C.R.A. Realty Corp. v. Crotty

• Decision Date: 14 June 1989
• Docket Number: No. 1084,D,1084
• Citation: 878 F.2d 562
• Parties: , Fed. Sec. L. Rep. P 94,483 C.R.A. REALTY CORP., Appellant, v. Joseph R. CROTTY and United Artists Communications, Inc., Appellees. ocket 89-7069.
• Court: U.S. Court of Appeals — Second Circuit

Page 562

878 F.2d 562

58 USLW 2008, Fed. Sec. L. Rep. P 94,483

C.R.A. REALTY CORP., Appellant, v. Joseph R. CROTTY and United Artists Communications, Inc., Appellees.

No. 1084, Docket 89-7069.

United States Court of Appeals Second Circuit.

Argued April 28, 1989.

Decided June 14, 1989.

Morris J. Levy (Levy & Levy, on the brief), New York City, for appellant, C.R.A. Realty Corp.

John M. Sherwood, Orinda, Cal., for appellee, Joseph R. Crotty.

Marvin Luboff, East Meadow, N.Y. for appellee, United Artists Communications, Inc.

Before OAKES, Chief Judge, and TIMBERS and MESKILL, Circuit Judges.

TIMBERS, Circuit Judge:

The essential question presented by this appeal is whether an employee's functions, rather than his title, determine whether he is an "officer" within the meaning of Sec. 16(b) of the Securities Exchange Act of 1934. The district court held that the employee's functions were determinative. We agree. We affirm.

Appellant C.R.A. Realty Corp. appeals from a judgment entered December 27, 1988 in the Southern District of New York, Robert L. Carter, District Judge, dismissing after trial appellant's complaint which alleged that appellee Joseph R. Crotty (Crotty), an "officer" of appellee United Artists Communications, Inc. (United Artists or the company) engaged in short-swing trading in United Artists' securities in violation of Sec. 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78p(b) (1982), which prohibits short-swing trading in the securities of a company by any director, officer or 10% shareholder of the company. The district court held that Crotty was not an "officer" within the meaning of Sec. 16(b)--despite his position as a corporate vice-president--because he was "a middle management employee of United Artists whose duties did not provide access to any confidential information about the company's financial plans or future operations". C.R.A. Realty Corp. v. Crotty, [1988-1989 Transfer Binder] Fed.Sec.L.Rep. (CCH) p 94,140, at 91,413.

Appellant asserts on appeal that the district court erred in holding that Crotty was not an officer because (1) Crotty's lack of access to confidential or inside information is irrelevant since Sec. 16(b) imposes strict liability on any officer engaging in short-swing trading regardless of whether he has access to inside information, and (2) in the alternative, appellant demonstrated in the district court that Crotty had access to inside information.

For the reasons which follow, we affirm.

I.

We shall summarize only those facts and prior proceedings believed necessary to an understanding of the issues raised on appeal. We shall assume familiarity with the facts set forth in Judge Carter's earlier opinion in which he denied appellees' motion to dismiss and the motions for summary judgment by all parties. C.R.A. Realty Corp. v. Crotty, 663 F.Supp. 444 (S.D.N.Y.1987).

Appellant is an organization incorporated to act as a private attorney general to purchase stock and commence actions against corporate officials for violations of the federal securities laws. During the period in question, appellant owned 10 shares of United Artists, then a nationwide distributor and exhibitor of motion pictures. Crotty, a vice-president of United Artists, was the head film buyer of its western division, a territory encompassing six western states.

Crotty was first employed by United Artists in December 1969. He became head film buyer for the western division in 1980. He was elected a vice-president of United Artists in 1982 and continued to serve as head film buyer for the western division. As head film buyer, he obtained movies to be shown at the 351 movie screens in the western division theaters. He supervised their distribution. This included negotiating and signing agreements pursuant to which United Artists obtained movies for exhibition, supervising the distribution of the movies to the company's theaters, and settling contracts after the movies had been shown in the theaters. Crotty also had some supervisory responsibility for advertising in his division.

Crotty supervised a staff of 30 people. He had virtually complete and autonomous control of film buying in the western division. He was required to consult with higher authority only if he wanted to exceed a certain limit on the amount of the cash advance paid to a distributor for the exhibition of a particular movie. This occurred no more than two or three times a year. The gross revenue from Crotty's division routinely was about 35-36% of United Artists' gross revenue from movie exhibition, or around 15-18% of the company's total gross revenue.

The short-swing transactions here involved took place between December 19, 1984 and July 24, 1985. During this period Crotty purchased 7500 shares of United Artists and sold 3500 of its shares. He realized a large profit which appellant seeks to recover on behalf of United Artists. Following an unsuccessful demand on United Artists that it proceed against Crotty to recover this profit ¹, appellant commenced the instant action against appellees pursuant to Sec. 16(b). Following trial, the district court entered a judgment which dismissed the complaint. The court held that, although Crotty was a vice-president of United Artists, he was not an officer within the purview of Sec. 16(b) because he had no access to inside information regarding the company's financial plans or future operations. This appeal followed.

II.

Section 16(b) provides in relevant part:

"For the purpose of preventing the unfair use of information which may have been obtained by such ... 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 ... shall inure to and be recoverable by the issuer, irrespective of any intention on the part of such ... officer in entering into such transaction of holding the security purchased or of not repurchasing the security sold for a period exceeding six months."

This provision of the statute "imposes a strict prophylactic rule with respect to insider, short-swing trading". Foremost-McKesson, Inc. v. Provident Securities Co., 423 U.S. 232, 251 (1976). Any corporate official within the statutory meaning of an "officer" who engages in short-swing trading automatically will be required to surrender any profit from the trading, "without proof of actual abuse of insider information, and without proof of intent to profit on the basis of such information". Kern County Land Co. v. Occidental Petroleum Corp., 411 U.S. 582, 595 (1973); Smolowe v. Delendo Corp., 136 F.2d 231, 235-36 (2 Cir.), cert. denied, 320 U.S. 751 (1943). This objective test was chosen by Congress because of the difficulty of proving whether a corporate insider actually abused confidential information to which he had access or purchased or sold an issuer's stock with the intention of profiting from such information. Reliance Elec. Co. v. Emerson Elec. Co., 404 U.S. 418, 422 (1972) (quoting Bershad v. McDonough, 428 F.2d 693, 696 (7 Cir.1970), cert. denied, 400 U.S. 992 (1971)); Smolowe, supra, 136 F.2d at 235-36. Since the statute imposes strict liability, it is to be applied only when doing so "best serves the congressional purpose of curbing short-swing speculation by corporate insiders". Reliance Elec., supra, 404 U.S. at 424.

Appellant challenges the district court's holding by asserting that Crotty automatically was an officer within the meaning of Sec. 16(b) by virtue of his title of vice-president of United Artists. The district court, however, held that it was Crotty's actual duties at the time of the short-swing trading--rather than his corporate title--that determined whether he was an officer within the meaning of Sec. 16(b). We believe that the district court's holding was correct.

Appellant's starting point in challenging the district court's holding is the Securities and Exchange Commission rule which defined the term "officer" in the 1934 Act as including a vice-president of an issuer. 15 U.S.C. Sec. 78c(b) (1982) (SEC has power to define 1934 Act terms in manner consistent with Act); Rule 3b-2, 17 C.F.R. 240.3b-2 (1988). ² Appellant asserts that, since Crotty is a vice-president of United Artists, this rule places him within the purview of Sec. 16(b). We believe it is significant, however, that the SEC itself does not believe that this rule should be rigidly applied in determining who is an officer within the meaning of Sec. 16. For example, two SEC releases show that the Commission does not consider an employee's title as an officer to bring the employee automatically under Sec. 16. Release on Ownership Reports and Trading by Officers, Directors and Principal Stockholders, Exchange Act Release No. 26333 [1988-1989 Transfer Binder] Fed.Sec.L.Rep. (CCH) p 84,343, at 89,601 (December 2, 1988) ³; Release on Rules Applicable to Insider Reporting and Trading, Exchange Act Release No. 18114 [Vol. 4] Fed.Sec.L.Rep. (CCH) p 26,062 at 19,063-5-19,063-6 (Sept. 23, 1981) (vice-president might not be an officer subject to reporting requirements of Sec. 16(a) if officer's duties are "insignificant" and he or she has no access to inside information). We do not believe that Rule 3b-2 requires us to hold that Crotty is an officer within the purview of Sec. 16(b) merely by virtue of his title as a vice-president of the company.

Moreover the district court's holding is consistent with the law of this Circuit. It relied primarily on Colby v. Klune, 178 F.2d 872 (2 Cir.1949). In Colby we held that a corporate employee who did not hold the title of a corporate officer nevertheless could be an officer within the meaning of Sec. 16(b) if he "perform[ed] important executive duties of such character that he would be likely, in discharging these duties, to obtain confidential information about the company's affairs that would aid him...