The opinion of the court was delivered by: GURFEIN
Motion for summary judgment by the defendants, Louis G. Seaton and General Motors Corporation. This is an action in which the plaintiff, a stockholder of General Motors, seeks to recover on its behalf against Seaton for alleged violation of Section 16(b) of the Securities Exchange Act of 1934 and of Section 10 and Rule 10b-5 thereunder, 15 U.S.C. § 78p(b) and § 78j.
The § 16(b) claim is to recover alleged profits made by Seaton as a result of his purchases and sales of General Motors stock within a period of less than six months.
The plaintiff alleges that she made demand upon General Motors to sue Seaton but that it failed to do so.
The undisputed facts are that Seaton was a Vice President of General Motors in charge of its personnel staff from January 1, 1957 through August 31, 1970. His resignation as Vice President became effective at the close of business on August 31, 1970 (Affd. of Pltf. Counsel in Opp. p. 2).
On March 19, 1962, General Motors granted an option to the defendant Seaton for the purchase of its common shares at $56.82 per share. On August 31, 1970, the date when his resignation became effective, Seaton still had not exercised his option for 2,151 shares (Affd. of Pltf. Counsel in Opp. p. 2). The option by its terms would expire three months after the resignation became effective, or on November 30, 1970.
On November 24, 1970, Seaton sold 2,000 shares of General Motors stock at $75.50 per share. On November 27, 1970 Seaton acquired 2,151 shares at $56.82 per share by exercise of the option which had been granted in 1962 (Affd. of Pltf. Counsel in Opp. p. 2). The plaintiff claims a "short-swing" profit of $37,400 -- the difference between the price paid by Seaton under his option and the price he received for an equivalent number of shares.
The option price of the 2,100 shares picked up was $56.82. The closing market price of General Motors at the date of exercise of the option, November 27, 1970, was $76.125; at November 24, the date of sale of the 2,000 shares it was $75.75. The actual selling price was $75.50 -- 5/8 of a point less. The price of the stock at the date the option was first exercisable, September 19, 1963, was $78.375. After the sale of November 24, the price of General Motors common stock remained above the selling price of $75.50 at all times until August 1971.
Two questions become immediately apparent. (1) Where both the purchase and the sale within six months of each other occur after the officer has left the employ of the corporation does a § 16(b) liability arise? (2) In measuring the "short-swing" profit what is considered the purchase price under the option to determine the profit for § 16(b) purposes?
Though I believe that the second question is subject to easy answer and is dispositive, I shall decide both questions in the interest of judicial economy on the assumption that there will be an appeal.
For § 16(b) purposes an option is a purchase only when it is exercised, not when it is granted. Silverman v. Landa, 306 F.2d 422 (2 Cir. 1962). The option here was exercised by Seaton on November 27, 1970 when he was no longer an officer. That was his "purchase" for § 16(b) purposes. He sold 2,000 shares on November 24, 1970 which was also after his resignation.
We, therefore, confront the novel suggestion that an ex-officer who purchases and sells within six months where both purchase and sale occur when he is no longer an officer is subject to the liability imposed by § 16(b).
There is § 16(b) liability when an officer or director purchases the shares before becoming an insider and sells within six months thereafter. Adler v. Klawans, 267 F.2d 840 (2 Cir. 1959). So too, where an officer or director purchases while an insider and sells after he has ceased being an insider there is § 16(b) liability. Feder v. Martin Marietta Corp., 406 F.2d 260 (2 Cir. 1969), cert. denied, 396 U.S. 1036, 90 S. Ct. 678, 24 L. Ed. 2d 681 (1970).
No case has been cited where the officer or director both purchased and sold after he had ...