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January 13, 1976



Burger, Brennan, Stewart, White, Marshall, Blackmun, Powell, Rehnquist; Stevens took no part in the consideration or decision of the case.

Author: Powell

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 MR. JUSTICE POWELL delivered the opinion of the Court.

This case presents an unresolved issue under § 16(b)

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     of the Securities Exchange Act of 1934 (Act), 48 Stat. 896, 15 U.S.C. § 78p(b). That section of the Act was designed to prevent a corporate director or officer or "the beneficial owner of more than 10 per centum" of a corporation*fn1 from profiteering through short-swing securities transactions on the basis of inside information. It provides that a corporation may capture for itself the profits realized on a purchase and sale, or sale and purchase, of its securities within six months by a director, officer, or beneficial owner.*fn2 Section 16(b)'s last sentence,

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     however, provides that it "shall not be construed to cover any transaction where such beneficial owner was not such both at the time of the purchase and sale, or the sale and purchase, of the security involved...." The question presented here is whether a person purchasing securities that put his holdings above the 10% level is a beneficial owner "at the time of the purchase" so that he must account for profits realized on a sale of those securities within six months. The United States Court of Appeals for the Ninth Circuit answered this question in the negative. 506 F.2d 601 (1974). We affirm.


Respondent, Provident Securities Co., was a personal holding company. In 1968 Provident decided tentatively to liquidate and dissolve, and it engaged an agent to find a purchaser for its assets. Petitioner, Foremost-McKesson, Inc., emerged as a potential purchaser, but extensive negotiations were required to resolve a disagreement over the nature of the consideration Foremost would pay. Provident wanted cash in order to facilitate its dissolution, while Foremost wanted to pay with its own securities.

Eventually a compromise was reached, and Provident and Foremost executed a purchase agreement embodying their deal on September 25, 1969. The agreement provided that Foremost would buy two-thirds of Provident's assets for $4.25 million in cash and $49.75 million in Foremost convertible subordinated debentures.*fn3 The agreement further provided that Foremost would register under the Securities Act of 1933 $25 million in

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     principal amount of the debentures and would participate in an underwriting agreement by which those debentures would be sold to the public. At the closing on October 15, 1969, Foremost delivered to Provident the cash and a $40 million debenture which was subsequently exchanged for two debentures in the principal amounts of $25 million and $15 million. Foremost also delivered a $2.5 million debenture to an escrow agent on the closing date. On October 20 Foremost delivered to Provident a $7.25 million debenture representing the balance of the purchase price. These debentures were immediately convertible into more than 10% of Foremost's outstanding common stock.

On October 21 Provident, Foremost, and a group of underwriters executed an underwriting agreement to be closed on October 28. The agreement provided for sale to the underwriters of the $25 million debenture. On October 24 Provident distributed the $15 million and $7.25 million debentures to its stockholders, reducing the amount of Foremost common into which the company's holdings were convertible to less than 10%. On October 28 the closing under the underwriting agreement was accomplished.*fn4 Provident thereafter distributed the cash proceeds of the debenture sale to its stockholders and dissolved.

Provident's holdings in Foremost debentures as of October 20 were large enough to make it a beneficial owner of Foremost within the meaning of § 16.*fn5 Having

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     acquired and disposed of these securities within six months, Provident faced the prospect of a suit by Foremost to recover any profits realized on the sale of the debenture to the underwriters. Provident therefore sued for a declaration that it was not liable to Foremost under § 16 (b). The District Court granted summary judgment for Provident, and the Court of Appeals affirmed.

Provident's principal argument below for non-liability was based on Kern County Land Co. v. Occidental Corp., 411 U.S. 582 (1973). There we held that an "unorthodox transaction" in securities that did not present the possibility of speculative abuse of inside information was not a "sale" within the meaning of § 16 (b). Provident contended that its reluctant acceptance of Foremost debentures in exchange for its assets was an "unorthodox transaction" not presenting the possibility of speculative abuse and therefore was not a "purchase" within the meaning of § 16 (b). Although the District Court's pre- Kern County opinion had adopted this type of analysis, 331 F. Supp. 787 (ND Cal. 1971), the Court of Appeals rejected it, reasoning that Provident's acquisition of the debentures was not "unorthodox" and that the circumstances did not preclude the possibility of speculative abuse. 506 F.2d, at 604-605.

The Court of Appeals then considered two theories of non-liability based on § 16 (b)'s exemptive provision: "This subsection shall not be construed to cover any transaction where such beneficial owner was not such both at the time of the purchase and sale, or the sale

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     and purchase...." The first was Provident's argument that it was not a beneficial owner "at the time of... sale." After the October 24 distribution of some debentures to stockholders, the debentures held by Provident were convertible into less than 10% of Foremost's outstanding common stock. Provident contended that its sale to the underwriters did not occur until the underwriting agreement was closed on October 28. If this were the case, the sale would not have been covered by § 16 (b), since Provident would not have been a beneficial owner "at the time of... sale."*fn6 The Court of Appeals rejected this argument because it found that the sale occurred on October 21 upon execution of the underwriting agreement.*fn7

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     The Court of Appeals then turned to the theory of non-liability based on the exemptive provision that we consider here.*fn8 It held that in a purchase-sale sequence the phrase "at the time of the purchase," "must be construed to mean prior to the time when the decision to purchase is made." 506 F.2d, at 614. Thus, although Provident became a beneficial owner of Foremost by acquiring the debentures, it was not a beneficial owner "at the time of the purchase." Accordingly, the exemptive provision prevented any § 16 (b) liability on Provident's part.


The meaning of the exemptive provision has been disputed since § 16 (b) was first enacted. The discussion has focused on the application of the provision to

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     a purchase-sale sequence, the principal disagreement being whether "at the time of the purchase" means "before the purchase" or "immediately after the purchase."*fn9 The difference in construction is determinative of a beneficial owner's liability in cases such as Provident's where such owner sells within six months of purchase the securities the acquisition of which made him a beneficial owner. The commentators divided immediately over which construction Congress intended,*fn10 and they remain divided.*fn11 The Courts of Appeals also are in disagreement over the issue.

The question of what Congress intended to accomplish by the exemptive provision in a purchase-sale sequence came to a Court of Appeals for the first time in Stella v. Graham-Paige Motors Corp., 232 F.2d 299, cert. denied, 352 U.S. 831 (1956). There the Court of Appeals for the Second Circuit without discussion, but over a dissent, affirmed the District Court's

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     adoption of the "immediately after the purchase" construction. That court had been impelled to this construction at least in part by concern over what the phrase "at the time of... purchase" means in a sale-repurchase sequence, reasoning: S

" If the ['before the purchase'] construction urged by [Graham-Paige] is placed upon the exemption provision, it would be possible for a person to purchase a large block of stock, sell it out until his ownership was reduced to less than 10%, and then repeat the process, ad infinitum." 104 F. Supp. 957, 959 (SDNY 1952).I

The District Court may have thought that "before the purchase" seemed an unlikely construction of the exemptive provision in a sale-repurchase sequence, so it could not be the proper construction in a purchase-sale sequence.*fn12 The Stella construction of the exemptive provision has been adhered to in the Second Circuit, Newmark v. RKO General, Inc., 425 F.2d 348, 355-356, cert. denied, 400 U.S. 854 (1970);*fn13 Perine v.

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     available to them only after they became statutory "insiders." 506 F.2d, at 608-614.*fn16



The general purpose of Congress in enacting § 16 (b) is well known. See Kern County Land Co., 411 U.S., at 591-592; Reliance Electric Co., 404 U.S., at 422, and the authorities cited therein. Congress recognized that insiders may have access to information about their corporations not available to the rest of the investing public. By trading on this information, these persons could reap profits at the expense of less well informed investors. In § 16 (b) Congress sought to "curb the evils of insider trading [by]... taking the profits out of a class of transactions in which the possibility of abuse was believed to be intolerably great." Reliance Electric Co., supra, at 422. It accomplished this by defining directors, officers, and beneficial owners as those presumed to have access to inside information*fn17 and enacting a flat rule

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     that a corporation could recover the profits these insiders made on a pair of security transactions within six months.*fn18

Foremost points to this purpose, and invokes the observation in Reliance Electric Co. that "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." 404 U.S., at 424 (footnote omitted). From these premises Foremost argues that the Court of Appeals' construction of the exemptive provision must be rejected*fn19 because it makes § 16 (b) inapplicable to some possible abuses of inside information that the statute would reach under the Stella construction.*fn20 We find this approach unsatisfactory in its focus on situations that § 16 (b) may not reach rather than on the language and purpose of the exemptive provision itself. Foremost's approach also invites an imposition of § 16 (b)'s liability without fault that is not consistent with the premises upon which Congress enacted the section.

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The exemptive provision, which applies only to beneficial owners and not to other statutory insiders, must have been included in § 16 (b) for a purpose. Although the extensive legislative history of the Act is bereft of any explicit explanation of Congress' intent, see Reliance Electric Co., supra, at 424, the evolution of § 16 (b) from its initial proposal through passage does shed significant light on the purpose of the exemptive provision.

The original version of what would develop into the Act was S. 2693, 73d Cong., 2d Sess. (1934). It provided in § 15 (b): S

"It shall be unlawful for any director, officer, or owner of securities, owning as of record and/or beneficially more than 5 per centum of any class of stock of any issuer, any security of which is registered on a national securities exchange --

"(1) To purchase any such registered security with the intention or expectation of selling the same security within six months; and any profit made by such person on any transaction in such a registered security extending over a period of less than six months shall inure to and be recoverable by the issuer, irrespective of any intention or expectation on his part in entering into such transaction of holding the security purchased for a period exceeding six months."I

In the next version of the legislation, H.R. 8720, 73d Cong., 2d Sess. (1934), § 15 (b) read almost identically to § 16 (b) as it was eventually enacted:*fn21 S

"Any profit realized by such beneficial owner,

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     director, or officer from any purchase and sale or sale and purchase of any such registered equity security within a period of less than six months, unless such security was acquired in good faith in connection with a debt previously contracted, shall inure to and be recoverable by the issuer, irrespective of any intention on the part of such beneficial owner, director, or officer in entering into such transaction of holding the security purchased or of not repurchasing the security sold for a period exceeding six months.... This subsection shall not be construed to cover any transaction where such beneficial owner was not such both at the time of the purchase and sale or sale and purchase of the security involved, nor any transaction or transactions which the Commission by rules and regulations may exempt as not comprehended within the purpose of this subsection 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."I

Thomas G. Corcoran, a spokesman for S. 2693's drafters, explained § 15 (b) as forbidding an insider "to carry on any short-term specu[la]tions in the stock. He cannot, with his inside information get in and out of stock within six months." Hearings on H.R. 7852 and H.R. 8720 before the House Committee on Interstate and Foreign Commerce, 73d Cong., 2d Sess., 133 (1934). The Court of Appeals concluded that § 15 (b) of S. 2693

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     would have applied only to a beneficial owner who had that status before a purchase-sale sequence was initiated, 506 F.2d, at 609, and we agree. Foremost appears not to contest this point. Brief for Petitioner 29. The question thus becomes whether H.R. 8720's change in the language imposing liability and its addition of the exemptive provision were intended to change S. 2693's result in a purchase-sale sequence by a beneficial owner. We think the legislative history shows no such intent.

S. 2693 and its House counterpart, H.R. 7852, 73d Cong., 2d Sess. (1934), met substantial criticism on a number of scores, including various provisions of § 15. See Hearings on Stock Exchange Practices before the Senate Committee on Banking and Currency, 73d Cong., 2d Sess., pt. 15 (1934); Hearings on H.R. 7852 and H.R. 8720, supra, at 1-623.*fn22 S. 2693 was recast into H.R. 8720 to take account of the criticisms that the bill's drafters thought valid. Hearings on H.R. 7852 and H.R. 8720, supra, at 625, 674. The primary substantive criticism directed at § 15 (b) of S. 2693 was that it did not prevent the use of inside information to reap a short-term profit in a sale-repurchase situation. See Hearings on Stock Exchange Practices, supra, at 6557-6558. Criticism was also directed at making liability for short-term profits turn on ownership "as of record and/or beneficially." See id., at 6914. H.R. 8720 remedied these perceived shortcomings by providing in § 15 (b): "Any profit realized by such beneficial

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     owner, director, or officer from any purchase and sale or sale and purchase... shall inure to and be recoverable by the issuer."*fn23 The term "such beneficial owner" was defined in § 15 (a) to mean one "who is directly or indirectly the beneficial owner of more than 5 per centum of any class" of a registered security.

The structure of the clause imposing liability in the revised § 15 (b) did not unambiguously retain S. 2693's requirement that beneficial ownership precede a purchase-sale sequence. But we cannot assume easily that Congress intended to eliminate the requirement in the revised bill. The legislative history reveals that the requirement was made clear in the hearings, yet no complaint was made about it.

The testimony on S. 2693 demonstrates that the drafters were emphatic about the requirement. In explaining the bill Corcoran pointed out a technical flaw in S. 2693's language: "It shall be unlawful for any director, officer, or owner of securities, owning as of record and/or beneficially more than 5 per centum of any class of stock...." It was possible to construe the phrase "owing... 5 per centum" to apply to directors and officers as well as to mere stockholders, so that trading by directors and officers would not be subject to § 15 (b) if their previous holdings did not exceed 5%. But Corcoran made clear that the requirement of pre-existing

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     ownership of the specified percentage applied only to beneficial owners. S

"Mr. CORCORAN.... The bill is not very well drawn there. It ought to read to cover every director, every officer, and every stockholder who owns more than 5 percent of the stock. That is the way it was intended to read.

"Mr. MAPES. It ought to read 'and/or beneficially more than 5 percent' followed by 'is a director, or officer.'

"Mr. CORCORAN. It is badly drawn. We slipped on that. It ought to read 'every director and every officer' and then 'every big stockholder.'" Hearings on H.R. 7852 and H.R. 8720, supra, at 133.I

See Hearings on Stock Exchange Practices, supra, at 6555.

The legislative record thus reveals that the drafters focused directly on the fact that S. 2693 covered a short-term purchase-sale sequence by a beneficial owner only if his status existed before the purchase, and no concern was expressed about the wisdom of this requirement. But the explicit requirement was omitted from the operative language of the section when it was restructured to cover sale-repurchase sequences. In the same draft, however, the exemptive provision was added to the section. On this record we are persuaded that the exemptive provision was intended to preserve the requirement of beneficial ownership before the purchase. Later discussions of the present § 16 (b) in the hearings are consistent with this interpretation.*fn24 We hold that,

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     in a purchase-sale sequence, a beneficial owner must account for profits only if he was a beneficial owner "before the purchase."*fn25

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Additional considerations support our reading of the legislative history.


Section 16 (b) imposes a strict prophylactic rule with respect to insider, short-swing trading. In Kern County Land Co., 411 U.S., at 595, we noted: S

"The statute requires the [statutorily defined] inside, short-swing trader to disgorge all profits realized on all 'purchases' and 'sales' within the specified time period, without proof of actual abuse of insider information, and without proof of intent to profit on the basis of such information."I

In short, this statute imposes liability without fault within its narrowly drawn limits.*fn26

As noted earlier, Foremost recognizes the ambiguity of the exemptive provision, but argues that where "alternative

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     constructions" of § 16 (b)'s terms are available, we should choose the construction that best serves the statute's purposes. Foremost relies on statements generally to this effect in Kern County Land Co., supra, at 595, and Reliance Electric Co., 404 U.S., at 424. In neither of those cases, however, did the Court adopt the construction that would have imposed liability, thus recognizing that serving the congressional purpose does not require resolving every ambiguity in favor of liability under § 16 (b). We reiterate that nothing suggests that the construction urged by Foremost would serve better to further congressional purposes. Indeed, the legislative history of § 16 (b) indicates that by adding the exemptive provision Congress deliberately expressed a contrary choice. But even if the legislative record were more ambiguous, we would hesitate to adopt Foremost's construction. It is inappropriate to reach the harsh result of imposing § 16 (b)'s liability without fault on the basis of unclear language. If Congress wishes to impose such liability, we must assume it will do so expressly or by unmistakable inference.

It is not irrelevant that Congress itself limited carefully the liability imposed by § 16 (b). See Reliance Electric Co., supra, at 422-425. Even an insider may trade freely without incurring the statutory liability if, for example, he spaces his transactions at intervals greater than six months. When Congress has so recognized the need to limit carefully the "arbitrary and sweeping coverage" of § 16 (b), Bershad v. McDonough, 428 F.2d 693, 696 (CA7 1970), cert. denied, 400 U.S. 992 (1971), courts should not be quick to determine that, despite an acknowledged ambiguity, Congress intended the section to cover a particular transaction.

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Our construction of § 16 (b) also is supported by the distinction Congress recognized between short-term trading by mere stockholders and such trading by directors and officers. The legislative discourse revealed that Congress thought that all short-swing trading by directors and officers was vulnerable to abuse because of their intimate involvement in corporate affairs. But trading by mere stockholders was viewed as being subject to abuse only when the size of their holdings afforded the potential for access to corporate information.*fn27 These

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     different perceptions simply reflect the realities of corporate life.

It would not be consistent with this perceived distinction to impose liability on the basis of a purchase made when the percentage of stock ownership requisite to insider status had not been acquired. To be sure, the possibility does exist that one who becomes a beneficial owner by a purchase will sell on the basis of information attained by virtue of his newly acquired holdings. But the purchase itself was not one posing dangers that Congress considered intolerable, since it was made when the purchaser owned no shares or less than the percentage deemed necessary to make one an insider.*fn28 Such a stockholder is more analogous to the stockholder who never owns more than 10% and thereby is excluded entirely from the operation of § 16 (b), than to a director or officer whose every purchase and sale is covered by the statute. While this reasoning might not compel our construction of the exemptive provision, it explains why Congress may have seen fit to draw the line it did. Cf. Adler v. Klawans, 267 F.2d 840, 845 (CA2 1959).

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Section 16 (b)'s scope, of course, is not affected by whether alternative sanctions might inhibit the abuse of inside information. Congress, however, has left some problems of the abuse of inside information to other remedies. These sanctions alleviate concern that ordinary investors are unprotected against actual abuses of inside information in transactions not covered by § 16 (b). For example, Congress has passed general antifraud statutes that proscribe fraudulent practices by insiders. See Securities Act of 1933, § 17 (a), 48 Stat. 84, 15 U.S.C. § 77q (a); Securities Exchange Act of 1934, § 10 (b), 15 U.S.C. § 78j (b); 3 Loss, supra, n. 11, at 1423-1429, 1442-1445. Today an investor who can show harm from the misuse of material inside information may have recourse, in particular, to § 10 (b) and Rule 10b-5, 17 CFR § 240.10b-5 (1975).*fn29 It also was thought that § 16 (a)'s publicity requirement*fn30

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     would afford indirect protection against some potential misuses of inside information.*fn31 See Hearings on H.R. 7852 and H.R. 8720, supra, at 134-135; H.R. Rep. No. 1383, 73d Cong., 2d Sess., 13 (to accompany H.R. 9323, 73d Cong., 2d Sess., passed by the House, May 4, 1934, without the present § 16 (b)).

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We must still consider briefly Foremost's contention that the "before the purchase" construction renders other enactments of Congress unnecessary and conflicts with the interpretation of § 16(b) by the Securities and Exchange Commission.

Foremost and amicus Allis-Chalmers Manufacturing Co. point to §§ 16(d) and (e) of the Act, 15 U.S.C. §§ 78p(d) and (e), as congressional actions that would not have been necessary unless one selling the securities the acquisition of which made him a beneficial owner is liable under § 16(b). Section 16(d), in part, exempts from § 16(b) certain transactions by a securities "dealer in the ordinary course of his business and incident to the establishment or maintenance by him of a primary or secondary market."*fn32 Section 16(e) provides an exemption for certain "foreign or domestic arbitrage transactions."*fn33 They argue similarly that the SEC's

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     Rule 16b-2, 17 CFR § 240.16b-2 (1975), is unnecessary if our construction of § 16(b) is correct. Rule 16b-2 exempts from § 16(b) specified transactions "in connection with the distribution of a substantial block of securities."*fn34

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     We do not consider these provisions to be inconsistent with our holding. Nothing on their faces would make them applicable to one selling the securities the purchase of which made him a beneficial owner. But the exemptions would be necessary to protect stockholders already qualifying as beneficial owners when they purchased*fn35 and they would, of course, apply to transactions by directors and officers as well.

Foremost and the amicus also remind us that the interpretation of the exemptive provision for which they contend has been adopted by the SEC in the past. See Brief for SEC as Amicus Curiae in Reliance Electric Co. v. Emerson Electric Co., O.T. 1971, No. 70-79, pp. 22-27. But the Commission has not appeared as an amicus in this case. In any event, even if the Commission's views have not changed we would not afford them the deference to which the views of the agency administering a statute are usually entitled, for in Reliance Electric Co., 404 U.S., at 425-427, the Court rejected the basic theory on which the SEC based its interpretation

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     of the exemptive provision. Our re-examination of the exemptive provision confirms the view that the SEC's theory did not reflect the intent of Congress.

The judgment is


MR. JUSTICE WHITE joins in the judgment of the Court, and in all but Part IV-C of the Court's opinion.

MR. JUSTICE STEVENS took no part in the consideration or decision of this case.


* S. Hazard Gillespie filed a brief for Allis-Chalmers Manufacturing Co. as amicus curiae urging reversal.

Whitney North Seymour, John A. Guzzetta, Bernhardt K. Wruble, and Conrad K. Harper filed a brief for Gulf & Western Industries, Inc., as amicus curiae urging affirmance.

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