Blau v. Lehman/Opinion of the Court

The petitioner Blau, a stockholder in Tide Water Associated Oil Company, brought this action in a United States District Court on behalf of the company under § 16(b) of the Securities Exchange Act of 1934 to recover with interest 'short swing' profits, that is, profits earned within a six months' period by the purchase and sale of securities, alleged to have been 'realized' by respondents in Tide Water securities dealings. Respondents are Lehman Brothers, a partnership engaged in investment banking, the securities brokerage and in securities trading for its own account, and Joseph A. Thomas, a member of Lehman Brothers and a director of Tide Water. The complaint alleged that Lehman Brothers 'deputed * *  * Thomas, to represent its interests as a director on the Tide Water Board of Directors,' and that within a period of six months in 1954 and 1955 Thomas, while representing the interests of Lehman Brothers as a director of Tide Water and 'by reason of his special and inside knowledge of the affairs of Tide Water, advised and caused the defendants, Lehman Brothers, to purchase and sell 50,000 shares of *  *  * stock of Tide Water, realizing profits thereon which did not inure to and (were) not recovered by Tide Water.'

The case was tried before a district judge without a jury. The evidence showed that Lehman Brothers had in fact earned profits out of short-swing transactions in Tide Water securities while Thomas was a director of that company. But as to the charges of deputization and wrongful use of 'inside' information by Lehman Brothers, the evidence was in conflict.

First, there was testimony that respondent Thomas had succeeded Hertz, another Lehman partner, on the board of Tide Water; that Hertz had 'joined Tidewater Company thinking it was going to be in the interests of Lehman Brothers'; and that he had suggested Thomas as his successor partly because it was in the interest of Lehman. There was also testimony, however, that Thomas, aside from having mentioned from time to time to some of his partners and other people that he thought Tide Water was 'an attractive investment' and under 'good' management, had never discussed the operating details of Tide Water affairs with any member of Lehman Brothers; that Lehman had bought the Tide Water securities without consulting Thomas and wholly on the basis of public announcements by Tide Water that common shareholders could thereafter convert their shares to a new cumulative preferred issue; that Thomas did not know of Lehman's intent to buy Tide Water stock until after the initial purchases had been made; that upon learning about the purchases he immediately notified Lehman that he must be excluded from 'any risk of the purchase or any profit or loss from the subsequent sale'; and that this disclaimer was accepted by the firm.

From the foregoing and other testimony the District Court found that 'there was no evidence that the firm of Lehman Brothers deputed Thomas to represent its interests as director on the board of Tide Water' and that there had been no actual use of inside information, Lehman Brothers having bought its Tide Water stock 'solely on the basis of Tide Water's public announcements and without consulting Thomas.'

On the basis of these findings the District Court refused to render a judgment, either against the partnership or against Thomas individually, for the $98,686.77 profits which it determined that Lehman Brothers had realized, holding:

'The law is now well settled that the mere fact that a     partner in Lehman Brothers was a director of Tide Water, at      the time that Lehman Brothers had this short swing      transaction in the stock of Tide Water, is not sufficient to      make the partnership liable for the profits thereon, and that      Thomas could not be held liable for the profits realized by      the other partners from the firm's short swing transactions. Rattner v. Lehman, 2 Cir., 1952, 193 F.2d 564, 565, 567. This     precise question was passed upon in the Rattner decision.'      173 F.Supp. 590, 593.

Despite its recognition that Thomas had specifically waived his share of the Tide Water transaction profits, the trial court nevertheless held that within the meaning of § 16(b) Thomas had 'realized' $3,893.41, his proportionate share of the profits of Lehman Brothers. The court consequently entered judgment against Thomas for that amount but refused to allow interest against him. On appeal, taken by both sides, the Court of Appeals for the Second Circuit adhered to the view it had taken in Rattner v. Lehman, 193 F.2d 564, and affirmed the District Court's judgment in all respects, Judge Clark dissenting. 286 F.2d 786. The Securities and Exchange Commission then sought leave from the Court of Appeals en banc to file an amicus curiae petition for rehearing urging the overruling of the Rattner case. The Commission's motion was denied, Judges Clark and Smith dissenting. We granted certiorari on the petition of Blau, filed on behalf of himself, other stockholders and Tide Water, and supported by the Commission. 366 U.S. 902, 81 S.Ct. 1048, 6 L.Ed.2d 202. The questions presented by the petition are whether the courts below erred: (1) in refusing to render a judgment against the Lehman partnership for the $98,686.77 profits they were found to have 'realized' from their 'short-swing' transactions in Tide Water stock, (2) in refusing to render judgment against Thomas for the full $98,686.77 profits, and (3) in refusing to allow interest on the $3,893.41 recovery allowed against Thomas.

Petitioner apparently seeks to have us decide the questions presented as though he had proven the allegations of his complaint that Lehman Brothers actually deputized Thomas to represent its interests as a director of Tide Water, and that it was his advice and counsel based on his special and inside knowledge of Tide Water's affairs that caused Lehman Brothers to buy and sell Tide Water's stock. But the trial court found otherwise and the Court of Appeals affirmed these findings. Inferences could perhaps have been drawn from the evidence to support petitioner's charges, but examination of the record makes it clear to us that the findings of the two courts below were not clearly erroneous. Moreover, we cannot agree with the Commission that the courts' determinations of the disputed factual issues wee conclusions of law rather than findings of fact. We must therefore decide whether Lehman Brothers, Thomas or both have an absolute liability under § 16(b) to pay over all profits made on Lehman's Tide Water stock dealings even though Thomas was not sitting on Tide Water's board to represent Lehman and even though the profits made by the partnership were on its own initiative, independently of any advice or 'inside' knowledge given it by director Thomas.

First. The language of § 16 does not purport to impose its extraordinary liability on any 'person,' 'fiduciary' or not, unless he or it is a 'director,' 'officer' or 'beneficial owner of more than 10 per centum of any class of any equity security * *  * which is registered on a national securities exchange.' Lehman Brothers was neither an officer nor a 10% stockholder of Tide Water, but petitioner and the Commission contend that the Lehman partnership is or should be treated as a director under § 16(b).

(a) Although admittedly not 'literally designated' as one, it is contended that Lehman is a director. No doubt Lehman Brothers, though a partnership, could for purposes of § 16 be a 'director' of Tide Water and function through a deputy, since § 3(a)(9) of the Act provides that "person' means * *  * partnership' and § 3(a)(7) that "director' means any direct or of a corporation or any person performing similar functions with respect to any organization, whether incorporated or unincorporated.' Consequently, Lehman Brothers would be a 'director' of Tide Water, if as petitioner's complaint charged Lehman actually functioned as a director through Thomas, who had been deputized by Lehman to perform a director's duties not for himself but for Lehman. But the findings of the two courts below, which we have accepted, preclude such a holding. It was Thomas, not Lehman Brothers as an entity, that was the director of Tide Water.

(b) It is next argued that the intent of § 3(a)(9) in defining 'person' as including a partnership is to treat a partnership as an inseparable entity. Because Thomas, one member of this inseparable entity, is an 'insider,' it is contended that the whole partnership should be considered the 'insider.' But the obvious intent of § 3(a)(9), as the Commission apparently realizes, is merely to make it clear that a partnership can be treated as an entity under the statute, not that it must be. This affords no reason at all for construing the word 'director' in § 16(b) as though it read 'partnership of which the director is a member.' And the fact that Congress provided in § 3(a) (9) for a partnership to be treated as an entity in its own right likewise offers no support for the argument that Congress wanted a partnership to be subject to all the responsibilities and financial burdens of its members in carrying on their other individual business activities.

(c) Both the petitioner and the Commission contend on policy grounds that the Lehman partnership should be held liable even though it is neither a director, officer, nor a 10% stockholder. Conceding that such an interpretation is not justified by the literal language of § 16(b) which plainly limits liability to directors, officers, and 10% stockholders, it is argued that we should expand § 16(b) to cover partnerships of which a director is a member in order to carry out the congressionally declared 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 * *  * .' Failure to do so, it is argued, will leave a large and unintended loophole in the statute-one 'substantially eliminating the great Wall Street trading firms from the statute's operation.' 286 F.2d, at 799. These firms it is claimed will be able to evade the Act and take advantage of the 'inside' information available to their members as insiders of countless corporations merely by trading 'inside' information among the various partners.

The argument of petitioner and the Commission seems to go so far as to suggest that § 16(b)'s forfeiture of profits should be extended to include all persons realizing 'short swing' profits who either act on the basis of 'inside' information or have the possibility of 'inside' information. One may agree that petitioner and the Commission present persuasive policy arguments that the Act should be broadened in this way to prevent 'the unfair use of information' more effectively than can be accomplished by leaving the Act so as to require forfeiture of profits only by those specifically designated by Congress to suffer those losses. But this very broadening of the categories of persons on whom these liabilities are imposed by the language of § 16(b) was considered and rejected by Congress when it passed the Act. Drafts of provisions that eventually became § 16(b) not only would have made it unlawful for any director, officer or 10% stockholder to disclose any confidential information regarding registered securities, but also would have made all profits received by anyone, 'insider' or not, 'to whom such unlawful disclosure' had been made recoverable by the company.

Not only did Congress refuse to give § 16(b) the content we are now urged to put into it by interpretation, but with knowledge that in 1952 the Second Circuit Court of Appeals refused, in the Rattner case, to apply § 16(b) to Lehman Brothers in circumstances substantially like those here, Congress has left the Act as it was. And so far as the record shows this interpretation of § 16(b) was the view of the Commission until it intervened last year in this case. Indeed in the Rattner case the Court of Appeals relied in part on Commission Rule X-16A-3(b) which required insider-partners to report only the amount of their own holdings and not the amount of holdings by the partnership. While the Commission has since changed this rule to require disclosure of partnership holdings too, its official release explaining the change stated that the new rule was 'not intended as a modification of the principles governing liability for short-swing transactions under Section 16(b) as set forth in the case of Rattner v. Lehman. * *  * ' Congress can and might amend § 16(b) if the Commission would present to it the policy arguments it has presented to us, but we think that Congress is the proper agency to change an interpretation of the Act unbroken since its passage, if the change is to be made.

Second. The petitioner and the Commission contend that Thomas should be required individually to pay to Tide Water the entire $98,686.77 profit Lehman Brothers realized on the ground that under partnership law he is co-owner of the entire undivided amount and has therefore 'realized' it all. '(O)nly by holding the partner-director liable for the entire short-swing profits realized by his firm,' it is urged, can 'an effective prophylactic to the stated statutory policy * *  * be fully enforced.' But liability under § 16(b) is to be determined neither by general partnership law nor by adding to the 'prophylactic' effect Congress itself clearly prescribed in § 16(b). That section leaves no room for judicial doubt that a director is to pay to his company only 'any profit realized by him' from short-swing transactions. (Emphasis added.) It would be nothing but a fiction to say that Thomas 'realized' all the profits earned by the partnership of which he was a member. It was not error to refuse to hold Thomas liable for profits he did not make.

Third. It is contended that both courts below erred in failing to allow interest on the recovery of Thomas' share of the partnership profits. Section 16(b) says nothing about interest one way or the other. This Court has said in a kindred situation that 'interest is not recovered according to a rigid theory of compensation for money withheld, but is given in response to considerations of fairness. It is denied when its exaction would be inequitable.' Board of Commissioners of Jackson County, Kansas v. United States, 308 U.S. 343, 352, 60 S.Ct. 285, 289, 84 L.Ed. 313. Both courts below denied interest here and we cannot say that the denial was either so unfair or so inequitable as to require us to upset it.

Affirmed.

Mr. Justice STEWART took no part in the disposition of this case.

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