Rattner v. Lehman

• Citation: 98 F. Supp. 1009
• Parties: RATTNER v. LEHMAN et al.
• Decision Date: 27 June 1951
• Court: U.S. District Court — Southern District of New York

98 F. Supp. 1009

RATTNER v. LEHMAN et al.

United States District Court S. D. New York.

June 27, 1951.

Morris J. Levy, New York City, for plaintiff.

Sullivan & Cromwell, New York City (Eustace Seligman and Inzer B. Wyatt, New York City, of counsel), for defendants Lehman Brothers and Hertz.

Simpson Thacher & Bartlett, New York City, for Consolidated Vultee Aircraft Corp.

Roger S. Foster, General Counsel, and Myer Feldman, Washington, D. C., for Securities and Exchange Commission, amicus curiae.

S. H. KAUFMAN, District Judge.

Defendant John D. Hertz moves, and plaintiff cross moves, for summary judgment. Defendant Robert Lehman and other members of the partnership, Lehman Brothers, move for an order dismissing the complaint for failure to state a claim upon which relief can be granted.

This action is based upon Section 16(b) of the Securities Exchange Act of 1934,¹ 15 U.S.C.A. § 78p(b). The following facts are established by the pleadings and affidavits submitted therewith. At all material times the equity securities of defendant, Consolidated Vultee Aircraft Corporation, were registered on the New York Stock Exchange, and transactions in such securities were subject to the provisions of Section 16(b). Defendant John D. Hertz is now, and was at the time of the transactions here involved, a director of Consolidated Vultee and a member of a partnership doing business as Lehman Brothers, entitled to 5.3208% of the profits of said partnership. Within the period from about November 10, 1948 to April 7, 1949 (less than six months), the partnership, Lehman Brothers, in the regular course of its business and without the knowledge of Hertz, purchased and sold 5,000 shares of common stock of Consolidated Vultee and realized a profit of $15,159.75. When Hertz learned of these transactions, he paid to Consolidated Vultee the sum of $806.62, his share of the profits of the partnership. Plaintiff, a stockholder of Consolidated Vultee, pursuant to Section 16 (b) requested Consolidated Vultee, in a letter dated July 13, 1950, to institute an action against the other defendants to recover the entire profits realized by such defendants from the foregoing transactions. Consolidated Vultee advised plaintiff that Hertz had accounted for his share of such profits and refused to bring suit to recover the balance. Thereupon plaintiff, on March 30, 1951, brought this action, in behalf of Consolidated Vultee, to require defendant Hertz and the other partners of Lehman Brothers, jointly and severally, to pay over to Consolidated Vultee the balance of said profits.

The only question in this case is whether Section 16(b) requires a corporate fiduciary of a class designated in that section, or the partners of such a fiduciary, to account to the corporate issuer for profits realized by such partners in short-swing speculations in the equity securities of such issuer.

The statute plainly requires the fiduciary to account only for "any profit realized by him from any purchase and sale". There is no provision requiring the partners of the fiduciary to account for profits realized by them. Moreover, the legislative history of the statute shows that the omission of any provision for such liability was intentional. Provisions in early drafts of the statute "declaring unlawful the improper disclosure of confidential information regarding securities by directors, officers, or principal stockholders, and holding that any profit made by any person to whom such unlawful disclosure was made should inure to the corporate issuer, were deleted, presumably because the burden of proof made enforcement unfeasible." Smolowe v. Delendo Corporation, 2 Cir., 1943, 136 F.2d 231, 236, 148 A.L.R. 300, certiorari denied, 1943, 320 U.S. 751, 64 S.Ct. 56, 88 L.Ed. 446.

Section 16(a) of the Securities Exchange Act,² 15 U.S.C.A. § 78p(a), requires the corporate fiduciaries referred to in Section 16(b) to file periodic reports of changes in their ownership of securities, registered on a national securities exchange, with the Commission and with the exchange where such securities are registered. Under this provision the Commission has adopted Rule X-16A-3³, which permits a partner, at his option, to report only the amount of such securities which represents his proportionate interest in the partnership. In a brief filed by the Commission as amicus curiae, it is urged that Rule X-16A-3 should be accepted as an administrative interpretation of Section 16 (b), since it is predicated on the assumption that the Commission has no interest, under Section 16(a) and the related Section 16(b), in anything more than the partner's proportionate interest in the...