Smolowe v. Delendo Corporation
| Decision Date | 12 November 1942 |
| Citation | 46 F. Supp. 758 |
| Parties | SMOLOWE et al. v. DELENDO CORPORATION et al. (UNITED STATES, Intervenor). |
| Court | U.S. District Court — Southern District of New York |
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Arthur J. Sleppin, of New York City, for plaintiff Smolowe.
Samuel A. Mehlman, of New York City (Arthur J. Sleppin and Jack Hart, both of New York City, of counsel), for plaintiff Levy.
Jay Leo Rothschild, of New York City (Louis Rivkin, of New York City, of counsel), for defendants.
Mathias F. Correa, U. S. Atty., of New York City (Chester T. Lane, Sp. Asst. to the Atty. Gen., and William L. Lynch, Asst. U. S. Atty., of New York City, of counsel), for United States, Intervenor.
Chester T. Lane, Gen. Counsel, of Washington, D. C. (Christopher M. Jenks, Asst. Gen. Counsel, of Philadelphia, Pa., Donald R. Seawell, of Washington, D. C., and Milton P. Kroll, of Philadelphia, Pa., of counsel), for Securities & Exchange Commission.
These actions were brought by Philip Smolowe and M. William Levy, stockholders of the defendant Delendo Corporation, to recover for the corporation profits received between December 1, 1939, and June 1, 1940, by the defendants I. J. Seskis and Henry C. Kaplan, president and vice president respectively, and directors of the corporation, each owning approximately 12% of its common stock. The cases were consolidated and tried together without a jury.
The issues involve the interpretation and constitutionality of Section 16(b) of the "Securities Exchange Act of 1934". 48 Stat. 896, 15 U.S.C.A. § 78p(b), which reads:
Subdivision (a) of the same section requires every person who is directly or indirectly the beneficial owner of more than 10% of any class of any equity security (other than an exempted security) registered on a national securities exchange, or who is a director or an officer of the issuer of such security, to file a statement with the exchange and the Securities and Exchange Commission of the amount of equity securities of which he is the owner, and within ten days after the close of each current month thereafter to file another statement indicating his ownership and such changes therein as have occurred during such current month.
The facts are stipulated. Delendo was formerly the Oldetyme Distillers Corporation. Its name was changed to Delendo Corporation on May 22, 1940, in contemplation of dissolution, and it was dissolved on June 28, 1940. During the period in question — December 1, 1939 to June 1, 1940 — the stock of the corporation was duly registered and listed on the New York Curb Exchange, which was and is a national securities exchange, as defined in the Act, and such stock was not an exempted security.
The individual defendants have been owners of common stock in the company since April 7, 1933. The defendant Seskis purchased 14,920 shares of the corporation's stock on January 19, 1940, from the Distillers & Brewers Corporation of America, paying $24,245. On February 28, 1940, he purchased 584 shares on the New York Curb Exchange, paying $905.20, the total purchase price of the two lots being $25,150.20. He had previously, and in 1936, borrowed from the Inwood Corporation (wholly owned by the defendant Kaplan), $54,536.03. He reduced that obligation by payments from time to time, and completely paid it off on April 4, 1940, by transferring to Kaplan 15,800 shares of the stock of the corporation at $2.25 a share, a total of $35,550. The stock certificates actually delivered by Seskis to Kaplan were not the same as those acquired by Seskis during the period sued for, but were certificates of stock which had been acquired by the latter, some on August 3, 1934, and the balance on May 4, 1937. Plaintiff claims that having purchased 15,504 shares at $25,150.20, he sold 15,800 shares to Kaplan, making a profit upon the 15,504 shares of $9,733.80.
The defendant Kaplan, during the period in question, made the following purchases of the corporation's stock upon the New York Curb Exchange:
December 1, 1939 5,000 shares at $ 7,750
February 5, 1940 200 " " 285
February 20, 1940 200 " " 335
March 25, 1940 400 " " 924
March 27, 1940 1,000 " " 2,560
April 11, 1940 300 " " 768.
_____ ________
7,100 $12,622.
He sold upon the same exchange during the same period, as follows:
February 15, 1940 200 shares at $ 308.91
April 19, 1940 500 " " 750.00
April 22, 1940 500 " " 1,312.50
May 7, 1940 200 " " 525.00
May 7, 1940 800 " " 2,000.00
May 10, 1940 500 " " 1,040.20
May 11, 1940 200 " " 250.00
May 13, 1940 2,000 " " 7,779.03
May 14, 1940 1,000 " " 3,889.52
_____ __________
5,900 $17,855.16
Sixteen hundred of the shares sold were identical certificates purchased during the period in question. The other shares were not. Plaintiff claims that the defendant Kaplan made a profit on the stock so purchased and sold during the period of $8,305.16.
It is conceded that all purchases and sales by the individual defendants, above listed, were made within the State of New York. And it is not claimed or contended that either of the individual defendants acted in bad faith, or that they or either of them unfairly used any information obtained by them with respect to any of the transactions.
If the section quoted does not apply to the sales and purchases set forth, there will be no need to determine its constitutionality. The first question, therefore, is directed to the application of the section.
It seems to me that a particular aid in this respect would be to see what wrongs, practices or transactions Congress sought to prohibit, regulate or remedy. In section 2 of the Act, Congress found that transactions in securities on exchanges, or in over-the-counter markets were affected with a national public interest, and that it was necessary to provide for their regulation and control, including transactions by officers, directors and principal security holders. It deemed this necessary, among others, to protect interstate commerce, the national credit and the federal taxing power, as well as to protect and make more effective the national banking and Federal Reserve systems. It sought to "insure the maintenance of fair and honest markets in such transactions." Among other important elements, it distinctly recognized that such transactions constituted an important part of the current of interstate commerce, involved in large part securities of issuers engaged in interstate commerce, affected the national credit, and that the prices established and offered in such transactions constituted a basis for determining prices at which securities are bought and sold. Congress sought, among other things, to control excessive speculation, sudden and unreasonable fluctuations in prices, with their evils of unreasonable expansion and contraction of credit, and the precipitation, intensification and prolongation of national emergencies of unemployment and dislocation of trade and industry. These are some of the matters sought to be comprehended within the four corners of the Act. They have particular significance to the questions here involved.
These findings of Congress are presumptively sound, and are to be taken as true unless overthrown by contrary findings of greater weight based on facts of common knowledge, or on other facts judicially noticed, or on facts proved by the parties asserting the invalidity of the statute. There are certainly no facts within my knowledge, or which I may judicially notice, or which have been called to my attention, or proven, which would justify me in disregarding or questioning these findings. Securities & Exchange Commission v. Torr, D.C., 15 F.Supp. 315-320, reversed on other grounds, 2 Cir., 87 F.2d 446; West Coast Hotel Co. v. Parrish, 300 U.S. 379, 57 S.Ct. 578, 81 L.Ed. 703, 108 A.L.R. 1330.
Coming now to the section in question, it definitely applies to directors, officers and principal stockholders, either or both. A...
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