Blau v. Lehman/Dissent Douglas

Mr. Justice DOUGLAS, with whom THE CHIEF JUSTICE concurs, dissenting.

What the Court does today is substantially to eliminate 'the great Wall Street trading firms' from the operation of § 16(b), as Judge Clark stated in his dissent in the Court of Appeals. 286 F.2d 786, 799. This result follows because of the wide dispersion of partners of investment banking firms among our major corporations. Lehman Bros. has partners on 100 boards. Under today's ruling that firm can make a rich harvest on the 'inside information' which § 16 of the Act covers because each partner need account only for his distributive share of the firm's profits on 'inside information', the other partners keeping the balance. This is a mutilation of the Act.

If a partnership can be a 'director' within the meaning of § 16(a), then 'any profit realized by him,' as those words are used in § 16(b), includes all the profits, not merely a portion of them, which the partnership realized on the 'inside information.' There is no basis in reason for saying a partnership cannot be a 'director' for purposes of the Act. In Rattner v. Lehman, 2 Cir., 193 F.2d 564, 567, Judge Learned Hand said he was 'not prepared to say' that a partnership could not be considered a 'director', adding 'for some purposes the common law does treat a firm as a jural person.' In his view a partnership might be a 'director' within the meaning of § 16 if it 'deputed a partner' to represent its interests. Yet formal designation is no more significant than informal approval. Everyone knows that the investment banking-corporation alliances are consciously constructed so as to increase the profits of the bankers. In partnership law a debate has long raged over whether a partnership is an entity or an aggregate. Pursuit of that will-o'-the-wisp is not profitable. For even New York with its aggregate theory recognizes that a partnership is or may be considered an entity for some purposes. It is easier to make this partnership a 'director' for purposes of § 16 than to hold the opposite. Section 16(a) speaks of every 'person' who is a 'director.' In § 3(a)(9) 'person' is defined to include, inter alia, 'a partnership.' Thus, the purpose to subject a partnership to the provisions of § 16 need not turn on a strained reading of that section.

At the root of the present problem are the scope and degree of liability arising out of fiduciary relations. In modern times that liability has been strictly construed. The New York Court of Appeals, speaking through Chief Judge Cardozo in Meinhard v. Salmon, 249 N.Y. 458, 164 N.E. 545, 62 A.L.R. 1, held a joint adventurer to a higher standard than we insist upon today:

'Many forms of conduct permissible in a workaday world for     those acting at arm's length, are forbidden to those bound by      fiduciary ties. A trustee is held to something stricter than the morals of the market     place. Not honesty alone, but the punctilio of an honor the     most sensitive, is then the standard of behavior. As to this     there has developed a tradition that is unbending and      inveterate. Uncompromising rigidity has been the attitude of     courts of equity when petitioned to undermine the rule of      undivided loyalty by the 'disintegrating erosion' of      particular exceptions (Wendt v. Fischer, 243 N.Y. 439, 444,      154 N.E. 303). Only thus has the level of conduct for     fiduciaries been kept at a level higher than that trodden by      the crowd. It will not consciously be lowered by any judgment     of this court.' 249 N.Y., at 464, 164 N.E., at 546.

In Mosser v. Darrow, 341 U.S. 267, 71 S.Ct. 680, 95 L.Ed. 927, we allowed a reorganization trustee to be surcharged $43,447.46 for profits made by his employees through trading in securities of subsidiaries of a bankrupt company. We made this ruling even though there was 'no hint or proof that he has been corrupt or that he has any interest, present or future, in the profits he has permitted these employees to make.' Id., 341 U.S. at 275, 71 S.Ct. at 684. We said:

'These strict prohibitions would serve little purpose if the     trustee were free to authorize others to do what he is      forbidden. While there is no charge of it here, it is obvious     that this would open up opportunities for devious dealings in      the name of others that the trustee could not conduct in his      own. The motives of man are too complex for equity to     separate in the case of its trustees the motive of acquiring      efficient help from motives of favoring help, for any reason      at all or from anticipation of counterfavors later to come. We think that which the trustee had no right to do he had no     right to authorize, and that the transactions were as forbidden for benefit of others as      they would have been on behalf of the trustee himself.

' * *  * equity has sought to limit difficult and delicate      fact-finding tasks concerning its own trustee by precluding      such transactions for the reason that their effect is often      difficult to trace, and the prohibition is not merely against      injuring the estate-it is against profiting out of the      position of trust. That this has occurred, so far as the     employees are concerned, is undenied.' Id., 341 U.S. at 271      273, 71 S.Ct. at 682.

It is said that the failure of Congress to take action to remedy the consequences of the Rattner case somehow or other shows a purpose on the part of Congress to infuse § 16 with the meaning that Rattner gave it. We took that course in Toolson v. New York Yankees, 346 U.S. 356, 74 S.Ct. 78, 98 L.Ed. 64, and adhered to a ruling the Court made in 1922 that baseball was not within the scope of the antitrust laws, because the business had been 'left for thirty years to develop, on the understanding that it was not subject to' those laws. Id., 346 U.S. p. 357, 74 S.Ct. p. 78. Even then we had qualms and two Justices dissented. For what we said in Girouard v. United States, 328 U.S. 61, 69, 66 S.Ct. 826, 830, 90 L.Ed. 1084, represents our usual attitude: 'It is at best treacherous to find in congressional silence alone the adoption of a controlling rule of law.' It is ironic to apply the Toolson principle here and thus sanction, as vested, a practice so notoriously unethical as profiting on inside information.

We forget much history when we give § 16 a strict and narrow construction. Brandeis in Other People's Money spoke of the office of 'director' as 'a happy hunting ground' for investment bankers. He said that 'The goose that lays golden eggs has been considered a most valuable possession. But even more profitable is the privilege of taking the golden eggs laid by somebody else's goose. The investment bankers and their associates now enjoy that privilege.' Id., at 12.

The hearings that led to the Securities Exchange Act of 1934 are replete with episodes showing how insiders exploited for their personal gain 'inside information' which came to them as fiduciaries and was therefore an aset of the and was therefore an asset of the Senate Report labeled those practices as 'predatory operations.' S.Rep.No. 1455, 73d Cong., 2d Sess., p. 68. It said:

'Among the most vicious practices unearthed at the hearings     before the subcommittee was the flagrant betrayal of their      fiduciary duties by directors and officers of corporations      who used their positions of trust and the confidential      information which came to them in such positions, to aid them      in their market activities. Closely allied to this type of     abuse was the unscrupulous employment of inside information      by large stockholders who, while not directors and officers, exercised sufficient control over the      destinies of their companies to enable them to acquire and      profit by information not available to others.' Id., at 55. See also S.Rep.No. 792, 73d Cong., 2d Sess., p. 9.

The theory embodied in § 16 was the one Brandeis espoused. It was stated by Sam Rayburn as follows: 'Men charged with the administration of other people's money must not use inside information for their own advantage.' H.R.Rep. No. 1383, 73d Cong., 2d Sess. 13.

What we do today allows all but one partner to share in the feast which the one places on the partnership table. They in turn can offer feasts to him in the 99 other companies of which they are directors. 14 Stan.L.Rev. 192, 198. This result is a dilution of the fiduciary principle that Congress wrote into § 16 of the Act. It is, with all respect, a dilution that is possible only by a strained reading of the law. Until now, the courts have given this fiduciary principle a cordial reception. We should not leave to Congress the task of restoring the edifice that it erected and that we tear down.

Appendix to Opinion of Mr. Justice DOUGLAS.

Lehman v. Civil Aeronautics Board, supra, 93 U.S.App.D.C., at 85-87, 209 F.2d, at 292-294.

'Petitioner Lehman is a director of Pan American; petitioner     Joseph A. Thomas is a director of National Airlines, Inc.,      and of American Export Lines, Inc.; petitioner Frederick L.      Ehrman is a director of Continental Air Lines, Inc., and Mr. John D. Hertz is a director of Consolidated Vultee Aircraft     Corporation. All the companies referred to are in the     aeronautic field and so must have Board approval of the kind      of interlocking relationships which are made unlawful unless      approved. Messrs. Lehman, Thomas, Ehrman, Hertz, and others,     are also members of Lehman Brothers, a partnership which, as      previously pointed out, conducts an investment banking      business.

'The Board held that an individual Lehman Brothers partner     who is a director of a Section 409(a) company is a      representative of another partner who is a director of      another such company. The relationships thus found to exist     were disapproved as to those involving Pan American and      National; Pan American and American Export Lines; Pan      American and Consolidated Vultee; National and Pan American;      National and Consolidated Vultee; and Continental Air Lines      and Consolidated Vultee. * *  *

'More precisely the Board concluded that a Lehman Brothers     partner who is director of an air carrier has a      representative 'who represents such *  *  * director as *  *  * a      director' in another Section 409(a) company if another Lehman      Brothers partner is a director of the latter, coupled with      the circumstances that he seeks on behalf of Lehman Brothers      the security underwriting and merger negotiation services      used by the company of which he is director. The underwriting     of security issues and the conduct of merger negotiations constitute a substantial part      of the business of Lehman Brothers, who have been employed      for these purposes not infrequently by Section 409(a)      companies. The partners feel free to solicit this business     for their firm.

' * *  * But we must consider the facts of the case in the      light of the purpose of Congress to keep the developing      aviation industry free of unhealthy interlocking      relationships, though this purpose must be carried out only      as the statute provides. The relevant findings which point up     the problem are not in dispute. The underwriting activities     of Lehman Brothers is a substantial part of its business;      substantial fees are also obtained by Lehman Brothers from      merger negotiations. Profits from the fees are shared by the     partners. Section 409(a) companies, with Lehman Brothers     partners as directors, need and use both types of services,      and the partner directors seek such business for the      partnership. In doing so they act as representatives of the     partnership. It follows that they act as representatives of     fellow partners, some of whom are directors of air carriers. Is this representation within the meaning of the statute? Does Mr. Thomas, to use his case as illustrative, who is a     Lehman Brothers partner and also a director of National      Airlines, represent, as director of National Airlines, Mr. Lehman, another Lehman Brothers partner and director of Pan     American? We think that the affirmative answer of the Board     should not be disturbed. For the situation comes to more than     some community of interest and some sharing of common      benefits as partners. The particular common interest and     benefits are among directors of the regulated industry with      respect to industry matters. The partnership link does not     extend merely to a type of business remote from the      aeronautical industry in which the partners are directors; it      is with respect to business activities of air carriers and      other aeronautical companies enumerated in Section 409(a). In these activities there is not only literal     representation by one partner of another in partnership      business but the particular partnership business is as well      the business of aeronautical enterprises of which the      partners are directors. When Mr. Thomas, again to illustrate,     as director of National seeks to guide that company's      underwriting business to Lehman Brothers he acts in the      interest of and for the benefit of Mr. Lehman who is not only      his underwriting partner but is also a director of an air      carrier, Pan American. Mr. Lehman the partner is the same Mr. Lehman the director. The Board is not required to separate     him into two personalities, as it were, and to say that Mr. Thomas represents him as a partner but not as a director, if,     as is the case here, the representation is in regard to the      carrying on of the affairs of Section 409(a) companies. The     undoubted representation which grows out of the partnership      we think follows into the directorships when the transactions      engaged in are not only by the partners but concern companies      regulated by the statute, of which the partners are      directors. This is representation within not only the     language but the meaning of the statute.'