issuer, who deals in securities of the issuer and who is, in the nature -- in the very nature of its business, an investment adviser to the issuer is in such close relationship to the issuer that it must be deemed as a person who has access to confidential information and against whom the statute was meant to apply. This Court has on several occasions held that it would not -- it will not be limited by the literal statutory words of a statute but will apply the statute even beyond its literal wording in order to accomplish the purpose which Congress intended. I specifically refer Your Honors to the cases of the United States against American Trucking Association where this Court held that there is, of course, no more persuasive evidence of the purpose of the statute than the words by which the legislature undertook to give expression to its wishes. Often, these words are sufficient in and of themselves to determine the purpose of the legislation. In such cases, we have followed their plain meaning when --
Felix Frankfurter: Do you mean?
Morris J. Levy: -- that meaning --
Felix Frankfurter: Do you mean --
Morris J. Levy: Has led --
Felix Frankfurter: I beg your pardon.
Morris J. Levy: Sorry.
Felix Frankfurter: I'm sorry.
Morris J. Levy: -- when that meaning has led to absurd or futile results. However, this Court has looked beyond the words to the purpose of the Act. Frequently, however, even when the plain meaning did not produce absurd results, but merely an unreasonable one. Plainly at variance with a policy of the legislation as a whole, this Court has followed that purpose, rather than the literal words. I say to Your Honor that the accomplishments of the statutory purpose can only be effectuated by holding in this case a partnership liable for its short-swing transactions because of the fact that one of its members is a director of the issuer, has -- definitely has access to inside information and, apart from which, the partnership itself because of the nature of its business with the issuer also has the same access to inside information.
John M. Harlan II: Would your argument apply to a limited partner?
Morris J. Levy: I'd say, Your Honor, that it would apply to a limited partner.
John M. Harlan II: Even though he had no interest in the profits of the firm, that they it might represent the (Inaudible)?
Morris J. Levy: Well, I'm assuming, Your Honor, that the same facts -- you're also giving me the same facts with respect to the partnership. Now, the partnership is also an investment adviser to the issuer.
John M. Harlan II: But the limited partner is excluded from -- the limited partner-director is excluded from all such business under the terms of its limited partnership.
Morris J. Levy: I --
John M. Harlan II: Would you even carry that far?
Morris J. Levy: I'd say that the close relationship of a limited partner to the rest of his partners would seem that -- to make him liable or to make his partnership firm liable for any profits realized by the firm. But I say, in this case, we don't have to come to that. I say, Your Honors, that the court below -- the trial court below found as a fact that there was no deputation of Mr. Thomas by Lehman Brothers. I can't see how as a legal conclusion, the court could have made such finding. Here we have a person who is a member of a partnership, Mr. Hertz, who testified that he joined the firm of Lehman Brothers to bring his business, that he joined Tide Water for the purpose of bringing business to Lehman Brothers -- the Tide Water business to Lehman Brothers, that he recommended Mr. Thomas -- that he asked Mr. Thomas whether he wished to be a member of the Tide Water Board and that his purpose of asking him whether he wanted to be a member was to -- for him to further the interest of Lehman Brothers, that pursuant to his recommendation which was tantamount to I suppose an order since Mr. Hertz had been a director of Tide Water for approximately 20 years and he was sort of the elder statesman there, and in view of the fact that Lehman Brothers was the financial adviser to Tide Water, how there could be a legal finding that Lehman Brothers did not deputize Mr. Thomas to be -- to represent its interest on the Board. It's most difficult to see Judge Clark in his dissenting opinion.
Charles E. Whittaker: May I ask you, please sir, at that point, what interest did Lehman Brothers have in Tide Water to be represented at the time that the (Inaudible)?
Morris J. Levy: The only interest it had at that time was that they were getting the business from Tide Water in the financing.
Charles E. Whittaker: But, they bought this certain types of shares of stock afterwards?
Morris J. Levy: Afterwards, yes, sir. And then, it's also interesting to note, Your Honor, that in a testimony of Mr. Thomas, he testified that at the time prior to his joining the Tide Water Board, he owned approximately 4,000 shares of stock in Monterey Oil which he claimed was a competing company. And that in order for him to take his job with Tide Water, he promised to give up his directorship in Monterey, although he stated he didn't own one share of stock in Tide Water which apparently assumes that here's a person giving up a directorship in a company which he has a large investment to take a directorship in a company in which he has no investment whatsoever. That was only done for the purpose of representing Lehman Brothers. In fact, Lehman -- he was deputized by Lehman Brothers to do that.
John M. Harlan II: Do you -- do you con -- do you attack the findings of the two lower courts?
Morris J. Levy: I certainly do, Your Honor. I say, the legal conclusion, the finding was wrong, and Judge Clark apparently sides with me and says that the lily was gilded. He couldn't see how -- how the court could find that there was no deputation there.
John M. Harlan II: This is sort of a secondary argument. In other words, your basic position is consistent with accepting the fact, do you not?
Morris J. Levy: My basic position is -- well, actually, my basic position is -- it's two things. It is that the partnership in general, as a legal proposition, should be held liable apart from any deputation but that there was deputation there.
John M. Harlan II: I just wanted to make it clear or --
Morris J. Levy: Yes.
John M. Harlan II: -- myself clear. Your basic position is the same as the Commission, is it not? They say they accept the findings and (Inaudible) that it should've been in the judgment against the partnership.
Morris J. Levy: Well, I differ from the Commission, Your Honor, and that I do not accept the findings, respectfully so, of the courts below that there was no deputation.
Felix Frankfurter: Mr. Levy, “the lily was gilded,” is that a conclu -- a finding of facts?
Morris J. Levy: No, that's a conclusion by Judge Clark from the evidence. He found that -- he felt that the -- there was deputation that there couldn't be anything but -- anything else but deputation from the facts and he couldn't understand how a court could find otherwise.
Felix Frankfurter: That's frequently the fate of people who disagree with the majority, I know that very well.
John M. Harlan II: Well, what I'm trying to get at is, if your attack on the findings is rejected, the findings of two courts are rejected, are you still in the Court with all your concerns?
Morris J. Levy: Yes, sir.
John M. Harlan II: In the Court here?
Morris J. Levy: Yes, sir.
John M. Harlan II: That's what I wanted to get at.
Morris J. Levy: Yes, sir. I maintain with the Commission that the partnerships must be held liable (Voice Overlap) under the interpretation.
John M. Harlan II: I understood.
Morris J. Levy: Now, if we go to the --
Felix Frankfurter: Because it is a director.
Morris J. Levy: I beg your pardon, sir?
Felix Frankfurter: Because it is “a director” under 16 (b), which is it --
Morris J. Levy: Because --
Felix Frankfurter: Is it a beneficial owner? Is it a director? Is it an officer by reason of his relationship to the issuer? Which one, or as I gather from your argument, though I for myself think most abstract discussions of statutory construction and not very profitable, but I gather in your argument, it was that the purpose behind this provision is so important to the public interest as disclosed by the disclosure preceding its enactment that the condemnation and the right to sue under the statute isn't restricted to those three categories.
Morris J. Levy: Precisely, Your Honor.
Felix Frankfurter: That's your point?
Morris J. Levy: That's my point.
Felix Frankfurter: But it isn't restricted to what the statute as --
Morris J. Levy: That's right.
Felix Frankfurter: -- as classified?
Morris J. Levy: That's exactly what I meant to say and I hope I have made my argument clear with respect to that. I say it's not restricted to only those three mentioned that Congress never intended to restrict that merely by mentioning it. They didn't say that it shall only apply to a director or officer, but they said for the purpose of preventing the unfair use of information. Any profits realized by a director, because a director, officer, or 10%-stockholder, by reason of his relationship to the issuer, because he had access to information, should be recoverable.
Charles E. Whittaker: Well, are you arguing that remedy here is controlled by something other than that statute?
Morris J. Levy: No, I say the remedy, Your Honor, if this statute is not, as Mr. Seymour stated, a penal statute, it is a remedial statute. All the courts have so held the statute from the history to be a remedial statute, and that the courts must apply its operation to the facts in such a way that it will carry out the very purpose which Congress intended to be carried out and, on -- that, unless that is done, the statute will actually fall by the wayside and have no usefulness whatsoever.
Charles E. Whittaker: Does this statute allow to create a remedy conversely against anyone other than the beneficial partner, officer, or director of the issuer?
Morris J. Levy: Yes, sir. In my opinion, Your Honor, the statute creates a right against a person whose relationship to the issuer is such that he may have access to inside information. The very essence of the statute is access to inside information so that he isn't able to use such information. That is the very evil against which the statute is aimed.
Charles E. Whittaker: Wasn't this to say you should be liable for the profit realized by him?
Morris J. Levy: That is correct, sir.
Charles E. Whittaker: Well then, does that mean by him and somebody else?
Morris J. Levy: No, realized by him, specifying those three types of persons who fall within the category of persons who have access to inside information, but not excluding -- not excluding anybody who can be proved to be in such relationship to the issuer that he has indeed such access to inside information. I believe that, in this particular case, we have actually proven that there was inside information transmitted to the partnership by the partners.
John M. Harlan II: Which you've got the hurdles of -- the findings of facts which were against you on that.
Morris J. Levy: Well, I say we have two -- two ways to hold the partnership and that is, one, to actually carry out the congressional purpose and we say that Congress stated that anybody who has access to inside information is in such relationship to the issuer that he has access to such information shall be held liable, or we can go on the proposition that there was deputation. Now, if Your Honors find that the conclusions of the court below, there was -- that there was no deputation, of course, I'd want to proceed on the theory that the purpose of Congress must be carried out and that the only it can be carried out is by holding the partnership liable for the profits because a director, a member of its firm, is a partner -- is a director. Now, going to the partner himself, to Thomas himself, we need not go beyond the reaches of the statute in his case. He was a director. There was no doubt. There's no doubt of that. The statute reaches him. Now, why should his profits be limited to a proportionate partnership interest? In order to carry out the purposes of the statute, this Court would not have to go beyond the literal meaning of the words but, actually, by holding him liable for the entire profits, the congressional purpose would be carried out in this fashion. Of course, if he and his partnership were held liable jointly and severally, I think that would be -- that should be -- that should be the congressional -- it should be the attitude of the court in carrying out the purpose of Congress, but if the court sees fit not to hold the partnership, I say only by holding the partner himself for the entire profits can the congressional purpose be carried out in this case and, by doing so, this Court would not have to go beyond the very reaches or literal language of the statute.
John M. Harlan II: What do you do with “realized”?
Morris J. Levy: Well, as --
John M. Harlan II: Profit realized?
Morris J. Levy: As an owner, as a co-owner of the partnership funds, the partnership realized -- realized the profits.
John M. Harlan II: It was realized by him.
Morris J. Levy: Well, realized by him. “By his partnership” is him, too. I say that his partnership is him. He and his partnership are one and the same. He cannot be disassociated from his partnership.
Charles E. Whittaker: Is it the law -- under your partnership law, this is something that's -- the theory that each partner owns it all and he belongs to the (Inaudible)
Morris J. Levy: I believe, Your Honor, if I'm not mistaken, that each partner has an indivisible interest in common with the other partners, if I'm not mistaken. That is the law.
Potter Stewart: Co-owner.
Morris J. Levy: Now, Mr. Seymour has made some statement here with respect to certain of the facts with respect to waiver not being properly set forth. Now, I refer Your Honors to pages 126 and 127 of the record in which Mr. Thomas specifically testified that there had been cases where his partners have waived -- 125 and 126 of the record. We have had a number of transactions, and I'm quoting, “In which other partners have waived their interests of short-swing profits.” There were the facts which indicate that there had been other cases. It's in the record.
Earl Warren: Waived in favor of the other partners?
Morris J. Levy: In favor of the other partners in other -- other corporations.
Felix Frankfurter: What page are you reading?
Morris J. Levy: Page 125 to 126 of the record.
Felix Frankfurter: What is that?
Morris J. Levy: I beg your pardon?
Felix Frankfurter: 25 (a) -- 125?
Morris J. Levy: Yes.
Felix Frankfurter: What is that, an offer of proof?
Morris J. Levy: No, 125 (a) and 125 -- 126 (a). That was an -- that was not an offer of proof. It was actually testimony by Mr. Thomas in which he was asked --
John M. Harlan II: You said that the question is, “It couldn't be possible?” And he said, “Yes, it couldn't be possible.” And then, he ends up and says, “Yes, it occurred right here.” So, you end up saying that this meant -- there's nothing in this record that, so far as testimony is concerned, except this transaction.
Morris J. Levy: Well, no, I refer Your Honor prior to that. My question was -- I started with “now,” and he answered “I might tell you, Mr. Levy, that we have had a number of transactions in which other partners waived their interest, primarily CAB Financing whereby a lawyer can't participate.” Now, question, “Were a partner in Lehman Brothers waives his interest in a transaction, is that partner's interest distributed amongst the other partners?” Answer, “It is to my understanding, yes.” Then, of course --
John M. Harlan II: That's a different kind of a transaction than the one that you're referring to at the bottom.
Morris J. Levy: That is --
John M. Harlan II: (Inaudible)
Morris J. Levy: That is true, Your Honor, except that he specifically stated cab financing primarily, not excluding other transactions, he did not exclude other transactions and said -- and say they're limiting it to cash transactions.
Felix Frankfurter: Did you pursue that question and asked -- did you pursue that question and make clear that you had other specific transactions in mind and get his views on them or his testimony regarding it?
Morris J. Levy: I don't believe I did pursue that, Your Honor.
Earl Warren: Very well.