Court Opinion

ID: 9422328
Source: CourtListenerOpinion
Date Created: 2023-08-02 23:02:08.809751+00
Date Added: 2024-06-11T17:22:36.068953
License: Public Domain

Mr. Justice Douglas,
with whom The Chief Justice concurs,
dissenting.
What the Court does today is substantially to eliminate “the great Wall Street trading firms” from the operation of § 16 (b), as Judge Clark stated in his dissent in the Court of Appeals. 286 F. 2d 786, 799. This result follows because of the wide dispersion of partners of investment banking firms among our major corporations. Lehman Bros, has partners on 100 boards. Under today’s *415ruling that firm can make a rich harvest on the “inside information” which § 16 of the Act covers because each partner need account only for his distributive share of the firm’s profits on “inside information,” the other partners keeping the balance. This is a mutilation of the Act.
If a partnership can be a “director” within the meaning of § 16 (a), then “any profit realized by him,” as those words are used in § 16 (b), includes all the profits, not merely a portion pf them, which the partnership realized on the “inside information.” There is no basis in reason for saying a partnership cannot be a “director” for purposes of the Act. In Rattner v. Lehman, 193 F. 2d 564, 567,1 Judge Learned Hand said he was “not prepared to say” that a partnership could not be considered a “director,” adding “for some purposes the common law does treat a firm as a jural person.” In his view a partnership might be a “director” within the meaning of § 16 if it “deputed a partner” to represent its interests. Yet formal designation is no more significant than informal approval. Everyone knows that the investment banking-corporation alliances are consciously constructed so as to increase the profits of the bankers. In partnership law a debate has long raged over whether a partnership is an *416entity or an aggregate. Pursuit of that will-o’-the-wisp is not profitable. For even New York with its aggregate theory recognizes that a partnership is or may be considered an entity for some purposes.2 It is easier to make this partnership a “director” for purposes of § 16 than to hold the opposite. Section 16 (a) speaks of every “person” who is a “director.” In § 3 (a) (9) “person” is defined to include, inter alia, “a partnership.” 3 Thus, the purpose to subject a partnership to the provisions of § 16 need not turn on a strained reading of that section.
At the root of the present problem are the scope and degree of liability arising out of fiduciary relations. In modern times that liability has been strictly construed. The New York Court of Appeals, speaking through Chief Judge Cardozo in Meinhard v. Salmon, 249 N. Y. 458, 164 N. E. 545, held a joint adventurer to a higher standard than we insist upon today:
“Many forms of conduct permissible in a workaday world for those acting at arm’s length, are forbidden to those bound by fiduciary ties. A trustee *417is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the 'disintegrating erosion’ of particular exceptions (Wendt v. Fischer, 243 N. Y. 439, 444). Only thus has the level of conduct for fiduciaries been kept at a level higher than that trodden by the crowd. It will not consciously be lowered by any judgment of this court.” 249 N. Y., at 464, 164 N. E., at 546.
In Mosser v. Darrow, 341 U. S. 267, we allowed a reorganization trustee to be surcharged $43,447.46 for profits made by his employees through trading in securities of subsidiaries of a bankrupt company. We made this ruling even though there was “no hint or proof that he has been corrupt or that he has any interest, present or future, in the profits he has permitted these employees to make.” Id., at 275. We said:
“These strict prohibitions would serve little purpose if the trustee were free to authorize others to do what he is forbidden. While there is no charge of it here, it is obvious that this would open up opportunities for devious dealings in the name of others that the trustee could not conduct in his own. The motives of man are too complex for equity to separate in the case of its trustees the motive of acquiring efficient help from motives of favoring help, for any reason at all or from anticipation of counterfavors later to come. We think that which the trustee had no right to do he had no right to authorize, and that *418the transactions were as forbidden for benefit of others as they would have been on behalf of the trustee himself.

. . equity has sought to limit difficult and delicate fact-finding tasks concerning its own trustee by precluding such transactions for the reason that their effect is often difficult to trace, and the prohibition is not merely against injuring the estate — it is against profiting out of the position of trust. That this has occurred, so far as the employees are concerned, is undenied.” Id.; at 271-273.
It is said that the failure of Congress to take action to remedy the consequences of the Rattner case somehow or other shows a purpose on the part of Congress to infuse § 16 with the meaning that Rattner gave it. We took that course in Toolson v. New York Yankees, 346 U. S. 356, and adhered to a ruling the Court made in 1922 that baseball was not within the scope of the antitrust laws, because the business had been “left for thirty years to develop, on the understanding that it was not subject to” those laws. Id., p. 357. Even then we had qualms and two Justices dissented. For what we said in Girouard v. United States, 328 U. S. 61, 69, represents our usual attitude: “It is at best treacherous to find in congressional silence alone the adoption of a controlling rule df law.”4 *419It is ironic to apply the Toolson principle here and thus sanction, as vested, a practice so notoriously unethical as profiting on inside information.
We forget much history when we give § 16 a strict and narrow construction. Brandeis in Other People’s Money spoke of the office of “director” as “a happy hunting ground” for investment bankers. He said that “The goose that lays golden eggs has been considered a most valuable possession. But even more profitable is the privilege of taking the golden eggs laid by somebody else’s goose. The investment bankers and their associates now enjoy that privilege.” Id., at 12.
The hearings that led to the Securities Exchange Act of 1934 are replete with episodes showing how insiders exploited for their personal gain “inside information” which came to them as fiduciaries and was therefore an asset of the entire body of security holders. The Senate Report labeled those practices as “predatory operations.” S. Rep. No. 1455, 73d Cong., 2d Sess., p. 68. It said:
“Among the most vicious practices unearthed at the hearings before the subcommittee was the flagrant betrayal of their fiduciary duties by directors and officers of corporations who used their positions of trust and the confidential information which came to them in such positions, to aid them in their market activities. Closely allied to this type of abuse was the unscrupulous employment of inside information by large stockholders who, while not *420directors and officers, exercised sufficient control over the destinies of their companies to enable them to acquire and profit by information not available to others.” Id., at 55. See also S. Rep. No. 792, 73d Cong., 2d Sess., p. 9.
The theory embodied in § 16 was the one Brandéis espoused. It was stated by Sam Rayburn as follows: “Men charged with the administration of other people’s money must not use inside information for their own advantage.” H. R. Rep. No. 1383, 73d Cong., 2d Sess. 13.
What we do today allows all but one partner to share in the feast which the one places on the partnership table. They in turn can offer feasts to him in the 99 other companies of which they are directors.5 14 Stan. L. Rev. 192, 198. This result is a dilution of the fiduciary principle that Congress wrote into § 16 of the Act. It is, with all respect, a dilution that is possible only by a strained reading of the law. Until now, the courts have given this fiduciary principle a cordial reception. We should not leave to Congress the task of restoring the edifice that it erected and that we tear down.
*421APPENDIX TO OPINION OF MR. JUSTICE DOUGLAS.
Lehman v. Civil Aeronautics Board, supra, 93 U. S. App. D. C., at 85-87, 209 F. 2d, at 292-294.
“Petitioner Lehman is a director of Pan American; petitioner Joseph A. Thomas is a director of National Airlines, Inc., and of American Export Lines, Inc.; petitioner Frederick L. Ehrman is a director of Continental Air Lines, Inc., and Mr. John D. Hertz is a director of Consolidated Vultee Aircraft Corporation. All the companies referred to are in the aeronautic field and so must have Board approval of the kind of interlocking relationships which are made unlawful unless approved. Messrs. Lehman, Thomas, Ehrman, Hertz, and others, are also members of Lehman Brothers, a partnership which, as previously pointed out, conducts an investment banking business.
“The Board held that an individual Lehman Brothers partner who is a director of a Section 409 (a) company is a representative of another partner who is a director of another such company. The relationships thus found to exist were disapproved as to those involving Pan American and National; Pan American and American Export Lines; Pan American and Consolidated Vultee; National and Pan American; National and Consolidated Vultee; and Continental Air Lines and Consolidated Vultee. . . .
“More precisely the Board concluded that a Lehman Brothers partner who is director of an air carrier has a representative 'who represents such . . . director as . . . a director’ in another Section 409 (a) company if another Lehman Brothers partner is a director of the latter, coupled with the circumstances that he seeks on behalf of Lehman Brothers the security underwriting and merger negotiation services used by the company of which he is director. The underwriting of security issues and the *422conduct of merger negotiations constitute a substantial part of the business of Lehman Brothers, who have been employed for these purposes not infrequently by Section 409 (a) companies. The partners feel free to solicit this business for their firm.
“. . . But we must consider the facts of the case in the light of the purpose of Congress to keep the developing aviation industry free of unhealthy interlocking relationships, though this purpose must be carried out only as the statute provides. The relevant findings which point up the problem are not in dispute. The underwriting activities of Lehman Brothers is a substantial part of its business; substantial fees are also obtained by Lehman Brothers from merger negotiations. Profits from the fees are shared by the partners. Section 409 (a) companies, with Lehman Brothers partners as directors, need and use both types of services, and the partner directors seek such business for the partnership. In doing so they act as representatives of the partnership. It follows that they act as representatives of fellow partners, some of whom are directors of air carriers. Is this representation within the meaning of the statute? Does Mr. Thomas, to use his case as illustrative, who is a Lehman Brothers partner and also a director of National Airlines, represent, as director of National Airlines, Mr. Lehman, another Lehman Brothers partner and director of Pan American? We think that the affirmative answer of the Board should not be disturbed. For the situation comes to more than some community of interest and some sharing of common benefits as partners. The particular common interest and benefits are among directors of the regulated industry with respect to industry matters. The partnership link does not extend merely to a type of business remote from the aeronautical industry in which the partners are directors; it is with respect to business activities of air carriers and other aeronautical companies enumerated in *423Section 409 (a). In these activities there is not only-literal representation by one partner of another in partnership business but the particular partnership business is as well the business of aeronautical enterprises of which the partners are directors. When Mr. Thomas, again to illustrate, as director of National seeks to guide that company’s underwriting business to Lehman Brothers he acts in the interest of and for the benefit of Mr. Lehman who is not only his underwriting partner but is also a director of an air carrier, Pan American. Mr. Lehman the partner is the same Mr. Lehman the director. The Board is not required to separate him into two personalities, as it were, and to say that Mr. Thomas represents him as a partner but not as a director, if, as is the case here, the representation is in regard to the carrying on of the affairs of Section 409 (a) companies. The undoubted representation which grows out of the partnership we think follows into the directorships when the transactions engaged in are not only by the partners but concern companies regulated by the statute, of which the partners are directors. This is representation within not only the language but the meaning of the statute.”

 The Rattner decision was rendered at a time when the Securities and Exchange Commission, pursuant to its regulatory power, provided a reporting requirement for § 16 (a) which allowed a partner-director to disclose only that amount of the equity securities of the corporation in question held by his partnership and representing his proportionate interest in the partnership. Rule X-16A-3. After the Rattner decision that Rule was amended to read:
“A partner who is required under § 240.16a-l to report in respect of any equity security owned by the partnership shall include in his report the entire amount of such equity security owned by the partnership. He may, if he so elects, disclose the extent of his interest in the partnership and the partnership transactions.” 17 CFR, 1961 Cum. Supp., § 240.16a-3 (b). See Loss, Securities Regulation, Vol. 2, pp. 1102-1104 (1961).

 Matter of Schwartzman, 262 App. Div. 635, 636-637, 30 N. Y. S. 2d 882, 884, aff’d 288 N. Y. 568, 42 N. E. 2d 22, holding a partnership to be a legal entity for purposes of the Unemployment Insurance Law; Mendelsohn v. Equitable Life Assurance Soc., 178 Misc. 152, 154, 33 N. Y. S. 2d 733, 735, holding “attorneys as partners are but one person” for purposes of the Rules of Civil Practice; Travelers Ind. Co. v. Unger, 4 Misc. 2d 955, 959, 158 N. Y. S. 2d 892, 896, holding a partnership "is to be regarded as a legal entity for the purposes of pleading.” And see Bernard v. Ratner, 7 N. Y. S. 2d 717.

 In United States v. A & P Trucking Co., 358 U. S. 121 — a case far more severe in its impact than the result I urge here, as it held a partnership could be criminally liable under the Motor Carrier Act — 'the Court said, “Congress has specifically included partnerships within the definition of ‘person’ in a large number of regulatory Acts, thus showing its intent to treat partnerships as entities.” Id., p. 124, note 3.

 We said in Toucey v. New York Life Ins. Co., 314 U. S. 118, 140-141:
“It is indulging in the merest fiction to suggest that the doctrine which for the first time we are asked to pronounce with our eyes open and in the light of full consideration, was so obviously and firmly part of the texture of our law that Congress in effect enacted it through its silence. There is no occasion here to regard the silence of Congress as more commanding than its own plainly and unmistakably spoken words. This is not a situation where Congress has failed to act after having been requested to act or where the circum*419stances are such that Congress would ordinarily be expected to act. The provisions of §265 have never been the subject of comprehensive legislative reexamination. Even the exceptions referable to legislation have been incidental features of other statutory schemes, such as the Removal and Interpleader Acts. The explicit and comprehensive policy of the Act of 1793 has been left intact. To find significance in Congressional nonaction under these circumstances is to find significance where there is none.”

 The proper approach to the problem of interlocking directorates through the agency of an investment banking house was expressed by Judge Fahy in Lehman v. Civil Aeronautics Board, 93 U. S. App. D. C. 81, 209 F. 2d 289, a case involving this same firm. See Appendix to this opinion.