Tristar Corp. v. Freitas
| Citation | 84 F.3d 550 |
| Decision Date | 21 May 1996 |
| Docket Number | No. 1305,D,1305 |
| Parties | Fed. Sec. L. Rep. P 99,230 TRISTAR CORPORATION, Plaintiff-Appellee, v. Ross A. FREITAS and Carolyn Safer Kenner, Defendants-Appellants. ocket 95-7952. |
| Court | United States Courts of Appeals. United States Court of Appeals (2nd Circuit) |
Anthony C. Cianciotti, Fried, Frank, Harris, Shriver & Jacobson, Washington, DC (Elliot E. Polebaum, Washington, DC, on the brief), for Plaintiff-Appellee.
Chase A. Caro, Caro & Graifman, P.C., New York City (Brian D. Graifman, New York City, of counsel), for Defendants-Appellants.
Before KEARSE, JACOBS and CABRANES, Circuit Judges.
Tristar Corporation ("Tristar") brought this action pursuant to section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b), to recover short-swing profits allegedly realized by defendants Ross A. Freitas and Carolyn Safer Kenner through the purchase and sale of securities of Ross Cosmetics Distribution Centers, Inc. ("Ross Cosmetics"), later renamed Tristar. On July 20, 1994, Tristar moved for summary judgment. As an affirmative defense to that motion, the defendants, appearing pro se, contended that Tristar's complaint was filed after the two-year period of limitations set forth in section 16(b) had expired. The United States District Court for the Eastern District of New York (Dearie, J.) found that the defendants had failed to make the mandatory filings with the Securities and Exchange Commission (the "Commission") that would have provided Tristar with notice of the short-swing transactions and, for that reason, equitably tolled the two-year limitations period for a period sufficient to render timely Tristar's complaint. Tristar v. Freitas, 867 F.Supp. 149, 153-54 (E.D.N.Y.1994). Accordingly, the district court granted summary judgment in favor of Tristar.
On appeal, the parties ask us to decide whether the limitations period set forth in section 16(b) is subject to equitable tolling. We need not decide that question because, even assuming arguendo that the defendants' non-compliance with the filing requirements of the Securities Exchange Act tolled the limitations period, Tristar's complaint was still untimely filed. We therefore reverse the district court's grant of summary judgment in favor of Tristar.
From 1982 through at least May 31, 1989, defendants Freitas and Kenner served as officers and directors of Ross Cosmetics and were beneficial owners of more than ten percent of the outstanding shares of the company's common stock. In separate transactions On May 31, 1989, the defendants entered into a binding contract (the "Agreement") to sell to Starion International Limited ("Starion") a total of 906,594 shares of Ross Cosmetics common stock, approximately 28 percent of the company's outstanding shares. The Agreement, which was styled a "Periodic Loan Agreement" by the contracting parties, required the defendants to transfer the shares to Starion in more than a dozen installments. In return, the defendants were to receive "loan disbursements" fixed at between approximately $4.65 and $7.50 for each share in each installment. Through this transaction (and others), Starion acquired control of Ross Cosmetics (which was later re-named Tristar).
occurring in February, March, May and June 1989, the defendants purchased more than 39,000 shares of Ross Cosmetics at prices ranging from $1.10 to $4.50 per share.
On December 16, 1993, Tristar filed its complaint pursuant to section 16(b) of the Securities Exchange Act to recover the defendants' short-swing profits. Section 16(b) permits a corporation or shareholder to bring an action for recovery of profits that a director, officer or principal shareholder realizes by purchasing and selling stock within a six-month period. 15 U.S.C. § 78p(b). Tristar alleged that from February 1989 to June 15, 1989 the defendants purchased shares of Ross Cosmetics at prices from $1.10 to $4.50 per share, and that the defendants then realized a profit exceeding $270,000 on those shares by selling them to Starion, pursuant to the Agreement, at prices between approximately $4.65 and $7.50 per share.
On July 20, 1994, Tristar moved for summary judgment. In an opinion dated November 9, 1994, the district court determined that the Agreement constituted a "sale" of securities as defined by section 3 of the Securities Exchange Act, 15 U.S.C. § 78c(a)(14). 867 F.Supp. at 153. The court also found that the defendants had reaped short-swing profits by entering into the Agreement with Starion, giving rise to a cause of action that accrued on May 31, 1989. Id. at 152-53. But because the two-year period of limitations set forth in section 16(b) expired on May 31, 1991, the district court found that Tristar's complaint (filed on December 16, 1993) was "clearly untimely." Id. at 153. No one appeals these determinations.
However, the district court found that circumstances warranted granting Tristar equitable relief. Because the Agreement was entered into on May 31, 1989, each defendant was required by section 16(a) to disclose the transaction on or before June 10, 1989 in a filing--designated a "Form 4"--with the Commission. See 17 C.F.R. § 240.16a-3(a) (1995). The defendants, however, failed to file Form 4s until December 18, 1991--over two and one-half years after the filings were due. Tristar contended that it was thus deprived during that period of notice of the defendants' short-swing transactions. The district court, relying on the Ninth Circuit's decision in Whittaker v. Whittaker Corp., 639 F.2d 516, 527-30 (9th Cir.), cert. denied, 454 U.S. 1031, 102 S.Ct. 566, 70 L.Ed.2d 473 (1981), held that section 16(b)'s two-year period of limitations was equitably tolled during the defendants' delinquency. 867 F.Supp. at 153-54. The district court then determined (as did the Ninth Circuit in Whittaker ) that the two-year limitations period began to run on the date that the defendants filed their (untimely) Form 4s--on December 18, 1991. Id. at 154. The court therefore held that Tristar's complaint, which was filed on December 16, 1993, was timely under section 16(b), and entered judgment against Freitas for $101,004.00, and against Kenner for $81,893.75, plus pre-judgment interest.
Section 16 of the Securities Exchange Act is intended "to curb short-swing trading by insiders whose position gives them access to information not available to the investing public." Kern County Land Co. v. Occidental Petroleum Corp., 411 U.S. 582, 592 n. 23, 93 S.Ct. 1736, 1743 n. 23, 36 L.Ed.2d 503 (1973). Section 16(b) permits a shareholder or corporation to maintain an action against any director, officer or beneficial owner of more than 10% of any class of outstanding shares (a "statutory insider") who profits from short-swing transactions in that corporation's securities. 15 U.S.C. *553s 78p(b). A short-swing transaction is "any purchase and sale, or any sale and purchase, of any equity security of such issuer ... within any period of less than six months." Id. A suit to recover such profits may be brought "by the issuer, or by the owner of any security of the issuer ... in behalf of the issuer ...; but no such suit shall be brought more than two years after the date such profit was realized." Id. (emphasis added).
Section 16(a) provides a mechanism for facilitating the recovery of short-swing profits by requiring statutory insiders to disclose any change in ownership "within ten days after the close of each calendar month" in which such change occurs. Id. § 78p(a). That disclosure is made via a Form 4 (filed with the Commission and made publicly available, see 17 C.F.R. § 240.16a-3(a) (1995)) which sets forth the insider's name, the date of the transaction, the number of shares sold or bought and the price per share. See Ownership Reports and Trading by Officers, Directors and Principal Security Holders, 56 Fed.Reg. 7242, 7278-81 (Feb. 21, 1991) (instructions for Form 4). Where the requirements of section 16(a) are met, the corporation or shareholder may determine easily and quickly whether any statutory insider has profited from a short-swing transaction by examining the Form 4s filed each month with the Commission. The corporation or shareholder may then use the Form 4s to establish liability in an action under section 16(b). Because the "statute imposes liability without fault within its narrowly drawn limits," Foremost-McKesson, Inc. v. Provident Secs. Co., 423 U.S. 232, 251, 96 S.Ct. 508, 519, 46 L.Ed.2d 464 (1976), recovery...
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