Opinion ID: 272506
Heading Depth: 2
Heading Rank: 2

Heading: Transactions Between Enterprises and Other Corporations Controlled by Lamb.

Text: 35 The district court held that the transaction on June 6, 1955 in which Enterprises acquired from Industries 68,100 shares of Air-Way Common plus other assets was a Section 16(b) 'purchase' by Enterprises, which the lower court then matched against the October 6, 1955 sale by Enterprises to Industries of 10,500 shares of Air-Way Common and the October 13, 1955 sale by Enterprises to the Edward Lamb Foundation, Inc. of 6,500 shares of new Air-Way Common. 26 Thus the district court held Lamb and Enterprises jointly liable for short-swing profits totaling $153,526.50. 27 Lamb and Enterprises appeal this determination, contending inter alia that the June 6, 1955 transaction was not a Section 16(b) 'purchase' by Enterprises. The Securities and Exchange Commission also urges that we adopt this view. For reasons given hereafter we reverse the district court and hold that the June 6, 1955 Transaction was not a 'purchase' by Enterprises within the meaning of Section 16(b). 36 It must be recalled that on June 6, 1955 Lamb controlled 100 per cent of the stock of Enterprises and 97 per cent of the stock of Industries-- the remaining 3 per cent was owned by several employees or former employees of Industries. By virtue of Lamb's pervasive control over Industries and Enterprises, there was at most a token change in the insider's investment position when Air-Way Common was transferred from Industries to Enterprises; Lamb indirectly owned this stock both before and after its transfer. Thus Lamb did not place himself where he could make any more advantageous use of inside information for speculative purposes than he could have before the transfer. Nor did the decision to transfer the Air-Way Common alter the nature of his investment, increase or decrease the amount invested, or alter in any way the risks involved. 37 The rule announced by Judge Clark in the first half of Blau v. Mission Corp., 212 F.2d 77 (2 Cir.), cert. denied, 347 U.S. 1016, 74 S.Ct. 872 98 L.Ed. 1138 (1954) seems applicable here. In that case a parent corporation, which was an insider in Tide Water Associated Oil Company because of stock ownership in excess of 10 per cent, transferred a substantial block of Tide Water stock to its (the parent') wholly-owned and newlyorganized subsidiary holding company established for that purpose. Our court held that this transfer was 'mere bookkeeping without the reach of the statute' and thus was not a Section 16(b) 'sale.' 212 F.2d at 81. After characterizing the transaction as 'a mere transfer between corporate pockets,' this court also said, 212 F.2d at 80: 38 To hold otherwise would be to place entirely undue stress on the corporate fiction reaching harsh and wooden results quite unnecessary to achieve the purposes of the act. Until, going beyond the corporate forms, some new individuals entitled to share in the ultimate profits enter the picture there has been no real sale of stock. 39 In the present case the district court rejected the analogy between the first transaction in Mission Corp. and the transfer of Air-Way to Enterprises. In doing so, the court below stressed the absence of complete ownership of the Industries stock by Lamb. It concluded that the rule of the first half of Mission Corp. should be applied only to cases involving 100 per cent ownership because there were no 'precise and generally applicable criteria' that would enable courts to know how much control less than 100 per cent was enough to invoke this rule. 242 F.Supp. at 159. We sympathize with this position because we have been unable to formulate a brightline rule as to how much stock control is enough to invoke the rule. Nevertheless, we agree with the Securities and Exchange Commission's conclusion that in the present case the amount of Industries stock not owned by Lamb-- approximately 6,000 of 196,000 shares-- is not sufficient to affect the unity of interest between Lamb, Enterprises and Industries. The transfer to Enterprises of the Air-Way Common in no way increased Lamb's power to make use of inside information, and for this reason that transfer was not a Section 16(b) 'purchase' of the Common. 40