Waterman, Kaufman and Hays, Circuit Judges.
The plaintiff-appellee-appellant, Isadore Blau, a stockholder of Air-Way Industries, Inc. (Air-Way), a Delaware corporation, commenced this action pursuant to Section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p (b), to recover "short-swing" profits allegedly realized by the defendants-appellants-appellees, Edward Lamb (Lamb) and Edward Lamb Enterprises, Inc. (Enterprises), an Ohio corporation, as a result of their respective short-term dealings in the convertible preferred stock and common stock of Air-Way.*fn1 Jurisdiction and venue in the district court were proper under Section 27 of the Act, 15 U.S.C. § 78aa. Blau v. Lamb, 20 F.R.D. 411 (SDNY 1957). See 2 Loss, Securities Regulation 1044-45 (2d ed. 1961).
For reasons to be considered hereinafter the court below entered a final judgment on June 5, 1965, holding Lamb liable to Air-Way for "short-swing" profits amounting to $206,356.45 and Lamb and Enterprises jointly and severally liable to Air-Way for "short-swing" profits amounting to $1,091,063.31. Blau v. Lamb, 242 F. Supp. 151 (SDNY 1965). Lamb and Enterprises have appealed on the ground that the transactions in which they engaged did not involve "purchases" or "sales" or, in any event, that the transactions did not result in any "profit realized" within the meanings of those three terms as the terms are used in Section 16(b) of the Act. They contend further that even if all the relevant transactions are within the scope of Section 16(b) the court below grossly overvalued the "profit realized." Blau has appealed on the grounds that the lower court undervalued the "profit realized," that certain cash dividends for which recovery was denied are recoverable, and that interest should have been added to the amount held recoverable. The Securities and Exchange Commission was granted permission to submit a brief, amicus curiae, in order to express its views upon certain of the issues presented by the appeal of Lamb and Enterprises.
I. The Factual Background.
The present lawsuit arises out of a complicated series of transactions in the Convertible Preferred Stock and the common stock of Air-Way, carried on by Enterprises and Lamb during 1955. We set forth this series of transactions chronologically before turning to consider the question of Section 16(b)'s application to any of them.
In June of 1955 and throughout the relevant period Lamb was an officer and director of Air-Way. Enterprises, which was a personal holding company for Lamb interests solely owned by Lamb, members of his immediate family, and corporations controlled by them, was the beneficial owner of more than 10 per cent of the outstanding common stock of Air-Way.*fn2 Lamb, members of his family, and certain corporations controlled by them were sufficiently in control of Air-Way to have elected 5 of that company's 7 directors. At all relevant times the common stock of Air-Way was registered for trading on the American Stock Exchange and was actively traded. Also, Enterprises and Lamb, together with members of Lamb's family, owned approximately 97 per cent of the outstanding shares of Lamb Industries, Inc. (Industries), an Ohio corporation they completely controlled. None of Industries' shares were ever listed on a national securities exchange.
In June 1955 the "Lamb interests" decided to merge Industries into Air-Way. On June 6, shortly before the stock-for-stock merger was finally approved by the Air-Way Board, Industries transferred to Enterprises 68,100 shares of Air-Way Common, which Industries had apparently held for more than six months, plus other assets, aggregating $227,850. Industries received in exchange 40,002 shares of Industries (its own) Common Stock plus the assumption by Enterprises of a $581,250 note that Industries had given to a bank.
On June 9, 1955, the Air-Way Board approved an offer to the shareholders of Industries to exchange one share of newly-created 5 per cent Cumulative Convertible Preferred Stock of Air-Way (Air-Way Preferred) for each five shares of Industries Common. The par value of the Air-Way Preferred was $50, it had a liquidation value of $52.50 plus accumulated dividends, and was convertible at any time into Air-Way Common at a ratio of 3 1/2 shares of Air-Way Common for each share of Air-Way Preferred. In the event of any stock dividend, or split-up by reclassification, or by any other method, of the shares of Air-Way Common, the number of shares into which the shares of Air-Way Preferred were convertible would be appropriately adjusted. Each share of Air-Way Preferred carried a dividend of $2.50 a share per annum and was entitled to one vote.
From July through September 1955, in accordance with Air-Way's June 9 offer, Lamb exchanged 26,300 shares of Industries Common for 5,260 shares of Air-Way Preferred, and Enterprises exchanged 172,945 shares of Industries Common for 34,589 shares of Air-Way Preferred. On September 13, 1955 Enterprises converted its recently-acquired 34,589 shares of Air-Way Preferred into 121,061 shares of Air-Way Common. On September 13, 14, and 15, Lamb converted his recently-acquired 5,260 shares of Air-Way Preferred into 18,410 shares of Air-Way Common.
On September 12, 1955 Air-Way declared a 100 per cent stock dividend on its Common, in the nature of a stock-split, payable on October 14, 1955, to stockholders of record on September 29, 1955. The conversions by Lamb and Enterprises occurred on September 13, 14, and 15, 1955, after the two-for-one stock dividend had been declared, and after the news of this declaration had been made public. On September 19, 1955, four days after the last conversion had occurred, Air-Way declared a cash dividend of 15 cents per share on its Common, payable November 1, 1955, to stockholders of record on October 24, 1955.*fn3
On October 6, 1955 Enterprises privately sold 10,500 shares of Air-Way Common as constituted prior to the stock split to Industries, on October 13, 1955 Enterprises privately sold 6,500 shares of new Air-Way Common -- that is, Air-Way Common after the 100 per cent stock dividend in the nature of a stock split -- to the Edward Lamb Foundation, Inc., a charitable foundation, created and controlled by Lamb.*fn4 Other sales by Enterprises during the relevant period are not at issue on appeal.*fn5
Certain facts that do not conveniently fit the foregoing chronological review of the relevant transactions are nevertheless important and are best stated now. On June 30, 1955 Air-Way declared a 30 cents per share dividend on the Air-Way Common then outstanding. Throughout the period relevant to this litigation Lamb and Enterprises, on various occasions, purchased and sold blocks of Air-Way Common on the American Stock Exchange. Lamb purchased 300 shares of Air-Way Common between March 18 and March 22, another 100 shares on May 13, and 200 more shares between September 2 and September 8. On September 15, on the American Stock Exchange, he sold 300 shares of Air-Way Common, as constituted prior to the 100 per cent stock dividend. This was the only relevant transaction in which Lamb disposed of shares of Air-Way Common to a purchaser other than a corporation controlled by him. Lamb also purchased on a "when-issued" basis 100 shares of new Air-Way Common on October 6 on the American Stock Exchange. Between May 2, 1955 and December 28, 1956, Enterprises purchased 1,700 shares of old Air-Way Common and 5,200 shares of new Air-Way Common.
II. Purpose and Scope of Section 16(b).
Section 2 of the Securities Exchange Act of 1934, 15 U.S.C. § 78b, states that the Act was designed, inter alia, "to insure the maintenance of fair and honest markets" in securities transactions. Section 16(b) helps to implement this overriding purpose by making it unprofitable for "insiders"*fn6 to engage in short-swing speculation. "Prior to the enactment of the Securities Exchange Act," the SEC has said, "profits from 'sure thing' speculation in the stocks of their corporations were more or less generally accepted by the financial community as part of the emolument for serving as a corporate officer or director notwithstanding the flagrantly inequitable character of such trading." 10 SEC Ann.Rep. 50 (1944). Among the inequitable short-swing transactions that prompted the enactment of Section 16(b) were transactions in which insiders, with advance knowledge of information that would produce a rise in the market price of a stock of their company, bought stock at the then current market prices and sold it when publication of the information had caused the anticipated rise to occur. And, too, there were transactions in which insiders with advance knowledge of facts that would depress the market price sold their stock at the then current prices and purchased stock ...