Before WATERMAN, KAUFMAN and MARSHALL, Circuit Judges.
The primary issues invloved in this appeal relate to the computation of "short-swing" profits recoverable by plaintiff B. T. Babbitt, Inc., in an action brought under § 16(b) of the Securities Exchange Act against its former president and director, Marshall S. Lachner. After a trial without a jury, the District Court awarded Babbitt profits of $30,194.12, with interest. For reasons to be explained shortly, we find this amount to be excessive, and we accordingly modify the judgment.
Although essentially undisputed, the relevant facts are somewhat complex. Thus, the stipulations reveal that Lachner served as president and director of Babbitt from December 4, 1957 through June 15, 1960. "In order to induce Lachner to enter this contract of employment," an agreement of December 16, 1957 granted the defendant options to purchase 50,000 shares of Babbitt common stock; these options were first exercisable on or after December 4, 1958, and enabled Lachner, if still a Babbitt employee on that date, to purchase 10,000 shares for 95% of the market price on December 16, 1957, or at $3.44375 per share.
On April 30, 1958, Lachner acquired 591.06 shares of Babbitt Series "B" Preferred Stock by private purchase at the price of $40 per share. As stipulated by the parties, the preferred had a $50 par value, and was convertible into common - at the rate of 8.2 shares of common for each share of preferred - at any time between the date of Lachner's purchase and June 30, 1959. The preferred was redeemable - but not before September 1, 1959 - at $50 per share plus accrued dividends.
The first transaction to give rise to the present suit occurred on November 5, 1958, when Lachner converted the preferred into 4,846 shares of Babbitt common stock. Based on his $40 acquisition price for the preferred, the common, in effect, was purchased at a cost to Lachner of $4.878 per share, while the market price for common on this date was $8.6875. Approximately four months thereafter, on March 6, 1959, Lachner's wife sold 4,600 shares of Babbitt common, at the then market price of $8.625 per share; the parties have agreed that for present purposes, this sale may be attributed to Lachner.
One week later, on March 13, 1959, Lachner exercised the option granted to him at the commencement of his employment, and purchased 10,000 shares of common at the option price of $3.44375 per share. And finally, to round out the list of relevant but complicated transactions, Lachner sold 5,749 shares of common on May 6, 1959, at a price of $9.7945 per share.
In the words of § 16(b), any profit by an officer or director "from any purchase and sale, or any sale and purchase" of his corporation's equity securities "within any period of less than six months * * * shall inure to and be recoverable by" the corporation. As we explained in Smolowe v. Delendo Corp., 136 F.2d 231, 148 A.L.R. 300 (2d Cir.), cert denied, 320 U.S. 751, 64 S. Ct. 56, 88 L. Ed. 446 (1943), the section "was designed to protect the 'outside' stockholders against at least short-swing speculation by insiders with advance information." 136 F.2d at 235. The statute is prophylactic in operation; even absent proof that inside information was, in fact, used, the short-term profits of an officer-director dealing in his corporation's securities must be forfeited to the corporation. Smolowe v. Delendo Corp., supra.
Save for one contention to be considered shortly, therefore, we are not primarily concerned here with determining Babbitt's right to Lachner's profits, but rather with fixing the precise amount of profits to which Babbitt is entitled. On appeal, Babbitt concedes that the District Court erred in its computations, and offers an alternative method of analysis which yields a roughly comparable result.But while we agree that the District Court's computations cannot be accepted, we are unable, in the main, to adopt Babbitt's suggested alternatives; our reasons for so deciding are set forth below.
I. The Computations in the District Court .
In analyzing the transactions in dispute, the District Court isolated two "deals," or pairings of purchases and sales. Thus, as a first pairing, the Court linked Lachner's March 13, 1959 purchase of 10,000 shares, at the option price of $3.44375, with the sale of 4,600 shares on March 6, 1959, at $8.625. Taking the option price as the "purchase price," the Court computed a per share profit of $5.18125; when this figure was multiplied by 4,600, an aggregate total of $23,833.75 was fixed; and this amount was considered Lachner's short-swing profit on this transaction. Thus:
(Sale) March 6, 1959 $8.625
(Purchase) March 13, 1959 $3.44375