Mendell in Behalf of Viacom, Inc. v. Gollust
| Decision Date | 25 July 1990 |
| Docket Number | Nos. 468,D,562,s. 468 |
| Parties | , Fed. Sec. L. Rep. P 95,378, 17 Fed.R.Serv.3d 129 Ira L. MENDELL, in Behalf of VIACOM, INC. and, alternatively, Viacom International, Inc., Plaintiffs-Appellants, v. Keith R. GOLLUST, Paul E. Tierney, Jr., Augustus K. Oliver, Gollust Tierney and Oliver, Gollust & Tierney, Inc., Coniston Partners, Coniston Institutional Investors, Baker Street Partners, WJB Associates, Helston Investment, Inc., Viacom Inc., and Viacom International, Inc., Defendants-Appellees. ockets 89-7068, 89-7686. |
| Court | U.S. Court of Appeals — Second Circuit |
Irving Malchman (Kaufman Malchman Kaufmann & Kirby, New York City, of counsel), for plaintiffs-appellants.
Edwin B. Mishkin (James W. Pharo, Michael S. Sommer, Cleary, Gottlieb, Steen & Hamilton, New York City, of counsel), for defendants-appellees other than nominal parties Viacom Inc., and Viacom Intern., Inc.
S.E.C. (Daniel L. Goelzer, Gen. Counsel, Jacob H. Stillman, Associate Gen. Counsel, Thomas L. Riesenberg, Asst. Gen. Counsel, Leslie E. Smith, Atty., and Paul Gonson, Sol., Washington, D.C., of counsel), filed a brief for the S.E.C., amicus curiae.
Before OAKES, Chief Judge, CARDAMONE, Circuit Judge, and POLLACK, District Judge. *
This appeal deals with a suit brought to recover short-swing profits against insiders which was dismissed in the district court. It is clear from Supreme Court precedent that liability for short-swing trading will not arise unless the securities transactions at issue fall within the literal language of the statute that prohibits over-reaching by insiders. Here plaintiff's standing to bring suit against insiders, rather than such individuals' liability, is the question presented. In resolving this issue the words of the statute must still be carefully examined, but legislative purpose may also be considered where standing is not clearly precluded by the statutory language. Congressional policy is a stubborn thing; it permeates this area of the law. In resolving this case therefore we must not defeat Congress' plain policy by viewing standing too narrowly.
Before us is an order of the Southern District of New York (Mukasey, J.), entered November 9, 1988 that granted summary judgment to defendants dismissing plaintiff's complaint for lack of standing. Plaintiff also appeals from an order dated May 23, 1989 denying his Rule 60(b) motion for relief from the November 9, 1988 order. Plaintiff appeals that dismissal of his action brought pursuant to Sec. 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78p(b) (1988). Section 16(b) provides that an owner of an issurer's security may bring an action in behalf of the issuer to recover short-swing profits realized by the corporation's officers, directors and principal stockholders. A "short-swing" profit occurs when a profit is realized on a purchase and sale, or sale and purchase, of stock occurring within a period of six months. The statute requires officers, directors and owners of more than ten percent of the issuer's stock (insiders) to disgorge short-swing profits back to the issuer.
The question presented is whether a shareholder whose shares in an issuer are converted by a business restructuring into shares of a newly formed parent corporation that owns all of the stock of the issuer loses standing to maintain a previously instituted Sec. 16(b) suit. Because we think the answer to the question posed is "no," the grant of summary judgment dismissing plaintiff's suit must be reversed.
Plaintiff Ira L. Mendell is a former shareholder of Viacom International Inc. (International). Defendants are limited partnerships, general partnerships, individual partners and certain corporations (Coniston or the Coniston defendants) that together invested in the stock of International. In 1986 defendants collectively owned more than ten percent of its stock. In January 1987 plaintiff filed a complaint alleging that Coniston was liable to International Approximately six months later, in June 1987, after plaintiff had filed suit, International was acquired through a merger transaction by Arsenal Acquiring Corporation, a shell corporation formed for that purpose. All of International's stock was exchanged for a combination of cash and stock in Arsenal Acquiring's parent corporation called Arsenal Holdings, Inc., and Arsenal Acquiring then merged into International, which thereby became a wholly-owned subsidiary of the parent, Arsenal Holdings. As part of the merger, Arsenal Holdings changed its name to Viacom, Inc. (Viacom). Thus plaintiff, who held shares in International when he brought suit to recover insider profits for the issuer, now holds shares in its parent, Viacom. Viacom is the sole shareholder of International, and International is the parent corporation's sole asset.
pursuant to Sec. 16(b) for profits arising out of Coniston's purchases and sales of International stock in 1986. Plaintiff asserted that on trades of International stock made between July and October 1986 the Coniston defendants acquired approximately 11 million dollars in short-swing profits at a time when they were insiders by virtue of their ownership of more than ten percent of International stock. The complaint also alleged that in October 1986 a demand was made upon International and its Board of Directors to institute a Sec. 16(b) suit against the Coniston defendants, but that though more than 60 days had passed no suit had been commenced by International.
At a pretrial conference held in February 1988 defendants asserted that plaintiff no longer had standing to maintain his Sec. 16(b) suit since he was no longer a shareholder of International. In March 1988 plaintiff served an amended complaint asserting that he had standing to bring the action in behalf of Viacom, the parent corporation, which he claimed was effectively the "issuer." Alternatively, he contended that he had standing to bring the action as a double-derivative action in behalf of International. Coniston moved for summary judgment. On November 9, 1988 the district court granted summary judgment to defendants because plaintiff lacked standing, ruling that "[s]uits to disgorge ill-gotten gains under Sec. 16(b) may be prosecuted only by the issuer itself or the holders of its securities." Mendell v. Gollust, [1988-89] Fed.Sec.L.Rep. (CCH) p 94,086 at 91,086, 1988 WL 123703 (S.D.N.Y.1988).
On January 9, 1989--after the opinion issued but before the judgment of dismissal was entered on January 17, 1989--plaintiff purchased a subordinated note issued by International. In March 1989 plaintiff made a motion pursuant to Fed.R.Civ.P. 60(b) asserting that he now had standing as a noteholder of International, and that the judgment entered some weeks earlier should be vacated. In an opinion dated May 23, 1989 the district court denied the Rule 60(b) motion stating that counsel's failure to advise his client to purchase the note earlier did not provide grounds to overturn the judgment. See Mendell v. Gollust, [Current Volume] Fed.Sec.L.Rep. (CCH) p 94,477, 1989 WL 56252 (S.D.N.Y.1989).
We heard oral argument on November 21, 1989, and on November 28 requested the Securities and Exchange Commission (SEC) to submit an amicus curiae brief setting forth its views on plaintiff's standing under Sec. 16(b). We now have the benefit of the SEC's amicus curiae brief filed on January 10, 1990.
In order to determine how broadly Sec. 16(b)'s standing requirements should be construed, we begin with a brief examination of the policy considerations and the legislative purpose that preceded the enactment of the statute. The Securities Act of 1934 in general and Sec. 16(b) in particular were passed to insure the integrity of the securities markets and to protect the investing public. See 15 U.S.C. Sec. 78p(b) (1988); Federal Securities Exchange Act of 1934, S.Rep.No. 792, 73d Cong., 2d Sess. 9 The Committee on Banking and Currency heard many instances where insiders either personally or through the medium of holding companies made large profits from the use of information not available to the public. Senate Report at 9. It concluded that the reporting requirements regarding changes in insider holdings and the provision making profits recoverable on sales or purchases made within six months would render difficult or impossible trading on advance information by insiders for profit. Id. The bill's provisions were for the express purpose of preventing the unfair use of inside information. Id. at 21.
(1934) [Senate Report ]; 2 L. Loss, Securities Regulation 1037-38, 1040-41 (2d ed. 1961).
Among the most vicious practices unearthed at the hearings before the subcommittee was the flagrant betrayal of their fiduciary duties by directors and officers of corporations who used their positions of trust and the confidential information which came to them in such positions, to aid them in their market activities.
Stock Exchange Practices, Report of the Committee on Banking and Currency, S.Rep.No. 1455, 73d Cong., 2d Sess. 55 (1934). Hence, Congress envisioned Sec. 16(b) as a remedial law that would deter those "intrusted with the administration of corporate affairs or vested with substantial control over corporations [from using] inside information for their own advantage." Id. at 68.
Since its passage the Supreme Court has construed Sec. 16(b) in a number of cases. In the earliest, Blau v. Lehman, 368 U.S. 403, 82 S.Ct. 451, 7 L.Ed.2d 403 (1962), it refused to hold an entire partnership liable for short-swing profits as an insider when one of its members was a director of the issuer because the plain language of Sec. 16(b) did not provide for partnership liability, though the director was susceptible to suit in his individual...
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