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Feder v. Martin Marietta Corp.

decided: January 14, 1969.


Waterman, Smith and Hays, Circuit Judges.

Author: Waterman

WATERMAN, Circuit Judge:

Plaintiff-appellant, a stockholder of the Sperry Rand Corporation ("Sperry") after having made the requisite demand upon Sperry which was not complied with, commenced this action pursuant to § 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b) (1964), to recover for Sperry "short-swing" profits realized upon Sperry stock purchases and sales by the Martin Marietta Corporation ("Martin").*fn1 Plaintiff alleged that George M. Bunker, the President and Chief Executive of Martin Marietta, was deputized by, or represented, Martin Marietta when he served as a member of the Sperry Rand Board of Directors and therefore during his membership Martin Marietta was a "director" of Sperry Rand within the meaning of Section 16(b). The United States District Court for the Southern District of New York, Cooper, J., sitting without a jury, finding no deputization, dismissed plaintiff's action. 286 F. Supp. 937 (SDNY 1968). We hold to the contrary and reverse the judgment below.

The purpose of § 16(b) as succinctly expressed in the statute itself is to prevent "unfair use of information" by insiders and thereby to protect the public and outside stockholders. The only remedy which the framers of § 16(b) deemed effective to curb insider abuse of advance information was the imposition of a liability based upon an objective measure of proof, e.g., Smolowe v. Delendo Corp., 136 F.2d 231, 235 (2 Cir.), cert. denied, 320 U.S. 751, 64 S. Ct. 56, 88 L. Ed. 446 (1943). Thus, application of the act is not conditional upon proof of an insider's intent to profit from unfair use of information, e.g., Blau v. Lamb, 363 F.2d 507, 515 (2 Cir. 1966), cert. denied, 385 U.S. 1002, 87 S. Ct. 707, 17 L. Ed. 2d 542 (1967), or upon proof that the insider was privy to any confidential information, e.g., Ferraiolo v. Newman, 259 F.2d 342, 344 (6 Cir. 1958), cert. denied, 359 U.S. 927, 79 S. Ct. 606, 3 L. Ed. 2d 629 (1959). Rather, Section 16(b) liability is automatic, and liability attaches to any profit by an insider on any short-swing transaction embraced within the arbitrarily fixed time limits of the statute.

The judicial tendency, especially in this circuit, has been to interpret Section 16(b) in ways that are most consistent with the legislative purpose, even departing where necessary from the literal statutory language. See, e.g., cases cited in Blau v. Oppenheim, 250 F. Supp. 881, 884-885 (SDNY 1966) (Weinfeld, J.). But the policy underlying the enactment of § 16(b) does not permit an expansion of the statute's scope to persons other than directors, officers, and 10% shareholders. Blau v. Lehman, 368 U.S. 403, 410-411, 82 S. Ct. 451, 7 L. Ed. 2d 403 (1962). Cf. Ellerin v. Massachusetts Mut. Life Ins. Co., 270 F.2d 259, 263 (2 Cir. 1959). Through the creation of a legal fiction, however, our courts have managed to remain within the limits of § 16(b)'s literal language and yet have expanded the Act's reach.

In Rattner v. Lehman, 193 F.2d 564 (2 Cir. 1952), Judge Learned Hand in his concurring opinion planted the seed for a utilization of the theory of deputization upon which plaintiff here proceeds. In discussing the question whether a partnership is subject to Section 16(b) liability whenever a partner is a director of a corporation whose stock the partnership traded, Judge Hand stated:

I agree that § 16(b) does not go so far; but I wish to say nothing as to whether, if a firm deputed a partner to represent its interests as a director on the board, the other partners would not be liable. True, they would not even then be formally "directors"; but I am not prepared to say that they could not be so considered; for some purposes the common law does treat a firm as a jural person. 193 F.2d at 567.

The Supreme Court in Blau v. Lehman, 368 U.S. 403, 408-410, 82 S. Ct. 451, 7 L. Ed. 2d 403 (1962), affirming 286 F.2d 786 (2 Cir. 1960), affirming 173 F. Supp. 590 (SDNY 1959) more firmly established the possibility of an entity, such as a partnership or a corporation, incurring Section 16(b) liability as a "director" through the deputization theory. Though the Court refused to reverse the lower court decisions that had held no deputization, it stated:

Although admittedly not "literally designated" as one, it is contended that Lehman is a director. No doubt Lehman Brothers, though a partnership. could for purposes of § 16 be a "director" of Tide Water and function through a deputy * * *. 368 U.S. at 409, 82 S. Ct. at 455.

In Marquette Cement Mfg. Co. v. Andreas, 239 F. Supp. 962, 967 (SDNY 1965), relying upon Blau v. Lehman, the availability of the deputization theory to impose § 16(b) liability was again recognized. See also Molybdenum Corp. of America v. International Mining Corp., 32 F.R.D. 415, 418 (SDNY 1963).

In light of the above authorities, the validity of the deputization theory, presumed to be valid here by the parties and by the district court, is unquestionable. Nevertheless, the situations encompassed by its application are not as clear. The Supreme Court in Blau v. Lehman intimated that the issue of deputization is a question of fact to be settled case by case and not a conclusion of law. See 368 U.S. at 408-409, 82 S. Ct. 451, 7 L. Ed. 2d 403. Therefore, it is not enough for appellant to show us that inferences to support appellant's contentions should have been drawn from the evidence. Id. at 409, 82 S. Ct. 451. Rather our review of the facts and inferences found by the court below is imprisoned by the "unless clearly erroneous" standard. Fed.R.Civ.P. 52(a). In the instant case, applying that standard, though there is some evidence in the record to support the trial court's finding of no deputization, we, upon considering the entire evidence, are left with the definite and firm conviction that a mistake was committed. Guzman v. Pichirilo, 369 U.S. 698, 702, 82 S. Ct. 1095, 8 L. Ed. 2d 205 (1962); United States v. United States Gypsum Co., 333 U.S. 364, 394-395, 68 S. Ct. 525, 92 L. Ed. 746 (1948). Consequently, we reverse the result reached below.

Bunker served as a director of Sperry from April 29, 1963 to August 1, 1963, when he resigned. During the period December 14, 1962 through July 24, 1963, Martin Marietta accumulated 801,300 shares of Sperry stock of which 101,300 shares were purchased during Bunker's directorship. Between August 29, 1963 and September 6, 1963, Martin Marietta sold all of its Sperry stock. Plaintiff seeks to reach, on behalf of the Sperry Rand Corporation, the profits made by Martin Marietta from the 101,300 shares of stock acquired between April 29 and August 1, all of which, of course, were sold within six months after purchase.

The district court, in determining that Bunker was not a Martin deputy, made the following findings of fact to support its decision: (1) Sperry initially invited Bunker to join its Board two and a half months before Martin began its accumulation of Sperry stock; (2) Bunker turned down a second offer by Sperry at a time when Martin already held 400,000 shares of Sperry stock; (3) Sperry, not Martin, took the initiative to encourage Bunker to accept the directorship; (4) no other Martin man was ever mentioned for the position in the event Bunker absolutely declined; and (5) Bunker's fine reputation and engineering expertise was the prime motivation for Sperry's interest in him. In addition, the testimony of the only two witnesses who testified at trial, Mr. Bunker and a Mr. Norman Frost, a Sperry director and its chief counsel, were fully believed and accepted as truthful by the court. We assume all of the foregoing findings have a basis of fact in the evidence, but we find there was additional, more germane, uncontradicted evidence, overlooked or ignored by the district court, which we are firmly convinced require us to conclude that Martin Marietta was a "director" of Sperry Rand.*fn2

First and foremost is Bunkers' testimony that as chief executive of Martin Marietta he was "ultimately responsible for the total operation of the corporation" including personal approval of all the firm's financial investments, and, in particular, all of Martin's purchases of Sperry stock. As the district court aptly recognized, Bunker's control over Martin Marietta's investments, coupled with his position on the Board of Directors of Sperry Rand, placed him in a position where he could acquire inside information concerning Sperry and could utilize such data for Martin Marietta's benefit without disclosing this information to any other Martin Marietta personnel. Thus, the district court's findings that Bunker "never disclosed inside information relevant to investment decisions" and that the "information that he obtained while a director 'simply wasn't germane to that question at all'" are not significant. 286 F. Supp. at 946. Nor are these findings totally supported by the evidence. Bunker's testimony revealed that while he was a Sperry director three Sperry officials had furnished him with information relating to the "short-range outlook" at Sperry, and, in addition, Bunker admitted discussing Sperry's affairs with two officials at Martin Marietta and participating in sessions when Martin's investment in Sperry was reviewed. Moreover, an unsigned document concededly originating from ...

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