The opinion of the court was delivered by: CARTER
Plaintiff, a shareholder of First National Realty & Construction Corporation ("FNR"), brought this action pursuant to § 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b), to recover short-swing profits which defendant Realty Equities Corporation ("REC") allegedly realized from a purchase and sale of FNR stock within a six-month period. The court granted plaintiff's motion for summary judgment on the issue of liability and gave the parties 30 days from the entry of the order to submit proof on the issues of damages and pre-judgment interest. 373 F. Supp. 829. However, the amount of damages could not be determined on summary judgment, and a short trial was held on the issue of damages alone. This opinion constitutes the findings of fact and conclusions of law required by Rule 52, F.R. Civ. P. The measure of damages is REC's profit, which is calculated by subtracting the purchase price of the FNR shares from the proceeds of sale.
In its opinion on the issue of liability the court found the following facts concerning the purchase of the FNR shares to be undisputed. On March 9, 1967, REC entered into the "Second Exchange Agreement" with certain FNR shareholders. The agreement provided that, subject to certain conditions precedent, REC would exchange 51,000 REC shares for 306,000 shares of FNR. By September 18, 1968, the selling shareholders had performed all conditions precedent to REC's obligation under the Agreement. However, REC had not fulfilled all the conditions necessary to obligate the selling shareholders. On October 22, 1968, the closing occurred, and pursuant to the Agreement, REC transferred a quantity of its own shares and received 302,900 FNR shares in exchange. On March 31, 1969, REC sold 300,000 shares of its FNR stock to Property Investment Company, Inc. ("Property Investment"). The date of sale was more than six months after September 18, 1968, but less than six months after the closing date of October 22, 1968.
It was held that the purchase date was October 22, rather than September 18 as argued by defendant. As of September 18, the court said, the transaction was "arguably akin" to an option. According to the Second Circuit's decision in Blau v. Ogsbury, 210 F.2d 426 (2d Cir. 1954), the purchase occurs upon the exercise of the option, "when the alleged insider's rights and obligations [become] fixed * * * ", 210 F.2d at 427. In the present case, even if REC's obligations became fixed on September 18, its rights did not become fixed until the closing on October 22, 1968.
The following additional facts concerning the purchase price of the FNR stock appear to be undisputed. At the closing on October 22, 1968, the consideration given by REC for 300,000 of the total of 302,900 FNR shares purchased that day was 50,483 shares of REC stock. In reports to shareholders, to the SEC and to the Internal Revenue Service and in response to an interrogatory in this case, REC stated that the purchase price of its 300,000 FNR shares was $435,646.80. This figure was based on the market price of REC shares as of March 9, 1967, the date of the Agreement, rather than October 22, 1968, the date of the closing. On the date of the closing, the market price of 50,483 shares of REC stock, at $34.375 per share, was $1,735,353.
The "purchase price" of a security is ordinarily held to be the value of the consideration given for the security, rather than the value of the security itself. Blau v. Lamb, 242 F. Supp. 151 (S.D.N.Y. 1965), aff'd in part and rev'd in part, 363 F.2d 507 (2d Cir. 1966), cert. denied, 385 U.S. 1002, 87 S. Ct. 707, 17 L. Ed. 2d 542 (1967). REC argues that the purchase price of the FNR shares is equal to $1,735,353, the value of 50,483 shares of REC as of October 22, 1968.
Plaintiff contends, however, that REC is estopped by its statements to the SEC and the IRS and by its response to the interrogatory from denying that the value of the REC shares exchanged for FNR stock was $435,646.80, the market price of the REC shares as of March 9, 1967.
In Stella v. Graham-Paige Motors Corp., 259 F.2d 476 (2d Cir. 1958), cert. denied, 359 U.S. 914, 3 L. Ed. 2d 576, 79 S. Ct. 583 (1959), defendant had reported a large profit on a purchase and sale of stock in documents filed with the SEC and on its tax return. In holding that defendant was not estopped by such prior statements, the Court of Appeals emphasized that the statements had been made "in the regular course of business" for a purpose unrelated to the instant securities litigation. 259 F.2d at 482.
In the present case, I have no difficulty in holding, on the authority of Stella v. Graham-Paige, that REC is not estopped by its statements in documents filed with the SEC and the IRS.
These statements, like those in Stella, supra, were made in the regular course of business for a purpose unrelated to this litigation.
Although this is not true of REC's response to plaintiff's interrogatory, I have decided that REC should not be estopped by that response. Testimony at trial established that use of the March 9, 1967, purchase price was proper according to the "first in first out"
accounting practice then in use by REC. That practice is not, however, binding on the court in calculating profits for purposes of § 16(b). Moreover, in holding REC liable in my earlier decision, I found that its purchase of the 300,000 FNR shares occurred not on March 9, 1967, but on October 22, 1968, which in six months of the date of sale, March 31, 1969. It would be inconsistent and unfair to hold now that the purchase price should be calculated as of March 9, 1967, a date considerably more than six months prior to the sale.
See B. T. Babbitt, Inc. v. Lachner, 332 F.2d 255, 258 (2d Cir. 1964); Booth v. Varian Associates, 334 F.2d 1 (1st Cir. 1964), cert. denied, 379 U.S. 961, 13 L. Ed. 2d 556, 85 S. Ct. 651 (1965).
Furthermore, there is no real inconsistency between REC's prior statement and its present position. REC made its response to plaintiff's interrogatory before my decision on the motion for summary judgment, at a time when REC was still contesting liability and maintaining that the purchase had occurred more than six months prior to the sale. Since then, this court has decided the issue of the date of purchase against REC, and it is wholly proper to allow REC to conform its position as to the purchase price with this court's determination of the date of purchase.
In calculating the purchase price, the court is asked to follow the practice adopted by this circuit with respect to stock purchased pursuant to an option. In B. T. Babbitt, Inc. v. Lachner, supra, the Court of Appeals held that the exercise price should not be considered the purchase price of such stock. Rather, the purchase price for purposes of § 16(b) was held to be equivalent to the fair market value of the underlying stock as of the date the option first became exercisable. 332 F.2d at 258; Steinberg v. Sharpe, 95 F. Supp. 32 (S.D.N.Y. 1950), aff'd, 190 F.2d 82 (2d Cir. 1951). The court's apparent concern was that there may be a long lapse of time between the grant of the option, when the exercise price is determined, and the six-month period during which the option is exercised and the stock sold. The Court wished to avoid imposing liability for the sometimes large increment in the value of the stock between the grant of the option and its exercise. The effect of the holding in Babbitt is to move the date as of which the purchase price is determined up toward the six-month period in which liability arises under § 16(b).
If the rule with respect to options is applied to this case, the value of the REC shares should be computed as of October 22, 1968. REC's conditional right or "option" to purchase did not become "exercisable" on March 9, 1967, or even on September 18, 1968, since REC never performed the conditions precedent to the selling shareholders' obligation. REC's right to purchase did not become ...