Popkin v. Dingman

• Decision Date: 25 October 1973
• Docket Number: No. 72 Civ. 1232.,72 Civ. 1232.
• Citation: 366 F. Supp. 534
• Parties: Irwin POPKIN, Plaintiff, v. Michael D. DINGMAN et al., Defendants.
• Court: U.S. District Court — Southern District of New York

366 F. Supp. 534

Irwin POPKIN, Plaintiff, v. Michael D. DINGMAN et al., Defendants.

No. 72 Civ. 1232.

United States District Court, S. D. New York.

October 25, 1973.

Rubin, Wachtel, Baum & Levine, New York City, for plaintiff; Martin A. Coleman, New York City, of counsel.

Paul Weiss, Rifkind, Wharton & Garrison, New York City, for defendants Dingman and Halliday; Simon Rifkind and Paul J. Newlon, New York City, of counsel.

Debevoise, Plimpton, Lyons & Gates, New York City, for defendant Wheelabrator-Frye; Robert von Mehren, and Paul E. Konney, New York City, of counsel.

ROBERT L. CARTER, District Judge.

OPINION

This is an action arising under § 16(b) of the Securities Exchange Act of 1934 (the "Act"), 15 U.S.C. § 78p(b). Jurisdiction rests under § 27 of the Act, 15 U.S.C. § 78aa.

Plaintiff sues on his own behalf, on behalf of all stockholders of Wheelabrator-Frye, Inc. similary situated, and on behalf of and in the right of the corporation itself. In a motion for summary judgment, plaintiff asks this court to impose liability upon defendants Dingman and Halliday, as corporate insiders, for profits realized from the alleged sale and exchange of securities within a six-month period.¹ The motion is denied and summary judgment is granted to the defendants.

I. Factual Background:

The essential facts in this case are not in dispute. Allied Equities is a public industrial corporation with approximately 5,300 stockholders and 2,000,000 outstanding shares. Its stock is traded in the over-the-counter market. During the relevant period, defendant Dingman was a director of Allied Equities and defendant Halliday was a director and Chairman of the Board of Directors. They were not a part of the management of the corporation. During this same period Dingman owned between 3.4% and 4.8% of the outstanding shares of Allied Equities and Halliday owned between 12% and 14%.

Dingman and Halliday were also active in the affairs of Wheelabrator-Frye, Inc., and were "insiders". Dingman was a director, as well as President, and Halliday was Chairman of the Board. Wheelabrator-Frye is a public corporation with common stock registered and traded on the New York Stock Exchange. This stock has been subject to the provisions of the Act.

Allied Equities owned a large block of stock in Wheelabrator-Frye, which it purchased on January 14, 1971. On March 22, 1972, due to a need for income and working capital by Allied Equities, the company sold its stock in Wheelabrator-Frye at a significant appreciation in value. The decision to sell the stock was proposed and approved by the Board of Directors, with defendants Dingman and Halliday abstaining from the vote. The proceeds of the disposition were used to pay off most of the company's long-term debt.

During the six-month period immediately preceding the Allied Equities sale, Dingman and Halliday had individually purchased shares of common stock of Wheelabrator-Frye for a price per share which was less than the per share price in the Allied Equities sale.

The elements necessary for Section 16(b) liability are a purchase and sale of a non-exempt security by an insider, within six months, which results in the realization of a profit by the insider. The plaintiff contends that the sale by Allied Equities and the purchase by Dingman and Halliday was a purchase and sale within the meaning of the Act and that both defendants realized a profit thereby. It is plaintiff's position that Dingman and Halliday's pro rata portion of the shares of Wheelabrator-Frye which were sold by Allied Equities within six months of their own acquisition, may be matched against the shares which they acquired individually. Each individual's pro rata portion of the shares of Wheelabrator-Frye stock which were sold by Allied Equities is to be computed from that individual's percentage equity interest as a stockholder in Allied Equities. The difference in price between the matched portions bought and sold is to be considered profit for which the defendants are liable.² The central issue is whether liability can be imposed on a stockholder-director for his company's sale and his own purchase within the previous six months of that sale, of securities of another company of which he is an "insider".

II. Application of Governing Legal Principles:

The relevant language of § 16(b) of the Securities Exchange Act of 1934 provides:

"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 . . . within any period of less than six months . . . 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. . . . This subsection shall not be construed to cover . . any . . . transactions which the Commission by rules and regulations may exempt as not comprehended within the purpose of this subsection." 15 U.S.C. § 78p(b).

One of the major purposes of the Act, as declared in Section 2, 15 U.S.C. § 78b, was "to insure the maintenance of fair and honest markets" in securities transactions. Section 16(b), designed to implement this overall objective, bars the unfair use of inside information by making it unprofitable for "insiders" to engage in short-swing speculation. See Feder v. Martin Marietta, 406 F.2d 260 (2 Cir.), cert. denied, 396 U.S. 1036, 90 S.Ct. 678, 24 L.Ed.2d 681 (1969); Blau v. Lamb, 363 F.2d 507 (2d Cir. 1966). To serve this purpose, Congress established a relatively arbitrary rule capable of easy administration. It was recognized that the section's success as a deterrent was rooted in its simplicity and automatic application. Blau v. Lamb, supra, at 516; Bershad v. McDonough, 428 F.2d 693, 696 (7th Cir. 1970), cert. denied, 400 U.S. 992, 91 S.Ct. 458, 27 L.Ed.2d 440 (1971). Responsibility for observance of the provision was put upon the "insider", since he was deemed capable of structuring his purchases and sales so as to avoid liability. (Bershad, supra, at 696.)

In an attempt to serve the dual objectives of preventing insider abuse and applying the statute in an easily definable manner, the courts have utilized both an "objective" and "subjective" approach. The objective approach takes the statutory requirements and applies them as broadly as the language permits. This is done without regard to the intent of the insider, the actual knowledge or use of insider information for speculation, or even whether speculative abuse was possible. See, e. g., Smolowe v. Delendo Corp., 136 F.2d 231 (2d Cir.), cert. denied, 320 U.S. 751, 64 S.Ct. 56, 88 L.Ed. 446 (1943); Reliance Electric Co. v. Emerson Electric Co., 404 U.S. 418, 92 S.Ct. 596, 30 L.Ed.2d 575 (1972).

"As applied to `purchases' and `sales' as those terms are ordinarily understood in the law, the Congress allowed no loophole by which the insider could avoid the impact of the statute. In the case of such ordinary purchases and sales, it mattered not to whom, why or how the insider sold." Morales v. Arlen Realty & Development Corp., 352 F.Supp. 941, 944 (S.D.N.Y.1973).

What is clear from these cases, is that the statute is applied objectively to transactions which come within the ordinarily understood meaning of "purchase and sale". Ordinary purchases and sales have always been understood to be those enacted by the insider. Although "sale" can and has been interpreted broadly to include sophisticated exchanges, in every instance the individual held liable must have performed acts, by himself or through his alter ego, constituting the actual acquisition and disposition of securities.

In the immediate case, Dingman and Halliday did not dispose of any securities. The sale of Wheelabrator-Frye stock was the act of Allied Equities. The corporation's sale cannot be treated as the defendant's sale without disregarding the requirement that the insider engage in the transaction. Dingman and Halliday could not control or prevent the sale of Wheelabrator-Frye stock by Allied Equities and it would be illogical and beyond any accepted understanding of corporate organization to attribute the act of the corporation to them.

In addition, Dingman and Halliday cannot be said to have realized a profit when the proceeds of the sale went to the corporation and their only interest was that of a shareholder. Few cases have dealt with the issue of when a profit is "realized", and the logical inference to draw from this is that as normally applied, the term provides little difficulty. In Heli-Coil Corp. v. Webster, 352 F.2d 156, 167 (3d Cir. 1965), in determining whether real profits as opposed to paper profits were realized, it was assumed that since Congress did not define the terms "realize" or "profit", it intended them to have their ordinary and usual meaning.

"Measuring the terms `profit' and `realize' in conjunction, we think it is clear that Congress intended that ordinarily no gain in the value of securities should be deemed to be realized as a profit under the Act until there had been a definitive act by the owner of the securities whereby the paper value of the securities has become a real and an includible one . . . ." 352 F.2d at 167-168. (Emphasis added.)

Dingman and Halliday were not the "owners" of the stock. They performed no "definitive act", and the value of the proceeds was not "real and includible" to them. Allied Equities converted an investment into cash and used it to pay off debt. While the transaction was obviously in the financial interest of the corporation, its shareholders did not even "realize" a distribution on their shares, let alone a real or paper profit. Thus, defendants cannot be held...