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LEWIS v. RIKLIS

February 10, 1978

HARRY LEWIS, Plaintiff, against MESHULAM RIKLIS and AITS, INC., Defendants.


The opinion of the court was delivered by: TENNEY

MEMORANDUM

TENNEY, J.

 Plaintiff has moved the Court for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure. For the reasons set forth below, summary judgment is granted in favor of the defendants and the complaint is dismissed.

 Plaintiff brought this action under Section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b), to recover short-swing profits that the defendant Meshulam Riklis allegedly received from a series of transactions involving the common stock of the issuer, AITS, Inc. ("AITS").

 The following facts are undisputed. Riklis was a director of AITS and also the beneficial owner of more than ten per cent of AITS's equity securities at all times relevant to this action. On June 25, 1973, he entered into an agreement for the sale of 25,000 shares oo AITS common stock to Harold S. Devine for a $160,000 promissory note ($6.40 per share). On August 9, 1973, Riklis purchased 100,000 shares of AITS common stock for $500,431 ($5.00431 per share) and an additional 37,500 AITS shares from the issuer on September 28, 1973 for $150,000 ($4.00 per share). Riklis filed a Form 4 Report with the Securities and Exchange Commission, pursuant to the provisions of Section 16(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(a). This report, dated November 7, 1973, stated that the June 25 sale "was subsequently rescinded as of the date of the sale." On December 11, 1975, plaintiff Harry Lewis, an AITS stockholder, instituted this action pursuant to section 16(b) on behalf of the issuer to recover the short-swing profits realized by the defendant.

 The disputed facts revolve around the June 25, 1973 agreement between Riklis and Devine for the sale of 25,000 shares of AITS common stock. Plaintiff alleges that the shares were sold for the aggregate sum of $160,000 ($6.40 per share) and that Riklis's subsequent purchase of 37,500 shares for $150,000 ($4.00 per share) caused him to realize short-swing profits in the sum of $60,000. The basis of plaintiff's lawsuit is that the issuer has not recovered the $60,000 as provided for in section 16(b).

 Riklis contends that the rescission date of the June 25 sale was on or before September 25, 1973, thereby precluding a "matching" with the September 28 purchase. While neither Riklis nor Devine can remember the exact date of the rescission, both claim that no payments were ever made to Riklis and that the stock was never transferred to Devine. In addition, Riklis maintains that Devine's personal unsecured promissory note was actually worth less than its face value of $160,000 and that it had a lesser value than the price at which any AITS stock was acquired by him.

 Section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b), provides in pertinent part:

 For the purposes 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, any profit realized by him from any purchase and sale, or any sale and purchase, of any equity security of such issuer (other than an exempted security) within any period of less than six months,... 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.

 The overall purpose of the Securities Exchange Act of 1934 is "to insure the maintenance of fair and honest markets" in transactions of securities. 15 U.S.C.§ 78b. Section 16(b) was designed to protect "outside" stockholders against short-swing speculation by insiders with advance information by the imposition of "a liability based upon an objective measure of proof." Smolowe v. Delendo Corp., 136 F.2d 231, 235 (2d Cir. 1943), cert. denied, 320 U.S. 751, 88 L. Ed. 446, 64 S. Ct. 56 (1943). Thus the liability imposed by section 16(b) is absolute and is not dependent upon an actual misuse of inside information. The statute clearly imposes liability "irrespective of any intention on the part of such [insider]." See Blau v. Lehman, 286 F.2d 786 (2d Cir. 1960), aff'd, 368 U.S. 403, 7 L. Ed. 2d 403, 82 S. Ct. 451 (1962).

 The Supreme Court has stated 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." Reliance Electric Co. v. Emerson Electric Co., 404 U.S. 418, 422, 30 L. Ed. 2d 575, 92 S. Ct. 596 (1972).

 The necessary elements for a section 16(b) cause of action are: (1) a 10% beneficial owner, a director, or an officer; (2) a sale and purchase or a purchase and sale within the six-month period; and (3) a profit realized. Landy v. United Fruit Co., 305 F. Supp. 254 (D.N.J. 1969); see Newmark v. R.K.O. General, Inc., 425 F.2d 348 (2d Cir.), cert. denied, 400 U.S. 854, 27 L. Ed. 2d 91, 91 S. Ct. 64 (1970).

 Plaintiff contends that Riklis's liability was fixed as of September 28, 1973 when Riklis purchased 37,500 shares at $4.00 per share. Profits for section 16(b) purposes are computed by arbitrarily matching purchases with sales in order to obtain the maximum amount of profits. Thus, the maximum profit is determined by a rule of lowest-price-in and highest-price-out within the six-month period. Gratz v. Claughton, 187 F.2d 46 (2d Cir.), cert. denied, 341 U.S. 920, 95 L. Ed. 1353, 71 S. Ct. 741 (1951); Smolowe v. Delendo Corp., supra. The $60,000 profit alleged by plaintiff is based on matching the June 25th sale with the September 28th purchase.If Riklis and Devine rescinded their contract prior to September 28th the matching purchase would be August 9th, and the alleged profit would amount to $20,000. *fn1"

 Plaintiff argues that any rescission of a sale subsequent to a purchase is void by the terms of Section 29 of the Securities Exchange Act, 15 U.S.C. § ...


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