Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Livingston

• Decision Date: 04 January 1978
• Docket Number: No. 75-3779,75-3779
• Citation: 566 F.2d 1119
• Parties: Fed. Sec. L. Rep. P 96,310 MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., Plaintiff-Appellee, v. William G. LIVINGSTON, Defendant-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1119

566 F.2d 1119

Fed. Sec. L. Rep. P 96,310

MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., Plaintiff-Appellee, v. William G. LIVINGSTON, Defendant-Appellant.

No. 75-3779.

United States Court of Appeals, Ninth Circuit.

Jan. 4, 1978.

G. Douglas Kranwinkle (argued), of Munger, Tolles & Rickershauser, Los Angeles, Cal., for defendant-appellant.

Joel Mark (argued), of MacDonald, Halsted & Laybourne, Los Angeles, Cal., for plaintiff-appellee.

Before HUFSTEDLER and KILKENNY, Circuit Judges, and GRANT, ^* District Judge.

HUFSTEDLER, Circuit Judge:

Merrill Lynch, Pierce, Fenner & Smith, Inc. ("Merrill Lynch") obtained judgment against its employee Livingston requiring him to pay Merrill Lynch $14,836.37 which was the profit that he made on short-swing transactions in the securities of his employer in alleged violation of Section 16(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78p (1971)). We reverse because Livingston was not an officer with access to inside information within the purview of Section 16(b) of the Securities Exchange Act of 1934.

From 1951 to 1972, Livingston was employed by Merrill Lynch as a securities salesman with the title of "Account Executive." In January, 1972, Merrill Lynch began an "Account Executive Recognition Program" for its career Account Executives to reward outstanding sales records. As part of the program, Merrill Lynch awarded Livingston and 47 other Account Executives the title "Vice President." Livingston had exactly the same duties after he was awarded the title as he did before the recognition. Livingston never attended, nor was he invited or permitted to attend, meetings of the Board of Directors or the Executive Committee. He acquired no executive or policy making duties. Executive and managerial functions were performed by approximately 350 "Executive Vice Presidents."

Livingston received the same kind of information about the company as an Account Executive both before and after he acquired his honorary title. As an Account Executive, he did obtain some information that was not generally available to the investing public, such as the growth production rankings on the various Merrill Lynch retail offices. Information of this kind was regularly distributed to other salesmen for Merrill Lynch. Livingston's supervisor, a branch office manager, testified that he gave Livingston the same kind of information that he gave other salesmen about the company, none of which was useful for purposes of stock trading.

In November and December, 1972, Livingston sold a total of 1,000 shares of Merrill Lynch stock. He repurchased 1,000 shares of Merrill Lynch stock in March, 1973, realizing the profit in question.

The district court held that Livingston was an officer with access to inside information within the meaning of Section 16(b) of the Securities Exchange Act of 1934. The predicate for the district court's decision was that Section 16(b) imposes strict liability on any person who holds the title of "officer" and who has access to information about his company that is not generally available to the members of the investing public.

The district court used an incorrect legal standard in applying Section 16(b). Liability under Section 16(b) is not based simply upon a person's title within his corporation; rather, liability follows from the existence of a relationship with the corporation that makes it more probable than not that the individual has access to insider information. Insider information, to which Section 16(b) is addressed, does not mean all information about the company that is not public knowledge. Insider information within the meaning of Section 16(b) encompasses that kind of confidential information about the company's affairs that would help the particular employee to make decisions affecting his market transactions in his employer's securities.

Strict liability to the issuer is imposed upon any "beneficial owner, director, or officer" for entering into such a short- swing transaction "(f)or the purpose of preventing the unfair use of information which may have been obtained by such . . . officer by reason of his relationship to the issuer." "The purpose of the statute was to take 'the profits out of a class of transactions in which the possibility of abuse was believed to be intolerably great' and to prevent the use by 'insiders' of confidential information, accessible because of one's corporate position or status, in speculative trading in the securities of one's corporation for personal profit." (Gold v. Sloan (4th Cir. 1973) 486 F.2d 340, 342, quoting Reliance Electric Co. v. Emerson Electric Co. (1972) 404 U.S. 418, 422, 92 S.Ct. 596, 30 L.Ed.2d 575.

To achieve the beneficial purposes of the statute, the court must look behind the title of the purchaser or seller to ascertain that person's real duties. Thus, a person who does not have the title of an officer, may, in fact, have a relationship to the company which gives him the very access to insider information that the statute was designed to reach. Thus, in Colby v. Klune (2d Cir. 1949) 178 F.2d 872, the employee's title was "Production Manager." (See Colby v. Klune (S.D.N.Y.1949) 83 F.Supp. 159, 161.) Relying upon that title, the district court held that the defendant was excluded from the purview of the statute. The Second Circuit reversed and remanded for a factual inquiry into the question whether, despite his title, the defendant was nevertheless an officer within the meaning of the statute. The court defined "officer" as: "a corporate employee performing important executive duties of such character that he would be likely, in discharging those duties, to obtain confidential information about the company's affairs that would aid him if he engaged in personal market transactions. It is immaterial how his functions are labeled or how defined in the by-laws, or that he does or does not act under the supervision of some other corporate representatives." (178 F.2d at 873.)

Job labels were no more significant to the Fourth Circuit in Gold v. Sloan, supra, 486 F.2d 340. One of the defendants, Rumbel, had the title of Vice President. However, his title was purely " 'titular' and not real" (486 F.2d at 351), because he neither performed any important executive duties nor was his actual job one that put him in a position of being able to acquire confidential information about the company's affairs that could have given him any advantage in dealing in the corporate securities. Rumbel had no access to the inside information concerning the merger which resulted in the exchange of stock at issue in the case. He was as ignorant of the merger developments as any outside stockholder. ¹

The title "Vice President" does no more than raise an inference that the person who holds the title has the executive duties and the opportunities for confidential information that the title implies. The inference can be overcome by proof that the title was merely honorary and did not carry with it any of the executive responsibilities that might otherwise be assumed. The record in this case convincingly demonstrates that Livingston was simply a securities salesman who had none of the powers of an executive officer of Merrill Lynch. ²

Livingston did not have the job in fact which would have given him presumptive access to insider information. ³ Information that is freely circulated among non-management employees is not insider information within the meaning of Section 16(b), even if the general public does not have the same information. Employees of corporations know all kinds of things about the companies they work for and about the personnel of their concerns that are not within the public domain. Rather, insider information to which Section 16(b) refers is the kind of information that is commonly reserved for company management and is thus the type of information that would "aid (one) if he engaged in personal market transactions." (Colby v. Klune, supra, 178 F.2d at 873.)

Livingston did not receive insider information within the meaning of Section 16(b). The only information that he received was that generally available to all Merrill Lynch salesmen. It was not information reserved for company management, nor was it in any way useful to give him any kind of advantage in his security transactions over any other salesmen for Merrill Lynch.

REVERSED.

KILKENNY, dissenting:

I would hold that the findings of the district court, being based upon inferences drawn from the undisputed facts and the documentary evidence, are not clearly erroneous and that the judgment of the district court should be affirmed. Because the taint of short swing trading by a vice-president causes subjective damage to the issuer by eroding shareholder confidence in the integrity of management, the...