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ADLER v. KLAWANS

January 29, 1958

Suzanne L. ADLER, on behalf of herself and all of the stockholders of Williams-McWilliams Industries, Inc., similarly situated, Plaintiff,
v.
W. Edward KLAWANS and Williams-McWilliams Industries, Inc., Defendants



The opinion of the court was delivered by: RYAN

Both plaintiff and defendants move for summary judgment in this action; the corporate defendant joins plaintiff in seeking relief against the individual defendant.

Plaintiff sues to require defendant Klawans to account and pay over to the corporate defendant all profits realized by him from his purchase and sale of the corporation's common stock. The facts are not in dispute. Klawans admits on these motions that a corporation in which he has an interest sold stock of the corporate defendant (which is listed on the American Stock Exchange) after Klawans became a director of Williams-McWilliams Industries, Inc. It is conceded that the stock was sold at a profit within six months of its purchase. Klawans asserts, however, that he was not a director of the corporate defendant at the time he purchased the stock.

 The issue before the Court is a narrow one and requires consideration of Section 16(b) of the Securities and Exchange Act of 1934. *fn1" The question to be decided may be stated: Is a director liable to account for and pay over profits on the purchase and sale of stock which was acquired prior to his election as director but sold after he became a director? In other words, must a director be such, both at the time of purchase as well as of sale, to be liable to account under Section 16(b); or is it sufficient if he is not a director when he buys, but is when he sells stock in his corporation.

 Defendant Klawans argues that he is not to be held accountable because he was not a director both at the time of purchase and sale of the securities. He reaches this conclusion by too narrow a reading of Section 16(b) which would defeat the salutary purpose of Congress in enacting the statute.

 The statute is broadly remedial and is designed to prevent any insider, such as a director, from speculating in the corporation's securities by use of inside information. Shaw v. Dreyfus, 2 Cir., 1949, 172 F.2d 140. No case on all fours with this one has been called to the Court's attention, and the Court's independent research has revealed none. The informed text writer, however, would seem to sustain plaintiff's position. Cf. Loss, Securities Regulation p. 578; Rubin and Feldman, Statutory Inhibitions Upon Unfair Use of Corporate Information by Insiders, 95 U. of Pa.Law Review 468.

 From a consideration of the purposes for which the statute was enacted, the Court concludes that plaintiff's view must be sustained. If a director of a corporation could make shortswing profits by selling the corporation's securities within six months of his becoming a director, a loophole would be created defeating the very salutary purpose of Section 16(b). The statute is designed to prevent the use, or likelihood of use, of inside information by a corporate director for personal profit. Here, Klawans admittedly sold the corporation's stock within six months of its purchase, and the sale, at a profit, was made after he became a director. The purposes of the law requiring an accounting and payment of profits 'for the purpose of preventing the unfair use of information' obtained by a director 'by reason of his relationship to the issuer', would be defeated if it did not apply here.

 Defendant Klawans' motion for summary judgment dismissing the complaint is denied. Plaintiff's motion for partial summary judgment is granted with reservation for a trial on the issue of damages to be returned to the corporation.

 Settle order on notice.

 Supplemental Opinion

 On January 29, 1958 we granted partial summary judgment adjudging defendant liable to account for shortswing profits realized in violation of Sec. 16(b) of the S.E.A. of 1934 and reserved for trial the question of the amount of recoverable profits.

 The parties have since stipulated the mathematical accuracy of all possibly relevant transactions thus eliminating all factual issues and leaving for determination only the following questions of law:

 1. Which of these transactions should be considered in computing recoverable profits;

 2. whether dividends are to be included in computing such ...


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