Court Opinion

ID: 8971206
Source: CourtListenerOpinion
Date Created: 2022-11-27 10:32:17.929787+00
Date Added: 2024-06-11T17:10:26.280799
License: Public Domain

SWEET, District Judge,
dissenting:
Because in my view the majority opinion permits evasion of the insider trading provisions of § 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b) (1982), I respectfully dissent.
According to the majority opinion, despite Posner’s ownership of or control over all of the appellee Posner companies, and his role as Chairman, President and CEO of each of the companies, neither Posner nor any of the individual companies, except APL, the only purchaser within the group of shares during the short swing period, was a beneficial owner of the Peabody stock. According to the majority, APL became a beneficial owner subject to disgorgement of short swing profits only when its holdings of Peabody reached ten percent of the common stock, despite the ownership of twenty-three percent of APL’s shares by other Posner companies. This interpretation of beneficial ownership in the context of a control contest defeats the aim of Congress to prohibit short swing profits by insiders.
The express purpose of § 16(b)'s prohibition on short swing profits is to prevent a person with inside information — arbitrarily denominated as a beneficial owner of 10% or more of a class of security — from unfairly using that information to make short-*1165swing profits. Thus, if a shareholder has more than 10% of a class of securities, he or she is presumed to have access to inside information.1
The crucial issue for § 16(b) enforcement is to determine whether a person is a beneficial owner. The majority recognizes that control is a factor of beneficial ownership, but concentrates on the question of whether or not an insider has obtained a direct pecuniary benefit from the profit. Among other cases, the majority relies upon Margolies v. Rea Bros. Plc, [1982-1983 Transfer Binder] Fed.Sec.L.Rep. (CCH) ¶ 99,261 (S.D.N.Y. June 30, 1983) to show that one cannot be liable under § 16(b) without realizing a direct pecuniary benefit. However, Margolies involved purchases and sales of stock between related companies and the viability of a claim against the chief executive of the related companies who had himself engaged in no sales. Here, the context is a struggle for corporate control conducted by related companies, all of which had made prior purchases and sold on the same day under the same agreement. Moreover, as this member of the Circuit Court, I feel less constrained to praise the reasoning of the district court in Margolies, particularly given the factual distinctions between the two cases, despite my tentative respect for the author of Margolies.
In order to determine who is a beneficial owner under § 16(b), the definition which would best serve Congress’s goals of curbing benefits from trading on inside information is one which includes those who are able to exert control over a company and thereby possess an indirect pecuniary interest in the shares at issue.
In recognition of Congress’s goal, this court held in Whiting v. Dow Chemical Co. that “[f]or purposes of the family unit, shares to which legal title is held by one spouse may be said to be ‘beneficially owned’ by the other, the insider, if the ordinary rewards of ownership are used for their joint benefit.” 523 F.2d 680, 688 (2d Cir.1975). In the interests of curbing short swing profits by corporate insiders, the rule set forth in Whiting should control any case in which there is a coordinated purchase of shares of stock in a control contest for the “joint benefit” of a group. Whiting should have been extended to the context of members of a corporate family, and APL would thus be considered an insider of Peabody prior to its purchase of shares. Under the reality of a control contest in which a group is acting in a coordinated manner, all should be considered beneficial owners for short swing profit purposes.
A recent SEC release lends support to this interpretation. For the first time, the SEC has attempted to define the term “beneficial owner” for reporting and profit recovery purposes. The SEC’s proposed definition of “beneficial owner” includes “any person who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise has or shares a pecuniary interest in the subject securities.” Proposed SEC Rule 16a-1(a)(2), 4 Fed.Sec.L.Rep. (CCH) ¶ 26,013, at 19,029 (Dec. 2, 1988) (emphasis added). In its background to the proposed changes, the SEC explains:
Congress, in applying Section 16 to ten percent holders, intended to reach those persons who could be presumed to have access to inside information because of their interest in the issuer’s securities. Thus, in determining beneficial ownership for purposes of ascertaining who is a ten percent holder, the analysis properly should turn on the person’s potential for control. The proposed rules would rely on Section 13(d) definitions for determining who is a ten percent holder.
SEC Exchange Act Release No. 26333, [1988-1989 Transfer Binder] Fed.Sec.L. Rep. (CCH) 1184,343, at 89,602 (Dec. 2, 1988).
This proposed definition of “beneficial owner” seeks to reflect Congress’s intention to limit insider trading, and, as the *1166majority noted, the definition would in all likelihood unify the concept of beneficial ownership under §§ 16(a), 16(b) and 13(d). Presumably the SEC in assessing that intent is well aware of the effect of its definition in today’s marketplace. As the Supreme Court has said, “where alternative constructions of the terms of § 16(b) are possible, those terms are to be given the construction that best serves the congressional purpose of curbing short-swing speculation by corporate insiders.” Reliance Electric Co. v. Emerson Electric Co., 404 U.S. 418, 424, 92 S.Ct. 596, 600, 30 L.Ed.2d 575 (1972) (footnote omitted).
Posner, as President, Chairman and CEO of each of the Posner companies, had control over the group’s financial investments and made decisions regarding the companies’ acquisition and disposition of Peabody common stock in connection with his takeover attempt. Thus, the group as a whole and each member of the group, united by its interest in Peabody, possessed an interest in the disposition of the APL shares and was a beneficial owner of Peabody before August 7, 1985 as a result of the combined ownership of twenty-three percent of Peabody. Such a conclusion acknowledges the reality of Posner’s position confirmed by the standstill agreement.
APL got its profits — the proceeds from the sale of its shares plus its proportional amount of the $5.6 million, a total of $1.77 million — by virtue of the nature of this group relationship and the standstill agreement covering all the Posner companies. The sales were an integral part of the settlement and standstill agreements in September, 1985. Therefore, profits on all 1,421,800 shares of Peabody which APL purchased within six months prior to the September 20 sale should be subject to disgorgement under § 16(b).
As is indeed appropriate, the majority has upheld Judge Keenan’s factual finding that the standstill agreement had value derived from the termination of litigation and the standstill provisions that Posner and his companies would refrain for five years from attempting to frustrate the Pullman-Peabody merger, seeking control of Peabody or Pullman, or buying securities in either firm. However, the only litigation which the Posner companies gave up were threats of counterclaims which would challenge both the option granted to Peabody and Peabody’s issuance to Pullman of pre-fered stock in the action filed by Peabody against Posner, and a derivative action brought by Chesapeake Insurance, DWG and Propane against Peabody’s self-tender, which had already caused Peabody to withdraw its self-tender proposal, leaving only a claim for attorneys fees by the derivative plaintiffs, which presumably were worth considerably less than the $4 million attributed to the standstill agreement by Judge Keenan. Without ownership of stock in Peabody, Posner and the corporate members of his group posed no more threat to the Peabody-Pullman merger than any other raider on Wall Street. As a matter of logic, were I free to do so, I would quarrel with the conclusion that the five year bar is worth the $4 million attributed to it by the District Court’s finding of fact.
Leaving the value of the standstill agreement aside, I respectfully dissent, concluding as I do that APL was a beneficial owner of Peabody common stock before it crossed the 10% threshold on August 23, 1985, and that short swing profits on all 1,421,800 shares purchased by APL between August 7 and September 19, 1985 should be disgorged. Unless the concept of control is defined to include beneficial ownership in a context such as this, disgorgement of short swing profits can be evaded as it was here simply by splitting up purchasing entities.

Conclusion

For the reasons set forth above, I dissent.

. As the SEC has recognized, "Section 16 is a strict liability provision under which an insider's short-swing profits can be recovered regardless of whether that insider actually was in possession of material, nonpublic information." SEC Exchange Act Release No. 26333, [1988— 1989 Transfer Binder] Fed.Sec.L.Rep. (CCH) H 84,343, at 89,599 (Dec. 2, 1988).