Jefferson Lake Sulphur Co. v. Walet

• Decision Date: 02 April 1952
• Docket Number: Civ. A. No. 3104.
• Citation: 104 F. Supp. 20
• Parties: JEFFERSON LAKE SULPHUR CO. v. WALET.
• Court: U.S. District Court — Eastern District of Louisiana

104 F. Supp. 20

JEFFERSON LAKE SULPHUR CO. v. WALET.

Civ. A. No. 3104.

United States District Court E. D. Louisiana, New Orleans Division.

April 2, 1952.

Deutsch, Kerrigan & Stiles, Eberhard P. Deutsch and Rene H. Himel, Jr., all of New Orleans, La., for plaintiff.

James G. Schillin, New Orleans, La., Myer Feldman, Washington, D. C., Atty. for Securities & Exchange Commission amicus curiae for defendant.

WRIGHT, District Judge.

Section 16(b) of the Securities & Exchange Act of 1934¹ provides that all profits realized by an officer or director of a corporation from short-term trading in its securities shall inure to the corporation. The purpose of the statute is to prevent in short-term trading in its securities the unfair use of information which may have been obtained by an officer or director of the corporation by reason of his position.

The defendant is the President and a director of the plaintiff corporation. At all material times he was married and a resident of Louisiana, a community property state. Between April 20, 1950 and November 29, 1950, the defendant purchased 3600 shares of plaintiff's common stock which is registered on the New York Curb Exchange and paid a total price therefor of $35,216. Between August 16, 1950 and November 24, 1950 defendant sold a like number of shares for a total of $74,581.79. 1200 of the shares purchased were acquired pursuant to an option granted to defendant by the corporation whereunder the defendant had the right to buy 1200 treasury shares of the company for 86% of the market price at the time the option was granted.

The transactions in question were duly reported to the Commission in accordance with the requirement of Section 16(a) of the Act. Whereupon the company was advised by the Commission of the possible liability of the defendant to it under Section 16(b) as a result of his trading activities. This suit followed and the matter is before the court now on motions for summary judgment filed by the plaintiff and the defendant.

In the stipulation of facts filed in the record the defendant admits short-term trading in the plaintiff's securities. Consequently the decision in this case will be based on a consideration of his defenses. Preliminarily defendant urges that his transactions in plaintiff's stock were consummated in good faith without the use of inside information² and further that the certificates of stock purchased by him within the six month periods were not the certificates sold by him during the same periods. These two defenses have been urged unsuccessfully in every reported case brought under Section 16(b). They were effectively disposed of by the Second Circuit in Smolowe v. Delendo Corporation, 136 F.2d 231, certiorari denied 320 U.S. 751, 64 S.Ct. 56, 88 L.Ed. 446, and Gratz v. Claughton, 187 F.2d 46, certiorari denied 341 U.S. 920, 71 S.Ct. 741, 95 L.Ed. 1353, and it would be supererogation to labor the matter further. Suffice it to say that this court follows the holding in the Smolowe and Gratz cases.

Defendant's third and fourth defenses relate only to the 1200 shares of stock acquired by him pursuant to the option granted by the corporation. With reference to these shares defendant argues that they do not come within the intendment of Section 16(b) because that section relates to "equity security" of the corporation and the treasury stock purchased under the option is not an equity security. This argument is founded in the circumstance that Section 3(a) (10) of the Act in defining the term "security" expressly mentions treasury stock whereas that phrase is not found in the definition of equity security in Section 3(a) (11). Section 3(a) (11) defines equity security as "any stock or similar security". Obviously that definition is broad enough to include a treasury share. In any event treasury stock by the very fact of purchase and issuance ceases to be such and becomes outstanding, or nontreasury, stock.

Defendant's further defense with reference to the stock purchased pursuant to the option is that the corporation is estopped from exercising its rights under Section 16(b) having waived those rights by extending the option. This argument ignores the fact that it is not the exercise of the option which is penalized under Section 16(b). If this defendant had not sold stock of his corporation within six months after he acquired the option stock, then of course Section 16(b) would not apply. Defendant further argues, however, that when the corporation voted defendant the option to acquire the stock it was intended that he sell on the short swing in order that he might make a profit and thereby be compensated for meritorious service to the corporation. Consequently, so the argument goes, the corporation cannot now demand the profits from transactions it implicitly approved.

This argument misconceives the purpose of Section 16(b). Section 16(b) became law following a Congressional investigation which showed unhealthy, if not unconscionable, dealings between officers and directors of a corporation and the corporation itself, some of which dealings involved options from the corporation to the officers and directors.³ One of the purposes of Section 16(b) was to prevent these questionable transactions between insiders among themselves to the possible detriment of the minority shareholders and the public in general. It is true that Section 16(b) makes short-term profits of officers and directors inure to the corporation and provides that the corporation shall institute proper proceedings to claim these profits. The bringing of such suit by the corporation, however, cannot work out an estoppel. The statute directs the corporation to bring the suit and, realizing that corporations where insiders deal in its stock on the short swing are very often under the control of those insiders and consequently may be loath to bring such suits, or having brought them, to prosecute them actively, provides further that any shareholder may bring the suit in the name of the corporation where the corporation has not acted. The courts, also as a protective measure, have allowed shareholders to intervene freely where the corporation has brought suit pursuant to Section 16(b). Park & Tilford v. Schulte, 2 Cir., 1947, 160 F.2d 984. In other words, in order to protect minority shareholders and the public who have no control over the management of the corporation, Section 16(b) uses the corporation as an instrument, sometimes an unwilling instrument, by which the officer or director is forced to disgorge his short term profits. Under such circumstances there can be no estoppel. As a matter of fact the legislative purpose is made crystal clear in this regard by Section 29(a) of the Act which provides: "Any condition, stipulation, or provision binding any person to waive compliance with any provision of this title * * * shall be void." 15 U.S.C.A. § 78cc. Since under this section the corporation cannot be estopped by an express waiver, an implied waiver must likewise be void.

Defendant's final defense relates only to one-half the profits realized on his short swing sales. The defendant asserts that since he was domiciled in Louisiana and married at all material times, only one-half of any profits from the transactions in suit were realized by him, the other half having been realized by his wife. Defendant relies on the line of cases which hold that the wife in Louisiana has a present vested one-half interest in the marital community. Phillips v. Phillips, 160 La. 813, 107 So. 584; Succession of Wiener, 203 La. 649, 14 So.2d 475. He cites both state and federal cases recognizing this present vested interest for tax purposes. Succession of Wiener, supra; Bender v. Pfaff, 282 U.S. 127, 51 S.Ct. 64, 75 L.Ed. 252; Fernandez v. Wiener, 326 U.S. 340, 66 S.Ct. 178, 90 L. Ed. 116. At the outset it may be observed that the fact the courts have recognized the wife's vested present interest in the community for tax purposes does not necessarily mean that recognition applies generally. For example, for tax purposes in calculating profit on dealings in specific corporate shares, the first in first out rule is observed. Internal Revenue Reg. 111, § 29.22(a)-8 (1943). As shown above in the Smolowe case the Second Circuit refuses to use that rule of thumb in cases arising under Section 16(b). Smolowe v. Delendo Corporation, supra; Gratz v. Claughton, supra.

Any marriage in Louisiana superinduces of right the marital community. Louisiana Civil Code, Article 2399. This marital community is made up of all of the earnings of the husband and wife during the existence of the community, profits from all effects over which the husband has the administration and enjoyment, all property acquired by either spouse unless purchased with separate funds, income from separate property of the husband, and income from separate property of the wife when administered by the husband. Louisiana Civil Code, Article 2402. In fact all property, real or personal, acquired by either spouse during the community is presumed to be community property. Louisiana Civil Code, Article 2405. Not forming part of the community are profits from the separate property of the wife when not administered by the husband, damages recovered for personal injuries to the wife and any property purchased with separate funds or received by either spouse by donation or inheritance. Louisiana Civil Code, Article 2402.

The husband is the head and master of the community. He administers its effects, disposes of the revenues they produce and may alienate any community property by onerous title without the consent of his wife. He may even give away personal property belonging to the community without permission of his wife. Louisiana Civil Code, Article 2404. The husband's debts, however incurred, before or during the marriage, are collectible out of the community, while the creditors of the wife must look elsewhere for...