The opinion of the court was delivered by: LEIBELL
Both plaintiff and defendants have moved for a summary judgment. Plaintiff's claim is based on Sec. 16(b) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78p(b).
The Securities and Exchange Commission has filed a brief amicus curiae.
The defendants' notice of motion under Rule 56 Fed.Rules Civ.Proc. 28 U.S.C.A. asks the Court:
'1. To enter summary judgment in favor of defendants Harold D. Hodgkinson, Fred Lazarus, Jr. and Jeffrey L. Lazarus dismissing the action on the ground that there is no genuine issue as to any material facts and that defendants are entitled to a summary judgment as a matter of law; or
'2. To enter summary judgment in favor of defendants Fred Lazarus, Jr. and Jeffrey L. Lazarus as set forth in paragraph 1 and, with respect to defendant Harold D. Hodgkinson, if the Court is not satisfied that said defendant is entitled to summary judgment with respect to asserted liability under Section 16(b) of the Securities Exchange Act of 1934 for profits arising out of the sale of 620 shares of the common stock of Federated Department Stores, Inc. (hereinafter referred to as 'Federated') within six months of his acquisition of common stock of Federated on January 13, 1949, by the exercise of stock warrants issued to him on October 2, 1944, (a) to enter summary judgment in favor of said defendant dismissing the action against him in so far as it relates to asserted liability arising under Section 16(b) of the Securities Exchange Act of 1934 for profits arising out of the sale of 100 shares of the common stock of Federated within six months of his acquisition on December 6, 1949, of common stock of Federated received by him as a stockholder of Wm. Filene's Sons Company upon his surrender od stock in said Wm. Filene's Sons Company in accordance with the Agreement and Plan of Reorganization between Federated and Wm. Filene's Sons Company dated November 7, 1949, on the ground that there is no genuine issue as to any material facts and that said defendant is entitled to said transaction as a matter of law; and (b) with respect to the transaction first above referred to, to enter summary judgment determining the said defendant's liability to be limited to $ 1,820.09 by Rule X-16B-6 of the Securities Exchange Commission.'
The plaintiff's cross motion prays: '* * * for an order pursuant to Rule 56 of the Federal Rules of Civil Procedure, granting a summary judgment in favor of the plaintiff and against the defendants upon the ground that, except as to the amount of damages, there is not genuine issue as to any material fact and that plaintiff is entitled to a judgment as a matter of law, and that plaintiff have such other and different relief as to the Court may seem just and proper, including a reasonable fee for plaintiff's attorney.'
The affidavit of plaintiff's attorney states: 'The defendants' moving papers detail with great particularity all of the material facts involved herein. The sole issue, therefore, is the legal effect of these facts with respect to the liability of the individual defendants under Section 16(b) of the Securities Exchange Act of 1934.'
Therefore we can look to the affidavits submitted by the defendant for a detailed statement of the facts, which are somewhat involved although not disputed.
The affidavit of Mr. Lebor, treasurer of Federated Department Stores, Inc., to which are annexed a number of exhibits points up the issues and also contains important particulars relevant to the issues. I quote from it at some length as follows:
'The first relates only to Mr. Harold D. Hodgkinson. It involves his acquisition, on January 13, 1949, of 3400 shares of common stock of Federated through the exercise of a Warrant Certificate which he had held since October 2, 1944, and his sale within a period of six months before or after January 13, 1949, of 620 shares of the common stock of Federated. This claim raises a question as to the amount of 'profit' realized by Mr. Hodgkinson and, in this connection, as to the valuation of the shares acquired by Mr. Hodgkinson on January 13, 1949, and also as to the effect of a settlement made between Mr. Hodgkinson and Federated in July, 1950.
'The second claim relates to transactions of all three defendants. Late in 1949 Federated and its principal subsidiaries carried out a plan of corporate simplification. This plan had been under consideration for several years. It involved the purchase by Federated of the asset of the subsidiaries, in consideration of the issuance to the subsidiaries of common stock of Federated and the assumption by Federated of the liabilities of the subsidiaries. The subsidiaries thereupon distributed to their stockholders, upon surrender of the latter's stock in the subsidiaries, the stock of Federated which the subsidiaries had received. Each of the three defendants held a small amount of stock in one or more of these subsidiaries. Each of them sold common stock of Federated within six months of their receipt of common stock of Federated as a result of the liquidation of the subsidiaries. This claim raises the question whether defendants made a 'purchase' of the stock of Federated received by them upon their surrender of stock in the subsidiaries.
'I propose to set forth in this affidavit the pertinent facts as to these matters which appear in the records of the corporation or are otherwise known to me.
'I. The Transaction Arising out of Mr. Hodgkinson's 1949 Exercise of Warrants Acquired by Him in 1944.
'The Board of Directors of Federated on June 25, 1940, adopted resolutions recommending that the stockholders authorize the Board of Directors to put into effect a Plan for Issuing Warrants for the Purchase of, or Conversion into, Common stock of Federated to Certain Executives of Subsidiaries of Federated (hereinafter referred to as the 'Warrant Plan'). This Warrant Plan was approved by the stockholders of Federated as a special meeting held August 29, 1940.
'Each warrant was to authorize the holder to purchase one share of common stock of Federated, on or before May 1 of the fifth year after the calendar year in which the warrant was originally issued, at a price equivalent to the average closing price or bid price for the stock for the ten trading days prior to the first day of the calendar month as of which such warrant was originally issued. If the warrant was not exercised, it could be converted, without payment, into one-tenth of a share of common stock of Federated at any time before it expired, but only after two years from its original issue date. This right of conversion was exercisable only while the warrant remained in the possession of the original recipient who was still in the employ of one of the subsidiaries of Federated unless this requirement of employment at the time of conversation was waived by Federated.
'On September 26, 1940, the Board of Directors of Federated adopted the Warrant Plan which had been approved by the stockholders at their special meeting on August 29, 1940, and authorized the issuance of 25,000 warrants for the year 1940 for distribution among major executives of the four principal subsidiaries above named and of their subsidiaries. 10,000 warrants were divided among the four principal subsidiaries equally, and 15,000 warrants were distributed among said subsidiaries in proportion to their earnings. Similar action was taken by Federated Board of Directors in each of the years 1941-1944, inclusive, except that in these years 8,000 warrants were divided among the four subsidiaries equally and 17,000 warrants were distributed in proportion to the subsidiaries' earnings.
'On June 25, 1941, the Board of Directors of Federated adopted resolutions recommending to the stockholders certain amendments of the Warrant Plan. The most important of these amendments was as follows: The Plan adopted in 1940 had provided that 'No Warrant Certificate may be transferred except as a whole; nor until after the expiration of one year from its original issue date'; and had also provided that the warrants were to 'contain such provisions as your Board of Directors determines insuring that the acquisition thereof or of shares thereunder is for the purpose of investment and that the holder does not intend redistribution thereof.' The directors recommended the striking out of the latter provision and the substitution for the former of a provision reading as follows: 'No Warrant Certificate may be transferred until after the expiration of one year from the date as of which it is originally issued.' These amendments were approved by the stockholders at a special meeting held on July 23, 1941.
'The common stock of Federated issuable upon the exercise of the warrants was listed on the New York Stock Exchange and was registered under the Securities Exchange Act of 1934 (15 U.S.C.A. § 78a et seq.). Both the warrants and the common stock issuable upon the exercise thereof were registered with the Securities and Exchange Commission under the Securities Act of 1933 (15 U.S.C.A. § 77a et seq.). The prospectus dated September 6, 1943, which included warrants of the Series issued to Mr. Hodgkinson on October 2, 1944, stated that the consideration for such warrants 'Will be services of certain executives of subsidiaries of Federated to the subsidiaries.' * * *
'In each of the five years during which the Warrant Plan was in effect, Mr. Hodgkinson was one of the executives to whom warrants were issued pursuant to authority conferred by Federated's Board of Directors. During the life of the plan there were issued to Mr. Hodgkinson, out of warrants which had been allocated to Filine's, Warrant Certificates as follows:
Date of No. of Exercise
"Series Actual issue Warrants Price
//////-- ///////////-- //////-- //// ///--
(before split-up) (before split-up)
1940 9-02-40 3,000 $ 18.7125
1941 5-01-41 2,500 19.1375
1942 5-01-42 2,500 12.275
1943 1-27-44 1,500 19.825
1944 10-2-44 1,700 23.075
* * * * * *
'In 1946 Federated reclassified its stock so that two shares of stock were issued for each share theretofore outstanding. Thereafter, the Warrant Certificate issued to Mr. Hodgkinson on October 2, 1944, entitled him to purchase 3400 shares of the common ...