August 17, 1962
BERTHA SILVERMAN, PLAINTIFF-APPELLANT,
ALFONS LANDA, DEFENDANT-APPELLEE, AND FRUEHAUF TRAILER COMPANY, DEFENDANT.
Before CLARK, HINCKS and FRIENDLY, Circuit Judges.
HINCKS, Circuit Judge.
Silverman, a stockholder of Fruehauf Trailer Company, sued Landa, a director of the corporation, for profits realized from his simultaneous writing of puts and calls on Fruehauf stock. Landa, the beneficial owner of 2,000 Fruehauf shares, issued the following options.
1. "Calls" on 1,000 shares at 24 3/8 per share (the then market price), for which he received a premium of $4,000.
2. "Puts" on 500 shares, also at 24 3/8, for which the premium he received was $1,000.
The calls were irrevocable options to buy, under which the optionee could call on Landa to assign 1,000 shares upon demand at any time within the next year and tender of the option price of 24 3/8. The puts were the converse; the optionee, any time within the next year, upon tender of 500 shares could demand payment of the option price.
Silverman brought this derivative action to recover, for the corporation, Landa's profit on these transactions, claiming that the "straddle" (i.e., the matched sale of puts and calls on 500 shares), was a sale and purchase of Fruehauf stock prohibited by § 16(b)*fn1 of the Securities and Exchange Act of 1934, 15 U.S.C.A. § 78p(b), and that the remaining 500-share call was a short sale prohibited by § 16(c).*fn2 Alternatively, it was claimed that the calls for 1,000 shares were short sales and subject to § 16(c). On crossmotions for summary judgment on facts admitted by Landa's affidavits and stipulated, Judge Murphy held that the options did not constitute a purchase and sale within the purview of § 16(b) or sales prohibited by § 16(c) and dismissed the complaint. 200 F.Supp. 193 (S.D.N.Y.1961).
Plaintiff relies first on § 3(a) (13) and (14), 15 U.S.C.A. § 78c(a) (13) and (14), which define "purchase" and "sale" to include contracts to buy and to sell. This court has held that when fixing the six-months' period, "the time when the alleged insider's rights and obligations became fixed [is] controlling in the application of the statute," Blau v. Ogsbury, 210 F.2d 426, 427 (2d Cir. 1954); Falco v. Donner Foundation, Inc., 208 F.2d 600, 40 A.L.R.2d 1340 (2d Cir. 1953). Since Landa became irrevocably bound for the next year to buy and sell at the optionee's pleasure, at the time he issued the options, plaintiff claims that a "sale and purchase" then occurred.
Plaintiff misconceives the nature of an option. By its nature, the option is one-sided; it fixes the obligations, but not the rights, of the issuer. Landa cannot be said to have "sold" or "purchased" Fruehauf stock; should the options lapse unexercised (and in fact the call options did so lapse), no change in his beneficial ownership of the underlying security would occur. And, most importantly, any change would occur at the pleasure of the optionee. Only if both the options had been exercised within their first six months would there have been a "sale and purchase" of the underlying security within the reach of § 16(b). And if, under the sweeping definition of the Act,*fn3 each option (as distinguished from the stock covered by the option) itself is viewed as an "equity security," as the plaintiff contends, he still has no case. For the call was never exercised and the put was exercised not until after the six months' period. Thus there was no sale and purchase of either option within the statutory period. Moreover, Landa who subsequent to the six months' period had paid a brokerage firm to assume his obligation under the put, derived no profit from his dealings with respect to the put.*fn4
The plaintiff argues that this type of transaction offers such possibilities for abuse of inside information, and such temptation to manipulation, that it is clearly within the policy of the Act and should therefore be penalized. Abuse of information is assumed in that if Landaknew that dividends and earnings would remain stable for a year he could write a straddle for a year with confidence that neither option would be exercised. But even this position depends on the wholly untenable assumption that earnings and dividends are the sole factors which control market prices - a proposition contrary to the statute itself, which assumes that, after six months, the likelihood of profits from inside information is too remote to warrant continued restriction in the free play of market transactions.
These underlying assumptions in which the plaintiff indulges seem to us remote, at best. But it is true that "[the] statute is broadly remedial * * intended * * * to squeeze all possible profits" out of abuses, "and thus to establish a standard so high as to prevent any conflict between the selfish interest of a fiduciary officer, director, or stockholder and the faithful performance of his duty," Smolowe v. Delendo Corp., 136 F.2d 231, 239, 148 A.L.R. 300 (2d Cir. 1943), cert. denied 320 U.S. 751, 64 S. Ct. 56, 88 L. Ed. 446 (1943). Notwithstanding, of course the statute did not intend to penalize every speculative transaction; otherwise it would not have categorically limited its impact to purchases and sales occurring within six months. Merely because the options may have been entered into for a speculative purpose, it does not follow that they constitute purchases and sales of the type which were penalized.
The plaintiff claims further that the straddle which Landa issued was an arbitrage brought within the purview of § 16(b) by Rule 16d-1 of the General Rules and Regulations of the Securities and Exchange Commission. Our holding that the options did not constitute a purchase and sale under § 16(b) of course disposes of this claim also.
Alternately, plaintiff contends that the sale of call options is a short sale or a "sale against the box" within the meaning of § 16(c).*fn5 Apparently, the plaintiff argues that a call-option presents the same dangers of insider manipulation as sales short or against the box. Here again our holding that a call-option is not a sale of the underlying security demolishes the plaintiff's contention. But that apart, a call-option does not violate § 16(c). For it falls within the proviso that "no person shall be deemed to have violated this subsection if he proves that notwithstanding the exercise of good faith he was unable to make such delivery within [twenty days]"; obviously one who issues a call-option cannot deliver the underlying security until called on to do so. And plaintiff's asserted dangers seem unreal when we bear in mind that the Commission, under § 9(b), has complete power to ban or regulate all trading in options - a power it has not yet felt compelled to use.
Thus our holding as already indicated makes it unnecessary for us to consider the defendant's contention that § 16(c) of the Act, in that it makes no express provision for a civil recovery in favor of the corporate defendant, precludes recovery.