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Ellerin v. Massachusetts Mutual Life Insurance Co.

decided: September 8, 1959.


Before Medina and Hincks, Circuit Judges, and Mathes, District Judge.*fn*

Author: Medina

MEDINA, Circuit Judge.

Plaintiff, Ellerin, a stockholder of The General Tire & Rubber Company, is seeking on behalf of the company under Section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C.A. ยง 78p(b), to recover certain profits realized by the defendant, Massachusetts Mutual Life Insurance Company, from its purchases and sales of General Tire common stock within a period of less than six months. Ellerin appeals from an order of the District Court denying his motion for a summary judgment, granting a similar motion of Massachusetts Mutual and dismissing his complaint. The SEC, as amicus curiae, has filed a brief supporting Ellerin's position and appellees argue for affirmance, General Tire seeking to protect its interests in series financing.

This is the first time a court has been asked to find that each series in an issue of preferred stock is a separate "class," and that the owner of more than 10% of the stock of a particular series is an "insider" and liable for shortswing profits under Section 16(b). This contention is supported with considerable resourcefulness by Ellerin and by the SEC who advance a variety of arguments, the general purport of which is that the interpretation they would have us adopt would tend to further the underlying purposes of the statute and curb abuses by "officers, directors and principal security holders." They also claim that the literal wording of Section 16 as well as the overall pattern of the Act and the SEC Rules and Regulations substantiate their view. Massachusetts Mutual in effect tells us that "class" means "class" and that a "series" is not a "class" of stock; and General Tire argues to the same effect. It is clear that the authorization of the issue of stock and the transactions of the parties to this litigation were undertaken in the ordinary course of business and without any thought that Section 16(b) was in any way involved.

It is our view that the wording of the statute is clear on its face and that no amount of liberality in the interpretation of Section 16 would justify us in holding that a separate series of an issue of preferred stock was intended by the Congress to be encompassed by the word "class." We shall review the facts and the principal contentions of Ellerin and the SEC, as well as those of Massachusetts Mutual and General Tire, but we think it proper to say at the outset that the true guide to what is meant by an "insider" must be found in the definition in the statute itself, and that any attempt to substitute a different evaluation based either upon a close examination of the terms and conditions of particular issues, which would fluctuate and require reappraisal according to the facts of each case, or upon far-fetched inferences drawn from rules and regulations of the SEC not in pari materia can only result in uncertainty and confusion in an area of the law where the statute contains internal evidence that the Congress intended to establish a certain and selfsufficient test.

The facts have been stipulated. General Tire is authorized to issue in series 150,000 shares of Cumulative Preferred Stock of $100 par value. Two such series have been issued. The first designated 4 1/4% Cumulative Preferred was registered under the Securities Exchange Act on April 5, 1945 and listed on the New York Stock Exchange on April 26, 1945. The second, designated 3 3/4% Cumulative Preferred Stock, was registered under the Act June 4, 1946 and listed on the New York Stock Exchange July 3, 1946. General Tire issued 75,000 of the 4 1/4% preferred and 25,000 of the 3 3/4% preferred.

Between November 1, 1954 and February 28, 1955 Massachusetts Mutual was the owner of 2,500 shares of the 3 3/4% Cumulative Preferred. During those times there were 18,605 shares of the 3 3/4% series and 52,488 of the 4 1/4% Cumulative Preferred left issued, outstanding and registered on the New York Stock Exchange. And it was during this interval that Massachusetts Mutual purchased and sold 7,143 shares of General Tire common stock resulting in a profit of $22,006.90.

Section 16(b) provides:

"For the 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, any profit realized by him from any purchase and sale, or any sale and purchase, of any equity security of such issuer (other than an exempted security) within any period of less than six months, * * shall inure to and be recoverable by the issuer, irrespective of any intention on the part of such beneficial owner, director, or officer in entering into such transaction of holding the security purchased or of not repurchasing the security sold for a period exceeding six months. * *" (Emphasis supplied.)

The term "such beneficial owner" clearly refers to Section 16(a) which provides:

"Every person who is directly or indirectly the beneficial owner of more than 10 per centum of any class of any equity security (other than an exempted security) which is registered on a national securities exchange, or who is a director or an officer of the issuer of such security, shall file, at the time of the registration of such security or within ten days after he becomes such beneficial owner, director, or officer, a statement with the exchange (and a duplicate original thereof with the Commission) of the amount of all equity securities of such issuer of which he is the beneficial owner, * * *" (Emphasis supplied.)

Ellerin asserts that Massachusetts Mutual is such "beneficial owner" because it owned over ten per cent of the 3 3/4% Cumulative Preferred stock outstanding at the time of its dealings in General Tire common. Massachusetts Mutual contends that all the Cumulative Preferred stock must be considered together for the purposes of determining a "class" of stock within the meaning of Section 16(a) and that if Massachusetts Mutual's holdings are compared to the aggregate of the outstanding shares of both the 3 3/4% Cumulative Preferred and the 4 1/4% Cumulative Preferred, the requisite ten per cent ownership necessary for treatment as an insider is lacking.

Massachusetts Mutual contends, and the court below held, that each of the two series was a separate series within the "class" of Cumulative Preferred stock. Ellerin asserts that each of these two series is a "class" in itself within the meaning of the Act notwithstanding any labels attached thereto by General Tire in its articles of incorporation.

The differences and similarities between the two series of stock were described in great detail by Judge Herlands in his opinion at 167 F.Supp. 71, 76-78, and will be only briefly summarized here. The chief differences upon which Ellerin rests his claim for individual class characterization are in the following respects: (1) annual dividend rates; (2) redemption prices, via sinking fund or otherwise; (3) sinking fund accumulation rates; (4) dates of issuance, registration, listing and commencement of the payment of dividends; and (5) voting ...

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