The opinion of the court was delivered by: COOPER
This action is based upon § 16(b) of the Securities Exchange Act, 15 U.S.C. § 78p(b).
a shareholder of defendant Sperry Rand Corporation
(hereinafter Sperry) seeks recovery, on behalf of Sperry, of profits realized by defendant Martin Marietta Corporation (hereinafter Martin) from alleged purchases and sales of Sperry common stock within a period of less than six months. Sperry's common stock was, at all relevant times, registered on the New York Stock Exchange, and is not now, nor has it ever been, an "exempted security" within the meaning of § 3(a) (12) of the Securities Exchange Act, 15 U.S.C. § 78c(a) (12).
Pursuant to § 16(b), plaintiff requested that Sperry institute suit against Martin to recover the profits realized from the alleged transactions. Plaintiff's request was refused in a letter from Sperry's general counsel to plaintiff's attorney (Ex. 8).
Martin commenced purchasing Sperry common stock on December 14, 1962 and continued such purchases throughout the period up to and including July 24, 1963; during that time, Martin accumulated 801,300 shares of stock. On March 27, 1963, Sperry's Board of Directors resolved that George M. Bunker, Martin's president and chief executive officer, be invited to membership on the Board to fill the vacancy created by the resignation of Harry Landsiedel. Bunker informed Martin's Board of Directors, at its April 25th meeting, of Sperry's invitation, and asked their permission to serve; it was the consensus of the Board that he accept the invitation. On April 29, 1963, Bunker was elected a director of Sperry, and he retained such directorship until he tendered his resignation on August 1, 1963, effective as of that date. During the period commencing August 29, 1963 and terminating September 6, 1963, Martin sold all Sperry shares held by it.
Plaintiff stipulated that she makes no claim with respect to such purchases by Martin prior to March 1, 1963; purchases between March 1, 1963 and July 24, 1963 total 229,300 shares.
Plaintiff has asked this Court to reconsider its rulings denying admissibility of two exhibits. Exhibit 1 for identification is an anonymous memorandum, taken from Martin's files, entitled "NOTES ON EXPLORATORY INVESTMENT IN SPERRY RAND CORPORATION." Plaintiff offers this exhibit for the express purpose of showing that "Martin had confidential information about Sperry's affairs,"
and for the ultimate purpose of impeaching Bunker's testimony that he did not disclose inside information about Sperry to his associates at Martin.
Upon reconsideration, we find this exhibit admissible. There is sufficient circumstantial proof to establish its authenticity as a document prepared by a person in Martin's employ; defendant Martin has stipulated that the exhibit was furnished from its files. See United States v. Imperial Chemical Industries, 100 F. Supp. 504, 513 (S.D.N.Y. 1951). Accordingly, we admit Exhibit 1 into evidence.
The weight to be accorded it is another matter.
We disagree with plaintiff's assertion, for we do not find the information contained in this memorandum necessarily "confidential;" portions of the memorandum contain information readily available to the investing public, while other portions contain statements which may be nothing more than one man's opinion. Additionally, the evidence contradicts plaintiff's contention that such information could only be obtained from a corporate insider, namely, Bunker. Therefore, we give little weight to Exhibit 1.
Exhibit 4 for identification is a magazine article entitled "The Millions Under Martin Marietta's Mattress," which appeared in the November, 1963 edition of Fortune. Plaintiff, while admitting the exhibit is hearsay, contends that "one statement" appearing therein constitutes an admission by Bunker, and is therefore admissible as an exception to the hearsay rule.
The article's author, Charles J. V. Murphy, interviewed Bunker on two occasions; during these interviews, Murphy had a stenographer present to take notes. The statement which presently concerns us is set off by quotation marks ostensibly to indicate that the words used originated with Bunker.
Bunker testified that he did not recall making the statement here in question, although he did recall reading the article "at the time it was published." Plaintiff concedes that "the fact that the statement is attributed to Bunker in a magazine article is insufficient."
Plaintiff contends, however, that Bunker, after reading the article, never informed the author or an officer or employee of Fortune magazine that he did not make the statement attributed to him; therefore his silence constitutes an admission that he did make it. While the evidence supports the contention that Bunker never denied making the statement, we find unacceptable the conclusion plaintiff would have us draw. Accordingly, we sustain the objection to Exhibit 4 for identification.
The preamble of § 16(b) sets forth the congressional intent underlying its enactment: "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. . . ." To effectuate such purpose, the imposition of liability is based upon an objective measure of proof,
i.e., regardless of whether or not inside information was actually used. On the other hand, despite proof of the unfair use of such information, liability is imposed only on "insiders," i.e., 10% stockholders, officers, and directors, as those terms are defined in the statute and in the rules and regulations of the Securities and Exchange Commission.
Martin's realization of a profit from its purchases and sales of Sperry common stock, within a period of less than six months, is clearly evident. There remains for determination the issue of whether Martin was an "insider." This issue is narrowed by our finding that Martin was neither a 10% stockholder nor an officer of Sperry. We must determine whether Martin was a director of Sperry during the period here relevant.
Section 3(a) (9) of the Securities Exchange Act, 15 U.S.C. § 78c(a) (9), provides that "the term 'person' means . . . a corporation . . .," and § 3(a) (7), 15 U.S.C. § 78c(a) (7), that "'director' means any director of a corporation or any person performing similar functions with respect to any organization, whether incorporated or unincorporated." Thus, although not expressly designated as such, for purposes of § 16 a corporation could be a "director" and function through a deputy of its choosing. See Marquette Cement Mfg. Co. v. Andreas, 239 F. Supp. 962 (S.D.N.Y. 1965); cf. Blau v. Lehman, 368 U.S. 403, 7 L. Ed. 2d 403, 82 S. Ct. 451 (1962).
That a corporation could be a director leads to the inquiry of the standard to be applied in determining such status. The Supreme Court's dictum in Blau, that "Lehman Brothers would be a 'director' of Tide Water, if . . . Lehman actually functioned as a director through Thomas, who had been deputized by Lehman to perform a director's duties not for himself but for Lehman,"
is likewise applicable when it is a corporation which is sought to be brought within § 16(b)'s definition of "director."
Plaintiff has the burden of convincing this Court that Martin deputized Bunker to represent its interests as a director on Sperry's Board.
While liability fixed by § 16(b) is imposed on directors according to an objective standard of proof, resort must be had to a subjective standard
to determine whether a corporation is a "director." The existence of deputization is a "question of fact to be settled case by case;"
the realization that, in many instances, the evidence necessary for such a showing is within the knowledge and control of the defendant corporation does not alleviate plaintiff's burden. In the absence of proof of formal deputization by the corporation, plaintiff must rely on circumstantial evidence and the inferences to be drawn therefrom.
In the spring of 1962, Norman B. Frost, a Sperry director and its general counsel at all times here relevant, and Harry F. Vickers, president, chief executive officer and director of Sperry, had a series of talks concerning possible new directors in anticipation of three vacancies on Sperry's nine man Board. At Vickers' request, Frost submitted a list of names of men he believed would be good directors; included was Martin's president and chief executive officer, George M. Bunker. In late September or early October, 1962, Frost inquired of Bunker whether he would so serve if invited. Bunker replied that he had large responsibilities and did not think he would have the time. We have it then that Sperry first expressed this interest in Bunker about two and a half months prior to December 14, 1962, the date on which Martin commenced purchasing Sperry stock.
On February 1, 1963, Harry Landsiedel resigned his Sperry directorship.
Later that month, Frost again approached Bunker about joining Sperry's Board. Bunker again replied that he was too busy, but he "left the gate open," so that Frost felt "free to go back and ask him again."
By February 1, 1963, Martin owned well over 400,000 shares of Sperry common stock, and its ownership increased substantially during that month. We note, however, Bunker's apparent reluctance to become a Sperry director when approached in February.
Sperry's Board of Directors, on March 27, 1963, duly adopted the following resolution: "RESOLVED, that Mr. George M. Bunker be invited to membership on this Board of Directors to fill the vacancy thereon." Around the middle of April, Frost informed Bunker of the Board's resolution and indicated that a formal invitation would be extended by Vickers;
Frost urged Bunker to agree to become a director. Whereupon Bunker informed Frost that Martin owned in excess of 700,000 shares of Sperry stock, and indicated that he would give the matter consideration and let Frost know. During the next few days, Bunker spoke with Vickers, and received a number of telephone calls from other Sperry people who ...