Booth v. Varian Associates

• Decision Date: 15 July 1964
• Docket Number: No. 6277.,6277.
• Citation: 334 F.2d 1
• Parties: Harold C. BOOTH et al., Defendants, Appellants, v. VARIAN ASSOCIATES, Plaintiff, Appellee.
• Court: U.S. Court of Appeals — First Circuit

334 F.2d 1 (1964)

Harold C. BOOTH et al., Defendants, Appellants, v. VARIAN ASSOCIATES, Plaintiff, Appellee.

No. 6277.

United States Court of Appeals First Circuit.

July 15, 1964.

Louis Loss, Cambridge, Mass., with whom C. Henry Glovsky and Glovsky & Glovsky, Beverly, Mass., were on brief, for appellants.

Frank W. Crocker, Boston, Mass., with whom Edward A. Benjamin and Ropes & Gray, Boston, Mass., were on brief, for appellee.

Before WOODBURY, Chief Judge, and HARTIGAN and ALDRICH, Circuit Judges.

HARTIGAN, Circuit Judge.

Plaintiff-appellee, Varian Associates, a California corporation, brought an action in the United States District Court for the District of Massachusetts under Section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b), to recover alleged "inside profits" made by defendants-appellants, Harold C. Booth and Henry J. McCarthy, both of Massachusetts, on the sale of certain shares of Varian stock. From the granting of the appellee's motion for summary judgment, entered December 12, 1963, appellants appeal.

The facts are not in dispute. In January, 1959 Varian acquired 80% of the outstanding shares of Bomac Laboratories, Inc., a Massachusetts corporation. Most of these shares were acquired from appellants, who remained owners of the remaining 20% of the Bomac stock. Shortly thereafter appellants became members of the board of directors of Varian.

On January 14, 1959 Varian and appellants entered into a contract entitled "Agreement For Exchange of Stock," amended on February 26, 1959, under which appellants agreed to sell to Varian their remaining shares of Bomac stock in return for that number of shares of Varian stock which, on the basis of the market quotations of the day before the closing, would equal in value $2,000,000 plus 20 per cent of the amount by which the retained earnings of Bomac at the end of the month preceding the closing exceeded the retained earnings on December 31, 1958. The closing date was to be July 2, 1962, subject to acceleration by Varian, or in certain limited circumstances by appellants. The closing was in fact accelerated by three days by Varian and the actual exchange of shares took place on June 29, 1962. Since late in 1959 appellee's shares have been listed on the New York Stock Exchange.

Within less than six months after June 29, 1962 appellants sold some of their shares of Varian on the New York Stock Exchange at a profit over the June 29 market of $42,895 for appellant Booth and $12,309 for appellant McCarthy. These profits are recoverable under § 16 only if the sales of the stock took place within six months of the purchases.

The objectives sought to be accomplished by Congress in adopting Section 16(b) are clear from the statute which, in pertinent part, reads as follows:

"(b) For the purpose of preventing the unfair use of information which may have been obtained by such beneficial owner, director, or officer by reason of his relationship to the issuer, any profit realized by him from any purchase and sale, or any sale and purchase, of any equity security of such issuer * * * within any period of less than six months, unless such security was acquired in good faith in connection with a debt previously contracted, shall inure to and be recoverable by the issuer, * * *."

It was recognized that those covered by the statute might have information not accessible to a shareholder, actual or prospective, and would thus possess an unfair advantage in market dealings. Gratz v. Claughton, 187 F.2d 46 (2d Cir.), cert. denied, 341 U.S. 920, 71 S.Ct. 741, 95 L.Ed. 1353 (1951). The statute is remedial rather than penal, Adler v. Klawans, 267 F.2d 840 (2d Cir. 1959), and includes all profits realized by those assumed by the statute to have access to inside information whether or not an intention to profit from an unfair use of information can be shown. Smolowe v. Delendo Corporation, 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). If, as directors of Varian, appellants negotiated a sale of Varian stock within six months of the date of purchase, they are liable to appellee for the profit resulting from such sale.

Section 3(a) (13) of the Act, 15 U.S.C. § 78c(a), states that "unless the context otherwise requires" the term "purchase" includes "any contract to buy, purchase or otherwise acquire." Appellants contend that the "purchase" of the Varian shares occurred at the time in 1959 when appellants entered into a mutually binding agreement to exchange their Bomac shares for those of appellee, although the number of Varian shares and their price on the date of exchange was then indeterminable due to the formula aspect of the agreement. Appellee contends that the "purchase" did not take place until June of 1962 when appellants received a specific number of shares at a specific price.

To further their respective arguments and due to a dearth of cases involving a contract containing terms similar to those here in issue, both sides have relied to a great extent upon cases concerned with the application of Section 16(b) to options, warrants, conversions and like transactions. E. g., Blau v. Ogsbury, 210 F.2d 426 (2d Cir. 1954) (options); Roberts v. Eaton, 212 F.2d 82 (2d Cir.), cert. denied, 348 U.S. 827, 75 S.Ct. 44, 99 L.Ed. 652 (1954) (reclassification); Park & Tilford v. Schulte, 160 F.2d 984 (2d Cir.), cert. denied, 332 U.S. 761, 68 S.Ct. 64, 92 L.Ed. 347 (1947) (conversion). While these cases contain language applicable to the present fact situation, it must be noted that they have presented special problems as to time and price of purchase and sale not easily fitted into the statutory framework nor directly relevant to the problem immediately before us.¹ Options, conversions and similar devices have lent themselves quite readily to the abuses uncovered in the Congressional investigation antedating the Act, and in order to give maximum support to the statute courts have attempted to include these transactions by characterizing them as purchases or sales. This has led to inconsistent results in the decisions, compare Park & Tilford v. Schulte, supra, with Ferraiolo v. Newman, 259 F. 2d 342 (6th Cir. 1958), cert. denied, 359 U.S. 927, 79 S.Ct. 606, 3 L.Ed.2d 629 (1959), and conflicting views among the commentators. Compare Cook and Feldman, Insider Trading Under the Securities Exchange Act, 66 Harv.L.Rev. 612 (1953), with Hardee, Stock Options and the "Insider Trading" provisions of the Securities Exchange Act, 65 Harv.L.Rev. 997 (1952). The practice of the courts in option cases of using one "purchase" date for the purpose of deciding whether profits are "short swing" and another "purchase" date for the purpose of measuring those profits led to the Commission's formulation of a rule mitigating the loss to the insider option holder found to have violated the statute. 17 C.F.R. § 240.16b-6. See Blau v. Hodgkinson, 100 F.Supp. 361 (S.D.N.Y.1951). In sum, we do not believe cases of the classes referred to, involving problems peculiar to their own types of transactions, are especially helpful in deciding the case before us.

As there are no cases which we can turn to for substantial precedent, it is proper that we attempt to resolve the question involved in a manner that is practical and logical and will be most consonant with the statutory purpose. The question thus becomes one of balancing the respective advantages and disadvantages of each contended for "purchase" date and determining which one, if held to be the date of purchase, would be more likely to lend itself to the abuses the statute was designed to protect against. Adler v. Klawans, supra. See S.E.C. v. Ralston Purina Co., 346 U.S. 119, 125, 73 S.Ct. 981, 97 L.Ed. 1494 (1953). In addition, since we are dealing with a remedial measure, it is important that we consider the probability of bringing the insider to task for his violation of the statute. If one date lends...