Court Opinion

ID: 8914527
Source: CourtListenerOpinion
Date Created: 2022-11-27 04:25:55.407034+00
Date Added: 2024-06-11T17:08:51.274409
License: Public Domain

REINHARDT, Circuit Judge,
concurring.
I concur in the conclusion that the sale of the warrant by the Foundation does not fall within the purview of § 16(b), but for somewhat different reasons than those expressed by my colleagues.
Where it is clear from the face of the transaction that there was both “a purchase and sale” of a security by an insider within the statutory period, liability under § 16(b) is imposed without reference to congressional purpose in enacting the statute or the possibility for speculative abuse in the transaction. But where it is not clear from the face of a transaction that it is the type of transaction which the statute prohibits an insider from profiting by, courts employ a flexible, “pragmatic” approach which looks to congressional intent and the possibility for speculative abuse:
In deciding whether borderline transactions are within the reach of the statute, courts have come to inquire whether the transaction may serve as a vehicle for the evil which Congress sought to prevent— the realization of short swing profits based on access to inside information— thereby endeavoring to implement congressional objectives without extending the reach of the statute beyond its intended limits.
Kern County Land Co. v. Occidental Petroleum Corp., 411 U.S. 582, 594, 93 S.Ct. 1736, 1744, 36 L.Ed.2d 503 (1973).
Thus, where it is unclear whether a particular transaction is a “purchase,” a “sale,” or a “purchase and sale”, as those terms are used in § 16(b), we apply the flexible, pragmatic approach. “The courts, however, are free to adopt such a flexible approach in construing § 16(b) only in those cases where the relevant provision is either intrinsically ambiguous or in which there are alternative plausible applications of the provision to a particular fact situation.” Lewis v. Varnes, 505 F.2d 785, 789 (2d Cir. 1974) (citing Kern County Land Co., 411 U.S. at 594, 93 S.Ct. at 1744). Transactions which on their face do not clearly inyolve a purchase and a sale, and which therefore require analysis under the pragmatic approach to determine if the possibility for speculative abuse exists, have been described as “unorthodox” transactions. See Kern County Land Co., 411 U.S. at 594, 93 S.Ct. at 1744. The transaction here involved is an unorthodox transaction which, I believe, must be analyzed under the pragmatic approach to determine if § 16(b) applies.1 I *1286conclude that the transaction does not possess the potential for speculative abuse and therefore does not fall within the purview of § 16(b).
The transaction under scrutiny in this case involves the sale of a warrant with the condition that the warrant be exercised immediately. In Kern County Land Co. the Supreme Court expressly acknowledged that “dealings in options, rights, and warrants” (emphasis added) are unorthodox transactions to be analyzed under the pragmatic approach. Id. at 593 n.24, 93 S.Ct. at 1744. In Kern County Land Co., the Supreme Court utilized the pragmatic approach in analyzing a transaction in which the defendant, within six months of acquiring stock in the plaintiff corporation, granted an option to another party to purchase that stock. In concluding that the granting of the option was not a “sale” within the meaning of § 16(b), the Court reasoned that the “option does not appear to have been an instrument with potential for speculative abuse, whether or not [the defendant] possessed inside information. . . . ”
Similarly, this court has applied the pragmatic approach in analyzing a transaction in which an exchange of one class of stock for another class was followed within six months by the sale of the latter class of stock. Blau v. Max Factor, 342 F.2d 304 (9th Cir.) cert. denied, 382 U.S. 892, 86 S.Ct. 180, 15 L.Ed.2d 150 (1965). In holding that the exchange did not fall within the purview of § 16(b), we explained that
to avoid purposeless harshness, a transaction is held not to be a section 16(b) “purchase” if it “was not one that could have lent itself to the practices which Section 16(b) was enacted to prevent.”
Moreover, since there was no speculative advantage in holding Class A [stock] rather than Common, the exchange conferred no opportunity for speculative profit which appellees did not already enjoy. Thus, appellees made only one *1287investment decision in the six months period ....
Id. at 307-08 (quoting Ferraiolo v. Newman, 259 F.2d 342, 346 (6th Cir. 1958)).
Portnoy contends that the sale of the warrants by the Foundation on the condition that the warrants be “immediately” exercised was a purchase and sale within the meaning of § 16(b). Specifically, Portnoy asserts that “the sale of the warrant under such circumstances was in no way different from and was commercially identical to an exercise by the Foundation of the warrant, with its concommitant purchase of the underlying common stock, and the sale of the stock obtained thereby to the underwriters.” There are, of course, obvious differences between the sale of a warrant with the condition that it be exercised immediately and the exercise of a warrant followed by a subsequent sale of the converted stock; the only differences we need consider, however, are those which affect the possibility for speculative abuse by trading on inside information as prohibited by § 16(b).
First, we note that § 16(b) was ^neither intended nor designed to reach all transactions in which parties speculate on the basis of inside information. Rather, the statute was designed to curb speculative abuse of a very specific nature — the use of inside information by statutorily defined insiders to reap short swing profits. The statutory scheme makes it clear that the particular abuse to be prevented is the situation in which an insider purchases or sells a security interest and then, based on inside information, waits for the market price to fluctuate on a short term basis, at which point the insider engages in a second act — a sale or purchase of the security interest — and profits from his speculation.2
The transaction entered into by the Foundation possessed no possibility for speculative abuse, although the hypothetical transaction that Portnoy claims is “commercially identical” does possess the possibility for such abuse. The sale of a warrant with the condition that it be exercised immediately provides no “span of time” during which the insider can speculate on inside information by waiting for the market price of the stock to change. See Rosen v. Drisler, 421 F.Supp. 1282 (S.D.N.Y.1976) (holding that the sale of an option for an amount equal to the value of the converted shares less the exercise cost was not within § 16(b) because there was no span of time in which the market could fluctuate and inside information could be exploited). Once the Foundation sold the warrant to the underwriters, the Foundation lost any ability it had to exploit inside information as prohibited by § 16(b), because it no longer had ownership or control over the warrant or the converted shares and could not profit from subsequent dealings in the warrant by the underwriters. However, in the situation which Portnoy claims is “commercially identical,” the Foundation would have the ability to speculate. Under Portnoy’s hypothetical transaction, after the Foundation exercised the warrant, it would be able to sell the converted shares at a time which it knew, because of its inside information, that it would receive the most profit on the sale of the converted shares.
Portnoy attempts to circumvent the facts that (1) the Foundation engaged in only the single act of selling the warrant with the condition that it be immediately exercised rather than in two acts (a purchase and a sale), and (2) that the transaction provided no span of time in which the Foundation could have speculated on inside information. He seeks to do so by attributing the subse*1288quent exercise of the warrants to the Foundation. However, the underwriters purchased the warrant as principals for their own accounts and not as agents for the Foundation. That the underwriters were required under the terms of the underwriting agreement to exercise the warrant immediately upon its receipt does not change this conclusion. The sale of the warrant to the underwriters by the Foundation was only part of a much larger public offering organized by Memorex. The choice open to the Foundation was to sell its warrant to the underwriters as part of the offering or to refrain from selling its warrant as the other warrant holders were doing. Once the Foundation chose to enter into the agreement, it was bound by the same terms as all other selling warrant holders, of which there were thirteen in addition to the Foundation. The underwriting agreement obligated the syndicate of 103 underwriters to immediately exercise all warrants purchased from the fourteen warrant holders. Thus, it is clear that the underwriters were not acting as agents for the Foundation merely because the agreement required the underwriters to exercise the warrant immediately upon receipt.3 Only a single act can therefore be attributed to the Foundation— that of selling the warrant.
Moreover, even if Portnoy were correct, and the actions of the underwriters in exercising the warrants could be attributed to the Foundation, there would still be no span of time during which the Foundation could have profited through the exploitation of inside information. Because the underwriters agreement provided that the warrants were to be exercised immediately, a fact which was announced publicly in advance, there was neither the time nor the opportunity for the Foundation to wait for market prices to fluctuate before the warrant was exercised. Such a “simultaneous” transaction provides no opportunity for profit because the market price of the stock is the same at the time of both the purchase and sale.
Finally, I would note that even if, by a “commercially identical transaction,” Portnoy is referring to an agreement with underwriters pursuant to which a warrant holder is required to convert warrants and immediately transfer the shares to the underwriters for a price established in the agreement, his argument fails. While we need not decide whether such a transaction is covered by § 16(b), I believe that it would not be; we would still be dealing with an “unorthodox” transaction which does not provide the possibility for speculative abuse. However, even if one were to conclude that such a transaction is clearly “a purchase and sale” because two separate actions by the warrant holder are involved, that fact would not be of assistance to Portnoy. The Foundation structured its sale of the warrant so that there was only one action on its part, an action which did not involve the possibility for speculative abuse. “Liability cannot be imposed simply because the investor structured his transaction with the intent of avoiding liability under § 16(b). The question is, rather, whether the method used to ‘avoid’ liability is one permitted by the statute.” Reliance Electric Co. v. Emerson Electric Co., 404 U.S. 418, 422, 92 S.Ct. 596, 599, 30 L.Ed.2d 575 (1972).
As stated above, § 16(b) is designed to prevent the exploitation of inside information where the insider has engaged in at least two actions on a short term basis which allow him to profit from the fluctuation in the market price of the stock. Where, as here, an unorthodox transaction is involved, we look to the purpose of § 16(b) and the possibility for speculative abuse in determining whether the statute should apply to the transaction under scrutiny. Under the pragmatic approach set forth in Kern County Land Co., I conclude that (1) the transaction presented no possi*1289bility for the type of speculative abuse § 16(b) was intended to prevent, (2) the sale of the warrant with the condition that it be exercised immediately constituted only a single act for purposes of the statute, and (3) section 16(b) does not apply to the sale of the warrant by the Foundation.

. The parties agree that the transaction before us is an unorthodox one and that the pragmatic approach is the appropriate method of analysis for determining if § 16(b) applies, and have both argued this appeal on that basis.
*12861 do not read Foremost-McKesson, Inc. v. Provident Securities, Co., 423 U.S. 232, 96 S.Ct. 508, 46 L.Ed.2d 464 (1976), as repudiating the pragmatic approach enunciated in Kern County Land Co., 411 U.S. 582, 93 S.Ct. 1736, 36 L.Ed.2d 503 (1973), nor as requiring a mechanical approach in cases involving unorthodox transactions. In a post-Foremost-McKesson case, we recently attempted to explain when the pragmatic approach is to be applied. We stated that:
[T]he pragmatic approach is used to determine the boundaries of the statute’s definitional scope in borderline situations, especially unorthodox transactions [Kern County Land Co., 411 U.S. at 594-95, 93 S.Ct. at 1744-1745], For a garden-variety transaction which cannot be regarded as unorthodox, the pragmatic approach is not applicable. Mouldings, Inc. v. Potter, 465 F.2d 1101, 1104-05 (5th Cir. 1972), cert. denied, 410 U.S. 929, 93 S.Ct. 1368, 35 L.Ed.2d 591 (1973); Tyco Laboratories, Inc. v. Cutler-Hammer, Inc., 490 F.Supp. 1, 7 (S.D.N.Y.1980); Matas v. Siess, 467 F.Supp. at 220. In such cases, if the situation is within the requirements established by Congress for § 16, then the mechanical, “objective,” operation of the statute imposes liability.
Whittaker v. Whittaker Corp., 639 F.2d 516, 522 (9th Cir.), cert. denied, - U.S. -, 102 S.Ct. 567, 70 L.Ed.2d 473 (1981).
Other courts have continued to apply the pragmatic approach when it is necessary to analyze the transaction itself rather than the statutory language of § 16(b). In Matas v. Siess, 467 F.Supp. 217 (S.D.N.Y.1979), the court stated that:
Although the Court [in Foremost-McKesson] might appear at first blush to be espousing a “strict constructionist” approach to § 16(b), defendants should observe that the court was concerned, in Foremost-McKesson, with a problem of construction as to which it found an ambiguity inherent in the statutory language itself. The problem facing the court here, in contrast, is the treatment of a device which requires analysis to determine whether the statute is applicable.
Id. at 224. The Matas approach, like the one we took in Whittaker, has considerable merit.
In any event, in all reported § 16(b) cases which have cited Foremost-McKesson, the courts have recognized the continuing validity of the pragmatic approach enunciated in Kern County Land Co. See Portnoy v. Revlon, Inc., 650 F.2d 895, 898-899 n.5 (7th Cir. 1981); Whittaker v. Whittaker Corp., 639 F.2d 516, 522-523 (9th Cir. 1981); Merrill Lynch, Fenner & Smith v. Livingston, 566 F.2d 1119 (9th Cir. 1978); Portnoy v. Seligman & Latz, Inc., 516 F.Supp. 1188, 1193-1194 (S.D.N.Y.1981); Cutler-Hammer, Inc. v. Leeds & Northrup Co., 469 F.Supp. 1021, 1022-1023 (E.D.Wis.1979); Freedman v. Barrow, 427 F.Supp. 1129, 1148 (S.D.N.Y.1976).

. As noted above, where it is clear that there has been “a purchase and sale” by an insider within the statutory period, liability is imposed without reference to Congressional purpose in enacting the statute. But where it is not clear that a transaction is one which § 16(b) prohib- . its an insider from profiting by, the pragmatic approach is applied. Thus, inquiry into the possibility for speculative abuse is appropriate only when it is necessary to determine whether the transaction is the type which is covered by the statute. However, once it is determined that § 16(b) is applicable, strict liability or liability without fault is applied. “(T)his statute imposes liability without fault within its narrowly drawn limits.” Foremost-McKesson, 423 U.S. at 251, 96 S.Ct. at 519.

. There may be circumstances in which an an action by a third party will be attributed to the insider for purposes of § 16(b) liability. If an insider transfers a security interest to a third party, but maintains some control over, and a profit interest in, the security, he may be held liable for a subsequent action by the third party. See Blau v. Mission Corp., 212 F.2d 77 (2d Cir.), cert. denied, 347 U.S. 1016, 74 S.Ct. 872, 98 L.Ed. 1138 (1954).