Petteys v. Butler

• Decision Date: 09 January 1967
• Docket Number: No. 18277,18278.,18277
• Citation: 367 F.2d 528
• Parties: Alonzo PETTEYS and C. Frank Reavis, Appellants, v. Eunice S. BUTLER and Northwest Airlines, Inc., Appellees. Alonzo PETTEYS and C. Frank Reavis, Appellants, v. Isadore BLAU and Northwest Airlines, Inc., Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

367 F.2d 528 (1966)

Alonzo PETTEYS and C. Frank Reavis, Appellants, v. Eunice S. BUTLER and Northwest Airlines, Inc., Appellees.

Alonzo PETTEYS and C. Frank Reavis, Appellants, v. Isadore BLAU and Northwest Airlines, Inc., Appellees.

Nos. 18277, 18278.

United States Court of Appeals Eighth Circuit.

October 19, 1966.

Rehearing Denied December 6, 1966.

Certiorari Denied January 9, 1967.

Robert H. McRoberts of Bryan, Cave, McPheeters & McRoberts, St. Louis, Mo., for appellants. Gaylord C. Burke and Edwin S. Taylor, St. Louis, Mo., and Richard W. Johnson of Neville, Johnson & Thompson, Minneapolis, Minn., and Martin D. Jacobs, William R. Luney and Gerald A. Eppner, of Reavis & McGrath, New York City, with him on the brief.

J. L. Hannaford, of Doherty, Rumble & Butler, St. Paul, Minn., for appellee Eunice S. Butler. J. C. Foote and Frank Claybourne, St. Paul, Minn., with him on the brief.

Morris J. Levy, New York City, for appellee Isadore Blau. Felix M. Phillips, of Shanedling, Phillips, Gross & Aaron, Minneapolis, Minn., with him on the brief.

Philip A. Loomis, Jr., Gen. Counsel, Walter P. North, Associate Gen. Counsel, and Jacob H. Stillman, Atty., S.E.C., Washington, D. C., on brief for the Securities and Exchange Commission.

Before VAN OOSTERHOUT, BLACKMUN and GIBSON, Circuit Judges.

Certiorari Denied January 9, 1967. See 87 S.Ct. 712.

GIBSON, Circuit Judge.

This appeal presents another difficult question on the applicability of the sanctions of § 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b)¹ to a conversion of preferred stock into common stock, which was then sold within six months of the conversion. Appellants, Petteys and Reavis, appeal from a judgment of the United States District Court for the District of Minnesota holding them liable for profits realized from the sale of Northwest Airlines, Inc. common stock in a transaction held to be a short-swing speculation proscribed by § 16(b). The cases were joined for trial and one opinion written by the District Court. Jurisdiction of the cases filed is founded upon § 27 of the Act, 15 U.S.C. § 78aa, and upon 28 U.S.C. § 1331.

The facts of these cases are not in dispute. Petteys and Reavis are minority stockholders and were during the period in question, two of the thirteen directors of Northwest Airlines, Inc. (Company). On January 14, 1963, Petteys owned 5000 shares of the Company's 5¼% convertible cumulative preferred stock and 15,000 shares of common stock. Reavis owned 1167 shares of the preferred stock and 4000 shares of the common stock. Each had owned his stock for more than six months. On January 14, 1963, the Company had outstanding 449,615 shares of preferred stock and 1,388,459 shares of common stock. The common and preferred stock were listed and traded on the New York Stock Exchange; and the preferred stock was protected against dilution resulting from the issuance of additional common stock. The preferred and common stock each had one vote per share. Petteys had been a director since 1945 and Reavis since 1952. The preferred stock was convertible at any time on the basis of $25 for each preferred share into common stock at a conversion price of $26 for each common share plus accrued dividends prior to January 1, 1964.

At a meeting of the Company's board of directors on January 14, 1963, it was unanimously decided that the elimination of the preferred stock was desirable since this would place the Company in a more advantageous position to seek new capital. It was, therefore, unanimously decided to call for redemption of the preferred shares at $26.161815 per share on the entire outstanding issue ($26 redemption price plus accrued dividend). Both Petteys and Reavis were present at the directors' meeting. The market value of the preferred stock on this date was $34 per share, or about $8 more per share than the redemption price. The common stock of the Company at that time was selling for about $36 per share, which was approximately equal to the conversion rate of .9615 of common per share of preferred. Due to this wide difference between the market value of the stock and the redemption price, it was believed that the preferred shareholders would exercise their rights to convert their preferred shares into common prior to the redemption date of February 14, 1963. This judgment proved to be correct in that 99.98% of all the preferred shares were converted. Only 70 shares were not converted.

On January 17, 1963, when its market price was approximately $35 per share, Petteys converted his 5,000 shares of preferred stock for 4,808 shares of common stock. Less than six months after the conversion (between May 20 and June 18, 1963) Petteys sold 9,808 shares of common stock at prices ranging from 51 to 55½ per share.

Reavis converted his 1,167 shares of preferred stock on January 31, 1963, when the market value was approximately $38 per share and received therefor 1,123 shares of common stock. Less than six months later (June 5, 1963) Reavis sold 1,600 shares of common stock at prices ranging from 53¼ to 53 5/8 per share.

On February 25, 1963, eleven days after the terminal date of the redemption call, the board of directors increased the quarterly dividend on its common stock from 20 cents to 25 cents per share. After the increased dividend, the market price of the common stock increased substantially.

The Minnesota suit, Number 18277, was filed July 2, 1964, in the District Court by Petteys and Reavis, seeking a judgment against the Company to the effect that these transactions were not proscribed short-term profits making them accountable therefor to the Company under § 16(a) and (b) of the Securities Exchange Act. On July 8, 1964, Eunice S. Butler, a stockholder, was granted leave to intervene to seek judgment on behalf of the Company. On July 14, 1964, the Company filed an answer, stating, "It is and has been unwilling to institute or prosecute an action against the plaintiffs." On July 17, 1964, Isadore Blau, another stockholder, instituted an action in the United States District Court for the Southern District of New York against Petteys, Reavis and the Company, alleging a § 16(b) liability of Petteys and Reavis to the Company. The New York case was then transferred to the District of Minnesota. Both cases were combined for a hearing on cross-motions for summary judgment. Summary judgment was appropriate as the facts were not in dispute.

The District Court denied Petteys' and Reavis' motions, granted the motions of intervener Butler and plaintiff Blau, and held, in an opinion reported at 246 F. Supp. 526 (D.Minn.1965), that the conversion of the preferred stock into common stock constituted a "purchase" within the meaning of § 16(b), and therefore Petteys and Reavis were liable to the Company for profits derived from the sale of the common stock within six months after the date of "purchase" or conversion.

Petteys and Reavis contend that the conversion of preferred stock into common stock under the particular facts of this case was not a "purchase" within the meaning of § 16(b).

Petteys and Reavis, as directors, are "insiders"² under § 16(a) and subject to the requirements of § 16(a) and the civil liabilities of § 16(b). The only question remaining is whether their conversion of preferred stock into common stock constituted a purchase of the common so that the subsequent sale of common within six months thereafter would make them liable to the Company for any profit realized on the sale transactions. The fact that Petteys and Reavis had other common stock, purchased prior to the periods in question, from which their sales were, or could have been, made is immaterial.³

The reasons for the enactment of the Securities Exchange Act of 1934 and the specific purpose to be served by § 16(b) are fully documented and examined in prior § 16(b) cases discussed in this opinion, and will not be repeated in detail here. In summary, congressional investigations in the early 1930s disclosed a number of instances in which "insiders" of corporations had abused their fiduciary positions by using confidential corporate information to aid their personal market activities. Armed with information not available to ordinary stockholders, these "insiders" brought about artificial, but predictable, fluctuations in the market and, in so doing, were able to reap substantial profit with little or no investment risks to themselves — all at the expense of outside stockholders and the public. This manipulation and "sure thing" speculation discouraged valid investment and contributed to the cause and depth of the economic collapse of 1929. Congress, therefore, set out to remedy this particular evil with § 16 of the Securities Exchange Act of 1934.⁴

Section 16(b) of the Act was enacted expressly "for the purpose of preventing the unfair use of information which may have been obtained by such beneficial owner, director, or officer * *." To implement this statement of purpose, the statute provides that profits realized by "insiders" from the purchase and sale, or sale and purchase, of equity securities of a company within a period of less than six months inure to the benefit of the company. This liability is enforceable by the company, or if the company fails to act, by a stockholder acting in a derivative capacity. The Act broadly defines "purchase" as "any contract to buy, purchase, or otherwise acquire," and "sale" as "any contract to sell or otherwise dispose of." 15 U.S.C. § 78c (a) (13) (14).

The section establishes liability "irrespective of any intention on the part of (the insider)." Though perhaps reaching harsh results in individual cases, this arbitrary rule is thought necessary for the attainment of the goal set forth in the statute. If it were otherwise, "insiders" could continue all but the most blatant of practices and take refuge behind an artificial wall of good faith. Experience with the common law remedy had convinced...