368 U.S. 403 (1962), 66, Blau v. Lehman

Docket Nº:No. 66
Citation:368 U.S. 403, 82 S.Ct. 451, 7 L.Ed.2d 403
Party Name:Blau v. Lehman
Case Date:January 22, 1962
Court:United States Supreme Court

Page 403

368 U.S. 403 (1962)

82 S.Ct. 451, 7 L.Ed.2d 403




No. 66

United States Supreme Court

Jan. 22, 1962

Argued December 12-13, 1961




Petitioner, a stockholder in a corporation with stock registered on a national securities exchange, sued under § 16(b) of the Securities Exchange Act of 1934 to recover on behalf of the corporation from one of its directors and a partnership of which he was a member "short-swing" profits realized by them on the purchase and sale by the partnership of stock of the corporation within a period of less than six months. Petitioner alleged that the partnership had "deputed" the director to represent its interests on the corporation's board of directors and that, by reason of his inside information, he had caused the partnership to purchase the stock of the corporation. The District Court found that these allegations were not supported by the evidence, and that the partnership had bought the stock solely on the basis of the corporation's public announcements, and without consulting the director. Accordingly, it denied a judgment against the partnership and the director for the full amount of the resulting profits and awarded a judgment against the director for only his proportionate share of the partnership's profits on these transactions, without interest. The Court of Appeals affirmed in all respects.

Held: the judgment is affirmed. Pp. 404-414.

(1) The findings of the courts below on the disputed factual issues were not clearly erroneous; they were not conclusions of law; and they are sustained. Pp. 408-409.

(2) The partnership was neither an officer nor a 10% stockholder of the corporation, and it cannot be held liable as a director under § 16(b). Pp. 409-413.

(a) The findings of the courts below, which are accepted by this Court, preclude a finding that the partnership actually functioned as a director of the corporation through a partner who had been deputized by the partnership to perform a director's duties, not for himself, but for the partnership. Pp. 409-410.

(b) The fact that § 3(a)(9) defines "person" as including a partnership does not require that the entire partnership be held liable as an "insider" under § 16(b) merely because one of its members was a director of the corporation. P. 410.

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(c) This Court cannot extend the coverage of § 16(b) so as to include a partnership of which a director is a member. Pp. 410-413.

(3) The courts below properly held that the director was liable only for any profit realized by himself, and not for all the profits earned by the partnership on these transactions. Pp. 413-414.

(4) Denial by the two courts below of interest on the amount for which the director was held liable was neither so unfair nor so inequitable as to require this Court to upset it. P. 414.

286 F.2d 786, affirmed.

BLACK, J., lead opinion

MR. JUSTICE BLACK delivered the opinion of the Court.

The petitioner Blau, a stockholder in Tide Water Associated Oil Company, brought this action in a United States District Court on behalf of the company under § 16(b)1 of the Securities Exchange Act of 1934 to

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recover with interest "short swing" profits, that is, profits earned within a six months' period by the purchase and sale of securities, alleged to have been "realized" by respondents in Tide Water securities [82 S.Ct. 453] dealings. Respondents are Lehman Brothers, a partnership engaged in investment banking, the securities brokerage and in securities trading for its own account, and Joseph A. Thomas, a member of Lehman Brothers and a director of Tide Water. The complaint alleged that Lehman Brothers "deputed . . . Thomas, to represent its interests as a director on the Tide Water Board of Directors," and that, within a period of six months in 1954, and 1955 Thomas, while representing the interests of Lehman Brothers as a director of Tide Water and

by reason of his special and inside knowledge of the affairs of Tide Water, advised and caused the defendants, Lehman Brothers, to purchase and sell 50,000 shares of . . . stock of Tide Water, realizing profits thereon which did not inure to and [were] not recovered by Tide Water.

The case was tried before a district judge without a jury. The evidence showed that Lehman Brothers had in

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fact earned profits out of short-swing transactions in Tide Water securities while Thomas was a director of that company. But, as to the charges of deputization and wrongful use of "inside" information by Lehman Brothers, the evidence was in conflict.

First, there was testimony that respondent Thomas had succeeded Hertz, another Lehman partner, on the board of Tide Water; that Hertz had "joined Tidewater Company thinking it was going to be in the interests of Lehman Brothers"; and that he had suggested Thomas as his successor partly because it was in the interest of Lehman. There was also testimony, however, that Thomas, aside from having mentioned from time to time to some of his partners and other people that he thought Tide Water was "an attractive investment" and under "good" management, had never discussed the operating details of Tide Water affairs with any member of Lehman Brothers;2 that Lehman had bought the Tide Water securities without consulting Thomas, and wholly on the basis of public announcements by Tide Water that common shareholders could thereafter convert their shares to a new cumulative preferred issue; that Thomas did not know of Lehman's intent to buy Tide Water stock until after the initial purchases had been made; that, upon learning about the purchases, he immediately notified Lehman that he must be excluded from "any risk of the purchase or any profit or loss from the subsequent sale"; and that this disclaimer was accepted by the firm.3

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From the foregoing and other testimony, the District Court found that "there was no evidence that the firm of Lehman Brothers deputed Thomas to represent its interests as director on the board of Tide Water," and that there had been no actual use of inside information, Lehman Brothers having bought its Tide Water stock "solely on the basis of Tide Water's public announcements, and without consulting Thomas."

On the basis of these findings, the District Court refused to render a judgment, either against the partnership or against Thomas individually, for the $98,686.77 profits which it determined that Lehman Brothers had realized,4 holding:

The law is now well settled that the mere fact that a partner in Lehman Brothers was a director of Tide Water at the time that Lehman Brothers had this short swing transaction [82 S.Ct. 454] in the stock of Tide Water is not sufficient to make the partnership liable for the profits thereon, and that Thomas could not be held liable for the profits realized by the other partners from the firm's short-swing transactions. Rattner v. Lehman, 2 Cir., 1952, 193 F.2d 564, 565, 567. This precise question was passed upon in the Rattner decision.

173 F.Supp. 590, 593. Despite its recognition that Thomas had specifically waived his share of the Tide Water transaction profits, the trial court nevertheless held that, within the meaning of § 16(b), Thomas had "realized" $3,893.41, his proportionate share of the profits of Lehman Brothers. The court consequently entered judgment against Thomas for that amount, but refused to allow interest against him.

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On appeal, taken by both sides, the Court of Appeals for the Second Circuit adhered to the view it had taken in Rattner v. Lehman, 193 F.2d 564, and affirmed the District Court's judgment in all respects, Judge Clark dissenting. 286 F.2d 786. The Securities and Exchange Commission then sought leave from the Court of Appeals en banc to file an amicus curiae petition for rehearing urging the overruling of the Rattner case. The Commission's motion was denied, Judges Clark and Smith dissenting. We granted certiorari on the petition of Blau, filed on behalf of himself, other stockholders and Tide Water, and supported by the Commission. 366 U.S. 902. The questions presented by the petition are whether the courts below erred: (1) in refusing to render a judgment against the Lehman partnership for the $98,686.77 profits they were found to have "realized" from their "short-swing" transactions in Tide Water stock, (2) in refusing to render judgment against Thomas for the full $98,686.77 profits, and (3) in refusing to allow interest on the $3,893.41 recovery allowed against Thomas.5

Petitioner apparently seeks to have us decide the questions presented as though he had proven the allegations of his complaint that Lehman Brothers actually deputized Thomas to represent its interests as a director of Tide Water, and that it was his advice and counsel based on his special and inside knowledge of Tide Water's affairs that caused Lehman Brothers to buy and sell Tide Water's stock. But the trial court found otherwise, and the Court of Appeals affirmed these findings. Inferences could perhaps

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have been drawn from the evidence to support petitioner's charges, but examination of the record makes it clear to us that the findings of the two courts below were not clearly erroneous. Moreover, we cannot agree with the Commission that the courts' determinations of the disputed factual issues wee conclusions of law, rather than findings of fact. We must therefore decide whether Lehman Brothers, Thomas, or both have an absolute liability under § 16(b) to pay over all profits made on Lehman's Tide Water stock dealings even though Thomas was not sitting on Tide Water's board to represent Lehman and even though the profits made by the partnership were on its own...

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