decided: January 11, 1972.
RELIANCE ELECTRIC CO
EMERSON ELECTRIC CO.
CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE EIGHTH CIRCUIT.
Stewart, J., delivered the opinion of the Court, in which Burger, C. J., and Marshall and Blackmun, JJ., joined. Douglas, J., filed a dissenting opinion, in which Brennan and White, JJ., joined, post, p. 427. Powell and Rehnquist, JJ., took no part in the consideration or decision of the case.
[ 404 U.S. Page 419]
MR. JUSTICE STEWART delivered the opinion of the Court.
Section 16 (b) of the Securities Exchange Act of 1934, 48 Stat. 896, 15 U. S. C. § 78p (b), provides, among other things, that a corporation may recover for itself the profits realized by an owner of more than 10% of its shares from a purchase and sale of its stock within any six-month period, provided that the owner held more than 10% "both at the time of the purchase and sale."*fn1 In this case, the respondent, the owner of 13.2% of a corporation's shares, disposed of its entire holdings in two sales, both of them within six months of purchase. The
[ 404 U.S. Page 420]
first sale reduced the respondent's holdings to 9.96%, and the second disposed of the remainder. The question presented is whether the profits derived from the second sale are recoverable by the Corporation under § 16 (b). We hold that they are not.
On June 16, 1967, the respondent, Emerson Electric Co., acquired 13.2% of the outstanding common stock of Dodge Manufacturing Co., pursuant to a tender offer made in an unsuccessful attempt to take over Dodge. The purchase price for this stock was $63 per share. Shortly thereafter, the shareholders of Dodge approved a merger with the petitioner, Reliance Electric Co. Faced with the certain failure of any further attempt to take over Dodge, and with the prospect of being forced to exchange its Dodge shares for stock in the merged corporation in the near future,*fn2 Emerson, following a plan outlined by its general counsel, decided to dispose of enough shares to bring its holdings below 10%, in order to immunize the disposal of the remainder of its shares from liability under § 16 (b). Pursuant to counsel's recommendation, Emerson on August 28 sold 37,000 shares of Dodge common stock to a brokerage house at $68 per share. This sale reduced Emerson's holdings in Dodge to 9.96% of the outstanding common stock. The remaining shares were then sold to Dodge at $69 per share on September 11.
After a demand on it by Reliance for the profits realized on both sales, Emerson filed this action seeking a declaratory judgment as to its liability under § 16 (b). Emerson first claimed that it was not liable at all,
[ 404 U.S. Page 421]
because it was not a 10% owner at the time of the purchase of the Dodge shares. The District Court disagreed, holding that a purchase of stock falls within § 16 (b) where the purchaser becomes a 10% owner by virtue of the purchase. The Court of Appeals affirmed this holding, and Emerson did not cross-petition for certiorari. Thus that question is not before us.
Emerson alternatively argued to the District Court that, assuming it was a 10% stockholder at the time of the purchase, it was liable only for the profits on the August 28 sale of 37,000 shares, because after that time it was no longer a 10% owner within the meaning of § 16 (b). After trial on the issue of liability alone, the District Court held Emerson liable for the entire amount of its profits. The court found that Emerson's sales of Dodge stock were "effected pursuant to a single predetermined plan of disposition with the overall intent and purpose of avoiding Section 16 (b) liability," and construed the term "time of . . . sale" to include "the entire period during which a series of related transactions take place pursuant to a plan by which a 10% beneficial owner disposes of his stock holdings" 306 F.Supp. 588, 592.
On an interlocutory appeal under 28 U. S. C. § 1292 (b), the Court of Appeals upheld the finding that Emerson "split" its sale of Dodge stock simply in order to avoid most of its potential liability under § 16 (b), but it held this fact irrelevant under the statute so long as the two sales are "not legally tied to each other and [are] made at different times to different buyers . . . ." 434 F.2d 918, 926. Accordingly, the Court of Appeals reversed the District Court's judgment as to Emerson's liability for its profits on the September 11 sale, and remanded for a determination of the amount of Emerson's liability on the August 28 sale. Reliance filed a petition for certiorari, which we granted
[ 404 U.S. Page 422]
in order to consider an unresolved question under an important federal statute. 401 U.S. 1008.
The history and purpose of § 16 (b) have been exhaustively reviewed by federal courts on several occasions since its enactment in 1934. See, e. g., Smolowe v. Delendo Corp., 136 F.2d 231; Adler v. Klawans, 267 F.2d 840; Blau v. Max Factor & Co., 342 F.2d 304. Those courts have recognized that the only method Congress deemed effective to curb the evils of insider trading was a flat rule taking the profits out of a class of transactions in which the possibility of abuse was believed to be intolerably great. As one court observed:
"In order to achieve its goals, Congress chose a relatively arbitrary rule capable of easy administration. The objective standard of Section 16 (b) imposes strict liability upon substantially all transactions occurring within the statutory time period, regardless of the intent of the insider or the existence of actual speculation. This approach maximized the ability of the rule to eradicate speculative abuses by reducing difficulties in proof. Such arbitrary and sweeping coverage was deemed necessary to insure the optimum prophylactic effect." Bershad v. McDonough, 428 F.2d 693, 696.
Thus Congress did not reach every transaction in which an investor actually relies on inside information. A person avoids liability if he does not meet the statutory definition of an "insider," or if he sells more than six months after purchase. Liability cannot be imposed simply because the investor structured his transaction with the intent of avoiding liability under § 16 (b). The question is, rather, whether the method used to "avoid" liability is one permitted by the statute.
[ 404 U.S. Page 423]
Among the "objective standards" contained in § 16 (b) is the requirement that a 10% owner be such "both at the time of the purchase and sale . . . of the security involved." Read literally, this language clearly contemplates that a statutory insider might sell enough shares to bring his holdings below 10%, and later -- but still within six months -- sell additional shares free from liability under the statute. Indeed, commentators on the securities laws have recommended this exact procedure for a 10% owner who, like Emerson, wishes to dispose of his holdings within six months of their purchase.*fn3
Under the approach urged by Reliance, and adopted by the District Court, the apparent immunity of profits derived from Emerson's second sale is lost where the two sales, though independent in every other respect, are "interrelated parts of a single plan." 306 F.Supp., at 592. But a "plan" to sell that is conceived within six months of purchase clearly would not fall within § 16 (b) if the sale were made after the six months had expired, and we see no basis in the statute for a different result where the 10% requirement is involved rather than the six-month limitation.
The dissenting opinion, post, at 442, reasons that "the 10% rule is based upon a conclusive statutory presumption that ownership of this quantity of stock suffices to
[ 404 U.S. Page 424]
provide access to inside information," and that it thus "follows that all sales by a more-than-10% owner within the six-month period carry the presumption of a taint, even if a prior transaction within the period has reduced the beneficial ownership to 10% or below." While there may be logic in this position, it was clearly rejected as a basis for liability when Congress included the proviso that a 10% owner must be such both at the time of the purchase and of the sale. Although the legislative history affords no explanation of the purpose of the proviso, it may be that Congress regarded one with a long-term investment of more than 10% as more likely to have access to inside information than one who moves in and out of the 10% category. But whatever the rationale of the proviso, it cannot be disregarded simply on the ground that it may be inconsistent with our assessment of the "wholesome purpose" of the Act.
To be sure, where alternative constructions of the terms of § 16 (b) are possible, those terms are to be given the construction that best serves the congressional purpose of curbing short-swing speculation by corporate insiders.*fn4 But a construction of the term "at the time
[ 404 U.S. Page 425]
of . . . sale" that treats two sales as one upon proof of a pre-existing intent by the seller is scarcely in harmony with the congressional design of predicating liability upon an "objective measure of proof." Smolowe v. Delendo Corp., supra, at 235. Were we to adopt the approach urged by Reliance, we could be sure that investors would not in the future provide such convenient proof of their intent as Emerson did in this case. If a "two-step" sale of a 10% owner's holdings within six months of purchase is thought to give rise to the kind of evil that Congress sought to correct through § 16 (b), those transactions can be more effectively deterred by an amendment to the statute that preserves its mechanical quality than by a judicial search for the will-o'-the-wisp of an investor's "intent" in each litigated case.
The Securities and Exchange Commission, participating as amicus curiae, argues for an interpretation of the statute that both covers Emerson's transaction and preserves the mechanical quality of the statute. Seizing upon a fragment of legislative history -- a brief exchange between one of the principal authors of the bill and two members of the Senate Committee during hearings on the bill*fn5 -- the Commission suggests that the sole purpose
[ 404 U.S. Page 426]
of the requirement of 10% ownership at the time of both purchase and sale was to exclude from the statute's coverage those persons who became 10% shareholders "involuntarily," as, for example, by legal succession or by a reduction in the total number of outstanding shares of the corporation. The effect of such an interpretation would be to bring within § 16 (b) all sales within six months by one who has gained the position of a 10% owner through voluntary purchase, regardless of the amount of his holdings at the time of the sale. We cannot accept such a construction of the Act.
In the first place, we note that the SEC's own rules undercut such an interpretation. Recognizing the inter-relatedness of § 16 (a) and § 16 (b) of the Act, the Commission has used its power to grant exemptions under § 16 (b) to exclude from liability any transaction that does not fall within the reporting requirements of § 16 (a).*fn6 A 10% owner is required by that section to report at the end of each month any changes in his holdings in the corporation during that month. The Commission has interpreted this provision to require a report only if the stockholder held more than 10% of the corporation's shares at some time during the month.*fn7 Thus, a 10% owner who, like Emerson, sells down to 9.96% one month and disposes of the remainder the following month, would presumably be exempt from the reporting requirement and hence from § 16 (b) under the SEC's own rules, without regard to whether he acquired the stock "voluntarily."
But the SEC's argument would fail even if it were not contradicted by the Commission's own previous construction of the Act. As we said in Blau v. Lehman,
[ 404 U.S. Page 427368]
U.S. 403, 411, one "may agree that . . . the Commission present[s] persuasive policy arguments that the Act should be broadened . . . to prevent 'the unfair use of information' more effectively than can be accomplished by leaving the Act so as to require forfeiture of profits only by those specifically designated by Congress to suffer those losses." But we are not free to adopt a construction that not only strains, but flatly contradicts, the words of the statute.
The judgment is
MR. JUSTICE POWELL and MR. JUSTICE REHNQUIST took no part in the consideration or decision of this case.
434 F.2d 918, affirmed.
MR. JUSTICE DOUGLAS, with whom MR. JUSTICE BRENNAN and MR. JUSTICE WHITE concur, dissenting.
On June 16, 1967, Emerson Electric Co., in an attempt to wrest control from the incumbent management, acquired more than 10% of the outstanding common stock of Dodge Manufacturing Co. Dodge successfully resisted the take-over bid by means of a defensive merger with petitioner, Reliance Electric Co. Emerson then sold the shares it had accumulated, within six months of their purchase, for a profit exceeding $900,000.
Because this sale purportedly comprised two "independent" transactions, the first of which reduced Emerson's holdings to 9.96% of the outstanding Dodge common stock, the Court today holds that the profit from the second transaction is beyond the contemplation of § 16 (b) of the Securities Exchange Act.*fn1 So Emerson
[ 404 U.S. Page 428]
need not account to the corporation for these gains. In my view, this result is a mutilation of the Act, contrary to its broad remedial purpose, inconsistent with the flexibility required in the interpretation of securities legislation, and not required by the language of the statute itself.
Section 16 (b) is a "prophylactic" rule, Blau v. Lehman, 368 U.S. 403, 413, whose wholesome purpose is to control the insiders whose access to confidential information gives them unfair advantage in the trading of their corporation's securities.*fn2
[ 404 U.S. Page 429]
The congressional investigations which led to the enactment of the Securities Exchange Act unearthed convincing evidence that disregard by corporate insiders of their fiduciary positions was widespread and pervasive.*fn3 Indeed,
"the flagrant betrayal of their fiduciary duties by directors and officers of corporations who used their positions of trust and the confidential information which came to them in such positions, to aid them in their market activities,"
[ 404 U.S. Page 430]
was reported by the Senate subcommittee charged with the investigation to be "among the most vicious practices unearthed at the hearings." S. Rep. No. 1455, 73d Cong., 2d Sess., 55 (1934). The subcommittee did not limit its attack to directors and officers.
"Closely allied to this type of abuse was the unscrupulous employment of inside information by large stockholders who, while not directors and officers, exercised sufficient control over the destinies of their companies to enable them to acquire and profit by information not available to others." Ibid.
Despite its flagrantly inequitable character, the most respected pillars of the business and financial communities considered windfall profits from "sure-thing" speculation in their own company's stock to be one of the usual emoluments of their position. Cook & Feldman, Insider Trading Under the Securities Exchange Act, 66 Harv. L. Rev. 385, 386 (1953); 10 SEC Ann. Rep. 50 (1944). These abuses were perpetrated by such ostensibly reliable men and institutions as Richard Whitney, President of the New York Stock Exchange,*fn4 Albert H. Wiggin and the Chase National Bank, of which he was the chief executive officer,*fn5 and Charles E. Mitchell and the National City Bank, of which he was Chairman of the Board.*fn6
Section 16 (b) was drafted to combat these "predatory operations," S. Rep. No. 1455, supra, at 68, by removing all possibility of profit from those short-swing insider trades occurring within the statutory period of six
[ 404 U.S. Page 431]
months.*fn7 The statute is written broadly, and the liability it imposes is strict. Profits are forfeit without proof of an insider's intent to gain from inside information, and without proof that the insider was even privy to such information.*fn8 Feder v. Martin Marietta Corp., 406 F.2d 260, 262 (CA2).
[ 404 U.S. Page 432]
Today, however, in the guise of an "objective" approach, the Court undermines the statute. By the simple expedient of dividing what would ordinarily be a single transaction into two parts -- both of which could be performed on the same day, so far as it appears from the Court's opinion -- a more-than-10% owner may reap windfall profits on 10% of his corporation's outstanding stock. This result, "'plainly at variance with the policy of the legislation as a whole,'" United States v. American Page 432} Trucking Assns., 310 U.S. 534, 543, is said to be required because Emerson, owning only 9.96%, was not a "beneficial owner" of more than 10% within the meaning of § 16 (b) "at the time of" the disposition of this block of Dodge stock.
If § 16 (b) is to have the "optimum prophylactic effect" which its architects intended, insiders must not be permitted so easily to circumvent its broad mandate. We should hold that there was only one sale -- a plan of distribution conceived "at the time" Emerson owned 13.2% of the Dodge stock, and implemented within six months of a matching purchase. Moreover, in the spirit of the Act we should presume that any such "split-sale" by a more-than-10% owner was part of a single plan of disposition for purposes of § 16 (b) liability.
This construction of "the sequence of relevant transactions," Bershad v. McDonough, 428 F.2d 693, 697 (CA7), is not foreclosed by any language in the statute. The statutory definitions of such terms as "purchase," "sale," "beneficial owner," "insider," and "at the time of" are not, as one might infer from the Court's opinion, objectively defined words with precise meanings.
"'Whatever the terms "purchase" and "sale" may mean in other contexts,' they should be construed in a manner which will effectuate the purposes of the specific section of the [Securities Exchange] Act in which they are used. SEC v. National Securities, Inc., 393 U.S. 453, 467." Id., at 696.
MR. JUSTICE STEWART, while on the Court of Appeals, explained the manner appropriate for the construction of the statutory definitions in the context of § 16 (b):
"Every transaction which can reasonably be defined as a purchase will be so defined, if the transaction is of a kind which can possibly lend itself to the speculation encompassed by Section 16 (b)." Ferraiolo v. Newman, 259 F.2d 342, 345 (CA6).
[ 404 U.S. Page 433]
Applying this salutary approach toward the statutory definitions, the courts have reasoned that, because of the opportunities for abuse inhering in his position, a director must account both for purchases made shortly before his appointment, Adler v. Klawans, 267 F.2d 840 (CA2), and for sales made shortly after his resignation, Feder v. Martin Marietta Corp., supra. "Options," which played such a large role in the manipulative practices disclosed during the 1930's,*fn9 are not ordinarily thought to be "purchases" or "sales" of the underlying commodity; yet, because of the opportunity for abuse inherent in the device, courts have held that an option can be a "sale," when granted, within the meaning of § 16 (b). Bershad v. McDonough, supra. But, in order to bring the underlying transaction within the six-month limitation of § 16 (b), an option was also held to be a "purchase" when exercised. Booth v. Varian Associates, 334 F.2d 1 (CA1). Similarly, where there was an opportunity for the abuse of inside information, a conversion of debentures into common stock was held to be a "sale"; Park & Tilford v. Schulte, 160 F.2d 984 (CA2); but where there was no such opportunity, a similar conversion was held not to be. Blau v. Lamb, 363 F.2d 507 (CA2).
The common thread running through the decisions is that whether we approach the problem of this case as a question of "beneficial ownership" at the time of the second transaction, or as a question whether the two transactions were one "sale," it "is not in any event primarily a semantic one, but must be resolved in the light of the legislative purpose -- to curb short swing speculation by insiders." Ferraiolo v. Newman, supra, at 344.
Until today, the federal courts have been almost universally faithful to this philosophy, "even departing where necessary from the literal statutory language."
[ 404 U.S. Page 434]
that the modern-day insider is no less prone than his counterpart of a generation ago to succumb to the lure of insider trading where windfall profits are in the offing. Indeed, in a survey of "reputable" businessmen, 42% of those responding indicated they would themselves trade on inside information, and 61% believed that the "average" executive would do likewise.*fn10 Thus, it would appear both that § 16 (b) was directed at such conduct as is herein at issue and that the protection § 16 (b) affords is as necessary today as it was when the statute was enacted.
Despite the fact that the decision below strikes at the vitals of the statute, the Court says it must be affirmed because to treat "two sales as one upon proof of a pre-existing intent by the seller" detracts from the "mechanical quality" of the statute and is "scarcely in harmony with the congressional design of predicating liability upon an 'objective measure of proof.'" Ante, at 425.
This "mechanical quality," however, is illusory.
"There is no rule so 'objective' ('automatic' would be a better word) that it does not require some mental effort in applying it on the part of the person or persons entrusted by law with its application." Blau v. Lamb, supra, at 520.
Thus, the deterrent value of § 16 (b) depends not so
[ 404 U.S. Page 436]
much on its vaunted "objectivity" as on its "thorough-going" qualities.
"We must suppose that the statute was intended to be thoroughgoing, to squeeze all possible profits out of stock transactions, 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 (CA2).
Insiders have come to recognize that "in order not to defeat [§ 16 (b)'s] avowed objective," federal courts will resolve "all doubts and ambiguities against insiders." Blau v. Oppenheim, 250 F.Supp. 881, 884-885.
Moreover, courts have not shirked this responsibility simply because, as here, such a resolution may require a factual inquiry. In Blau v. Lehman, supra, this Court said that on an appropriate factual showing, an investment banking firm might be forced to disgorge profits made from short-swing trades in the stock of a corporation on whose board a partner of the firm was "deputized" to sit. Id., at 410. In Colby v. Klune, 178 F.2d 872 (CA2), cited by the majority, the court permitted a factual inquiry into the possibility that an individual might be a "de facto" officer or director, although not formally labeled as such. Virtually all courts faced with § 16 (b) problems now inquire into the opportunity for abuse inherent in a particular type of transaction, in order to see if applying the statute would serve its purposes. See, e. g., Bershad v. McDonough, supra; Blau v. Max Factor & Co., 342 F.2d 304 (CA9); Booth v. Varian Associates, supra; Ferraiolo v. Newman, supra. And, even under the narrow approach of the majority, I presume it would still be open, in cases like this one, to inquire whether the ostensibly separate sales are "legally
[ 404 U.S. Page 437]
tied."*fn11 It follows that the necessity of a factual inquiry is no bar to the application of the statute to the present case.
It is beyond question, of course, that a prime concern of the statute was that a requirement of positive proof of an insider's "intent" would render the statute ineffective. Insofar as the District Court's approach appears to place the burden on the plaintiff to demonstrate the existence of a "plan of distribution," it is justifiably open to criticism. The broad sweep of § 16 (b) requires that a minimal burden be placed on putative plaintiffs.
But this goal -- elimination of proof problems -- is subsidiary to the statute's main aim -- curbing insider speculation. Whatever "mechanical quality" the statute possesses, it was intended to ease the plaintiff's burden, not to insulate the insider's profits.
Thus, we should not conclude, as does the majority, that there is no enforceable way to combat the potential
[ 404 U.S. Page 438]
for sharp practices which inheres in the "split-sale" scheme.
"The 'objective' or 'rule of thumb' approach need not compel a court to wink at the substantial effects of a transaction which is rife with potential sharp practices in order to preserve the easy application of the short-swing provisions under Section 16 (b). Certainly the interest of simple application of the prohibitions of Section 16 (b) does not carry so far as to facilitate evasion of that provision's function by formalistic devices." Bershad v. McDonough, supra, at 697 n. 5.
A series of sales, spaced close together, is more than likely part of a single plan of disposition. Plain common sense would indicate that Emerson's conduct in the present case had probably been planned, even if there were no confirmation in the form of an admission. It is statistically probable that any series of sales made by a beneficial owner of more than 10%, within six months, in which he disposes of a major part of his holdings, would be similarly connected.
We, therefore, should construe the statute as allowing a rebuttable presumption that any such series of dispositive transactions will be deemed to be part of a single plan of disposition, and will be treated as a single "sale" for the purposes of § 16 (b).*fn12 Because the burden
[ 404 U.S. Page 439]
would be on the defendant, not the plaintiff, such a rule would operate with virtually the same less-than-perfectly automatic efficiency that the statute now does, and it would comport far more closely with the statute's broad, remedial sweep than does the approach taken by the Court.
Such a rule would not, moreover, import questions of "intent" into the statutory scheme. Any factual inquiry would involve only an objective analysis of the circumstances of the various dispositions in the series, applying the "various tests" established by the cases "to determine whether a transaction, objectively defined, falls within or without the terms of the statute." Ante, at 424 n. 4.
[ 404 U.S. Page 440]
Only if a beneficial owner carried an affirmative burden of proof -- that his series of dispositive transactions was not of a type that afforded him an opportunity for speculative abuse of his position as an insider -- should we say that he was not such a beneficial owner "at the time of . . . sale."*fn13
The Court suggests two additional factors militating against Emerson's liability under § 16 (b). First, the Court implies that it is contrary to the SEC's own rules. This argument rests on the power given to the SEC by § 16 (b) to exempt from its scope those transactions that are "not comprehended within the purpose" of the section. Pursuant to this authority, the SEC has promulgated Rule 16a-10, providing that transactions not required to be reported under § 16 (a) are exempt from § 16 (b) as well.
The SEC's reporting requirements are contained in "Form 4." Until recently, this Form required insiders -- officers, directors, and more-than-10% owners -- only to report transactions occurring in a calendar month in which they met the formal requirements to be denominated such an insider. Emerson sold down to 9.96% in August, then sold out in September. Presumably, it did not have to report the September sale on Form 4, and thus, by operation of Rule 16a-10, the September sale is argued to be exempt from the operations of § 16 (b) as well.
[ 404 U.S. Page 441]
Inasmuch as the SEC's power to promulgate such a rule is not "a matter solely within the expertise of the SEC and therefore beyond the scope of judicial review," Greene v. Dietz, 247 F.2d 689, 692 (CA2), this argument loses substantially all its force after Feder v. Martin Marietta Corp., supra. There, the court held, in the face of the identical argument that Rule 16a-10 was invalid, insofar as it operated through Form 4 to exempt transactions by ex-directors from liability under § 16 (b). The court reasoned that the limitation of the reporting requirement to the calendar month in which a transaction occurred was "an arbitrary . . . [and] unnecessary loophole in the effective operation of the statutory scheme," id., at 269, because it required reporting of some transactions 30 days after an ex-director's resignation, but insulated others taking place the very next day.
Form 4 did, however, extend § 16 (b) liability to at least some transactions occurring after resignation.
"Therefore, inasmuch as Form 4, a valid exercise of the SEC's power, has already extended § 16 (b) to cover, in part, an ex-director's activities, a less arbitrarily defined reporting requirement for ex-directors is but a logical extension of § 16 (b) coverage, would be a coverage in line with the congressional aims, and would afford greater assurance that the lawmakers' intent will be effectuated." Ibid.*fn14
This analysis is equally applicable to the reporting requirements of ex-10% owners.
[ 404 U.S. Page 442]
Second, the Court analogizes Emerson's "plan" to a sale "conceived" during the six-month period but not made until after the expiration of the statutory limitation. The Court incorrectly assumes that such a sale could not fall within § 16 (b). If the "conception" were sufficiently concrete to be construed as a "contract to sell," or an "option," there would indeed be liability. Cf. Bershad v. McDonough, supra. In any event, the analogy fails because the purposes of the six-month rule are different from the purpose of the 10% rule.
The six-month limitation is based on Congress' estimation that beyond this time period, normal market fluctuations sufficiently deter attempts to trade on inside information. Blau v. Max Factor & Co., supra, at 308. Thus, it is consistent with the statutory scheme to permit an insider to "plan" a sale within the six-month period that will not take place until six months have passed from a matching purchase.
But the 10% rule is based upon a conclusive statutory presumption that ownership of this quantity of stock suffices to provide access to inside information. Newmark v. RKO General, Inc., 425 F.2d 348 (CA2). The rationale of the six-month rule implies that such information will be presumed to be useful during that length of time. It follows that all sales by a more-than-10% owner within the six-month period carry the presumption of a taint, even if a prior transaction within the period has reduced the beneficial ownership to 10% or below.
In sum, neither the statutory language nor the purposes articulated by the majority justify the result reached today. Rather than deprive § 16 (b) of vitality in the course of a vain search for a nonexistent purity of operation, we should reverse the judgment of the Court of Appeals and remand the case for further proceedings.