Gold v. Scurlock
| Decision Date | 06 April 1971 |
| Docket Number | Civ. A. No. 4990-A. |
| Citation | 324 F. Supp. 1211 |
| Parties | Betty L. GOLD, on behalf of the Susquehanna Corporation, Plaintiff, v. Arch C. SCURLOCK, Arthur W. Sloan, Daniel McBride, Glenn L. Sloane, Keith E. Rumbel and the Susquehanna Corporation, Defendants. |
| Court | U.S. District Court — Eastern District of Virginia |
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Ewell G. Moore, Jr., Fairfax, Va., Sidney B. Silverman, New York City, for plaintiff.
A. Francis Vitt, Jr., Arlington, Va., for Keith E. Rumbel.
Louis Koutoulakos, Arlington, Va., Cleary, Gottlieb, Steen & Hamilton, New York City, for the Susquehanna Corp.
Edmund D. Campbell, Arlington, Va., Benjamin W. Dulany, Fairfax, Va., Stuyvesant Keith Bearns, Washington, D. C., for Arthur W. Sloan and the Susquehanna Corp.
William W. Koontz, Alexandria, Va., Hale, Russel & Stentzel, New York City, for Arch C. Scurlock and Daniel McBride.
Edmund D. Campbell, Arlington, Va., Courts Oulahan, Washington, D. C., for Glenn L. Sloane.
In this stockholder's derivative suit the plaintiff seeks reimbursement on behalf of The Susquehanna Corporation for short-swing profits which she says were realized by the defendants in violation of Section 16(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78p).1
The facts are essentially undisputed. Atlantic Research Corporation (ARC) was a public corporation whose stock was traded on the American Exchange —Defendant Arthur W. Sloan was ARC's chief executive officer and chairman of the board—He owned 16.52% of ARC's common stock—Defendant Arch C. Scurlock was a member of ARC's board of directors—He owned 19.68% of ARC's common stock. Defendants Glenn L. Sloane, Daniel McBride and Keith E. Rumbel were officers of ARC—each owned less than 10% of ARC's common stock.
On August 2, 1967 ARC's board of directors announced that an offer for merger with The Susquehanna Corporation (SC)2 had been accepted in principal. The basic provisions of this merger offer were outlined in a memorandum dated July 31, 1967 from Korholz, chairman of SC's board of directors, to Arthur Sloan. One of the provisions provided that SC would issue newly created preferred stock with a value of not less than $36.00 for each share of ARC common.
The merger was approved by the shareholders of both companies November 27, 1967—effective December 4, 1967.
Scurlock has served as a director of SC since December 1, 1967. He acquired more than 10% of the outstanding preferred stock of SC on December 4, 1967 in exchange for his ARC holdings —He sold 36,000 shares of his original holding of 380,070 shares of SC preferred between December 20, 1967 and January 17, 1968.
Arthur Sloan has served as a director and chief executive officer of SC since December 1, 1967—He acquired more than 10% of the outstanding preferred stock of SC on December 4, 1967 in exchange for his ARC holdings—He sold 1,000 shares of SC preferred on December 27, 1967 and another 1,000 shares on January 18, 1968.
Rumbel, Glenn L. Sloane and McBride served as officers of SC after the merger. McBride sold 300 shares of the SC preferred he had acquired in exchange for ARC stock within six months from the date of the merger. Rumbel and Glenn Sloane sold, within six months of the merger, 6,300 and 500 shares, respectively, of the SC preferred they had acquired in exchange for their ARC stock.
The plaintiff wants the Court to require the defendants to turn back to the corporation the profits made from the sale of this stock.
This is the type of transaction Section 16(b) seeks to prevent. See Newmark v. RKO, 425 F.2d 348 (2nd Cir. 1970).
It is the potential for abuse, not the actual abuse, at which Section 16(b) is aimed.
In Newmark the court held that fixing the purchase price for the stock of the corporation dissolving in the merger before the details of the proposed merger became public knowledge opened the door to possible speculative abuse—The fact that the details, including the purchase price of the stock in the dissolving corporation, were made public the day after consummation did not eliminate the possibility of abuse.
The same situation existed here —The defendants were aware on July 31, 1967 (Monday) of the market value of preferred stock SC would issue in exchange for their ARC common. This was not made public until August 2, 1967 (Wednesday). Thus the defendants had a 48-hour advantage over the general public for speculation. Clearly this presented the defendants with the opportunity for abuse, which Section 16(b) was designed to prevent.
For liability to attach via 16(b) there must be (1) a purchase and (2) a sale of securities (3) by one who owns more than 10% of any one class of the issuer's securities or who is a director or officer of the issuer, (4) within a six-month period.
The transactions here made all occurred within a six-month span commencing December 4, 1967—The defendants acquired their SC preferred in exchange for their ARC common. They disposed of the SC preferred in question on the open market.
The Court here holds that the initial exchange of ARC common for SC preferred constitutes a purchase for 16(b) purposes—The "economic equivalence exemption" established by Blau v. Lamb, 363 F.2d 507 (2nd Cir. 1966), does not apply where the securities received reflect ownership rights in a newly merged corporation (see Newmark, supra).
That disposal of stock on the open market is a sale is beyond question.
Arthur Sloan and Scurlock, in addition to being directors of SC prior to the merger, became 10% beneficial owners of a class of equity securities upon exchange of their ARC common for SC preferred stock.
It is well settled that the prohibition of Section 16(b) embraces transactions made by such beneficial owners. See Stella v. Graham-Paige Motors Corp., 232 F.2d 299 (2nd Cir. 1956), where the court held that Graham-Paige, which held six per cent of Kaiser-Frazer stock, became the "beneficial owner" of more than 10% at the very moment it purchased additional shares—A sale there within six months from that time subjected Graham-Paige to liability.
Arthur Sloan and Scurlock, being both directors and beneficial owners of SC preferred stock, are clearly "insiders"—Thus, having fulfilled all the requirements for 16(b) liability, they will be required to turn back the profits made on the sale of the stock in...
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...205 F.Supp. 569, 572 (E.D.Pa.1962); Perfect Photo, Inc. v. Sentiff, 205 F.Supp. 574, 575 (E.D.Pa.1962). See also Gold v. Scurlock, 324 F.Supp. 1211, 1216 (E.D.Va.1971), aff'd in part and rev'd in part on other grounds sub nom Gold v. Sloan, 486 F.2d 340 (4th Cir.1973), cert. denied, 419 U.S......
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Gold v. Sloan
...for measuring the six-month period between purchase and sale of stock by the several defendants. The District Court found that it did, 324 F.Supp. 1211. We reverse in part and affirm in I. These actions are predicated on Section 16(b) of the Securities Exchange Act,2 which provides that any......
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...had never attended a board meeting). In the one case where an officer had originally possessed some inside information, Gold v. Scurlock, 324 F.Supp. 1211 (E.D.Va.1971), aff'd in part, rev'd in part sub nom., Gold v. Sloan, 486 F.2d 340 (4th Cir.1973), the officer had "ceased being an impor......
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...time between his tendered resignation and the date it became effective is also a factor here. Winston relies heavily on Gold v. Scurlock, 324 F.Supp. 1211 (E.D.Va.1971), aff'd in part, rev'd in part sub nom., Gold v. Sloan, 486 F.2d 340 (4th Cir.1973). In Gold, the court concluded that an o......