Smolowe v. Delendo Corporation

• Decision Date: 26 December 1940
• Citation: 36 F. Supp. 790
• Parties: SMOLOWE v. DELENDO CORPORATION et al. (UNITED STATES, Intervener).
• Court: U.S. District Court — Southern District of New York

36 F. Supp. 790

SMOLOWE v. DELENDO CORPORATION et al. (UNITED STATES, Intervener).

District Court, S. D. New York.

December 26, 1940.

Arthur J. Sleppin, of New York City, for plaintiff.

Jay Leo Rothschild, of New York City, for defendants.

John T. Cahill, U. S. Atty., of New York City, Francis M. Shea, Asst. Atty. Gen., and Sidney J. Kaplan and Chester T. Lane, Sp. Assts. to Atty. Gen., for the United States.

MANDELBAUM, District Judge.

The United States applies for an order of intervention in this action, pursuant to 28 U.S.C.A. § 401, and Rule 24 of the Federal Rules of Civil Procedure, 28 U.S.C.A. following section 723c. The defendants oppose the motion, whereas the plaintiff takes no position, stating that he is entirely satisfied to abide by whatever decision this court may make.

The action is brought by a stockholder on behalf of the defendant corporation to recover from the defendants, who are officers and directors of the corporation, profits alleged to have been made by them in the sale and purchase of the corporation's stock.

Amended pleadings were filed and issue was joined October 28, 1940. On the same day, cross-motions were made by both plaintiff and defendants. The former moved to strike certain affirmative defenses contained in the answer as insufficient in law. The latter moved for judgment on the pleadings claiming, among other things, that the statute upon which this action was predicated was unconstitutional, in that it violated certain amendments and provisions of the Constitution. On the return day of the cross-motions, the matters were adjourned to November 29, 1940, and the parties, pursuant to Rule 11 of the Local Rules of Civil Procedure, notified Judge Knox, the Senior District Judge, of the existence of the constitutional question raised by the defendants' amended answer and motion. Judge Knox thereafter wrote to the Attorney General of the United States certifying the question. At this point, it is well to point out that an unintentional error crept into the certification in that the question of the constitutionality was addressed to the entire Section 16 of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78p. It is conceded by both sides that the intention was to refer to subdivision (b) of Section 16 and nothing else. The court will accordingly treat this motion as if the original certification was based on subdivision (b) of Section 16. This may formally be cured by a subsequent order.

While several grounds for opposition to intervention are urged, mainly, I should say it is the position of the defendants that at present the constitutionality of the aforementioned subdivision is not "drawn into question" and may never be; that all that is involved at present is the construction of the subdivision in question, and the application at best is premature.

I think that the purposes sought to be accomplished by the enactment of the Securities Exchange Act of 1934 are well understood. But it is important enough to bear repetition. This law was enacted primarily to protect the investing public by maintaining free, fair and open markets for listed securities and by preventing and punishing abuse of the facilities of the national securities upon which such securities are traded.

The specific section (Subdivision (b) of Section 16) upon which this suit is founded gives the corporation (or those suing in behalf thereof) the right to recover from "insiders" any profit which the "insiders" may make by trading operations in their corporation's stock within a...