Opinion ID: 264439
Heading Depth: 1
Heading Rank: 2

Heading: Babbitt's Computations on Appeal.

Text: 12 As we have indicated, Babbitt itself has conceded the invalidity of the District Court's computations, and has offered alternative pairings of purchases and sales on appeal. We now turn, therefore, to an analysis of the company's computations. 13 Babbitt's first pairing links Lachner's conversion of preferred into common, on November 5, 1958, with the sale of 4,600 shares on March 6, 1959 at $8.625 per share. While this approach avoids the six-month problem encountered above, and although it is clear that a conversion of preferred into common is a purchase within the meaning of § 16(b), Park & Tilford, Inc. v. Schulte, 160 F.2d 984 (2d Cir. 1947), this is of little assistance to Babbitt. For, as was true with one of the District Court's pairings, this transaction yields no recoverable profits. 14 In determining the purchase price of the common obtained on the conversion, we must necessarily value the preferred which was surrendered in return. And, unlike the situation in Park & Tilford, supra, the parties have expressly stipulated here that there was no market for the Series B Preferred at the time of the conversion. As a result, we find that the District Court was correct in determining that the preferred might only be valued by looking to the market price of the common received in return and into which it was readily convertible. Since the common sold for $8.6875 on November 5, no profits are yielded when this purchase is paired with the sale on March 6, 1959 at $8.625. 15 As a second suggested pairing, Babbitt links the March 13 purchase under the option with the May 6 sale of 5,749 shares at $9.7945. Here, profits clearly are realized. Subtracting the purchase price, computed under Steinberg as the value of the stock on the date the option became exercisable, or $9.3125, from the sale price of $9.7945, we arrive at a per share profit of $.482, and an aggregate recoverable amount of $2,771.02. Thus: 16 (Sale) May 6, 1959 ....................... $9.7945 (Purchase) March 13, 1959 .................... $9.3125 _______ Per share profit .............................. $ .482 × 5,749 shares ______________ Total profits ................................ $2,771.02 17 Assuming the accuracy of the above figures, we have thus concluded to modify the judgment below, and to award Babbitt $2,771.02, with interest from May 6, 1959. Admittedly, neither party to the appeal is entirely satisfied with this result. Asking us to disregard Steinberg, Babbitt contends that a greater sum is properly due; contending that his transactions were exempted from the provisions of § 16(b), Lachner insists that Babbitt is entitled to no recovery at all. We have considered the arguments of both parties and find neither to be persuasive. 18 Babbitt's suggestion that Steinberg be discarded is founded on SEC Rule X-16B-6, which was recently held valid in Kornfeld v. Eaton, 327 F.2d 263 (2d Cir. 1964). By the terms of this rule, the purchase price of stock bought pursuant to an option — when the option is acquired more than six months prior to its exercise — is deemed to be the lowest market price of any security of the same class within 6 months before or after the date of sale. In the present case, this figure is $7.00; if the Rule were applicable here, per share profits would be increased to $2.7945 on Babbitt's second pairing, and total profits would be raised to $17,065.58 instead of the $2,771.02, allowable under Steinberg. 19 We find it clear, however, that Rule X-16B-6 has no application to the present case. For, as its very wording makes manifest, far from a mechanism to increase allowable profits, the Rule was intended to mitigate the severity of Steinberg, and to reduce the amounts for which Steinberg would hold an insider liable. Thus, X-16B-6 specifically provides that nothing therein contained shall be deemed to enlarge the amount of profit which would inure to the issuer in the absence of this section. If we were to accept Babbitt's argument and employ the Rule to award five times the profits allowable under Steinberg, we would vitiate its purpose. At least on this side of the Looking-Glass, words cannot be read in this way to mean their opposite. 20 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. 21 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. 22 The judgment will be modified to provide for damages of $2,771.02, with interest from May 6, 1959, and, as so modified, is affirmed.