Heli-Coil Corporation v. Webster

• Citation: 352 F.2d 156
• Decision Date: 01 October 1965
• Docket Number: No. 14809.,14809.
• Parties: HELI-COIL CORPORATION v. Reginald WEBSTER, Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (3rd Circuit)

352 F.2d 156 (1965)

HELI-COIL CORPORATION v. Reginald WEBSTER, Appellant.

No. 14809.

United States Court of Appeals Third Circuit.

Argued October 20, 1964.

Reargued May 25, 1965.

Decided October 1, 1965.

Charles Danzig, Riker, Danzig, Scherer & Brown, Newark, N. J., (Cole & Deitz, New York City, of counsel, on the brief), for appellant.

Emory C. Risley, Stryker, Tams & Dill, Newark, N. J., (William T. Sutphin, Newark, N. J., on the brief), for appellee.

Philip A. Loomis, Jr., Gen. Counsel, Washington, D. C. (David Ferber, Sol., Richard M. Phillips, Sp. Counsel, Gus J. Bennett, Atty., S.E.C., Washington, D. C., on the brief), for amicus curiae.

Before BIGGS, Chief Judge, and McLAUGHLIN, KALODNER, STALEY, HASTIE, GANEY, SMITH and FREEDMAN, Circuit Judges.

BIGGS, Chief Judge.

Heli-Coil Corporation brought this suit against one of its directors, Mr. Reginald Webster, to recover alleged short-swing profits under § 16(b) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78p(b). The pertinent portion of § 16(b) is set out below.¹ All of the events upon which the suit at bar is based took place prior to the effective dates of the Securities Acts Amendments of 1964, Pub.L. No. 467, 88th Cong.2d Sess., Act of August 20, 1964, 78 Stat. 565. We therefore take the statute as it existed prior to the amendments just referred to.

Webster, an industrialist, became a director of Heli-Coil soon after the company was organized on October 16, 1958, at the suggestion of W. C. Langley & Co., (Langley) investment bankers for the company. At the time of his election Webster had been for many years and still is the chairman of the board of Standard-Thompson Corporation, the common stock of which is traded on the American Stock Exchange. On November 20, 1958, Webster purchased at par value plus accrued interest, $60,000 principal amount of Heli-Coil 5% Convertible Debentures due November 1, 1973, and 500 shares of Heli-Coil common stock at $14.50 per share, the par value of the common stock being $1 per share. The debentures were limited to the aggregate principal amount of $1,300,000 and were callable by the company at any time at its election at prices as fixed in the debenture. None were called for redemption. The debentures were to mature in November, 1973. Any debenture holder at his option at any time on or before November 1, 1973, could convert a debenture into common stock of the company "at a conversion price equal to $16 2/3 principal amount of Debentures for each share of Common Stock, or at the adjusted conversion price in effect at the date of the conversion determined as provided in said Indenture." It should be noted that the debenture indenture contains typical anti-dilution provisions protecting the conversion rights of the debenture holders.²

On December 11, 1958, the shares of Heli-Coil common stock were listed for trading on the American Stock Exchange. The debentures were never registered on any national securities exchange but were traded in the over-the-counter market.

In February, 1959, Langley informed Webster that some of their customers had converted Heli-Coil debentures into the common stock of the company and suggested to Webster that he convert his debentures. The basis of the suggestion for the conversion, according to the uncontradicted testimony of Webster, was that Langley considered Heli-Coil's prospects excellent and that the elimination of indebtedness from the balance sheet of the company would "make a better statement." On March 18, 1959, Webster converted all his debentures into 3600 shares of Heli-Coil common stock, receiving no money upon the conversion. At the time Webster converted his debentures, holders of debentures in principal amount totaling $185,000 had already converted their debentures into common stock, and by April 30, 1959, $283,000 in principal amounts of debentures had been so converted.

On July 16, 1959, approximately eight months after Webster had purchased his debentures, he sold 1000 shares of Heli-Coil common stock for cash in the amount of $69,470.60. Thereafter, on August 26, 1959, Webster sold 200 shares of Heli-Coil common for $14,293.55, and on September 1, 1959, he sold 100 shares of Heli-Coil common for $7,096.86. Prior to the sale of the 1000 shares of Heli-Coil common, Webster consulted with a partner in Langley, Mellor, and with his own accountant, as to whether or not he was "at liberty to sell the stock."

Information respecting Heli-Coil's financial condition was submitted to its board of directors from time to time and it appears that there was nothing in this information to indicate that retention of Heli-Coil common stock was unwise or that any investment in that stock was in jeopardy. Indeed, the company was in good condition and had already declared a dividend. The common stock was rising steadily in value. It is not charged and there is no evidence that at the time Webster sold his stock in the period July-September, 1959, his sales were inspired by any information that was not possessed by or available to any other stockholder, or that Webster acted in other than good faith in selling the stock. Indeed Webster testified that he sold the stock to raise cash to pay some of the expenses incurred in the operation of his racing stable.

The court below filed an opinion, 222 F.Supp. 831, and gave judgment in favor of Heli-Coil in the sum of $116,544.36 without interest.³ Webster has appealed.

Contentions of the Parties

Heli-Coil contends (1) that the voluntary conversion by Webster of his debentures into common stock and the subsequent sale of that common stock was a "purchase and sale" within the meaning of the statute; (2) that the voluntary conversion by Webster of the debentures into common stock was a "sale" within the purview of the Act; (3) that the profits resulting from Webster's voluntary acquisition of common stock upon the conversion of the convertible debentures and his subsequent sales of 1300 shares of common stock less than six months after the conversion, were not exempted by § 16(b) as profits on securities acquired "in good faith in connection with a debt previously contracted"; and (4) that the conversion of convertible debentures into common stock is not arbitrage and does not fall within the exemption provision of § 16(d), 15 U.S.C.A. § 78p(d).

Webster in substance endeavours to negate each of these contentions.

Prior to the rehearing en banc we requested the Securities and Exchange Commission to file a brief and to give the court the benefit of oral argument as amicus curiae. The Commission has done this through its counsel. We conclude that the position taken by the Commission's counsel is correct for the reasons set out hereinafter.

Statement of Pertinent Statutes and Regulations

The facts are not in dispute. The court below held that the conversion of the debentures into common stock constituted a sale of the debentures and a purchase of the stock within the meaning of § 16(b), and determined further that neither the "securities acquired in good faith in connection with a debt previously contracted" clause, nor the arbitrage exemption of § 16(d) were applicable. The sum of the lower court's holding was that Webster was liable for profits derived by him from the disposition of the debentures upon conversion within six months after his acquisition of them, and from the sale of common stock within six months after the conversion of the debentures into common stock. See note 3 supra.

The Commission's counsel take the position that the court below was correct in concluding that Webster's voluntary conversion of debentures into common stock constituted a sale of the debentures and a purchase of the common stock within the purview of § 16(b), and also that the court below was correct in concluding that the marks 16(b) and 16 (d) exemptions referred to above were not applicable, but the Commission's counsel concluded that no profit was realized by Webster from the disposition of the debentures upon their conversion, and that accordingly the judgment against him should be reduced to $45,144.36, the amount of the profit which he realized from the sale of the common stock within six months of the conversion.

The position of the Commission's counsel is, we believe, soundly based on both the language of the statute and its legislative history, as well as on Rule 16d-1, 17 CFR 240.16d-1, promulgated by the Commission pursuant to the authority of the Act. The Securities Exchange Act of 1934 was intended by Congress "to insure the maintenance of fair and honest markets in securities * * * transactions."⁴ The provisions of § 16(b) were designed to implement this intention by making it unprofitable for insiders to engage in short-swing speculations. The preamble to § 16(b) expressly states that the section was framed "For the purpose of preventing the unfair use of information which may have been obtained by a * * * beneficial owner to the extent defined by the statute, director, or officer by reason of his relationship to the issuer * * *." The abuses which led to the enactment of § 16(b) were manifold and have been documented so fully in the legislative history of the Act and in the decisions⁵ that they need not be enumerated exhaustively or discussed fully here.

Prior to the Securities Acts the difficulty in maintaining a suit by a corporation, or a stockholders' derivative suit, against an officer or director who had profited from inside knowledge of the corporation's business or financial position, was in proving that it was the intent of the officer or director to speculate on the basis of his inside information. Section 16(b) was designed to obliterate this difficulty. Section 16(a), 15 U.S. C.A. § 78p(a), required officers and directors of any corporation the securities of which had been registered pursuant to § 12 of the Act, 15 U.S.C.A. § 78l, as well as beneficial owners of more than 10% of every class of such...