Lockheed Aircraft Corp. v. Campbell

• Citation: 110 F. Supp. 282
• Decision Date: 24 February 1953
• Docket Number: No. 14610.,14610.
• Court: U.S. District Court — Southern District of California
• Parties: LOCKHEED AIRCRAFT CORP. v. CAMPBELL.

110 F. Supp. 282

LOCKHEED AIRCRAFT CORP. v. CAMPBELL.

No. 14610.

United States District Court S. D. California, Central Division.

February 24, 1953.

Gray, Binkley & Pfaelzer, by William P. Gray, Los Angeles, Cal., for the plaintiff.

Hill, Farrer & Burrill, by William S. Scully, Los Angeles, Cal., for the defendant.

YANKWICH, Chief Judge.

By this action the plaintiff, Lockheed Aircraft Corporation, a corporation, to be referred to as "Lockheed", seeks to recover profits realized by one of its officers in a "short-swing" transaction in its corporate stock, under Section 16(b) of the Securities and Exchange Act of 1934, 15 U.S.C.A. § 78p(b).

The complaint sets forth the transaction with brevity. On June 7, 1951, the defendant, H. R. Campbell, sold 600 shares of the capital stock of Lockheed that were owned by him, and on about June 16, 1951, he sold an additional 100 of such shares. Within six months after June 7, 1951, namely on August 23, 1951, the defendant purchased 1,400 shares of stock of the plaintiff corporation, which was the equivalent of the 700 shares previously sold by him, a stock-split of the shares of the company having intervened between the sale and the purchase transaction.

I.

The Agreed Facts.

A pre-trial stipulation of facts gives the following additional details about the parties and the transaction. Lockheed is a California corporation engaged in the manufacture and sale of airplanes, and is the "issuer" of capital stock which is, and at all times here concerned, was, registered on a national securities exchange.

The defendant at all times since May, 1938, has been, and still is, an employee of Lockheed. On March 11, 1942, he was made Assistant Treasurer of the corporation, and on March 5, 1951, he was made Assistant Secretary. He has held both positions continuously up to the present time.

Immediately prior to June 7, 1951, the defendant was the owner of at least 700 shares of capital stock of Lockheed. On about that date, he sold 400 of such shares at $38¼ per share, sold 100 additional shares at $38½ and sold an additional 100 shares at $38¾. On June 16, 1951, he sold still another 100 shares at $38¼. The total consideration that he received for the 700 shares was $26,850.

Between June 16, 1951, and August 23, 1951, the shares of Lockheed were split in such manner that one share prior to the division had the value of two shares thereafter. On about August 23, 1951, the defendant purchased 1,400 shares of stock of the plaintiff corporation at $11 per share for a total consideration of $15,400. The difference between the price at which he sold the 700 shares and the price at which he purchased shares of equal value was $11,450.

At the time that the defendant made the transactions, Lockheed had in effect a stock purchase option plan which permitted certain key employees, of which the defendant was one, to buy stock of the company at the price of $22 per share. The defendant had acquired the option more than six months prior to the purchase.

On December 15, 1951, Lockheed made demand of the defendant that he turn over to them the profit, which he has refused. The answer of the defendant admits the transaction but denies that the functions performed by him, either as Assistant Treasurer or as Assistant Secretary, were of the character performed by an "officer" of the Corporation, as that word is defined by the Act, 15 U.S.C.A. § 78p(b), or under Regulation X-3b-2 promulgated by the Securities and Exchange Commission. 17 Code Fed.Reg., 1949, Sec. 240.3b-2, p. 194.

As already appears, the defendant participated in an option extended to him and others to acquire certain shares of stock below the market value, to compensate him and others for reduced earnings. The stocks have been held by him for a longer period than six months, and the profit sought to be recovered is the difference between the purchase price of the stock and its agreed market value. The good faith of the defendant is not in dispute. Indeed, counsel for the plaintiff forthrightly stated in open court, that the defendant was and continues to be "a valued and trusted employee". And the only object of the action is to determine the validity, as to him, of the stock transaction, the suit being instituted under the authority of the Act. 15 U.S.C.A. § 78aa.

II. What is an "Officer"?

The question to be determined is whether the defendant, at the times mentioned in the Complaint, and in the agreed statement of facts, was an "officer" of the corporation, and, therefore, subject to the interdiction of the section of the Act which prohibits an officer from profiting by a "short-swing" transaction in the corporation stock. 15 U.S.C.A. § 78p(b).

The Act does not define what an officer is. It gives the Securities and Exchange Commission power, by rules and regulations, to define technical, trade and accounting terms. 15 U.S.C.A. § 78c (b). The Commission, by its regulations, has defined "officer" to mean president, vice president, treasurer, secretary, comptroller, and "any other persons who perform for an issuer, whether incorporated or unincorporated, functions corresponding to those performed by the foregoing officers". (Sec. X-3b-2; 17 Code Fed.Regs., 1949, 240.3b-1, p. 194). In adopting this definition, and contrasting the duties of designated officers with those performing similar functions, the Commission followed, as a precedent, the definition of "director" contained in the Act itself. 15 U.S.C.A. § 78c(a) (7). The Commission in its interpretation of the regulation, has expressed the view that an assistant treasurer, an assistant secretary and an assistant comptroller are not officers unless their chief is so inactive as to thrust the burden of the office upon them. (Exchange Act Release No. 2687, November 16, 1940). Doubts have been expressed as to whether the Commission's definition has validity. Colby v. Klune, 2 Cir., 1949, 178 F.2d 872, 873. And a subjective test has been suggested which would include as an officer, inter alia,

"a corporate employee performing 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 if he engaged in personal market transactions."

The court which adopted this criterion added:

"It is immaterial how his functions are labelled or how defined in the bylaws, or that he does or does not act under the supervision of some other corporate representative." Colby v. Klune, supra, 178 F.2d at page 873.

On the other hand, the Commission's definition has been defended upon the ground that unless these assistants are excluded, we would have two identical officers in each prohibited category. See opinion of Judge Wm. Byrne of this court in Lockheed Aircraft Corp. v. Rathman, D.C. Cal.1952, 106 F.Supp. 810, 812-813. I think the question which confronts us here can be solved without adopting either view in its entirety. For, as stated at the trial, it is conceivable that in a corporation like Lockheed, with complex activities, two persons might perform the functions of treasurer, secretary and comptroller, each doing, within a certain sphere of the corporation's far-flung activities, exactly the same things.

In the last analysis, the object of the prohibition in the Act was to prevent persons on the inside from profiting unduly by the knowledge that they may have acquired as to the financial situation of the corporation. Colby v. Klune, supra. In seeking to prevent such dealings by making the directors and officers accountable to the corporation for the profits, the Congress sought to prevent the practice, and disregarded entirely the fact whether in a particular instance, there may or may not have been an actual or unfair use of such information. Smolowe v. Delendo Corp., 2 Cir., 1943, 136 F.2d 231, 235-236, 148 A.L.R. 300; Park & Tilford v. Schulte, 2 Cir., 1947, 160 F.2d 984, 987; Shaw v. Dreyfus, 2 Cir., 1949, 172 F.2d 140, 142; Gratz v. Claughton, 2 Cir., 1951, 187 F.2d 46, 49-50. And see, Donald C. Cook and Myer Feldman, 1952, Insider Trading Under the Securities Exchange Act, 66 Harv. L.Rev. 385.

So if a transaction comes within the inhibition of the statute, it matters not, as happened in this case, that the stock came into the hands of the defendant as a part of a policy of the corporation to compensate some of its highranking...