Opinion ID: 437691
Heading Depth: 2
Heading Rank: 1

Heading: The Events and the Complaint

Text: 2 The lawsuit focuses on trading by Drexel in securities of TSI during the period from June 5, 1979, to November 11, 1981. Most of the facts are undisputed. TSI had three classes of securities, each listed and traded on a national securities exchange: a common stock, a 7% convertible subordinated debenture, and a 10% convertible debenture. The debentures were convertible at the option of their holders into shares of TSI common stock without the payment of additional consideration. 3 Drexel, a broker-dealer in securities, owned more than 10% of TSI's common stock. During at least part of the period in question, Drexel held itself out to be a market maker in TSI's convertible debentures. It was not a market maker in TSI common stock. Within each class of TSI securities, between June 1979 and November 1981, Drexel made purchases and sales, or sales and purchases, within periods of less than six months (short-swing transactions). CRA instituted the present action as a shareholder of TSI, contending that, under Sec. 16(b) of the 1934 Act, TSI was entitled to recover Drexel's profits from its short-swing transactions. 4 Following a period of discovery, Drexel moved for summary judgment on the ground, inter alia, that it was a market maker in TSI debentures, and that Sec. 16(d) of the 1934 Act therefore exempted all of its transactions in TSI securities from the scope of Sec. 16(b). CRA opposed the motion, contending that Drexel had not consistently been a market maker in the convertible securities during the period in question. It presented affidavit evidence that Drexel had listed itself in an inter-dealer quotation service published daily by The National Quotation Bureau, and known informally as the Yellow Sheets, as a market maker in the convertible debentures only on certain dates and not on others. CRA contended that the sporadic character of Drexel's listings and transactions contradicted its claim to status as a market maker, and that its short-swing transactions in the debentures were thus not exempted by Sec. 16(d). Further, it contended that even if Drexel had been a market maker in the debentures, none of Drexel's transactions in TSI common stock were exempted by Sec. 16(d) since Drexel was at no pertinent time a market maker in that stock. CRA cross-moved for summary judgment in its favor. 5 In opposition to CRA's cross-motion and in further support of its own motion, Drexel presented affidavits of two of its employees and of four independent broker-dealers, stating that, notwithstanding the Yellow Sheets, Drexel had in fact at all pertinent times held itself out to other dealers as willing to buy and sell TSI convertible debentures for its own account at reasonable prices on a regular and continuous basis. Drexel stated that its transactions in TSI common stock were incident to and in connection with its market-making activities in the convertible securities, because there was a necessary relationship between the common stock and the 10% convertible debentures, in that the two securities traded in step with each other and at roughly equivalent prices.