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Adler v. Klawans

decided : May 4, 1959.

SUZANNE L. ADLER, ON BEHALF OF HERSELF AND ALL OF THE STOCKHOLDERS OF WILLIAMS-MCWILLIAMS INDUSTRIES, INC., SIMILARLY SITUATED, PLAINTIFF-APPELLEE,
v.
W. EDWARD KLAWANS, DEFENDANT-APPELLANT, AND WILLIAMS-MCWILLIAMS INDUSTRIES, INC., DEFENDANT.



Author: Burger

Before MEDINA, LUMBARD and BURGER,*fn* Circuit Judges.

BURGER, Circuit Judge.

This appeal presents for the first time the question whether Section 16(b) of the Securities Exchange Act of 1934*fn1 covers so called "insider profits" made on sales of the corporation's stock by the director of a corporation while holding such office but who was not a director when he purchased the stock less than six months earlier. We hold that such profits are covered by the statute.

Appellant also raises a subsidiary question, whether, if accountable for such profits, the director may offset losses in transactions in the same stock within the six month period covered by the statute. We hold that such losses may not be offset against profits. Smolowe v. Delendo Corp., 2 Cir., 136 F.2d 231, 148 A.L.R. 300, certiorari denied, 1943, 320 U.S. 751, 64 S. Ct. 56, 88 L. Ed. 446.

The statute controlling these issues provides in pertinent part:

"For the purpose of preventing the unfair use of information which may have been obtained by such beneficial owner, director, or officer by reason of his relationship to the issuer, any profit realized by him from any purchase and sale, or any sale and purchase, of any equity security of such issuer (other than an exempted security) within any period of less than six months, unless such security was acquired in good faith in connection with a debt previously contracted, shall inure to and be recoverable by the issuer, irrespective of any intention on the part of such beneficial owner, director, or officer in entering into such transaction of holding the security purchased or of not repurchasing the security sold for a period exceeding six months. Suit to recover such profit may be instituted at law or in equity in any court of competent jurisdiction by the issuer, or by the owner of any security of the issuer in the name and in behalf of the issuer if the issuer shall fail or refuse to bring such suit within sixty days after request or shall fail diligently to prosecute the same thereafter; but no such suit shall be brought more than two years after the date such profit was realized. This subsection shall not be construed to cover any transaction where such beneficial owner was not such both at the time of the purchase and sale, or the sale and purchase, of the security involved, or any transaction or transactions which the Commission by rules and regulations may exempt as not comprehended within the purpose of this subsection."

Appellee Adler, a stockholder of Williams-McWilliams Industries, Inc., sued in the corporation's behalf under Section 16(b) to recover profits realized by appellant Klawans when the latter sold shares of the corporation which he had purchased before but sold after he became a director. Appellant moved for summary judgment asserting Section 16(b) did not apply because he, Klawans, was not a director when he purchased the shares. Appellee by cross motion sought summary judgment urging that accountability for profits in these circumstances depends only on his being a director at the time of sale when the profit is realized. Judge Sylvester J. Ryan granted this cross motion fixing the profit realized at $20,748.36 unreduced by losses sustained by Klawans on sales of certain of the shares.

The pertinent facts are not in dispute. Appellant through another purchased 9900 shares of stock of Williams-McWilliams Industries, Inc., at various times between October 1, 1956 and January 17, 1957. This stock is listed and traded on the American Stock Exchange. Appellant's holdings amounted to less than 10% of the corporation's stock and he was neither a director nor officer between October 1, 1956 and January 17, 1957. He became a director on March 18, 1957 or about 60 days after the last purchase of the corporation's stock. He made no purchases of this stock after becoming a director. In five separate transactions within 10 days after his election as a director he sold 7900 shares at a profit. Thereafter he made other sales of the stock at a loss (between March and May 3, 1957), divesting himself of all the stock of the corporation purchased after October 1, 1956. However he remained a director of the company. From the outset of his term as director, commencing with the first meeting he attended - on the day he was elected - he was active in pressing for the payment of dividends both in cash and in stock.

I - Applicability of Statutes.

On the principal issue presented by this appeal appellant contends that, to give meaning to Section 16(b) in its entirety, the relationship of director or officer must exist both at the time of the purchase and at the time of the sale. Emphasizing the conjunctive "and" of the statute he argues that by its terms the law limits itself to "profit realized by him from any purchase and sale, or sale and purchase * * *" (Emphasis added.) To support his argument he refers to the language of a dissenting opinion in a case in this court, Stella v. Graham-Paige Motors Corp., 2 Cir., 1956, 232 F.2d 299, 305 (see footnote 3, infra). He recognizes that the dissenting view on which he relies touched on an issue not reached by the majority of the court in that case, since it involved a 10% beneficial owner rather than a director or officer.

Additionally appellant urges that Section 16(b) must be strictly construed because it is a penal statute; he also points to Rule X-16A-10 of the Securities and Exchange Commission and argues that since it exempts him from reporting the challenged sales it operates to take the transactions out of the reach of Section 16(b) by reason of the last sentence of the section which reads:

This subsection shall not be construed to cover * * * any transaction or transactions which the Commission by rules and regulations may exempt as not comprehended within the purpose of this subsection."

The objectives sought to be accomplished by Congress in adopting Section 16(b) are clear from the language of the statute without reference to the legislative history. They supply the key to the resolution of whatever ambiguity can be argued from other portions of the statute. The pertinent language is:

"For the purpose of preventing the unfair use of information which may have been obtained by such beneficial owner, director, or officer by reason of his relationship to the issuer, any profit realized by him from any purchase and sale, * * * of any equity security of such issuer * * * within any ...


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