Blau v. Lehman, 66

Citation7 L.Ed.2d 403,368 U.S. 403,82 S.Ct. 451
Decision Date22 January 1962
Docket NumberNo. 66,66
PartiesIsadore BLAU, etc., Petitioner, v. Robert LEHMAN et al
CourtUnited States Supreme Court

Morris J. Levy, New York City, for the petitioner.

Allan F. Conwill, Washington, D.C., for the Securities and Exchange Commission, as amicus curiae, by special leave of Court.

Whitney North Seymour, New York City, for respondents.

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 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 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 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 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 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. 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, 81 S.Ct. 1048, 6 L.Ed.2d 202. 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 per- haps 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 initiative, independently of any advice or 'inside' knowledge given it by director Thomas.

First. The language of § 16 does not purport to impose its extraordinary liability on any 'person,' 'fiduciary' or not, unless he or it is a 'director,' 'officer' or 'beneficial owner of more than 10 per centum of any class of any equity security * * * which is registered on a national securities exchange.' 6 Lehman Brothers was neither an officer nor a 10% stockholder of Tide Water, but petitioner and the Commission contend that the Lehman partnership is or should be treated as a director under § 16(b).

(a) 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, since § 3(a)(9) of the Act7 provides that "person' means * * * partnership' and § 3(a)(7)8 that "director' means any direct or of a corporation or any person performing similar functions with respect to any organization, whether incorporated or unincorporated.' Consequently, Lehman Brothers would be a 'director' of Tide Water, if as petitioner's complaint charged Lehman actually functioned as a director through Thomas, who had been deputized by Lehman to perform a director's duties not for himself but for Lehman. But the findings of the two courts below, which we have accepted, preclude such a holding. It was Thomas, not Lehman Brothers as an entity, that was the director of Tide Water.

(b) It is next argued that the intent of § 3(a)(9) in defining 'person' as including a partnership is to treat a partnership as an inseparable entity. 9 Because Thomas, one member of this inseparable entity, is an 'insider,' 10 it is contended that the whole partnership should be considered the 'insider.' But the obvious intent of § 3(a)(9), as the Commission apparently realizes, is merely to make it clear that a partnership can be treated as an entity under the statute, not that it must be. This affords no reason at all for construing the word 'director' in § 16(b) as though it read 'partnership of which the director is a member.' And the fact that Congress provided in § 3(a) (9) for a partnership to be treated as an entity in its own right likewise offers no support for the argument that Congress wanted a partnership to be subject to all the responsibilities and financial burdens of its members in carrying on their other individual business activities.

(c) Both the petitioner and the Commission contend on policy grounds that the Lehman partnership should be held liable even though it is neither a director, officer, nor a 10% stockholder. Conceding that such an interpretation is not justified by the literal language of § 16(b) which plainly limits liability to directors,...

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