Appeal from a declaratory judgment of the District Court for the Southern District of New York, Robert J. Ward, J., holding a director of a corporation liable to the corporation for short-swing profit pursuant to Section 16(b) of the Securities Exchange Act. The Court of Appeals, Gurfein, Circuit Judge, held that, in the circumstances disclosed, sales by the wife of the director of corporate shares owned by her within six months of the exercise of a stock option by the director-husband should be matched for Section 16(b) purposes and the profit paid to the corporation. Affirmed.
Gibbons,*fn* Gurfein and Meskill, Circuit Judges.
This appeal presents a difficult and important question of first impression in this court concerning the interpretation of § 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b), as it applies to the matching transactions of a corporate insider and his spouse. The issue is whether a corporate director may be held to have "realized profit" within the meaning of § 16(b) as a result of a matching of his wife's sales and his own purchase of his company's securities within the statutory six-month period.*fn1
In a thorough opinion after a non-jury trial, Judge Ward dismissed the complaint of Macauley Whiting, a director of Dow Chemical Company ("Dow"), which sought a declaratory judgment that he was not liable to Dow under § 16(b) and awarded judgment to Dow on its counterclaim for the profits realized. 386 F. Supp. 1130 (S.D.N.Y. 1974). We affirm.
Helen Dow Whiting sold an aggregate of 29,770 shares of Dow stock for $1.6 million during September and November of 1973 at an average price of $55- $56. In December 1973 her husband, appellant Macauley Whiting, exercised an option to purchase 21,420 Dow shares for $520,000 at a price of $24.3125. He exercised the option with funds he borrowed from his wife, which were part of the proceeds of her sales of the Dow stock in the preceding two months.
Macauley Whiting has been a director of Dow since 1959. His wife of thirty years is a granddaughter of the founder of Dow, and acquired substantial amounts of Dow stock over the years by gift and inheritance, and these assets are segregated from appellant's. On the other hand, Judge Ward found that "the resources of both husband and wife are significantly directed toward their common prosperity, and they easily communicate concerning matters which relate to that prosperity." Moreover, the Whitings' separate accounts are managed by the same financial advisors. The Whitings file joint tax returns, and their common financial planning has included Mrs. Whiting's use of her husband's annual gift tax exclusion to make charitable gifts and gifts to trusts established for their six children.
Mrs. Whiting's personal wealth and income - primarily consisting of dividends and capital gains derived from her Dow holdings - is considerably larger than that of her husband. Although Judge Ward found that Mr. Whiting contributes virtually his entire salary toward family expenses, he also found that Mrs. Whiting is primarily responsible for the considerable costs incurred in the style of living the Whitings have chosen to pursue. It is her dividend income, for example, which has provided for education of the Whitings' children, which defrays medical expenses, which maintains a family vacation home, and which pays real estate taxes on the Whitings' property.
Mrs. Whiting's sales of the Dow stock in September and November of 1973 were made pursuant to a long-term investment plan, arranged by the Whitings and their financial advisor, which was designed to diversify the holdings of the family and to obtain tax benefits. The Court found that the Whitings discussed the general philosophy to govern the management of Mrs. Whiting's estate, and, in early 1972, agreed on a major shift in their philosophy. They then discharged their long-time investment advisor. Desiring to pursue a more aggressive investment program, the Whitings in late 1972 retained new investment counselors, Smith, Barney & Company, Inc. ("Smith Barney"), and new tax, accounting and estate planning advisors, Goldstein, Golub, Kessler & Company ("Goldstein"). As had been the case with their previous financial advisor, the Whitings continued to maintain formal segregation of their investment accounts, but these accounts were managed jointly as discretionary accounts under the supervision of one person at Smith Barney.
Since January 1966, in the Form 3 and 4 reports he was required to make as a Dow director pursuant to § 16(a),*fn2 Mr. Whiting regularly reported his wife's Dow stock as "directly owned" by him, and never disclaimed ownership as he might have pursuant to SEC regulations,*fn3 a procedure of which he was made aware by Dow's counsel. Under SEC Rule 144(a)(2)(i), 17 C.F.R. § 230.144(a)(2)(i), effective April 15, 1972, Mrs. Whiting as a "relative or spouse" was herself required to report her sales of Dow stock. From the outset Smith Barney advised the Whitings that it considered Mrs. Whiting to be a "control" person of Dow by reason of Mr. Whiting's position as a Dow director. The Whitings acquiesced in such treatment, and Mrs. Whiting, thereafter, regularly filed Form 144 reports with the SEC covering her sales of Dow stock.*fn4
Judge Ward found that not only did Mr. and Mrs. Whiting use the same financial advisors, but both were present at many meetings with these advisors; they had a "general philosophy" concerning the management of the family estates. He also found that Mrs. Whiting upon occasion "consults her husband concerning the desirability of certain investments in areas of his expertise," but that "Mr. Whiting does not communicate with his wife concerning the affairs of [Dow]." 386 F. Supp. at 1132.
In December 1972 discussions were begun at the Goldstein office, Mr. and Mrs. Whiting being present, at which certain of the subjects were recorded as "Mr. Whiting's 1972 executive compensation award," joint contributions to their charitable foundation and "investment philosophy." They met with the advisors again on May 31, 1973 when, among other things, there was a discussion of estate planning, investments in municipal bonds and "whether Mr. Whiting should exercise his options in Dow Chemical in 1973 or 1974." A Goldstein executive was "to prepare a projection comparing the tax consequences of the sale of Dow stock versus the exercise of stock options." The reference to sales of Dow stock was in the context of the planning of sales of Mrs. Whiting's Dow stock.
The conference was resumed on October 29, 1973, when "it was suggested that Mr. Whiting exercise his options in Dow Chemical, in total, this year, due to the adverse consequences which could result upon the exercise in 1974 if the proposed concept of minimum taxable income becomes law." The possible tax difference between exercise in 1973 and in 1974 was described as about $245,000. The question of the best method of funding the exercise of the option was discussed, together with ...