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STEINBERG v. SHARPE

December 21, 1950

STEINBERG et al.
v.
SHARPE et al.



The opinion of the court was delivered by: MEDINA

This matter is before me on cross-motions for summary judgment by the plaintiff against the defendant W. J. Reuscher and by the defendant Reuscher against the plaintiff. There are no disputed issues of fact and the sole question is whether defendant Reuscher enjoyed any profit as a result of the purchase and sale within six months of securities issued by the corporation of which he is an officer. The action is brought pursuant to Sec. 16(b) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78p(b).

The securities were purchased pursuant to the provisions of two option agreements between Reuscher and the corporation. The first agreement was entered on November 16, 1944. Reuscher was granted an option to purchase 400 shares of stock at any time on or after November 16, 1945 and on or before November 16, 1948 at a price of $ 8.75 per share, the then market price; two additional options for the same amounts of stock were granted, one exercisable between November 16, 1946 and November 16, 1948 and the other between November 16, 1947 and November 16, 1948. An option for an additional 400 shares, exercisable at any time on or after November 16, 1947 and on or before November 16, 1948 was granted, on the condition that the defendant had not sold any of the shares he may have purchased pursuant to the earlier options. None of the options were exercisable in the event that the defendant was discharged or resigned, except for a period of thirty days after such resignation or discharge; during that thirty-day period he might exercise any options which had accrued as of the date of resignation or discharge.

 The second option agreement, made on August 18, 1945, is, with the following exceptions, the same as the first: the exercise price was $ 13.38 per share, the market price at the time the agreement was entered; the accrual dates were August 18 of the years 1946, 1947 and 1948, and the date by which the options were required to be exercised was August 18, 1949; and the number of shares in each of the four blocks was 225.

 On January 2, 1948 the defendant purchased 1,025 shares of stock from the corporation by exercising the options available to him, 800 shares under the first agreement and 225 under the second. The options under the first agreement which were exercised had accrued on November 16, 1947, on which date the market value of the stock was $ 24.75 per share. The options under the second agreement which were exercised accrued on August 18, 1947, on which date the market value of the stock was $ 20.75 per share. The market value of the stock on the date of exercise, January 2, 1948, was $ 21.50 per share.

 Reuscher sold 1,200 shares between December 23, 1947 and January 9, 1948 at the following prices:

 December 23, 1947- 200 shares- $ 21.25 per share

 January 2, 1948- 300 shares- $ 21.50 per share

 January 5, 1948- 200 shares- $ 21.50 per share

 January 9, 1948- 100 shares- $ 21.125 per share

 January 9, 1948- 400 shares- $ 21.00 per share

 Whether or not any 'profit' within the meaning of Sec. 16 (b) of the Securities Exchange Act of 1934 was realized will turn on the cost of the securities. Defendant Reuscher urges that the proper figure to be used in this computation is the fair market price of the security on the date of its acquisition, citing Truncale v. Blumberg, D.C.S.D.N.Y. 1950, 88 F.Supp. 677, affirmed sub nom Truncale v. Scully, 2 Cir. 1950, 182 F.2d 1021.

 That case dealt with the sale of stock warrants obtained under an employment agreement. I can discern no tenable distinction between that agreement and those before me on the ground urged by plaintiff, that the Truncale case involved the grant of stock options as 'compensation' while those involved in this case are properly denominated as 'incentive.' All compensation is an incentive; in both cases the consideration for the stock options was the employee's remaining in the employ of the corporation.

 Nevertheless, it would be improper to use here the formula applied in the Truncale case. There stock warrants were issued to employees of a corporation on a date which was fixed by agreement entered into long prior to that date, and the warrants were subsequently sold. Judge Rifkind adopted the criterion he did in order to determine the amount of compensation which the defendants received in the form of the stock warrants. Thus he said: 'The effect of such a measurement is to treat the transaction as if, on December 12, 1945, the corporation had paid to defendants an amount of money sufficient to purchase such warrants and defendants had thereupon made the purchases (of the warrants).' Truncale v. Blumberg, supra, 88 F.Supp.at page 679.

 But in this case the date of acquisition of the security was selected by the defendant, not fixed by an employment agreement. As a result, if the cost of the security were deemed to be its fair market value on the date of its acquisition, an officer could utilize such grants as a means to circumvent the provisions and subvert the purposes of Sec. 16(b), merely by deferring the exercise of options because he anticipated an increase in the value of the stock on the basis of some inside information; when that increase had occurred, he could exercise the option and sell the stock obtained thereby while the market for the stock remained high. If 'cost' equalled market value at ...


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