The opinion of the court was delivered by: DAWSON
This is an action based upon § 16(b) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78p(b),
in which plaintiff, a shareholder of defendant Tide Water Associated Oil Company (hereinafter called 'Tide Water'), seeks an accounting by defendants other than Tide Water of certain profits realized from alleged purchases and sales of securities within a period of less than six months.
This action was tried by the Court without a jury and the following are the findings of fact of the Court:
At all material times the securities of defendant Tide Water were registered on the New York Stock Exchange. Defendant Joseph A. Thomas was, at the time of the transactions here involved, a director of Tide Water and also a member of a partnership doing business as Lehman Brothers. In 1954 under the partnership agreement Thomas was entitled to receive 4% of the first 47.05% of the profits and 1.85% of the remaining 52.95% of the profits. In 1955 he was entitled to receive 4% of the first 44.05% of the profits, plus 1.85% of the remaining 55.95%.
In 1954, at the age of 76, defendant John Hertz, then a partner of Lehman Brothers, resigned his directorship of Tide Water. After resigning he spoke with Mr. Staples, President of Tide Water, and recommended defendant Thomas as a prospective director of Tide Water. Hertz then asked Thomas whether he would like to become a director of Tide Water and Thomas said that he would. Mr. Thomas was then introduced to Mr. Staples at the home of John Schiff, a friend of Mr. Thomas and a partner of Kuhn, Loeb & Company. Staples and Thomas then met several times, culminating in Staples asking Thomas if he would like to be a director. The invitation to join the Tide Water Board was upon the initiative of Tide Water. Thomas accepted the directorship because of his interest in the oil business and because of the prestige factor in serving on the Board of a large corporation.
Between October 8, 1954 and November 15, 1954, the partnership, Lehman Brothers, purchased in the regular course of its business 50,000 shares of Tide Water common stock at an aggregate cost of $ 1,330,800. The purchase of these shares by Lehman Brothers was made at the direction of the partners constituting the investment committee of the firm, of which Thomas was not a member, and he was not consulted by his partners as to the proposed plan of recapitalization of Tide Water, or with reference to any of the affairs of Tide Water, except to say to them that he believed it was a good company under good management. The Court finds as a fact that the stock of Tide Water was bought and sold by Lehman Brothers without any advice or concurrence of Thomas, or without his knowledge until after the transactions had taken place.
Pursuant to a plan of recapitalization, Lehman Brothers exchanged its 50,000 shares of common stock on December 8, 1954 for 50,000 shares of a new preferred stock issued by Tide Water. Between December 9, 1954 and March 8, 1955, Lehman Brothers sold its 50,000 shares of preferred stock realizing in the aggregate the sum of $ 1,361,186.77. Lehman Brothers' purchases of Tide Water common stock were made upon the basis of two articles published in the Wall Street Journal. The first of these articles appeared on September 17, 1954. In it Tide Water announced that it was considering a proposal to allow shareholders to exchange common stock for a new dividend-paying preferred stock. On October 8, 1954 a second article appeared in the Wall Street Journal which announced that the Tide Water board of directors had approved a plan of recapitalization under which it proposed to create an issue of $ 1.20 dividend cumulative preferred stock and under which plan all holders of its common stock could exchange their common stock on a share-for-share basis for the new dividend-paying cumulative preferred stock.
Beginning on October 8, 1954, after the plan of recapitalization had been approved by the Tide Water board and had become public information, Lehman Brothers, planning to convert Tide Water common into Tide Water preferred, and acting solely on the basis of Tide Water's public announcements and without consulting Thomas with reference thereto, purchased the 50,000 shares of Tide Water common stock which were exchanged for an equal number of shares of the newly issued preferred stock on December 8, 1954. By March 9, 1955 Lehman Brothers had sold all the preferred stock.
Joseph A. Thomas, who had served as a director of Tide Water since August 5, 1954, from the outset completely revealed the firm's transactions just described by filing monthly statements with the Securities and Exchange Commission for October, November and December, 1954 and January, February and March, 1955.
When Thomas learned that his firm had purchased shares of stock in Tide Water, of which he was then a director, he orally indicated to his partners that he wished to be disassociated with the transaction and that he waived his interest in it. According to his testimony he made this statement at a meeting of partners and his partners acquiesced. Later, when the transaction was completed by the sale of the Tide Water stock, a statement was prepared by the Comptroller of the firm showing the profits made by Lehman Brothers on the transaction, but no share of the profits was shown as attributable to Thomas and what otherwise would have been his share of the profits was allocated to the other members of the firm.
Plaintiff, a stockholder of Tide Water, through his attorney, sent a letter on June 29, 1955, pursuant to § 16(b), requesting Tide Water to institute suit against defendants Lehman Brothers and Thomas to recover profits realized in the above transaction. Further, plaintiff allowed more than sixty (60) days to elapse after making the demand, and when Tide Water failed to bring the suit plaintiff brought this action.
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. Judge L. Hand, in a concurring opinion in the case, said that he wished to say nothing as to 'whether, if a firm deputed a partner to represent its interest as a director on the board, the other partners would not be liable.' In this case there was no evidence that the firm of Lehman Brothers deputed Thomas to represent its interest as director on the board of Tide Water; in fact, the interests of Lehman Brothers in Tide Water at the time Thomas was elected to be a director were minimal.
In the Rattner case the partner of Lehman Brothers, who was a director of the corporation whose shares had been involved, realized $ 806.62 profit from the transaction and he paid this money over to the corporation. Thomas has paid nothing over to Tide Water. The Court dismissed the instant action as to Lehman Brothers on the authority of the Rattner decision, leaving open, however, the question as to whether Thomas individually might be liable for his share of the profits on the short swing transaction.
The basic question which this Court must decide on this issue is whether an insider-partner realizes profits within the meaning of § 16(b), and is liable therefor, if he orally waives receipt of his share of the profits made by the partnership in 'short swing' transactions of his corporation's securities.
Section 16(b) of the Securities Exchange Act of 1934 provides that all profits 'realized' by an officer or director of a corporation from short term trading in its securities shall inure to the corporation. The purpose of the statute is to prevent, in short term trading in its securities, the possible unfair use of information which may have been obtained by an officer or director of the corporation by reason of his position. One of the purposes of § 16(b) was to prevent questionable ...