Legal Document

404 U.S. 418 92 Supreme Court Reporter 596 30 United States Reports Lawyer’s Edition 2d Series KF101.8 U54 575 RELIANCE ELECTRIC COMPANY, Petitioner,v.EMERSON COMPANY. Number 70—79. Argued Nov. 10, 11, 1971. Decided Jan. 1972. Rehearing Denied Feb. 28, See 405 969, 1162. Syllabus Respondent, the owner of more than 10% Dodge Mfg. Co.'s stock, within six months purchase thereof sold enough shares to a broker reduce its holding 9.96%, for purpose immunizing disposal remainder from liability under § 16(b) Securities Exchange Act 1934. Under that provision corporation may recover itself profits realized by an and sale stock any six-month period, provided held 'both at time sale.' Held: terms respondent is not liable petitioner (Dodge's successor) derived 9.96% purchase. Pp. 422—427. 434 Federal Reporter, 2nd 918, affirmed. Thomas Pacific KF135 P2 Mulliganm, Cleveland, Ohio, petitioner. Walter North, Washington, D.C., Commission, as amicus curiae, special leave Court. Albert E. Jenner, Jr., Chicago, Ill., respondent. 1 Mulligan, opinion 2 Section 1934, 48 Statutes-at-Large 896, 15 Code KF62 78p(b), provides, among other things, sale.'1 In this case, respondent, 13.2% corporation's shares, disposed entire holdings in two sales, both them The first reduced respondent's second remainder. question presented whether are recoverable Corporation 16(b). We hold they not. 3 * On June 16, 1967, Emerson Electric Co., acquired outstanding common Manufacturing pursuant tender offer made unsuccessful attempt take over Dodge. price was $63 per share. Shortly thereafter, shareholders approved merger with petitioner, Reliance company Faced certain failure further Dodge, prospect being forced exchange merged near future,2 Emerson, following plan outlined general counsel, decided dispose bring below 10%, order immunize Pursuant counsel's recommendation, on August 28 37,000 brokerage house $68 This Emerson's stock. remaining were then $69 share September 11. 4 After demand it filed action seeking declaratory judgment claimed all, because shares. District disagreed, falls where purchaser becomes virtue Appeals affirmed holding, did cross-petition certiorari. Thus before us. 5 alternatively argued that, assuming stockholder purchase, only after no longer meaning trial issue alone, amount profits. court found sales 'effected single predetermined disposition overall intent avoiding liability,' construed term 'time . sale' include 'the period during which series related transactions place beneficial disposes his holdings.' 306 F.Supp. 588, 592. 6 interlocutory appeal 1292(b), upheld finding 'split' simply avoid most potential 16(b), but fact irrelevant statute so long 'not legally tied each (are) different times buyers ..' 926. Accordingly, reversed Court's 11 sale, remanded determination sale. petition certiorari, we granted consider unresolved important federal statute. 401 1008, 91 1257, 544. II 7 history have been exhaustively reviewed courts several occasions since enactment See, e.g., Smolowe versus Delendo Corp., 136 231; Adler Klawans, 267 840; Blau Max Factor & 342 304. Those recognized method Congress deemed effective curb evils insider trading flat rule taking out class possibility abuse believed be intolerably great. As one observed: 8 'In achieve goals, chose relatively arbitrary capable easy administration. objective standard imposes strict upon substantially all occurring statutory regardless or existence actual speculation. approach maximized ability eradicate speculative abuses reducing difficulties proof. Such sweeping coverage necessary insure optimum prophylactic effect.' Bershad McDonough,428 693, 696. 9 reach every transaction investor actually relies inside information. A person avoids if he does meet definition 'insider,' sells Liability cannot imposed structured is, rather, used 'avoid' permitted 10 Among 'objective standards' contained requirement such security involved.' Read literally, language clearly contemplates might sell later—but still months—sell additional free Indeed, commentators securities laws recommended exact procedure who, like wishes their purchase.3 urged Reliance, adopted Court, apparent immunity lost though independent respect, 'interrelated parts plan.' F.Supp., But 'plan' conceived would fall had expired, see basis result involved rather limitation. 12 dissenting opinion, post, 442, reasons based conclusive presumption ownership quantity suffices provide access information,' thus 'follows more-than-10% carry taint, even prior has below.' While there logic position, rejected when included proviso must Although legislative affords explanation proviso, regarded long-term investment likely information who moves category. whatever rationale disregarded ground inconsistent our assessment 'wholesome purpose' Act. 13 To sure, alternative constructions possible, those given construction best serves congressional curbing short-swing speculation corporate insiders.4 'at treats proof pre-existing seller scarcely harmony design predicating measure proof.' supra, F.2d, 235. Were adopt could sure investors future convenient case. If 'two-step' owner's thought give rise kind evil sought correct through can effectively deterred amendment preserves mechanical quality judicial search will-o'-the-wisp investor's 'intent' litigated III 14 participating argues interpretation covers Seizing fragment history—a brief between principal authors bill members Senate Committee hearings bill5—the Commission suggests sole exclude statute's persons became 'involuntarily,' as, example, legal succession reduction total number corporation. effect gained position voluntary accept place, note SEC's own rules undercut interpretation. Recognizing interrelatedness 16(a) Act, power grant exemptions reporting requirements 16(a).6 required section report end month changes month. interpreted require some month.7 Thus, down month, presumably exempt hence rules, without regard 'voluntarily.' 16 argument fail contradicted Commission's previous said Lehman, 368 403, 411, 82 451, 456, 'may agree present(s) persuasive policy arguments should broadened prevent unfair use information' accomplished leaving forfeiture specifically designated suffer losses.' strains, flatly contradicts, words 17 18 Affirmed. 19 Mr. Justice POWELL REHNQUIST took part consideration decision 20 DOUGLAS, whom BRENNAN WHITE concur, dissenting. 21 wrest control incumbent management, successfully resisted take-over bid means defensive accumulated, profit exceeding $900,000. 22 Because purportedly comprised 'independent' transactions, today holds beyond contemplation Act.1 So need account these gains. my view, mutilation contrary broad remedial purpose, flexibility legislation, itself. 23 'prophylactic' rule, 413, 556, whose wholesome insiders confidential gives advantage securities.2 24 investigations led unearthed convincing evidence disregard fiduciary positions widespread pervasive.3 25 flagrant betrayal duties directors officers corporations trust came positions, aid market activities,' reported subcommittee charged investigation '(a)mong vicious practices hearings.' S.Rep.No. 1455, 73d Cong., Sess., 55 (1934). limit attack officers. 26 'Closely allied type unscrupulous employment large stockholders while officers, exercised sufficient destinies companies enable acquire available others.' Ibid. 27 Despite flagrantly inequitable character, respected pillars business financial communities considered windfall 'surething' company's usual emoluments position. Cook Feldman, Insider Trading Eschange 66 Harv.L.Rev. 385, 386 (1953); SEC Ann.Rep. 50 (1944). These perpetrated ostensibly reliable men institutions Richard Whitney, President New York Stock Exchange,4 Haw. Hawai‘i KFH45 A2 Wiggin Chase National Bank, chief executive officer,5 Charles Mitchell City Chairman Board.6 drafted combat 'predatory operations,' 68, removing trades months.7 written broadly, strict. Profits forfeit insider's gain information, privy information.8 Feder Martin Marietta 406 260, 262 (CA2). 29 Today, however, guise 'objective' approach, undermines By simple expedient dividing what ordinarily into parts—both performed same day, far appears opinion—a reap result, "plainly variance legislation whole," American Trucking Assns., 310 534, 543, 60 1059, 1064, 84 L.Ed. 1345, owning 'beneficial owner' of' block 'optimum effect' architects intended, easily circumvent mandate. sale—a distribution time' owned implemented matching Moreover, spirit presume 'split-sale' purposes liability. 31 sequence relevant transactions,' McDonough, 428 697 (CA7), foreclosed definitions 'purchase,' 'sale,' owner,' not, infer objectively defined precise meanings. 32 'Whatever 'purchase' 'sale' mean contexts,' manner will effectuate specific (Securities Exchange) used. Securities, Inc., 393 453, 467, 89 564, 572, 668.' Id., 33 Stewart, Appeals, explained appropriate context 16(b): 34 'Every reasonably defined, possibly lend encompassed 16(b).' Ferraiolo Newman, 259 342, 345 (CA6). 35 Applying salutary toward definitions, reasoned opportunities inhering director purchases shortly appointment, 840 (CA2), resignation, 'Options,' played role manipulative disclosed 1930's,9 'purchases' 'sales' underlying commodity; yet, opportunity inherent device, option granted, supra. But, limitation also exercised. Booth Varian Associates, 334 (CA1). Similarly, conversion debentures 'sale'; Park Tilford Schulte, 160 984 (CA2); opportunity, similar Lamb, 363 507 36 thread running decisions problem case ownership' transaction, 'is event primarily semantic one, resolved light purpose—to short swing insiders.' 344. 37 Until today, almost universally faithful philosophy, 'even departing literal language.' 262. offer, although justifiably described discrete purchases, treated Abrams Occidental Petroleum, 323 570, 579 (SDNY), rev'd grounds, 450 157 And, whereby 38 'it possible until less repeat process, ad infinitum,' 39 phrase sale,' places heavy reliance, 'simultaneously with' 'just to' Stella Graham-Paige Motors, 104 957, 959 (SDNY). commentator noted, 40 'necessitates logical inconsistency insofar moment Recent Developments, 57 Col.L.Rev. 287, 289. 41 Yet, present discrepancy seems slight view broader policies 42 broadly it, preclude analysis herein 'sale.' 43 self-evident. Equally obvious modern-day prone counterpart generation ago succumb lure offing. survey 'reputable' businessmen, 42% responding indicated themselves trade 61% 'average' do likewise.10 appear directed conduct protection enacted. 44 strikes vitals statute, says treat 'two seller' detracts 'mechanical quality' 'scarcely proof." Ante, 425. 45 quality,' illusory. 46 'There ('automatic' better word) mental effort applying entrusted law application.' 520. 47 deterrent value depends much vaunted 'objectivity' 'thoroughgoing' qualities. 'We suppose intended thoroughgoing, squeeze establish high conflict selfish interest officer, director, performance duty.' 231, 239 49 Insiders come recognize 'in defeat (§ 16(b)'s) avowed objective,' resolve 'all doubts ambiguities against Oppenheim, 250 881, 884—885. shirked responsibility because, here, resolution factual inquiry. showing, banking firm disgorge board partner 'deputized' sit. U.S., 410, S.Ct., 455, 403. Colby Klune, 178 872 cited majority, inquiry individual 'de facto' officer formally labeled such. Virtually faced problems now inquire particular serve purposes. supra; 304 (CA9); narrow N Dec. Immigration Nationality Decisions open, cases separate 'legally tied'.11 It follows necessity bar application 51 question, course, prime concern positive render ineffective. Insofar burden plaintiff demonstrate 'plan distribution,' open criticism. sweep requires minimal placed putative plaintiffs. 52 goal—elimination problems—is subsidiary main aim—curbing Whatever possesses, ease plaintiff's burden, insulate 53 conclude, enforceable way sharp inheres 'splitsale' scheme. 54 '(T)he 'rule thumb' compel wink substantial effects rife preserve provisions Certainly prohibitions facilitate evasion provision's function formalistic devices.' n. 5. spaced close together, disposition. Plain sense indicate probably planned, confirmation form admission. statistically probable benefical months, major holdings, similarly connected. 56 We, therefore, construe allowing rebuttable dispositive disposition, 16(b).12 defendant, plaintiff, operate virtually less-than-perfectly automatic efficiency does, comport closely broad, taken moreover, import questions Any involve circumstances various dispositions series, 'various tests' established 'to determine statute.' 424, 4. 58 Only carried affirmative proof—that afforded him insider—should say sale.'13 IV 59 factors militating First, implies rules. rests scope comprehended section. authority, promulgated Rule 16a—10, providing well. 'Form 4.' recently, Form insiders—officers, directors, owners—only calendar met formal denominated insider. August, September. Presumably, 4, thus, operation 16a operations 61 Inasmuch promulgate 'a matter solely expertise therefore review,' Greene Dietz, 247 689, 692 loses force There, held, face identical 16a—10 invalid, operated ex-directors occurred 'an (and) unnecessary loophole scheme,' id., 269, days ex-director's insulated others very next day. 62 did, extend least resignation. 63 'Therefore, inasmuch valid exercise power, already extended cover, part, activities, arbitrarily extension coverage, line aims, afford greater assurance lawmakers' effectuated.' Ibid.14 64 equally applicable ex-10% owners. 65 Second, analogizes 'conceived' expiration incorrectly assumes 'conception' sufficiently concrete 'contract sell,' 'option,' indeed Cf. event, analogy fails rule. Congress' estimation normal fluctuations deter attempts Factor, 308. consistent scheme permit passed 67 Newmark RKO General, 425 348 presumed useful length time. below. V 68 sum, neither nor articulated majority justify reached today. Rather deprive vitality course vain nonexistent purity operation, reverse remand proceedings. provides: 'For preventing obtained owner, reason relationship issuer, equity issuer (other exempted security) shall inure irrespective intention entering purchased repurchasing subsection cover involved, regulations subsection.' 78p(b). 'such refers owns 'more centum registered (12) title.' 16(a), 78p(a). Second Circuit another agreement constitutes 348, 354. '(A) percent wants 5-plus then, holder slightly percent, remainder.' L. Loss, Regulation 1060 (2d ed. 1961). purchased, 5% three later. latter believed, safe rely upon.' Seligman, Problems Va.L.Rev. 1, (one purchase). interpreting properly asked abuse. 693 (granting 'sale'). And deciding 'officer' 'director' allowed functions 872, 873; cf. 262—263. tests employed predicated 'considerations intent, lack motive, improper conduct' suits. 887. That follows: 'Senator Carey. Suppose estate, estate raise money? 'Mr. Corcoran. think, sir, apply. Kean. Why not? beneficiary. believe would. apply sort situation.' Hearings Practices Banking Currency S.Res. 84, 56, 97, 1st pt. 15, Page 6558. sometime revised add exemptive provision. Regulations 240.16a—10. Release 6487 (Mar. 9, 78p(b): unless good faith connection debt previously contracted, months. Suit instituted competent jurisdiction name behalf refuse suit sixty request diligently prosecute thereafter; brought years date realized. 'Next comes everlasting protecting fellow outside stockholder—and buys stockholder—who know about inside. (T) poor little getting into, just unwarranted destructive speculation, protected pool let buy too setting margins low.' H.R. 7852 8720 House Interstate Foreign Commerce, (1934) (testimony Corcoran). One particularly glaring example concerned brothers gave controlling interest. Just voted omit dividend $16,000,000. When news omission public later, repurchased equivalent $7,000,000, showing $9,000,000 deal. S.Rep.No.792, Much participation so-called 'pools,' dummy accounts sell, time, frenetic pace. churning account, often engineer false impression immense activity arrange spectacular, artificial, rises. bought 1,500,000 RCA seven-day 1929, net $5,000,000. S.Rep.No.1455, 32—33, Another famous Commercial Alcohol During summer 1933, eight associates reaped $300,000 $62,000. third pool, Fox Film Corporation, $2,000,000 fave notable extent participated. 55—68. 100 stocks listed subjects pools. 32. pools ubiquitous. generally KF105 F3 Pecora, Wall Street Oath (1939). SEC, Report Investigation Matter Whitney 21(a) 1934 (Nov. 1938). 3, 131—188. 70—130. Corcoran bill, 'crude thumb,' 6557. represents balance struck short-swings desire unduly inhibiting investment. 792, 6. Six hit upon, presumably, 'where obliged original wipe profits.' Comment, 117 U.Pa.L.Rev. 1034, 1054 (1969). 'This 696 (CA7). somewhat anomalous feature designed broaden device goals largely frustrated. Twentieth Century Fund, Market Control 114—118 Baumhart, How Ethical Are Businessmen?, Harv.Bus.Rev., July-Aug. 1961, 6, 16. posed hypothetical: 'What you corporation, learned meeting impending smaller company? unprofitable year, selling low knowledge.' 7. well extensive. commentary, aimed below, applies equal majority's approach: 'Even exception severed final 9.9 otherwise independent? provides guidelines. All is: 'The peculiar facts stand facts.' What facts? vendee? parties be—different companies, corporations, entities? Must interval sales? long? followed, how discreet (sic) counsel been? lead away violators full sanctions Decisions, Ga.L.Rev. 584, 590 (footnote omitted). novel suggestion legislation. 74, amended, 77a et seq., offerings SEC. 5, 77e. registration 'private placement.' 4(2), 77d(2). resells 'with distribution.' 2(11), 77b(11). determining elusive 'view,' 665—687 1961), prompted indicates distribution. 2652 (Supplement 1969); Wheat Report, Disclosure Investors 165 (CCH 1969). 'controlling person,' (as 405, 230.405(f)). register 1933 1% issuer's 154, 230.154. 'if exists successive ' periods, category routine rule.' 4818, Fed.Reg. 2545 (1966). Different policies, underlie Acts. above-described deterring presumptions short-term reflect engage registration. justified statistical likelihood Emerson's, undertaken disposition.' conceded general, perhaps 'changed circumstances' private offering exemption Regulation, 665—673; 2646—2654 response amended disclosure appointment resignations. 16a—1, 240.16a 1(d), (e) Sept. 30, restrictive relied owners, distinction.

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