Lockheed Aircraft Corp. v. Rathman, 13261.

• Decision Date: 21 July 1952
• Docket Number: No. 13261.,13261.
• Court: U.S. District Court — Southern District of California
• Parties: LOCKHEED AIRCRAFT CORP. v. RATHMAN.

106 F. Supp. 810

LOCKHEED AIRCRAFT CORP. v. RATHMAN.

No. 13261.

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

July 21, 1952.

Gray, Binkley & Pfaelzer, Los Angeles, Cal., for plaintiff.

Hill, Farrer & Burrill, Los Angeles, Cal., for defendant.

BYRNE, District Judge.

This is an action brought by Lockheed Aircraft Corporation against one of its former employees to recover profits realized by the employee from the sale of 1,000 shares of the capital stock of plaintiff corporation. The claim arises under 15 U.S. C.A. § 78p(b), which provides:

"(b) For the purpose of preventing the unfair use of information which may have been obtained by such beneficial owner, director, or 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 (other than an exempted security) within any period of less than six months, unless such security was acquired in good faith in connection with a debt previously contracted, shall inure to and be recoverable by the issuer, irrespective of any intention on the part of such beneficial owner, director, or officer in entering into such transaction of holding the security purchased or of not repurchasing the security sold for a period exceeding six months. * * *"

In 1940 the defendant was employed by the plaintiff in its financial department where his progress culminated in his election, on May 4, 1948, to the position of assistant treasurer. At about the same time plaintiff embarked on a stock option plan for the avowed purpose of retaining the services of its valued employees, lest these services be lost to competing firms who, at that time, were capable of paying larger salaries than was plaintiff. The plan provided that the employees including defendant could, after a specified period of time, purchase a specified number of shares of plaintiff's stock at the price of $22 per share. Defendant was included in this plan, although the president, vice-president and treasurer were not, since it was intended by plaintiff that the exercise of these options could be immediately followed by a sale of the stock, and it was felt that section 78p(b), supra, precluded these officers from participating in the plan. Later, the secretary and comptroller were excluded from the plan, because it was thought that they were subject to 78p(b), — a thought, we may assume, that was engendered by Securities Exchange Commission Rule X-3B-2, promulgated pursuant to 15 U.S.C.A. § 78w(a), on August 13, 1934, providing:

"The term `officer' means a president, vice-president, treasurer, secretary, comptroller, and any other person who performs for an issuer, whether incorporated or unincorporated, functions corresponding to those performed by the foregoing officers."

On February 23, 1950, defendant exercised his option; the same day he sold the stock on the New York Stock Exchange and realized the profit which is the subject matter of this action.

The defendant has interposed two defenses: (1) that he was not an officer of plaintiff at the time of the sale within the meaning of the word "officer", as used in section 78p(b), supra; and (2) even if he were such an officer, his liability was vitiated by the saving provision of 15 U.S.C. A. § 78w(a), which I shall discuss later.

When SEC Rule X-3B-2 is applied to the instant facts, it at once becomes apparent that plaintiff, if it would prevail, must establish that defendant was some "other person who performs for an issuer functions corresponding to those performed by ..." the officers enumerated in the rule, since it is not suggested that defendant ever occupied any of the five enumerated posts. It will be observed that the "other person" provision does not refer to persons performing functions of a president, etc., but refers to persons who perform "functions corresponding to those performed by the foregoing officers." When followed by the preposition "to" the term "corresponding" means "similar". It is here we perceive the significance of the phrase "whether incorporated or unincorporated". An unincorporated issuer (and in some states an incorporated issuer) might not have any of the officers enumerated in Rule X-3B-2 but may have a manager who performs "functions corresponding to those performed by" a president, or have a finance officer who performs "functions corresponding to those performed by" a treasurer.

The meaning of Rule X-3B-2 is much clearer when compared with the definition of "director" in 15 U.S.C.A. § 78c (a) (7), (a definition formulated by Congress itself):

"The term `director' means any director of a corporation or any person performing similar functions with respect to any organization, whether incorporated or unincorporated."

It is quite apparent that Congress added the "or any person" provision to apply to organizations which did not have directors in name but did have persons who performed functions similar to those ordinarily performed by the directors of a corporation. The Commission in carrying out the power granted by Congress to define "technical, trade, and accounting terms" 15 U. S.C.A. § 78c(b), intended its definition of the term "officer" to be analogous to the Congressional definition of "director" and added the "other person" provision to apply to an "issuer" which did not have a treasurer in name, but did have a person who performed functions similar or corresponding to those ordinarily performed by the treasurer of a corporation.

Thus it will be seen that the "other person" provision does not relate to an employee who assists one of the enumerated officers or performs any of the functions of his office during his absence, but relates to an officer, regardless of title, the functions of whose office, correspond to those performed by one of the enumerated officers. Here the plaintiff corporation had a treasurer during the entire tenure of defendant's employment. The defendant was assistant treasurer and the functions of that office did not correspond to those performed by the treasurer. If they had the corporation would have had two treasurers. It follows that the defendant was not an "officer" within the meaning of section 78p(b), supra, or Rule X-3B-2.

If Rule X-3B-2 were construed as contemplating two treasurers in one issuer, it would not avail the plaintiff. The evidence adduced at the trial established that plaintiff corporation, during defendant's tenure as assistant treasurer, was possessed of a full time and fully capable treasurer in the person of one Barker, who preempted the executive functions of that office to the exclusion of defendant's performing any of the functions of treasurer. Even during Barker's absences it was Comptroller Browne who was vested with what was called "superior seniority" among the financial subalterns, and whose "opinion prevailed" in matters requiring...